Supply Chain Management N

SUPPLY CHAIN MANAGEMENT
(FOR PRIVATE CIRCULATION ONLY)

2017
PROGRAMME COORDINATOR
Dr. Padmpriya Irabatti
COURSE DESIGN AND REVIEW COMMITTEE

Prof. Viraj Atre Dr. Narendra Parchure
Prof. Ranjan Joshi Prof. D.H. Joshi
Dr. Shailesh Kasande Prof. Ashok Chaudhari
Prof. Madhup Gandhi Prof. Safia Farooqui
Prof. Manisha Ketkar Prof. Sudhir Deshpande
Prof. Rajiv Shirke Ms. Nazima Shaikh
COURSE WRITERS
Capt. Uday Palsule Girish G. Phatak
EDITOR
Ms. Barnalee Handique
Published by Symbiosis Centre for Distance Learning (SCDL), Pune

July, 2007 (Revision 04, 2014)
Copyright © 2016 Symbiosis Open Education Society

All rights reserved. No part of this book may be reproduced, transmitted or utilised in any form or by any
means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval
system without written permission from the publisher.
Acknowledgement
Every attempt has been made to trace the copyright holders of materials reproduced in this book. Should any
infringement have occurred, SCDL apologises for the same and will be pleased to make necessary corrections
in future editions of this book.
PREFACE
Welcome to the world of SCM - Supply Chain Management. This SLM on Supply Chain Management
has been written keeping in mind students residing far and wide, who wish to undertake distance
learning in order to overcome conceptual problems, and professionals seeking a ‘tool box’ or reference
material.
The SLM is an effort to provoke interest in the subject and allow the reader to grasp the approach
to supply chain management in various business sectors. It provides an insight into every stage of
business right from suppliers to manufacturers to wholesalers to retailers and finally to the customer.
Its main theme is to maximise business profits keeping in mind the belief that the “Customer is
King”. We think this can be definitely achieved if a business possesses the right information and the
appropriate software.
We hope the contents of this SLM will be able to pass on the knowledge of the strategic role played
by supply chain and its performance drivers, and thereby provide all that is required from a supply
chain manager in today’s competitive business arena.
Suggestions are most welcome so that this simple to read SLM can be made more useful.
Uday Palsule
Mr. Girish Phatak
iii
ABOUT THE AUTHORS
Uday Palsule is a partner in a logistics Management Company and has several large clients in Western
and Southern India. He has worked with some large international logistics companies. His area of
expertise has been network design, warehouse operations and business analytics.
He started his career in the Merchant Navy after passing out of T.S. Dufferin in 1972. He completed
his studies in the U.K. in 1981 and has spent a large part of his sea career in some well-known
Norwegian firms. He has been teaching ‘Shipping’ and ‘Supply Chain Management’ in IMDR and in
SIIB for the past 6-7 years.
Mr. Girish Phatak, a Trainer and Consultant in the field of Quality Management Systems, Information
Systems and Business Process Re-engineering since May 1999, is a qualified lead assessor from BSI
UK for ISO 9001. He has experience in training and consulting in ISO 9000, TQM, Service Quality,
SW Quality Assurance, Business Process Re-engineering, Enterprise Solutions such as ERP, SCM
and CRM for Domestic Clients as well as International Clients in different countries in West Africa
such as Nigeria, Ghana. He is also a Visiting faculty member in the subject of SCM at Symbiosis
Institute of Management Studies, Symbiosis Institute of International Business, Symbiosis Center for
Management and Human Resource Development and Symbiosis Institute of Business Management
for working professionals.
iv
CONTENTS
Unit No. TITLE Page No.

1 Introduction to Supply Chain Management (SCM) 1 – 28
1.1 Introduction
1.2 Core Concept of SCM
1.3 Nature and Scope of SCM
1.4 Decision Phases in SCM
1.5 Process of SCM
1.6 Three Tier Concept of SCM
1.7 Pitfalls in Inventory Management under SCM
1.8 SCM Elements
1.9 Competitive Strategy versus SCM Strategy
1.10 Achieving Strategic Fit
1.11 Factors affecting Strategic Fit
1.12 The Role played by Major Drivers in achieving Strategic Fit
1.13 The Obstacles in Strategic Fit Achievement
1.14 Importance of SCM in Business Management
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
2 Logistics to Supply Chain Management (SCM) 29 – 44
2.1 Introduction to Logistics Management
2.2 Productivity in Logistics Management
2.3 A Logistics Performance Framework
2.4 Logistics at the Strategic Level
2.5 Logistics to Supply Chain Management
Summary
Key Words
Suggested Reading
v
3 Forecasting and Aggregate Planning 45 – 64
3.1 Introduction
3.2 Forecasting Components and Methods of Forecasting
3.3 Aggregate Planning
3.4 Role played by Aggregate Planning
3.5 Strategies of Aggregate Planning
3.6 Aggregate Planning Implementation
3.7 Predictable Variability in a Supply Chain
3.8 Managing the Supply
3.9 Managing Demand
3.10 Implementing Solutions
Summary
Key Words
Suggested Reading
4 Inventory Management in SCM 65 – 86
4.1 Introduction
4.2 Need for holding Inventory
4.3 Types of Inventories
4.4 Safety Inventory
4.5 Costs associated with Inventories
4.6 Inventory Control Systems
4.7 JIT and MRP
Summary
Key Words
Suggested Reading
vi
5 Transportation 87 – 108
5.1 Introduction
5.2 Factors influencing Transportation Decisions
5.3 Various Modes of Transport
5.4 Design Options
5.5 Transportation Design Tradeoffs
5.6 Routing and Scheduling
5.7 Tailored Transportation
5.8 Transportation in Practice
Summary
Key Words
Suggested Reading
6 Inbound Supply Chain Management 109 – 126
6.1 Introduction
6.2 Supplier Scoring and Assessment
6.3 Supplier Selection
6.4 Contracts
6.5 Product Design Collaboration
6.6 Procurement
6.7 Inbound SCM Planning and Analysing
6.8 Inbound SCM in Practice
Summary
Key Words
Suggested Reading
vii
7 Outbound Supply Chain Management 127 – 146
7.1 Introduction
7.2 Material Handling in SCM
7.3 Factors influencing the Levels of Product Availability
7.4 Improving Supply Chain Profitability
7.5 Retail in the Supply Chain
7.6 The Distribution Channels
7.7 The Distribution Channel Strategy
Summary
Key Words
Suggested Reading
8 Designing Supply Chain Distribution Network 147 – 172
8.1 Introduction
8.2 Factors affecting the Distribution Network Design
8.3 Different Distribution Network Designs
8.4 Selecting a Network Design Option
8.5 Network Design in a Supply Chain
Summary
Key Words
Suggested Reading
9 Postponement and CRM in SCM 173-188
9.1 Introduction
9.2 Optimal Postponement Preconditions
9.3 Postponement Implementation
9.4 Postponement Evaluation
9.5 Postponement Cost
9.6 Suitability of Postponement for Companies
9.7 Postponement in Practice
9.8 CRM in SCM
Summary
Key Words
Suggested Reading
viii
10 Outsourcing and Financial Aspects of SCM 189-202
10.1 Introduction
10.2 Third Party Logistics
10.3 Benefits of Outsourcing
10.4 Risks in Outsourcing
10.5 Current Issues in Outsourcing
Summary
Key Words
Suggested Reading
11 Role of IT in Supply Chain Management 203-220
11.1 Introduction
11.2 Role played by IT in SCM
11.3 Benefits of IT in a Supply Chain
11.4 IT Enabled Supply Chain
11.5 Radio Frequency Identification in SCM
Summary
Key Words
Suggested Reading
12 E-Business and the Supply Chain 221-240
12.1 Introduction to E-SCM
12.2 Role of E-Business in a Supply Chain
12.3 The E-Business Framework
12.4 B2B E-Business and B2C E-Business
12.5 Practising E-Business
Summary
Key Words
Suggested Reading
ix
13 SCM Measurement 241-260
13.1 Introduction
13.2 The Need for a New Approach to Performance Measurement
13.3 Towards a New Measurement Approach
13.4 SCM Measurement
Summary
Key Words
Suggested Reading
14 The Indian Supply Chain Architecture 261-274
14.1 Introduction
14.2 SCM Practices in India
14.3 Linking Management Tool with Critical Supply Chain Processses
14.4 Governing the Manufacturing Mindset
14.5 Outsourcing - An increasing Trend for Mixed Reasons
14.6 Alignment of Supply Chain Strategy with Business Strategy
Summary
Key Words
Suggested Reading
References 275
x
Introduction to Supply Chain Management (SCM)
UNIT
1
Structure:
1.1 Introduction
1.2 Core Concept of SCM
1.3 Nature and Scope of SCM
1.4 Decision Phases in SCM
1.5 Process of SCM
1.6 Three Tier Concept of SCM
1.7 Pitfalls in Inventory Management under SCM
1.8 SCM Elements
1.9 Competitive Strategy versus SCM Strategy
1.10 Achieving Strategic Fit
1.11 Factors affecting Strategic Fit
1.12 The Role played by Major Drivers in achieving Strategic Fit
1.13 The Obstacles in Strategic Fit Achievement
1.14 Importance of SCM in Business Management
Summary
Key Words
Suggested Reading
Introduction to Supply Chain Management (SCM) 1

Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain the nature and scope of SCM
----------------------
• Discuss the concept of Supply Chain Management
---------------------- • Assess the important issues in SCM
---------------------- • Determine critically the SCM decisions
---------------------- • Evaluate the need for SCM

• Describe strategic fit
----------------------
• Explain the meaning of competitive strategy
----------------------
• Identify major drivers of SCM
----------------------
1.1 INTRODUCTION
----------------------
---------------------- Supply Chain Management is a total system approach to managing the

flow of information, materials and services from raw material suppliers through
---------------------- factories and warehouses to the end customer. Supply chain Management is
the discipline which encompasses the end to end business activities carried out
---------------------- in any business, independent of the manufacturing or service sectors. In fact
---------------------- it is the only way today in which businesses need to be carried out in order to
encourage and endorse a ‘win-win’ relationship among the business partners
---------------------- concerned.
---------------------- Definitions
A supply chain is a network of facilities and distribution options that
----------------------
performs the functions of procurement of materials, transformation of these
---------------------- materials into intermediate and finished products, and the distribution of
these finished products to customers. Supply chains exist in both service and
---------------------- manufacturing organisations, although the complexity of the chain may vary
greatly from industry to industry and firm to firm.
----------------------
Traditionally, marketing, distribution, planning, manufacturing, and the
---------------------- purchasing organisations along with the supply chain operated independently.
---------------------- These organisations have their own objectives and these are often conflicting.
Marketing objectives of high customer service and maximum sales dollars
---------------------- conflict with manufacturing and distribution goals. Many manufacturing
operations are designed to maximise through put and lower costs with little
---------------------- consideration for the impact on inventory levels and distribution capabilities.
---------------------- Purchasing contracts are often negotiated with very little information beyond
historical buying patterns. The result of these factors is that there is not a single,
---------------------- integrated plan for the organisation-there were as many plans as businesses.
Clearly, there is a need for a mechanism through which these different functions
---------------------- can be integrated together. Supply chain management is a strategy through
which such an integration can be achieved.
2 Supply Chain Management
Supply chain management is typically viewed to lie between fully Notes
vertically integrated firms, where the entire material flow is owned by a single
firm, and those where each channel member operates independently. Therefore, ----------------------
coordination between the various players in the chain is the key in its effective
management. Cooper and Ellram [1993] compare supply chain management to ----------------------
a well-balanced and well-practiced relay team. Such a team is more competitive ----------------------
when each player knows how to be positioned for the hand-off. The relationships
are the strongest between players who directly pass the baton, but the entire ----------------------
team needs to make a coordinated effort to win the race.
----------------------
There seems to be a universal agreement on what a supply chain is.
Jayashankar defines a supply chain to be a network of autonomous or semi- ----------------------
autonomous business entities collectively responsible for procurement, ----------------------
manufacturing, and distribution activities associated with one or more families
of related products. ----------------------
Lee and Billington have a similar definition: ----------------------
‘‘A supply chain is a network of facilities that procures raw materials, ----------------------
transforms them into intermediate goods and then final products, and delivers
the products to customers through a distribution system.’’ ----------------------
Ganeshan and Harrison have yet another analogous definition: ----------------------
‘‘A supply chain is a network of facilities and distribution options that ----------------------
performs the functions of procurement of materials, transformation of these
materials into intermediate and finished products, and the distribution of these ----------------------
finished products to customers.’’
----------------------
1.2 CORE CONCEPT OF SCM ----------------------
Supply Chain Management is the discipline which encompasses the ----------------------

end to end business activities carried out in any business, independent of the
manufacturing or service sectors. In fact it is the only way today in which ----------------------
businesses need to be carried out. To encourage and endorse a win-win ----------------------
relationship among the business partners concerned e.g, the success of a big
Automobile component manufacturing industries, to a great extent depends, on ----------------------
how it gets supplies from its Tier 1, 2,3 suppliers, (Quality of parts, quantity,
delivery and commitments for the above if there are fluctuations in demand). ----------------------
That means the survival of the organisations is dependent on the joint, integrated ----------------------
and committed efforts of all the tiers of suppliers below. From the perspective
of the tier suppliers, why do they continue to do business with Automobile ----------------------
component manufacturing industries despite the uncertainties in demand? This
is because, if organisations are happy, they will get more business. Thus, the ----------------------
very survival of all parties is dependent on one another. ----------------------
----------------------
----------------------

Notes 1.3 NATURE AND SCOPE OF SCM
---------------------- Supply Chain Management is a very broad management concept. Supply
Chain Management focuses on the management relationship as a means
---------------------- of achieving better results for all members of Supply Chain, including the
customers. Supply chain Management is the discipline which encompasses the
----------------------
end to end business activities carried out in any business, independent of the
---------------------- manufacturing or service sectors. In fact, it is the only way today in which
businesses need to be carried out. Business focus is changing from complete
---------------------- manufacturing to more outsourcing, purchasing and assembly, based on the core
competence of the organisation, since in a large number of cases, raw material
----------------------
and component cost are to the order of 60-80% of the product costs. Companies
---------------------- can save a lot with a small percentage reduction in the cost of materials, its
management and coordination efforts. Companies also want to share their
---------------------- suppliers the burden of flexibility and responsiveness to take care of varying
customer demands, their timings and risk of product developmental efforts and
----------------------
costs involved. It is due to the fact that fierce competition, changing customer’s
---------------------- preference and compressed product life cycle are reducing profit margins.
Therefore, companies want to play safe to avoid risks, but simultaneously want
---------------------- to maintain the flexibility of the business. This is a shared way of handling
business risks and variations.
----------------------
The capability required for market entrance and leadership has changed
---------------------- from ability to supply to ability to add more value to the customer. This situation
---------------------- can be regarded as the basic cause of evolution of supply chain management.
---------------------- Check your Progress 1

----------------------
Fill in the blanks.
----------------------
1. Supply Chain Management touches _______ business activities.
---------------------- 2. Supply chain activities account for _______ % of the product costs.
----------------------
---------------------- 1.4 DECISION PHASES IN SCM

---------------------- The flow of products, information and funds through the supply chain
takes place in three phases. These three phases are as follows:
----------------------
 Supply Chain Design
----------------------  Supply Chain Planning
----------------------  Supply Chain Operation
---------------------- Proper execution of these three phases is very important for the fulfillment
of the supply chain. Let us now look at these phases.
----------------------
----------------------

Supply Chain Design Notes
This is the first phase in the supply chain decision process and involves
----------------------
the structuring of the supply chain over the next several years.
Decisions regarding the configuration of the supply chain, the proper ----------------------
allocation of the resources and what processes each stage will perform are
----------------------
important. Decisions based on the company’s strategies like the locations of the
warehouses, the manufacturing facilities, the production, the different modes ----------------------
of transportation to be used and the information systems to be used are equally
critical. ----------------------
During this phase it is very important for the company to configure ----------------------
their supply chain in accordance with the strategic objectives. The uncertainty
prevailing in the anticipated market and in the concerned industry should be ----------------------
kept in mind over the next few years. This phase involves long-term decision-
----------------------
making and is very expensive if any reversal of decisions is required.
Supply Chain Planning ----------------------
This is the second phase in the supply chain decision process which requires ----------------------
decisions to be made in consideration with the corporate time frame. This time
frame is usually a quarter of a year to a year. Since the configuration of the ----------------------
supply chain is fixed in the first phase, it is now time to design the configuration
strategically. It is in this phase that an organisation gets its corporate strategy ----------------------
developed. As the configuration established involves constraints, it is important
----------------------
for the planning to be done within these constraints.
A lot of forecasting is involved in this phase like forecasting the demand ----------------------
in the next few years for the concerned product in different markets, supplies
to be made from different locations, whether manufacturing is to be done in- ----------------------
house or outsourced, and policies regarding the inventory, the timing and size ----------------------
of marketing promotions.
Such forecasting will enable the organisation to establish parameters ----------------------
within which a supply chain will function within a specified time. It is easy for
----------------------
an organisation to develop within a shorter time horizon with better forecasts
and incorporate any flexibility in the supply chain design phase and try to ----------------------
improve its performance. So, it can be seen that this phase is for a short period
of time involving demand forecasts and helps for the structuring of corporate ----------------------
policies that govern short-term operations.
----------------------
Supply Chain Operations
The third phase in the supply chain decision process involves the ----------------------
decisions to be taken daily or weekly or for a very short period of time. Here,
----------------------
the time horizon is extremely short. The organisation takes decisions on the
basis of individual customer orders. The supply chain configuration is already ----------------------
set and also the policies of the organisation are well defined. The main objective
of this phase is to handle the incoming customer’s order in the best possible ----------------------
manner. In this phase the organisation allocates the inventory or the production
to individual orders, fixes the transport and delivery schedules of trucks, and ----------------------
also places replenishment orders.
----------------------

Notes Even small decisions required for reducing the uncertainty about the
demand of information are to be taken during this phase. Given the constraints
---------------------- established by the configuration and the planning policies, the main objective is
to reduce the uncertainty and improve the overall performance.
----------------------
The profitability and success of any organisation can be optimised with the
---------------------- proper and timely execution of the above three decision-making phases in a
supply chain.
----------------------
---------------------- 1.5 PROCESS OF SCM

---------------------- The supply chain process is a sequence of processes and flows taking place
between different stages that together help to satisfy the needs of a customer.
----------------------
We can view the supply chain processes in two different forms: -
----------------------  Cycle View
----------------------  Push/Pull View
---------------------- 1. Cycle View
This view depicts a series of cycles in the supply chain. These cycles are
----------------------
performed at the interface between two successive stages in the supply chain.
---------------------- The five supply chain stages thus result in four supply chain cycles.
---------------------- Customer Order

Cycle
---------------------- Retailer
Replenishment
---------------------- Cycle
Distributor
---------------------- Manufacturing
Cycle
Manufacturer
---------------------- Procurement
Cycle
---------------------- Supplier
----------------------
---------------------- Fig 1.1: Cycles of a supply chain process
---------------------- The cycle view shows the various cycles and each of the organisations in the
supply chain. The various cycles are as follows:
---------------------- a) The Customer Order Cycle
---------------------- b) The Replenishment Cycle
---------------------- c) The Manufacturing Cycle
d) The Procurement Cycle
----------------------
However, it is not necessary for every supply chain to have all the
---------------------- four cycles clearly separated. For example, a grocery supply chain in which
---------------------- a retailer stocks finished goods’ inventories and places replenishment orders
with a wholesaler, is likely to have all the four cycles, whereas a company
like ‘Amway’ which believes in selling directly to customers, thus bypassing Notes
wholesalers and retailers, may have only 2/3 cycles.
----------------------
Let us now look at these cycles in detail.
a) The Customer Order Cycle ----------------------
The customer order cycle occurs at the interface of the customer and ----------------------
the retailer. It involves all the processes involved in receiving and filling the
customer’s order. It begins when the customer visits a retailer in order to fulfill ----------------------
his demand and ends when the customer receives the order. The customer order
----------------------
cycle consists of the following processes:
i) Customer arrival ----------------------
ii) Customer order entry ----------------------

iii) Customer order fulfillment ----------------------
iv) Customer order receiving
----------------------
Customer order cycle ----------------------
----------------------
Customer arrival Customer order receiving ----------------------
----------------------
Customer order entry Customer order fulfillment ----------------------
----------------------
Fig 1.2: The customer order cycle ----------------------
Customer arrival ----------------------
It refers to the customer’s arrival at the point of purchase where he has ----------------------
access to product choices and makes decisions for purchase. This place may
be a retailer’s shop, an Internet website of a mail order firm or even a call to a ----------------------
telemarketing center.
----------------------
Customer order entry
----------------------
Customer order entry refers to the customer informing the retailer what product
he wants to purchase. At a super market, the loading of products desired onto their ----------------------
carts or basket by the customer can be considered as a customer order entry. ----------------------
Customer order fulfillment
----------------------
In this process the customer’s order is fulfilled and sent to the customer.
In the supermarket, the customer would do this process himself. Here, the ----------------------
replenishment of the stocks is initiated and it is here that the replenishment ----------------------
cycle begins. Here the objective is to fulfill the customer’s requirement as per
his expectations and that too at the lowest possible cost. ----------------------

Notes Customer order receiving
During this process the customer receives the desired product and takes
----------------------
ownership. At the supermarket, customer order receiving takes place after
---------------------- paying for, and receiving the products from the checkout counter.
---------------------- b) The Replenishment cycle
---------------------- The replenishment cycle occurs at the retailer and wholesaler interface
and includes all the processes in updating and replenishment of inventory. Such
---------------------- a cycle may occur in an organisation that is out of stock of a particular product.
The replenishment cycle consists of the following processes:
----------------------
i) Retail order trigger
----------------------
ii) Retail order entry
----------------------
iii) Retail order fulfillment
----------------------
iv) Retail order receiving
----------------------
---------------------- The
The Replenishment Cycle
replenishment Cycle
----------------------
---------------------- Retail Order Trigger Retail Order Receiving
----------------------
---------------------- Retail Order Entry Retail Order Fulfillment
----------------------
---------------------- Fig. 1.3: The Replenishment Cycle

i) Retail order trigger
----------------------
After fulfilling the customer’s demand, the stocks get depleted and need to
---------------------- be replenished to meet the future demand. So, the retailer has to prepare an
‘Ordering Policy’ and this triggers an order from the previous stage. The
---------------------- main objective is to maximise profitability by ensuring economies of scale
---------------------- and balancing product availability and inventory holding costs. This order
has to be passed on to the wholesaler for generation of the replenishment
---------------------- order.
---------------------- ii) Retail order entry
Here the retailer places an order with the wholesaler. Here again like the
----------------------
customer order entry, this can be done electronically or by some other
---------------------- method, again inventory or production is allocated to fulfill the order. The
objective here is that an order should be entered and conveyed accurately
---------------------- and quickly to all the supply chain processes affected.
----------------------

iii) Retail order fulfillment Notes
Here the order size is more than that ordered by a customer to a retailer. The
----------------------
main objective here is to supply the desired quantity on time and minimise
on costs. ----------------------
iv) Retail order receiving
----------------------
As soon as the replenishment stock arrives at the retailer, he must physically
update all inventory records. This process involves the flow of products ----------------------
from the wholesaler to the retailer, the flow of information updates at the
----------------------
retailer and funds flow from the retailer to the wholesaler. Here, the main
objective is inventory update and display of products at minimised costs. ----------------------
c) The Manufacturing Cycle ----------------------
This cycle typically occurs at the distributor and manufacturer interface. It
involves the replenishment of the distributor’s inventory. This cycle is triggered ----------------------
by the customer’s order, the replenishment of the distributor’s inventory, or ----------------------
by the forecast of customer demand and also the availability of finished goods
at the manufacturer’s warehouse. The processes involved in this cycle are as ----------------------
follows:
----------------------
The manufacturing cycle ----------------------
----------------------
Order arrival
Receiving ----------------------
----------------------
----------------------
Production scheduling Manufacturing & shipping
----------------------
Fig. 1.4: The Manufacturing Cycle ----------------------
i) Order arrival ----------------------
ii) Production scheduling ----------------------

iii) Manufacturing and shipping ----------------------
iv) Receiving ----------------------
i) Order arrival ----------------------
During this process the distributor prepares a replenishment order based on
----------------------
the forecast for future demand and current product inventories. However,
in some cases, the customer may order directly from the manufacturer. ----------------------
ii) Production scheduling ----------------------
During this process the forecasted orders are allocated to a production plan.
This plan should be based on a precise production sequence. The objective ----------------------

Notes of this process is to maximise the fulfillment of orders in proportion while
keeping lower costs.
----------------------
iii) Manufacturing and shipping
---------------------- During the manufacturing phase of the process, products are manufactured
as per the production schedule. During the shipping phase of this process,
----------------------
the product is transported to the customer, retailer and wholesaler or to the
---------------------- company’s own finished product warehouse. The main objective of this
phase is to produce and ship the desired product on the promised due date
---------------------- and also meet quality requirements while keeping the costs down.
---------------------- iv) Receiving
---------------------- In this process, the distributor receives the products and then updates his
inventory records.
---------------------- d) The Procurement Cycle
---------------------- This cycle occurs at the manufacturer and supplier interface. This cycle is
exercised to ensure that the materials are available on time to the manufacturer.
---------------------- Usually components and other raw material required for the production process
---------------------- are ordered from suppliers that replenish the concerned inventories. These
orders are as per the production schedule.
----------------------
----------------------
Procurement Cycle
----------------------
Receiving at the
---------------------- Order by manufacturer’s manufacturer’s facility
production schedule
----------------------
----------------------
Supplier’s production Component manufacturing &
---------------------- scheduling shipping
----------------------
Fig. 1.5: The Procurement Cycle
----------------------
2. Push and Pull View
----------------------
All the processes in supply chain management fall into any one of two
---------------------- categories depending on the timing of their execution in relation to the customer
demand. These processes are either ‘Pull’ or ‘Push’ in nature.
----------------------
A Pull process is one in which execution is initiated after the customer’s
---------------------- order is received. Here, there is no execution until the organisation receives
---------------------- the desired order of the customer. Thus, in this process the customer demand is
known with certainty.
----------------------
This process is also called as a “Reactive Process” because it reacts to
---------------------- customer demand.

A Push process is one in which execution is initiated in anticipation Notes
of a customer’s order. Here, there is an execution even before the product is
demanded for. Thus, in this process, the demand is not known and must be ----------------------
forecasted. This process is also called as a “Speculative Process” because it
reacts to a speculative or forecasted demand, rather than the actual demand. ----------------------
----------------------
Procurement manufacturing
& Customer order cycle ----------------------
Replenishment cycles ----------------------
----------------------
----------------------
PUSH PULL
----------------------
Customer ----------------------
Order Arrives ----------------------
Fig. 1.6: The push and pull process ----------------------
----------------------
1.6 THREE TIER CONCEPT OF SCM
----------------------
The supply chain has a three tier concept as follows:
----------------------
1. Customer Relationship Management (CRM)
----------------------
CRM consists of all those processes that take place at the interface between
the concerned firm and its customers. This macro process helps to generate ----------------------
customer demand and helps for placing and tracking orders from various
customers. Functions of marketing, promotion, sales and website management ----------------------
are performed during this process. ----------------------
2. Internal Supply Chain Management (ISCM)
----------------------
ISCM consists of all those processes that take place internally within the
----------------------
concerned firm. This macro process helps in fulfilling the demands of the CRM
process. This process is concerned with the functions of internal production, ----------------------
inventory policies and storage capacity, and also the preparation of demand and
supply plans. ----------------------
3. Supplier Relationship Management (SRM) ----------------------

SRM consists of all those processes that take place at the interface between ----------------------
the concerned firm and its suppliers. This macro process performs the function
of evaluation and selection of suppliers, the negotiation of the supply terms and ----------------------
communication regarding new products and orders with suppliers. ----------------------
----------------------

Notes Again you must remember that the flow of information, products and funds takes
place through these three macro processes and helps in generating, receiving
---------------------- and fulfilling of the customer’s request.
---------------------- Table 1.1: The different macro processes with their functions
---------------------- SRM ISCM CRM

Source Strategic Planning Market Research
----------------------
Negotiate Demand Planning Sell Products
----------------------
Buy Supply Planning Call Centers
---------------------- Design Collaboration Fulfillment Order Management
---------------------- Supply Collaboration Field services
---------------------- It is very important to note that the above three macro processes are aimed
to satisfy the same customer, so it is essential to integrate these three processes
---------------------- for the supply chain to be successful. Thus, we can conclude from the above
description that within a firm, all the supply chain activities belong to one of
----------------------
these three macro processes.
----------------------
1.7 PITFALLS IN INVENTORY MANAGEMENT UNDER
----------------------
SCM
----------------------
Based on knowledge and experience from supply chain management in
---------------------- electronics, computer, and automobile companies, Lee and Billington identified
14 pitfalls in inventory management, eight of which are found relevant to this
---------------------- project:
---------------------- Pitfall 1: No Supply Chain Metrics
---------------------- In a supply chain with multiple sites, each site will often have its fairly
autonomous management team. The objectives of the various teams may differ,
---------------------- and even be conflicting. Inventory may for example be reduced at a Site A of
a supply chain, and thereby, seen from a local perspective, the performance is
---------------------- enhanced. But the inventory decrease may also decrease Site A’s flexibility. As
---------------------- Site A now responds more slowly to changes, Site B, which is Site A’s customer
will have to increase its inventory (of Site A parts) in order to maintain its
---------------------- flexibility and level of customer service. The lack of supply chain metrics has
prevented managers at Site A to see that their local improvements have not led
---------------------- to improve overall performance of the supply chain. The objective of supply
---------------------- chain metrics is to give the basis for evaluations of the performance of the
whole supply chain as one system.
---------------------- Pitfall 2: Inadequate Definition of Customer Service
---------------------- Too few and in-concise metrics for customer service. The evaluation of
performance becomes difficult, and certain aspects of customer service may be
----------------------
overlooked.
----------------------

Pitfall 3: Inaccurate Delivery Status Data Notes
Customers are not correctly informed of delivery dates of orders and of
----------------------
late deliveries. Companies can often not readily retrieve the information needed
to do so. ----------------------
Pitfall 4: Inefficient Information Systems
----------------------
Databases at different operation sites that describe system environment,
inventories, backlog, future production plans, and so on are often not linked. ----------------------
Information must be retrieved manually, and this can be a long process. Planning
----------------------
cycles may therefore be long, using highly uncertain demand forecasts. The
wrong products are made, and inventories and backlogs grow. ----------------------
Pitfall 5: Ignoring the Impact of Uncertainties ----------------------
Too often supply chains do not track uncertainties such as suppliers’
delivery times, the quality of incoming materials, manufacturing process time, ----------------------
transit times, and so on. This leads to non-optimal stocking levels. In some ----------------------
cases uncertainties are properly tracked, but there is no follow-up.
Pitfall 6: Simplistic Inventory Stocking Policies ----------------------
Stocking policies are often not linked to knowledge of the uncertainties ----------------------
mentioned above. Stocking policies are often based on the quantity usage of the
----------------------
items stocked. This says nothing about the uncertainty associated with the usage.
Analysis show that stocking levels could be greatly reduced by transferring ----------------------
stocking policies from being quantity based to being uncertainty based.
----------------------
Pitfall 7: Organisational Barriers
Entities in a supply chain may belong to different organisations within the ----------------------
same company. The organisations will independently measure the performance
----------------------
of the entities. While each entity is occupied with achieving local goals (much
like in pitfall 1), important synergies may be lost. ----------------------
Pitfall 8: Incomplete Supply Chain ----------------------
Supply chain managers are often focussed only on the internal supply
chain. Going beyond the internal supply chain by including external suppliers ----------------------
and customers often exposes new opportunities for improving internal ----------------------
operations.
----------------------
Section gives some thoughts on how many of these pitfalls can be avoided
through increased integration and coordination. The section suggests that this ----------------------
can be done using agent-based management and information systems.
----------------------
Through the past decades we have seen an increasing rate of globalisation
of the economy and thereby also of supply chains. Products are no longer ----------------------
produced and consumed within the same geographical area. Even the different
parts of a product may, and often do, come from all over the world. This ----------------------
creates longer and more complex supply chains, and therefore it also changes
----------------------
the requirements within supply chain management. This again affects the
effectiveness of computer systems employed in the supply chain. ----------------------

Notes A longer supply chain will often involve longer order to delivery lead
times. Flaherty states, in accordance with the discussion in Section, that the
---------------------- consequences of longer lead times will often be:
----------------------  less dependable forecasts as these have to be made earlier
 reduced production flexibility, i.e. greater difficulties to adjust to order
----------------------
changes
----------------------
 higher levels of inventory
---------------------- The evident answer to the problem of longer lead times is to speed up
the supply chain. But a limit is often reached beyond which further effort to
----------------------
shorten lead times are futile, especially in international supply chains. Another
---------------------- approach is to restructure the supply chain. This simply means to reconsider the
strategic level decisions priorly made. A third approach identified by Flaherty
---------------------- is changing coordination: The order, forecasting, procurement, and information
sharing procedures among the members of the supply chain. We will dwell on
----------------------
the issue of coordination in the next section.
---------------------- Globalisation also brings foreign competition into markets that traditionally
were local. Local companies are thereby forced to respond by improving their
----------------------
manufacturing practices and supply chain management. Bhatnagar states that
---------------------- attempts have focused, among others, on reduction of inventory levels, and
increased flexibility through reduced lead times. Yet again we see how industry
---------------------- focuses on the issues of inventory management and flexibility to maintain high
levels of customer satisfaction.
----------------------

----------------------
Multiple Choice Single Response.
----------------------
1. ‘Pull’ based planning implies more of
---------------------- i. Customer orientation
ii. Made to order planning
----------------------
iii. Pulling in stocks
---------------------- iv. Strategic stocking
---------------------- 2. Activities covered by CRM would not include
i. Market Research
----------------------
ii. Sales
---------------------- iii. Production
---------------------- iv. Customer support
3. Aim of inventory management should be
----------------------
i. Great customer service
---------------------- ii. Minimum possible stock
iii. To keep safety stock
----------------------
iv. Optimum stock and competitive service
1.8 SCM ELEMENTS Notes
There are various descriptions of supply chain management. Two that ----------------------
are commonly used are ‘cradle to grave’ and ‘dirt to dirt.’ The supply chain
starts from the origin of the raw material and ends once the product has been ----------------------
discarded or recycled.
----------------------
SCM gets the right product, to the right place, in the right quantity, with
the right quality, at the right cost. ----------------------
The primary decisions made within the supply chain include: ----------------------
1. Sourcing ----------------------
a) Quality of product
----------------------
b) Choosing suppliers
----------------------
c) Location of suppliers
d) How much product to order ----------------------
e) Transportation channels ----------------------

2. Production ----------------------
a) Location of production (domestic, international)
----------------------
b) Make vs. Buy
----------------------
c) Capacity of plants
d) Quality of the product (low cost leader, differentiation strategy) ----------------------
3. Inventory ----------------------
a) How much inventory to hold (safety stock)? ----------------------
b) Should the company do JIT?
----------------------
c) How much to order?
----------------------
d) When to order?
4. Logistics ----------------------
a) Transportation - best way to get the product to the customer ----------------------

i) Truck ----------------------
ii) Rail
----------------------
iii) Air
----------------------
iv) Mode of transport
v) Shipment size ----------------------
b) Location of distribution centers in order to keep customer service high ----------------------

and costs low
----------------------
----------------------

Notes Some of the objectives of a supply chain manager include:
 increase communication along all modes of the supply chain to create an
----------------------
uninterrupted flow of materials.
----------------------  decrease inventory while still maintaining high customer service levels.
----------------------  reduce the supplier base and develop supplier relationship in order to
reduce overall costs.
----------------------
 standardise parts as much as possible in order to reduce the amount of
---------------------- inventory needed to be carried.
----------------------
1.9 COMPETITIVE STRATEGY VERSUS SCM STRATEGY
----------------------
The competitive strategy of a company can be defined as the products
---------------------- and services that are offered by the company in order to satisfy the needs of its
customers.
----------------------
For example, Reliance Infocomm boasts of its competitive strategy to be
---------------------- the country’s cheapest and quickest mobile service provider.
---------------------- It should be noted that the company’s strategy is based on how the customer
prioritises his wants, like the product cost, the delivery time, the variety and
---------------------- quality of the product demanded. It also targets the various segments of people
who will purchase their product. Thus, it is very important for the company to
---------------------- prioritise its customer needs and place the product in the market so that most
---------------------- of its customers are satisfied with the product and services offered. A person
buying an assembled computer may prioritise his wants based on the product
---------------------- cost and the variety of hardware involved in his purchase; for him the delivery
time may not mean a lot. However, a person purchasing a branded computer
---------------------- would be quality conscious and would look for the variety offered and also the
---------------------- delivery time involved in his purchase.
Thus, a company in order to gain a competitive edge over its competitors, has
---------------------- to prepare its competitive strategy with the help of the following:
---------------------- a) Developing the product to be launched.
---------------------- b) Marketing the product launched, involving research for new specifications
for product development.
----------------------
c) Operations and production of the product or service offered.
---------------------- d) Distribution of the product to the customer and information from the
---------------------- customer to the firm.
e) Providing after sales service.
----------------------
These steps need to be followed by every company in order to undertake
---------------------- sale, and this chain is referred to as the ‘Value Chain’.
---------------------- Accounting, Finance, Information Technology and Human Resources are
the other functions that a company performs to support this value chain.
----------------------

Each of these functions are performed individually. They create their own Notes
strategies which are then combined into one which becomes the company’s
competitive strategy. Thus, the supply chain strategy of a firm would include ----------------------
the procurement of raw material, manufacturing, transportation of the material
to and from the company, the distribution and the after sales service. The supply ----------------------
chain strategy is what was formerly called the supplier strategy, the operations ----------------------
and logistics strategy. It also includes inventory, transportation, operating
facilities and information. Similarly, all the other functional strategies like that ----------------------
of Finance, Marketing and Operations need to be integrated and should not be
kept isolated from each other, so as to form the company’s competitive strategy. ----------------------
----------------------
1.10 ACHIEVING STRATEGIC FIT
----------------------
A company is said to be strategically fit when its competitive strategy and
supply chain strategy coincide. Thus, we can say that the company has achieved ----------------------
a strategic fit when its competitive strategy and supply chain strategy have the ----------------------
same goal.
In order to be strategically fit, the company has to take care of the following: ----------------------
a) Understand the customer uncertainty and supply chain uncertainty ----------------------

In order to understand the customer and the supply chain uncertainty, it ----------------------
is important for the firm to understand exactly what the customer requires. A
customer who requires a certain product at the earliest (urgently) would be more ----------------------
interested in the availability of the product, and not its price in order to satisfy his
----------------------
need. He would be ready to pay a higher price for the product if he gets it when
he wants it. In contrast, a person who has ample amount of time to purchase ----------------------
his desired product will be on the hunt for sellers offering him a discount, even
if he receives his product at a later date. Thus, the customer’s need plays a ----------------------
very important role in identifying customer and supply chain uncertainty. The
----------------------
following factors are responsible for the uncertainty in customers and supply
chains: ----------------------
i) The price of the product
----------------------
A customer placing an urgent order would be less sensitive about the price
----------------------
of the product, whereas a customer who requires the products at a late date
would be more sensitive to price and would surely bargain a little for the ----------------------
products required.
----------------------
ii) The variety of products required
----------------------
A customer may place a complete order with a single supplier if he has the
required variety of products and may also be ready to pay a little extra if ----------------------
the products are readily available. However, a person who does not find all
the products at a single place may hunt for places where he gets the desired ----------------------
variety and at a cheaper rate. ----------------------
----------------------

Notes iii) The service level required
---------------------- A customer placing an emergency order would expect high product

availability, thereby involving a small lead time. Whereas a customer who
---------------------- has placed an order well in advance may be involved in a longer lead time.
---------------------- iv) Tolerable response time
---------------------- The tolerable response time for an emergency order is likely to be short,
whereas the tolerable response time for a well-in-advance order is likely to
---------------------- be longer.
---------------------- v) Quantity required in each lot
---------------------- An urgent order for parts to repair an assembly line is likely to be small,
whereas parts required to construct a whole new assembly line is usually
---------------------- large.
---------------------- vi) Rate of product innovation
---------------------- People visiting high end malls in metropolitan cities expect a high level of
product innovation, whereas people in smaller cities may be less sensitive
---------------------- to a new product at any of the general stores.
---------------------- Thus, you will agree that customers in different segments have different
wants and customers of a single segment have similar needs. So, the main
---------------------- objective here is to combine all these factors that will help decide what the
---------------------- supply chain should do so as to satisfy the customers and achieve corporate
goals also.
----------------------
1.11 FACTORS AFFECTING STRATEGIC FIT
----------------------
---------------------- The topics that we have so far discussed above are limited to a single
product serving a single market segment in order to achieve a strategic fit. Let
---------------------- us now discuss the other issues affecting strategic fit achievement.
---------------------- These factors can be summarised as follows:

1) Large number of products and market segments
----------------------
2) Product life cycles
----------------------
3) Time related competitive changes
---------------------- These have been elaborated below:
---------------------- 1) Large number of products and market segments
---------------------- With the increase in demand of a large variety of products and the need
for quicker availability of the products and services, companies now provide a
---------------------- large number and types of products. These are prepared specially for different
market segments and are supplied to the customers as per their requirements on
---------------------- time.
----------------------

In the monsoons, a retailer may stock a large variety and quantity of Notes
umbrellas and raincoats in order to satisfy the seasonal demand due to higher
implied demand uncertainty. He also maintains sufficient stock of socks that ----------------------
have a lower implied demand uncertainty. Here, we can see that the umbrellas
and raincoats due to higher implied demand uncertainty will be expensive due ----------------------
to the rise in seasonal demand and shall serve the high end population. On the ----------------------
other hand, the socks due to lower implied demand uncertainty shall serve the
lower segment and will be comparatively cheaper too. ----------------------
Let us take another example, where a tailor stitches both standard and ----------------------
customised clothes. Now during the festive season, it is for sure that there will
be a higher implied demand uncertainty for customised clothes from a segment ----------------------
of people who want clothes for the festive season and would also be expensive.
----------------------
On the other hand, people who purchase the standard sizes of the clothes already
prepared by the tailor, have a lower implied demand uncertainty and will also ----------------------
be cheaper to buy, serving a segment of people who require these clothes for
daily wear. ----------------------
From the above cited examples, it is clear that any company while ----------------------
devising a supply chain strategy needs to strike the right balance between the
efficiency and responsiveness given its range of products, supply sources and ----------------------
market segments. A company, with respect to a large demand of a particular
----------------------
product may have separate supply chains for each of them or for a particular
market segment for a number of products. ----------------------
The company needs to tailor it’s supply chain by sharing certain links
----------------------
in the supply chain with some products, while having separate operations for
separate links. This helps to achieve maximum efficiency in terms of costs ----------------------
and responsiveness. For example, similar products are produced on the same
production line and products that are required urgently are shipped by air for ----------------------
quicker delivery.
----------------------
2) Product life cycles
----------------------
The demand for a particular product and the needs of various market
segments tend to change as and when the product goes through its life cycle. ----------------------
Changes in the above factors lead to a change in the supply patterns due to
maturity of the product and the introduction of sophisticated technology. Hi- ----------------------
tech products such as computers, laptops and mobile phones are prone or rather ----------------------
largely affected by these life cycle swings over a short period of time. Every
product has to go through the introductory phase where only a few innovative ----------------------
customers are interested and the supply of these products is uncertain till the
point at which the product becomes a commodity in the now saturated market ----------------------
where the supply can be easily predicted. Thus, a company needs to alter its ----------------------
supply chain strategy as and when a product moves from one phase to another.
Let us consider the demand and supply characteristics over the life cycle ----------------------
of a product. ----------------------
----------------------

Notes Beginning stage (Introductory and growth stages):
1. Uncertain demand and therefore unpredictable supply
----------------------
2. Higher margins and quick delivery
----------------------
3. Product availability necessary for capturing the market
---------------------- 4. Costs are not first priority
---------------------- Diminishing stage (Maturity and decline stages):
---------------------- 1. Certain demand and predictable supply

2. Less margins due to increased competition
----------------------
3. Price of the product is a significant factor for customer purchase
----------------------
Thus, from the above description of the demand and supply characteristics of
---------------------- a product through its lifecycle, it can be clearly understood that a company’s
supply chain strategy shall make a shift from being more responsive to being
---------------------- more efficient.
---------------------- Responsive
---------------------- Zone of Strategic Fit
---------------------- Responsiveness
Spectrum
----------------------
----------------------
---------------------- Efficient
---------------------- Product Implied demand Product

maturity uncertainty introduction
----------------------
---------------------- Fig. 1.7: Changes over the product life cycle

3) Time related competitive changes
----------------------
The final area that needs to be considered in order to match the competitive
---------------------- strategy and the supply chain strategy and obtain the status of strategic fit, a
company needs to keep a check on the competitor’s behaviour. Just like the
----------------------
product life cycles, competitors can change their grounds. As competitors flood
---------------------- the market with larger product varieties, customers become use to their needs
being satisfied. So, companies are required to produce larger variety of products
---------------------- with cost efficiency in mind. Thus, due to the large variety provided by the
competitors in today’s business, supply chains need to be upgraded, in order to
----------------------
fulfill the supply of a large variety of goods and services, resulting in the change
---------------------- of competitive strategy. So, both the competitive strategy and the supply chain
strategy need to be altered for a company to maintain a strategic fit.
----------------------
----------------------

Notes
Check your Progress 3
----------------------
State True or False. ----------------------
1. First time placement of a new product would be tricky, as the quantity
----------------------
could be too much or too less.
2.
Supply chain management of single well-established consumer ----------------------
product selling well is probably the most challenging job.
----------------------
----------------------
1.12 THE ROLE PLAYED BY MAJOR DRIVERS IN
ACHIEVING STRATEGIC FIT ----------------------
We know that in order to achieve a strategic fit, a company needs to ----------------------

balance its efficiency with responsiveness in its supply chain so as to suit its
----------------------
competitive strategy. Thus, in order to keep a check on this balance, a company
needs to analyse the performance of the drivers of its supply chain i.e. the ----------------------
facilities, inventory, transportation and information, as this would also help the
company to know how and when it has achieved the strategic fit. ----------------------
The major drivers of any supply chain are: ----------------------
a) Facilities (for example, Production unit) ----------------------
b) Inventories (for example, Stock of goods)
----------------------
c) Transportation (for example, Modes and Routes)
----------------------
d) Information (for example, Customer demand)
Now we are going to learn how each and every supply chain driver plays ----------------------
an important role in the supply chain, by mentioning the functions performed
----------------------
by them:
a) Facilities ----------------------
The facilities include all those places where the material is stored, ----------------------
assembled, fabricated or produced. For example, production unit and storage
house. The capacity, function, location and flexibility of a facility largely affect ----------------------
the performance of a supply chain. For example, a food product distributor ----------------------
in order to attain responsiveness may open many facilities near its targeted
customers, or may also operate from a lesser number of facilities in order to ----------------------
achieve efficiency.
----------------------
b) Inventory
----------------------
Inventory refers to the raw material, work in progress and finished
goods present within a supply chain. The inventory of a supply chain is a very ----------------------
important driver because any change in the inventory can have a dramatic effect
on the company’s supply chain, which in turn would affect the efficiency and ----------------------
responsiveness of the supply chain.
----------------------

Notes For example, a footwear retailer can have a huge inventory in order to
fulfill the demand of its customers as and when they arrive, thereby making it
---------------------- more responsive to customer demand. However, this highly responsive retailer
would become less efficient as the increased inventory would increase the costs.
----------------------
c) Transportation
----------------------
Transportation involves the movement of inventory from one place to
---------------------- another in the supply chain. Transportation involves the selection of the modes
and the routes of transport that are best suited for the company. The combination
---------------------- of the mode and route of transportation chosen can have a great impact on the
efficiency and responsiveness of the supply chain. For example, an exporter may
----------------------
send his goods by air to the desired destination thereby being highly responsive,
---------------------- as the goods would reach quickly. However, he may also ship it, which would
be an efficient mode of transport but less responsive as the delivery would take
---------------------- more amount of time.
---------------------- d) Information
---------------------- It is important to note that the term Information is not misunderstood as

the marketing information of a company, (its offers or schemes). It includes data
---------------------- and the analysis about the various facilities, inventories, the modes and routes
of transport and its customer’s involved in the supply chain. The information of
---------------------- any supply chain is perhaps the biggest driver of a supply chain, this is because
---------------------- the information of a supply chain directly affects each and every driver in
the supply chain.It is this driver that helps the company and its management
---------------------- to become highly responsive and efficient in its supply chain. For example,
the customer demand for a particular product would enable the producer to
---------------------- maintain inventory and stock the produce in order to meet this demand; e.g.
---------------------- during the rainy season for products like raincoats and umbrellas. Thus, here a
company has become more responsive. Similarly, a fall in the customer demand
---------------------- would enable a company not to stock goods or maintain a large inventory as
this would increase its costs and thereby make it less efficient. Information
---------------------- regarding different modes of transport would enable the managers to select the
---------------------- cheapest or quickest mode of transport enabling them to be more responsive or
more efficient as the situation arises.
----------------------
1.13 THE OBSTACLES IN STRATEGIC FIT
----------------------
ACHIEVEMENT
----------------------
We have learnt until now that in order to achieve a strategic fit, a
---------------------- company needs to strike a balance between efficiency and responsiveness. In its
endeavour to achieve this strategic fit, the company needs to understand what
---------------------- the customer wants, on the basis of which the company should place itself on
---------------------- the responsiveness spectrum. However, this is not easy as the company faces a
lot of obstacles and it takes years and years for a company to achieve this goal
---------------------- of strategic fit.
----------------------

The obstacles are becoming dynamic creating more difficulties for Notes
companies to create a proper balance. On the other hand they have also helped
the companies with increased opportunities to improve on the supply chain ----------------------
management. Thus, managers have to play a very important role in tackling
these obstacles in order to turn it to an advantage and in turn increase the ----------------------
profitability of their supply chain. Obstacles can be of various types some of ----------------------
which are as under:
----------------------
a) Increase in product variety
----------------------
b) Increase in demanding customers
----------------------
c) Smaller product lifecycles
d) Effect of globalisation ----------------------
e) Difficulty in execution of strategies ----------------------
a) Increase in product variety ----------------------

The demand of customers has been continuously increasing. There has been ----------------------
a continuous increase in the demand for customised products. Information
technology and computers are sectors that have seen immense increase ----------------------
in demand for customised products and services, and manufacturers and
----------------------
service providers have provided their customers with the desired products
and services. ----------------------
b) Increase in demanding customers
----------------------
‘Customer is King’ in today’s world. There has been an increase in the
number of customers who constantly demand improved services like timely ----------------------
delivery, cost, product performance, discounts and shorter lead times. And,
----------------------
if a supplier cannot provide this to his customer, he would shift to another
supplier. It is very difficult for any company to increase the prices of its ----------------------
products as this would lead to a decrease in the market share. However,
customers want better product performance, better offers and more from ----------------------
the company, and that too without any price rise. This rise in demanding
----------------------
customers means that a supply chain must provide more and better services
to its customer to maintain a good position in the market and become a ----------------------
global leader the world over.
----------------------
c) Smaller product life cycles
With the increase in the number and types of products demanded, there ----------------------
has been a decrease in the life cycles of a large number of products. Today, ----------------------
there are products whose life cycles can be measured in terms of months,
like mobile phones and computers unlike products that would remain in ----------------------
the market for years and years. The automobile sector has also seen vast
development due to which there has been a decrease in the life cycle of ----------------------
many auto components. This becomes a major supply chain obstacle as ----------------------
the producers have to manufacture new products and also have to face the
uncertain demand of the customers. Thus, a larger gap between the supply ----------------------

Notes and demand for products and services is created, thereby becoming a major
obstacle in the supply chain.
----------------------
d) Effect of globalisation
---------------------- The removal of trade restrictions by various governments has enabled
increased Global Trade. The effects of globalisation on supply chains
----------------------
have been tremendous and have also provided supply chains a broader
---------------------- environment to work in. Firstly, globalisation has made supply chains
global, that has provided supply chains a platform to source from a large
---------------------- number of global suppliers, provided better benefits like cheaper products
as compared to the ones available in the home country. However, these
----------------------
benefits make coordination between the drivers of the supply chain more
---------------------- and more difficult to exercise.
Secondly, it has allowed foreign players to enter the local markets and this
----------------------
has created tremendous competition among the players in every domestic
---------------------- market. This is increasing the strain on the supply chain performance.
---------------------- e) Difficulty in execution of strategies

The creation of a successful supply chain strategy is not very easy. The
---------------------- formulation of the strategy may be easy; however the execution of this
---------------------- strategy is most difficult. The successful execution of a supply chain
strategy involves the skillful ability of employees and managers at each
---------------------- and every level of the organisation.
---------------------- From the above discussed obstacles that arise in achieving a strategic fit, it can
be seen that these obstacles make it more difficult for any company to achieve a
---------------------- strategic fit by creating a balance between responsiveness and efficiency in the
supply chain. But, it should also be noted that these obstacles help the supply
---------------------- chains by providing them with an opportunity to work on the untapped areas
---------------------- where improvement is required. This makes supply chain management liable to
the success or failure of companies.
----------------------
----------------------
---------------------- State True or False.

---------------------- 1. Transportation is the only driver of product supply chain.
---------------------- 2. Delighting customers by adding variety to a product range would

usually make supply chain planning more difficult.
----------------------
---------------------- 1.14 IMPORTANCE OF SCM IN BUSINESS MANAGEMENT

---------------------- According to the Society of Indian Auto Manufacturers, sale of automobile
---------------------- will increase four times than that of today. Last years the sale was 36 billion
dollars, which will reach up to 145 billion dollars in 2016. Moreover, the
---------------------- current trends of outsourcing and customisation force automobile component

manufacturing industry to find flexible ways to meet this upcoming demand. Notes
Hence, this study will focus on supply chain management as a strategic tool to
face challenges ahead for automobile component manufacturing industry. ----------------------
Business focus is changing from complete manufacturing to more ----------------------
outsourcing, purchasing and assembly, based on the core competence of the
organisation, since in the large number of cases, raw material & component ----------------------
cost are of the order of 60-80% of the product costs. Companies can save a
----------------------
lot with a small percentage reduction in the cost of materials, its management
and coordination efforts. Companies also want to share with their suppliers ----------------------
the burden of flexibility and responsiveness to take care of varying customer
demands, their timings and risk of product developmental efforts and costs ----------------------
involved. This is due to the fact that fierce competition, changing customer’s
----------------------
preference and compressed product life cycle are reducing profit margins.
Therefore, companies want to play safe to avoid risks, but simultaneously want ----------------------
to maintain the flexibility of the business. This is a shared way of handling
business risks and variations. ----------------------
----------------------
Activity 1
----------------------
1. Let us say that you are the CEO of a big company and you wish to put ----------------------
up a new manufacturing plant. What are the supply chains decisions
that you need to take before you begin on your new project? ----------------------
2. With an example, differentiate between a push view and a pull view ----------------------
process of a supply chain.
----------------------
3. How would you make use of the supply chain macro processes to
achieve, to the greatest extent, both responsiveness and efficiency in ----------------------
your company? A practical answer is expected.
----------------------
4. Imagine you own a pharmaceutical company. With what competitive
strategy would you introduce your drugs into the market? ----------------------
5. Let us assume that you are the supply chain manager of a company
----------------------
that produces mobile phones. Explain the effect of your competitor’s
entry with better variety and cheaper mobile phones into the market. ----------------------
What would be your reaction to the supply chain? Does it require an
alteration or does it not? ----------------------
----------------------
Summary ----------------------
 A supply chain is a network of facilities and distribution options that ----------------------
performs the functions of procurement of materials, transformation
of these materials into intermediate and finished products, and the ----------------------
distribution of these finished products to customers. Supply chains exist
in both service and manufacturing organisations, although the complexity ----------------------
of the chain may vary greatly from industry to industry and firm to firm. ----------------------

Notes  In this unit, we have discussed three different types of decision phases in
the supply chain management, which are:
----------------------
1. Supply Chain Design
---------------------- 2. Supply Chain Planning
---------------------- 3. Supply Chain Operation
 The supply chain process is a sequence of processes and flows that take
----------------------
place between different stages, which together help to satisfy the needs of
---------------------- a customer.
---------------------- We can view the supply chain processes in two different forms:
----------------------  Cycle View which includes four different cycles

 Push/Pull View
----------------------
 Finally, we discussed the importance of supply chain management

----------------------
in today’s business as business focus is changing from complete
---------------------- manufacturing to more outsourcing, purchasing and assembly, based on
the core competence of the organisation, since in the large no of cases, raw
---------------------- material & component cost are of the order of 60-80% of the product costs.
---------------------- Companies can save a lot with a small percentage reduction in the cost of
materials, its management and coordination efforts. Companies also want
---------------------- to share their suppliers the burden of flexibility and responsiveness to
take care of varying customer demands, their timings and risk of product
---------------------- developmental efforts and costs involved. It is due to the fact that fierce
---------------------- competition, changing customer’s preference and compressed product
life cycle are reducing profit margins. Therefore, companies want to play
---------------------- safe to avoid risks, but simultaneously want to maintain the flexibility of
the business.
----------------------
 Supply Chain Management is a total system approach to managing the
---------------------- flow of information, materials and services from raw material suppliers
through factories and warehouses to the end customer. Supply Chain
---------------------- Management is the discipline which encompasses the end to end business
---------------------- activities carried out in any business, independent of the manufacturing or
service sectors. In fact it is the only way today in which businesses need
---------------------- to be carried out in order to encourage and endorse a win-win relationship
among the business partners concerned.
----------------------
---------------------- Keywords
----------------------  Logistics: System of transportation to get the product to the customer.
----------------------  Pull View: A Pull process is one in which execution is initiated after the
customer’s order is received.
----------------------
 Push view: A Push process is one in which execution is initiated in
---------------------- anticipation of a customer’s order.

 SRM: SRM consists of all those processes that take place at the interface Notes
between the concerned firm and its suppliers.
----------------------
 Strategic fit: Strategic fit ensures that both the supply chain and
competitive strategy have the same goal. ----------------------
----------------------
----------------------
1. Give any three definitions of supply chain management.
2. Which are the different decision phases in supply chain management? ----------------------
3. Depict the following SCM cycles: ----------------------

i) The Customer order cycle ----------------------
ii) The Replenishment cycle
----------------------
iii) The Manufacturing cycle
----------------------
iv) The Procurement cycle
4. What is difference between Pull and Push process in SCM? ----------------------
5. Describe the different pitfalls discussed in this unit. ----------------------
6. Discuss the nature and scope of Supply Chain Management.
----------------------
7. What is competitive strategy? Discuss the relationship between
competitive strategy and SCM strategy. ----------------------
8. What is strategic fit? Discuss various ways of achieving strategic fit. ----------------------
9. What are major drivers in SCM?
----------------------
10. List various factors affecting strategic fit.
----------------------
Answers to Check your Progress ----------------------
Check your Progress 1 ----------------------
Fill in the blanks. ----------------------
1. Supply Chain Management touches end-to-end business activities.
----------------------
2. Supply chain activities account for 60-80 % of the product costs.
----------------------
Multiple Choice Single Response. ----------------------
1. ‘Pull’ based planning implies more of ----------------------
ii. Made to order planning ----------------------
2. Activities covered by CRM would not include
----------------------
iii. Production
----------------------
3. Aim of inventory management should be
iv. Optimum stock and competitive service ----------------------

Notes Check your Progress 3
State True or False.
----------------------
1. True
----------------------
2. False
---------------------- 1. False
2. True
----------------------
---------------------- Suggested Reading

---------------------- 1. Ayers, James B. Handbook of Supply Chain Management. CRC Press.
---------------------- 2. Shah, Janat. Supply Chain Management: Text and Cases. Pearson
Education India.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
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----------------------
----------------------

Logistics to Supply Chain Management (SCM)
UNIT
2
Structure:
2.1 Introduction to Logistics Management
2.2 Productivity in Logistics Management
2.3 A Logistics Performance Framework
2.4 Logistics at the Strategic Level
2.5 Logistics to Supply Chain Management
Summary
Key Words
Suggested Reading
Logistics to Supply Chain Management (SCM) 29

Notes
Objectives
----------------------
----------------------
• Define elements of logistics management
----------------------
• Identify the role of logistics management in SCM
---------------------- • Justify the role of productivity in logistics management
---------------------- • Assess logistics management at the strategic level
---------------------- 2.1 INTRODUCTION TO LOGISTICS MANAGEMENT

----------------------
Logistics is the art and science of managing and controlling the flow
---------------------- of goods, energy, information and other resources like products, services,
and people, from the source of production to the marketplace. It is difficult
---------------------- to accomplish any marketing or manufacturing without logistical support. It
involves the integration of information, transportation, inventory, warehousing,
----------------------
material handling, and packaging. The operating responsibility of logistics is
---------------------- the geographical repositioning of raw materials, work in process, and finished
inventories wherever required at the lowest cost possible.
----------------------
The word logistics originates from the ancient Greek ‘logos,’ which
---------------------- means “ratio, word, calculation, reason, speech, oration”.
---------------------- Logistics as a concept is considered to have evolved from the military’s

need to supply themselves as they moved from their base to a forward position.
---------------------- In ancient Greek, Roman and Byzantine empires, there were military officers
with the title ‘Logistikas’ who were responsible for financial and supply
---------------------- distribution matters.
---------------------- The Oxford English dictionary defines logistics as: “The branch of military
science having to do with procuring, maintaining and transporting material,
---------------------- personnel and facilities.” Another dictionary definition is: “The time related
---------------------- positioning of resources.” As such, logistics is commonly seen as a branch of
engineering which creates ‘people systems’ rather than ‘machine systems’.
---------------------- The term ‘Logistics ‘ was also in use in the days of Louis XIV of France.
---------------------- It was even felt then that the effectiveness of the military organisation did not
merely depend on the weapons, fighting skills and the fighting spirit of the
---------------------- soldiers. It was also affected by the efficiency of transportation and supply of
ammunition and food. Logistics was the term used for this military support (i.e.
---------------------- transportations and supply of food materials and ammunition).
---------------------- Logistics management when considered in the context of industrial
activity, reflect similar kind of approach to improve flow of product from source
----------------------
through different stages and finally to customer. In India, the concept is gaining
---------------------- ground.
Current market forces - increased competition, high costs of acquisition
----------------------
and distribution of products including raw materials, increased services levels
demanded by the customers and shrinking profits - have forced the management Notes
to realise the need and importance of efficient management of physical flow of
raw materials, components/parts, spares, work-in-process and finished goods ----------------------
from suppliers, through the organisation and finally to the customer. Every
organisation, be it in the manufacturing or non-manufacturing sector, requires a ----------------------
tool/system for the integration and coordination of different functional activities ----------------------
to smoothen the flow at minimum cost. Logistics management has also been
known by various other names such as total physical distribution, complete flow ----------------------
management, and supply management. Another term which is being widely
used in the USA and is gaining ground in other countries is integrated logistics ----------------------
management. ----------------------
Logistics management encompasses all materials flows management,
----------------------
from the inflow of purchased materials into works (i.e. materials planning of
suppliers to works, receiving and inspection and storage of materials), materials ----------------------
flow through manufacturing processes (i.e. materials issues and material
handling) and material flow to customers (physical distribution). ----------------------
Factors affecting logistics function ----------------------
The following factors affect logistics function:
----------------------
 Lack of standardisation. If new components are specified for each new
product, the time for the planning and procurement will increase. ----------------------
 Too close tolerances and high finishes, tend to restrict procurement from a ----------------------
few suppliers and thereby retard the efficiency of the logistics management.
----------------------
 Efficiency of the production function affects logistics function to a large
extent. ----------------------
 Effectiveness of production, planning and control affects materials flow. ----------------------
Schmidt (1986) describes logistics management as:
----------------------
“The management (i.e..the planning, execution and control) of all
factors that affect the materials flow and the information about it, seen from ----------------------
the perspective of customer requirements, for the purpose of achieving a high ----------------------
delivery, a high reliability, a high degree of completeness and a short delivery
time.” ----------------------
Institute of Purchasing and Supply looks at logistics as: ----------------------
“Logistics is the concept which seeks to provide for the management
and coordination of the activities within the supply chain from sourcing and ----------------------
acquisition, through production, where appropriate and on through distribution ----------------------
channels to the customer. The goal of logistics is the creation of competitive
advantages through the simultaneous achievement of high customer service ----------------------
levels, optimum investment and value for money.”
----------------------
According to Bowersox and Closs
----------------------
“Logistics Management includes the design and administration of systems
to control the flow of materials, work in progress and finished inventory to ----------------------
support business unit strategy.”
Notes From these definitions we can conclude that:
 Logistics management is the function of managing the total flow of
----------------------
materials which includes movement of raw materials from suppliers, in
---------------------- process within the firm, and movement of finished goods to customer.
 Logistics management covers both physical flow of products as well as
----------------------
information flows covering reports and documentation relating to goods
---------------------- movement.
 Logistics management evolves procedures that meet customer service at
----------------------
minimum cost.
----------------------  Logistics management achieves cost reduction by speeding flow of
---------------------- materials, work-in progress and finished products.
Objectives of Logistics Management
----------------------
 Basic objective of a good logistic system is to get the right good or services,
---------------------- to the right place, at the right time, in the right condition and at the right
cost. The objectives of logistics management include to:
----------------------
 Minimise the operating cost of physical material system.
----------------------
 Reduce time spent at every stage of the chain from procurement to delivery
---------------------- to customer.
 Add value at every stage of the logistic pipeline.
----------------------
 Control and reduce wherever possible, inventory of raw materials, work-
---------------------- in-progress and finished goods.
----------------------  To raise company’s image and improve its competitive position in the
market.
----------------------
 Improve company’s communications both internally and externally.
----------------------
 Implement the principle of just-in-time.
----------------------  Promote co-operation and coordination among sub-systems by making
them realise that their activities are interrelated and interdependent.
----------------------
Activities of the Logistics Function
----------------------
Logistics function consists of the following sets of activities:
---------------------- Order processing: Though this activity does not contribute most to total cost,
---------------------- yet it is treated important because of its contribution to lead time.
Transportation management: Transportation involves firm’s own transport (if
----------------------
goods are to collected).
---------------------- Logistics Management with Various Concepts
---------------------- Military logistics
---------------------- In military logistics, experts manage how and when to move resources
to the places they are needed. In military science, maintaining one’s supply
---------------------- lines while disrupting those of the enemy is a crucial-some would say the most

crucial-element of military strategy, since an armed force without food, fuel and Notes
ammunition is defenseless.
----------------------
The Iraq war was a dramatic example of the importance of logistics. It
had become very necessary for the US and its allies to move huge amount of ----------------------
men, materials and equipment over great distances. Led by General William
Pagonis, Logistics was successfully used for this movement. The defeat of the ----------------------
British in the American War of Independence, and the defeat of Rommel in
----------------------
World War II, have been largely attributed to logistical failure. The historical
leaders Hannibal Barca, Alexander the Great and the Duke of Wellington are ----------------------
considered to have been logistical geniuses.
----------------------
Logistics Management
Logistics Management is that part of the supply chain which plans, ----------------------
implements and controls the efficient, 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 customers’ requirements. ----------------------
Business logistics ----------------------
Logistics as a business concept evolved only in the 1950s. This was mainly
due to the increasing complexity of supplying one’s business with materials ----------------------
and shipping out products in an increasingly globalised supply chain, calling ----------------------
for experts in the field who are called Supply Chain Logisticians. This can be
defined as having the right item in the right quantity at the right time for the ----------------------
right price and is the science of process and incorporates all industry sectors.
The goal of logistic work is to manage the fruition of project life cycles, supply ----------------------
chains and resultant efficiencies. ----------------------
In business, logistics may have either internal focus (inbound logistics),
or external focus (outbound logistics) covering the flow and storage of materials ----------------------
from point of origin to point of consumption. The main functions of a logistics ----------------------
manager include Inventory Management, purchasing, transport, warehousing,
and the organising and planning of these activities. Logistics managers combine ----------------------
a general knowledge of each of these functions so that there is a coordination
of resources in an organisation. There are two fundamentally different forms of ----------------------
logistics. One optimises a steady flow of material through a network of transport ----------------------
links and storage modes. The other coordinates a sequence of resources to
carry out some project. Logistics as a concept is considered to evolve from the ----------------------
military’s need to supply themselves as they moved from their base to a forward
position. In ancient Greek, Roman and Byzantine empires, there were military ----------------------
officers with the title ‘Logistikas’ who were responsible for financial and supply ----------------------
distribution matters.
----------------------
Production logistics
The term is used for describing logistic processes within an industry. The ----------------------
purpose of production logistics is to ensure that each machine and workstation
----------------------
is being fed with the right product in the right quantity and quality at the right
point in time. ----------------------

Notes The issue is not the transportation itself, but to streamline and control
the flow through the value adding processes and eliminate non-value adding
---------------------- ones. Production logistics can be applied in existing as well as new plants.
Manufacturing in an existing plant is a constantly changing process. Machines
---------------------- are exchanged and new ones added, which give the opportunity to improve
---------------------- the production logistics system accordingly. Production logistics provides the
means to achieve customer response and capital efficiency.
----------------------
Logistic Engineering deals with the science of Logistics. Logistics is about
---------------------- the purchasing, transport, storage, distribution, warehousing of raw materials,
semi-finished/work-in-process goods and finished goods. Managing all these
---------------------- activities efficiently and effectively for an organisation is the main question at
the back of the mind of any logistic engineer.
----------------------
Different performance measures are used to examine the efficiency of an
---------------------- organisation’s logistics. The most popular and widely used performance measure
is the landed cost. The landed cost is the total cost of purchasing, transporting,
----------------------
warehousing and distributing raw materials, semi-finished and finished goods.
---------------------- Another performance measure equally important is the end customer fill
rate. It is the percentage of customer demand which is satisfied immediately
----------------------
off-shelf. Logistics is generally a cost-center service activity, but it provides
---------------------- value via improved customer satisfaction. It can quickly lose that value if the
customer becomes dissatisfied. The end customer can include another process
---------------------- or work center inside of the manufacturing facility, a warehouse where items
are stocked or the final customer who will use the product.
----------------------
Another much more popular derivative and a complete usage of the logistic
---------------------- term which has appeared in recent years is the supply chain. The supply chain
---------------------- also looks at an efficient chaining of the supply/purchase and distribution sides
of an organisation. While Logistics looks at single echelons with the immediate
---------------------- supply and distribution linked up, supply chain looks at multiple echelons/
stages, right from procurement of the raw materials to the final distribution
---------------------- of finished goods up to the customer. It is based on the basic premise that the
---------------------- supply and distribution activities if integrated with the manufacturing/logistic
activities, can result in better profitability for the organisation. The local minima
---------------------- of total cost of the manufacturing operation is getting replaced by the global
minima of total cost of the whole chain, resulting in better profitability for the
---------------------- chain members and hence lower costs for the products.
---------------------- “Logistics Engineering” as a discipline is also a very important aspect
of system engineering that includes reliability engineering. It is the science
---------------------- and process whereby reliability, maintainability, and availability are designed
---------------------- into products or systems. It includes the supply and physical distribution
considerations above as well as more fundamental engineering considerations.
---------------------- For example, if we want to produce a system that is 95% reliable (or improve
a system to achieve 95% reliability), a logistics engineer understands that
---------------------- total system reliability can be no greater than the least reliable subsystem or
---------------------- component. Therefore our logistics engineer must consider the reliability of

all subcomponents or subsystems and modify system design accordingly. If a Notes
subsystem is only 50% reliable, one can concentrate on improving the reliability
of that subsystem, design in multiple subsystems in parallel (5 in this case would ----------------------
achieve approximately 97% reliability of that subsystem), purchase and store
spare subsystems for rapid change out, establish repair capability that would ----------------------
get a failed subsystem back in operation in the required amount of time, and/ ----------------------
or choose any combination of those approaches to achieve the optimal cost vs.
reliability solution. Then the engineer moves onto the next subsystem. ----------------------
----------------------
2.2 PRODUCTIVITY IN LOGISTICS MANAGEMENT
----------------------
The term productivity is often ill-defined but, basically, its measurement
is that of a prescribed output to the resources consumed. It can be divided into ----------------------
three main types:
----------------------
1. Partial measures being a ratio relating output to a single input, such as
labour, materials or capital. ----------------------
2. Total factor or value-added productivity being based on sales less bought- ----------------------
in goods, materials and services.
----------------------
3. Total productivity measures being a ratio of total output to total input.
----------------------
The competitive priorities in operations strategy, according to Krajewski
and Ritzman (1993, pp. 47-52), are cost, quality, time and flexibility. Hence, any ----------------------
productivity or performance gauges in logistics should embrace these factors.
A study, carried out almost 20 years ago by The National Council of Physical ----------------------
Distribution Management (1978), shows that not all the indicators commonly ----------------------
used in logistics to monitor productivity are strictly output/input measures as
many relate more to utilisation and efficiency. It also suggests that measures ----------------------
should be more complete and comparable, covering the use of all resources.
Such an approach is even more valid in today’s complex environment. ----------------------
Ballou (1987, pp. 389-98) and Coyle et al (1992, pp. 500-2) list various basic ----------------------
logistics productivity ratios; they believe these can be used to control such
elements as warehousing, transportation, inventory and customer service. Their ----------------------
measures are almost entirely partial and are not integrated, and, consequently, ----------------------
they have limited application, mainly at the operational rather than the strategic
level. Moreover, logistics management has always contained basic performance ----------------------
indicators, as expounded by Fawcett et al. (1992, pp. 16-17), such as customer
service effectiveness and distribution efficiency. However, as Heap (1992, p. 9) ----------------------
explains, although efficiency and effectiveness are the cousins of productivity, ----------------------
they are not its clone. Effectiveness is the ability of an organisation to fulfill
its objectives, while efficiency is the relationship between actual and standard ----------------------
performance. Productivity, therefore, can be seen as the combination of
effectiveness and efficiency and described as the value of performance achieved ----------------------
in relation to the cost of resources used. ----------------------
----------------------

Notes Table 2.1: A proforma of the logistics performance framework
Information
---------------------- Procurement Packaging Handling Storing Transport Systems Total
Total productivity x x x x x x X
---------------------- Quality of operation x x x x x x X
Flexibility x x x x x x X
---------------------- Speed of operation x x x x x x X
Capacity utilisation x x x x x x X
---------------------- Total X X X X X X X
---------------------- The international group, TNT, as revealed by Geanuracos and Meiklejohn

(1993, pp. 115, 207) and Fitzgerald and Moon (1996, pp. 17-41), employ
---------------------- productivity and performance yardsticks relating to logistics which combine
employee productivity analysis with best-of-group benchmarking as a way of
---------------------- both monitoring the effectiveness of the delivery process and setting targets.
---------------------- They emphasise that, in the performance scenario, the main difference from
traditional systems in measuring business processes is not the analytical tool but
---------------------- the scale of the measurement. This is when organisations run into difficulties
of data availability if they attempt to use their existing management accounting
---------------------- systems to develop measures of business process efficiency.
---------------------- ‘In the performance scenario, the main difference from traditional systems
in measuring business processes is not the analytical tool but the scale of the
----------------------
measurement...’
---------------------- As an overview, Sumanth (1984, pp. 122-46), in a simplistic manner,
provides the continuous total productivity management cycle of measurement,
----------------------
evaluation, planning and improvement. Its overall effectiveness depends on the
---------------------- combination of the components’ individual effectiveness. He believes that its
objective is to increase total productivity, mirrored in the reduction of the real
---------------------- unit costs of goods or services at the highest quality possible.
---------------------- Productivity measures should be viewed as meaningful indicators in the
control and analysis of logistics performance and should also form part of a
---------------------- balanced set of yardsticks. This is because such measurement provides a strategic
focus for objectives which everyone in the organisation should understand
----------------------
and work towards. Measurement represents only the starting point of a cycle,
---------------------- creating a dialogue between the specialists responsible for measurement and
analysis, and the managers accountable for employee commitment and actions
---------------------- taken.
----------------------
2.3 A LOGISTICS PERFORMANCE FRAMEWORK
----------------------
Productivity and performance measures need to reflect the objectives and
---------------------- goals of logistics management. Total productivity appears the only relevant
productivity measure for decision-making purposes as it incorporates all inputs.
----------------------
Partial measures are useful only when concentrating on one particular input,
---------------------- such as labour, while the others are held constant. In the service industry, where
often output is difficult to measure because of its intangibility, a proxy form of
---------------------- productivity indicator can be used.

A further development of this concept is that a matrix of indicators can Notes
be formulated to relate the main processes of logistics to the major long-term
goals. The goals selected, related to the chosen processes, can be defined as ----------------------
follows:
----------------------
 Total productivity: This is the total output or throughput in relation to the
total cost. Inflation is isolated by founding calculations on a base year. The ----------------------
measure is the inverse of real unit cost.
----------------------
 Quality of operation: This relates to customer requirements and needs
being consistently satisfied, whether for a product or a service. ----------------------
 Flexibility: This is the ability to adapt and accommodate, from both the ----------------------
viewpoints of the supplier and the customer, ensuring minimal costs and
delays. ----------------------
 Speed of operation: This is the efficient use of time from order to delivery. ----------------------
 Capacity utilisation: This is the measure, related to a maximum, of an ----------------------
organisation’s ability to provide demanded goods or services in the amount
requested and in a timely manner. ----------------------
To aid management in its decision making, such a matrix would assist in ----------------------
a three-stage pathway:
----------------------
1. Setting objectives, goals and standards of performance.
2. Measuring the performance. ----------------------
3. Taking action to improve performance. ----------------------
----------------------
----------------------
1. Logistics is function of management of ______ flow of materials.
----------------------
2. Flexibility adds to capability to deliver variety and avoid service
_______. ----------------------
----------------------
2.4 LOGISTICS AT THE STRATEGIC LEVEL ----------------------
Strategic planning is affected by the total environment of the organisation, ----------------------
both externally and internally. Within the context of logistics management, the
four key factors of the logistics strategic environment are: competition, markets ----------------------
served, technology and stakeholders’ satisfaction. Once these are analysed,
relevant performance measures can then be developed to monitor the long-term ----------------------
success of the chosen strategy and the underlying determinants of that strategy. ----------------------
In this respect, combining both the approaches of Tidd (1994, pp. 212-25)
and Fitzgerald et al. (1991, pp. 7-9), a strategic model can be constructed. It ----------------------
displays the linking of the logistics strategy to the organisation’s environment, ----------------------

Notes as well as incorporating the relevant performance measures.
Competition Logistics Markets served
---------------------- strategy
---------------------- Technology Shareholders satisfaction
----------------------
---------------------- Performance
---------------------- Resultant success of chosen strategy  Market competitiveness
 Financial performance
----------------------
Determinants of competitive success  Quality
----------------------  Productivity
----------------------  Innovation
 Lead time
----------------------
Fig. 2.1: A strategic model for logistics management
----------------------
The competition can be analysed by size, number and capability, with the
---------------------- markets served comprising volume, variety and life cycles. Technology should
include an analysis of computer-integrated systems, electronic data interchange,
----------------------
as well as resource planning. With regard to stakeholders’ satisfaction, this
---------------------- would embrace employees, customers, shareholders as well as society at large.
As Schermerhorn (1993, pp. 701-02) points out, management must have a social
---------------------- responsibility both towards employees and the environment. In the logistics
field, related examples could include common delivery to minimise pollution
----------------------
and avoidance of on-the-job stress which may be attributed to non-productive
---------------------- behaviour.
---------------------- In the model, performance is measured across six dimensions which fall
into two distinct categories: results of the effectiveness of a chosen strategy
---------------------- and the operational determinants of competitive success. This philosophy can
be demonstrated by SKF, whose innovative channel concept of lean production
----------------------
and lean logistics has allowed the company to become faster and more efficient.
---------------------- The group’s leading market position is based on strong quality awareness,
with innovation in operations assisting in the achievement of productivity and
----------------------
quality goals. As reported by Ellis and Williams (1995, p. 355), Mauritz Sahlin,
---------------------- Chairman of SKF, states that such a philosophy is more a matter of mental
channels and a total change in perception of production.
----------------------
Parasuraman et al. (1988) identify five distinct dimensions of service
---------------------- performance:
---------------------- 1. Tangibles: Physical facilities, equipment, appearance of personnel.
---------------------- 2. Reliability: Ability to perform the promised service, with dependability
---------------------- and accuracy.

3.
Responsiveness: Willingness to help customers and provide prompt Notes
service.
----------------------
4. Assurance: Knowledge and courtesy of employees and their ability to
inspire trust and confidence. ----------------------
5. Empathy: Caring, individualised attention provided to customers.
----------------------
These essentials must be incorporated in the strategic thinking. The
----------------------
adoption of the customer care philosophy inherent in these aspirations has
sound business objectives: that is, customer retention through satisfaction and ----------------------
loyalty. Consequently, there must be a balance between productivity reflected
in real unit costs and throughput times with total quality mirrored in perceived ----------------------
customer value. ----------------------
As Geanuracos and Meiklejohn (1993, pp. 115, 207) advocate, the initial ----------------------
requirement for a performance measurement review is to achieve consensus
amongst the top managers as to what the strategic direction of the organisation ----------------------
is. Within this thinking, the mix of labour and capital inputs, and their
----------------------
partial productivities in total productivity analysis is essential for sustained
profitability. Thus, management is able to adopt the strategic direction to match ----------------------
the organisational productivity objectives. An axis (see Figure 2.2) can thus be
----------------------
developed to incorporate the level of strategic commitment in relation to both
the inputs of capital and labour resources in the effective pursuit of high total ----------------------
productivity and, hence, low real unit costs.
----------------------
Labour oriented
Labour improvement High total
----------------------
productivity productivity
----------------------
Excess capital Capital oriented ----------------------
investment improvement
----------------------
----------------------
Low total Inefficient use of
productivity labour resources ----------------------
Capital productivity
----------------------
Fig. 2.2: The total productivity axis
----------------------
Hörnell (1992, pp. 231-54) believes that there are lessons to be learned from
world leaders in productivity. These include: ----------------------
 Cost effectiveness and innovation. ----------------------

 Effective interaction with the surrounding world. ----------------------
 Ability to deal with change efficiently.
----------------------
 Linking organisational structure with technology.
----------------------

Notes They echo much of the preaching of Porter (1985, pp. 33-61) in that the
most productive companies handle neither the cheap nor the more exclusive
---------------------- and expensive products or services. Their image is associated with providing
high performance at a competitive price. They are also strongly aware of the
---------------------- importance of high productivity and ensure that measurement, evaluation, as
---------------------- well as planning and improvement, are performed in a thorough manner.
Achieving sustained profitability in the logistics environment depends
----------------------
considerably on the organisation’s ability to anticipate change and adapt to
---------------------- it. Strategically, the organisation must creatively manage its resources while
maintaining its competitive edge. As Christopher (1992, pp. 8-10, 209-27) cites
---------------------- in a study carried out in North America for the Council of Logistics Management
to identify the characteristics of companies which were at the leading edge
----------------------
in logistics, one of the main recommendations was the inevitable call for the
---------------------- employment of more comprehensive and integrated performance measurement.
---------------------- 2.5 LOGISTICS TO SUPPLY CHAIN MANAGEMENT

---------------------- Logistics management can be defined as, Design and operation of the
---------------------- physical, managerial, and informational systems needed to allow goods to
overcome time and space from the producer to the consumer.
----------------------
Supply chain management can be defined as, ‘Design and operation of
---------------------- the physical, managerial, informational and financial systems needed to transfer
goods and services from the vendor to customer in an effective and efficient
---------------------- manner.’
---------------------- Supply chain management is a much broader scope. The relationship
between supply chain management and Logistics tends to vary from firm to firm.
---------------------- In some cases, supply chain management plays a dominant role in sourcing and
pricing logistics services. Supply chain management focuses on all the aspects
----------------------
of business across the supply chain leading to business improvement including
---------------------- bottom line performance improvement. All other support functions are organised
across the supply chain to improve its effectiveness and efficiency.
----------------------
The concept of SCM has only recently stepped into the marketing world.
---------------------- It took root three decades back and has passed through three phases (Evans and
Danks 1998):
----------------------
Phase 1: Physical distribution management: This phase is better characterised
---------------------- as ‘inventory push phase’ when manufacturing was handled in isolation and
output was pushed down to the finished goods warehouses.
----------------------
Phase II: Integrated logistics management: This phase recognised the
---------------------- importance of integrating operations within the organisation like sales,
procurement, manufacturing, warehousing, distribution and transportation to
---------------------- achieve an efficient and effective goods distribution system.
---------------------- Phase IIl: SCM: The graduation of logistics management to its modern day avatar
is better known as ‘SCM’. SCM extends the scope to link external partners like
---------------------- suppliers, vendors, distributors and customers with a view to deliver enhanced

customer and economic value through synchronised management of the flow of Notes
physical goods and associated information from source to consumption.
----------------------
In fact, the need for supply chain management is felt to benefit both
customer and enterprise. While it enhances customer delight by satisfying the ----------------------
customer need for better products, lower costs and fastest supply, it improves
enterprise plight by improving its productivity. In a nutshell, the benefits derived ----------------------
by applying SCM are:
----------------------
 Reduced operational costs
----------------------
 Improved flow of supplies
 Reduction of delays in distribution and increased customer satisfaction ----------------------
 Bringing compelling bottomline benefits to enterprise ----------------------

The corporate profitability can be linked to the deliverables of a supply ----------------------
chain with the help of the following equation:
----------------------
Profit = Revenue + Customer service/Cost + Capital employed
Use of the Internet has enabled companies to realise several supply chain ----------------------
related benefits (Coppe and Duffy 1998, 521-534). These are:
----------------------
 More collaborative, timely product development through enhanced
communication among functional departments, suppliers, customers and ----------------------
even regulatory agencies. ----------------------
 Reduction of channel inventory and product obsolescence owing to closer
linkage across the supply chain and better insights into demand signals to ----------------------
drive products schedule and ultimately achieve build-to-order capability. ----------------------
 Reduction in communication costs and customer support costs with more
interactive, tailored support capability inherent with Internet technologies. ----------------------
 New channel capability to reach different customer segments and further ----------------------
exploit current market.
----------------------
 Ability to enhance traditional products and customer relationships through
customisation driven by Internet connectivity and interactivity. ----------------------
What drove logistics to SCM? One can identify a number of drivers for a ----------------------
paradigm shift from logistics to SCM (Dubey 1999). The major ones are:
----------------------
 First, the expectations of customer for increased value addition, response
time sensitivity, need for reliability, cost consciousness and information ----------------------
sensitivity.
----------------------
 Second, the nature of competition favouring firms that have been in a
position to decrease lead times as well as operational costs. ----------------------
 Third, the recent revolution that took place in the field of information ----------------------
technology has enabled and encouraged the firms to initiate newer means
in the field of distribution management. ----------------------
----------------------

Notes  Fourth, managers have realised and recognised the need for continuous
improvement of process involved in marketing activity. The attitude of
---------------------- managers has changed in favour of integrating all activities in the chain
from sourcing to consumption.
----------------------
 Fifth, perception of firms to have inventories has changed to JIT philosophy.
---------------------- While money locked up in inventories leads to poor use of working capital,
higher inventories lead to higher lead times for procurement, manufacture
----------------------
and distribution.
----------------------
----------------------
---------------------- Fill in the blanks.
---------------------- 1. _______ should be one of the prime drivers of logistics strategy.

2. _______ based communication is the biggest facilitator of inter-
---------------------- organizational collaboration in supply chain in modern times.
----------------------
---------------------- Activity 1
----------------------
1. Imagine you are the manager of a car manufacturing company. Where
---------------------- would you want to locate your manufacturing facilities and why?
---------------------- 2. Imagine your company produces goods that have a very short product
life cycle. What strategy would you adopt in order to overcome it?
----------------------
---------------------- Summary
----------------------  There are two critical trends which will shape the future of supply chain
management. First, it is the trend for leading organisations to focus on
----------------------
improvements outside their traditional boundaries and, second, it is
---------------------- the increasing differentiation of services between customers. Above
all, logistics management must maintain and improve cost advantages
---------------------- reflected in total productivity, as well as customer service performance in
order to remain healthy.
----------------------
 As logistics are, by definition and character, the ultimate in just-in-time
---------------------- management, they should be underpinned by logical frameworks and
---------------------- models for strategic measurement, evaluation, planning and improvement.
There is no doubt that a goal-focused productivity and performance
---------------------- measurement system is the best channel for institutionalising targeted
improvements in the logistics arena and invigorating management action.
----------------------
 Looking ahead, there are many opportunities for further investigation and
---------------------- advancement for both the logistics manager and the academic researcher.
For the practitioner, there are four specific requirements:
----------------------

i) to ensure that the organisation undertakes continual total productivity Notes
and integrated performance improvement;
----------------------
ii)
to appreciate that performance excellence is based on the
effectiveness of a continuous cycle of measurement, evaluation, ----------------------
planning and improvement;
----------------------
iii) to understand that measures, which may seem complex, often can
be simplified when setting goals, such as using real unit costs as the ----------------------
inverse of total productivity;
----------------------
iv) to ensure that there are efficacious monitoring and communication
----------------------
systems in place.
----------------------
Keywords
----------------------
 Tolerances: Permissible allowances ----------------------
 Capacity utilisation: An organisation’s ability to provide demanded
goods or services in the amount requested and in a timely manner. ----------------------
 Flexibility: This is the ability to adapt and accommodate, from both the ----------------------
viewpoints of the supplier and the customer, ensuring minimal costs and
delays. ----------------------
 Speed of operation: This is the efficient use of time from order to ----------------------
delivery.
----------------------
Self-Assessment Questions ----------------------
1. Define Logistics Management. ----------------------
2. Discuss the relationship between Productivity and Logistics. ----------------------

3. Which are the various processes in Logistics Management? ----------------------
4. Describe the Logistics to supply chain journey in your words.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes Answers to Check your Progress
---------------------- 1. Logistics is function of management of total flow of materials.
2. Flexibility adds to capability to deliver variety and avoid service delays.
----------------------
----------------------
Fill in the blanks.
---------------------- 1. Competition should be one of the prime drivers of logistics strategy.
---------------------- 2. Internet based communication is the biggest facilitator of inter-
organizational collaboration in supply chain in modern times.
----------------------

---------------------- 1. Bowersox. Supply chain logistics management. Tata McGraw-Hill.
---------------------- 2. Brewer, Ann and Kenneth John Button. Handbook of Logistics and
Supply-chain Management. Elsevier Publication.
----------------------
3. Waters, Donald J. Global Logistics: New Directions in Supply Chain
---------------------- Management. Kogan Page Publishers.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Forecasting and Aggregate Planning
UNIT
3
Structure:
3.1 Introduction
3.2 Forecasting Components and Methods of Forecasting
3.3 Aggregate Planning
3.4 Role played by Aggregate Planning
3.5 Strategies of Aggregate Planning
3.6 Aggregate Planning Implementation
3.7 Predictable Variability in a Supply Chain
3.8 Managing the Supply
3.9 Managing Demand
3.10 Implementing Solutions
Summary
Key Words
Suggested Reading
Forecasting and Aggregate Planning 45

Notes
Objectives
----------------------
----------------------
• Explain the role played by forecasting in SCM
----------------------
• List the characteristics, components and methods of forecasting
---------------------- • Identify the steps in demand forecasting
---------------------- • Discuss the role played by distributors in supply chain
---------------------- • Justify the need for aggregate planning in supply chain

• Explain the information needed to formulate an aggregate plan
----------------------
---------------------- 3.1 INTRODUCTION

---------------------- This chapter helps a supply chain manager to take decisions that are a
part of the planning process and identify the tools that can be used for planning.
---------------------- This helps the managers to have a proactive approach and respond to the
fluctuations in demand and supply and thereby, increase the overall profitability
----------------------
of the firm. We know that all supply chain decisions are taken based on the
---------------------- anticipated demand and keeping these decisions in mind, we are going to study
different methodologies that can be used to forecast the future demand based
---------------------- on the demand data already available. Also, we are going to study the planning
methodology to be used by a supply chain manager to manage the allocation,
----------------------
production and distribution of available resources, and also to make trade-offs
---------------------- when necessary between inventory and capacity. We will also learn to manage
unmet orders across the supply chain.
----------------------
Role of Forecasting in a Supply Chain
---------------------- Every strategic and planning decision taken by the manager is based on
---------------------- demand forecasts. Even the push and pull processes that we studied earlier are
based on these forecasts. In the push process, we see that the supply chain
---------------------- manager executes this process in anticipation of the customer demand, on the
other hand, all the pull processes are performed on the basis of response of the
---------------------- customer demand, where the supply chain manager needs to plan the available
---------------------- capacity and inventory levels. Thus, it can be seen from the above that the first
thing that the supply chain manager does before execution is forecasting the
---------------------- customer’s demand for products and services.
---------------------- Forecasting is a very important tool used in every department of a

company, like production, marketing, finance and human resources department.
---------------------- The aggregate of these demands tends to give an accurate forecast and helps
to take accurate decisions. This aggregation of the demand forecasts of each
---------------------- department in a firm is called as Collaborative Forecasting, which helps
---------------------- the company to enhance decision making. It is further observed that these
forecasting decisions are best made jointly by the departments as they influence
---------------------- each other significantly.

Forecasting decisions in each of the departments include: Notes
Human Resource: Manpower planning
----------------------
Marketing: Promotions, sales force allocation and new product introduction
----------------------
Production: Purchasing, scheduling and inventory management
Finance: Investments and budgeting ----------------------
Thus, it is important for any company to have collaborative forecasting ----------------------

within its various departments and also other companies in the supply chain.
Here, by companies we mean the associate companies involved in sourcing the ----------------------
raw material, conversion and the delivery of the finished goods to the customers. ----------------------
Different products have different demand trends and are therefore difficult
to forecast. Products, like milk and bread have a stable demand and hence are ----------------------
easy to forecast. Whereas, technological products likes mobile phones and ----------------------
laptops are difficult to forecast. There is a need for able forecasting in such
cases because of the lack of the time available and if the company faces an over ----------------------
or under production, it is very difficult for the company to recover. However,
if the supply of raw material or the demand for the finished goods is variable, ----------------------
forecasting and managing the decisions to be taken becomes very difficult. ----------------------
Characteristics of a Forecast
----------------------
The following are the major characteristics of a forecast:
----------------------
a) Forecast errors
b) Accuracy of forecasts ----------------------
c) Information distortion ----------------------

a) Forecast errors ----------------------
Forecasts are usually wrong. Forecasts must always include both an
----------------------
expected value of the forecast and the measure of a forecast error. In order
to understand the above statement, let us take an example of two dealers ----------------------
selling sewing machines. One of these dealers expects a sale between 100
and 1,900 units. The other dealer expects to sell between 900 and 1,100. ----------------------
From this we can observe that the average sales of each of these dealers
----------------------
is 1000 units. However, it must also be noted that the sourcing policies
of each of these dealers is very different from each other. It is different ----------------------
because of the accuracy involved in forecasting their sales (or rather the
demand by the customers). Here, the main point to be kept in mind is the ----------------------
Forecast Error (Demand Uncertainty), involved as it would significantly
----------------------
impact the working of these firms. Since, there is an absence of the forecast
error in the decisions the resulting estimates vary widely in each supply ----------------------
chain stage, thereby making the whole supply chain non-collaborative.
----------------------
b) Accuracy of forecasts
Short term forecasts are always more accurate than long term forecasts. ----------------------
Statistically, we can say that long term forecasts have a larger standard ----------------------
deviation of error with respect to the mean than short term forecasts. For

Notes example, let us say, the store manager at Pizza Hut places an order for
the days requirement of garlic bread. The manager places this order at 9
---------------------- am and he receives the bread at 5 pm. Here, it can be clearly understood
that the manager has placed an order for the day’s requirement wherein
---------------------- the lead time involved is less than 12 hours, and is quite quick. Here, it
---------------------- should be understood that the forecasts made for products involving a
shorter lead time are more accurate, as it just involves taking into account
---------------------- the conditions prevailing at the time of placing the order, rather than if the
manager had to forecast for the bread a week in advance.
----------------------
Aggregate forecasts are considered to be more accurate as they have
---------------------- a small standard deviation of error relative to the mean. It is very easy
to forecast the total revenue of any banking institution as a whole. For
----------------------
example, State Bank of India with a forecast error of 2%; but it would
---------------------- be very difficult to forecast the revenue of any of its branches with less
than 2% error. Here, the key difference between the forecasts is the degree
---------------------- of aggregation involved. The greater the degree of aggregation, the more
accurate the forecast would be.
----------------------
c) Information distortion
----------------------
It is often observed that as we move up the supply chain, the degree of
---------------------- information distortion increases. As this distortion (noise) get amplified as
we go upwards from the end customer there is more standard deviation of
---------------------- error from the mean. The solution to this problem lies with collaborative
forecasting involving the participation by all departments at each stage of
----------------------
the supply chain to reduce the forecast error involved.
----------------------
3.2 FORECASTING COMPONENTS AND METHODS OF
----------------------
FORECASTING
----------------------
It is very important for companies to identify the factors affecting the
---------------------- future demand of products and services by customers. These factors can be
predicted if companies can determine the relationship between these factors and
---------------------- the future demand. Companies must keep in mind both objective and subjective
---------------------- goals to be achieved. A supply chain manager has to focus on both quantitative
methods and human input, in order to determine the future demand and achieve
---------------------- these goals.
---------------------- Many companies, there is a extensive use of several support systems, that
help the supply chain manager to determine the future demands and take apt
---------------------- decisions. However, these decision support systems only have a quantitative
ability. It is, thus, important for the supply chain managers, to evaluate the
---------------------- current market conditions by the supply chain managers to take correct
---------------------- forecasting decisions, as current market conditions have a great impact on
the future demand. Before taking any forecasting decisions, the supply chain
---------------------- manager must keep a thorough check on the basic forecasting components,
listed below:
----------------------

 The past demand Notes
 Lead time involved of the product ----------------------
 Economy
----------------------
 Advertising decisions
----------------------
 Discounts offered
----------------------
 Competitors
----------------------
The above components of a forecast must be kept in mind before following
a particular supply chain forecasting methodology. This is because there are ----------------------
numerous changes that may have taken place over the time, or there may be
future changes going to take place. ----------------------
Let us now see the various methodologies that a company may use as ----------------------
methods of forecasting:
----------------------
a) Qualitative Methods
----------------------
These forecasting methods are highly subjective in nature and rely
deeply on human judgment. Such a method is used when there is very ----------------------
less historical data available. It is also used when a panel of experts are
involved in making forecasts several years in the future of a new industry. ----------------------
b) Time Series Methods ----------------------
These methods involve the use of available historical data. They assume ----------------------
the past results as the indicator of the future demand as well. These methods
are appropriate when the demand is stable and does not vary much from ----------------------
year to year.
----------------------
c) Causal Methods
----------------------
Such forecasting methods assume that the demand forecasts are correlated
with certain environmental factors like the economy or market rates. They ----------------------
find the correlation between demand and environmental factors and thus,
try to determine what the environmental factors would be using estimates ----------------------
to forecast the demand in the future.
----------------------
d) Simulation
----------------------
These methods imitate the customer choices, due to which demand arrives
at a particular forecast. Simulation can be used, by combining time series ----------------------
methods and casual methods to arrive at a forecast.
----------------------
It is very difficult for a company to decide which single method to be
used in order to have accurate demand forecasts. However, experts believe that ----------------------
using multiple forecasting methods to create combined forecasts is the most
productive. ----------------------
----------------------
----------------------

Notes 3.3 AGGREGATE PLANNING
---------------------- Aggregate planning can be defined as a process by which a company can
determine the level of production, capacity, inventory, sourcing, unmet demands
---------------------- and pricing over a specified period of time. The main objective of aggregate
planning is to satisfy demand with a view to maximise the company’s profits.
----------------------
The term aggregate planning means planning on a large platform i.e. solving
---------------------- problems on aggregate decisions to be made, rather than a stock keeping unit
level decisions. Let us take for example that aggregate planning can be used
---------------------- to determine the total production level in any company for a particular month,
but this is done without determining the quantity of each single stock- keeping
----------------------
unit that will be produced. Aggregate planning is thus useful for determining
---------------------- the production level (product family or group of products) of a company for
a particular time frame, say three months to a year. But, it is very early to
---------------------- determine unit by unit production levels of each type of product.
----------------------
3.4 ROLE PLAYED BY AGGREGATE PLANNING
----------------------
The main objective of a supply chain planner is to identify the following
---------------------- operational parameters over a specified period of time.
----------------------  Rate of production
---------------------- Rate of production is the number of units completed per unit time. It could
be per week or month depending on the firm’s requirement.
----------------------
 Workforce required
----------------------
The workforce includes the number of workers required for the target set.
----------------------
 Overtime
----------------------
Overtime is the amount of overtime the production will continue.
----------------------
 Machine capacity level
----------------------  Subcontracting
---------------------- Subcontracting is the capacity that is subcontracted over and above the
---------------------- planning period.
 Unmet demands
----------------------
Unmet demands include the demands that have not been fulfilled and those
----------------------
which will be carried forward to the subsequent periods of production.
----------------------  Inventory
---------------------- Inventory on hand, is the planned inventory that will be carried over from
---------------------- one month to another over the planning horizon.
With the help of the above information, it becomes very easy for the supply
---------------------- chain managers to decide upon the short term operations that can be carried out

to meet the long terms plans. It further helps in the overall coordination of the Notes
planning process.
----------------------
It is necessary that each of the departments have a common goal, or else
it would result in individual goal seeking and not coordinate with others. Thus, ----------------------
aggregation of the individual strategies into one is required to attain the firm’s
goal and increasing the efficiency of the supply chain. ----------------------
----------------------
3.5 STRATEGIES OF AGGREGATE PLANNING
----------------------
‘Trade off’ is the buzzword to be kept in mind by every efficient supply
chain manager. ----------------------
The aggregate planner must be able to make trade-offs between the ----------------------
capacity, inventory, and the unmet demand costs. Any increase in any one of
these costs shall automatically result in the decrease of the other two. Arriving ----------------------
at the most profitable trade-off is the main goal of the firm. Let us say, if a
----------------------
company wants to lower the inventory cost, the firm must either increase the
capacity cost or delay the delivery of the product to the customer. ----------------------
If the costs of changing the capacity are very high, then a company may build
----------------------
some inventory and also carry some unmet orders, but if the costs of changing
the capacity is low, then it may not build up any inventory or carry any unmet ----------------------
orders.
----------------------
Thus, a supply chain manager has only three fundamental trade-offs
available to him with the use of which, he will be able to increase the profitability ----------------------
of the firm:
----------------------
a. Capacity
b. Inventory ----------------------
c. Unmet demands/orders ----------------------
In order to achieve a balance between the three costs, we can make use of
the following three strategies: ----------------------
1. Chase strategy ----------------------

2. Time flexibility strategy ----------------------
3. Level strategy
1. Chase strategy ----------------------
The chase strategy involves chasing the demand rate by varying the ----------------------
production rate, with the help of changing the machine capacity or hiring and
----------------------
laying off employees as the demand rate varies. Thus, this strategy uses capacity
as a lever. Synchronisation of both the production rate and the demand rate is ----------------------
the major difficulty in this strategy. This strategy is very expensive to implement
if the costs of altering capacity and layoffs are high. Lower inventory levels ----------------------
are another drawback of this strategy. This strategy also may have a negative
----------------------
impact on the morale of the employees and workers. Thus, this strategy must
be adopted only when the costs of carrying inventory is expensive and costs of ----------------------
altering labour and machine capacity are low.
Notes Time flexibility strategy
---------------------- The time flexibility strategy makes use of machines as a lever. This
strategy can be used when there is excess machine capacity available. In this
---------------------- case, the workforce is kept stable but the number of hours worked is varied over
time, in an effort to synchronise production with demand. The supply chain
---------------------- manager can make use of variable amounts of overtime or a flexible schedule
---------------------- to achieve this synchronisation. This strategy should be applied only when
the inventory carrying costs are relatively high and the machine capacity is
---------------------- relatively inexpensive.
---------------------- Level strategy
---------------------- The level strategy makes use of inventory as a lever. Under this strategy,
a stable machine capacity and work force are maintained with a constant output
---------------------- rate. However, this is not always possible, and due to this there are shortages or
surpluses that result in fluctuating inventory levels. Here the production is not
---------------------- matched with the demand, but it is the inventories that are built up in anticipation
---------------------- of future demand or the unmet demands (i.e. unmet orders) are carried over
from the higher demand periods to the lower demand periods. However, the
---------------------- major disadvantage of this strategy is that it results in accumulation of large
inventory and also dissatisfies the customers by not delivering the goods on
---------------------- time. Such a strategy must be used only when the inventory carrying costs and
---------------------- the costs resulting due to unmet demands are relatively low.

----------------------
----------------------
1. Advertising decisions cannot affect forecasting.
---------------------- 2. Time flexibility strategy essentially requires excess machine capacity
availability.
----------------------
----------------------
3.6 AGGREGATE PLANNING IMPLEMENTATION
----------------------
For any supply chain manager, implementing the aggregate plans is the
---------------------- most difficult task that he has to manage; the reason being the decision of trade-
offs. It is at this position where the actual role of a supply chain manager comes
---------------------- into picture. The following points need to be kept in mind in order to take
---------------------- accurate aggregate planning decisions:
1. Keeping the entire supply chain in mind
----------------------
2. Flexible planning
----------------------
3. Rerun the aggregate plan with new data being available
---------------------- 4. Using aggregate planning when capacity utilisation increases
----------------------

Keeping the entire supply chain in mind Notes
Most of the aggregate planning is done with an individualistic approach
----------------------
and not with a broader approach in mind. But this is the biggest mistake that
any supply chain planner can ever do because there are a lot many supply ----------------------
chain factors that can dramatically ruin the aggregate plan. Therefore, it is very
important that a supply chain manager keeps the whole supply chain in mind, ----------------------
and not his enterprise at the time of devising the aggregate plan. It is very
----------------------
necessary for the planner to work with his subordinates to prepare forecasts,
and with his seniors to identify the constraints in order to improve the quality of ----------------------
inputs required in devising the aggregate plan.
----------------------
Moreover communicating with everyone associated with the supply chain
is very important as each and every one’s contribution should be considered as ----------------------
a valuable input in devising the aggregate plan.
----------------------
Flexible planning
As we have studied earlier and learnt that forecasts are always wrong. ----------------------
Thus, keeping this in mind, a planner must devise his plans in such a way that ----------------------
these aggregate plans can adjust as per the situation. Let us say, if future demands
change or if there is an increase in the cost of production, then the aggregate ----------------------
plan should be able to sustain such changes or rather adjust accordingly.
----------------------
Rerun the aggregate plan with new data available
We know that time never remains the same and the demand is dynamic. ----------------------
Keeping this in mind, it is very important that the supply chain planner must ----------------------
rerun the aggregate plan by making use of the latest information available.
By doing this accuracy can be achieved and it will also help the company to ----------------------
monitor itself at the right time, rather than realising after making huge losses.
Thus, if new demand trends are realised, the aggregate plan must be reevaluated ----------------------
in order to achieve better efficiency and better profits. ----------------------
Using aggregate planning when capacity utilisation increases
----------------------
Many companies, even today, do not make use of the aggregate planning
process and rely solely on the demands of their distributors and or warehouses ----------------------
to determine their production schedules. If any company is able to meet these
----------------------
demands, then the lack of aggregate planning may not harm it. However if there
is an increase in capacity utilisation, then aggregate planning is a must; because ----------------------
when the utilisation of capacity is high, then the possibility of producing for
all the orders is very low at that time. Thus, planning needs to be done to best ----------------------
utilise this capacity to meet the forecasted demand. So, it is very important to
----------------------
note that as the capacity utilisation increases aggregate planning is a must.
----------------------
3.7 PREDICTABLE VARIABILITY IN A SUPPLY CHAIN ----------------------
In the last unit, we studied the importance of aggregate planning in the ----------------------
supply chain, since it helps the company to maximise the profits. It is very easy
to plan the production levels required for products having a stable demand. ----------------------

Notes Thus, production schedules can be set according to the demand for that product.
Goods can also be produced at the time when they are required by the customer,
---------------------- however companies do maintain little inventory. However, it is often observed
that the demands for products change from time to time, due to certain predictable
---------------------- influences. These influences may be seasonal or non-seasonal in nature, e.g. i)
---------------------- sudden rise in demand for raincoats during monsoons which is seasonal. ii)
Promotion of a soft drink during the summer may be non seasonal, resulting in
---------------------- increase in demand for soft drinks. Thus, managing these two variables as we
call them, is the role of predictable variability, since these factors may cause
---------------------- sudden predictable increase or decrease in the total sales.
---------------------- Predictable variability can be defined as the change in demand for a
product or service, that which can be forecasted. Such type of changes taking
----------------------
place in the demand may cause numerous problems ranging from very high
---------------------- levels of unmet demands due to non availability of stocks during the peak
period, to times when there is very less demand with high inventories. These
---------------------- predictable changes try and spoil the supply chain by increasing the costs to the
company or by decreasing the supply chain response.
----------------------
Thus in such a situation, the main aim of the company should be to
---------------------- handle the predictable variability using different methods and by managing the
supply including the production, capacity, sourcing and unmet demands; also,
----------------------
to manage the demand side by coming up promotions and trade discounts.
---------------------- In order to manage both the demand and supply sides of the supply chain,
the companies usually divide the task of supply and demand management
----------------------
between the production and marketing departments. However, at higher levels
---------------------- of the supply chain, when supply and demand decisions are made independently,
it becomes increasingly difficult to coordinate the supply chain, which thereby
---------------------- results in decreasing profits. Therefore, coordination among the various
functions of the company is a must in order to maximise profitability of the
----------------------
supply chain.
----------------------
3.8 MANAGING THE SUPPLY
----------------------
As we have learnt earlier, the supply side of the supply chain consists
----------------------
of the production and operations department and the inventory department. A
---------------------- company has to vary its supply from time to time by controlling these two
departments or functions of the company. Now we are going to study what all
---------------------- measures the company has to take in these two departments, to vary the supply
of goods and services.
----------------------
As far the production department is concerned, the company may alter
---------------------- its production capacity and the inventory levels that are set in the inventory or
storage department. Before discussing the various approaches to managing the
----------------------
capacity and inventory in the respective departments, it is very important to
---------------------- understand that the companies are doing this in order to maximise their profits,
which is their sole aim. The profitability of a company is the difference between
---------------------- the revenue from sales and the total costs associated with the products sold.

Capacity management (production and operations department) Notes
There are a large number of approaches that can be used to manage the
----------------------
production capacity of a plant. One can make use of a combination of these
approaches also, in order to maximise profitability of the company. These ----------------------
approaches are listed as under:
----------------------
a) Workforce time flexibility
Under this approach, a firm makes use of flexible working hours provided ----------------------
by the workers to manage the capacity in order to meet the demands. A
----------------------
large number of plants do not produce continuously, and are often left with
idle time during the day or night. This situation is called as spare plant ----------------------
capacity. Let us take for example, any company that has daily two shifts
of 8 hours each. So, in the remaining 8 hours of the day, they can make ----------------------
use of the flexibility of the available workforce by allowing them to work
----------------------
overtime, and produce in accordance with the demand.
If a company is able to match the production with the demands from ----------------------
customers, it can also have part-time workers to help them match the ----------------------
demands.
b) Seasonal workforce ----------------------
In this type of capacity management approach, the company makes use ----------------------
of the seasonal workforce. By seasonal workforce, we mean hiring more
employees during the peak periods of demand. So whenever there an ----------------------
increase in the demand for the products being produced, the company may ----------------------
increase the workforce by adding seasonal workforce to match the rise in
demands. ----------------------
c) Dual facility usage ----------------------
By dual facility usage, we mean using it both dedicatedly as well as in a
----------------------
flexible way. This is essential when companies are required to produce high
volume stable products over a period of time in the most efficient manner ----------------------
possible and varied products in wider volumes having high unit costs.
For example: a company producing transformers could have dedicated ----------------------
facilities for a specific type of transformer as well as a flexible facility that
----------------------
could manufacture all types of transformers. This is because each of the
dedicated facilities could produce at a steady rate, and the flexible facilities ----------------------
would be useful to bear the fluctuations in demand over a period of time.
----------------------
d) Sub-contracting
Sub-contracting is done usually. During the peak season of a product, where ----------------------
the company concerned gets the products made from a sub-contractor. ----------------------
This approach is adopted in order to maintain the internal production and
not to over burden it with more orders, so that the internal production ----------------------
remains considerably cheaper. It is very important that subcontractor has
a facility that can handle flexible capacity of production to produce the ----------------------
products required. Only when a sub-contractor can provide such flexibility ----------------------

Notes in production capacity by getting orders from various manufacturers and
producing a variety of products in large volumes, this process feasible for
---------------------- him.
---------------------- e) Merging product flexibility in the production process
In such a case, a firm may have flexible production lines, whose production
----------------------
rates can be varied easily. In this approach, the production can be altered
---------------------- with respect to the demand. The use of workforce and machinery is made
to achieve such flexibility. Companies having several production lines for
---------------------- different product groups are able to merge the production flexibility into the
production process by shifting the workforce from one production line to
----------------------
another and thereby, varying the rate of production. As long as the variation
---------------------- of demand across different production lines remains complimentary to each
another, the capacity on each of the production lines can be varied using
---------------------- this approach. If the production machinery being used is flexible and can
be changed from producing one product to another, production flexibility
----------------------
can also be achieved.
---------------------- Managing inventory
---------------------- A large number of firms make use of the following two approaches
in combination when managing the inventory in order to meet predictable
---------------------- variability. The two approaches are:
---------------------- Use of common components
---------------------- This approach involves the manufacturer to design common components
that can be used in multiple products, which have a predictably variable demand
---------------------- that result in an overall constant demand for the components. For example,
engine manufacturers like Tata Motors make use of common engine assemblies
---------------------- for various models of trucks which allows the demand for these items to remain
---------------------- stable, even though the demands for the trucks fluctuate from time to time.
Developing inventory for highly demanded products
----------------------
For products that are highly demanded or those that have a highly
---------------------- predictable demand, the previous approach is of no use. Let us say, the products
that a company produces have a similar high demand season, then it is important
----------------------
for them to decide upon which of their products shall have the highest demand,
---------------------- and therefore build inventory for that product in the off season (because there
are less chances of fluctuation in the demand for these products closer to the
---------------------- peak season). As far as products having an uncertain demand are concerned,
the production of these goods should take place when peak season is close
----------------------
and there is more accurate information on the demand for these products is
---------------------- available. Let us consider a company producing shoes both for retail sales
and for the Indian army. The demand for shoes in the Indian army would be
---------------------- much more predictable and can be produced in the off season i.e. after the new
cadets have been appointed every year. The retail demand would however, be
----------------------
more unpredictable and the demand for it could be predicted well only when
---------------------- closer to the time of sales when it is sold because the fashion trends could

change considerably. Therefore, for retail sales, shoes must be produced close Notes
to the peak season when they are being sold, to enable the company to gain
latest information on the demand, and thereby, manage the demand and supply ----------------------
accurately.
----------------------
3.9 MANAGING DEMAND ----------------------
Pricing and different forms of promotion are the two main factors that ----------------------
influence demand to a great extent. These promotions and pricing tactics that
are used by companies are done with an objective of maximising revenue. But ----------------------
as we have studied in the previous chapters, the changes in demand patterns ----------------------
can change the costs that a company incurs in order to fulfill that demand.
Thus, it is very important to note that promotions and pricing decisions that are ----------------------
made with an objective of increasing revenues often result in decreasing the
overall profitability of the company. But in this part of the unit we are going to ----------------------
study how a supply chain manager can use both aggregate planning and pricing ----------------------
strategies to maximise supply chain profitability.
The supply chain manager must know how to come up with promotions ----------------------
and effective price changes. There are four major factors that affect the timing ----------------------
of a trade promotion:
----------------------
 Impact of the promotion on demand
 Product margins ----------------------
 Holding costs ----------------------
 Change in capacity costs ----------------------

Keeping these four factors in mind, a supply chain manager can come up ----------------------
with new promotions during high and low demand periods.
----------------------
Let us now consider the first factor that affects the timing of trade
promotions i.e. the impact of promotion on demand. The impact can be seen in ----------------------
three major areas listed under:
----------------------
a) Market growth
----------------------
b) Stealing share
----------------------
c) Forward buying
----------------------
a) Market growth
By market growth, we mean an increase in consumption of the goods by ----------------------
old customers or increase in the number of new customers consuming the
----------------------
products. e.g. When Nokia provides a promotion on any of its high end
N-series mobile phones, then it may attract buyers who were actually going ----------------------
in for a lower end model. Thus, with the help of promotion, there is an
increase in the overall sales of high end mobile phone and also increasing ----------------------
the Nokia sales.
----------------------

Notes b) Stealing share
With the help of price promotion, customers begin to substitute the firm’s
----------------------
products for a competitor’s product. Let us say Tata Indicom provides Rs
---------------------- 1500 free talk time on a handset of Rs 2500, whereas Reliance provides
Rs 2500 free talk time on the handset of Rs 2500. This attracts customers
---------------------- to Reliance who might have purchased Tata Indicom mobiles. Thus, in
this case the promotion increases the sales for Reliance mobiles (however,
----------------------
keeping the overall size of CDMA mobile users the same).
---------------------- c) Forward buying
---------------------- By forward buying, we mean moving the future purchases to the present. A
promotion may induce a customer to purchase a Nokia mobile phone, who
---------------------- would have purchased the mobile few months down the line. In this case
there is no change in the overall sales in the long run, leaving the mobile
----------------------
users base the same size.
---------------------- From the above, it is clear that the first two factors increase the overall
---------------------- demand for the companies concerned, whereas the third simply shifts the future
demand to the present. Thus, a supply chain manager must know the impact
---------------------- of promotions and then decide upon the timing of the promotions. Usually,
as the fraction of increased demands grows due to forward buying, offering
---------------------- promotions during peak periods becomes less attractive. Offering a promotion
---------------------- during a peak period (that has significant forward buying) creates even more
variable demand than before the promotion. Thus, the product that was once
---------------------- demanded in the slow period, is now demanded in the peak period, thereby
making the demand pattern more costly to handle.
----------------------
Timing of these promotions during the peak demand periods and during
---------------------- off peak demand periods to generate demand, is one of the most important tasks
of a supply chain manager. It is important to note that all these promotions and
---------------------- pricing strategies are developed with a view to gain maximum supply chain
---------------------- profitability of the firm. Here, the operations and the marketing departments
must put in a collaborative effort to time the promotions during different periods.
---------------------- Forward buying of products by firms is another factor affecting the promotion
and pricing of goods offered to the customers during off peak and peak demand
---------------------- periods. Thus, the period of promotions and forward buying affect the timing of
---------------------- promotions of goods and services.
---------------------- 3.10 IMPLEMENTING SOLUTIONS

---------------------- In order to gain the benefits from predictable variability in a supply chain,
---------------------- the supply chain manager must be able to practice predictable variability as
an important tool to maximise the profitability of the firm as a whole. The
---------------------- collaborative efforts of the marketing production and operations departments,
with the cooperation of senior officials are a must to gain maximum from
---------------------- predictable variability, which the following points shall explain:
---------------------- a) Planning and coordination across the supply chain

b) Considering predictable variability before taking any decision Notes
c) Pre-empting predictable variability and not reacting to it
----------------------
a) Planning and coordination across the supply chain
----------------------
Maximising profitability of the firm is the sole aim of any supply chain. In
order to fulfill this objective, every department of the firm or all the enterprises in ----------------------
the supply chain must work together towards a common goal. It is very difficult
to get these different functions within a firm to work collaboratively. In order ----------------------
to achieve this planning collaboration within the company, incentives are to be
----------------------
provided: both incentives related to revenue for the marketing department and
incentives related to the costs for the production department. This is because ----------------------
any supply chain departments or enterprises are evaluated on their individual
profitability, and not as a whole. But, we know that if these functions within a ----------------------
company do not collaborate amongst themselves in order to achieve common
----------------------
goals, it would result in suboptimal profits for the supply chain. Formation of
joint teams and support from the organisation are required in order to combat ----------------------
the traditional procedures of working and increase the overall profitability of
the firm. ----------------------
b) Considering predictable variability before taking any decision ----------------------
The operations of a company are widely affected by predictable variability, ----------------------
therefore considering predictable variability before making any decisions is a
must for any supply chain. Decisions regarding building new facilities, types ----------------------
and pricing of products regarding the company are strategic decisions taken
by the firm. However, considering predictable variability before taking these ----------------------
strategic decisions can help to determine the success or failure of these strategic ----------------------
decisions.
c) Pre-empting predictable variability and not reacting to it ----------------------
It is often observed reacting to predictable variability is a tendency ----------------------

with companies. This is usually a concern for the production and operations
----------------------
department, which tries to meet the demand fluctuations due to predictable
variability in the market by managing the supply. But we have studied in this ----------------------
unit that managing both the demand and the supply provides to best result for
managing predictable variability. Issues relating to the pricing and promotion ----------------------
of goods are related to the marketing department and have their impact on the
----------------------
demand due to predictable variability. Thus, a collaborative effort by both, the
production and the marketing departments, is required to plan the predictable ----------------------
variability together well before the peak period of demand is observed.
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------

1. Using common component in many different products helps ________
----------------------
variation in demand.
---------------------- 1. Seasonal workforce policy may work well particularly with coinciding
surplus availability of labor.
----------------------
2. Diwali sales for a retailer are a predictable variability to be considered
---------------------- in planning.
----------------------
Activity 1
----------------------
---------------------- 1. Imagine you are the Supply Chain Manager of a pharmaceutical
company. How would you forecast the manufacturing of a particular
---------------------- drug?
---------------------- 2. Imagine that you have started a new company producing cotton towels.
Which typical method of forecasting would you apply? Why?
----------------------
3. Imagine you are the supply chain manager of an auto component
---------------------- manufacturing unit. What operational parameters would you require
to determine aggregate plans for the company?
----------------------
4. If you were the supply chain manager of a company manufacturing
---------------------- umbrellas, which supply chain strategy would you opt for? Why?
---------------------- 5. Assuming that you are the supply chain manager of a steel sheets
producing company, how would you manage the predictable variability
---------------------- due to the surging demand in steel sheets worldwide?
---------------------- 6. Imagine you are the Supply Chain Manger of a precision tool making
company, employing a large workforce. Discuss points that would
---------------------- help you manage such a large workforce during periods of peak and
---------------------- off-peak demand of production.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Summary Notes
 We have given just an overview of the types of forecasting methods ----------------------
available. The key in forecasting nowadays is to understand the different
----------------------
forecasting methods and their relative merits, to be able to choose which
method to apply in a particular situation. ----------------------
 All forecasting methods involve tedious repetitive calculations and so are ----------------------
ideally suited to be done by a computer. Forecasting packages, many of
an interactive kind (for use on PCs) are available to the forecaster. ----------------------
 Better the accuracy of forecast, higher is the probability of better ----------------------
performance of SCM.
 Aggregate planning is a process by which a company determines levels ----------------------
of capacity, production, subcontracting, inventory, stock outs, and pricing ----------------------
over a specified time horizon. All supply chain stages should work
together on an aggregate plan that will optimise supply chain performance. ----------------------
 Information needed for an aggregate plan is Demand forecast in each period ----------------------
& Production costs, Labour costs, regular and overtime, Subcontracting
costs (per hr on per unit), Cost of changing capacity: hiring or layoff (Rs./ ----------------------
worker) and cost of adding or reducing machine capacity (Rs./machine).
----------------------
 Outputs of aggregate plan are Production quantity, number of workers &
purchase levels, Inventory held, how much warehouse space and working ----------------------
capital is needed, Backlog/stock out quantity used to determine what
----------------------
customer service levels will be, Machine capacity: if new production
equipment needed. A poor aggregate plan can result in lost sales, lost ----------------------
profits, excess inventory, or excess capacity.
----------------------
 Strategies are focusing on the trade-off between capacity, inventory,
backlog/lost sales. Strategies used in aggregate planning are: ----------------------
i) Chase strategy – using capacity as the lever. ----------------------
ii) Time flexibility from workforce or capacity strategy – using
----------------------
utilisation as the lever.
iii) Level strategy – using inventory as the lever. ----------------------
 Predictable variability can be defined as the change in demand for a ----------------------

product or service, that which can be forecasted.
----------------------
Managing the Supply
----------------------
a) Capacity management (Production and Operations Department).
b) Managing Inventory. ----------------------
Implementing Solutions
----------------------
a) Planning and coordination across the supply chain.
----------------------
b) Considering Predictable Variability before taking any decision.
c) Preempt predictable variability, and do not react to it. ----------------------

Notes Keywords
----------------------
 Forecasting: is the method of forecasting the demand in the next few
---------------------- years for the concerned product in different markets.
 Collaborative forecasting: This is an aggregation of the demand forecasts
----------------------
of each department in a firm.
----------------------  Simulation: These methods imitate the customer choices, due to which
demand arrives at a particular forecast.
----------------------
 Chase Strategy: The chase strategy involves chasing the demand rate
---------------------- by varying the production rate, with the help of changing the machine
---------------------- capacity or hiring and laying off employees as the demand rate varies.
 Dual Facility usage: By dual facility usage, we mean using it both
---------------------- dedicatedly as well as in a flexible way
----------------------  Forward Buying: By forward buying, we mean moving the future
purchases to the present
----------------------
---------------------- Self-Assessment Questions

---------------------- 1. What types of decisions are best solved by aggregate planning?
---------------------- 2. What is the importance of aggregate planning as a supply chain activity?
---------------------- 3. What kinds of information are needed to produce an aggregate plan?
4. What are the basic trade-offs a manager has to make to produce an
----------------------
aggregate plan?
---------------------- 5. Define predictable variability. Explain its importance.
---------------------- 6. With the help of an example, explain the impact on demand due to
promotion.
----------------------
7. Inventory management is essential for any supply chain firm. Explain this
---------------------- with respect to a product like sugar, which has a high demand.
---------------------- 8. Explain the factors to be considered for capacity management in a

production facility.
----------------------
9. What do you mean by forward buying? Give examples.
---------------------- 10. Write short notes on:
---------------------- a) Benefits of analysing predictable variability
---------------------- b) Forward buying

c) Sub-contracting
----------------------
d) Chase strategy
----------------------
e) Merging product flexibility in production process
----------------------

11. Explain the various methods of forecasting in detail. Notes
12. Explain the importance of forecasting in SCM.
----------------------

1. False
----------------------
2. True
----------------------
1. Using common component in many different products helps reduce ----------------------

variation in demand.
----------------------
----------------------
1. True
2. True ----------------------
----------------------
Suggested Reading
----------------------
1. Chopra, Sunil. Supply Chain Management. Pearson Education.
----------------------
2. Panneerselvam, R. Production and Operations Management. PHI
Learning Pvt. Ltd ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Inventory Management in SCM
UNIT
4
Structure:
4.1 Introduction
4.2 Need for holding Inventory
4.3 Types of Inventories
4.4 Safety Inventory
4.5 Costs associated with Inventories
4.6 Inventory Control Systems
4.7 JIT and MRP
Summary
Key Words
Suggested Reading
Inventory Management in SCM 65

Notes
Objectives
----------------------
----------------------
• Explain the role of inventory management in a supply chain
----------------------
• List various inventory control systems
---------------------- • Develop a framework for making EOQ Model
---------------------- • Demonstrate the relationship between inventory and customer
----------------------
4.1 INTRODUCTION
----------------------
Inventory incurs costs, ties up working capital, it consumes space
---------------------- and must be managed in and out. Stocks can deteriorate or get stolen. Most
operations, capacity planning and scheduling, depend on inventory. Stocks
---------------------- serve to smooth out timing gaps in the rates of supply and demand. Inventory
offers insurance and good planning/control can minimise the associated costs
----------------------
and satisfy efficiency/effectiveness requirements. This is the reason for a just-
---------------------- in-time approach to inventory.
Services generally are not stocked nevertheless in car repair services
----------------------
and retail distribution, inventory of support items are components of service
---------------------- transactions. For a central heating installation company, if a fitter has to drive to
and queue at a supplier to obtain a minor part - this adds to service costs.
----------------------
All organisations keep inventories - some trivial, some highly significant.
---------------------- Even the trivial can from another perspective e.g. health and safety take on a
different degree of importance. What is trivial to one organisation is important
---------------------- to the next e.g. cleaning materials - trivial in a factory but essential to a supplier
of cleaning materials. Spares, stationery, consumables are common inventory to
---------------------- all organisations.
----------------------
4.2 NEED FOR HOLDING INVENTORY
----------------------
The most important task in a supply chain is the management of
---------------------- inventories. Inventory is a very large and costly investment that every stage of
the supply chain needs to incur. Every stage works independently to make the
----------------------
supply chain profitable. Thus, it is very important that every stage of the supply
---------------------- chain coordinates and together forms the inventory policy. Now let us come to
the main theme of this unit.
----------------------
How can you manage inventories in the supply chain? There are five main
---------------------- points that describe the need for holding inventories, namely:
---------------------- a) Achieve economies of scale

b) Balance demand and supply
---------------------- c) Specialisation
---------------------- d) Protection from uncertainty and order cycles
e) Act as a buffer between the stages of the supply chain
a) Achieve economies of scale Notes
In order to achieve economies of scale in purchasing, transportation and
----------------------
manufacturing, a firm needs to hold inventory. For example, a manufacturer
of a certain product maintains inventory only in order to take advantage of the ----------------------
per unit price reductions that are associated with volume purchases from his
suppliers. This is due to the purchase made in lot sizes by the manufacturer. ----------------------
However, when the volume of purchases increase, purchase contracts are
----------------------
negotiated based on the annual purchases or annual volumes and not on
individual lot sizes or individual orders. Also, due to the increase in volumes ----------------------
purchased, there is a lower transportation cost per unit. This is simply because
full truck loads receive lower transportation rates than smaller shipments. ----------------------
The same can be said for holding finished stock inventory, as transportation
----------------------
economies are possible with large volume shipments by consolidating a number
of customer orders into one shipment and then paying for the local delivery of ----------------------
products from warehouses to the local markets served. Also having a finished
goods inventory is essential as it provides various manufacturing economies by ----------------------
reducing the per unit cost of production.
----------------------
----------------------
Seasonal changes in the supply and demand of products make it very
necessary for firms to hold inventory. Let us say for example, during the festival ----------------------
of Diwali, sweets experience a significant increase in sales volume. The cost
of establishing a production capacity which can manage the volume of sweets ----------------------
at these peak demand period, would be very high. Also, the availability of idle
----------------------
capacity and labour fluctuations need to be managed. Thus, the decision of
maintaining a stable workforce and production at a constant level throughout ----------------------
the year helps to build up inventory and that too at a lower cost per unit. The
seasonal inventory can be stored in freezers near the production units. ----------------------
It may also happen that the demand for particular products may be stable ----------------------
throughout the year, but the raw material is available only at certain periods
in the year. For example, fruits like apple, watermelons, etc. are seasonal and ----------------------
available only during certain months. Producers of canned food stuffs may ----------------------
have to produce in excess of the current demand and store them, unless the
fruits can be procured from abroad during different growing seasons. However, ----------------------
this would be very expensive. In this case, a firm must compare the increased
acquisition costs with the inventory carrying costs or holding costs associated ----------------------
with the local supplies. ----------------------
c) Specialisation
----------------------
Inventory makes it possible for a firm’s plant to specialise in its
production. These finished products are shipped to mixed warehouses from ----------------------
where customer orders can be shipped. These enable economies of scale due to
larger production runs and savings in transportation costs which offset the costs ----------------------
of additional handling. Transational companies like Cummins and JCB have ----------------------
found significant cost savings in the operation of consolidation warehouses that
allows the firm to specialise production by plant location. ----------------------

Notes d) Protection from uncertainty and order cycles
Inventory is also held by firms as a protection from uncertainties. Raw
----------------------
material inventories in excess of the quantity required to support the production
---------------------- are a result of speculative purchases that are made when the firm believes that
there will be a price increase, possibility of strikes, etc.
----------------------
Work in progress inventories are maintained, usually in order to avoid
---------------------- a shutdown if a critical piece of equipment were to break down, and also
sometimes in order to maintain the rate of production.
----------------------
Shortage of raw material can lead to stoppage of production lines and
---------------------- thereby lead to modification of the production schedule which will in turn
affect the costs and the customer responsiveness to a great level. Finished
---------------------- goods inventory can be used to improve customer service levels by reducing
the likelihood of a stock out due to unanticipated demand. Increase in finished
----------------------
goods inventory will enable a manufacturer to maintain higher levels of product
---------------------- availability and lower the chances of a stock-out.
---------------------- e) Acts as a buffer

Inventory in the form of safety stock combat the variation in either demand
---------------------- or replenishment. A lot of planning is required to determine the size of safety
---------------------- stocks. Safety stock is as good as purchasing insurance when it is necessary to
protect inventory position in times of uncertainty. Safety stocks provide cover
---------------------- of two uncertainties, the first being the demand in excess of the forecast during
the performance cycle and the second being the uncertainty involving delays
---------------------- in performance i.e. length of the cycle itself. An example for the first case is
---------------------- a customer demanding for more or less quantity of the goods ordered for. An
example for the second case would be delays in order processing or delay in
---------------------- transportation, etc.
----------------------
4.3 TYPES OF INVENTORIES
----------------------
Inventories can be categorised into the following types:
----------------------
a) Cycle inventory
----------------------
b) Safety inventory
---------------------- c) Speculative inventory
---------------------- d) Seasonal inventory
---------------------- e) Dead stock
---------------------- Let us study these in detail.
---------------------- a) Cycle inventory
---------------------- The cycle inventory can be defined as the average inventory that exists in
a supply chain, either due to production or the purchase of products in lot sizes
---------------------- that are larger than those demanded by the customers. A lot size is the quantity

of products produced or purchased by a firm at a given time. For example, an Notes
electronic appliances dealer who sells on an average 4 television sets a day,
places an order of 80 television sets with his supplier. Here, the lot size is 80 ----------------------
television sets. Given the daily sales of 4 television sets a day, it takes 20 days
before the dealer sells the entire lot and purchases a replenishment lot. The ----------------------
dealer holds an inventory because he purchases a lot size larger than the daily ----------------------
sales. Thus, we can conclude from this example, the meaning of cycle inventory.
With the help of cycle inventory we can obtain information about the average ----------------------
flow time of the product resulting from cycle inventory.
----------------------
Let us take for example, Shopper’s Stop which has a stable demand for
jeans at 100 jeans per day. The manager however orders a lot size of 1000 jeans. ----------------------
Because the lot size is 1000 units and the daily demand is only 100, it would
----------------------
take 10 days for the lot to be completely sold out. The inventory declines from
1000 to 0 units in ten days. When the demand is steady, the cycle inventory = lot ----------------------
size/2 = the average inventory. Here in this case, the cycle inventory would thus
be 500 jeans (1000/2=500). From this we can conclude that cycle inventory is ----------------------
directly proportional to the lot size.
----------------------
Now, Average flow time = Average inventory/Average Flow Rate
----------------------
In any supply chain the average flow rate is the demand itself
Therefore, average flow time resulting from cycle inventory = cycle inventory/ ----------------------
demand = 500/100 = 5 days ----------------------
From the above, we can conclude that Shopper’s Stop adds 5 days to the
amount of time the jeans spent on an average in the supply chain. The larger the ----------------------
cycle inventory, the larger the lead time. However, smaller lead times are preferable ----------------------
as larger time lags leave a firm vulnerable to the demand changes in the market
place. Also lower cycle inventories require lesser working capital. See Fig. 4.1, 4.2. ----------------------
Order Level
----------------------
Lot Size Y
----------------------
----------------------
1000
----------------------
Average ----------------------
500 Cycle
Inventory ----------------------
----------------------
0 10 20 30 40X ----------------------
Time (Days) ----------------------

Order Placed
----------------------
Fig 4.1: The inventory profile of Shopper’s Stop showing the cycle ----------------------
inventory at constant lead time and fixed demand.
Notes Lot Size
----------------------
----------------------
Order Level
----------------------
---------------------- 500
Average
Cycle
---------------------- 250 Inventory
----------------------
0 5 10 15 20 25 30 35 40
----------------------
Order Placed Time (Days)
----------------------
Lot Size
---------------------- 2000 Order Level
----------------------
----------------------
Average
---------------------- 1000 Cycle
Inventory
----------------------
----------------------
---------------------- 20
0 10
---------------------- Order Placed
Time (Days)
----------------------
Fig. 4.2: Relation between average cycle inventory and lot size
----------------------
b) Safety inventory
----------------------
Safety inventory can be defined as the inventory carried for the purpose
---------------------- of satisfying the demand that exceeds the amount forecasted for a given period
of time. Due to this uncertainty in the demand for products, a product shortage
---------------------- may result if the actual demand exceeds the forecasted demand. For example,
let us assume the mega clothes retailer Pantaloons imports high end T- shirts
----------------------
for sale from Singapore. Given the high transportation costs from Singapore,
---------------------- Pantaloons orders in lots of 6000 T- shirts. The total demand of T- shirts in a
week is 1000 shirts. The supplier takes about three weeks to deliver the T-shirts
---------------------- to Pantaloons. Now, if there is no demand uncertainty and exactly 1000 T-
shirts are sold every week, the store manager at Pantaloons can place an order
----------------------
when the store has exactly 3000 T- shirts remaining. If there is no uncertainty
---------------------- in demand, such a policy ensures that a new lot arrives just as the last T-shirt
is being sold at the store. But we have learnt that forecasts are almost never
---------------------- accurate!

Given the forecast errors, there is bound to be a demand higher or lower Notes
than 3000 T-shirts forecasted. Some customers may be unable to make purchases
which may result in a loss for Pantaloons. Keeping this in mind, the store ----------------------
manager at Pantaloons now places an order when they still have 4000 T-shirts in
the store. This allows him to improve the product availability because the store ----------------------
now runs out of T-shirts only when the demand exceeds 4000. Given an average ----------------------
weekly demand of 1000 T- shirts, Pantaloons shall have an average of 1000
T-shirts remaining when the replenishment lot arrives. Thus, safety inventory is ----------------------
said to be the average inventory remaining when the replenishment lot arrives.
Here Pantaloons carries a safety inventory of 1000 units. ----------------------
This example helps a supply chain manager to make the necessary trade ----------------------
offs at the time of planning safety inventory. The first is that raising the level
of safety inventory increases product availability and also gets a higher margin ----------------------
from the customer purchases. But the second point to be kept in mind is that ----------------------
raising the level of safety inventory raises the overall holding costs for the firm.
Fig. 4.4 shows the inventory profile with safety inventory. ----------------------
c) Speculative inventory ----------------------
Speculative inventory is the stock that is held for reasons other than
satisfying current demand. For example, a manufacturer may purchase a large ----------------------
quantity of material, larger than what is actually needed to serve the current ----------------------
demand. This may be done in order to receive large quantity discounts because
of a future price increase or due to a future shortage of the material. This ----------------------
provides material for production during seasons or even throughout the year at
a constant level. ----------------------
d) Seasonal inventory ----------------------
Seasonal inventory is a form of speculative demand that involves the
----------------------
accumulation of inventory before any season begins in order to maintain stable
production or maintain a stable work force during periods of seasonal demand. ----------------------
e) Dead stock
----------------------
Dead stock refers to those products for which no demand has been
registered over a large period of time. These products are treated as obsolete ----------------------
and block the working capital of the firm. They may also have been stocked
----------------------
over a long period of time at a particular location and if so, may be shipped to
another location in an attempt to try and sell it there. ----------------------
4.4 SAFETY INVENTORY ----------------------
The amount of safety inventory necessary to satisfy a given level of ----------------------

demand can be determined with the help of statistical techniques. It is important ----------------------
that supply chain managers at the time of calculating safety inventory, consider
the joint impact of demand and the replenishment cycle variability. For the ----------------------
calculation of safety inventory, the supply chain manager must refer to the
recent sales volume chart and the replenishment cycle chart. With the help of ----------------------
the data from these charts, it becomes easy for the managers to determine safety ----------------------
inventory requirements using the formula:

Notes
----------------------
where,
----------------------
= units of safety stock to satisfy a particular service level (in %),
----------------------
= average replenishment cycle,
----------------------
= standard deviation of daily sales,
----------------------
---------------------- = average daily sales,
---------------------- = standard deviation of the replenishment cycle

---------------------- With the help of the above formula one can determine the quantity of safety
inventory required to cover the variability in both demand and lead time.
----------------------
With the help of the information mentioned and the sales history chart, the
---------------------- next thing that a supply chain manager needs to do is to calculate the standard
deviation by using the formula:
----------------------
----------------------
----------------------
Where,
----------------------
= standard deviation of the daily sales,
---------------------- = frequency of the event,
---------------------- = deviation of event from mean,
---------------------- r = total number of observations.
---------------------- Table 4.1: Daily Sales of a Watch Trader
---------------------- Daily Sales Frequency Deviation Deviation fd. squared
squared
---------------------- 60 1 -40 1600 1600
---------------------- 70 2 -30 SDO 1800
80 3 -20 400 1200
---------------------- 90 4 -10 100 400
100 s 0 0 0
---------------------- 110 4 10 100 400
120 3 20 400 1200
----------------------
130 2 30 SDO 1800
---------------------- 140 1 40 1600 1600
S=lOO n= 25 10000
----------------------
----------------------

Applying the above formula to the given data in Table 4.1, we get: Notes
----------------------
----------------------
This means that 68% (customer service level) of time, the daily sales for the watch
dealer falls between 80 and 120 units (100+ or - 20 units). The same procedure ----------------------
can be used to arrive at the mean and standard deviation of the replenishment
cycle. Once a supply chain manager is ready with this information, the formula ----------------------
used previously can be used to determine safety stock requirements at a certain ----------------------
level of demand.
Let us now use the following chart to determine the standard deviation of ----------------------
replenishment cycles: ----------------------
Table 4.2: Standard deviation of replenishment cycles
----------------------
lead time in frequency deviation deviation fd squared
days squared ----------------------
7 1 -3 9 9 ----------------------
8 2 -2 4 8
----------------------
9 3 -1 1 3
10 4 0 0 0 ----------------------
11 3 1 1 3
----------------------
12 2 2 4 8
13 1 3 9 9 ----------------------
n= 16 40 ----------------------
=10
From the above chart: ----------------------
standard deviation of the replenishment cycle = ----------------------
----------------------
----------------------
Also, = average replenishment cycle = 10
----------------------
With all the information now being available, the supply chain manager can
determine the combined inventory required, covering availability in both ----------------------
demand and lead time by using the formula:
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes From the above we can conclude that in a situation in which the daily
sales vary from 60 to 140 watches and the inventory replenishment cycle varies
---------------------- from 7 to 13 days (i.e. lead time), the watch trader would require a safety stock
of 175 watches to provide 84% of all possible occurrences (the percentage of
---------------------- service level that the trader will be able to provide). In order to protect himself
---------------------- from 98% of all the possibilities, the trader will have to maintain 350 watches
as safety inventory.
----------------------
With the help of this example, Table 4.3 shows the summary of the alternate
---------------------- service levels, the safety stock levels and also the total average inventory to be
maintained by the watch trader. In order to calculate the total average inventory
---------------------- in this case, we have assumed the E0Q to be 1000 units. Therefore, the average
cycle stock or inventory is equal to half the EOQ as discussed earlier.
----------------------
Table 4.3: Summary of the alternate service levels, the safety stock levels
---------------------- and the total average inventory to be maintained by the watch trader
---------------------- Service No of standard Safety stock Average Total Average
level deviations required requirement Cycle Stock Inventory
----------------------
84.10% 1.0 175 500 675
---------------------- 90.30% 1.3 228 500 728
94.50% 1.6 280 500 780
----------------------
97.70% 2.0 350 500 850
---------------------- 98.90% 2.3 403 500 903
---------------------- 99.50% 2.6 455 500 955
99.90% 3.0 525 500 1025
----------------------
Average cycle inventory = ½ of EOQ, therefore if EOQ= 1000units, cycle
---------------------- inventory is 500 units.
In the next unit, we are going to study in detail the role played by the cycle
---------------------- service level or the fill rate in a supply chain and how it can lead to the product
---------------------- availability and the overall profitability of the firm.

----------------------
Fill in the blanks.
----------------------
1. One should explore possibility of uses at another location for the
---------------------- _____ stock.
---------------------- Multiple Choice Single Response.
1. Inventory is not required for
----------------------
i. Protection from uncertainties
----------------------
ii. Buffering between stages of manufacturing
---------------------- iii. Reducing cost of capital
---------------------- iv. Achieving economies of scale

4.5 COSTS ASSOCIATED WITH INVENTORIES Notes
Inventory holding costs ----------------------
Holding cost is estimated as the sum of the following costs. We usually
----------------------
mention the holding cost as a percentage of the cost of the product:
a) Cost of capital ----------------------
b) Spoilage cost ----------------------
c) Handling cost
----------------------
d) Occupancy cost
e) Miscellaneous cost ----------------------
a) Cost of capital ----------------------

The cost of capital is the most important component of holding cost. One ----------------------
can calculate the holding cost using the weighted average cost of capital
(WACC): ----------------------
----------------------

----------------------
where, E = amount of equity
----------------------
D = amount of debt
----------------------
R f = risk free rate of return
----------------------
b = the firm’s beta
----------------------
MRP = market risk premium
----------------------
R b = rate at which a firm can borrow money
----------------------
t = tax rate
WACC is calculated after tax results, however inventory is calculated ----------------------
before taxes are paid. Therefore, pre tax WACC = post tax WACC/(1-t).
----------------------
b) Spoilage cost
----------------------
The spoilage cost estimates the rates at which the value of the product that
a firm stores, drops following a drop in the market value of the product or ----------------------
because of quality deterioration. The rate of spoilage depends upon the
type of products, like foodstuff having high spoilage rates and even non- ----------------------
perishable items like microprocessors having spoilage rates upto 100%. ----------------------
On the other hand, products like gasoline take a long time to get spoilt. For
such products, a very low spoilage rate may be applicable. ----------------------
c) Handling costs ----------------------
Handling costs should include receiving and storage cost of the products.
These costs vary with the quantity of products received. Handling costs ----------------------
based on the number of orders should also be included in the total handling ----------------------
cost. Quantity dependent costs remain stable if the quantity of products

Notes remains within certain limits. Thus, there is no additional or incremental
handling cost on the products that lie within this range. But if there are any
---------------------- incremental costs that arise due to larger quantity of products, then these
costs must also be included in the holding costs.
----------------------
d) Occupancy costs
----------------------
The occupancy cost must show an incremental change in the space cost due
---------------------- to the change in the cycle inventory. If the firm is charged on the number
of units stored, then we call it the direct occupancy cost. If firms lease a
---------------------- particular space, and if a marginal change in the quantity stored does not
affect the occupancy cost, but there is an increase in the quantity stored
----------------------
which leads to an increase in the leased space, then this incremental cost
---------------------- must be added to the holding cost too.
e) Miscellaneous costs
----------------------
Miscellaneous costs deal with a large number of costs such as costs due to
---------------------- theft, damage, tax and insurance that may be incurred by the company. Any
---------------------- incremental costs arising due to a change in the cycle inventory must also
be added to the holding cost.
---------------------- Ordering costs
---------------------- All additional or incremental costs associated with the placing or receiving
of an extra order, independent of the size of the order, are called ordering costs.
---------------------- These are:
---------------------- i) Buyer time costs
---------------------- ii) Transportation costs
---------------------- iii) Receiving costs

iv) Other costs
----------------------
i) Buyer time costs
----------------------
Buyer time is the incremental time of the buyer placing an extra order. This
---------------------- cost should be included in the order cost, if and only if, the buyer places
an order and is utilised fully. With the help of e-commerce, one can place
---------------------- orders on the internet. This also helps to reduce the costs for the supplier.
---------------------- ii) Transportation costs
A fixed transportation cost is often incurred by firms regardless of the size
----------------------
of the order. For example, if a truck is sent to deliver every order, it costs
---------------------- the same amount to send a half empty truck as it does a full truck. Less
than truck load pricing also includes a fixed and a variable component. The
---------------------- variable component increases with the increase in the quantity shipped.
The fixed component should be included in the order cost.
----------------------
iii) Receiving costs
----------------------
Receiving costs are incurred by a firm regardless of the size of the order.
---------------------- These costs include some administrative work such as purchase order

matching and other clerical work associated with updating the inventory Notes
records.
----------------------
iv) Other costs
Every order placed or received can have a cost unique to it, which should ----------------------
be considered if they are incurred independent of the quantity of the order
----------------------
placed.
----------------------
4.6 INVENTORY CONTROL SYSTEMS
----------------------
It is important to understand systems of inventory management. As
----------------------
demand and lead times vary, we can order fixed quantities of stock at variable
times or order variable quantities at fixed times. Each has implications for ----------------------
safety stock, operational responsiveness, the level of risk involved given
variable demand and supply and security. Many factories will use a two-bin ----------------------
replenishment system. Stock records systems, computerised more often than
----------------------
not today, provide more detailed control over stock levels, issues and receipts.
They are essential to stores management. The data content and flows of such ----------------------
systems are needed by just-in-time methods.
----------------------
Inventory Control Systems
As demand and lead times are variable, we can either ----------------------
 order fixed quantities of stock at variable times or ----------------------
 order variable quantities at fixed times ----------------------
Fixed quantity systems (Re-order levels)
----------------------
 easy to manage
----------------------
 cope well with demand variability/changes and facilitate lower stocks
 orders can also be processed for convenience e.g. small orders can be ----------------------
consolidated to secure supplier discounts ----------------------
Using EOQ, fixed systems initiate replenishment orders when stock falls
below a pre-determined (re-order) level. Re-order level is calculated as mean ----------------------
demand during the mean lead time, plus the safety stock. As a rough indicator, ----------------------
half the mean lead time usage can be taken as the safety stock (RoL = I.5DL).
Two-bin replenishment system ----------------------
Imagine two equally sized bins (bays, pallets or similar) used for storage ----------------------
in the warehouse or at the workstation storage point. The ROL will thus be seen
----------------------
visually. With the first bin empty, a new full bin is “called” to arrive before the
second bin is exhausted. The call is rotated. With proper rotation the system ----------------------
is efficient (little paperwork). In a computerised enviroment the bins/pallets
themselves can be bar coded and their movement/position and batch numbers ----------------------
of bin components can be traced.
----------------------
----------------------

Notes Stock records
A two bin system is suited to components needing to be issued in large
----------------------
quantities and where the bin size and hence ROL can be checked simply. With
---------------------- many stock items this is inappropriate. More detailed control over issues is
needed, hence a stock record system showing receipts/issues and balance is
---------------------- required. Paper or computer records require time to check stock against reorder
levels. There may be differences between the physical or actual stock and the
----------------------
book stock. “The record says we have 5 in the warehouse but I could only
---------------------- find three and one of these was damaged”. Computerised systems enable
replenishment orders to be raised as soon as stock falls below a reorder level.
----------------------
In a supermarket, the record for each stock item is decremented as
---------------------- each sale is logged at the checkout. With computer interconnectivity, the
regional warehouse receives the store’s replenishment needs and makes up a
---------------------- replenishment package for next day delivery. Periodic stock checks to count
the stock physically enable the store to feed in adjustment figures to reconcile
----------------------
physical against book stock. Thus stock losses can be accounted for.
---------------------- Such systems assist with demand forecasting. Up-to-date demand figures
feed in to reorder level and order quantity calculations.
----------------------
Fixed Time/Order Cycle Systems
----------------------
Annual requirements for low value, low bulk items can be estimated and
---------------------- ordered in a routine re-order cycle.
---------------------- We may need to set a maximum stock level (average demand + safety
stock). At the routine re-order time current stock can be subtracted from the
---------------------- maximum to give the order quantity (frequency of ordering could be based on
EOQ).
----------------------
Safety stock must accommodate unexpected increases in demand and
---------------------- the risk of stock-out situation. Compare this to a re-order level system where
the risk is limited only to variations in demand in the lead-time period. For a
----------------------
fixed time re-order cycle system, the time at risk is re-order lead time plus the
---------------------- re-order cycle time. Calculation of the maximum stock level formula gives a
higher level of safety stock.
----------------------
Re-order level approach
---------------------- Average stock levels stay more or less the same and are less responsive to
changes in demand. There is a risk of stock outs with expected rising demand
----------------------
but outstanding re-supply orders can be chased.
----------------------
Re-order cycle systems
----------------------
Rising demand can exhaust stocks with no outstanding orders in the
---------------------- pipeline.
Which System?
----------------------
Of the systems (annual demand, two-bin, re-order cycle, re-order level)
---------------------- none are universally versatile. Many organisations operate a hybrid. Choosing

between fixed quantity or fixed time approaches depends on risking unexpected Notes
movement in demand against the costs of administering convenient, scheduled
replenishment. The safety stock penalty of fixed re-order cycle methods worsens ----------------------
as stock usage value and demand variability rise. Generally fixed time systems
suit stock with stable/predictable demand patterns and low usage values. ----------------------
Risk and security ----------------------

Most cost benefits arise from attention to stock items of highest usage ----------------------
value where most costs lie (some lower value/usage items may be critical
also e.g. key spares). Theft is always a risk even for bricks and JCB’s stored ----------------------
on company building sites. Accurate stock records assist security monitoring
----------------------
(detecting theft) and control. A two-bin or annual demand system offers little
security for high value, important, difficult to supervise items. ----------------------
Economic Order Quantity (EOQ)
----------------------
We could buy-in, or make for stock either a few large orders or frequent
small orders for a given usage. Few big orders involve low acquisition and high ----------------------
holding costs. Conversely many small orders result in low holding and high ----------------------
acquisition costs.
Purchasing an economic order quantity (a.k.a. economic batch quantity, ----------------------
economic lot size or EOQ) seeks to reconcile ordering and holding costs to ----------------------
obtain an optimum order size.
Cost of holding stock and ordering/acquisition cost are represented by the ----------------------
formulae ----------------------
 The value of the average stockholding = (Q/2 x item cost/value) where Q ----------------------
is the order quantity. The holding cost/unit (Ch) is derived from the average
inventory value) multiplied by the cost of carrying the item over the period ----------------------
(one year) expressed as a % of the item cost/value.
----------------------
 Order cost (Co) is derived from the number of orders placed (D/Q - demand
p.a. divided by order quantity) multiplied by the cost of placing an order. ----------------------
 Order/acquisition cost or set-up cost for a make-to-stock situation. ----------------------

Holding costs = Ch x Q/2 ----------------------
Ch is the holding cost/unit ----------------------
Ordering Costs = Co x D/Q
----------------------
Co is the ordering cost
----------------------
Therefore, Total cost = Ch + Co
These relationships can be seen in the graphic representation of EOQ. ----------------------
The EOQ is found at the lowest point on the total cost curve. Here the order size
----------------------
optimises the cost of stockholding with the cost of acquisition. The equation is:
----------------------
----------------------

Notes As an example, in a company where order cost is estimated at Rs.10 and with
a holding cost of 25% of item value if annual demand is 1000 units at a supply
---------------------- price of Rs.36, if we substitute these figures in the EOQ formula then the EOQ
is 48 units (47.1 Kango hammers will not be supplied).
----------------------
----------------------
----------------------
EOQ Evaluation and Assumptions of Simple EOQ
----------------------  Demand (units of supply, not issue) is known and steady, so average
---------------------- inventory can be estimated.
 Quantity discounts do not apply - the effect of buying discount/price breaks
----------------------
needs to be calculated additionally.
----------------------
Quantity discounts
----------------------
The order cost is spread over more items (larger batches) with discounts!
---------------------- But there are higher holding costs.
 Orders arrive in one batch with a known lead time, arriving just as stock is
----------------------
exhausted.
----------------------  Some order placement/receiving costs are independent of order quantity,
---------------------- others are dependent.
 Economies or diseconomies of scale do not apply to holding stock
---------------------- (assumption = holding costs are a fixed % of stock value). Order quantities
---------------------- should not exceed shelf-life expectations, room for storage or what is
affordable (nb. at the end of a year - a school of hospital department may
---------------------- buy small (retail) quantities, as the budget is depleted).
 Someone can buy 10000 in batch when usage is in millions.
----------------------
 EOQ assumes good information on variable costs e.g. we know that by
----------------------
placing few big orders, Rs.95 per order, say, can be saved; or that with
---------------------- smaller quantities the opportunity cost of tied up capital and associated
warehouse space costs are saved. But such data on actual costs may be at
---------------------- best a good estimate. This is less of a problem as EOQ is not very sensitive
to error so long as the magnitude of the cost/demand data is reasonably
----------------------
accurate.
---------------------- Safety stock and service levels
---------------------- We may run out of stock because of a re-supply delay or higher than
anticipated usage. If we can predict demand then we merely place EOQ orders
---------------------- on time. The figure shows the predictable, timely re-ordered stock movements.
---------------------- But we risk a stock-out with unpredictable demand, usage and re-supply
so introducing a safety or buffer stock reduces the risks of variable demand/lead
---------------------- time.
----------------------

4.7 JIT AND MRP Notes
JIT ----------------------
Just-in-time (JIT) is easy to grasp conceptually, everything happens just-
----------------------
in-time. For example consider my journey to work this morning, I could have
left my house, just-in-time to catch a bus to the train station, just-in-time to ----------------------
catch the train, just-in-time to arrive at my office. Conceptually there is no
problem, however achieving it in practice is likely to be difficult. ----------------------
So too in a manufacturing operation, component parts could conceptually ----------------------
arrive just-in-time to be picked up by a worker and used. So we would at a
stroke eliminate any inventory of parts, they would simply arrive just-in-time! ----------------------
Similarly we could produce finished goods just-in-time to be handed to a
----------------------
customer who wants them. So, at a conceptual extreme, JIT has no need for
inventory or stock, either of raw materials or work in progress or finished goods. ----------------------
Obviously any sensible person will appreciate that achieving the
----------------------
conceptual extreme outlined above might well be difficult, or impossible, or
extremely expensive, in real-life. However that extreme does illustrate that, ----------------------
perhaps, we could move an existing system towards a system with more of a
JIT element than it currently contains. For example, consider a manufacturing ----------------------
process - whilst we might not be able to have a JIT process in terms of handing
----------------------
finished goods to customers, so we would still need some inventory of finished
goods; perhaps it might be possible to arrange raw material deliveries so that, ----------------------
for example, materials needed for one day’s production arrive at the start of the
day and are consumed during the day - effectively reducing/eliminating raw ----------------------
material inventory.
----------------------
Adopting a JIT system is also sometimes referred to as adopting a lean
production system. ----------------------
JIT originated in Japan. Its introduction as a recognised technique/ ----------------------
philosophy/way of working is generally associated with the Toyota motor
company, JIT being initially known as the “Toyota Production System”. Note ----------------------
the emphasis here - JIT is very much a mindset/way of looking at a production
system that is distinctly different from what (traditionally) had been done ----------------------
previous to its conception. ----------------------
Within Toyota, Taiichi Ohno is most commonly credited as the father/
originator of this way of working. The beginnings of this production system ----------------------
are rooted in the historical situation that Toyota faced. After the Second World ----------------------
War the president of Toyota said “Catch up with America in three years,
otherwise the automobile industry of Japan will not survive”. At that time one ----------------------
American worker produced approximately nine times as much as a Japanese
worker. Taiichi Ohno examined the American industry and found that American ----------------------
manufacturers made great use of economic order quantities - the traditional idea ----------------------
that it is best to make a “lot” or “batch” of an item (such as a particular model of
car or a particular component) before switching to a new item. They also made ----------------------
use of economic order quantities in terms of ordering and stocking the many
parts needed to assemble a car. ----------------------

Notes Ohno felt that such methods would not work in Japan - total domestic
demand was low and the domestic marketplace demanded production of small
---------------------- quantities of many different models. Accordingly Ohno devised a new system
of production based on the elimination of waste. In his system waste was
---------------------- eliminated by:
----------------------  just-in-time - items only move through the production system as and when
they are needed.
----------------------
 autonomation - (spelt correctly in case you have never met the word
---------------------- before) - automating the production system so as to include inspection -
human attention only being needed when a defect is automatically detected
----------------------
whereupon the system will stop and not proceed until the problem has been
---------------------- solved.
In this system inventory (stock) is regarded as an unnecessary waste as
----------------------
also the need to deal with defects.
---------------------- Ohno regarded waste as a general term including time and resources as
---------------------- well as materials. He identified a number of sources of waste that he felt should
be eliminated:
----------------------  Overproduction - waste from producing more than is needed.
----------------------  Time spent waiting - waste such as that associated with a worker being idle
whilst waiting for another worker to pass him an item he needs (e.g., such
---------------------- as may occur in a sequential line production process).
----------------------  Transportation/movement - waste such as that associated with transporting/
moving items around a factory.
----------------------
 Processing time - waste such as that associated with spending more time
---------------------- than is necessary processing an item on a machine.
----------------------  Inventory - waste associated with keeping stocks.
 Defects - waste associated with defective items.
----------------------
JIT Outline Points
----------------------
It is often said Japanese industry works just-in-time, Western industry works
---------------------- just-in-case.
---------------------- JIT is also known as stockless production or lean production.
---------------------- JIT is a suitable production system when:
----------------------  There is a steady production of clearly defined standard products.
----------------------  There is a reasonable number of units made.
----------------------  It is a high value product.
----------------------  There are flexible working practices and a disciplined workforce.
----------------------  There are short setup times on machines.

 Quality can be assured, e.g. zero defects either through good working Notes
practices or through a cost penalty.
----------------------
MRP
Material Requirement Planning(MRP) is a product oriented computerised ----------------------
technique aimed at minimising inventory and maintaining delivery schedules. It
----------------------
relates the dependent requirements for the material and components comprising
an end product to time period known as bucket over a planned horizon on the ----------------------
basis of forecasting provided by marketing & other input information. The
system sets a schedule so that each raw material, assembly and part that is ----------------------
required for production will arrive at the correct time simultaneously to produce
----------------------
the final product that appears in master production schedule.
It is often said that: ----------------------
 Material requirements planning (MRP) is a ‘Push’ system. ----------------------
 JIT is a ‘Pull’ system. ----------------------
But this is an incorrect analysis - MRP is a system based on fulfilling
----------------------
predicted usage in a set time period.
JIT is a system based on actual usage - parts of the production system are ----------------------
“linked” together via MRP as the system runs.
----------------------
It is this linkage that is the distinguishing difference between MRP and
JIT - JIT is a dynamic linked system, MRP is not. ----------------------
JIT Philosophy ----------------------
 Elimination of waste in its many forms. ----------------------
 Belief that ordering/holding costs can be reduced. ----------------------
 Continuous improvement, always striving to improve. ----------------------
Elements of JIT
----------------------
 Regular meetings of the workforce (e.g., daily/weekly).
----------------------
 Discuss work practices, confront and solve problems.
----------------------
 An emphasis on consultation and cooperation (i.e., involving the workforce)
rather than confrontation. ----------------------
 Modify machinery, e.g., to reduce setup time. ----------------------
 Reduce buffer stock. ----------------------

 Expose problems, rather than have them covered up. ----------------------
 Reveal bad practices. ----------------------
 Take away the “security blanket” of stock.. ----------------------
----------------------

Notes JIT need not be applied to all stages of the process. For example we could
keep large stocks of raw material but operate our production process internally
---------------------- in a JIT fashion (hence eliminating work-in-progress stocks).
----------------------
----------------------
Fill in the blanks.
----------------------
1. ________ on working capital is a dominant factor of cost of keeping
---------------------- inventory.
---------------------- 1. Fixed quantity system is easy to manage.
----------------------
1. JIT is not suitable for the following industry.
----------------------
i. Cement
---------------------- ii. Automobile
---------------------- iii. Small Electricals
---------------------- iv. Custom Made Machinery
----------------------
Activity 1
----------------------
---------------------- 1. As a Supply Chain Manager, do you think it is important for a company
to hold large inventory? Do you think it is expensive for a company to
---------------------- hold higher inventory during seasonal demand?
---------------------- 2. Imagine you are the supply chain manager of a company producing
mobile phones. What costs come to your mind when you think of
---------------------- products that have short life cycles?
----------------------
---------------------- Summary
----------------------  The most important task in a supply chain is the management of

inventories. Inventory is a very large and costly investment that every
---------------------- stage of the supply chain needs to incur. Every stage works independently
to make the supply chain profitable. Thus, it is very important that every
---------------------- stage of the supply chain co-ordinates and together forms the inventory.
---------------------- Inventory incurs costs, ties up working capital, it consumes space and
must be managed in and out. Stocks can deteriorate or get stolen. Most
---------------------- operations, capacity planning and scheduling, depend on inventory.
Stocks serve to smooth out timing gaps in the rates of supply and demand.
---------------------- Inventory offers insurance and good planning/control can minimise the
---------------------- associated costs and satisfy efficiency/effectiveness requirements. This is
the reason for a just-in-time and MRP approach to inventory.
 We could buy-in, or make for stock either a few large orders or frequent Notes
small orders for a given usage. Few big orders involve low acquisition and
high holding costs. Conversely many small orders result in low holding ----------------------
and high acquisition costs. Purchasing an economic order quantity (a.k.a.
economic batch quantity, economic lot size or EOQ) seeks to reconcile ----------------------
ordering and holding costs to obtain an optimum order size. ----------------------
Need for holding inventory
----------------------
a) Achieve economies of scale
----------------------
----------------------
c) Specialisation
----------------------
d) Protection from uncertainty and order cycles
----------------------
e) Acts as a buffer between the stages of the supply chain
----------------------
Types of inventory
a) Cycle inventory ----------------------
b) Safety inventory ----------------------
c) Speculative inventory ----------------------
d) Seasonal inventory ----------------------
e) Dead stock ----------------------
----------------------
Keywords
----------------------
 Buffer Stock: Safety stock to combat the variation in either demand or
replenishment. ----------------------
 Speculative Inventory: It is the stock that is held for reasons other than ----------------------
satisfying current demand.
----------------------
 Spoilage cost: The spoilage cost estimates the rates at which the value of
the product that a firm stores, drops following a drop in the market value ----------------------
of the product or because of quality deterioration.
----------------------
 EOQ: (Economic Order Quantity) It seeks to reconcile ordering and
holding costs to obtain an optimum order size. ----------------------
----------------------
----------------------
1. Explain the role played by cycle and safety inventory in a supply chain.
Which are the different types of inventories in a supply chain? ----------------------
2. What do you mean by fill rate? ----------------------

3. Describe the impact of lot sizing on the costs of a product. Explain with ----------------------
the help of a diagram.

Notes 4. How can you determine poor inventory levels in a supply chain?
5. What do you mean by EOQ? Provide the statistical expression for finding
----------------------
the economic ordering quantity.
---------------------- 6. Explain the various costs associated with cycle inventory.
---------------------- 7. Give the statistical expressions for determining safety inventory and
standard deviation of daily sales and replenishment cycles.
----------------------
---------------------- Answers to Check your Progress

Fill in the blanks.
----------------------
1. One should explore possibility of uses at another location for the dead
---------------------- stock.
---------------------- 1. Inventory is not required for
iii. Reducing cost of capital
----------------------
----------------------
Fill in the blanks.
---------------------- 1. Interest on working capital is a dominant factor of cost of keeping
---------------------- inventory.
----------------------
1. True
----------------------
---------------------- 1. JIT is not suitable for the following industry.
---------------------- i. Cement
----------------------
Suggested Reading
----------------------
1. Toomey, John. Inventory Management: Principles, Concepts and
---------------------- Techniques. Springer Publications.
---------------------- 2. Wild, Tony. Best Practice in Inventory Management. Routledge Publisher.
----------------------
----------------------
----------------------
----------------------
----------------------

Transportation
UNIT
Structure:
5.1 Introduction
5
5.2 Factors influencing Transportation Decisions
5.3 Various Modes of Transport
5.4 Design Options
5.5 Transportation Design Tradeoffs
5.6 Routing and Scheduling
5.7 Tailored Transportation
5.8 Transportation in Practice
Summary
Key Words
Suggested Reading
Transportation 87
Notes
Objectives
----------------------
----------------------
• Explain the role of transportation in a supply chain
----------------------
• Discuss the characteristics of the modes of transport
---------------------- • Identify various design options
---------------------- • List the trade-offs in transportation
----------------------
5.1 INTRODUCTION
----------------------
Transportation means movement of products from the beginning of the
---------------------- supply chain to the customer. Transportation plays a significant role in any
supply chain because products are rarely produced and consumed at the same
---------------------- location. An object produced at one point has very little value to the prospective
---------------------- customer unless it is moved to the consumption point. Transportation helps to
achieve this movement of products.
---------------------- Transportation creates place utility and time utility as it determines how
---------------------- fast and regularly products move from one place to another. If products are
not available on time, there may be lost sales or customer dissatisfaction.
---------------------- Transportation is a significant component of the cost that most supply chains
incur, and is a large portion of the GDP of many countries like the US, and
---------------------- even India. With the introduction of e- commerce, there has been a sharp rise
---------------------- in the number of websites, due to which there has been an increase in the
home delivery of products. This has led to the delivery of small packages to
---------------------- individual homes. As a result of this, the transportation cost is a large fraction
of the cost of delivery of the product sold online. Let us take an example -
---------------------- Shipping a truck of books to a Navneet retail book store costs a few rupees
---------------------- per book, may be Rs. 1 or Rs. 2/book. But, if www.navneetbooks.com sends
a package to a customer’s place the transportation cost would not be less than
---------------------- Rs. 10/book.
---------------------- The success of any supply chain is closely linked to the appropriate use
of transportation. Every company makes use of different modes and routes
---------------------- of transportation for maximum profitability. Supply chains also make use of
responsive transportation to centralise their inventories and operate with fewer
----------------------
facilities. Moreover, it is transportation that creates a significant link between
---------------------- different stages in a global supply chain.
---------------------- 5.2 FACTORS INFLUENCING TRANSPORTATION

---------------------- DECISIONS
---------------------- One must keep in mind that there are two key players within any supply
chain, one called the shipper and the other called the carrier.
----------------------

The shipper is the party that requires the movement of the product between Notes
two points in the supply chain and the carrier is the party that transports the
products for the shipper. Example: HCL Computers Ltd. uses GATI to ship ----------------------
its products from their production units to the customers. In this case, HCL
Computers Ltd. is the shipper and GATI is the carrier. ----------------------
When making any transportation decisions, factors affecting transportation ----------------------

vary depending on whether one takes the perspective of a carrier or shipper.
----------------------
A shipper uses transportation to minimise the total cost of the product to be
delivered while providing an appropriate level of responsiveness to the customer. ----------------------
Whereas a carrier makes investment decisions regarding the transportation
infrastructure and makes operating decisions to try and maximise the return ----------------------
from these assets. Now, let us discuss in detail the factors affecting the decisions
----------------------
of a carrier and a shipper.
A. Factors affecting decisions of carriers ----------------------
A carrier such as a transport company, an airline or a railroad must account ----------------------
for the following costs before making any investments in assets or making any
pricing and operating policies. All decisions taken should be with a view to ----------------------
maximise the return on the investments made.
----------------------
1. Vehicle related costs
----------------------
2. Fixed costs
----------------------
3. Trip related costs
4. Quantity related costs ----------------------
5. Overhead costs ----------------------
1. Vehicle related costs ----------------------
The vehicle related cost is the cost that the carrier incurs for the purchase
or lease of a vehicle that is used to transport goods. These costs are ----------------------
incurred irrespective of the vehicles being used or not. These costs remain ----------------------
fixed for short operational decisions taken by the carrier. However,
when long term strategic decisions are to be taken, the vehicle related ----------------------
costs become variable. It is at this moment the carrier realises whether
he should purchase more vehicles or not. The vehicle related costs are ----------------------
directly proportional to the number of vehicles that a carrier has. ----------------------
2. Fixed costs
----------------------
Fixed costs are those costs which are incurred by the carrier whether or
not the vehicles operate. These include costs associated with terminal, ----------------------
airport gates and labour. Sometimes even the salaries of the driver if not
----------------------
paid by way of their travel schedule, are included under fixed costs. These
costs remain fixed for operational decisions, but for planning and strategic ----------------------
decision making, these costs become variable. The fixed operational cost
is generally proportional to the size of operating facilities. ----------------------
----------------------
Transportation 89
Notes 3. Trip related costs
Trip related costs include the price of fuel and labour incurred on each
----------------------
trip. In the case of products shipped by truck, the trip related costs would
---------------------- remain same irrespective of the quantity transported. These costs depend
on the time taken to ship the products to the desired destination and back.
---------------------- Both while making operational and strategic long term decisions, trip
related costs are variable.
----------------------
4. Quantity related costs
----------------------
These include costs which are associated with the loading of the truck and
---------------------- the fuel spent to a certain extent. These costs vary with the quantity of
products being transported, and are mostly variable in all operational and
---------------------- strategic decision making, unless labour used for loading and unloading
is fixed.
----------------------
5. Overhead costs
----------------------
These include all the costs related to planning and scheduling a
---------------------- transportation network as well as any investment in technology
infrastructural development. Example: When a company invests in
---------------------- routing software that provides better alternatives to managers. Also, as
---------------------- example, companies using GPS services for locating and tracking their
vehicles. They include costs for providing on-time delivery and better
---------------------- response to its customers. These costs incurred on software and locating
systems are set as overhead costs.
----------------------
Thus, at the time of taking strategic decisions, carriers must consider these
---------------------- costs as they are variable. In the operational decision making level, these costs
are more or less fixed. The level of response to the customers, the target market
---------------------- and the price of the products also affect the transportation decisions in the long
---------------------- run.
B. Factors affecting shippers decision
----------------------
The shipper makes decisions regarding the design of transportation network,
---------------------- choice of the mode of transport and assigning each customer shipment to a
particular means of transport. The main objective of the shipper is to minimise
----------------------
the total cost associated with a particular order and at the same time fulfilling
---------------------- the promise to the customer. Thus, for every shipper, it is very important to take
note of the following transportation decisions:
----------------------
1) Transportation cost
---------------------- 2) Inventory cost
---------------------- 3) Facility cost
---------------------- 4) Processing cost
5) Service cost.
----------------------
1) Transportation cost
----------------------

The transportation cost includes the total cost a shipper involves in Notes
transporting the products to the customers. The transportation cost
depends upon the prices that every carrier offers and the extent to which ----------------------
the shipper makes use of slower and cheaper or quicker and expensive
means of transportation. The transportation costs are variable for all the ----------------------
decisions a shipper takes, as long as the shipper doesn’t own the carrier ----------------------
himself.
----------------------
2) Inventory cost
Inventory costs are the costs associated with inventory of the shipper. These ----------------------
costs remain fixed for a short period of time, that is until the shipment is
----------------------
assigned to a certain carrier. However, these costs become variable when
a shipper is designing the transportation network or framing the operating ----------------------
policies.
----------------------
3) Facility cost
The facility cost is the cost of the various facilities of the shipper’s supply ----------------------
chain network. These costs are variable when supply chain managers ----------------------
make strategic transportation decisions, but are otherwise fixed.
4) Processing cost ----------------------
These are variable costs associated with the loading and unloading of ----------------------
orders.
----------------------
5) Service costs
----------------------
Service costs are the costs that accrue due to non-fulfillment of delivery
of products to the customers at the right time. These costs should be kept ----------------------
in mind at the time of devising strategic plans and operational decisions.
----------------------
1. Shippers, when engaging a transporter, are concerned with the cost of ----------------------
i. Production ----------------------
ii. Inventory
----------------------
iii. Fixed costs
----------------------
iv. Selling
1. Natural gas is probably most economically transported by ______. ----------------------
----------------------
----------------------
----------------------
Transportation 91
Notes 5.3 VARIOUS MODES OF TRANSPORT
---------------------- We are aware of the various modes of transport and have been studying
about them since school. Yet, let us study in detail about the performance and
---------------------- characteristics of each of these modes of transport:
---------------------- a) Truck Transport
---------------------- b) Package Carriers

c) Railways
----------------------
d) Water Ways
----------------------
e) Air Transport
---------------------- f) Pipeline
---------------------- g) Intermodal Transport
---------------------- a) Truck Transport
Truck is the dominant mode of transport in countries like the US and even in
----------------------
India, second only to railways. When we talk about supply chain management,
---------------------- the truck industry consists of two sectors i.e. TL – Truck load and LTL – Less
than truck load. The TL operation charges for a full truck load irrespective of
---------------------- the quantity shipped and varies with the distance travelled. On the other hand,
the less than truck load operation charges are based on the quantity loaded and
----------------------
the distance travelled. Less than truck load rates exhibit the economies of scale.
---------------------- Shipping using trucks is expensive when compared to rail, but the benefit is the
door-to-door facility the trucks provide and the shorter delivery time they take.
---------------------- No transfers between loading and delivery are required when goods are shipped
using trucks. Truck load operations have relatively low fixed costs and for a
----------------------
firm entering into a new business, it is sufficient to begin with.
---------------------- Truck load pricing displays economies of scale with respect to the distance
travelled. With the introduction of longer trucks or trailers, even pricing displays
----------------------
the economies of scale with respect to the size of the trailer used. Shipment of
---------------------- products between the supplier and manufacturer or between the manufacturing
facility and warehouses is best suited. The less than truck load operations are
---------------------- priced to encourage delivery in smaller lots, (usually less than half a truck load),
as truck load tends to be cheaper for larger shipments. The problem with less
----------------------
than truck load shipment is that they take longer because of other loads that
---------------------- need to be picked up and dropped off.
The less than truck load shipping is used for shipment that are too large to
----------------------
be mailed as small packages, but constitute less than half a truck load. The
---------------------- costs related with less than truck load shipping can be reduced with the help
of consolidation centres where trucks bring in small loads of products from
---------------------- a specified area and then deliver the products destined for the same specified
area. This allows them to increase their truck use along with increasing the
----------------------
delivery time. Thus, the main issues related to less than truck load sector is the
---------------------- location of consolidation centres, assigning loads to the trucks, scheduling and

routing of pickup and delivery. The main objective is to minimise costs without Notes
hampering the delivery time.
----------------------
b) Package Carriers
Package carriers are big transportation companies like TCI (Transportation ----------------------
Corporation of India) and GATI in India, and FedEx, UPS and DHL abroad.
----------------------
These transportation companies carry small packages ranging from letters to
shipment weighing about 200-250 kgs. They make use of air, truck and rail ----------------------
to transport time –bound smaller packages. These package carriers are very
expensive and cannot be compared to less than truck load carriers in terms of ----------------------
price for large shipment. Their aim is to provide quick and reliable delivery of
----------------------
goods. That is why a large number of shippers make use of these carriers to
deliver small and time-sensitive shipment. Package carriers also provide value- ----------------------
added services that help shippers track the shipment status. Package carriers
provide pickup from the shipper location and provide delivery to the customer’s ----------------------
door step. With the increase in just in time deliveries and focus on inventory
----------------------
reduction, the demand for package carriers has grown tremendously.
A large number of e-business players like e-bay.com, amazon.com, rediff. ----------------------
com and many more prefer this mode of transport. The largest package carrier
----------------------
in the world UPS makes use of a large fleet of airplanes in order to deliver to
any place in Europe. ----------------------
Given the small size of packages and a large number of delivery points, ----------------------
consolidation of shipment is a key factor in increasing the utilisation and
decreasing the costs for package carriers. These package carriers make use of ----------------------
trucks that ensure local deliveries and pick up. These packages are then sorted
out in sorting centers and then sent by full truck loads or by air to the company ----------------------
owned sorting center near the place of delivery. By making milk runs, these ----------------------
packages are then sent to the destined locations by trucks. The scheduling and
routing of shipment is the main hurdle faced by these package companies. ----------------------
c) Railways ----------------------
The railways are priced to encourage large shipment over a long distance.
Prices display economies of scale in the quantity shipped as well as the distance ----------------------
travelled. The price structure and the capacity to carry heavy loads makes rail ----------------------
desirable for shipping heavy and large shipment over long distances. But, the
main drawback for shipping by rail is the time factor, as its takes a large amount ----------------------
of time to ship by rail than by trucks. Thus, rail is best suited for products that
are not time-sensitive. Nowadays, railways are being used as an intermodal ----------------------
mode of transport due to the losses related to it when operated singularly. Coal ----------------------
and oil are the fuels for rail, and due to the unstable rates for fuel, rail as a
medium of transport incurs heavy losses. The major goal in railroads is to ----------------------
keep the locomotives, the crew and the labour well utilised. The major tasks in
railroad transportation include vehicle maintenance, tracks and terminal delays ----------------------
and keeping a check on time performance by the crew and the labour associated. ----------------------
Each transition is time consuming. Moreover, trains leave only when there are
enough cars to constitute the train. Thus, the time taken is long and it adds to ----------------------
Transportation 93
Notes the uncertainty of the delivery time for the shipper. There is no proper schedule
as such. Even today, especially in India, the railway is a loss making mode of
---------------------- transportation.
---------------------- d) Waterways
Water transportation includes transporting by ships and boats. We are going
----------------------
to mainly speak about sea transport and not inland transport by boats. Sea
---------------------- transport is the cheapest mode for shipping bulk products. In today’s trade, where
big transnational companies exist, transportation by ship is the most dominant
---------------------- mode for shipping all kinds of products. Cars, grains, iron ore, oil and clothes
and many other products are shipped by sea. Though it is the cheapest mode for
----------------------
transporting bulk products, it is very time consuming due to the delays at ports,
---------------------- customs formalities and managing of containers are major issues concerning
transportation by ship. Thus, it is not useful for short halt trips as it becomes
---------------------- difficult to operate. Some of the world’s largest shipping ocean carriers include
Maersk Sealand, P&O Ned, Lloyd, ASL, Hyundai, Hanjin Shipping Co. and the
----------------------
Evergreen Group.
---------------------- e) Air Transport
---------------------- Transportation by air use airplanes primarily, sometimes helicopters too.
Products shipped by air include mostly small packages which are costly and
---------------------- time specific. Nowadays, flowers, lifesaving drugs, parcels, gifts, arms and
---------------------- ammunition, etc are shipped by air apart from passengers. The major costs
associated with air transportation are the heavy infrastructural costs and
---------------------- equipment related costs which are fixed. Labour and fuel costs are mostly trip
related and irrespective of the number of passengers or amount of the cargo
---------------------- carried on the flight. The main objective of airline carriers is to earn maximum
---------------------- profits per trip and also maximise the daily flying time of a plane. Aircrafts
offer the quickest but the most expensive means of transportation of products.
---------------------- It is most suitable for emergency items like life saving drugs. The main tasks
associated with transportation by air include identifying the location and the
---------------------- number of hubs, planning routes and assigning routes of different planes, flight
---------------------- scheduling, maintenance of planes, managing crews and pricing strategies.
f) Pipeline
----------------------
Pipelines are used mainly for the transport of natural gas, petroleum, oil and
---------------------- water. A significant amount of investment is required for setting up the pipeline
and related infrastructure. The fixed pipelines once laid are used at optimised
---------------------- levels for transportation of the products mentioned. Investment on pipelines
---------------------- is feasible only when we are assured of a relatively stable large flow of the
products. Pipeline can be an effective way of transporting crude oil to a port
---------------------- or refinery. However, transporting petrol to the petrol pump doesn’t actually
require a pipeline and can be done effectively using trucks. Pipeline pricing
---------------------- consist of two components: a fixed cost related to the amount of usage and the
---------------------- second related to the actual quantity transported.
----------------------

g) Intermodal Transport Notes
By intermodal transportation we mean the use of more than one mode of
----------------------
transportation to move a shipment to its desired destination. The most widely
used intermodal mode of transport is a combination of truck and rail. The ----------------------
increase in global trade and the extensive use of containers for shipping have
given rise to intermodal transportation. Containers are easy to transfer using ----------------------
different modes, their use facilitates intermodal transportation. For international
----------------------
trade, containerised shipments often are shipped using a combination of truck,
water and rail. On land, the truck and rail combination provides benefits of ----------------------
lower costs than truck loads along with better delivery time as compared to rail.
(These together if used offer the best shipment in terms of cost and deliver time ----------------------
that cannot be matched by any single mode.)
----------------------
A major task associated with intermodal shipping is the exchange of
information to facilitate intermodal transfers between different modes, which ----------------------
would sometimes involve delays, thereby hurting the delivery time.
----------------------
5.4 DESIGN OPTIONS ----------------------
There are various transportation-network design options that a company may ----------------------
implement to achieve the desired degree of response and lower costs associated
----------------------
with it. The transportation-network design largely affects the performance of a
supply chain. It forms the infrastructure, within which various scheduling and ----------------------
routing decisions are taken. We are going to study the following transportation
network design options: ----------------------
a) Direct shipping ----------------------
b) Direct shipping with milk runs
----------------------
c) Shipments via DC (distribution centre)
----------------------
d) Shipping via DC using Milk Runs
e) Customised tailored network ----------------------
a) Direct Shipping ----------------------

A direct shipping network involves shipping of products from the supplier to ----------------------
all its retail stores. Under the direct shipping network, routing is already fixed.
Managers only need to decide on the quantity to be shipped to each of the retail ----------------------
stores and the mode of transportation to be used. There are no intermediate
----------------------
warehouses and it is the simplest network design that can be operated and
coordinated easily. Since the products are shipped directly, the time involved is ----------------------
very short. Direct shipping is useful for big retail stores which have optimal lot
sizes, close to truck loads from each supplier to each retailer. However, direct ----------------------
shipment results in higher costs for smaller stores.
----------------------
A supplier must make a trade-off between the inventory and transportation
costs. If the supplier uses truck for transportation, then higher fixed costs of ----------------------
each truck moving large lots would result in higher inventories. If the use of less
----------------------
Transportation 95
Notes than truck load is used, both the delivery time and the costs increase with lower
inventories. Package deliveries shall be very costly. With direct delivery from
---------------------- each supplier, there would be a rise in receiving costs because every supplier
shall make separate deliveries.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Suppliers Retailers
----------------------
---------------------- Fig. 5.1: Direct Shipping
b) Direct shipping with Milk Runs
----------------------
A Milk Run is a route in which a truck either delivers a product from a single
---------------------- supplier to multiple retailers or goes from multiple suppliers to a single retailer.
Thus, with the help of milk runs, a single supplier can now deliver products to
----------------------
multiple retailers or multiple suppliers can deliver products to a single retailer.
---------------------- Direct shipping eliminates intermediate warehouses, whereas milk runs provide
lower transportation costs by consolidating shipment to multiple retailers on a
---------------------- single truck. Pepsi, Coke and Lays are best examples of products being delivered
to retailers by using direct shipping with Milk runs.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
---------------------- Suppliers Retailers
---------------------- Fig. 5.2: Direct Shipping with Milk Runs from multiple suppliers or to
---------------------- multiple retailers
----------------------

c) Shipments via DC Notes
In this type of transportation design network, suppliers need not send
----------------------
shipments directly to the retailers. Retail chains are divided into common
geographical areas and a centrally located DC is built for each of these regions. ----------------------
Suppliers then send their shipments to the DC and then the DC transfers the
appropriate shipments to every retailer within its geographical region. Here the ----------------------
DC acts as an extra layer between the suppliers and the retailers. It serves two
----------------------
main purposes, one is to store the inventory and the other is to serve as a transfer
location. Thus, the DC helps suppliers to reduce costs, if they are located far ----------------------
from the retailers and when transportation costs are significant. DC helps in
achieving economies of scale for inbound transportation costs to a point that ----------------------
is close to the point of destination. This is because the suppliers ship large
----------------------
quantities for all the retail stores that the particular DC serves. Also, because
the DCs are located close to the retailers, the outbound transportation costs ----------------------
is very less. The most important benefit that any company can have is Cross
Docking* of products that can be achieved at the DC. However, this requires ----------------------
immense coordination and synchronisation between the incoming shipment
----------------------
from the supplier and the outgoing shipments to the retailers and economies
of scale in transportation. Also, if transportation economies require very large ----------------------
shipments on the inbound side, DCs can hold inventory and deliver products to
the retailers in smaller lots. ----------------------
*Cross Docking: A cross dock of a product at a DC means each inbound truck ----------------------
contains products from a supplier for several retail stores while each outbound truck
contains product for a retail store from several suppliers. ----------------------
----------------------
----------------------
----------------------
----------------------
DC
----------------------
----------------------
----------------------
Suppliers Retailers
----------------------
Fig. 5.3: Shipments via DC ----------------------

d) Shipping via DC using Milk runs ----------------------
Milk runs are used from a DC when the lot sizes to be delivered to retailers
----------------------
are small. Milk runs are most important because they reduce the outbound
transportation costs by consolidating small shipments. Cross docking can be ----------------------
used with Milk runs, but requires a significant degree of coordination and
suitable routing and scheduling of deliveries to be made. ----------------------
Transportation 97
Notes
----------------------
----------------------
----------------------
----------------------
DC
----------------------
----------------------
----------------------
----------------------
Suppliers Retailers
----------------------
---------------------- Fig. 5.4: Shipping via DC using Milk runs
---------------------- e) Customised network
---------------------- A customised transportation design network is a combination of the options

that we have discussed so far. This helps to reduce the costs and increase the
---------------------- responsiveness of the supply chain. The main goal is the use of appropriate
options according to the situation. The transportation uses a combination of
---------------------- cross-docking, milk runs, truck loads and less than truck load carriers, along with
---------------------- package carriers in some cases. Products having a high demand may be shipped
directly while low demand products for different retailers are consolidated and
---------------------- shipped from the nearest DC. The main task is the high complexity of handling
this transportation network because of the different shipping procedures used
---------------------- for each product and retailer. A large investment in information infrastructure is
---------------------- required to facilitate the coordination.
---------------------- 5.5 TRANSPORTATION DESIGN TRADE OFFS

---------------------- All transportation decisions in a supply chain network must be taken keeping
---------------------- in mind their impact on the supply chain costs, as well as the level of response
provided to the customers. Since supply chain costs are hard to quantify, a
---------------------- supply chain manager must consider the following trade-offs when making
transportation decisions:
----------------------
a. Transportation cost and inventory cost trade off
---------------------- b. Transportation cost and customer response trade off
---------------------- a. Transportation cost and inventory cost trade off
---------------------- The trade off between the transportation cost and the inventory cost is
a significant one and must be considered when designing the supply chain
---------------------- network. The fundamental supply chain decisions involving this trade off are:

i) Choice of transportation mode. Notes
ii) Inventory aggregation.
----------------------
i) Choice of transportation mode
----------------------
Selecting a mode of transportation is both a planning and an operational
supply chain decision. The decision regarding the carrier with whom the ----------------------
company signs the contract is a planning decision, whereas the choice of the
mode of transportation for a particular shipment is an operational decision. ----------------------
For both these decisions, there must exist a balance between the transportation
----------------------
costs and the inventory costs. A mode of transportation having the cheapest
transportation cost may actually not reduce the overall supply chain costs. This ----------------------
is because cheaper modes of transport usually have longer lead times and large
minimum shipping quantities, which result in higher inventories in the supply ----------------------
chain. On the other hand, transportation modes which ship in smaller quantities
----------------------
lower the inventory levels, but tend to be more expensive. Thus, the choice of
a mode of transport impacts the inventories, response time and other costs in ----------------------
the supply chain. Faster modes of transportation are preferred for products with
a high value to weight ratio where reduction in inventories is essential. Slower ----------------------
modes are used for products having a small value to weight ratio resulting in
----------------------
reduced transportation costs. Thus, whenever a supply chain manager selects
a mode of transport, he must account for the inventory costs and then select ----------------------
the preferred mode of transport. Modes with higher transportation costs are
justified if they result in significantly lower inventories. ----------------------
ii) Inventory aggregation ----------------------
Firms can scale down their safety inventory significantly by aggregating ----------------------
their inventories in a single location. Most of the e- businesses have done that
in order to gain advantage over firms having facilities in several locations. But, ----------------------
we must remember that when inventories are aggregated, there is an increase
in the transportation costs. For example, for Navneet chain of bookstores, ----------------------
let us say that the inbound transportation cost is due to the replenishment of ----------------------
books at the respective stores and there is no outbound costs as the customers
themselves come and pick up their books respectively. If Navneet decides ----------------------
to close all its bookstores and begin to sell online, it will have to incur both
inbound and outbound transportation costs. The inbound transportation costs to ----------------------
the warehouses will be lower than to all the bookstores. However, the outbound ----------------------
transportation cost would be very high as outbound shipment to every customer
will be small and will require an expensive mode of transport like package ----------------------
carriers. Thus, the total transportation cost would increase on aggregation as each
book will now travel the same distance when it was sold through the bookstore, ----------------------
except that a large portion of it will be on the outbound side using an expensive ----------------------
mode of transportation. As the level of inventory aggregation increases, the total
transportation costs also goes up. Thus firms planning inventory aggregation ----------------------
must consider the trade off between transportation, inventory and facility costs
before taking any decision. ----------------------
----------------------
Transportation 99
Notes Inventory aggregation is useful when the inventory and facility costs form
a large fraction of the total supply chain costs. Products having large value to
---------------------- weight ratios and having high demand uncertainty are suitable for inventory
aggregation, whereas products of low value to weight ratio and small customer
---------------------- orders may result in higher supply chain costs due to increase in transportation
---------------------- costs.
b. Transportation cost and customer response trade off
----------------------
The transportation cost a supply chain incurs is related to the degree of
---------------------- response the supply chain aims to provide. If a firm has a high level of response
and transports all the orders within a day of receipt from the customer, it will
----------------------
result in smaller outbound shipments, which would result in an increase in the
---------------------- transportation costs. If the firm decreases the level of response and aggregates
the orders over a longer time horizon before shipping them out, it will be able
---------------------- to exploit large economies of scale that result from larger shipments. Temporal
aggregation is the process of aggregating or combining orders across time. It
----------------------
decreases a firm’s response because of shipping delay and the transportation
---------------------- costs because of economies of scale that result from large shipments. Thus, a
firm must consider a trade-off between the degree of response and transportation
---------------------- cost when designing its transportation network.
----------------------
5.6 ROUTING AND SCHEDULING
----------------------
With the investments made in the infrastructure, equipment and facilities
---------------------- vis-a-vis the operating expenses, carriers have realised the importance of good
routing and scheduling of their fleet in order to decrease the costs, and in turn,
----------------------
increase the overall profitability of the firm and increase the customer response.
---------------------- Because of the large complexities involved in routing and scheduling, the use of
common computer models exists, which determine the best and optimal routes
---------------------- and schedules for transportation of products. The Savings Matrix Method and
Generalised Assignment Method are two of the most important computational
----------------------
methods used for routing and scheduling.
---------------------- Routing and Scheduling of deliveries are the most important operational
decisions related to transportation in any supply chain. With the help of proper
----------------------
routing and scheduling, managers can decide on the customers to be visited
---------------------- by a particular vehicle and also the sequence in which they have to be visited.
Carriers, as well as companies operating private truck fleets, can achieve large
---------------------- benefits. One of these benefits is the increase in the load factor. The load factor
can be defined as the ratio of the amount of used space in a transport vehicle to
----------------------
the total amount of available space. Thus, if a vehicle has a high load factor, we
---------------------- can conclude that it is being used effectively and is profitable for the firm. This
results in savings for the carrier. Also, if there is a reduction in the frequency
---------------------- of pick-ups and deliveries, then it may result in the reduction of the amount
of transportation required to deliver the same amount of goods. This would
----------------------
result in the overall reduction in the cost of transportation and increase the
---------------------- productivity of the carrier.

Some of the most widely used Transportation software or Transportation Notes
management systems (TMS) used by large transportation and shipping
companies are listed below: ----------------------
1. Transportation analysis ----------------------
2. Traffic routing and Scheduling
----------------------
3. Freight rate maintenance and Auditing
----------------------
4. Vehicle maintenance
1. Transportation analysis ----------------------
The Transportation analysis software allows the management to closely ----------------------

monitor the costs and the service, by making available historical data of
key performance indicators, like the carrier performance, the shipping ----------------------
modes, backhauls, the lanes used and the amount of freight usage. ----------------------
2. Traffic routing and scheduling
----------------------
The traffic routing and scheduling software allows the carrier to know
when would the vehicles be available for use, determine the routes to ----------------------
be taken, the sequence and timing of vehicle stoppages and all other
----------------------
preparations regarding the transportation paperwork.
3. Freight rate maintenance and Auditing ----------------------
The freight rate maintenance and auditing software maintains a huge ----------------------
database of the freight rates used to rate shipments or to perform the
freight bill auditing. They provide valuable information by comparing the ----------------------
actual freight bills with the charges computed from the lowest applicable ----------------------
rates in the database available. Also, the system is helpful for making
payments or reporting any exceptions. ----------------------
4. Vehicle maintenance ----------------------
The vehicle maintenance software provides a database of the amount of
----------------------
money spent on the vehicle maintenance. Moreover, it stores information
about the vehicles like its make, model, year of purchase, the driver ----------------------
currently handling it, the distance travelled, the quantity of freight carried
till date. Database for vehicle maintenance scheduling and reporting is ----------------------
also maintained.
----------------------
5.7 TAILORED TRANSPORTATION ----------------------
Tailored transportation is nothing but customised transportation of products ----------------------

by using various types of transportation network and modes based on the product
and the customer characteristics. Tailored transportation is a tool in the hands ----------------------
of supply chain managers to help reduce the total costs to the firm. Tailored ----------------------
transportation helps companies alter their transportation network to meet the
customer needs and at the same time to reduce the costs to the company. A firm ----------------------
may be dealing in various types of products or even individual products that
vary in size and value and might be serving various customers having varied ----------------------
Transportation 101
Notes purchasing powers and the responsiveness required. So it is not suitable for a
firm to make use of a particular transportation network. With the help of tailored
---------------------- transportation, a firm is able to manage each of its customers cost effectively
and with suitable responsiveness at some of the forms of tailored transportation
---------------------- in supply chains that can be adopted by firms keeping in mind the following:
---------------------- 1. Customer density and distance
---------------------- 2. Size of the customer
3. Product value and demand
----------------------
1. Customer density and distance
----------------------
Firms consider tailored transportation on the basis of customer density and
---------------------- distance from the warehouse while designing the transportation networks.
When a firm is serving a very high density of customers that are located close
---------------------- to the DC, it is always economical for the firm to own a fleet of transportation
---------------------- vehicles like trucks that are used as Milk Runs from the DC to the suppliers, as
this makes a good use of the vehicles. But if the customer density is high and the
---------------------- customers are located far from the DC, then it may not be economical to deliver
products by Milk runs from the warehouse because now the trucks would travel
---------------------- a long distance and would have to return empty on their way back. In such a
---------------------- situation it is always better to use public carriers with large trucks to haul the
shipments to a cross dock center close to the customer’s location, where the
---------------------- products are then loaded onto smaller trucks to deliver the products using Milk
runs. In this situation too, the firm need not own its own fleet of trucks. With
---------------------- the decrease in the customer density, a firm may use a less than truck load
---------------------- carrier or a third party carrier doing Milk runs because this carrier can aggregate
shipments across a large number of firms. In low density area, where it is not
---------------------- feasible to use even a less than truck load carrier, the firms have the option of
delivering through package carriers.
----------------------
From the above description it is clear that firms must serve areas with high
---------------------- customer density more frequently because these areas are likely to provide
large economies of scale in transportation. However, for a firm to lower the
---------------------- transportation costs while serving areas of low customer density, high level of
---------------------- temporal aggregation is required.
2. Size of the customer
----------------------
Firms must consider tailored transportation by size of the customer while
---------------------- designing transportation networks. Large customers can be supplied using a
truck load carrier, whereas the smaller customers will require a less than truck
----------------------
load carrier or Milk Runs. When using milk runs to deliver to smaller customers,
---------------------- a firm incurs two types of costs, namely transportation cost and delivery cost.
Transportation costs are based on the total distance covered whereas the delivery
---------------------- costs are based on the number of deliveries made. The transportation costs are
the same irrespective of the delivery of products to a large or small customer.
----------------------
If delivery is made to large customers including smaller customers on the same
---------------------- truck, then the firm can save on the transportation cost. But here the delivery

cost per unit is higher for each smaller customer as compared to large customers. Notes
Thus, delivering both the types of customers with the same frequency is not
economical at all, as the firm may have to charge the smaller customers with ----------------------
higher transportation costs. Another logical alternative is to deliver the products
by tailoring the milk runs so that they deliver larger customers more frequently ----------------------
than the smaller customers. In a large number of firms that face such problems, ----------------------
it is overcome by dividing various customers into three different groups: Large,
medium and small, based on their demand for products. Now, they decide on ----------------------
the optimal frequency of visits based on the transportation and delivery costs.
A normal schedule of delivery of products could be something like every large ----------------------
customer be visited by every milk run, every medium customer be visited by ----------------------
every second Milk run and every small customer be visited every third milk
run. Such a tailored schedule sees to it that each truck carries about the same ----------------------
load and larger customers are provided more frequent delivery than smaller
customers, according to their relative costs of delivery. ----------------------
3. Product value and demand ----------------------

Firms must consider tailored transportation by product value and demand. ----------------------
The level of inventory aggregation and the modes of transportation used in a
supply chain network should vary with the demand and value of the product. ----------------------
High value products within high demand must be subject to disaggregate cycle
----------------------
inventory and aggregate safety inventory. Transportation of such products
should be done by an inexpensive mode of transport to replenish the cycle ----------------------
inventory and quicker mode of transport when using safety inventory. Whereas
for highly demanded low value products, one must disaggregate all inventories ----------------------
and make use of inexpensive mode of transportation for replenishment of the
----------------------
products.
Products that are of low value with high demand must be subject to aggregate ----------------------
inventory and the use of a quicker mode of transportation for meeting customer
----------------------
orders. Whereas products with low demand and low value should be subject to
aggregating of safety inventory and must make use of an inexpensive mode of ----------------------
transportation for replenishing the cycle inventory.
----------------------
1. Milk Run would be used for delivery of products over long distance ----------------------
to a single supplier.
----------------------
Fill in the blanks.
----------------------
1. While designing the transport network, one has to take into account
the ________ between transport cost and inventory carrying costs. ----------------------
----------------------
----------------------
Transportation 103
Notes
Activity 1
----------------------
---------------------- 1. Imagine you are the supply chain manager of a courier delivery
company. List the costs that your company would incur.
----------------------
2. As a supply chain manager, which mode of transport do you think
---------------------- is best suited for delivery of life saving drugs, steel bars, fruits and
automobile components and why?
----------------------
3. Imagine that you are the Supply Chain Manager for a company
---------------------- producing milk products. Which type of transportation design network
would you use for delivery of pasteurized milk packets?
----------------------
4. As a supply chain manager, by which type of transportation network
---------------------- design would you choose to deliver products in a high customer
density location?
----------------------
5. As a supply chain manager of a transportation company, what steps
---------------------- would you take in order to make the company more efficient and
reliable?
----------------------
----------------------
5.8 TRANSPORTATION IN PRACTICE
----------------------
Taking transportation decisions is not easy for a supply chain manager.
---------------------- Since transportation costs form a major fraction of the total supply chain costs,
a thorough analysis is required by managers to select appropriate modes of
---------------------- transport in order to reduce costs and manage the level of response required.
---------------------- In order to achieve these two goals, a firm may have to fulfill the following
conditions to make their transportation decisions effective:
---------------------- 1. Align transportation strategy with competitive strategy
---------------------- 2. Keep in mind both in-house and outsourced transportation
---------------------- 3. Be compatible with e-commerce
4. Use technology
----------------------
5. Allow design flexibility in transportation network
----------------------
1. Align transportation strategy with competitive strategy
---------------------- A company’s transportation strategy must support its competitive
---------------------- strategy. Functional incentives should be introduced to achieve this goal.
Earlier transportation functions within a firm were evaluated based on the
---------------------- extent to which it could lower the transportation costs. However such a focus
led to decisions that lowered the transportation costs, but in turn hurt the
---------------------- degree of customer response, which actually increased the firm’s total cost.
---------------------- Thus, firms must evaluate transportation functions based on the combination
of transportation cost, other costs like inventory affected by transportation
---------------------- decisions, and the level of response achieved towards the customers.

2. Keep in mind both in-house and outsourced transportation Notes
Supply chain managers must consider an appropriate combination of
----------------------
in-house (or company owned) transportation and outsourced transportation to
meet their needs. Such a decision should be based on the firm’s ability to handle ----------------------
transportation profitably as well as the strategic importance of transportation
to the success of the firm. Usually companies find outsourcing a better option ----------------------
when the shipments are small, and prefer their own fleet when the shipment
----------------------
sizes are large.
3. Be compatible with e-commerce ----------------------
The increase in e-Commerce for most of the firms has resulted in a ----------------------
decrease in shipment sizes and a rise in the home delivery. Transportation
systems must be able to provide on time delivery (i.e. needs to respond quickly) ----------------------
but must also be able to exploit the opportunity for aggregation; and even with
----------------------
competitors in some cases, they should be able to help reduce the transportation
cost of small shipment. If the latest trends are not kept in mind at the time of ----------------------
designing transportation networks, firms are likely to see a significant increase
in transportation cost along with a drop in response towards the customer. ----------------------
4. Use technology ----------------------
Supply chain managers must use information technology available to ----------------------
them in order to decrease the transportation costs and increase response in
their transportation networks. The use of software is crucial in transportation ----------------------
planning, mode selection and delivery route decisions. The use of global
positioning systems enable to track vehicles on the move. Satellite based ----------------------
communication systems allow carriers to communicate with each vehicle in the ----------------------
fleet. These technologies help a firm react better to unforeseen changes caused
due to the weather or other unpredictable factors that can affect the degree of ----------------------
responsiveness, towards the customers, which would in turn affect the supply
chain costs. ----------------------
5. Allow design flexibility in transportation network ----------------------

Uncertainty in demand and availability of transportation should be ----------------------
taken into account while designing transportation networks. If one ignores
uncertainty in transportation, then there is a greater use of inexpensive and ----------------------
inflexible transportation modes that perform well as per planning. But when
----------------------
such networks undergo any change, they perform very poorly.
When firms account for uncertainty, they are likely to include more expensive ----------------------
but more flexible modes of transportation within their network. Although these
----------------------
modes may be expensive for a particular shipment, including them in the
transportation options allows a firm to reduce the overall costs of providing a ----------------------
high level of response to the customers.
----------------------
----------------------
----------------------
Transportation 105
Notes Summary
---------------------- ●● Transportation creates place utility and time utility as it determines
how fast and regularly products move from one place to another. The
----------------------
success of any supply chain is closely linked to the appropriate use of
---------------------- transportation. Every company makes use of different modes and routes of
transportation for maximum profitability. Supply chains also make use of
---------------------- responsive transportation to centralise their inventories and operate with
fewer facilities. Moreover, it is transportation that creates a significant
----------------------
link between different stages in a global supply chain.
---------------------- Factors influencing transportation decisions
---------------------- a) Factors affecting decisions of carriers
---------------------- i) Vehicle related costs ii) Fixed costs

iii) Trip related costs
----------------------
iv) Quantity related costs v) Overhead costs
----------------------
b) Factors affecting shipper’s decision of carriers.
---------------------- i) Transportation cost ii) Inventory cost
---------------------- iii) Facility cost
---------------------- iv) Processing cost v) Service costs
●● Various modes of transport
----------------------
a) Truck b) Package carriers c) Railways
----------------------
d) Water e) Air
f) Pipeline
---------------------- g) Intermodal
---------------------- ●● Routing and scheduling
---------------------- a)
Routing and Scheduling of deliveries are the most important
operational decisions related to transportation in any supply chain.
----------------------
b)
Proper routing and scheduling, managers can decide on the
---------------------- customers to be visited by a particular vehicle and also the sequence
in which they have to be visited.
----------------------
c) The load factor can be defined as the ratio of the amount of the used
---------------------- space in a transport vehicle to the total amount of available space.
---------------------- d)
Some of the most widely used Transportation software or
Transportation management systems (TMS) used by large
---------------------- transportation and shipping companies are listed below:
---------------------- i) Transportation analysis

ii) Traffic routing and scheduling
----------------------
iii) Freight rate maintenance and auditing
----------------------
iv) Vehicle maintenance
Keywords Notes
----------------------
●● Service Cost: Service costs are the costs that accrue due to non-fulfillment
of delivery of products to the customers at the right time ----------------------
●● Modes: Different ways and routes of transportation for maximum
----------------------
profitability
●● Intermodal: Is the use of more than one mode of transportation to move ----------------------
a shipment to its desired destination
----------------------
●● Distribution Centres: Material distribution centres (DC)
----------------------
1. Explain the role played by transportation in a supply chain. Give suitable ----------------------
examples.
----------------------
2. What are the various modes of transport? Explain the characteristics of
each of the modes of transportation. ----------------------
3. Explain the factors affecting transportation decisions for both the buyer ----------------------
and seller.
----------------------
4. Which mode of transport is preferable for large and low value shipments?
Why? ----------------------
5. Explain the importance of tailored transportation. ----------------------
6. Describe in detail any three most commonly used design options in
----------------------
transportation.
7. Write short notes on: ----------------------
a) Load factor ----------------------
b) Milk runs ----------------------
c) Various transportation software
----------------------
d) Importance of routing and scheduling
----------------------
e) Tradeoffs in transportation decisions
----------------------
----------------------
----------------------
----------------------
1. Shippers, when engaging a transporter, are concerned with the cost of
ii. Inventory ----------------------

1. Natural gas is probably most economically transported by pipeline. ----------------------
Transportation 107
----------------------
1. False
----------------------
Fill in the blanks.
---------------------- 1. While designing the transport network, one has to take into account the
---------------------- tradeoff between transport cost and inventory carrying costs.

----------------------
1. Bardi, Edward J. and John Joseph Coyle. Management of Transportation.
---------------------- Thomson Publication.
2. Gubbins, Edmund. Managing Transport Operations. Institute of Logistics
----------------------
and Transport.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Inbound Supply Chain Management
UNIT
Structure:
6.1 Introduction
6
6.2 Supplier Scoring and Assessment
6.3 Supplier Selection
6.4 Contracts
6.5 Product Design Collaboration
6.6 Procurement
6.7 Inbound SCM Planning and Analysing
6.8 Inbound SCM in Practice
Summary
Key Words
Suggested Reading
Inbound Supply Chain Management 109

Notes
Objectives
----------------------
----------------------
• Explain the role played by sourcing in the supply chain
----------------------
• Describe the stages in the process of sourcing
---------------------- • Analyse the contracts to be structured in the process of sourcing
---------------------- • Discuss the importance of product design collaboration
---------------------- 6.1 INTRODUCTION

---------------------- Inbound SCM can be defined as the process by which companies acquire
---------------------- raw material, parts, components, different products and services from various
suppliers in order to carry out their operations. Such a process is also called as
---------------------- procurement. The Inbound SCM process comprises supplier selection, supplier
contracts designing, product design collaborations, procurement of material
---------------------- and performance evaluation of suppliers. The stages mentioned in the process
---------------------- of sourcing are depicted in Fig 6.1.
Supplier Scoring & Assessment
----------------------
---------------------- Selection & Contract Negotiation

----------------------
Product Design Collaboration
----------------------
---------------------- Procurement
---------------------- Sourcing Planning & Assessing

----------------------
Fig. 6.1: Stages in the sourcing process
---------------------- Supplier scoring and Assessment means rating the supplier’s performance.
---------------------- Traditionally, price was the primary characteristic on the basis of which suppliers
were rated. However, suppliers were ignored on other characteristics like lead
---------------------- times, quality, reliability and design capability and moreover, the impact on the
total costs doing business with them. With the help of the details received by
---------------------- supplier scoring, Supplier selection is done to identify appropriate suppliers.
---------------------- Once suppliers are identified, Supplier contracts need to be formulated and
negotiated with the suppliers. Here it is important to keep in mind that the
---------------------- primary objective of the supply chain is to maximise profitability and also
benefit both the contracting parties (buyer and supplier).
----------------------
Once contracts are signed, product designs need to be prepared with
---------------------- the help of the supplier, and in turn Product design collaboration takes place.
While doing this it is necessary to ensure that these designs are communicated
----------------------
effectively to all the parties involved in the production and operation departments.

Once the product designs are finalised, the next stage of Procurement begins Notes
in which the supplier sends the products in response to the orders placed and
delivered on schedule at the lowest possible costs. The final stage of Sourcing ----------------------
Planning and Assessing involves the identification of opportunities where the
buyers are able to decrease the overall cost of the product. ----------------------
A good example of sourcing products and services is that of companies ----------------------

like Levi’s, Dockers and Nike who source their raw material (cloth, yarns,
----------------------
buttons and thread) from a large number of Indian and Chinese companies due
to the cost benefits they get in India and China. ----------------------
The sourcing process is of great importance to companies, as they can
----------------------
improve the profits and avail of a large number of benefits by making appropriate
sourcing decisions like: ----------------------
 Aggregation of orders resulting in economies of scale.
----------------------
 Reduction in overall costs and purchase costs due to efficient procurement
transactions. ----------------------
 Better forecasting and planning due to better supplier relations. ----------------------

 Help to reduce inventories. ----------------------
 Distribution of risk with better coordination.
----------------------
Now we shall discuss the characteristics of each of the sourcing stages and
learn how supply chain managers gain from managing these stages efficiently. ----------------------
----------------------
6.2 SUPPLIER SCORING AND ASSESSMENT
----------------------
As mentioned earlier, a large number of firms make the mistake of
focusing on the prices quoted by the suppliers, ignoring various other factors ----------------------
that affect the total cost of the supplier. It is very important that buyers or
----------------------
sourcing agents take note of the following characteristics of the supplier. These
must be considered at the time of supplier scoring and assessment as these ----------------------
characteristics have a great impact on the total supply chain cost.
----------------------
a) Replenishment lead time
b) Scheduled performance ----------------------
c) Supply flexibility ----------------------
d) Delivery frequency ----------------------
e) Supply quality
----------------------
f) Transportation costs
g) Pricing ----------------------
h) Coordination of information ----------------------
i) Product design capability
----------------------
j) Exchange rates, taxes and duties
k) Supplier viability ----------------------

Notes a) Replenishment lead time
We have learnt in the previous units, that as the replenishment lead time
----------------------
from the supplier increases, the amount of the safety inventory that needs
---------------------- to be held by the buyer also increases. This is in proportion to the square
root of the replenishment lead time and it helps the company to determine
---------------------- the cost of holding safety inventory and thereby evaluating the supplier
performance.
----------------------
b) Scheduled performance
----------------------
Scheduled performance means on-time delivery of the products. The on-
---------------------- time delivery of products affects the variability of lead time. A supplier
having a low variability of lead time is considered to be a reliable supplier
---------------------- and vice versa.
---------------------- c) Supply flexibility
---------------------- As the term suggests supply flexibility means the amount of change
or variation in the quantity ordered that a supplier can tolerate without
---------------------- changing any other factors. If a supplier cannot provide supply flexibility,
then we can say that this supplier has more lead time variability, when the
---------------------- quantity ordered changes. This in turn has a great impact on the safety
---------------------- inventory that the firm needs to carry.
d) Delivery frequency
----------------------
The delivery frequency and also the minimum “Lot Size” that the supplier
---------------------- can offer, affects the size of each replenishment lot ordered by a firm. As
the replenishment lot size grows, the cycle inventory at the firm also grows,
----------------------
thus increasing the cost of holding inventory. Thus, the delivery frequency
---------------------- can be converted into the cost of holding cycle and safety inventory.
e) Supply quality
----------------------
Deteriorating supply quality increases the variability of the supply of the
---------------------- products available to the firm. This is because quality affects the lead time
taken by the supplier to complete the replenishment order and also the
----------------------
variability of this lead time. This is so because follow up orders often need
---------------------- to carry more safety inventory from a low quality supplier compared to
high quality supplier. The quality of the products also affects the customer
---------------------- satisfaction and the costs to the sourcing firm.
---------------------- f) Transportation costs
---------------------- The total cost of using a supplier includes the transportation cost of bringing
the material from the supplier. Sourcing a product from other countries
---------------------- is very costly in terms of transportation costs, as compared to the lower
production cost in other countries. Thus, in this case deciding which mode
---------------------- of transport to be used, the distance involved, and the delivery frequency
---------------------- affect the transportation costs associated with each supplier.
----------------------

g) Pricing Notes
The pricing terms include credit allowance and discounts. If a supplier
----------------------
provides some credit to the sourcing company, it allows the sourcing
company to save on their working capital. Discounts can be provided by ----------------------
the suppliers if purchases above certain quantity are made from them.
However these benefits increase the batch size and thereby the cycle ----------------------
inventory. Thus the impact of these quantity discounts on product cost and
----------------------
inventory cost can be quantified for each supplier separately and can be
later assessed. ----------------------
h) Coordination of information
----------------------
Lack of information coordination may increase the variability caused in
the supply chain thereby distorting the supplier’s performance. Better ----------------------
replenishment planning helps to decrease the inventory carried, as well
----------------------
as the sales lost due to lack of availability and can be achieved by proper
coordination of information. ----------------------
i) Product design capability ----------------------
The product design capability of a supplier is becoming increasingly
important. This is because a large portion of the product cost is influenced ----------------------
by the design collaboration capability of the supplier. This enables ----------------------
reduction in inventories and transportation cost. Suppliers must possess
the ability to coordinate with the manufacturer while designing products as ----------------------
this is critical to the ultimate success of the product.
----------------------
j) Exchange rates, taxes and duties
----------------------
In international sourcing, the major problem that companies face is
currency fluctuations. Many companies practice hedging so that exchange ----------------------
rate fluctuations can be managed. Suppliers having tax benefits and duty
exemptions are preferred by sourcing companies due to the reduction in ----------------------
total cost price of the product which is beneficial to the sourcing companies.
----------------------
k) Supplier viability
----------------------
Whether a supplier can fulfill his commitments, whether he can provide
the desired products and most importantly, whether he is cost effective to ----------------------
the sourcing company are important questions that must be asked. This
is important to assess because the suppliers have a great impact on the ----------------------
company’s performance. ----------------------
6.3 SUPPLIER SELECTION ----------------------
Selection of suppliers is the next stage in the inbound SCM process. Once ----------------------
the supplier scoring and assessment is over, and all the relevant information is
----------------------
available, it is time for supplier selection. But before supplier selection takes
place, the firm needs to decide whether it will use single sourcing or will have ----------------------
multiple suppliers from which to source the product. Once the firm is able
to decide this, contracts need to be structured between the buyer and every ----------------------

Notes supplier. Increasing the supply chain performance and profitability of the firm
is the main objective of the supply chain, and thus at the time of designing the
---------------------- contract, every supply chain manager should be able to answer the following
questions:
----------------------
1. What will be the magnitude of impact on the overall supply chain’s and the
---------------------- firm’s profitability?
---------------------- 2. Will the benefits in the contract attract any distortions?
---------------------- 3. How will the contract influence the supplier’s performance?
---------------------- 4. Will it increase the performance of the supply chain as a whole?
---------------------- 6.4 CONTRACTS

----------------------
It is very important to note that contracts between the suppliers and the
---------------------- buyer are made keeping in mind two basic aspects of supply chain profits and
product availability. However, many shortcomings take place within the supply
---------------------- chain, because the supplier and the buyer try to optimise their own profits. These
actions taken by either parties in the supply chain result in profits that are lower
----------------------
than what could have actually been achieved if both of them co-coordinated
---------------------- their actions with a common objective of supply chain profitability.
Let us consider a product whose demand is largely affected by its retail
----------------------
price. Here, it is the retailer who decides the price and also the quantity to be
---------------------- sold based on the margin he earns. In this case, the retailer’s margin is only a
fraction of the supply chain, margin leading to a retail price that is more than
---------------------- the optimal level of earning a margin, and a sales quantity that is below the
optimal level of sales for the supply chain. This phenomenon, as studied earlier,
----------------------
is called double marginalisation. Here the supplier increases the supply chain
---------------------- profits by offering large quantity discounts, in which the retailer pays lesser
price for the product if he purchases that minimum quantity of the product.
----------------------
As we have studied under demand uncertainty, the phenomenon of double
---------------------- marginalisation also affects the overall profitability and product availability in
the markets. We know that all manufacturers would want retailers to stock large
---------------------- quantity of their produce (inventory) in order to fulfill the sudden demand in
---------------------- the market. But, this is not easy for the retailer, as he would lose money on any
unsold inventory. As a result, he would prefer to carry lesser stocks, leading to
---------------------- suboptimal supply chain outcomes.
---------------------- From the above examples it is clear that in order to improve the overall
profits of the supply chain, the suppliers must designs contracts that encourage
---------------------- the buyers to purchase in larger quantities and thereby, increase the level of
product availability. But at the same time, it is important for the suppliers to share
---------------------- some of the buyer’s demand uncertainty. This coordination, when maintained,
---------------------- leads to optimal profits and product availability.
----------------------

There are three types of basic contracts that are best suited to both the Notes
suppliers and the buyers:
----------------------
 Buyback or return contracts
 Revenue sharing contracts ----------------------
 Quantity flexibility contracts ----------------------
1. Buyback Contracts ----------------------
A buyback contract is one that allows the retailer to return the unsold
----------------------
goods upto a certain specified amount at an agreed price. The buyback contract
makes it possible for the retailer to order more number of products, thereby ----------------------
resulting in higher product availability and higher profits for both the retailer
and the supplier. Examples of these types of products are books, music cassettes, ----------------------
compact discs and magazines. ----------------------
One of the drawbacks of this contract is that it leads to higher inventories
----------------------
that must be sold out. But the main task arises when returns of the unsold
products are to be handled which increase the supply chain costs. These costs ----------------------
can be totally eliminated if the supplier coordinates and allows the buyer to sell
these products at a significant discount. For a given level of product availability ----------------------
at the retailer, the presence of a buyback clause can also hurt the sales because ----------------------
it would make the retailer relax and not put in adequate efforts to sell the
inventory held. Such an attitude of the retailer occurs because his loss from the ----------------------
unsold inventory is higher when there is no buyback, leading to greater sales
----------------------
efforts. This problem of reduction in sales effort can be countered by limiting
the amount of buyback permitted. ----------------------
Under the buyback contract, it can be observed that the entire supply chain ----------------------
reacts to the order placed by the retailer and not the actual customer demand.
Thus, if a supplier sells to multiple retailers, he shall produce as per the demands ----------------------
of the retailers. Each of the retailers shall place orders based on the costs of
----------------------
over-stocking or under-stocking the goods. After the sales take place, the unsold
inventory is returned to the supplier by each of the retailers. This leads to a ----------------------
great deal of information distortion, because inventory is disaggregated at the
retailers. Whereas, if inventory is centralised at the supplier and only sent when ----------------------
the retailers demand it, information distortion can be reduced, because now ----------------------
the supplier is able to exploit the independence of demand across the retailers
to carry lower level of inventories. But in actual practice, buy-back contracts ----------------------
result in decentralised inventory at the retailers, thereby leading to information
----------------------
distortion.
2. Revenue sharing contracts ----------------------
Under a revenue sharing contract, the buyer pays only a minimal amount ----------------------
for each unit purchased from the supplier, but shares a fraction of the revenue
for each unit sold. For example, a supplier sells to the retailer, under the revenue ----------------------
sharing contract, keyboards at Rs 100 each, and the retailer agrees to share 50% ----------------------

Notes of the revenue from each of the keyboards sold. If each keyboard is sold for
Rs 1000 each, the supplier would get Rs 500 per keyboard sold and the retailer
---------------------- would keep the remaining Rs 500. Here, the retailer makes a margin of Rs 500
per keyboard sold and the supplier Rs 400 as margin per keyboard. This would
----------------------
result in the retailer keeping more keyboards for sale because they would make
---------------------- a loss of only Rs 100 per keyboard if not sold while making a margin of Rs 500
per keyboard sold. This would help increase the profits of both the supplier and
---------------------- the retailer.
---------------------- Like the buyback contracts, the revenue sharing contracts also increase
the level of product availability, meanwhile increasing the profits for the entire
----------------------
supply chain. There is lower retailer effort to sell under the revenue contracts as
---------------------- compared to retailers who pay an upfront wholesale price for the products from
the suppliers and keep the entire revenue from sales. Since the retailer gets only
---------------------- a fraction of the revenue from each sale, he puts in lesser efforts for selling the
---------------------- products. Revenue sharing contracts are best suited for products having lower
variable costs and a higher cost of return. They also require an information
---------------------- infrastructure that allows the supplier to monitor sale by the retailer. This being
very costly becomes difficult to manage financially.
----------------------
Just like buy-back contracts, revenue sharing contracts also generate
---------------------- retailer orders rather than customer demand. This leads to information distortion,
---------------------- leading to higher inventory in the supply chain. This drawback can be countered
by aggregating the inventory, thereby reducing the variability across multiple
---------------------- retailers. But even today, most of the revenue sharing contracts are implemented
with the retailer buying and holding the inventory.
----------------------
3. Quantity flexibility contracts
----------------------
In a quantity flexibility contract, the buyer is allowed to modify the
---------------------- order within certain limits as notified by the supplier as and when the demand
visibility inches closer to the point of sale. Let us consider the example of the
---------------------- keyboards, where the retailer places an initial order of 1000 keyboards. Closer
to the launch date, as the retailer gets a better idea of the actual demand, he
----------------------
would be allowed to modify his order between 950-1050 keyboards. In this
---------------------- contract, he modifies his order as he gains better market information over a
period of time. The supplier sends him the modified order quantity. The order
---------------------- placed by the retailer would be in accordance with the prevailing demand in
the market, thereby resulting in higher profits for the supply chain. Unlike
----------------------
the buyback or revenue sharing contracts, the quantity flexibility contract is
---------------------- suitable for suppliers serving multiple retailers with independent demands. In
order to meet the modified demands of the retailers, the supplier must possess
---------------------- flexible capacity. So, if a supplier has flexible capacity, a quantity flexibility
contract will increase profits for the entire supply chain and also for each party.
----------------------
These contracts are best suited for products with higher marginal costs or
---------------------- instances where surplus capacity is available. In order to be effective, quantity
flexibility contracts require retailers to be good at gathering the required market
---------------------- information and improving their forecasts closer to the point of sale.

As compared to buyback and revenue sharing contracts, quantity flexibility Notes
contracts have less information distortion. This is because the retailers’ orders
are well placed before the actual demands arise and are closer to the point of ----------------------
sale where the demand is more visible and is less uncertain.
----------------------
Some of the other contracts that are usually structured by suppliers are:
 Contracts for supply chain cost coordination ----------------------
 Increase in agent effort contracts ----------------------
 Performance improvement contracts
----------------------
4. Contracts for supply chain costs coordination
----------------------
In order to keep a check and control over the supply chain costs, the
supplier and buyer can enter into a quantity discount contract. Under a quantity ----------------------
discount contract, there is a reduction in the overall costs but leads to higher
lot sizes, and thus, higher levels of inventory in the supply chain. It is typically ----------------------
suited for commodity products, where the supplier has high fixed costs per ----------------------
lot. It is however important to modify the terms of the contract as operational
improvements are made at the supplier, resulting in lower fixed costs per batch. ----------------------
But there is also a high level of information distortion because there is an
increase in order badging. ----------------------
5. Increase in agent effort contracts ----------------------
There are two basic types of contracts aimed at increasing agent effort with an ----------------------
aim to increase supply chain profitability and high level of product availability.
These two types of contracts are: ----------------------
a) Two part tariff contracts ----------------------
b) Threshold contracts
----------------------
Supply chains have many instances where agents act on behalf of a
principal and the agent’s efforts are rewarded for the principal. For example ----------------------
let us consider any car dealer (agent) selling cars for Skoda Auto India Ltd.
(principal) who also sell 5 cars of other brands and seconds as well. Every ----------------------
month the dealer sells cars gaining benefits by promotions, advertising, etc. ----------------------
for all the cars. However, the earnings from Skoda are based on the sales of
their brands, which in turn are affected by the efforts exerted by the dealer. ----------------------
It is easy to judge the sales whereas the efforts are difficult to observe and
measure. If there is double marginalisation, then the dealer will exert less effort ----------------------
than the optimal from the perspective of Skoda Auto India Ltd., and from the
----------------------
perspective of the supply chain as a whole. Thus, Skoda Auto must offer the
right incentives to the dealer for him to exert the appropriate amount of effort. ----------------------
Now, with the above information let us discuss the characteristics of the
----------------------
two contracts mentioned above:
a) Two-part tariff contracts offer the right incentives for the dealer to exert ----------------------
the right amount of effort. Here, Skoda Auto India Ltd. will extract their
----------------------
profits up front as a franchise fee and then sell the cars to the dealer at cost.
The dealer’s margin in this case is the same as the supply chain margin and ----------------------
he exerts the right amount of effort.
Notes b) Threshold contracts offer the dealer an increase in the margin for sales
exceeding a certain threshold (limit). Example: Skoda Auto India offers
---------------------- the following in the first quarter of the year 2004:
----------------------  Dealers would be eligible to keep the margin made from customers if
sales for the month were under 75% of an agreed upon target.
----------------------
 If it exceeds 75% but is below 100%, the dealer would get additional
---------------------- Rs 15000 per car sold.
----------------------  If sales exceed 100% but is below 110%, the dealer would get
additional Rs 25000 per car sold.
----------------------
 If sales exceed 110%, the dealer would get Rs 50000 additional per
---------------------- car sold.
---------------------- This strategy would increase the effort exerted by the agent as he would
get higher incentives.
----------------------
But the major drawback of this contract is the high level of information
---------------------- distortion by making the agent exacerbate demand variability at the time when
the specified period is coming to an end (like in this case the first quarter of the
----------------------
year 2004). This information distortion can be dealt with if the companies offer
---------------------- threshold contracts based on a rolling horizon, wherein the incentives are made
available to the agents in short periods.
----------------------
6. Performance improvement contracts
---------------------- Performance improvement contracts are structured at instances where a
---------------------- buyer wants performance improvement from a supplier who has little incentive
to do so. In this case, a shared savings contract is formulated between the buyer
---------------------- who is given sufficient power, and the supplier. The shared savings contract
can be used to induce the performance improvement from a supplier along
---------------------- various dimensions like lead time, where the benefit of improvement accrues
---------------------- primarily to the buyer, whereas the effort for improvement comes primarily
from the supplier. Such contracts lead to increasing profits for both the buyer
---------------------- and the supplier, achieving outcomes that are beneficial to the supply chain in
the process.
----------------------
---------------------- 6.5 PRODUCT DESIGN COLLABORATION

---------------------- It is very important for a manufacturer to collaborate with the suppliers
during the design stage if product costs are to be kept low. The cost of purchased
---------------------- material and logistics can be lowered with the help of design collaboration. If
the firm wants a variety of products, then also design collaboration is important,
----------------------
otherwise, there can be a significant increase in the cost of variety. It is important
---------------------- for manufacturers to also become design coordinators for the supply chain, by
providing the product descriptions available to all the parties involved in the
---------------------- supply chain. The manufacturers must possess an excellent database of the
products manufactured before. This will help them produce different varieties
----------------------
or modify the ones produced before, thereby saving a lot of time and money.
On the other hand, the supplier or manufacturer should be provided Notes
with information regarding logistics and manufacture design. Design for
logistics attempts to reduce transportation, handling and inventory costs during ----------------------
distribution by taking appropriate actions during the design stage. Expected order
sizes must be conveyed to the designer in order to reduce the transportation and ----------------------
handling costs. With the help of this available information, compact packages ----------------------
are designed such that transportation and handling costs are lowered. In order
to reduce inventory costs, the product must be produced keeping postponement ----------------------
and customisation in mind. This allows the company to process the features that
differentiate the end product introduced late in the manufacturing phase. ----------------------
The best example of design collaboration can be seen in the automotive ----------------------
industry where the original equipment manufacturers all over the world are
----------------------
asking suppliers to participate in every aspect of product development, from
conceptual design to manufacturing. ----------------------

----------------------
Fill in the blanks.
----------------------
1. Lead time is an important consideration in selection of a supplier, as
it affects inventory through ________. ----------------------
2. Supplier-customer have a win-win situation when they collaborate in ----------------------

the ________ of the product.
----------------------
----------------------
1. Following type of contract is usually not part of purchase of direct
materials. ----------------------
i. Buyback ----------------------
ii. Revenue sharing ----------------------
iii. Capital goods ----------------------
iv. Agent effort ----------------------
----------------------
6.6 PROCUREMENT
----------------------
Once the suppliers are selected, contracts signed and products designed,
----------------------
the buyers and suppliers now begin the next stage of the procurement process
together. The procurement process begins with the buyer placing the order and ----------------------
ends with the buyer receiving the order and making payments for the products
----------------------
received. It is very important to keep in mind which goods are to be procured
first, whether they are direct material or indirect material. Direct material are ----------------------
those components that are used to make the finished products, like wood for
----------------------
making furniture and indirect material are those goods that are used to support

Notes the operations of a firm like nails, fevicol, etc for making furniture. If linked
with production, the procurement process for direct material should be designed
---------------------- to ensure that components are available at the right place, in the right quantity
---------------------- and at the right time. If we focus on the procurement of indirect material, then
the focus is on numerous, low value transactions. The procurement process for
---------------------- indirect material should focus on reducing the transaction cost of each order,
which tends to be high because of the difficulty in selecting goods, getting
----------------------
approvals and delivering a purchase order.
----------------------
Another important requirement for the procurement process, for both
---------------------- direct and indirect material, is to be able to aggregate orders by product and
supplier. This is because the consolidation of orders improves the economies of
---------------------- scale at the supplier’s end and also during transportation. It also allows the firm
---------------------- to gain from quantity discounts that may be offered by the supplier.
Majority of the indirect material purchased is included in general items.
----------------------
The goal of procurement in this case should be to reduce the transaction costs.
---------------------- The direct material is classified into bulk purchases, critical items and strategic
items. Bulk purchase items like steel would have similar selling price. Here,
----------------------
the firm must decide which supplier provides better performance across all
---------------------- dimensions. Critical items include special grades of steel that have longer lead
times, and the key point for procurement of critical items is not lower costs but
----------------------
availability. This would help coordination of the production plans at both the
---------------------- buyer’s and supplier’s end. As far as strategic items are concerned, the buyer
and supplier relationship will be long term. The suppliers should be evaluated
---------------------- on the value of the relationship. Thus, buyers should look for suppliers who can
---------------------- collaborate in the design phase, and coordinate design and production activities
with other parties in the supply chain.
----------------------
High
----------------------
Critical items Strategic items
---------------------- C
R
---------------------- I
T
I
---------------------- C
A
---------------------- L
General items Bulk purchase items

----------------------
----------------------
Low
---------------------- Low High

VALUE/ COST
----------------------
Fig. 6.2: Product categorisation by value and critical importance
----------------------

6.7 INBOUND SCM PLANNING AND ANALYSING Notes
In order to make future sourcing decisions, each firm must analyse its ----------------------
procurement spending and supplier performance. It is important to aggregate
the spending across and within categories and suppliers. Aggregation provides ----------------------
visibility of what a company is purchasing and from whom. Secondly, supplier
----------------------
performance should be measured against a plan on all dimensions that impact
total costs such as response, lead times, quality, etc as discussed at the beginning ----------------------
of the unit. This supplier performance analysis should be used to build a portfolio
of suppliers with complementary strengths. Suppliers who work at considerably ----------------------
lower rates and their performance is also low should be used to supply the base
----------------------
demand, whereas highly performing but more expensive suppliers should be
used as buffers against the variations in demand and supply. ----------------------
6.8 INBOUND SCM IN PRACTICE ----------------------
----------------------
The use of the following points make sourcing easier and efficient, resulting in
lower product costs and increasing the overall profitability of the firm: ----------------------
1. Use of multifunctional teams ----------------------
2. Coordination across regions and business units
----------------------
3. Evaluation of total cost of ownership
----------------------
4. Building long term relationships with the suppliers
1. Use of multifunctional teams ----------------------
The use of multifunctional groups helps develop better strategies for ----------------------
sourcing. It helps the purchasers to stress and focus on the purchase price.
Collaboration between the purchasing, manufacturing, engineering and ----------------------
planning departments is much more likely to identify the correct costs. ----------------------
This collaboration must be continued upto the procurement stage because
it is there that the manufacturing and engineering departments are most ----------------------
likely to realise the utmost benefits of a good sourcing strategy.
----------------------
2. Coordination across regions and business units
----------------------
In order to maximise the economies of scale in purchasing, and reducing
in transaction costs, coordination of purchasing across all the departments ----------------------
of the firm is very essential.
----------------------
3. Evaluation of total cost of ownership
An effective sourcing strategy should not make price reduction its main ----------------------
objective. Primarily the factors that influence the total cost of ownership ----------------------
should be identified and used for supplier selection. The performance of the
supplier should be evaluated and its impact on the total cost be quantified. ----------------------
Focusing on the total cost of ownership also allows a buyer to identify
opportunities for collaboration in design and planning in a better manner. ----------------------
----------------------

Notes 4. Building long term relationships with the suppliers
Sourcing itself is beneficial to both the supplier and the buyer working
----------------------
together, as this generates more opportunities for savings than the two
---------------------- parties working independently. Trust should be established between the
buyer and supplier in order to maintain a long term relationship. There
---------------------- will be better levels of communication and coordination between the
two parties. At the time of sourcing direct material, these capabilities are
----------------------
very important, and thus long term relationships should be nurtured with
---------------------- suppliers of critical and strategic direct material. In the long run, better
relationships are best suited for better profitability for both the supplier and
---------------------- the buyer.
---------------------- Inbound to Manufacturing
Inbound to manufacturing is the complete end-to-end logistics management of
----------------------
inventories, facilities and labour associated with the inbound flow of materials
---------------------- from vendors and supplier origins to consumption points in manufacturers’
production lines. The service encompasses:
----------------------
 Network, transportation and facility design
----------------------  Inventory optimisation
----------------------  Supplier management
----------------------  Transportation management
 In-plant services
----------------------
Key to the service is integrating manufacturers’ forecasting, order
---------------------- management and supply chain execution processes with their component
suppliers. DHL implements warehouse management and supply chain
----------------------
event management systems to manage just-in-time deliveries and allow
---------------------- supply chain participants to exchange forecast requirements in real time.
Value is created for manufacturers and component suppliers throughout the
---------------------- world by:
----------------------  Enabling a robust and cost-effective supply chain
 Providing the necessary visibility so that the location of all components
----------------------
within the supply chain is known to all supply chain participants
----------------------
 Reduce inventory and investment costs
----------------------  Improve delivery times
----------------------  Coordinate multiple components more efficiently
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
1. Supplier selection is vital for direct materials.
----------------------
Match the following.
----------------------
i. Multifunctional teams a. Selection of supplier
ii. Coordination among regions b. Purchasing-Planning-Manufacturing- ----------------------
Engineering
----------------------
iii. Total cost of ownership c. Savings
iv. Long-term relationships d. Economies of scale ----------------------
----------------------
Activity 1 ----------------------
----------------------
1. As a sourcing manager in a five-star hotel, how would you source
products required at lower costs? ----------------------
2. On the basis of which characteristics would you select your suppliers ----------------------
if you were the sourcing agent of a hospitality firm?
3. As an inbound SCM manager, what do you think are contracts best ----------------------
suited for the following products: ----------------------
• Newspapers
----------------------
• Vehicles
----------------------
• Video CD rental
• Computer peripherals ----------------------
4. Imagine you are the inbound SCM (sourcing) agent of a company ----------------------
producing mobile handsets. Explain which type of suppliers will be best
suited for this kind of product and why? ----------------------
5. As an inbound SCM manager of a car manufacturing company, ----------------------

explain how you would bring about a reduction in transaction costs in
the procurement of indirect material. ----------------------
6. As an inbound SCM manager of a computer manufacturing company, ----------------------

explain how you would design inbound system.
----------------------
----------------------
----------------------
----------------------
----------------------

Notes Summary
----------------------  The inbound SCM process comprises supplier selection, supplier contracts
designing, product design collaborations, procurement of material and
----------------------
performance evaluation of suppliers. Supplier scoring and Assessment
---------------------- means rating the supplier’s performance.
 Selection of suppliers is the next stage in the inbound SCM process.
----------------------
Once the supplier scoring and assessment is over, and all the relevant
---------------------- information is available, it is time for supplier selection. But before
supplier selection takes place, the firm needs to decide whether it will use
---------------------- single sourcing or will have multiple suppliers from which to source the
---------------------- product.
 Once the firm is able to decide this, contracts need to be structured between
---------------------- the buyer and every supplier. Increasing the supply chain performance
---------------------- and profitability of the firm is the main objective of the supply chain, and
thus at the time of designing the contract it is very important to note that
---------------------- contracts between the suppliers and the buyer are made keeping in mind
two basic aspects of supply chain profits and product availability.
----------------------
 It is very important for a manufacturer to collaborate with the suppliers
---------------------- during the design stage if product costs are to be kept low. The cost of
purchased material and logistics can be lowered with the help of design
---------------------- collaboration. If the firm wants a variety of products, then also design
---------------------- collaboration is important, otherwise, there can be a significant increase
in the cost of variety. In order to make future sourcing decisions, each
---------------------- firm must analyse its procurement spending and supplier performance. It
is important to aggregate the spending across and within categories and
---------------------- suppliers.
----------------------
Keywords
----------------------
 Procurement: The process of buying goods in systematic way.
----------------------
 Supplier Assessment: Analysing suppliers strengths for the suitability of
---------------------- the firm’s operations.
----------------------  Buy back Contracts: The contract in which the firm assures the customer
to buy back the rejected goods.
----------------------
 Threshold Contracts: The contract which offers the dealer an increase in
---------------------- the margin for sales exceeding a certain threshold (limit).
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
1. Define the term ‘sourcing’ and explain the role played by it in any supply
chain. ----------------------
2. Describe the various types of sourcing contracts in detail.
----------------------
3. What do you mean by double marginalisation? How can it be reduced to
have better profits? ----------------------
4. Explain the important points that a supply chain manager or a sourcing ----------------------
manager should keep in mind for effective and efficient sourcing?
----------------------
5. Write short notes:
----------------------
a) Quantity discounts
b) Performance contracts ----------------------
c) Threshold offers ----------------------
----------------------
1. Lead time is an important consideration in selection of a supplier, as it ----------------------
affects inventory through safety stock.
----------------------
2. Supplier-customer have a win-win situation when they collaborate in the
design of the product. ----------------------
1. Following type of contract is usually not part of purchase of direct
----------------------
materials.
iii. Capital goods ----------------------
1. True
----------------------
Match the following.
----------------------
i. –b
ii. –d ----------------------
iii. –a ----------------------
iv. –c ----------------------
----------------------
----------------------

Notes
Suggested Reading
----------------------
1. Cook, Thomas A. Mastering Purchasing Management for Inbound Supply
---------------------- Chains. CRC Press.
2. Coyle, John and C. Langley. Supply Chain Management: A Logistics
----------------------
Perspective. Cengage Learning Publication.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Outbound Supply Chain Management
UNIT
Structure:
7.1 Introduction
7
7.2 Material Handling in SCM
7.3 Factors influencing the Levels of Product Availability
7.4 Improving Supply Chain Profitability
7.5 Retail in the Supply Chain
7.6 The Distribution Channels
7.7 The Distribution Channel Strategy
Summary
Key Words
Suggested Reading
Outbound Supply Chain Management 127

Notes
Objectives
----------------------
----------------------
• Explain the importance of outbound SCM
----------------------
• Describe the various stages in outbound SCM
---------------------- • Determine how to improve profitability in outbound SCM
---------------------- • Describe the importance of SCM in production
---------------------- • List the various material handling principles

• Explain the importance of optimal levels of product availability
----------------------
---------------------- 7.1 INTRODUCTION

---------------------- The strategic decisions in the supply chain include what products to
produce, and which plants to produce them in, allocation of suppliers to plants,
---------------------- plants to DCs, and DCs to customer markets. As before, these decisions have a
---------------------- big impact on the revenues, costs and customer service levels of the firm. These
decisions assume the existence of the facilities, but determine the exact path(s)
---------------------- through which a product flows to and from these facilities. Another critical
issue is the capacity of the manufacturing facilities—and this largely depends
---------------------- on the degree of vertical integration within the firm. Operational decisions focus
---------------------- on detailed production scheduling. These decisions include the construction
of the master production schedules, scheduling production on machines, and
---------------------- equipment maintenance. Other considerations include workload balancing, and
quality control measures at a production facility.
----------------------
---------------------- 7.2 MATERIAL HANDLING IN SCM

---------------------- Material Handling is the primary activity of every manufacturing
organisation. It has been estimated that at least 15 to 25% of the cost of the
---------------------- product is attributable to material handling activities and as such it warrants
---------------------- consideration in every branch of manufacturing operation i.e. setting up
the factory, planning the facilities, selecting the manufacturing methods,
---------------------- mechanisation, purchasing, receiving and storage, inspection, warehousing and
distribution of the final product.
----------------------
Unlike many other operations, material handling adds to the cost of the
---------------------- product and not to its value. It is therefore important first to eliminate or at least
minimise the need for handling, and second to minimise the cost of handling.
---------------------- Most experts are of the opinion that in majority of the companies material-
---------------------- handling costs can be cut to 50% of their current level by employing scientific
principles of material handling.
---------------------- Material handling may be defined as the art and science of movement,
---------------------- handling and storage of materials during different stages of manufacturing
considered as material flow into, through and away from the plant. It is in fact,
the technique of getting the right goods safely to the right place at the right time Notes
and at the right cost.
----------------------
Material handling in an organisation takes place at various stages, such as
the following: ----------------------
 Unloading at goods inward stores ----------------------
 Loading on to an internal transport
----------------------
 Movement to stores for the purpose of storage
----------------------
 Movement from stores to the place of use (first work station)
 Movement to and from work stations ----------------------
 Movement to and from inspection bays ----------------------

 Movement to and from assembly benches ----------------------
 Movement to and from finished goods stores
----------------------
 Movement to and from dispatch department
----------------------
 Movement during packing
 Loading of packed materials on to an external transport. ----------------------
The above statements are an over simplification of the real complex ----------------------
situation. At each stage materials are loaded, unloaded/positioned, repositioned,
kept in/taken out from temporary area of storage, etc. Good material handling ----------------------
practices require systematic recording, critical review and improvement of all ----------------------
material handling activities to eliminate as many movements as possible, and
mechanisation/simplification/modification of remaining movements to reduce ----------------------
cost and improve efficiency.
----------------------
Material Handling Principles in SCM
----------------------
Material Handling principles can basically be grouped into five categories:
1. Planning Principles ----------------------
2 Operating Principles ----------------------

3 Equipment Principles ----------------------
4 Costing Principles ----------------------
5 General Principles
----------------------
1. Planning Principles
----------------------
Material handling should be planned and well integrated with production
activity to obtain maximum overall operating efficiency. This requires a ----------------------
systems approach and it should include a) Good plant layout b) Minimisation
of rehandling c) Effective space utilisation. ----------------------
2. Operating Principles ----------------------
Materials should be handled in bulk/lots over a distance. Gravitational ----------------------
force should be used wherever possible to transport the material. Material

Notes should be made to move over as straight a path as possible as it cuts down
distance.
----------------------
3. Equipment Principles
----------------------
The use of mechanised equipment instead of manpower, reduces handling
---------------------- cost, increases speed of handling, cuts down accidents, improves safety,
reduces fatigue of the workers and improves productivity since work done
---------------------- by power is cheaper and large volume of work is handled.
---------------------- 4. Costing Principles
---------------------- Material handling equipments have certain economic life. Proper selection
of equipment is needed. Retaining an equipment beyond its economic
---------------------- period increases repairs cost and causes production hold ups due to eventual
---------------------- break downs. So proper handling equipment selection and its maintenance
is very important.
----------------------
5. General Principles
----------------------
The general principles include safety principles, training Principles,
---------------------- location principles and material treatment principles.
---------------------- 7.3 FACTORS INFLUENCING THE LEVELS OF PRODUCT

---------------------- AVAILABILITY
---------------------- The level of product availability is a very important component of the

supply chain’s responsiveness towards its customers. The level of product
---------------------- availability can be calculated using the cycle service levels and the fill rate
---------------------- and is also called the ‘customer service level’. The higher the customer service
level, the better responsiveness a firm can provide to attract customers. With
---------------------- the help of higher customer service levels, a firm can increase its revenue by
increasing its sales. This can only be possible with the help of large inventories
---------------------- which in turn increases the supply chain costs. In order to have optimal levels
---------------------- of product availability a firm needs to strike the right balance between the level
of inventories held and the cost of holding these inventories. Thus, with the
---------------------- help of optimal levels of product availability, a firm can maximise its overall
profitability.
----------------------
If a firm thinks that it can maximise its profits, they must decide whether
---------------------- a higher or lower level of product availability will be more profitable. Let us
take the example of companies that are into e-business such as Amazon.com,
----------------------
E-bay.com and many more. If a customer searching for a product visits these
---------------------- sites and realises that the desired products are not available, then the customer
is lost by the firm. He then turns to another seller who he thinks has a higher
---------------------- level of responsiveness by providing a better customer service level or product
availability. Thus, the supply chain manager must be aware of the factors
----------------------
influencing the levels of product availability. In the next topic you shall study
---------------------- the two most important factors affecting the levels of product availability.

In order to understand the factors affecting the levels of product Notes
availability, let us consider Otto Burlington, an apparel selling company. One
of the many products they sell are jackets. It is obvious that the selling season ----------------------
for jackets in India are the months of November to January. The buyers at Otto
Burlington purchase the entire season’s jackets from their suppliers before their ----------------------
selling season begins. In order to have a high level of product availability, it is ----------------------
necessary that they purchase a large number of jackets. However, the level of
product availability may be able to satisfy all the demand that arises during the ----------------------
season; it may also result in a number of unsold jackets by the end of the season
resulting in losses for the firm. But, if they maintain a lower level of product ----------------------
availability, then Otto Burlington may have to turn away willing customers as ----------------------
the jackets would be sold out by then. In this case, the firm shall lose potential
profits by losing the customers. Buyers at Otto Burlington must balance the loss ----------------------
of having surplus jackets in their stock, and the lost profit from turning away
customers by deciding the appropriate level of product availability. ----------------------
From the above discussion, the two main factors that come to our mind ----------------------
are firstly the cost of overstocking the products, and secondly, the cost of
----------------------
understocking the products. The cost of overstocking can be defined as the loss
incurred by a firm for every unsold unit at the end of every season, whereas the ----------------------
cost of understocking the product can be defined as the margin lost by a firm for
each lost sale because of no inventory on hand. The margin lost shall include ----------------------
the margin for not having fulfilled the current orders as well as future orders.
----------------------
Before we carry on our discussion, let us remember that deciding the level
of product availability becomes an issue only when there is demand uncertainty. ----------------------
The loss that Otto Burlington incurs from an unsold jacket as well as the profit
----------------------
that it makes on each jacket sold, influences its buying decisions.
Let us say the cost price of each jacket = Rs 4500 ----------------------
Market price = Rs 10000 ----------------------
Unsold jackets are sold at a discount at outlets = Rs 5000 ----------------------
Inventory and transportation costs = Rs 1000
----------------------
Therefore Salvage value = Rs 4000
----------------------
Profit = 10000- 4500 = Rs 5500
Loss = 4500- 4000 = Rs 500 ----------------------
Let us assume the expected profit on selling 1000 jackets is Rs 49, 90,000. ----------------------
To decide whether or not to order 1100 jackets, the buyers at Otto ----------------------
Burlington need to determine the potential outcomes of buying these extra 100
jackets. If they do buy, then the expected profit on 100 jackets = 5500 X 100 = ----------------------
Rs 5,50,000, if demand is 1100 jackets or more. Otherwise a loss of 500 X 100
= Rs 50,000, if the jackets are sold at a discount at any outlet. ----------------------
From the probability chart showing the demand distribution we can ----------------------
----------------------

Notes determine that there is a probability of 0.49 that the demand is 1100 jackets or
higher and a 0.51 probability that the demand is 1000 jackets or less. Then we
---------------------- can calculate the expected profit from the sale of these extra 100 jackets = 5,
50,000 X 0.49 – 50, 000 X 0.51 = Rs 2, 44,000. And therefore the total profit
---------------------- from ordering 1100 jackets shall amount to Rs 52, 34, 000, which is about 5%
---------------------- higher than the profit earned on selling 1000 jackets. However, the customer
service level is low at 49% only.
----------------------
Using the above method we can calculate the expected marginal
---------------------- contribution of every 100 jackets that are sold. With the help of these calculations,
a supply chain manager can arrive at the most appropriate and optimum level
---------------------- of quantity that the firm must possess in order to maximise the expected profits.
For Otto Burlington, as we move ahead by adding 100 jackets each time, we
----------------------
come to the conclusion that the appropriate level of product availability is 1300
---------------------- jackets which provides a Customer Service Level of 92%. Otto Burlington has
a very high Fill Rate and can satisfy 100 % demand, equal to or under 1300
---------------------- jackets because of full demand being satisfied.
---------------------- Otto Burlington may continue to order a further 100 jackets, to fulfill the
demand. However, now it would begin to make losses but shall have a greater
---------------------- Customer Service Level of 96%. By loss we mean that the expected marginal
contribution of the excess 100 jackets (over 1300 jackets) would be negative.
----------------------
It is also important to note that as the cost of overstocking (Rs 500) and
---------------------- the cost of understocking (Rs 5500) changes, the optimal level of product
availability also changes.
----------------------
---------------------- 7.4 IMPROVING SUPPLY CHAIN PROFITABILITY

---------------------- Now that we are clear with the factors affecting the optimal level of
product availability, let us concentrate on how the chain manager can improve
----------------------
the supply chain profitability by taking certain actions. The two most important
---------------------- areas of concern in a supply chain to increase the overall profitability are:
 Increase the salvage value of each unit, which in turn increases the overall
----------------------
profitability of the firm.
----------------------  Decrease the margin lost due to stock-outs, thereby increasing the overall
---------------------- profitability.
In order to increase the salvage value, first the unsold stocks must be
---------------------- sold at discounted rates at other outlets so that these leftover units are not
---------------------- discarded. In order to decrease the margin lost in a stock-out, firms must be
well equipped with back up sourcing so that the customers are not lost. Even
---------------------- purchasing products from a competitor at the time of stock outs is justified in
order to reduce the margin lost from stock outs. Moreover, the customer is not
---------------------- lost and he remembers that the product has been made available to him, even if
---------------------- not immediately.
The optimal cycle service level
----------------------

It is a function of the ratio of the cost of overstocking and cost of Notes
understocking. In Fig 7.1, it can be clearly seen that the ratio between cost
of overstocking and the cost of understocking reduces as the optimal level of ----------------------
product availability increases. This relation can be understood with an example
in our daily life. Imagine the difference in the level of product availability at ----------------------
a shopping mall and a nearby grocery store. The shopping malls have higher ----------------------
margins and thus the cost of understocking for them is really high. This is also
the reason why they have higher levels of product availability than a nearby ----------------------
grocery store with lower margins, and therefore a lower cost of stocking-out.
----------------------
Another measure that a supply chain manager can use in order to maximise
profitability is the reduction of demand uncertainty. With reduced uncertainty, ----------------------
he can better match the supply and demand by reducing both overstocking
----------------------
and understocking. The following strategies can be applied to reduce demand
uncertainty: ----------------------
1. Efficient forecasting
----------------------
2. Quick response
----------------------
3. Postponement
4. Tailored sourcing ----------------------
1. Efficient forecasting ----------------------

Supply chain managers can make use of enhanced market intelligence ----------------------
and cooperation in order to reduce the uncertainty in demand. With
improved forecasting, a firm can significantly increase its profitability ----------------------
while decreasing the excess inventory that is overstocked and the sales
----------------------
lost due to understocking.
2. Quick response ----------------------
The meaning of quick response is in relation to the replenishment lead ----------------------
times. By reducing these, a larger number of orders may be placed in the
season. With a decrease in the lead times, it becomes easier for supply ----------------------
chain managers to increase their forecast accuracy and thereby increase
----------------------
the profitability.
It is very important to note the fact that as the total quantity for the season ----------------------
is broken into multiple small orders, the buyer is better able to match ----------------------
the supply and demand and increase the profitability for the firm. Also
it should be noted that with the increase in the number of orders during ----------------------
the selling season, the quantity of unsold inventory (the quantity of
overstocked products) is also reduced. ----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
CSL
----------------------
----------------------
----------------------
---------------------- Ratio of Cost of overstocking

and Cost of Understocking
----------------------
Fig. 7.1: Relation between the changing ratio of cost of overstocking and
----------------------
cost of understocking and the optimal cycle service level
----------------------
----------------------
Overstocked
---------------------- unsold
inventory at
---------------------- the end of the
selling
season
----------------------
----------------------
----------------------
---------------------- Number of order cycles per selling

season
----------------------
Fig. 7.2: The relationship between the overstocked unsold inventory at
---------------------- the end of the selling season and the number of order cycles per season
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
Expected ----------------------
Profit
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Number of order cycles per selling ----------------------
season
----------------------
Fig. 7.3 The relationship between the expected profits and the number of
order cycles per season ----------------------
Role of Master Production Schedule in SCM ----------------------
Since each master production scheduled item consists of its own bill
----------------------
of material, exploding master production schedule against its bill of material
will result in aggregate material requirement plan, based on which production ----------------------
plan and procurement plan can be prepared. Fix and rolling concepts used in
the master production schedule, help to understand the requirement of various ----------------------
items as per material requirement plan with much better accuracy. If material
----------------------
requirement plan is accurate, inventory management will be better. This results
in better management of cash flow. ----------------------
Also master production schedule helps to improve the performance of the
----------------------
value flow across the supply chain. It includes improvement in quality, timely
delivery and better availability of the resources such as men, machine and ----------------------
material.
----------------------
In Master Production Schedule, the aim of any organisation is to have fixed
period as low as possible to have market driven production. The fixed period ----------------------
say one month is possible to achieve if the organisation has low manufacturing
lead times and procurement lead times. e.g. If I am in the month of July, then ----------------------
for one month fix period I can make changes for any month August onwards. ----------------------
Similarly for two month fix period, I can make changes for any month September
onwards. Hence, higher the fix period duration of master production schedule, it ----------------------
is going to play a less effective role in managing supply chain management.
----------------------
----------------------
----------------------
----------------------

Notes
----------------------

1. Though varying from industry to industry, about _______% of the
----------------------
cost of product can be attributed to materials handling.
---------------------- 2. Most visible sign of responsiveness of supply chain is ________ of a
product to the customers.
----------------------
----------------------
7.5 RETAIL IN THE SUPPLY CHAIN
----------------------
Retail SCM
---------------------- Retail SCM offers efficient, cost-effective and flexible supply chain
---------------------- solutions and services to retailers around the world. The customers benefit from
proven expertise and a range of solutions that address key business issues such
---------------------- as on-shelf availability, supply chain agility, effective use of infrastructure and
global sourcing.
----------------------
Retail SCM provides focused solutions for retailers seeking to:
----------------------
 Increase customer satisfaction through better matching of supply and
---------------------- demand
 Maximise the potential benefits from global sourcing
----------------------
 Optimise their supply chain and release capital to be invested closer to the
---------------------- customer
----------------------  Expand through entering new markets and accessing new channels to
market
----------------------
Retail SCM includes all types of retailers, including designer fashion and
---------------------- luxury goods, high street fashion, department stores, DIY and electronics as
well as hypermarkets, supermarkets, and drinks and convenience retailers.
----------------------
Distribution to Stores Management
----------------------
In Retail SCM, distribution to store solutions are focused on helping
---------------------- retailers create efficient and flexible supply chains to deliver product to retail
outlets at high levels of service. Retail SCM seeks to help customers:
----------------------
 Design, structure (or restructure) their distribution networks to achieve
---------------------- required service levels at minimum cost
----------------------  Increase capacity and throughput of existing warehouse platforms

 Increase productivity and quality from warehouse and transport operations
----------------------
 Deliver products in a store friendly format to create efficient operations
----------------------
in-store
----------------------

Customer-focused solutions are built up from the following core services: Notes
 Warehousing, including chilled, frozen and ambient distribution centres; ----------------------
composite distribution centres; hanging garment facilities; automation
and sortation; bonded warehousing; cross-docks; multi-user warehousing; ----------------------
seasonal warehousing intake quality control; value-added services; pre-
retail services ----------------------
 Transport, including supplier collections; linehaul/trunking; store delivery; ----------------------

muti-user transport networks; managed transport services
----------------------
 Reverse logistics, including reverse logistics collections; sortation;
----------------------
processing; repair/refurbishment; value recovery; disposal; compliance
 Replenishment, including supplier management; inventory management ----------------------
and reordering ----------------------
 Supply chain consulting, including logistics network strategy; warehouse ----------------------
design and simulation; transport modelling
Store Logistics ----------------------
In the Retail SCM store, logistics solutions are focused on helping retailers ----------------------
bring logistics disciplines to in-store logistics operations in order to improve
----------------------
cost efficiency and on-shelf availability.
Retail SCM seek to help customers: ----------------------
 Work with the ‘upstream’ supply chain to focus on ‘store-friendly’ ----------------------
delivery to stores
----------------------
 Improve back-room and shelf replenishment processes
 Increase productivity by applying warehouse management disciplines to ----------------------
the store environment ----------------------
 Focus on the core issues at the store that contribute to out of stocks on the ----------------------
shelves
----------------------
 Maximise use of high cost store space as selling space through using
remote backrooms where appropriate ----------------------
 Reduce congestion on site and in the surrounding area ----------------------
 Increase sales through increasing range and availability of products, by ----------------------
providing fast and frequent replenishment from (cheaper) off-site storage
----------------------
 Provide pre-retail services off site, delivering product to store in a shelf-
ready format ----------------------
 Enable store staff to focus on serving customers rather than ‘backroom’ ----------------------
activities
----------------------
----------------------

Notes Customer-focused solutions are built up from the following core services:
 Supply management, including remote stockrooms; shopping mall
----------------------
consolidation centres; urban consolidation centres
----------------------
 Shelf replenishment, including stockroom management; productivity
---------------------- analysis and improvement; replenishment operations management
----------------------  Retail support systems, including backstore inventory systems; productivity

measurement systems
----------------------
Home Delivery
---------------------- In Retail SCM home delivery solutions are focused on helping retailers
---------------------- service existing and new markets from store, phone and internet-based retailing.
The aim is to fulfil our customers’ promise to their customers by providing a
---------------------- high quality and cost efficient home delivery service.
---------------------- Distribution Intensity

There are three broad options - intensive, selective and exclusive distribution.
----------------------
Intensive distribution aims to provide saturation coverage of the market
---------------------- by using all available outlets. For many products, total sales are directly linked
to the number of outlets used (e.g. cigarettes, beer). Intensive distribution is
----------------------
usually required where customers have a range of acceptable brands to chose
---------------------- from. In other words, if one brand is not available, a customer will simply
choose another.
----------------------
Selective distribution involves a producer using a limited number of
---------------------- outlets in a geographical area to sell products. An advantage of this approach
is that the producer can choose the most appropriate or best-performing outlets
---------------------- and focus effort (e.g. training) on them. Selective distribution works best
when consumers are prepared to “shop around” - in other words - they have
----------------------
a preference for a particular brand or price and will search out the outlets that
---------------------- supply.
Exclusive distribution is an extreme form of selective distribution in which
----------------------
only one wholesaler, retailer or distributor is used in a specific geographical
---------------------- area.
---------------------- 7.6 THE DISTRIBUTION CHANNEL

----------------------
Frequently there may be a chain of intermediaries, each passing the
---------------------- product down the chain to the next organisation, before it finally reaches the
consumer or end-user. This process is known as the ‘distribution chain’ or the
---------------------- ‘channel.’ Each of the elements in these chains will have their own specific
needs, which the producer must take into account, along with those of the all-
----------------------
important end-user.
----------------------
----------------------

Channels Notes
A number of alternate ‘channels’ of distribution may be available:
----------------------
a] Selling direct, such as via mail order, Internet and telephone sales
----------------------
b] Agent, who typically sells direct on behalf of the producer
----------------------
c] Distributor (also called wholesaler), who sells to retailers
d] Retailer (also called dealer), who sells to end customers ----------------------
Distribution channels may not be restricted to physical products alone. ----------------------
They may be just as important for moving a service from producer to consumer
in certain sectors, since both direct and indirect channels may be used. Hotels, ----------------------
for example, may sell their services (typically rooms) directly or through travel ----------------------
agents, tour operators, airlines, tourist boards, centralised reservation systems,
etc. ----------------------
There have also been some innovations in the distribution of services. ----------------------
For example, there has been an increase in franchising and in rental services -
the latter offering anything from televisions through tools. There has also been ----------------------
some evidence of service integration, with services linking together, particularly
in the travel and tourism sectors. For example, links now exist between airlines, ----------------------
hotels and car rental services. In addition, there has been a significant increase in ----------------------
retail outlets for the service sector. Outlets such as estate agencies and building
society offices are crowding out traditional grocers from major shopping areas. ----------------------
Channel members ----------------------
Distribution channels can thus have a number of levels. Kotler defined ----------------------
the simplest level, that of direct contact with no intermediaries involved, as the
‘zero-level’ channel. ----------------------
The next level, the ‘one-level’ channel, features just one intermediary; ----------------------
in consumer goods a retailer, for industrial goods a distributor, say. In small
markets (such as small countries) it is practical to reach the whole market using ----------------------
just one and zero-level channels.
----------------------
In large markets (such as larger countries) a second level, a wholesaler
----------------------
for example, is now mainly used to extend distribution to the large number of
small, neighbourhood retailers. ----------------------
In Japan the chain of distribution is often complex and further levels are ----------------------
used, even for the simplest of consumer goods.
----------------------
Channel structure
To the various ‘levels’ of distribution, which they refer to as the ‘channel ----------------------
length’, Lancaster and Massingham also added another structural element, the ----------------------
relationship between its members:
----------------------
Conventional or free-flow - This is the usual, widely recognised, channel
with a range of ‘middlemen’ passing the goods on to the end-user. ----------------------

Notes Single transaction - A temporary ‘channel’ may be set up for one transaction;
for example, the sale of property or a specific civil engineering project. This
---------------------- does not share many characteristics with other channel transactions, each one
being unique.
----------------------
Vertical marketing system (VMS) - In this form, the elements of distribution are
---------------------- integrated.
---------------------- The internal market
---------------------- Many of the marketing principles and techniques which are applied to the
external customers of an organisation can be just as effectively applied to each
---------------------- subsidiary’s, or each department’s, ‘internal’ customers.
---------------------- In some parts of certain organisations this may in fact be formalised, as goods are
transferred between separate parts of the organisation at a ‘transfer price’. To all
---------------------- intents and purposes, with the possible exception of the pricing mechanism itself,
this process can and should be viewed as a normal buyer-seller relationship.
----------------------
The fact that this is a captive market, resulting in a ‘monopoly price’, should not
---------------------- discourage the participants from employing marketing techniques.
Less obvious, but just as practical, is the use of ‘marketing’ by service and
----------------------
administrative departments to optimise their contribution to their ‘customers’
---------------------- (the rest of the organisation in general, and those parts of it which deal directly
with them in particular). In all of this, the lessons of the nonprofit organisations,
---------------------- in dealing with their clients, offer a very useful parallel.
---------------------- Channel management
---------------------- The channel decision is very important. In theory at least, there is a form of
trade-off; the cost of using intermediaries to achieve wider distribution is
---------------------- supposedly lower. Indeed, most consumer goods manufacturers could never
justify the cost of selling direct to their consumers, except by mail order. In
---------------------- practice, if the producer is large enough, the use of intermediaries (particularly
---------------------- at the agent and wholesaler level) can sometimes cost more than going direct.
Many of the theoretical arguments about channels therefore revolve around cost.
---------------------- On the other hand, most of the practical decisions are concerned with control of
---------------------- the consumer. The small company has no alternative but to use intermediaries,
often several layers of them, but large companies ‘do’ have the choice.
----------------------
However, many suppliers seem to assume that once their product has been
---------------------- sold into the channel, into the beginning of the distribution chain, their job is
finished. Yet that distribution chain is merely assuming a part of the supplier’s
---------------------- responsibility; and, if he has any aspirations to be market-oriented, his job
should really be extended to managing, albeit very indirectly, all the processes
----------------------
involved in that chain, until the product or service arrives with the end-user.
---------------------- This may involve a number of decisions on the part of the supplier:
 Channel membership
----------------------
 Channel motivation
----------------------  Monitoring and managing channels

Channel membership Notes
1. Intensive distribution - Where the majority of resellers stock the ‘product’
----------------------
(with convenience products, for example, and particularly the brand leaders
in consumer goods markets) price competition may be evident. ----------------------
2. Selective distribution - This is the normal pattern (in both consumer and
----------------------
industrial markets) where ‘suitable’ resellers stock the product.
3. Exclusive distribution - Only specially selected resellers (typically only ----------------------
one per geographical area) are allowed to sell the ‘product’.
----------------------
Vertical marketing
----------------------
This relatively recent development integrates the channel with the original
supplier - producer, wholesalers and retailers working in one unified system. ----------------------
This may arise because one member of the chain owns the other elements (often
called ‘corporate systems integration’); a supplier owning its own retail outlets, ----------------------
this being ‘forward’ integration. It is perhaps more likely that a retailer will own ----------------------
its own suppliers, this being ‘backward’ integration. (For example, MFI, the
furniture retailer, owns Hygena which makes its kitchen and bedroom units.) ----------------------
The integration can also be by franchise (such as that offered by McDonald’s
hamburgers and Benetton clothes) or simple cooperation (in the way that Marks ----------------------
& Spencer cooperates with its suppliers). ----------------------
Alternative approaches are ‘contractual systems’, often led by a
wholesale or retail cooperative, and ‘administered marketing systems’ where ----------------------
one (dominant) member of the distribution chain uses its position to coordinate ----------------------
the other members’ activities. This has traditionally been the form led by
manufacturers. ----------------------
The intention of vertical marketing is to give all those involved (and ----------------------
particularly the supplier at one end, and the retailer at the other) ‘control’ over
the distribution chain. This removes one set of variables from the marketing ----------------------
equations.
----------------------
Other research indicates that vertical integration is a strategy which is best
pursued at the mature stage of the market (or product). At earlier stages it can ----------------------
actually reduce profits. It is arguable that it also diverts attention from the real
----------------------
business of the organisation. Suppliers rarely excel in retail operations and, in
theory, retailers should focus on their sales outlets rather than on manufacturing ----------------------
facilities (Marks & Spencer, very deliberately provides considerable amounts
of technical assistance to its suppliers, but does not own them). ----------------------
Horizontal marketing ----------------------
A rather less frequent example of new approaches to channels is where ----------------------
two or more non-competing organisations agree on a joint venture - a joint
marketing operation - because it is beyond the capacity of each individual ----------------------
organisation alone. In general, this is less likely to revolve around marketing
synergy. ----------------------
----------------------

Notes [References: P. Kotler, ‘Marketing Management’ (Prentice-Hall, 7th ed., 1991),
G. Lancaster and L. Massingham, ‘Essentials of Marketing’ (McGraw-Hill,
---------------------- 1988)]
----------------------
7.7 THE DISTRIBUTION CHANNEL STRATEGY
----------------------
The following discussion describes the factors that influence the choice of
---------------------- distribution channel by a business:
---------------------- Market factors

An important market factor is “buyer behaviour”; how do buyer’s want
----------------------
to purchase the product? Do they prefer to buy from retailers, locally, via mail
---------------------- order or perhaps over the Internet? Another important factor is buyer needs
for product information, installation and servicing. Which channels are best
---------------------- served to provide the customer with the information they need before buying?
Does the product need specific technical assistance either to install or service a
----------------------
product? Intermediaries are often best placed to provide servicing rather than
---------------------- the original producer - for example in the case of motor cars.
The willingness of channel intermediaries to market product is also a
----------------------
factor. Retailers in particular invest heavily in properties, shop fitting etc. They
---------------------- may decide not to support a particular product if it requires too much investment
(e.g. training, display equipment, warehousing).
----------------------
Another important factor is intermediary cost. Intermediaries typically
---------------------- charge a “mark-up” or “commission” for participating in the channel. This
might be deemed unacceptably high for the ultimate producer business.
----------------------
Producer factors
---------------------- A key question is whether the producer has the resources to perform the
---------------------- functions of the channel? For example a producer may not have the resources to
recruit, train and equip a sales team. If so, the only option may be to use agents
---------------------- and/or other distributors.
---------------------- Producers may also feel that they do not possess the customer-based skills
to distribute their products. Many channel intermediaries focus heavily on the
---------------------- customer interface as a way of creating competitive advantage and cementing
the relationship with their supplying producers.
----------------------
Another factor is the extent to which producers want to maintain control
---------------------- over how, to whom and at what price a product is sold. If a manufacturer sells
via a retailer, they effectively lose control over the final consumer price, since
----------------------
the retailer sets the price and any relevant discounts or promotional offers.
---------------------- Similarly, there is no guarantee for a producer that their product/(s) are actually
been stocked by the retailer. Direct distribution gives a producer much more
---------------------- control over these issues
----------------------
----------------------

Product factors Notes
Large complex products are often supplied direct to customers (e.g.
----------------------
complex medical equipment sold to hospitals). By contrast perishable products
(such as frozen food, meat, bread) require relatively short distribution channels ----------------------
- ideally suited to using intermediaries such as retailers.
----------------------
Reverse Supply Chain
----------------------
Reverse supply chain is the last frontier in the supply chain, which
remains to be conquered. C. Glenn Mauney opines, “It is clear that more and ----------------------
more attention is being devoted to the reverse supply chain as companies
recognise the critical importance of managing the entire product life cycle.” ----------------------
Cost reduction is not the only benefit that can be gained from reverse supply ----------------------
chain. It helps in understanding why products are returned. Were they returned
due to poor quality? Were the stores improperly stocked? Was there a labelling ----------------------
problem? Answering these questions enable a company to go to the root cause
of returns, resulting in better engineering, manufacturing or distribution. It ----------------------
also helps to get slow-moving products off the shelf, the distribution networks ----------------------
and warehouses. Companies that have been most successful with their reverse
supply chains are those that closely coordinate them with their forward supply ----------------------
chains.
----------------------
----------------------
1. Intensive distribution would service this customer category. ----------------------
i. Premium ----------------------
ii. Cost conscious ----------------------
iii. All
----------------------
iv. Industrial
----------------------
1. Retail provides best deals to the customers by their ability to source ----------------------
globally.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
Activity 1
----------------------
---------------------- 1. Imagine that you are the supply chain manager for a multi-store
pharmaceutical company. How would you ensure optimal level of
---------------------- product availability using various principles of material handling?
---------------------- 2. Imagine that you are the supply chain manager for a chain of retail
grocery stores. How would you ensure that optimal level of product
---------------------- availability serves your daily customers efficiently and earns profits too?
---------------------- 3. Describe the impact of unsold trucks on the profitability of a company
manufacturing heavy commercial trucks.
----------------------
4. Design store layout, from logistics point of view, for an automobile
---------------------- company showroom.
---------------------- 5. Suppose you are the distribution manager for the washing powder
division of a FMCG product company. How would you ensure the
---------------------- optimal level of product availability to various distribution centres?
----------------------
---------------------- Summary

Material Handling is the primary activity of every manufacturing
----------------------
organisation. It has been estimated that at least 15 to 25% of the cost of
---------------------- the product is attributable to materials handling activities and as such it
warrants consideration in every branch of manufacturing operation i.e.
---------------------- setting up the factory, planning the facilities, selecting the manufacturing
---------------------- methods, mechanisation, purchasing, receiving and storage, inspection,
warehousing and distribution of the final product.
----------------------
 Material Handling principles can basically be grouped into five categories:
---------------------- 1. Planning Principles
---------------------- 2. Operating Principles
---------------------- 3. Equipment Principles
---------------------- 4. Costing Principles
---------------------- 5. General Principles
----------------------  The level of product availability is a very important component of the
supply chain’s responsiveness towards its customers. The level of product
---------------------- availability can be calculated using the cycle service levels and the
fill rate and is also called the ‘customer service level’. The higher the
----------------------
customer service level, the better responsiveness a firm can provide to
---------------------- attract customers. The two most important areas of concern in a supply
chain to increase the overall profitability are:
----------------------

Increase
 the salvage value of each unit, which in turn increases the Notes
overall profitability of the firm.
----------------------
Decrease
 the margin lost due to stock-outs, thereby increasing the
overall profitability. ----------------------
 Retail in SCM offers efficient, cost-effective and flexible supply chain
----------------------
solutions and services to retailers around the world. Customers benefit
from proven expertise and a range of solutions that address key business ----------------------
issues, such as on-shelf availability, supply chain agility, effective use of
infrastructure and global sourcing. ----------------------
 Distribution Intensity is of three types: Intensive, Selective and Exclusive ----------------------
Distribution.
----------------------
 Intensive distribution aims to provide saturation coverage of the market
by using all available outlets. For many products, total sales are directly ----------------------
linked to the number of outlets used (e.g. cigarettes, beer).
----------------------
 Selective distribution involves a producer using a limited number of
outlets in a geographical area to sell products. An advantage of this ----------------------
approach is that the producer can choose the most appropriate or best-
performing outlets and focus effort (e.g. training) on them. ----------------------
 Exclusive distribution is an extreme form of selective distribution in ----------------------

which only one wholesaler, retailer or distributor is used in a specific
geographical area. ----------------------
----------------------
Keywords
----------------------
 Retail SCM: It is the provision of efficient, cost-effective and flexible
----------------------
supply chain solutions and services to retailers around the world.
 Store Logistics: The in-store logistics operations in order to improve cost ----------------------
efficiency and on-shelf availability. ----------------------
 Intensive distribution: The distribution system which aims to provide
saturation coverage of the market by using all available outlets. ----------------------
 Selective distribution: The distribution system which involves a producer ----------------------

using a limited number of outlets in a geographical area to sell products.
----------------------
 Reverse SCM: Supply chain operation for returned goods.
----------------------
 Material Handling: System of movement of goods.
 Threshold contracts: The contract which offers the dealer an increase in ----------------------
the margin for sales exceeding a certain threshold (limit).
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
1. Describe inbound SCM with examples.
---------------------- 2. What is the role of Material Handling in SCM?
---------------------- 3. Discuss Material Handling Principles with respect to manufacturing industry.
4. Discuss the importance of the level of product of availability
----------------------
5. Discuss factors influencing Level of Product availability.
---------------------- 6. Discuss the role of SCM in retail industry.
---------------------- 7. Discuss distribution store management with examples.
8. What is distribution channel strategy?
----------------------
9. Differentiate between vertical marketing and horizontal marketing.
----------------------
10. Write short notes on:
---------------------- a. Channel Management
---------------------- b. Channel Decision
c. Channel Structure
----------------------
d. Channel Membership
---------------------- e. Distribution Intensity
----------------------
----------------------
----------------------
Fill in the blanks.
---------------------- 1. Though varying from Industry to industry, about 15-25% of the cost of
product can be attributed to materials handling.
----------------------
2. Most visible sign of responsiveness of supply chain is availability of a
---------------------- product to the customers.
----------------------
1. Intensive distribution would service this customer category.
---------------------- iii. All
1. True
----------------------

----------------------
1. Leeman, Joris J.A. Supply Chain Management: Fast, Flexible Supply
---------------------- Chains in Manufacturing and Retailing. BoD Publication.
2. Wisner, Joel and Keah-Choon Tan. Principles of Supply Chain
----------------------
Management: A Balanced Approach. Cengage Learning.
Designing Supply Chain Distribution Network
UNIT
Structure:
8.1 Introduction
8
8.2 Factors affecting the Distribution Network Design
8.3 Different Distribution Network Designs
8.4 Selecting a Network Design Option
8.5 Network Design in a Supply Chain
Summary
Key Words
Suggested Reading
Designing Supply Chain Distribution Network 147

Notes
Objectives
----------------------
----------------------
• Describe distribution and the role played by it in a supply chain
----------------------
• List the factors affecting the distribution network design
---------------------- • Choose between different distribution network designs
---------------------- • Explain the role played by distributors in the supply chain
---------------------- • Discuss the role of network design in a supply chain

• List the factors affecting the network design
----------------------
• Develop a framework for making network design decisions
----------------------
• Practice network design decisions
----------------------
8.1 INTRODUCTION
----------------------
The step that a company takes in order to move and store products
---------------------- from the supplier stage to the customer stage in any supply chain is called
---------------------- “Distribution”. Such movement and storage of goods takes place between every
pair of stages in the supply chain. For example, raw material is moved from the
---------------------- supplier’s premises to the manufacturers. Similarly, movement of goods can
happen between the manufacturer to the customer as well. It is the distribution
---------------------- network that drives the profitability of a firm. Distribution has a direct impact
---------------------- on the customer’s experience and the supply chain costs. The distribution cost
generally amounts to about 30% of the total cost of manufacturing the product
---------------------- and selling it.
---------------------- Distribution helps a company to cater to and fulfill the customer experience
and also reduce the supply chain costs. Distribution forms an integral part of the
---------------------- supply chain and therefore much importance is given to it in the formation of
different supply chain networks. It is dependant on the companies as to which
---------------------- distribution networks they wish to exercise in order to provide proper delivery
---------------------- to their customers and also save on their supply costs. Having an inappropriate
supply chain distribution network can dismantle any company with an increase
---------------------- in the supply chain costs as also because of not meeting the timely demands of
the customers.
----------------------
---------------------- 8.2 FACTORS AFFECTING THE DISTRIBUTION

NETWORK DESIGN
----------------------
The two major factors that deeply affect the distribution network design of any
---------------------- supply chain are:
---------------------- a) Meeting customer’s timely needs
---------------------- b) Costs involved in meeting the customer’s needs

In order that a company has the best distribution network, it needs to Notes
analyse the impact on customer service and the costs concerned with the various
distribution network options. Meeting the customer’s demands on time affect ----------------------
the revenues of the company at large, which along with the costs together affect
the overall profitability of the network and the company as a whole. ----------------------
In order to fulfill the above prerequisites a company must be able to ----------------------

provide an efficient customer service and focus on those measures that affect the
----------------------
distribution network. There are various components that affect both customer
service and the distribution network at large. These are: ----------------------
i) Response time ----------------------
ii) Product variety
----------------------
iii) Product availability
----------------------
iv) Customer experience
v) Order visibility ----------------------
vi) Returnability ----------------------

Let us now look at each briefly: ----------------------
i) Response time
----------------------
Response time is nothing but the difference between the time a customer
places an order and the time he receives delivery of it. ----------------------
ii) Product variety ----------------------
Product variety is the number of different products and different ----------------------
configurations that an organisation offers or a customer desires from the
company’s distribution network. ----------------------
iii) Product availability ----------------------
The probability of a product being available in stock, when a customer
----------------------
order arrives.
iv) Customer experience ----------------------
It is the ease with which a customer places an order and receives the products ----------------------
ordered. It could also include the service that the customer wishes to get
from the company, like a staff member greeting him when the customer ----------------------
arrives at a company outlet.
----------------------
v) Order visibility
----------------------
The ability of a customer to track the order placed from the time of placing
the order to the time he receives it. ----------------------
vi) Returnability ----------------------
It is the ease with which a customer may wish to return unwanted
----------------------
merchandise and the ability of the supply chain network to handle such
returns. ----------------------

Notes From the above it may seem that a customer wants all these criteria to
be fulfilled. However this is not true at all. For example, people who desire a
---------------------- BSNL landline connection have to wait for weeks at times, whereas a person
desiring a Reliance landline can get it the very next minute from the nearest
---------------------- web world. People are ready to wait for BSNL because of the features that it
---------------------- provides and the cheaper call charges.
Relationship between the number of facilities and the desired response
----------------------
time.
---------------------- Companies that target customers requiring a longer response time require
a lesser number of facilities, and these facilities maybe situated far from the
----------------------
customers with larger stocks. On the other hand, companies aiming at higher
---------------------- responsiveness towards its customers shall have a larger number of facilities
located closer to its customers and they would be large in number with lesser
---------------------- stocks. Fig 8.1 shows us the relationship between the number of facilities and
the desired response time.
----------------------
Required
---------------------- Number of
facilities
----------------------
----------------------
----------------------
----------------------
---------------------- Response time
----------------------
Fig. 8.1: Relationship between number of facilities and response time
---------------------- Thus, a company needs to alter its distribution network as per the
---------------------- customer’s requirements and to avail of cost benefits to the company. Changing
a distribution network shall affect the four drivers of the supply chain namely
---------------------- facilities, transportation, inventory and information.
---------------------- Effect on the inventory and inventory costs

As the number of facilities in a supply chain increases, the inventory and
---------------------- the resulting inventory costs increase and this can be seen in Fig 8.2.
---------------------- In order to reduce the inventory costs, companies try to reduce the number
of facilities and consolidate them in order to limit the number of facilities and
----------------------
thereby control their excess costs.
----------------------
----------------------
----------------------
----------------------

Inventory Notes
Costs
----------------------
----------------------
----------------------
----------------------
Number of facilities ----------------------
Fig. 8.2: Relationship between facilities and inventory costs ----------------------
Effect on transportation costs ----------------------

Transportation costs are of two types. These costs are called inbound ----------------------
transportation costs and outbound Transportation costs. Inbound transportation
costs are those costs that are incurred while bringing the material into the ----------------------
company facility. On the other hand, outbound transportation costs are those
----------------------
that are incurred while sending the products outside the facility. It is observed
that the inbound transportation costs are lesser than the outbound transportation ----------------------
ones because these include bringing of raw material that is in bulk, therefore the
per unit transportation costs tend to decrease. On the other hand, the outbound ----------------------
transportation costs are higher because products may need to be transported
----------------------
in smaller lots to different locations and the cost per unit tends to be higher
than the inbound transportation costs. This relationship between the number of ----------------------
facilities and the transportation costs is shown in Fig 8.3.
----------------------
Transport
Costs ----------------------
----------------------
----------------------
----------------------
----------------------
Number of facilities
----------------------
Fig. 8.3: Relationship between number of facilities and transport costs ----------------------
Effect on the facilities costs ----------------------
Facilities cost is nothing but the cost that is incurred in setting up a facility.
Companies, in order to have an efficient and responsive supply chain, tend to ----------------------
alter the number of facilities depending on the situation. However, a company ----------------------
needs to consolidate its number of facilities in order to have a responsive and
efficient supply chain. The number of facilities has a direct impact on the costs. ----------------------
An increase in the number of facilities will lead to an increase in the facility
costs and vice versa. ----------------------

Notes Facility Costs
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
---------------------- Fig. 8.4: Relationship between number of facilities and facility costs
---------------------- From the above three types of costs that we have studied, we can integrate
them all to form the Total Logistics Cost.
----------------------
Total Logistics Cost
----------------------
We can say that for a supply chain network:
----------------------
Total Logistics Cost = Inventory Costs + Transportation Costs + Facility
---------------------- Costs.
---------------------- The total logistics costs of any company tend to decrease with the increase
in the number of facilities. But, this is true only to a certain minimum point,
---------------------- after which every addition to the number of facilities or rather increase in the
---------------------- number of facilities leads to an increase in the logistics costs. This relationship
can be seen in Fig 8.5.
---------------------- Response time
----------------------
----------------------
---------------------- Total logistics cost
----------------------
----------------------
----------------------
---------------------- Minimum point
---------------------- Fig. 8.5: Relationship between total logistics cost and facilities cost
---------------------- If a company wishes to improve on its response time more effectively,

then it may increase the number of facilities, which would also lead to an
---------------------- increase in the total logistics costs after the minimum point. It is important
to note that companies would like to exercise such increase in the number of
---------------------- facilities only if they are confident that the increase in revenues because of

better responsiveness is more than the increase in the costs due to the additional Notes
facilities.
----------------------
From the topics that we have discussed, it is important to note that the
customer service that is to be provided and the costs that a company incur are the ----------------------
two most important measures that are used to analyse the different distribution
networks. It is very important for a company to adjust its distribution network ----------------------
with its strategic position in the market.
----------------------
----------------------
1. Quick and correct billing is not very important for good customer ----------------------
experience. ----------------------
2. More factories, supply depots or distributors spread out geographically
may increase cost but may not affect the response. ----------------------
----------------------
8.3 DIFFERENT DISTRIBUTION NETWORK DESIGNS ----------------------
Designing a distribution network is based on two important factors. These two ----------------------
factors are:
----------------------
 Whether the product is delivered or shall be picked up from some specified
site. ----------------------
 Whether the product flow directly to the customer or flows through some ----------------------
intermediary.
----------------------
After the company is clear about these two factors, they can choose the basic
framework of any of the six most important designs of distribution networks. ----------------------
These are:
----------------------
1) Manufacturer storage with direct shipping.
2) Manufacturer storage with direct shipping and in–transit merge. ----------------------
3) Distributor storage with package carrier delivery. ----------------------

4) Distributor storage with last mile delivery. ----------------------
5) Manufacturer/Distributor storage with customer pick-up.
----------------------
6) Retail storage with customer pick-up.
----------------------
Work on activity C and then we shall look at these in detail.
Distribution network designs: ----------------------
1) Manufacturer storage with direct shipping ----------------------

This is also known as drop shipping. The manufacturer with direct ----------------------
shipping design as a distribution network, involves the product being
directly shipped (transported and not delivered by ship) to the customer. ----------------------

Notes Here there are no intermediaries involved like the wholesalers or retailers;
it is simply between the manufacturer and the end customer. However,
---------------------- the intermediaries if present, are independent of the manufacturer and
hold no inventories at all. The manufacturer is the only one who holds the
---------------------- inventories. Therefore his design is also called as ‘Direct Shipping’, as the
---------------------- product is delivered directly to the customer’s location.
All sorts of information is sent by the customer through the retailer to the
----------------------
manufacturer regarding the products, and then the manufacturer delivers
---------------------- the product directly to the customer.
Characteristics of the drop shipping or direct shipping network design:
----------------------
a) Inventory
----------------------
With the direct shipping design network, centralisation of inventories
---------------------- is possible for the manufacturer. With this, the manufacturer is able
to aggregate the demand across all his retailers and maintain a lower
---------------------- inventory with a high level of product availability.
---------------------- This proves beneficial for all the high value products that are lower
demand items and have an unpredictable demand.
----------------------
For example, Auto Burlington, a catalogue company as it is called,
---------------------- produces customised T-shirts on order from their website on the
internet. Such a product would require a high level of customisation
---------------------- and therefore will be an expensive product. Here, in this case the
---------------------- customer may enter all the details as per his choice and order for the
desired T-shirt. The company on receiving such information, shall
---------------------- produce as per the requirements and deliver it to his place within
a specified time. This is a typical example for this type of network
---------------------- design.
---------------------- b) Product customisation
---------------------- Drop shipping design network offers the manufacturer the facility to
postpone the customisation of the products until after the customer
---------------------- has placed his order. This allows the manufacturer to maintain lower
inventories by aggregating even at the component level. For example,
----------------------
computer manufacturers like Dell, hold inventories as components
---------------------- and prepare the products as per the customer’s choice after receiving
the order. This allows them to postpone their customisation, maintain
---------------------- lower inventories and also satisfy the customers more.
---------------------- c) Transportation
---------------------- Transportation costs are very high when we talk about Drop Shipping.
This is because the average outbound transporting distance is large
---------------------- and also the transportation or shipping costs are high. Because there is
no aggregate outbound transportation, there is a further increase in the
---------------------- costs which may make the product more costly.
----------------------

d) Facilities Notes
Due to the aggregation of inventories at the manufacturer location
----------------------
there is no longer the need to maintain any warehouses in the supply
chain. This helps the supply chain to save on fixed costs of the facilities. ----------------------
There is also a saving on the handling costs, as there is the elimination
of retailers and wholesalers and the product has to be directly shipped ----------------------
from the manufacturer to the end customer. However, due care must
----------------------
be taken by the manufacturer when the goods are shifted into the
manufacturer’s warehouse in lots and then shipped individually in ----------------------
single units to the end customers. Thus, evaluation of handling costs
is necessary so that the manufacturer develops a single unit delivery ----------------------
capability. Other wise or else it would have a negative impact on the
----------------------
handling costs and the response time.
e) Information ----------------------
A significant information infrastructure is required between the ----------------------
manufacturer and retailer so that the retailer can provide information
to the customer regarding the product availability, even though the ----------------------
inventory is maintained with the manufacturer. This is because it
----------------------
gives the customer visibility in the order processing as the order is
placed with the retailer. Thus, significant investment is required so ----------------------
that proper and correct information is available from time to time.
----------------------
The above points that we have discussed are with respect to the Cost
Factors. Now, we are going to study the Service Factors that are ----------------------
explained below:
----------------------
i) Response time
Under the direct shipping network design, the response time involved ----------------------
is very large. This is because the order placed by the customer is ----------------------
transmitted from the retailer to the manufacturer, after which the
products are produced or customised and then transported. The ----------------------
distance to be covered by the finished products also increases due to
scattering deliveries at longer distances. However, this varies from ----------------------
product to product and also from the sourcing point of view. If the ----------------------
retailer sources the products demanded by the customer from different
producers, then the customer may receive several partial shipments, ----------------------
making receiving of products more difficult and complicated.
----------------------
ii) Product availability
----------------------
The direct shipping design network provides the manufacturer with
the ease to provide a large variety of goods, due to the aggregation of ----------------------
demand from individual buyers. Thus, it provides the customer with a
larger product availability. ----------------------
----------------------
----------------------

Notes iii) Customer experience
The direct shipping network design enables the customer to relax
----------------------
and have a good experience in terms of home delivery of products
---------------------- demanded. However, the customer may have to wait for a long time
for certain products and may also have to accept partial shipment of
---------------------- the products.
---------------------- iv) Returnability
Manufacturer storage with direct shipping network is likely to have
----------------------
some difficulty in handling returns, thereby decreasing customer
---------------------- satisfaction. Moreover, it is very expensive as this may involve the
shipments from more than one manufacturer. The products can be
---------------------- returned by the customer to the manufacturer, or the retailer must
provide a with facility to arrange for pick up of goods to be returned.
----------------------
Both these choices are expensive and require huge investment.
----------------------
Manufacturer
----------------------
----------------------
Retailer
----------------------
----------------------
Customer
----------------------
---------------------- Product Flow

Information Flow
----------------------
Fig. 8.6: Manufacturer storage with direct shipping network
----------------------
2) Manufacturer storage with direct shipping and in-transit merge
---------------------- The manufacturer storage with direct shipping and in-transit merge
---------------------- involves the combination of different pieces of an order that come from
different manufacturers (different locations) so that the customer gets a
---------------------- single delivery. This type of network design is unlike the manufacturer
storage with direct shipping, as this network design involves a carrier
---------------------- that helps in the in-transit merge of different pieces of the product to be
---------------------- delivered to the customer. Let us discuss the various characteristics of this
type of network design:
----------------------
a) Inventory
---------------------- Just like the drop shipping network, this network design also possesses
the ability to aggregate the inventories and postpone the product
----------------------
customisation significantly. This network design helps companies
---------------------- to maintain concentrated inventories at their facilities so that an in-
transit merge can take place.
----------------------

Let us explain the term in-transit merge, which means the merging Notes
of different components to form the final product during transit
(during its movement from the manufacturer to the customer). Every ----------------------
morning we receive the newspaper at home, which usually contains
some pamphlets of some advertisements and offers. This is a very ----------------------
simple example wherein the pamphlets are brought to the newspaper ----------------------
distributor’s storage, put inside every newspaper by the delivery boy
and then delivered to the customer. Thus, we can conclude from the ----------------------
above example that the pamphlets are merged with the newspaper in -
transit and then finally delivered to the readers. ----------------------
b) Transportation ----------------------
The transportation costs are lower than that of the direct shipping ----------------------
network because of the in - transit merge facility that takes place at
the carrier’s place before the final delivery to the customer. An order ----------------------
that consists of products from different manufacturers thus requires
----------------------
a single delivery after the products have been merged at the carrier’s
place, thereby reducing the number of individual product deliveries ----------------------
and also the costs.
----------------------
c) Facilities & Handling
The facilities and the handling costs for the manufacturer and the ----------------------
retailer are very much the same as in drop shipping. However, the ----------------------
company involved in the in - transit merge has higher facility costs
because of the services that it provides. The total supply chain costs ----------------------
are higher as compared to the costs involved in the drop shipping
network design. ----------------------
d) Information ----------------------
A very strong information infrastructure is required for the in-transit ----------------------
merge network. Thus, the costs of having such a sophisticated
information infrastructure will be very expensive and thereby increase ----------------------
the costs. These costs are very high as compared to the drop shipping
network design. ----------------------
After having completed the cost factors, let us now come to the service ----------------------
factors which are given below:
----------------------
i) Response time
----------------------
The response time involved in the in- transit merge network is
marginally higher than that of the direct shipping network. ----------------------
ii) Product variety & product availability ----------------------

There is no difference in the product variety when we compare both ----------------------
the drop shipping network and the in-transit merge network. Even the
product availability shall remain the same in both the cases. ----------------------
----------------------

---------------------- The customer experience is the main factor of difference between

the drop shipping network and the in-transit merge network. Since
---------------------- the customer receives a single delivery of the merged products at
his doorstep, we can say that it is the best service provided for the
---------------------- customer, unlike in the drop shipping network design where the
---------------------- customer may have had to receive multiple/partial shipments.
e) Returnability
----------------------
The reverse supply chain or the returning of goods is very expensive
---------------------- and also requires a huge investment by the retailer. So, we can say that
---------------------- returnability is the same as the drop shipping network design.
Thus, we can say that the in- transit merge network design is better than the
---------------------- drop shipping network design because of lower transportation costs and better
---------------------- customer experience. Products having a low demand, which are of high value
and which involve sourcing from a number of limited manufacturers are better
---------------------- suited for this type of design network.
----------------------
---------------------- Facilities
----------------------
---------------------- In-transit merge

Retailer by Carrier.
----------------------
----------------------
----------------------
Customer
----------------------
---------------------- Products Flow

Information Flow
----------------------
Fig. 8.7: Manufacturer storage with direct shipping and in-transit merge
----------------------
3) Distributor storage with carrier delivery
----------------------
This type of design option involves the storage of products with the retailer
---------------------- or distributor in their warehouses and not with the manufacturers as was the
case with the direct shipping and in-transit merge design network options.
---------------------- Also, there is the use of package carriers who transport the goods to the
customers.
----------------------
----------------------
----------------------

Let us now analyse the various characteristics of this type of network design. Notes
a) Inventory ----------------------
Now, we know that the goods here are stored with the retailer or
----------------------
distributor and not with the manufacturers. Because of this reason the
distributor or retailer will require a higher level of inventory. This is ----------------------
because the distributor is not able to aggregate the demand as precisely
as the manufacturer who aggregates the demand of a large number of ----------------------
distributors. It is obvious that the products that are highly demanded
----------------------
by the customers are stored by the distributors.
----------------------
b) Transportation
Transportation costs are lower for the distributor storage design option ----------------------
as the goods can be sent in truck loads to the distributor warehouse, ----------------------
and also because the distance between the customer and distributor is
shorter as compared to the manufacturer. ----------------------
c) Facilities ----------------------
The facilities and warehousing costs would be higher than the
----------------------
manufacturer storage option. This is because of the loss in aggregation
of the products demanded. If any type of processing is done with the ----------------------
distributor in the warehouse, then the costs would further increase. It
is for this reason that distributor storage is not appropriate for slow ----------------------
moving products.
----------------------
d) Information
----------------------
The information infrastructure required is less complicated as
compared to manufacturer storage. This is because the distributor or ----------------------
retailer acts as a buffer between the end customer and the manufacturer.
----------------------
Let us now go through the service factors provided by the distributor
storage network design option. ----------------------
i) Response time ----------------------
There is excellent response time as it is quicker when compared to
----------------------
the manufacturer storage design option. This is because the distance
between the customer and the distributor is much less as compared ----------------------
to that of the manufacturer and customer on an average. Also the
products are aggregated together at the distributor’s warehouse. ----------------------
ii) Product variety & product availability ----------------------
Product variety and availability is usually good when we speak about ----------------------
distributor storage. It is always more than the retailers in terms of
quantity, and is lesser than the manufacturer in terms of both quantity ----------------------
and variety.
----------------------
----------------------

The customer convenience is greater because a single shipment
----------------------
reaches the customer in response to his order of products demanded.
---------------------- iv) Returnability
---------------------- It is very much better than manufacturer storage because all the goods
that are returned by the customers can be replaced or processed at the
---------------------- distributor’s warehouse.
---------------------- Thus, we can conclude by saying that this type of design option is most
appropriate for fast moving, highly demanded products. Also, the distributors
---------------------- get a chance to store a larger variety of products than the retailers, and also some
---------------------- of the distributors may specialise in the products that are highly demanded in
a particular area. Hindustan Lever Ltd. is a perfect example of a company that
---------------------- possesses this type of design option. They have a range of products that are
stored and delivered by the distributors. All other services like replacement and
---------------------- returns are also done by these distributors.
----------------------
----------------------
Facilities
----------------------
---------------------- Distributor Storage
----------------------
----------------------
---------------------- Customer
---------------------- Products Flow

Information Flow
----------------------
---------------------- Fig. 8.8: Distributor storage with carrier delivery

4) Distributor storage with last mile delivery
----------------------
By ‘last mile delivery’ we mean that the distributor or retailer provides
---------------------- delivery of the demanded product up to the customer’s place. This delivery
---------------------- is made without using a carrier. It is very important to note that companies
opting for the distributor storage with last mile delivery design option have
---------------------- their warehouses placed very close to the customer. Also, one must keep
in mind that those companies providing such services will have a large
---------------------- number of warehouses that are located very near the customer. This is
---------------------- because of the limited radius that needs to be served with last mile delivery.
Now, let us go through the characteristics of distributor storage with last
---------------------- mile delivery network option.
----------------------

a) Inventory Notes
It requires high levels of inventory and inventories are highest as
----------------------
compared to any other design option. This is because of the low level
of aggregation in demand of the products demanded by the customers. ----------------------
Goods that are really fast moving and have high demand are best
suited for this type of design option. For example, grocery shops that ----------------------
provide various products for daily use like soap, oil and other fast
----------------------
moving consumer goods.
b) Transportation ----------------------
Transportation costs are generally very high, when it comes to last ----------------------
mile delivery of products to the customers. This is because it is easy
for the retailer to provide such services as compared to the distributors ----------------------
themselves as the carrier’s aggregate delivery to various retailers.
----------------------
c) Facilities & handling
----------------------
Since there are a large number of facilities that are provided by
these companies, the facility costs are bound to increase. This also ----------------------
leads to an increase in the handling costs. However, these are lesser
when compared to a supply chain having retailers and are more ----------------------
when compared to the manufacturer storage or distributor storage ----------------------
with carrier delivery. There are high processing costs as there is total
elimination of customer participation and also because the last mile ----------------------
delivery is performed by the distributor until the product is finally
delivered to the customer. ----------------------
d) Information ----------------------
Schedules need to be prepared for timely delivery of the goods. Just ----------------------
like any other design option, a sophisticated information infrastructure
is required for distributor storage with last mile delivery option. ----------------------
Having now looked at the cost factors, let us have a look at the service ----------------------
factors to be taken into account:
----------------------
i) Response time
----------------------
Quick response time is involved in this design option, as compared to
the carrier deliver option. ----------------------
ii) Product variety & availability ----------------------
The product variety is less as compared to the distributor storage with ----------------------
carrier delivery. Product availability will be costlier than any other
design option apart from retail outlets. ----------------------
iii) Customer experience ----------------------
There is an excellent customer experience, especially for those ----------------------

products that are heavy and big, as customers get doorstep delivery of
the desired goods. ----------------------

Notes However, apart from the benefits that the customer receives from this
design option, it is very difficult to implement this type of design option in areas
---------------------- where there is high labour cost. It is only feasible when either the labor is cheap
or when the customer is ready to pay a higher price for the product.
----------------------
----------------------
Facilities
----------------------
---------------------- Distributor Storage
----------------------
---------------------- Customer
---------------------- Products Flow

Information Flow
----------------------
Fig. 8.9: Distributor storage with last mile delivery
----------------------
5) Manufacturer storage or Distributor storage with Consumer pick-up
----------------------
This design option is comparatively a modern design network option and
---------------------- is used by most of the online or ‘dotcom’ companies as we call them. In
this option, the manufacturer or the distributor holds inventories at their
---------------------- warehouses, but the customers place their order by phone, or on the internet,
and then come to a designated place to collect the products ordered for. The
----------------------
products ordered by the customers are shipped from the storage to the pick
---------------------- up places where the customers are required to pick up their products from.
Let us now come to the characteristics of this type of design network
----------------------
option.
---------------------- a) Inventory
---------------------- The inventory costs can be maintained at a minimum, depending on
the product type (whether it is fast moving or slow moving) and also
---------------------- on the location (whether it is close to or far from the customer).
---------------------- b) Transportation
---------------------- The transportation costs are lower than the use of package carriers,
because aggregation of products can be done while delivering the
---------------------- products to a pick up site. Thus, goods can be delivered in bulk to the
pick –up sites, which helps to reduce the transportation costs.
----------------------
c) Facilities & handling
----------------------
The facility costs tend to be high if the company sets up new facilities
---------------------- (pick – up points). But these can be controlled if the use of the old
facilities is continued. Processing costs are high because the products
---------------------- are customised as per the expectations of the customers. Handling
---------------------- costs are also high at the pick-up points assigned by the companies.

d) Information Notes
There is a need for significant coordination between the manufacturer,
----------------------
retailer and the pick-up points, and this is possible only if there is the
presence of a significant information infrastructure. ----------------------
After having discussed the cost factors, now let us study the service
----------------------
factors given below:
i) Response time ----------------------
The response time involved in customer pick-up sites is as good as that ----------------------
of package carrier delivery with manufacturer storage or distributor
storage. ----------------------
ii) Product variety and availability ----------------------

There is no difference at all between the customer pick-up sites, ----------------------
network design option and the carriage delivery with manufacturer’s
storage or distributor’s storage when we speak of product variety and ----------------------
availability.
----------------------
iii) Customer experience
----------------------
Reduced customer experience is seen in this type of design option, as
in this case the customer needs to go and pick-up the desired products, ----------------------
unlike the manufacturer storage or distributor storage with carriage
delivery and last mile delivery options, where the customer gets door ----------------------
step delivery without taking any effort himself.
----------------------
iv) Order visibility
----------------------
In this option, order visibility is extremely important as the customer
goes himself to take delivery of goods and so he should be informed ----------------------
when the order shall arrive at the pick up point so that he can
easily identify the products ordered by him. However, this requires ----------------------
tremendous integration between each of the supply chain stages. ----------------------
v) Returnability
----------------------
Returnability is easy in this case as there is the presence of pick up
points that can correctly handle the returns. ----------------------
We can conclude by saying that the network with consumer pick up sites ----------------------
is useful as it helps to lower the delivery based costs and also helps in the
expansion of sales along with serving a large population. On the other hand, the ----------------------
main problem is controlling the facilities and handling costs at the various pick
----------------------
–up locations.
----------------------
----------------------
----------------------
----------------------

Notes
---------------------- Facilities
----------------------
Cross Dock
---------------------- Retailer
---------------------- Pick up sites
----------------------
----------------------
----------------------
----------------------
Customer
Products Flow
---------------------- Information Flow
Customer Flow
----------------------
---------------------- Fig. 8.10: Manufacturer storage or distributor storage with consumer

---------------------- pick-up
6) Retail storage with customer pick-up
----------------------
Under the retail storage option, the inventory is stored at the retail outlets.
----------------------
Desirous customers may come to these retail outlets anytime and purchase
---------------------- the desired products. They may also apply online or call up any of the
company’s hot line numbers to place their orders and then pick it up from
---------------------- a retail store. For example, Tele-brands and Asian Sky Shop are typical
examples where one can place orders online and pick up products from the
----------------------
retail outlet mentioned. The simplest example that we can think of is our
---------------------- grocery store, where we just walk inside and pick up some bread or milk.
Let us now discuss the characteristics of a retail outlet with customer pick-
---------------------- up.
---------------------- a) Inventory
---------------------- A high level of inventory is to be maintained which in turn increases

the inventory costs. This would be the highest amongst all the design
---------------------- options.
---------------------- b) Transportation
---------------------- Transportation costs are very low, as compared to the other design
options, because cheaper solutions can be thought of while delivering
---------------------- products to retail outlets.
----------------------
----------------------

c) Facilities Notes
The facilities required are numerous and therefore there is a tremendous
----------------------
rise in the facility costs as compared to other design options.
d) Information ----------------------
If customers just come in and purchase products, then a very minimal ----------------------
information infrastructure is required. However if orders are placed
online, or by phone, a sophisticated information infrastructure is ----------------------
essential.
----------------------
Let us now come to the service factors, after completing the cost
factors mentioned above: ----------------------
i) Response time ----------------------
An excellent response time can be achieved usually on the same day ----------------------
in most of the cases, as the products are stored locally at the retail
----------------------
outlets.
ii) Product variety & availability ----------------------
Product variety is less as compared to other design options. As far as ----------------------

the product availability is concerned it is very costly for retail outlets ----------------------
to provide high product availability.
----------------------
iii) Customer experience
----------------------
Here the customer’s experience really depends upon the customer
himself, whether his shopping activity is viewed as a positive or ----------------------
negative experience.
----------------------
iv) Returnability
----------------------
Returnability is very much easier with this option than any other
design option due to the presence of a large number of retail outlets ----------------------
that can handle these returns.
----------------------
8.4 SELECTING A NETWORK DESIGN OPTION ----------------------
A supply chain manager needs to keep in mind the following points before ----------------------
selecting any network design option:
----------------------
 Consideration of product characteristics.
----------------------
 The requirements of the network.
It is seen that big companies that hold the monopoly in their sectors exercise ----------------------
a single supply chain network, however most of the other companies use a ----------------------
combination of different supply chain network designs.
----------------------
----------------------

Notes The following table shall tell us which type of network design is best suited for
a particular product.
----------------------
Table 8.1: Comparative Performance of options
---------------------- FACTORS 8.3.1 8.3.3 8.3.2 8.3.5 8.3.4 8.3.6
---------------------- RESPONSE TIME 4 3 4 4 2 1
PRODUCT VARIETY 1 2 1 1 3 4
----------------------
PRODUCT AVAILABILITY 1 2 1 1 3 4
---------------------- CUSTOMER EXPERIENCE 4 2 3 5 1 5
ORDER VISIBILITY 5 3 4 6 2 1
----------------------
RETURNABILITY 5 4 5 2 3 1
---------------------- INVENTORY 1 2 1 1 3 4
---------------------- TRANSPORTATION 4 2 3 1 5 1
FACILITY AND HANDLING 1 3 2 5 4 6
---------------------- INFORMATION 4 3 4 5 2 1
---------------------- (1-Highest, 6-Lowest)
---------------------- 8.3.1 - Manufacturer storage with direct shipping.
---------------------- 8.3.2 - Manufacturer storage with direct shipping & in - transit merge.
8.3.3 - Distributor storage with carrier delivery.
----------------------
8.3.4 - Distributor storage with last mile delivery.
----------------------
8.3.5 - Manufacturer storage or Distributor storage with last mile delivery.
---------------------- 8.3.6 - Retail storage with customer pick - up.
---------------------- Table 8.2: Comparative performance for different product & customer
characteristics
----------------------
Characteristics 8.3.1 8.3.3 8.3.2 8.3.5 8.3.4 8.3.6
----------------------
Highly demanded product -2 0 -1 -1 1 2
---------------------- Medium demand product -1 1 0 0 0 1
---------------------- Low demanded product 1 1 0 1 -1 -1
Very low demanded product 2 0 1 1 -2 -2
---------------------- Many product sources -1 2 -1 0 1 1
---------------------- High product value 2 1 1 -2 0 -1
Quick response -2 -1 -2 -2 1 2
----------------------
High product variety 2 1 0 2 0 -1
---------------------- Low customer effort 1 2 2 -1 2 -2
---------------------- 2: Very much suitable 1: Suitable 0: Neutral -1: Unsuitable -2: Very much unsuitable
Distributors in The Supply Chain: the Indian Perspective
----------------------
It has been a topic of hot debate whether distributors should exist in a
---------------------- supply chain or not. This is because it is said that having distributors in a supply

chain badly affects the supply chain network. However in India, the distribution Notes
of all fast moving consumer goods and other electronic components takes place
through distributors. ----------------------
Let us now learn about the role played by distributors in the distribution of Fast ----------------------
Moving Consumer Goods (FMCGs) and electronic components.
----------------------
1. Distributors add significant value to the supply chain if there are a large
number of retailers involved in the supply chain. ----------------------
2. Distributors improve the performance of the supply chain by decreasing the
----------------------
transportation costs with the help of aggregation of the inbound shipment
and the outbound shipment. ----------------------
3. Distributors also help in the reduction of inventory costs, by keeping safety ----------------------
buffers of inventory and stabilising the flow of replenishment orders to the
manufacturers. ----------------------
4. Distributors prove excellent for the customer as they provide better ----------------------
customer experience, a one–stop shop for all purchases and also reduce the
response time as compared to the manufacturers. ----------------------
----------------------
8.5 NETWORK DESIGN IN A SUPPLY CHAIN
----------------------
An effective network design should be able to answer the following questions:
1. What roles do the facilities play and what are the processes performed by ----------------------
them? ----------------------
2. Where must these facilities be located?
----------------------
3. Which markets shall these facilities serve?
----------------------
4. How much capacity shall these facilities be allocated so as to perform
consistently? ----------------------
Once a facility is clear about these decisions, then it is very easy for them ----------------------
to perform consistently and become all the more “Flexible” in their operations.
It is very important to keep in mind the time frame while deciding upon ----------------------
the location of a facility, and also the long term impact on the supply chain’s ----------------------
performance. This decision shall help the supply chain to be more responsive to
its customers and also become more cost effective. In contrast, a poorly located ----------------------
facility shall make it difficult for the supply chain to perform efficiently.
----------------------
Capacity allocation has a significant impact on the supply chain’s
performance. This is because capacity of any facility can be altered easily as ----------------------
compared to the location of the facility. However, even these decisions need to
be made correctly, as proper allocation of capacity to a facility helps to maintain ----------------------
or reduce costs and thereby optimum utilisation of the facility can be achieved. ----------------------
But, if more capacity is allocated to a facility or even less capacity is allocated,
then it becomes difficult for a company to satisfy the demand of the customers ----------------------
that are closer or further from the facility.
----------------------

Notes The allocation of the various supply sources and also the allocation of
particular markets for a particular facility has a significant impact on the supply
---------------------- chain performance. This in turn affects the production and transportation costs
and also the inventory that a supply chain must serve in order to satisfy the
---------------------- customer demand. Thus, this decision must be reviewed from time to time so
---------------------- that the allocation of capacity, markets and supply sources can be altered as and
when the demand arises.
----------------------
The whole supply chain configuration can be altered on the basis of the
---------------------- decisions made on the supply chain network design. These decisions also help
to prepare restrictions within which the inventories, transportation and most
---------------------- importantly, information can be utilised to increase or decrease the supply
chain responsiveness and the supply chain costs. These decisions can help a
----------------------
company figure out which facility performs better, is cheaper for them or is
---------------------- more responsive to its customers and how these facilities will work for the
future. Nowadays, a lot of companies are into mergers and acquisitions; the
---------------------- main reason being the markets that both companies serve, the ability to reduce
their costs and in turn due to increased supply network they are able to satisfy a
----------------------
larger customer base.
----------------------
----------------------
---------------------- 1.
Reverse logistics or supply chain activity usually deals with
_________ product.
---------------------- 1. Network of supply chain must cover the markets effectively using
only own facilities for best service.
----------------------
----------------------
Activity 1
----------------------
---------------------- 1. What kind of distribution network would you like your company to
have?
---------------------- 2. Suppose you are the supply chain manager of a fast food chain. What
factors would you keep in mind so that you satisfy your customers and
----------------------
that too, on a large-scale basis?
---------------------- 3. What factors would you keep in mind before you plan to design a
supply chain network of a car manufacturing company like Maruti?
----------------------
----------------------
----------------------
----------------------

Notes
4. If you were the supply chain manager of a company producing the
following products, what supply chain network design option would ----------------------
you choose for each:
• Cars ----------------------
• Detergent ----------------------
• T-shirts ----------------------
• Mobile phones
----------------------
5.
Imagine you are the supply chain manager of a pharmaceutical
company producing lifesaving drugs. What factors will you consider ----------------------
while developing a supply chain network design?
----------------------
Summary ----------------------
----------------------
●● Do not underestimate the life span of a facility
Facilities live a long life. It is very important that managers should not ----------------------
underestimate the facilities and must try and anticipate the future demand
----------------------
and costs with respect to the facility. Technology is one such factor
that affects the life of any facility to a great extent. Thus technology ----------------------
upgradation is required and should be taken care of. Also, it must be
noted that the decisions regarding setting up of production facilities ----------------------
and warehouses must be taken keeping in mind that it is more difficult
----------------------
to change production facilities than the storage facilities. Usually
production facilities are set up with a view that they will operate for a ----------------------
decade or more, whereas storage facilities, if not owned by the company,
can be more easily changed from time to time as per the needs of the ----------------------
company.
----------------------
●● Beware of cultural implications
----------------------
The culture of any facility is greatly affected by the network design
decisions regarding the facility locations and the facility role. The culture ----------------------
of any facility is largely affected by the facilities surrounding it. Great
advantage of this factor can be taken in order to influence the workforce ----------------------
and the role to be played by the facility. ----------------------
The location of the facility has a significant impact on the extent and
form of communication that develops in the supply chain network. If ----------------------
the facility is located far from the headquarters, then such a facility may ----------------------
develop a somewhat autonomous culture. However, this would be good
if the facilities can prove to be better than the others and be different ----------------------
from what the company expects it to be, in terms of better performance.
Closely located facilities can also perform well as there can be better ----------------------
communication and decision making between them. ----------------------
----------------------

Notes ●● Do not to ignore the quality of life issues
The availability of the workforce and the morale of this workforce
---------------------- depends highly on the quality of life at selected facility locations. A
---------------------- company may have to incur higher costs if it wants its facilities to be
located in a better location providing a higher quality of life. A company
---------------------- may lose a large customer base if it shifts its facilities from a well
developed industrial area to smaller industrial area in some suburb of
---------------------- the city, as people wouldn’t know or wouldn’t want to go outside the
---------------------- city for fulfilling their wants.
●● Pay attention to the tax incentives and tariffs in the selected location
----------------------
Supply chain managers before considering any network design decisions
---------------------- must keep in mind and carefully observe the tariffs and tax incentives. It
is very important to know which location is granted certain tax incentives
---------------------- by the government so that a check on these locations is kept and compared.
---------------------- A large number of multinational companies locate their facilities in such
incentive-based locations granted by the concerned governments as this
---------------------- affects their overall profitability in a big way.
----------------------
Keywords
----------------------
 Distribution: The system that supplies goods to the proper destination.
----------------------
 Response time: Time taken to cater to the customer order.
----------------------
 Order visibility: The ability of a customer to track the order placed, from
---------------------- the time of placing the order to the time he receives it.
 Returnability: It is the ease with which a customer may wish to return
----------------------
unwanted merchandise and the ability of the supply chain network to
---------------------- handle such returns.
----------------------
----------------------
1. Discuss different distribution network designs.
----------------------
2. Discuss the relationship between total logistics cost and facilities cost.
---------------------- 3.
Depict the role of distributors in a supply chain from an Indian
---------------------- perspective.
----------------------
----------------------
----------------------
----------------------
----------------------

Answers to Check your Progress Notes

1. False ----------------------
2. False
----------------------
----------------------
Fill in the blanks.
1. Reverse logistics or supply chain activity usually deals with unsold, ----------------------
expired or rejected product. ----------------------
----------------------
1. False
----------------------
Suggested Reading ----------------------
1. Blanchard, David. Supply Chain Management Best Practices. John Wiley ----------------------
Publication.
----------------------
2. Stadtler, Hartmut and Christoph Kilger. Supply Chain Management and
Advanced Planning: Concepts, Models and Cases. Springer Business ----------------------
Media Publication.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
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----------------------
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Postponement and CRM in SCM
UNIT
Structure:
9.1 Introduction
9
9.2 Optimal Postponement Preconditions
9.3 Postponement Implementation
9.4 Postponement Evaluation
9.5 Postponement Cost
9.6 Suitability of Postponement for Companies
9.7 Postponement in Practice
9.8 CRM in SCM
Summary
Key Words
Suggested Reading
Postponement and CRM in SCM 173

Notes
Objectives
----------------------
----------------------
• Explain the postponement concept
----------------------
• Implement postponement
---------------------- • Describe postponement evaluation
----------------------
9.1 INTRODUCTION
----------------------
The first objective of this unit is to outline the concept of postponement
---------------------- and its applicability to supply chain management. In outlining the concept
---------------------- of postponement, we will show that this concept works best under specific
demand, product, and production preconditions. We will further explore the
---------------------- impact of postponement on company strategy, capabilities, processes, resources
and infrastructure. Also, we will outline the type of cost - benefit trade offs
---------------------- involved.
---------------------- Second, this note will illustrate the postponement concept through a set of
examples. In illustrating the functioning of the postponement concept, we will
---------------------- use examples from a variety of industries. The companies in these examples
---------------------- used different approaches to make postponement work for them. These
examples include Hewlett Packard, who reconfigured its infrastructure to delay
---------------------- the point in the supply chain where products became differentiated to be able
to better match supply with regional demand; Motorola, who redesigned its
---------------------- production process by delaying the point in which the most expensive module
---------------------- of the product was made part of the customised product.
Overview of Postponement
----------------------
The concept of postponement lies in organising the production and
---------------------- distribution of products in such a way that the customisation of these products is
made as close to the point when the demand is known as possible. Postponement
----------------------
belongs to a set of levers used in inventory management to attack the variability
---------------------- of demand and supply. This set of levers can be divided into proactive and
reactive. Proactive levers directly attack the causes of variability, reactive levers
---------------------- help to cope with its consequences. Together with substitution, specialisation,
and centralisation, postponement is a reactive lever (see Exhibit 1).
----------------------
Exhibit 1
---------------------- Postponement is a reactive lever for reduction of the demand and supply
---------------------- variability. In employing tools like postponement, the ultimate goal is to
improve profitability by better matching supply with demand.
----------------------
----------------------
----------------------

9.2 OPTIMAL POSTPONEMENT PRECONDITIONS Notes
Implementation of postponement works best under certain demand, ----------------------
product and production preconditions.
----------------------
Demand Preconditions:
----------------------
 Fluctuation (e.g., seasonal hikes in demand for ski equipment)
----------------------
 Unpredictability (e.g., demand for high-tech products with a short product
life) ----------------------
 Urgency - operating on short required order lead times relative to the ----------------------
production cycle (e.g., Benetton would not be able to run its full regular
production cycle after finding out which sweater colors sell best in the ----------------------
season).
----------------------
 Differentiation - associated with distinct customer segments that require
the company to provide a product line in which the products have different ----------------------
performance characteristics (e.g., different performance, technological or ----------------------
legal requirements on the same product in different countries).
----------------------
 Negative correlation for the products in the product line (e.g., success of
one line of printers can have an adverse impact on the demand for the ----------------------
remaining lines of printers).
----------------------
Product/product line preconditions:
----------------------
 High product value - Products with high unit value have high inventory
holding cost and high cost of oversupply. The postponement concept is ----------------------
best applied if there is one particular component (or step in operations)
that has a significantly high value added. It makes intuitive sense to delay ----------------------
it. (for example, in assembling a notebook computer, it would make sense ----------------------
to delay the installment and production of different LCD displays until the
last minute rather than the casing of the keyboard since an LCD display is ----------------------
much more expensive than a keyboard casing).
----------------------
 High customisation - Product lines with highly customised end products
usually find it difficult to forecast demand on a product basis. Additionally, ----------------------
it is usually difficult to find alternative uses for them and therefore their
cost of oversupply is high. Because of this, it is important to realise which ----------------------
production step has the most significant impact on customisation of the
product (point of product differentiation). It makes sense to defer these ----------------------
operations for the products in the product line (for example, in Benetton’s ----------------------
case, it was difficult to forecast demand for each sweater colour; once the
sweater has been dyed in a certain color, it is virtually impossible to change ----------------------
it; if the colour did not sell well, the sweater could not be re-coloured).
----------------------
 High component commonality/modularity - Component commonality
refers to a high degree of shared components across the product line. ----------------------
Shared components result in inventory pooling effects and also shared
production process steps. The component commonality can be taken one ----------------------

Notes step further in the modularity concept, which uses sharing of bundles of the
components instead of single components.
----------------------
Production preconditions:
----------------------  Balanced process capabilities - Capabilities, such as cost, time, quality and
flexibility need to be kept in balance. Delaying the component production
----------------------
until shortly before the demand is known may imply producing in small
---------------------- batches. However, if the set up and changeover cost of the production
equipment is high, there is a high level of scale economies in running large
---------------------- batches that would be lost.
----------------------  Availability and quality of the outside suppliers - in order to serve more
flexible production needs, the outside suppliers need to possess similar
---------------------- capabilities in terms of flexibility of deliveries, speed of order fulfillment
and quality of service.
----------------------
 Availability of information and IT systems in place - A steady flow of
---------------------- information is needed so that the company can effectively manage the
balance between the supply and the demand.
----------------------
9.3 POSTPONEMENT IMPLEMENTATION
----------------------
---------------------- Postponement can greatly improve the flexibility capabilities of the firms
that employ it. However, the basic operations framework implies that there
---------------------- is a link between capabilities and strategy on one hand and capabilities and
resources and infrastructure on the other hand (see Exhibit 2). Therefore the
---------------------- companies who implement postponement will need to address these links.
---------------------- Exhibit 2
---------------------- Since Implementation of postponement improves the flexibility capability,

it has to tie back to company’s strategy on one hand and to be realigned with the
---------------------- processes, resources and infrastructure on the other hand.
---------------------- First, they need to examine how coherent higher flexibility is with their strategy:
 Does the strategy need to be supported by this new flexibility?
----------------------
 Is the flexibility position desirable with regard to the customers and
---------------------- competitors?
---------------------- Second, they need to realign their resources and infrastructure to support
the flexibility capabilities.
----------------------
Realignment of processes:
----------------------  Order taking - For example, companies that used to collect customer orders
---------------------- on a monthly basis will need to shorten the information collection cycle time.
 Purchasing - More flexible and frequent purchasing operations need to be
----------------------
established.
----------------------  Manufacturing - If the installation of the most expensive components or
the point of product differentiation is to be delayed as much as possible,
----------------------
change in the sequence and timing of manufacturing steps may be required.
 Warehousing - The function of the warehouse under the postponement Notes
concept may have to be greatly expanded. Instead of being only a store
and shipping location, the warehouse may need to take a more proactive ----------------------
approach and function as an order consolidation and customisation center.
----------------------
 Expedition - more frequent and flexible deliveries may be required.
----------------------
Realignment of resources:
 Human resources - All of the product, process and infrastructure changes ----------------------
outlined above will have an impact on the knowledge and skills the
----------------------
employees will need to possess. Order taking and purchasing employees
will have to learn to manage shorter deadlines, warehousing employees ----------------------
will have to adopt new skills e.g., in assembling the products and accept
greater responsibilities in matching the orders and shipping in time. This, in ----------------------
turn, will have an impact on hiring, training and compensation procedures.
----------------------
 Supplies - Requirements for suppliers’ reliability and timeliness may
be significantly stepped up, which may require supplier switching and ----------------------
consolidation. ----------------------
Realignment of infrastructure:
----------------------
 Production and warehousing premises - It may be necessary to reconfigure
the plant and warehousing network to have the premises close to the ----------------------
customers or to the distributors.
----------------------
 Production equipment - Set up and changeover times will have to be
decreased to increase flexibility on the production line. ----------------------
 Information and IT systems - A major overhaul in information systems may ----------------------
be needed, sometimes with a similar requirement on the suppliers and the
customers, to provide an adequate support. Vendor managed inventories ----------------------
(VMI) are an example of such a coordinated action.
----------------------
They may have to address the issue of the product design. Developing new
products with robust design may be necessary to achieve standardisation ----------------------
and customisation at the same time - e.g., HP developed printers that could
----------------------
be connected to both 110 and 220 volt networks. Leveraging component
commonality/modularity can be extremely beneficial, especially for the ----------------------
components with long lead times from the suppliers (see Figure 9.1).
----------------------
9.4 POSTPONEMENT EVALUATION ----------------------
Before embarking on the changes in its processes and infrastructure, ----------------------
the company implementing postponement needs to evaluate whether the costs
associated with it do not exceed the expected benefits (see Exhibit 3). ----------------------
Exhibit 3 ----------------------
Whether or not postponement is a winning proposition to implement ----------------------
depends on whether its incremental benefits outweigh the incremental costs it
requires. ----------------------

Notes Postponement benefits
 Increased sales - By being able to postpone the production to the point
----------------------
when the demand is better known, the company can greatly improve its
---------------------- forecasting abilities and will run a lower risk of losing sales, because the
product is not available. Not only can the company improve its performance
---------------------- in its existing business but also the newly gained flexibility capabilities can
translate into dramatic improvements in meeting the customer requirements,
----------------------
which can attract business that was previously not attainable.
----------------------  Lower inventory holding cost
----------------------  Lower cost of obsolescence
----------------------  Lower scrap cost
There are two sources of these benefits:
----------------------
 Improved forecasting
----------------------
 Delaying expensive operations and point of product differentiation - This
---------------------- enables the company to maintain the bulk of its inventories in the cheaper
and/or pre-customised form. As a result, company will achieve the benefits
---------------------- of a larger inventory buffer (pooling effect) without having to carry the full
---------------------- cost of it.
Postponement
---------------------- Reactive Substitution
levers Specialisation
---------------------- Centralisation
---------------------- Improve Match supply

Reduce supply
& demand
profitability and demand
---------------------- variability
Reduction of the demand variability

---------------------- Proactive Reduction of the delivery time
methods Reduction of the supply variability
----------------------
Reduction of the supply time
----------------------
Fig. 9.1
---------------------- Whether Step 1 and Storage 1 should be combined will depend on:
----------------------  Incremental investment cost for producing common components at Step 1
----------------------  Unit cost of Step 1 (exploiting economies of scale or lack of)
 Potential savings due to reduction of inventory at Storage 1
----------------------
All of these benefits can lead to higher profitability for the company,
---------------------- which may decide to pass a portion of the benefits to the customers in the
---------------------- form of lower prices or higher customer service. However, postponement does
not guarantee a win-win situation under all circumstances because of the cost
---------------------- involved.
----------------------

Notes
----------------------
1.
Need of urgent delivery of a customer may be helped by
----------------------
‘Postponement’.
1. Filling up lube oil at distribution depot in appropriate size of sales ----------------------
packs after receipt of order is an example of _________.
----------------------
----------------------
9.5 POSTPONEMENT COST
----------------------
Postponement may increase company costs both directly and indirectly.
----------------------
 Direct cost increases can be caused by product or process redesign. For
instance, HP printers for dual volt networks mentioned above had higher ----------------------
unit cost than printers that were designed for one network only.
----------------------
 Indirect cost increases can be caused by the changes in the production
and distribution processes with the consequent impact on the infrastructure ----------------------
and resources (including labour). This impact is sometimes not limited to
----------------------
the company implementing postponement, but affects the other players in
the supply chain. As we will describe in the chemical company example, ----------------------
postponing the process of dyeing the plastic by letting the selected customers
do it, resulted in lower utilisation of the company’s dyeing equipment and ----------------------
non-recovery of a portion of the fixed cost.
----------------------
As these incremental cost increases may be significant, companies
----------------------
implementing postponement may do so selectively - e.g., if a company carries
100 products in its product line, but 5 products represent 90% of the demand, it ----------------------
may decide to focus only on these 5 products.
----------------------
The postponement concept can be compared to an option and the cost
associated with it to the exercise price. Just like it makes sense to exercise only ----------------------
options that are “in the money,” postponement makes sense to implement only
if the benefits outweigh the associated costs. But again, similar to options on ----------------------
financial assets, there is a lot of uncertainty involved with regard to the costs and
----------------------
benefits - e.g., implementing postponement can accelerate the learning process
and unlock new options, previously unavailable, such as attracting business ----------------------
from the customers whose demands previously could not have been met.
----------------------
That is why we have outlined in the beginning of the note, as a rule of
thumb, certain preconditions under which postponement is more likely to be ----------------------
successfully introduced. Companies that experience a radically different picture
in their business - demand with little or no uncertainty, low value of short time to ----------------------
market, low product proliferation, low inventory values etc., - would obviously
gain very little from postponement. For instance, if a farmer signs a long term ----------------------

Notes contract to supply all (reducing demand uncertainty) of his or her grain (no
SKU proliferation) to a customer at the end of the growing season (no need for
---------------------- unusual speed) then there really is no benefit to postponement. However, the
strength of postponement lies in its wide applicability as speed becomes a more
---------------------- important capability. The fact that postponement finds its use in such different
situations as high tech manufacturers and fast food chains is the best proof of
---------------------- this.
----------------------
9.6 SUITABILITY OF POSTPONEMENT FOR COMPANIES
----------------------
To conclude, companies that are in industries where it is particularly
---------------------- difficult to match supply with demand can benefit the most from implementing
a postponement system. As mentioned earlier, there are three characteristics
---------------------- that stand out where postponement can have a large effect: demand uncertainty,
substantial product proliferation, and importance of a quick response relative to
----------------------
the cycle time of producing the product or service.
---------------------- Companies that display any of these characteristics are candidates
for performance improvement through postponement. And the more of the
----------------------
characteristics companies display, the better candidates they are. Today, where
---------------------- more and more industries move towards creating markets of one and where
success is driven not so much by cost or quality but by speed, postponement
---------------------- becomes increasingly important.
---------------------- A Quantitative Example: The PC Company
Let’s suppose that we run a PC company that manufactures and sells
----------------------
notebook PCs directly to users. In order for us to compete with the retail channel,
---------------------- we guarantee our customers that we will ship on the day we receive their order.
This requires that we maintain significant amounts of inventory on hand to meet
---------------------- that promise.
---------------------- Our company is just about to introduce a new top of the line notebook to
the market. This new model has 25 different variations based on the same chassis
---------------------- and processor combination. The variations are based on various combinations
of software and the amount of RAM in the PC. Our marketing department has
---------------------- estimated daily demand for each of the 25 variations to resemble a normal
---------------------- distribution with an average of 100/day and a standard deviation of 100. This
variability may actually be rather low for the PC business so our analysis may
---------------------- underestimate the impact of postponement. For the sake of simplicity, we’ll
assume the same demand distribution for each model, although the principle
---------------------- holds even with different distributions.
---------------------- Let’s examine what sort of savings we could achieve if we could postpone
installing the software and RAM until after the order has been received while
---------------------- maintaining that 95% of the PCs be shipped that day. Without postponement,
we can’t take advantage of any pooling of the common basic computer since
---------------------- the software and RAM is pre-installed. This means we must deal with each
individual model’s variability. With postponement, however, we only need to
---------------------- deal with aggregate variability of demand.
----------------------

Without Postponement Notes
µ = 100/day σ = 100 Service Level = 95%
----------------------
Total Inventory needed at beginning of the day = 25 * (µ + 1.65 σ)
= 25 * (100 + 1.65 * 100) ----------------------
= 6625 units
----------------------
With Postponement
----------------------
µ = 100/day σ = 100 Service Level = 95%
Total Inventory needed at beginning of the day = 25 * µ + 1.65 sqrt(25) σ ----------------------
= 25 * 100 + 1.65 * 5 * 100
----------------------
= 3325 units
----------------------
Note: The standard deviation of the aggregate demand [sqrt(25)] σ) comes from
summing the variances of the 25 distributions and then taking the square root. ----------------------
Here we can see the impact of postponement. In this case, our inventory
----------------------
level is cut virtually in half. If we estimate that each of these PCs costs $ 3000
for our company, then the reduction in inventory due to postponement is $ 9.9 ----------------------
million.
----------------------
Additionally, this simple analysis ignores many of the other positive side
effects of lowering inventory such as lower obsolescence costs and smaller ----------------------
space requirements. Its purpose is to show in a very basic way how powerful
postponement can be. ----------------------
9.7 POSTPONEMENT IN PRACTICE ----------------------
Hewlett Packard ----------------------
Overview: Hewlett Packard is known as a leader in the application of ----------------------

postponement techniques. One of the areas where they have done this most
effectively is in customising their printers close to the local markets where ----------------------
they are actually being sold. The idea they use is to postpone commitment of a ----------------------
printer to a certain geographic market by producing universal printers and then
applying power supplies and labels (the parts that differentiate printers for local ----------------------
markets) at the last stage once demand is more certain. This allows them to gain
pooling effects and therefore, to better match supply and demand. ----------------------
Traditionally, most computer peripheral manufacturers have built one ----------------------
plant for a major market, such as the Americas, Asia, or Europe and then shipped
product from this plant to regional distribution centers (DCs) around that ----------------------
market. In many instances, only one worldwide plant existed with shipments
made from this plant to DCs around the world. These DCs provided quick ----------------------
response to customer orders for products and were needed in a major market
to reach customers within a certain time window. This supply chain seemed to ----------------------
make sense since there were some economies of scale to having a centralised ----------------------
plant supplying an entire major market.
----------------------
----------------------

Notes Problem: However, there are certain problems with the traditional system
that necessitated looking at the policy again. The first problem is the amount of
---------------------- finished goods inventory that must be carried in the local DCs. Since shipments
come from a distant plant, not only did these DCs need to stock a large amount
---------------------- of inventory to compensate for the lead time, they also had to stock additional
inventory to handle all of the product proliferation that took place. For example,
---------------------- in Europe, many different versions of a single printer model must be made
---------------------- due to the different power sources and sets of languages. Compounding this
problem is the increasing emphasis placed on speed. The lead time from when
---------------------- a customer orders a product to when they received it is being squeezed and
HP had to find ways to reduce cycle time while trying to keep inventory costs
---------------------- low. This squeeze on lead times means that postponing back at the plant level
is not an option. Local DCs are needed to meet this short lead time demand. So
---------------------- how can the apparently contradictory goals of increasing service and reducing
---------------------- inventory be met?
Management Decision and Outcome: The solution, following the
---------------------- postponement philosophy, was to actually build some assembly functions
into their DCs. This way, the plant could send generic printers to the DCs and
----------------------
they could be customised there for the local markets. This allowed HP to take
---------------------- advantage of inventory pooling at the DC level which dramatically cut inventory.
Certainly, it seemed that this would increase costs since there are economies
---------------------- of scale to these manufacturing processes. However, the decrease in inventory
more than made up for the increased cost in creating some assembly functions at
---------------------- the DC level. Essentially, what HP did was to postpone the customisation of the
printer until the printer was actually in the geographic area where the demand
---------------------- was coming from and until orders were more certain. Implementing this type of
---------------------- supply chain is not easy because it takes coordination and investment, but the
payoffs can be quite large.
---------------------- Motorola
---------------------- Overview: Motorola’s Land Mobile Products Sector/Radio Products
Americas Group (RPAG) has recently adopted a postponement manufacturing
---------------------- and distribution strategy for its two-way radio (pager) business. The shift
towards postponement allows RPAG to carry more variety without increasing
---------------------- inventory. But the shift in strategy also requires additional investment in its
---------------------- warehouse system.
Problem: RPAG builds radios for many national, regional, and local
---------------------- retailers. These retailers often demand many different varieties in packaging,
housing, and frequency because the ultimate end users demand variety. In the
----------------------
past, products would be manufactured to stock from different plants and then
---------------------- sent to the Atlanta DC.
Management Decision and Outcome: The recent shift in strategy is
---------------------- making to order. The most expensive part of the radio, the circuit board, is still
---------------------- manufactured at various plants and sent to the Atlanta DC. At the DC level
pre-manufactured circuit boards are now put in different housing, labels and
---------------------- packaging only after an order is received. With the new strategy, the DC can
carry more variations of finished good products without tying up additional
---------------------- money in inventory. Furthermore, customer service also improves because the

DC no longer needs to rely on the factory to ship special ordered products. The Notes
DC is able to customise packaging for short runs of special products.
However, the new strategy also requires the DC to take on additional ----------------------
responsibilities. RPAG has evolved from a push to a pull operation. ----------------------
Consequently, the DC must now be able to track and move inventory more
efficiently to meet customer demands. Thus, RPAG had to install a warehouse ----------------------
management system (WMS) to control the flow of inventories. Furthermore,
RPAG also adopted vendor-managed inventory (VMI) for retail customers to ----------------------
better manage its inventory.
----------------------
9.8 CRM IN SCM ----------------------
CRM, or Customer Relationship Management, is a company-wide ----------------------
business strategy designed to reduce costs and increase profitability by
solidifying customer loyalty. True CRM brings together information from all ----------------------
data sources within an organisation (and where appropriate, from outside the
----------------------
organisation) to give one, holistic view of each customer in real time. This
allows customer facing employees in such areas as sales, customer support, ----------------------
and marketing to make quick yet informed decisions on everything from cross-
selling and upselling opportunities to target marketing strategies to competitive ----------------------
positioning tactics.
----------------------
Once thought of as a type of software, CRM has evolved into a customer-
centric philosophy that must permeate an entire organisation. There are three ----------------------
key elements to a successful CRM initiative: people, process, and technology.
The people throughout a company-from the CEO to each and every customer ----------------------
service representative need to buy in to and support CRM. A company’s business ----------------------
processes must be reengineered to bolster its CRM initiative, often from the
view of, ‘How can this process better serve the customer?’ Firms must select the ----------------------
right technology to drive these improved processes, provide the best data to the
employees, and be easy enough to operate so that users won’t balk at it. If one ----------------------
of these three foundations is not sound, the entire CRM structure will crumble.
----------------------
It’s a strategy used to learn more about customers’ needs and behaviours
in order to develop stronger relationships with them. After all, good customer ----------------------
relationships are at the heart of business success. There are many technological
components to CRM, but thinking about CRM in primarily technological terms ----------------------
is a mistake. The more useful way to think about CRM is as a process that ----------------------
will help bring together lots of pieces of information about customers, sales,
marketing effectiveness, responsiveness and market trends. ----------------------
If customer relationships are the heart of business success, then CRM ----------------------
is the valve that pumps a company’s life blood. As such, CRM is best suited
to help businesses use people, processes, and technology to gain insight ----------------------
into the behaviour and value of customers. This insight allows for improved
customer service, increased call center efficiency, added cross-sell and upsell ----------------------
opportunities, improved close rates, streamlined sales and marketing processes,
----------------------
improved customer profiling and targeting, reduced costs, and increased share
of customer and overall profitability. ----------------------

Notes This sounds like a panacea, but CRM is not without its challenges. For
CRM to be truly effective, an organisation must convince its staff that change
---------------------- is good and that CRM will benefit them. Then it must analyse its business
processes to decide which need to be reengineered and how best to go about
---------------------- it. Next is to decide what kind of customer information is relevant and how
it will be used. Finally, a team of carefully selected executives must choose
----------------------
the right technology to automate what it is that needs to be automated. This
---------------------- process, depending upon the size of the company and the breadth of data, can
take anywhere from a few weeks to a year or more. And although some firms are
---------------------- using Web-based CRM technologies for only hundreds of dollars per month per
user, large companies may spends millions to purchase, install, and customise
---------------------- the technology required to support its CRM initiative.
---------------------- The Challenge: Minimise reductions and product returns by improving
accuracy associated with product pricing.
----------------------
For consumer goods companies, like Dial Corp., maker of Dial, Purex,
---------------------- and Renuzit brands, the order is where CRM and supply chain management
(SCM) meet. Managing orders can often be complicated, especially when
---------------------- dealing with a wide range of customers--from corner stores to Wal-Mart--each
---------------------- with a complex mix of pricing and promotion issues. Dial opted to integrate
Siebel CRM and IMI Americas supply chain software to handle the order
---------------------- management melees. Dial uses IMI Consumer Goods software as its customer
fulfillment engine, managing a high-volume business of almost $2 billion in
---------------------- customer orders annually. IMI Americas software provides Dial with a full
range of collaborative order management capabilities such as order capture,
----------------------
pricing, promotions, and fulfillment. Dial integrated IMI Americas’ software
---------------------- with Siebel trade promotion software to enable Dial to more accurately manage
promotions.
----------------------

---------------------- 1. Hewlett Packard has used postponement strategy for their printers for
world markets. The component assembled last is
----------------------
i. Roller
----------------------
ii. Power supply
---------------------- iii. Heaters
---------------------- iv. Ink tank

1. Tracking buying behavior of a customer through point of sale data is
---------------------- an example of ______.
----------------------
----------------------

Notes
Activity 1
----------------------
1. Imagine you are a Bicycle retailer. What would be the conditions for ----------------------
postponement? How would you design your postponement activity?
----------------------
2. Imagine you are a Television retailer. How would you design your
postponement activity? ----------------------
3. List the cost associated with postponement of packing of electrical
----------------------
switches for an electrical goods manufacturing company.
----------------------
Summary ----------------------
 The concept of postponement lies in organising the production and ----------------------

distribution of products in such a way that the customisation of these
products is made as close to the point when the demand is known as ----------------------
possible. Postponement belongs to a set of levers used in inventory ----------------------
management to attack the variability of demand and supply.
 Postponement refers to the delay in product differentiation till the ----------------------
product is being sold. Aggregate forecasting is required prior to product
----------------------
differentiation. However close to the time of sale, individual product
forecasts are required. During this there is least demand uncertainty and ----------------------
the demand is very easy to forecast. This allows the supply chain manager
to better match the supply with the demand. ----------------------
 The easiest example of postponement that we have is when a person is ----------------------
buying products on the internet. A person uses the internet to purchase
products on different websites due to the large variety and customisation ----------------------
of products available. Moreover, delivery of the products when orders
are placed on the internet is supposed to be quicker, as companies try ----------------------
to provide high levels of customer service. Therefore, postponement has
----------------------
a great impact on the profits and inventories of the firm because of the
time lag that exists between the time the customer places the order and ----------------------
when the delivery is expected. If a company is able to postpone product
differentiation until after receiving the order from the customers, a ----------------------
significant increase in the profits and reduction in inventories is possible.
Supply and demand can be easily matched due to postponement. However ----------------------
all this comes at a cost. This cost is the production cost that tends to be
----------------------
higher when production takes place during postponement. For example,
when Samsung postpones some of its assembly steps for the European ----------------------
and Chinese markets, the manufacturing costs increase because the
packing, unpacking and other steps that have to be duplicated. Given ----------------------
these additional costs, a company must quantify the benefits and ensure
that they are larger than the additional production costs incurred due to ----------------------
postponement. Postponement is said to be beneficial to firms which have ----------------------
a large variety of products whose demand is independent and comparable
with size, i.e. the demand is not positively correlated and is not of the ----------------------
same size.
Notes  But postponement is not very effective if a large portion of the demand
comes from a single product. This is because the increased manufacturing
---------------------- expense due to postponement outweighs the small benefit that aggregation
provides in this case. A large number of companies due to the uncertainty
---------------------- in demand faced in the market, opt for tailored postponement of the goods
produced by them. By using this, companies produce the amount of
----------------------
goods which are likely to sell using lower cost of production without any
---------------------- postponement and produce the portion of demand that is uncertain. Thus,
for a portion of the demand that is certain, the firm earns little value in
---------------------- terms of the increased forecasting accuracy. It uses the lower cost method
to lower the manufacturing cost. Moreover, on the portion of the demand
---------------------- that is uncertain, using postponement significantly improves the forecast
---------------------- accuracy. Due to this, the firm is ready to incur higher production costs
to achieve the benefits from the improved matching of the supply and
---------------------- demand.
----------------------
Keywords
----------------------
 Postponement: Postponement of an activity to the next level in supply
---------------------- chain
----------------------  CRM: Customer Relationship Management
----------------------
----------------------
1. What do you mean by postponement? Explain.
---------------------- 2. What are postponement costs?
---------------------- 3. Discuss Indian examples of postponement.
----------------------
----------------------
----------------------
---------------------- 1. True
---------------------- 1. Filling up lube oil at distribution depot in appropriate size of sales packs
after receipt of order is an example of postponement.
----------------------
----------------------
----------------------
----------------------
----------------------

Check your Progress 2 Notes
----------------------
1. Hewlett Packard has used postponement strategy for their printers for
world markets. The component assembled last is ----------------------
ii. Power supply ----------------------
1. Tracking buying behavior of a customer through point of sale data is an
example of CRM. ----------------------
----------------------
Suggested Reading
----------------------
1. Chorafas, Dimitris N. Integrating ERP, CRM, Supply Chain Management
----------------------
and Smart Materials. CRC Press.
2. Makkar. Customer Relationship Management. Tata McGraw-Hill ----------------------
Publication. ----------------------
----------------------
----------------------
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----------------------
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----------------------
----------------------

Notes
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Outsourcing and Financial Aspects of SCM
UNIT
Structure:
10.1 Introduction
10
10.2 Third Party Logistics
10.3 Benefits of Outsourcing
10.4 Risks in Outsourcing
10.5 Current Issues in Outsourcing
Summary
Key Words
Suggested Reading
Outsourcing and Financial Aspects of SCM 189

Notes
Objectives
----------------------
----------------------
• Describe the role played by third party logistics in outsourcing
----------------------
• List the benefits of outsourcing
---------------------- • Analyse the process of outsourcing
---------------------- • Discuss the risks in outsourcing
---------------------- • Discuss the financial aspects of SCM
---------------------- 10.1 INTRODUCTION

---------------------- Outsourcing is the latest buzzword and most talked about phenomenon
---------------------- that has taken the world by storm. Outsourcing can be viewed at two levels
- outsourcing of products and outsourcing of processes. This two-part article
---------------------- explores both these phenomena in detail. Outsourcing has been in existence for
decades; what has changed however is the dimension outsourcing has assumed.
---------------------- Outsourcing is no longer a tactical option that can help a firm save a few
---------------------- hundred dollars. Rather it has emerged as a strategic necessity in an era when
opportunities offered by “low-cost” countries, such as China, India or Mexico,
---------------------- are abound.
---------------------- By allowing the companies to focus on their core competencies,

outsourcing allows faster turnaround of resources thereby improving overall
---------------------- health of the economy. For countries to which the non-core activities have been
outsourced to, the benefits are immense as this not only generates employment
---------------------- opportunities but also brings in foreign currency thereby helping its economy.
---------------------- It is because of these reasons that the outsourcing Juggernaut will continue to
move forward, despite occasional mishaps and backlash, and transform national
---------------------- economies in both the developed and developing worlds in the process.
----------------------
10.2 THIRD PARTY LOGISTICS
----------------------
We shall cover basic concepts of 3PLs, and the benefits and risks of
---------------------- outsourcing logistics functions to these companies. Then, current issues facing
3PLs are discussed.
----------------------
The following is a list of the most frequently used 3PLs services:
----------------------
 Warehouse Management
----------------------  Shipment Consolidation
----------------------  Logistics Information Systems
 Fleet Management/Operations
----------------------
 Rate Negotiation
----------------------

 Carrier Selection Notes
 Order Fulfillment
----------------------
 Import/Export
----------------------
 Product Returns
 Order Processing ----------------------
 Product Assembly/Installation ----------------------

 Customer Spare Parts Inventory Replenishment ----------------------
In 1996 a company purchased about $25 billion worth of logistics
----------------------
services on behalf of their clients. There is potential for an even larger fraction
of the business to become available for outsourcing. Initially, candidates for ----------------------
outsourcing were companies that either needed to reduce their assets or play
catch-up with a competitor. Today a client may be a large company that sees ----------------------
an advantage in stripping away non-core functions. One should not make
----------------------
the mistake of viewing transportation or warehousing as functions. Smarter
companies are much more likely to outsource parts of these functions (the parts ----------------------
they are not good at or cannot manage profitably) rather than the whole.
----------------------
Another change today is that with larger companies, with worldwide
supply sources and markets, outsourcing some of the logistics functions, they ----------------------
are much more likely to demand a single vendor to support their massive
operations on a global basis. Since transportation is often the largest function ----------------------
outsourced, the demand for one stop shopping has encouraged some of the
----------------------
larger transportation companies to set up their own logistics companies.
Services Offered by Third-Party Providers ----------------------
Third party services can be described on three different levels: ----------------------
1. Basic Service Providers: In this case the third party provides traditional ----------------------
physical distribution services such as warehousing, order processing,
order picking, and transportation. ----------------------
2. Value Added Service Providers: In this case the third party provides ----------------------
the basic services listed above along with value added services such
as specialised pick/pack operations, cross docking, case marking and ----------------------
labelling, order consolidation, EDI, management reporting, and ASNs.
----------------------
3. Logistics Integrators: In this case the third party provider assumes
full responsibility for managing key supply chain operations on a daily ----------------------
basis. All work however is under the client’s supervision. The third party
----------------------
provides basic and value added services along with ensuring the seamless
flow of products and logistics information among themselves, their ----------------------
clients, and the customers.
----------------------
----------------------
----------------------

Notes 10.3 BENEFITS OF OUTSOURCING
---------------------- A key question that a company has to ask before considering the
outsourcing option is: What is there it in for us? Here we list some potential
---------------------- reasons that may argue in favour of outsourcing.
----------------------  Improve company focus: More organisations are eliminating internal
functions that are not considered core competencies.
----------------------
 Access to world-class capabilities and new technology: Often these
---------------------- third party logistics companies’ capabilities are the results of extensive
investments in technology, methodologies and people, over a considerable
----------------------
period of time. Sometimes, these capabilities include specialised industry
---------------------- expertise gained through working with many clients facing similar
challenges. Therefore, this expertise is translated into skills, processes, or
---------------------- technologies uniquely capable of meeting these needs.
----------------------  Accelerate reengineering benefits: Outsourcing to a 3PL already
reengineered to worldclass standards allows the company to realise those
----------------------
anticipated benefits immediately.
----------------------  Share (pool) risks: There are tremendous risks associated with the capital
---------------------- investments an organisation makes. A 3PL can share these risks across the
many companies that it serves. This allows a 3PL to lower risk relative to
---------------------- a company performing the function itself.
----------------------  Free-up resources: Outsourcing offers a way to conserve capital and
allows a company to redirect its resources from non-core activities toward
---------------------- activities which have the greater return in serving the customer.
----------------------  Cash infusion: Sometimes, outsourcing involves the transfer of assets
---------------------- from the company to the 3PL. These assets have a value, and in fact are
sometimes sold to the 3PL.
----------------------  Reduce and control operating costs: Outsourcing to a 3PL most likely
---------------------- will give access to a lower cost structure, which may be the result of a
greater economy of scale or some other advantage based on specialisation.
---------------------- When calculating the cost benefits it is very important to consider total
costs since coordination costs often increase when all or part of a function
---------------------- is outsourced.
----------------------  Resources not available internally: Companies might simply not have
access to the required resources within the company.
----------------------
 Eliminate labour problems: While companies are rarely willing to
---------------------- concede this fact, many view outsourcing as a way to eliminate labour
problems. This is a two-edged sword and one has to be extremely careful
----------------------
here. Perceived benefits do not always materialise.
----------------------
----------------------

10.4 RISKS IN OUTSOURCING Notes
Outsourcing is not without risks. In fact the benefits are often more ----------------------
transparent, with the risks often being hidden initially. Below we list some key
risks that must be accounted for before an outsourcing decision is made. ----------------------
 Coordination costs: When any logistics function is outsourced, ----------------------
coordination costs typically increase. It is important for the company to
account for these and decide how they are to be managed with the 3PL. ----------------------
 Loss of internal logistics management capability: The knowledge and ----------------------

expertise generated on the day-to-day operation will reside in the 3PL
company’s management team. This becomes crucial as a company grows ----------------------
and makes reorganising decisions. A close relationship with the 3PL can ----------------------
help in this regard.
----------------------
 Reduced contact with final customer: Outsourcing the distribution
function might force the company to lose direct contact with the end ----------------------
customer (at least physically). This has a critical impact on customer
service. It is hard for a company to define customer service for a 3PL if it ----------------------
does not itself have direct customer contact. This can also have an impact
----------------------
on the introduction of new products and services.
 Biased choices of service providers: If a 3PL is owned by a large trucking ----------------------
company and it is managing the distribution function, there might be some
----------------------
pressure by the parent company of the 3PL to give a portion of the business,
even when it’s not competitive. ----------------------
 Loss of voice in public policy issues: For example, if the distribution and
----------------------
warehouse functions are outsourced, and there is a threat of some legislation
that will affect the warehousing and trucking industries, the company will ----------------------
not be able to represent those interests, since they are performed by the 3PL.
----------------------
 Leakage of sensitive data and information: 3PL companies normally
have access to a lot of information that might be valuable to competitors, ----------------------
leaving the company vulnerable.
----------------------
----------------------
1. Following is not a benefit of outsourcing. ----------------------
i. Improved in-house skills pool ----------------------
ii. Shared risk ----------------------
iii. Improved focus
----------------------
iv. Free up resources
----------------------
1. Third party logistics can cover all outbound supply chain activities. ----------------------

Notes 10.5 CURRENT ISSUES IN OUTSOURCING
---------------------- Outsourcing decision: Who’s involved?
---------------------- Apparently, when it comes to outsourcing, the decision to hire a 3PL

still appears to originate at the top of the organisation chart. The Logistics
---------------------- Management online magazine issue of December 1996 published the results of a
comprehensive survey conducted by Prof. Lieb of Northeastern University and
---------------------- Hugh L. Randall of Mercer Management Consulting. They canvassed 500 of
---------------------- the largest US manufacturing companies and CEO’s of 25 top 3PL’s. This latest
study was a follow up to earlier surveys conducted in 1995, 1994, and 1991. In
---------------------- this year’s survey, 59% said the strategic decision to retain 3PL services came
from the corporate level.
----------------------
This study also found that logistics managers were being joined by
---------------------- managers from other functional areas (mainly manufacturing) when deciding
whether or not to outsource. The growing involvement of manufacturing in
---------------------- this process reflects the supply chain management focus of today’s companies.
---------------------- Some 57% said the main benefit of using a 3PL was lower distribution costs.
Others said that their companies outsource to take advantage of the providers’
---------------------- managerial expertise.
---------------------- The Growth of 3PLs Companies
The third party logistics companies have had growth rates in previous
----------------------
years of over 100%, but as the industry is reaching the $25 billion a year level
---------------------- (in the US alone), that kind of growth is no longer easy to maintain. In fact, a
recent article in the Logistics Management online magazine forecast a growth
---------------------- rate of about 40%, tailing off to 15% two or three years from now. Part of the
reason is simple calculation. In the early days when the third party logistics
----------------------
industry totalled $5 billion, a $5 billion increase represented a 100% increase,
---------------------- but with a $25 billion a year industry, a $5 billion increase represents only 20%
growth. Estimates are that this industry will triple in size over the next five
---------------------- years to more than $200 billion globally.
---------------------- However, that is only one explanation of why this industry is not growing
as fast as it once did. A recent survey by Prof. Lieb of Northeastern University
---------------------- and Hugh L. Randall of Mercer Management Consulting, noted signs of
dissatisfaction among shippers that use third party logistics. One quarter of
----------------------
the respondents reported that they had cancelled a third party contract at some
---------------------- point, most frequently for nonperformance. It seems that many companies start
a relationship with a client, offering them all kinds of logistics outsourcing, but
---------------------- in fact their expertise is in certain areas, and when faced with real challenges
in the other areas, service becomes an issue. For example, 78% of shippers
----------------------
reported that using a 3PL had a positive impact on logistics costs, however only
---------------------- 49% reported a positive effect on customer satisfaction, and only 57% said it
had encouraged service innovation. On top of that, some 33% of shippers said
---------------------- that use of 3PL’s had a negative impact on employee morale.
----------------------

Where is the growth going to come from? Notes
Although the industry is not growing as fast, there are certain companies
----------------------
that forecast growth rates in the range of 50%, including Menlo Logistics, from
Redwood City, California. A large portion of this growth, is actually not from ----------------------
new clients, but existing relationships with clients that want to extend the scope
of services. This trend towards an integrated logistics function is what will most ----------------------
likely generate future business. As an executive from Logix describes it: “The
----------------------
value added is when you’re moving across the supply chain. 3PL’s are stitching
together more than one function. There are significant dollars out there if you ----------------------
do this”. However, this sometimes requires going global. For one thing, 3PL’s
are forming alliances that allow them to offer a broader range of services. Over ----------------------
80% of the 3PL’s surveyed said that they had established alliances to provide
----------------------
services such as international distribution, trucking, freight forwarding, and
customs brokerage. ----------------------
Along with functional integration, third parties are seeing demand for
----------------------
their services in the area of information systems expertise. What has happened
with many companies is that their internal information systems departments ----------------------
are too busy installing/developing the necessary information technology for
their logistics operations. Therefore, this is a potential growth area for 3PLs, ----------------------
especially for those that have adopted a supply chain strategy to manage material
----------------------
flow.
Product assembly, handling product returns, relabelling, supplying spare ----------------------
parts, and product packaging (typically called end of supply chain tasks) are
----------------------
some of the most promising growth areas for contract distribution. The key
for 3PLs to continue growing is to continuously carve out market niches. ----------------------
Some concentrate on specific industries, like automotive, retail/wholesale, and
hightech/computers. Others are specialising in functions, since there is no room ----------------------
for an endless list of full service 3PLs.
----------------------
Supply Chain Management
----------------------
Some of the 3PLs are in the business of trading information for inventory.
True integration with all of the players in the supply chain — one that is ----------------------
transparent and merges into a true Supply Chain Management (SCM) system
— a new class of software technology. SCM will let warehouse operations, ----------------------
suppliers and manufactures better integrate their operations. For example, a ----------------------
single purchase decision in a retail store can generate a virtually instantaneous
series of domino-like responses all the way through the supply chain. Your goal ----------------------
is to be able to replace inventory — manufacturers’, suppliers’ and customers’,
wherever it may be — with information. To do this, all related parties “touching” ----------------------
this inventory and its related information need to have integrated time-phased ----------------------
inventory management software in place. Systems that can translate and
integrate higher level transactional needs (i.e., sales transactions) into lower ----------------------
level activities and demands (i.e., production processes and material movement
orders) i.e. Electronic Commerce. ----------------------
----------------------

Notes SCM is, in effect, just one great big distributed application spanning across
several firms, each with their own computer working in concert in the supply
---------------------- chain. It includes manufacturing and production systems; marketing and sales
systems; order entry and product configuration systems; traditional logistics
---------------------- – including warehouse management systems; customer service; invoicing
---------------------- for customers, accounts payable and receivable; vendor relations; electronic
commerce systems and communications; and integration, backup, security and
---------------------- overall management of all of the data created by all of these systems.
---------------------- From the shipper’s point of view, the person making the decision to
outsource logistics to a 3PL is actually betting on his or her job. If it’s a bad
---------------------- decision, they lose their job. Therefore, some companies have tried to hire
middle and top-level managers from those industries that they serve. One such
----------------------
company is Fritz Cos., that 10 years ago decided to go with this strategy. This
---------------------- affords Fritz’s customers a measure of confidence that their client’s needs and
requirements are understood. If 3PL’s are going to support the retail, hightech,
---------------------- and chemical industries, then it is integral that they have experienced managers
from those sectors, said Lynn C. Fritz, chairman and CEO of the San Francisco
----------------------
global logistics giant.
---------------------- Challenges for 3PLs
---------------------- Third party providers have significant opportunities, but they must
overcome some problems. A key is the perception that third parties have “over
---------------------- promised but under delivered.” This is a perception that must be reversed. 3PLs
must also focus on developing and perfecting those systems capabilities which
----------------------
differentiate the top companies from the rest.
---------------------- If 3PLs expect to meet their clients’ logistics needs effectively, they must be
---------------------- able to offer, among other services:
 Real time inventory information
----------------------
 Scanning capabilities
----------------------
 Data accuracy
----------------------  Reliable service
----------------------  Customised management reports
 Competitive prices
----------------------
3PLs must also be sensitive to their clients’ concerns about losing
---------------------- control over critical services to customers. If successful in establishing the new
---------------------- relationship, 3PLs must handle the move to external operations with careful
regard for the new client’s internal staff and corporate practices.
----------------------
Third parties must make a transition from their focus on product and
---------------------- transaction oriented services to new strategies based on long term business
partnerships, business process management, and integrated information flows.
---------------------- The third-party providers who can meet these needs will most likely enjoy long-
term success.
----------------------

Some specific areas for outsourcing Notes
Two major areas for outsourcing are private fleets and warehousing.
----------------------
We briefly discuss the options available in each case and some factors to be
considered in the decision. ----------------------
Private Fleet Management
----------------------
Private fleets are under great pressure these days to justify their existence.
However a company needs to be very careful when evaluating whether to ----------------------
outsource some or all of its private fleet operations. A key question is how to
----------------------
evaluate the best mix of asset use and ownership of the trucking operation. The
options available to a company are as follows: ----------------------
1. Contract maintenance: In this case a company simply contracts with an ----------------------
outside maintenance shop to handle its fleet maintenance.
----------------------
2. Full-service leasing: In this case a company leases the equipment,
maintenance, and reporting services. ----------------------
3. Dedicated contract carriage: Here the outside vendor provides drivers, ----------------------
equipment and management supervision of the fleet operation. This
segment grew at a double digit rate during the 1980s but has slowed to ----------------------
between 6-9% annual growth rate. ----------------------
4. Logistics and strategic partnerships: In this case a company outsources
----------------------
its fleet operations as part of outsourcing most of its logistics functions.
This combined sector is growing at 10-13% annually. ----------------------
There are a few basic rules of thumb that a company can use in deciding ----------------------
how and where to use a private fleet. In a delivery situation it is advantageous
to use a private fleet when the vehicles stay close to the point of origination ----------------------
(e.g. routes average less than 200 miles round trip). Outsourcing to a dedicated
provider works well when there are backhauls that can be secured to offset ----------------------
costs. Each company has to develop a mileage chart that depicts the mode to ----------------------
use based on certain parameters, including miles. In practice besides distance,
one also has to account for the utilisation achieved if a private fleet is used. ----------------------
Warehousing ----------------------
Outsourcing of warehousing has become a more widely available option
----------------------
in recent years for both manufacturers and retailers. While estimates of revenue
vary widely, it is conservatively projected that third party companies providing ----------------------
“contract” warehousing represent a growing $4 billion industry. One important
factor in estimating changing warehousing space requirements is the trend ----------------------
toward higher inventory turns in most goods distribution channels.
----------------------
In warehousing, the options available to a company are:
----------------------
1. Own warehouses operated by self
2. Own warehouses operated by third party ----------------------
3. Contract warehousing ----------------------
4. Public warehousing
Notes Once again a key decision faced by a company concerns the fraction of
total warehousing space to be allocated to each option. The only difference
---------------------- between contract and public warehousing is the duration of the agreement.
Contract warehousing typically involves long term contracts while public
---------------------- warehousing involves about 30 day contracts. Here it might pay if a company
---------------------- considers the fluctuation in warehousing requirements when deciding the
allocation of space between the options. Public warehousing is most useful to
---------------------- cover seasonal peak demand periods. However one has to be careful here since
peak periods coincide for most industries and public warehousing is scarce
---------------------- when most needed. When going to a third party one has to consider the location
---------------------- as well as their ability to keep track of inventory accurately and their ability to
ship on time and with accuracy. Once again it is crucial to consider coordination
---------------------- costs when all or part of the warehousing is with a third party.
---------------------- Financial sweet spot
Ones you have defined your supply chain, the next step is to determine
----------------------
your organisation’s internal competencies and those of other supply chain
---------------------- members organisations in an effort to identify which organisation is the best
positioned to perform specific activity. This process is often referred to as the
---------------------- “Insourcing/Outsourcing analysis’. The Insourcing/Outsourcing is the most
challenging facet in SCM. Supply chain wide Insourcing/Outsourcing analysis
----------------------
is required if supply chain member organisations are to fully leverage their
---------------------- competencies to best meet the needs of the end customer.
This discussion if often lost in debate over exciting capabilities and future
----------------------
strategic advantages. Managers often fail to recognise the distinction between
---------------------- a “Capability” and a “Competence”. The Insourcing/Outsourcing decision is a
search for your organisation’s sweet spot in the supply chain. Sweet spot is that
---------------------- spot where the organisation can make the greatest contribution to overall supply
chain success.
----------------------
Where is the ‘Sweet Spot’? It depends on a range of factors and must
---------------------- be determined by organisations through a systematic assessment process.
---------------------- The Sweet Spot can change the dependability on the changing position of an
organisation relative to that of the supply chain member organisations in terms
---------------------- of cost, technology, productive capacities and other factors as given below:
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Table 10.1 Notes
Sweet Spot Definition Evaluation criteria
----------------------
Financial Performance 
Anticipation of greatest profit·
ROI ----------------------
Critical Nature of component  Re-substitute components available
----------------------
that are superior to SBU’s quality
performance ----------------------
 Will substitute negatively impact
performance of network? ----------------------
 Are there multiple supply sources?
----------------------
 Is there a supply shortage or anticipated
shortage? ----------------------
Core competence & Competitive  Technology Leadership
advantage  Alignment to corporate mission and ----------------------
vision
----------------------
 Competitive advantage analysis tool
based on resources and capabilities ----------------------
Unfortunately Sweet spot decisions are often made based on financial
----------------------
returns only, without regard to the strategic importance or organisations’ areas
of core competencies. Supply Chain Manager must take a comprehensive and ----------------------
long term perspective when faced with Insourcing/Outsourcing decisions.
----------------------
To create a value system, companies should have a basic understanding of
performance metrics for supply chain member organisation, based on technology, ----------------------
potential for growth, and profitability. This means that the performance of key
supplier in terms of quality, lead time, on time delivery and technology should ----------------------
be described in financial terms that directly relate bottom line impact. A detailed ----------------------
market risk analysis should be performed with potential customers to access
the extent of patent loss exposure, price exposure, raw material and capital ----------------------
investment risks, demand risks, and other relevant factors that can quickly turn
a promising market opportunity in to major financial loss. Finally, collaborative ----------------------
sharing of forecasting and demand information can help to plan long term ----------------------
capacity planning, inventory planning and human resource planning. These are
some of the financial realities of supply chain, and they address how companies ----------------------
can discover the financial ‘Sweet Spot’ within their supply chain. This way,
they can produce the highest return given their intellectual and physical assets. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------

1. Real time inventory information is vital for ensuring availability of
----------------------
products with minimum inventory.
---------------------- 2. Better supply chain can affect financial performance of any business
through inventory carrying costs, reducing overall cost of product
----------------------
and improved sales driven by satisfied customers.
----------------------
---------------------- Activity 1
----------------------
1. Imagine you are a garments retailer. What would be your strategy for
---------------------- third party logistics?
---------------------- 2. Being the procurement manager for an automobile company, how you
would you design a policy for outsourcing? What factors will you
---------------------- consider for this?
---------------------- 3. Imagine you are a domestic third party logistics solution provider.
How would you analyse the market for your company?
----------------------
4.
What would be the Sweet Spot for a local electronic goods
---------------------- manufacturing company in the domestic market?
----------------------
Summary
----------------------

In this unit, we discussed the third party providers, the basic services listed
---------------------- above, along with value added services. Third party provider assumes
---------------------- full responsibility for managing key supply chain operations on a daily
basis. All work however is under the client’s supervision. The third party
---------------------- provides basic and value added services along with ensuring the seamless
flow of products and logistics information among themselves, their
---------------------- clients, and the customers.
---------------------- ●● The benefits of outsourcing are:
----------------------  Access to worldclass capabilities and new technology
 Accelerated reengineering benefits
----------------------
 Shared (pool) risks

----------------------
 Free-up resources
----------------------
 Cash infusion
----------------------
----------------------

 Reduction and control operating costs Notes
 Resources not available internally

----------------------
 Elimination of labour problems
----------------------
 Below we list some key risks that must be accounted for before an
outsourcing decision is made: ----------------------
 Coordination costs ----------------------
 Loss of internal logistics management capability ----------------------
 Reduced contact with final customer ----------------------

 Biased choices of service providers ----------------------
 Loss of voice in public policy issues ----------------------
 Leakage of sensitive data and information ----------------------
----------------------
Keywords
----------------------
 3PLs: Third Party Logistics: Logistics solution provider companies.
 Logistics Integrators: Third party provider who is full responsible for ----------------------
managing key supply chain operations on a daily basis. ----------------------
 Sweet spot: Sweet spot is that spot where the organisation can make the
----------------------
greatest contribution to overall supply chain success.
 Shared (pool) risks: The risks associated with the capital investments an ----------------------
organisation makes.
----------------------
1. What are the various services offered by Third Party Logistics providers? ----------------------
2. Explain the linkage between SCM and Third Party Logistics. ----------------------
3. What are the benefits of outsourcing? ----------------------
4. Discuss the risk involved in outsourcing.
----------------------

1. Following is not a benefit of outsourcing. ----------------------
i. Improved in-house skills pool
----------------------
----------------------
1. True

----------------------
1. True
----------------------
2. True
----------------------
---------------------- 1. Kulkarni, Sarika. Supply Chain Management: Creating Linkages for

Faster Business Turnaround. Tata McGraw-Hill Publication.
----------------------
2. Monczka, Robert. Purchasing and Supply Chain Management. Cengage
---------------------- Learning.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Role of IT in Supply Chain Management
UNIT
Structure:
11.1 Introduction
11
11.2 Role played by IT in SCM
11.3 Benefits of IT in a Supply Chain
11.4 IT Enabled Supply Chain
11.5 Radio Frequency Identification in SCM
Summary
Key Words
Suggested Reading
Role of IT in Supply Chain Management 203

Notes
Objectives
----------------------
----------------------
• Justify the importance of information technology in supply chain
----------------------
• Describe the use of various data acquisition equipment
---------------------- • Analyse the importance of information technology in the future
----------------------
11.1 INTRODUCTION
----------------------
The major technology behind improved information flow was the advent
---------------------- of electronic data interchange (EDI). It offers greatly improved information
flows and is an extremely important aspect within leading organisations
----------------------
in the fight to decrease lead-times (Evans et al., 1993). However, while the
---------------------- introduction of EDI in many companies has offered marked improvement in the
speed of transmission of orders (once sanctioned), the current information flow
---------------------- in the vast majority of supply chains is still far from ideal. Unfortunately, in all
too many instances the old problems of distortion and magnification of order
----------------------
information remain, not least because the many decision processes which still
---------------------- remain block rapid data transference to where it is really needed. In particular,
there is still much untapped mileage in seeking to improve the order fulfilment
---------------------- processes from utilising undistorted point of sales information.
---------------------- Information flow does not have the same lead time constraints that a
production process has, and via IT it is possible to eliminate the information
---------------------- transmission lead-time from one end of the chain to the other. The main
constraint to enriching a supply chain with market sales data is the common
----------------------
attitude that information is power. As a consequence of the traditional culture,
---------------------- companies will deliberately distort order information to mask their intent not
only to competitors but even to their own suppliers and customers, unbelievable
---------------------- though this may seem (Towill, 1996). In contrast, Ackere et al. (1993) argued
that managers can and should redesign their business processes to gain
----------------------
competitive advantage and must include improved information flow within
---------------------- their new strategy. They offer some preliminary simulation results based on the
MIT beer game, which show the tremendous potential which may be realised
---------------------- by redesigning the handling and usage of market sales information throughout
the supply chain.
----------------------
Market sales data is the information catalyst for the whole supply chain,
---------------------- holding undiluted data describing the consumer demand pattern. Therefore, the
best way to ensure everyone in the supply chain gets the most up to date and
----------------------
useful information is to feed each level of the supply chain directly with the
---------------------- market sales data. Managers should, therefore, be challenging and questioning
mechanisms within the pipeline and structures which delay order information
---------------------- through the supply chain.
----------------------

Figure 11.1 presents the distinction between the “traditional” supply Notes
chain and the herein advocated “enriched” supply chain in its approaches to
information usage. In the traditional supply chain the retailer is the only player ----------------------
who has direct sight of consumer demand; all other members only have the
orders from their immediate customer, (i.e. the warehouse only has sight of the ----------------------
distributor’s orders). Therefore, in the traditional mode, the market information ----------------------
is distorted initially by the retailer and further distorted with each successive
link in the chain. However, in the information enriched supply chain, each ----------------------
player, no matter how far upstream, receives the marketplace data directly. The
enrichment mechanism is an electronic point of sales link (EPOS). So rather ----------------------
than each player traditionally making an order decision based purely on the ----------------------
internal chain order data, he can now make an informed judgement based on
actual market demand as well. ----------------------
Traditional information pipeline ----------------------
Each supply chain player receives order information from the consumer only
Traditional factory ----------------------
order response
----------------------
Consumer Retailer Distributor Warehouse Brewery ----------------------
Sales
----------------------
Information flow pipeline ----------------------
Enriched factory
order response
----------------------
----------------------
Key Enriched information pipeline
Order decision
function All supply chain partners utilise marker sales information ----------------------
Fig. 11.1: Supply chain information and material flows ----------------------
As an early indication to the benefits of enriching the pipeline, Figure 11.1 ----------------------
presents the factory order rate response to a step up in market demand for both
the traditional and enriched models. The simulation models used are described ----------------------
later. The factory in the traditional supply chain cannot even begin to compete ----------------------
with the information enriched factory both in terms of response overshoot and
recovery time. ----------------------
The Value of Information ----------------------
The importance of measuring the value of information to utilise it to its
----------------------
best strategic advantage has been strongly advocated by Glazer (1993). Glazer
states that although through the implementation of IT many companies are ----------------------
swimming with information, very few have gained a competitive advantage via
their improved data flow. Implementation of IT is not enough if it only transfers ----------------------
the previous data pool faster; management of the information itself is the key
----------------------
variable. In short, it is not so much the technology of the IT but the information
that is transferred that leads to success. Successful information enriched supply ----------------------

Notes chains must view their information as a strategic asset and ensure that it flows
with minimum delay and minimum distortion.
----------------------
End consumer demand is converted into order information and passed
---------------------- down through the supply chain to trigger product release to the customer. In
the traditional supply chain each “player” receives an order from its immediate
---------------------- customer, from which a decision on the required internal order rate to satisfy
its stock targets (which may be zero) is made. The decision process normally
----------------------
involves a certain amount of “hunch” judgement to forecast what is happening
---------------------- within the marketplace so as to try to ensure the company stays in control of the
situation. Transferring information through a supply chain in a traditional “blind”
---------------------- manner (i.e. only via echelon-to-echelon) gives rise to the “law of industrial
dynamics” as originally stated by Burbidge (1989): “If demand for products
----------------------
is transmitted along a series of inventories using stock control ordering, then
---------------------- the demand variation will increase with each transfer”. The traditional supply
chain factory response to only a step change in market demand in Figure 11.1
---------------------- clearly illustrates the magnification effect of the Law of Industrial Dynamics
experienced by supply chains (Houlihan, 1987).
----------------------
In practice both the bias and noise distorting the demand information
---------------------- through its transference between each echelon (level) leads to vast stock holding
in the chain in a desperate bid to eliminate customer service problems. Not only
----------------------
does stock holding across the chain cost money to maintain, but carried to excess
---------------------- it also results in write-off due to obsolescence. This amplification phenomenon
has been widely researched and simulated to enable opportunities for good
---------------------- supply chain design. The general consensus is that in the real world if there is a
situation in which the demand might amplify, then it will (Towill, 1992). So, the
----------------------
farther away from the consumer an echelon is within the supply chain, the less
---------------------- he is aware of the true consumer demand. Hence, as Forrester (1960) pointed
out, the more likely it is that such an upstream “player” will completely misread
---------------------- the market with disastrous effects on profitability. Thus, taking the example of
a traditional supply chain shown in Figure 11.1 the factory will respond to an
----------------------
amplified increase in consumer demand many weeks after the buying pattern
---------------------- first showed itself in the marketplace. By this time the required product may
actually be obsolete.
----------------------
---------------------- 11.2 ROLE PLAYED BY IT IN SCM
---------------------- Information availability is very important for the performance of a supply

chain because all decisions made by supply chain managers are based on the
---------------------- information they receive. Information technology is used to gain access to
this information. It provides the tools to gain awareness, analyse the received
----------------------
information, and then act upon it to improve the overall performance of the
---------------------- supply chain.
----------------------
----------------------

Amongst all the supply chain drivers that we have discussed so far, Notes
information is the only intangible driver. Information keeps all the other drivers
of the supply chain glued together and helps in creating an integrated supply ----------------------
chain. Information is crucial to the performance of the supply chain because
it provides a foundation for the supply chain managers to make decisions ----------------------
about supply chain processes and execute numerous transactions. Information ----------------------
makes the chain visible. It is important to know what the customer desires, how
much inventory is in stock, when and how the products have been shipped, ----------------------
etc. This enables the manager to make efficient decisions and increases the
performance of the supply chain. It is very important to note that in a supply ----------------------
chain if information does not exist, then none of the other drivers can be utilised ----------------------
to deliver a high level of performance.
----------------------
Thus information gathering at every stage of the supply chain is a must.
Collecting and analysing information is the role of information technology. It ----------------------
acts as a system to support decision making. Information technology consists
of hardware and software that is used throughout the supply chain to collect, ----------------------
analyse and act on the information. The use of information technology enables
----------------------
gathering and analysing of information and providing the same to support
effective decision making. For example, in an auto component manufacturing ----------------------
company, the use of information technology allows a manager to know which
components are there in stock and helps him decide if more production is ----------------------
required, as per the demand forecast. He also needs to know the downstream
----------------------
demand, the upstream supplier lead times and the variability associated, in order
to set production schedules and manage appropriate and optimal inventory ----------------------
levels to maximise overall profitability. Information, is thus very important
for the proper functioning of the supply chain. It must possess the following ----------------------
characteristics to be useful for making supply chain decisions:
----------------------
 Accuracy
----------------------
 Easy access
 Correctness
----------------------
1. Accuracy ----------------------
Good decisions can be made only if true information is available. This ----------------------
does not mean that the information required must be 100% correct, but it
must be directionally correct. ----------------------
2. Easy access ----------------------
Up-to-date information of all tasks must be readily available at all times
----------------------
for effective decision making.
3. Correctness ----------------------
Managers require information that is relevant to their decision making. All ----------------------
other information amounts to piling up of data which is of no use. Thus,
companies must lay stress on gathering valuable information and not waste ----------------------
time and money on collecting irrelevant data. ----------------------

Notes All the above characteristics must be present in the information that is gathered
leading to effective decision making and supply chain visibility. Various
---------------------- decisions regarding the inventory, transportation and facilities are made based
on the available relevant information. Information technology systems do
---------------------- just that. The use of various software and hardware enables managers to get
---------------------- the latest information at the right time. With the help of the information the
following decisions can be made:
----------------------
1. Inventory related decisions
---------------------- a. Demand patterns
---------------------- b. Cost of holding inventory
---------------------- c. Stock-outs
---------------------- d. Ordering costs
---------------------- 2. Transportation related decisions
---------------------- a. Decisions on transportation networks
---------------------- b. Routing
---------------------- c. Decisions on the mode of transport
---------------------- d. Tracking shipment
---------------------- 3. Facility related decisions
---------------------- a. Determining appropriate locations

b. Determining capacity allocation
----------------------
c. Scheduling
----------------------
d. Decisions on whether the facility should be efficient or flexible
----------------------
e. Taxes
----------------------
Thus, every phase requires some or the other information. Fig 11.2 shows the
---------------------- functions of information at each of the supply chain phases. Thus, information
technology not only gathers the data required to perform these functions to
---------------------- create supply chain visibility, but it also analyses the data so that supply chain
---------------------- managers can take decisions effectively and maximise supply chain profits.
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
Strategic Planning
Strategic ----------------------
Alliances
Development
and opportunity ----------------------
Focused
customers service ----------------------
analysis
----------------------
 Network Design
Decision Analysis
 Inventory Levels ----------------------
 Vertical Intergration
 Vehicle routing and scheduling ----------------------
 Measurement Management Control

----------------------
 Financial Cost and Asset Management
 Customer Service ----------------------
 Productivity
 Quality
----------------------
Transaction ----------------------
 Order Entry  Shipping Systems
 Inventory Assignment  Pricing and Invoicing ----------------------
 Order Selection  Customer Inquiry
----------------------
Fig. 11.2: Information functions ----------------------
11.3 BENEFITS OF IT IN A SUPPLY CHAIN ----------------------
----------------------
The seven most important benefits that information technology provides for
effective supply chain management are discussed below: ----------------------
1. Increased accuracy ----------------------
2. Greater economy
----------------------
3. Quick Transmission of Information
----------------------
4. Visibility
5. Immediate accessibility ----------------------
6. Customer focus ----------------------

7. Higher level of productivity ----------------------
1. Increased accuracy
----------------------
Due to the elimination of manual data feeding, information technology
----------------------
minimises errors and provides accurate information which helps in better
decision making. ----------------------
----------------------
----------------------

Notes 2. Greater economy
Due to information technology streamlining, automated data entry and
----------------------
exchange procedures have been established. These help in delivering
---------------------- accurate information at very low costs as compared to manual approaches.
3. Quick Transmission of Information
----------------------
Due to the use of bar code scanners, electronic data interchange systems,
---------------------- satellite tracking programs and radio frequency identification equipment,
quicker transmission of information has become possible.
----------------------
4. Visibility
----------------------
The use of information technology provides a system-wide view of all
---------------------- operations. The use of powerful software programs helps in providing a
clear inventory picture across all the warehouses and other facilities.
----------------------
5. Immediate accessibility
----------------------
With the use of information technology, supply chain managers get instant
---------------------- access to the information they require to manage their supplies, track
shipment and audit their procedures.
----------------------
6. Customer focus
---------------------- Quick communication of accurate and timely information has always
---------------------- remained the key to maximise customer satisfaction. It is only due to
the use of information technology that companies are able to serve their
---------------------- customers in this critical activity.
---------------------- 7. Higher level of productivity

With the use of information technology, there has been a total eradication
---------------------- of manual approaches to data gathering and assessing. This has resulted in
---------------------- the employees concentrating more on innovation and customer orientation,
thereby increasing the overall productivity and performance of the supply
---------------------- chain.
----------------------
----------------------
Fill in the blanks.
----------------------
1. Easy access to information would support quicker and correct
---------------------- _________ of supply chain, which in turn would improve efficiency
---------------------- as well as service to customers.
----------------------
1. The most wide spread applications of IT in supply chain are system
---------------------- of manufacturing planning (MRP) and distribution planning (DRP).
---------------------- 2. The shipment tracking service provided by logistics companies on
their portals is not an example of Visibility facilitated by IT.
----------------------

11.4 IT ENABLED SUPPLY CHAIN Notes
The main reasons for IT applications in the field of SCM are, the wide ----------------------
spread of manufacturing and service activities and the time element in planning,
both of which require data intensive decision making. ----------------------
To make such decision making possible, there has to be efficient, reliable, ----------------------
and timely data capture, data availability at various locations and the ease with
which it can be manipulated for the purpose of decision making. ----------------------
Another advantage of IT is that report and statistics can be generated, ----------------------

which allows the monitoring of the supply chain performance.
----------------------
Segmentation of IT
----------------------
IT segments can be identified along three dimensions such as: Scope of
Application, Functionality, and Stage of Technological Development. ----------------------
Scope of application
----------------------
 Transaction Processing System (TPS)
----------------------
 Management Information System (MIS)
 Decision Support System (DSS) ----------------------
 Knowledge Based System (KBS) ----------------------

Functionality ----------------------
 Data capture, display and organisation
----------------------
 Communication of data
----------------------
 Processing data
----------------------
Stage of Technological Development
 Stand alone applications such as despatch advice, stock control, order ----------------------
processing
----------------------
 Firm level/inter-firm integrated systems such as MRP-I, MRP-II, ERP
----------------------
 Integrated System such as EDI & Interactive Web sites along with ERP
EDI is defined as: ----------------------
The transfer of structured data, by agreed message standards, from one computer ----------------------
system to another, by electronic means.’
----------------------
Source- International Data Exchange Association (IDEA)
----------------------
EDI standards
… EDI provides a standard for data interchange that is: ----------------------
 Ready formulated ----------------------
 Comprehensive
----------------------
 Independent of hardware and software
----------------------
 Independent of special interest

Notes  EDI standards provide a common language for the interchange of standard
transactions.
----------------------
Three stages:
----------------------  Early applications/common formats
----------------------  Sector and national EDI standards
 The international EDI standard
----------------------
 These were developed by organisations that had to process data from a
---------------------- large number of customer organisations.
----------------------  Standards were set by data recipients and the customers conformed to it.
---------------------- Examples:
 BACS
----------------------
System of electronic payments (from user organisations)
----------------------
 LACES
---------------------- Freight Clearance System (at LHR)
----------------------  World Meteorological Office (WMO) System
---------------------- System for exchange of weather information and weather reports.
 Application independent interchange standards, formulated by industry
----------------------
sector and/or national standards bodies.
---------------------- Examples:
----------------------  ODETTE:
---------------------- An EDI format developed for, and widely used in, the European motor
industry.
----------------------
 TRADACOMS:
---------------------- A UK EDI standard for general trade developed by the ANA (Article
---------------------- Numbering Association).
 ANSI X12:
----------------------
Developed as an American national standard by ANSI with the aim of
---------------------- replacing the various sector standards.
----------------------  To meet the requirements of international and cross sector trade …
---------------------- … EDIFACT was developed, under the auspices of the United Nations
(UN), as a universal standard for commercial EDI.
----------------------  EDIFACT is Electronic Data Interchange for Administration, Commerce
---------------------- and Transport which was started in Europe in mid 1980s.
 It was accepted by US (ANSI) to supersede X12 and promoted as the world
----------------------
EDI standard
----------------------

EDIFACT interchange structure: Notes
 Each document (order, invoice, etc.) is a Message.
----------------------
 Several messages are sent as an Interchange.
----------------------
 Messages are made up of Data Segments, e.g. Order Date or Buyer’s
Name and Address. ----------------------
 Data segment consists of a Tag and Data Items. ----------------------
 The tag identifies the data segment.
----------------------
 Data items are codes, values and qualifiers.
----------------------
EDI communications can be:
 A magnetic tape or diskette posted or despatched by courier. ----------------------
 A direct data communications link. ----------------------
 A value added data service (VADS) also known as a value added network ----------------------
(VAN).
 The Internet. ----------------------
The VADS has tended to be the preferred option (and the Internet, in this ----------------------
context, is another VADS).
----------------------
EDI IMPLEMENTATION
----------------------
EDI software
----------------------
Pens and Packaging ----------------------
Things Solutions
----------------------
----------------------
Production Order ----------------------
Control Processing
System System ----------------------
----------------------
VADS ----------------------
EDI Software EDI Software
----------------------
----------------------
Fig. 11.3: EDI Implementation
----------------------
----------------------
----------------------
----------------------

Notes EDI software - basic functions:
 Coding transactions into the EDI Standard
----------------------
 Interfacing with the VADS
----------------------
EDI software - additional functions:
----------------------  Trading partner database
----------------------  Support of multiple EDI Standards
----------------------  Facilities for formatting application data to and from the EDI Standard
 Fax or e-mail transmission to non EDI users
----------------------
 Interfacing with a variety of EDI VADS
----------------------
 Encrypting the EDI Message
----------------------  Automatic acknowledgment
----------------------  Message tracking and an audit trail
----------------------  Direct input and printed output of EDI transactions
For full integration of the business application and the EDI Software there
----------------------
needs to be an interface to transfer data from the business application to the
---------------------- EDI software and visa versa.
For example, to send an order
----------------------
 The supplier record has an EDI indicator.
----------------------
 Order for EDI suppliers are not printed.
----------------------  EDI orders are formatted onto a flat file.
----------------------  The flat file is input to the EDI software, formatted into the required EDI
standard and posted into the VADS.
----------------------
The reverse process is used for incoming EDI messages - arguably they need
---------------------- to be validated.
---------------------- EDI operation:
---------------------- A big difference between electronic transactions and their paper equivalents is
that with electronic transactions there is no paperwork to fall back on should
---------------------- anything go wrong - all incoming transactions need to be secured.
---------------------- Frequency of operation needs to meet the requirements of the business cycle - it
can be daily, hourly or as required.
----------------------
EDI alternatives:
---------------------- Large organisations need their own EDI set-up - small companies might:
----------------------  Make use of a free-standing, PC EDI facility.
 Make use of an EDI clearing house using:
----------------------
 Post or Fax
----------------------
 Internet access
EDI Agreements Notes
To achieve a successful, electronically controlled supply chain, businesses need
----------------------
to agree on:
 The nature of the business that is to be done electronically. ----------------------
 The technical details of how it is to be undertaken. ----------------------
 The procedures for resolving any disputes that arise. ----------------------
The appropriate way to document these details is an EDI Interchange Agreement.
----------------------
Legal Framework
----------------------
Most business law relates to paper based trading and how that law should apply
to the less tangible form of an electronic message is not always clear. ----------------------
‘For EDI to be a successful alternative to paper trading, it is essential that
----------------------
messages are accorded a comparable legal value as their paper equivalent, when
the functions effected in an electronic environment are similar to those effected ----------------------
in a paper environment, and where all appropriate measures have been taken to
secure and store the data.’ ----------------------
Legal (and related) aspects: ----------------------
 The point in its transmission and processing at which a message will be ----------------------
deemed to be legally binding.
 The timescale for processing EDI messages. ----------------------
 The time that message will be retained. ----------------------

 The procedure for settling any disputes. ----------------------
 The legal jurisdiction for settling disputes.
----------------------
Technical aspects:
----------------------
 The coding systems for identifying entities.
----------------------
 The EDI standard that is to be employed.
----------------------
 The network that is to be used.
----------------------
Model agreements are available from various organisations.
EDI privacy and security ----------------------
 Reliable procedures (data processing standards). ----------------------
 Controls in the EDI Standards. ----------------------
 Controls in the Transmission Protocol. ----------------------
 Protection against Tampering (e.g. digital signature). ----------------------

 Privacy of Message (e.g. encryption). ----------------------
 Non-repudiation (e.g. message acknowledgment or ‘trusted third party’). ----------------------

Notes EDI Privacy and Security
---------------------- Application Digital Signatures Application

System Encryption System
----------------------
---------------------- EDI
EDI Checks EDI
---------------------- Soft- Soft-
Comms Protocol Comms
----------------------
ware Checks ware
---------------------- EDI
Acknowledgement (phy.)
----------------------
EDI
---------------------- Acknowledgement (logical)
----------------------
Fig.11.4: EDI Privacy and Security
----------------------
----------------------
Trading Partner EDI Trading Partner
---------------------- Interchange Agreement
----------------------
---------------------- Application Application

---------------------- System System
----------------------
----------------------
EDI Software EDI Software
---------------------- VADS
EDI Standards EDI Standards
----------------------
----------------------
Fig. 11.5: Nuts, Bolts and Toolkit for EDI
----------------------
EDI - further developments
----------------------
e-Procurement systems are being developed using XML formatted messages in
---------------------- place of traditional EDI.
Benefits of EDI
----------------------
Shortened ordering time
----------------------
If a posted order takes say 7 days between two large organisations an EDI order,
---------------------- following the sequence:
---------------------- Customer - EDI transmission - Supplier
takes one day, one hour, as quick as you like.
 Cutting costs Notes
 Stationery
----------------------
 Postage
----------------------
 Staff:
 order entry ----------------------

 invoice matching ----------------------
 payment checking ----------------------
The principle saving is staff costs - staff savings can be very significant.
----------------------
Elimination of errors
----------------------
 No keying errors
 (but no manual check for silly mistakes) ----------------------
Fast response ----------------------

 Immediate acknowledgment and status report ----------------------
 (available, but not always implemented)
----------------------
Accurate invoicing
----------------------
 Automatic matching to orders
 Elimination of queries and delays ----------------------
EDI payments ----------------------

 Rapid settlement ----------------------
 Automatic matching to invoices
----------------------
Reduced stockholding
----------------------
 Just-in-time for manufacture
 Quick response supply for retail ----------------------
 Less (or no) cost of stock in hand ----------------------

 Less (or no) warehousing costs ----------------------
 Elimination of double handling of goods
----------------------
 Less damage/deterioration of stock
----------------------
Cash flow
 Quicker settlement = improved cash flow ----------------------
Business opportunities ----------------------

 Access to Customers that require EDI ----------------------
Customer lock-in
----------------------
 Switching costs - setting-up an EDI system with a new supplier
----------------------

Notes 11.5 RADIO FREQUENCY IDENTIFICATION (RFID) IN SCM
---------------------- This tried and tested technology has now been transformed for automatic
data capture and identification. The Radio Frequency Identification (RFID) tag
---------------------- is a transponder incorporating a coiled antenna and a silicon chip containing
information such as a serial number. It transmits via wireless, encoded
----------------------
information when placed in the transmission field of a reader.
---------------------- There are two types of tags used in radio frequency identification:
----------------------  Passive and active
----------------------  Read only and read-write
A radio frequency identification reader is a small radio transmitter
----------------------
that sends out a continuous electromagnetic pulse. When a radio frequency
---------------------- identification tag moves into the range of a reader, an inductive coupling is
formed, stimulating the chip and returning the serial number to the reader. See
---------------------- Fig. 11.7.
----------------------
----------------------
----------------------
---------------------- Fig. 11.6: Working of Radio frequency identification

----------------------
----------------------
1. A passive RFID tag will have less range of sensing than the active
---------------------- one.

1. EDI stands for Electronic _______ Interchange.
----------------------
----------------------
Activity 1
----------------------
---------------------- Imagine you are the supply chain manager of a warehousing company. What
sort of information would you require at each?
----------------------
----------------------
----------------------
----------------------
----------------------

Summary Notes
●● IT allows the flow of all supply chain transactions involving the transfer ----------------------
of information, products and funds through the internet. Information
----------------------
Technology performs the following functions:
i) Provides information on the products to all the participants of the ----------------------
supply chain
----------------------
ii) Allows placing orders with suppliers
----------------------
iii) Allows customers to place orders
----------------------
iv) Filling and delivering the orders to customers
----------------------
v) Receiving payments from customers
----------------------
 Transactions are now performed more efficiently and quickly, thereby
providing high levels of responsiveness. ----------------------
 Filing up forms for exams, making payments for the exam fees by ----------------------
transferring funds from your bank account to the institute’s account have
now become very quick, and the hassle of making DD’s and pay orders is ----------------------
all over.
----------------------
Keywords ----------------------
 Competitive advantage: strategic advantage for a company ----------------------

 EDI: Electronic data exchange. ----------------------
 MIS: Management Information system.
----------------------
 RFID: Radio Frequency Identification.
----------------------
1. What is the role of Information Technology in Supply Chain ----------------------

Management?
----------------------
2. Discuss different benefits of using IT in Supply Chain.
----------------------
3. Write short notes.
a. IT Enabled Supply Chain ----------------------
b. RFID in SCM ----------------------

c. EDI in SCM ----------------------
----------------------
----------------------
----------------------

Notes Answers to Check your Progress
---------------------- 1. Easy access to information would support quicker and correct decisions
of supply chain, which in turn would improve efficiency as well as service
---------------------- to customers.
1. True
----------------------
2. False
----------------------
---------------------- 1. True
1. EDI stands for Electronic Data Interchange.
----------------------

---------------------- 1. Ivanov, Dimitry and Boris Sokolov. Adaptive Supply Chain Management.
---------------------- Springer Publication.
2. Wood, Dan. SAP SCM: Applications and Modeling for Supply Chain
----------------------
Management. John Wiley Publication,
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

E-Business and the Supply Chain
UNIT
Structure:
12.1 Introduction to E-SCM
12
12.2 Role of E-Business in a Supply Chain
12.3 The E-Business Framework
12.4 B2B E-Business and B2C E-Business
12.5 Practising E-Business
Summary
Key Words
Suggested Reading
E-Business and the Supply Chain 221

Notes
Objectives
----------------------
----------------------
• Outline the nature of e-business
----------------------
• Define the role played by e-business in supply chain
---------------------- • Describe the integration of e-business with supply chain
---------------------- • Analyse whether a company is a good candidate for e-business
----------------------
12.1 INTRODUCTION TO E-SCM
----------------------
Can you move your business into the fast lane with an e-Supply chain
---------------------- Management strategy enabled with the Internet? Absolutely. Putting your
demand and supply planning and execution information into a collaborative
---------------------- mode via the Internet means employees can communicate with customers,
---------------------- suppliers and other business functions much faster and also execute ordering,
promising and processing and other manufacturing activities more quickly and
---------------------- at lower cost.
---------------------- However, there are some important caveats (warnings). As R. Michael

Donovan, a management consultant based in Framingham, Mass., and a leading
---------------------- authority on manufacturing supply chain management solutions points out, a
manufacturer’s business strategy and processes usually need to be redesigned
---------------------- first before a new e-Supply Chain approach can perform properly. “If poor
---------------------- customer promising, order processing, inventory planning and scheduling and
other processes are allowed to remain in place, all an Internet-based e-Supply
---------------------- Chain system achieves is to accelerate the rate at which “bad numbers” flow
from one business to another,” says Donovan. “The Internet is a very useful
---------------------- enabler for getting information to people, but it’s not the solution - it’s just a
---------------------- tool for speeding up communication. Inaccurate information that gets passed
via the Internet from one company to the next, using the latest in technology,
---------------------- is still inaccurate, bad information which forces people to guess at what’s right
and make decisions “on-the-fly”. Not very productive,” Donovan emphasises.
----------------------
For an e-Supply Chain Management approach to do its job, key process
---------------------- performance objectives need to guide overall strategy and the design of the
system:
----------------------
 Getting order-to-delivery cycle times reduced
----------------------
 Boosting on-time performance to at least 99%
----------------------  Getting inventories slimmed down to the bare minimum
----------------------  Ensuring world-class product and service quality
 Lowering operating costs - but without reducing quality and on-time
----------------------
performance
----------------------

Getting the right strategy and supply chain processes in place so that Notes
an Internet enabled system will, in fact, do the job it is designed for, requires
having a well-defined plan for servicing and retaining customers, and for ----------------------
improving returns on investment. “Just throwing new software technology into
a manufacturing facility almost never fixes a flawed order-to-delivery process, ----------------------
and the same applies to Internet-based supply chain solutions,” Donovan ----------------------
emphasises. Because order-to-delivery is usually one of the more complex
business processes, it’s important for management to answer a number of key ----------------------
questions before trying to supercharge the process using Internet technology:
----------------------
 How can we best implement reduced cycle time techniques to first improve
business performance? ----------------------
 How much product will our customers be needing, and how much inventory ----------------------
and capacity will we need to meet that demand?
----------------------
In addition, management needs the capability that can also provide quick,
precise answers to the following questions: ----------------------
 What is the best schedule we can execute? ----------------------
 When will each order ship?
----------------------
 What will be our lead times for each product?
----------------------
Once internal planning and scheduling processes have been redesigned to
maximise business performance, then it makes sense to consider conversion to ----------------------
an Internet-based e-Supply Chain strategy. In moving from older, conventional
systems to modern approaches employees will find themselves empowered to ----------------------
make relevant, quick and good decisions by having the information they need
----------------------
to know when they need to know it at their fingertips. They can interactively
plan and schedule in real time, from the beginning of the cycle, at the time the ----------------------
customer places an order, through to the end of the process, including inventory
replenishment, production scheduling, shipping and invoicing. ----------------------
Putting the right processes in place first before converting to e-Supply ----------------------
Chain Management has another advantage. Sound processes lead to immediate
reductions in inventory with cash freed up to pay for the conversion from the ----------------------
older systems to an Internet-based planning and scheduling system. “Dealing
----------------------
with the people issues, and getting strategy and policies straightened out
first before throwing Internet technology at the problem,” Donovan says, “is ----------------------
essential to a successful result.” This organisational conversion necessitates
achieving understanding and subsequently acceptance which means personnel ----------------------
can work with a process that is properly aligned with the company’s business
----------------------
improvement strategy. Then, it can easily be readjusted when and if senior
management decides it’s time to ramp-up and seek further business performance ----------------------
improvements.
----------------------
----------------------
----------------------

Notes 12.2 ROLE OF E-BUSINESS IN A SUPPLY CHAIN
---------------------- e-Business is a term used to describe businesses run on the internet, or
---------------------- which utilise internet technologies to improve the productivity or profitability
of a business. In more general sense, the term may be used to describe any
---------------------- form of electronic business which utilises a computer. This usage is somewhat
archaic, however, and in most contexts e-business refers exclusively to internet
---------------------- businesses. In 1997, IBM was one of the first to use this term when it launched
---------------------- a campaign built around the term. Today, many corporations are rethinking their
businesses in terms of the internet and its capabilities. Companies are using the
---------------------- web to buy parts and supplies from other companies, to collaborate on sales
promotions, and to do joint research. Many companies, both large and small
---------------------- have already discovered how to use the Internet successfully, exploiting its
---------------------- convenience, availability and global reach.
e-Business is the easiest way to reach out to the people involved in the
---------------------- supply chain. All you have to do is to have a website or register with a known
---------------------- search engine to hold its website in order for the site to be known. A person or
a business having a website can put all information regarding their products,
---------------------- services, contact number on the site. As soon as this is done, the website is
available for the customers and other participants of the supply chain to be
---------------------- viewed. The customers or suppliers can then view all the types of products
---------------------- and services available and accordingly make an offer. The terms of delivery
and the payment can also be done through e-business. Payment also with the
---------------------- help of credit card can be done online. All type of companies nowadays use
e-business in order to promote their products and establish a relationship with
---------------------- their suppliers or customers. Thus e-business in a way helps the world to come
---------------------- closer.
Through e-business, customers anywhere in the world can just sit at home
---------------------- and order products. So it helps in saving time and is also a very easy and efficient
---------------------- tool to conduct business. E-business also provides the advantage of variety as
a person can now view different types of commodities available with different
---------------------- companies and can compare the prices and hence, buy the products which best
suit their needs, and pocket!
----------------------
Is e-commerce the same as e-business?
----------------------
While some use e-commerce and e-business interchangeably, they are
---------------------- distinct concepts.
In e-commerce, information and communications technology (ICT) is
----------------------
used in inter-business or inter-organisational transactions (transactions between
---------------------- and among firms/organisations) and in business-to-consumer transactions
(transactions between firms/organisations and individuals).
----------------------
In e-business, on the other hand, information and communication
---------------------- technology (ICT) is used to enhance one’s business. It includes any process that
a business organisation (either a for-profit, governmental or non-profit entity)
---------------------- conducts over a computer-mediated network.

Three primary processes are enhanced in e-business: Notes
1. Production processes, which include procurement, ordering and
----------------------
replenishment of stocks, processing of payments, electronic links with
suppliers and production control processes amongst others. ----------------------
2. Customer-focused processes, which include promotional and marketing
----------------------
efforts, selling over the internet, processing of customers’ purchase orders
and payments and customer support amongst others. ----------------------
3. Internal management processes, which include employee services,
----------------------
training, internal information-sharing, video-conferencing, and recruiting.
Electronic applications enhance information flow between production and ----------------------
sales forces to improve sales force productivity. Workgroup communication
and electronic publishing of internal business information are likewise ----------------------
made more efficient.
----------------------
e-Business allows the flow of all supply chain transactions involving the ----------------------
transfer of information, products and funds through the internet. Keeping the
supply chain in mind, let us discuss how e- business can provide a virtual supply ----------------------
chain over the internet. It performs the following functions:
----------------------
1. Provides information on the products to all the participants of the supply
chain. ----------------------
2. Allows placing orders with suppliers. ----------------------
3. Allows customers to place orders.
----------------------
4. Filling and delivering the orders to customers.
----------------------
5. Receiving payments from customers.
We know that all these transactions are traditional, but with the use of ----------------------
e-business, these transactions are now performed more efficiently and quickly, ----------------------
thereby providing high levels of customer response. Enterprises run by
young entrepreneurs, companies having a monopoly in their product and new ----------------------
innovative companies are making great use of e- Business. These companies
can showcase their products to the world. By logging on to their website, one ----------------------
can view the company profile, the products offered, the price lists, the models, ----------------------
contact information and also fill up feedback forms. Filling up forms for exams,
making payments for the exam fees by transferring funds from your bank ----------------------
account to the institute’s account have now become very quick, and the hassle
of making demand drafts and pay orders is almost over. It’s not that other modes ----------------------
of making payment are not used, but e- Business allows transactions round ----------------------
the clock which no other mode of payment can provide. In this chapter we are
going to learn about the two most important models of e- Business i.e. B2C e- ----------------------
business and B2B e- business.
----------------------
----------------------
----------------------

Notes Business to Consumer e-business (B2C)
 E-Business of this type takes place between a company and a consumer.
----------------------
 In this case, the consumer comes directly in contact with the company
---------------------- and can view the company brochure or prospectus online along with their
product and services and thus, make an order. This type of business reduces
----------------------
the trouble of the consumers going to the retail outlets and buying their
---------------------- goods.
---------------------- Example: ebay.com sells their products online directly to the consumers,
and also delivers the goods to the consumers’ homes after the order has
---------------------- been placed.
---------------------- Business to Business (B2B)
----------------------  E-Business of this type takes place between a company and a company.
----------------------  Many a time, one company is dependent on another company for raw
material, spare parts or other products which they require to manufacture
---------------------- their goods.
----------------------  Example: Intel selling microprocessors to Dell.
---------------------- It is very important for supply chain managers to note that the value
provided by e-business is tremendous. However, its correct implementation is
---------------------- very necessary or else it may even turn the other way round for the company.
e-Business implementation is not an easy process and the failure to exercise
----------------------
proper implementation has even resulted in large companies closing down.
---------------------- However, the value it provides is very large and many companies have now
realised the importance of its implementation and are performing extremely
---------------------- well. It is very important to understand the framework of e-business so that
supply chain managers can identify where the value lies, the magnitude of the
----------------------
value and how the value provided by e-business can best be extracted after
---------------------- considering the effort involved in developing the e-business.
---------------------- 12.3 THE E-BUSINESS FRAMEWORK

----------------------
The e-business framework consists of the role it plays in all the functions
---------------------- of a supply chain i.e. marketing, sales, research and development, logistics etc.
We are now going to discuss how the e- business framework is necessary
----------------------
for every function of the supply chain, its characteristics, how can it help in
---------------------- providing greater response to customers and how it can help in lowering the
costs for the firm.
----------------------
----------------------
----------------------
----------------------

Following are the values that e-business provides to a supply chain by Notes
providing clear visibility of every stage in a supply chain:
----------------------
1. General values
a) Exchange and share data across the world ----------------------
Text messages, documents, graphics, photographs, music, video, ----------------------
CAD/CAM files, and much more can be converted into data and sent
as email attachments or presented on a web site. There are no postage, ----------------------
printing and packaging costs with e-commerce communication.
----------------------
b) Send messages faster and cheaper
----------------------
When you send a message, you only pay for the internet access. As
soon as the message has arrived at your ISP, it will be sent at zero ----------------------
cost to all the people to whom it has been addressed. Moreover, your
message is likely to arrive at its destination, even the other side of the ----------------------
world, in a matter of seconds or minutes, depending on the size of the ----------------------
email and its attachments. Think of the possibilities for saving time
and money with email. ----------------------
c) Approve and proof work quickly ----------------------
A quotation, purchase order, letter, design drawings, brochure,
----------------------
or advertisement colour proof, etc., can be e-mailed to you as an
attachment for your approval. Using email in this way can dramatically ----------------------
speed-up the turn-around of work between you and your business
contacts. ----------------------
d) Introduce collaborative working ----------------------
With fast, reliable, and cheap e-commerce communications, it is ----------------------
possible for colleagues, customers, suppliers and partners, to use
collaborative working practices to manage, share, and enhance project ----------------------
work, regardless of location.
----------------------
e) Update employees instantly with new policies or procedures
Email works well when communicating with colleagues who are off- ----------------------
site, out of the country, or teleworking. ----------------------
f) Hold web meetings or data conferencing
----------------------
A great way to have a virtual meeting is to upload a document
(spreadsheets, project plans, etc) on to a web site and enable it to be ----------------------
viewed and edited in real-time through the Internet. Holding virtual
----------------------
meetings can save travel expenses and time significantly.
g) Take advantage of time differences ----------------------
As e-commerce communications are fast and cost-effective, new ----------------------
business relationships have been established where work is exchanged
between time zones at the end of one day, which, on the other side of ----------------------
the world, is the beginning of either the same or next day. ----------------------

Notes h) Send out e-mail automatically
Event-triggered emails can be used to acknowledge orders made on
----------------------
web sites and to update customers on order progress. Alert e-mails or
---------------------- SMS can also be used to notify technical support of critical issues or
maintenance problems. These and many other similar applications are
---------------------- effortless, cheap, and efficient ways of enhancing customer service
and the brand experience.
----------------------
i) Use the internet to improve business administration
----------------------
With a mobile phone connected to a portable computer, employees
---------------------- working off-site can access and up-date internal information; such as
customer records, price lists, time sheets, schedules, and job reports.
---------------------- Providing remote internet access for staff makes it possible for the
latest information to be at hand, for administrative tasks such as
----------------------
invoicing, employee whereabouts, and expense claims.
---------------------- j) Train on the web
---------------------- The multi-media capabilities of web sites make them ideal for
creating a virtual learning environment for employees and customers.
---------------------- When training material is updated, the latest version is immediately
---------------------- available. Online learning facilities enable trainees living all over the
world to access study material according to their convenience without
---------------------- having to travel to a training centre, which, in turn, saves time and
expenses.
----------------------
k) Replace the fax machine and save money
----------------------
If a multi-page document has to be faxed to many people, it can
---------------------- work out expensive on telephone bills, especially if a national or
international call has to be made. The cost savings can be huge if
---------------------- email is used instead, and the message can also be sent to multiple
people at no extra cost.
----------------------
2. Research & development value
----------------------
a) Speed up market and product research
---------------------- Information on almost every conceivable subject is available on the
---------------------- web and most of it is free. Finding information to assist in product
development is usually much quicker using e-commerce methods,
---------------------- and this can result in significantly reduced product development time.
---------------------- b) Trade intellectual assets on the web

Patents and other intellectual assets can be bought, sold, and licensed
----------------------
in e-markets, making the whole process of acquiring licensing rights,
---------------------- and marketing them much easier.
The internet can be used to collaborate research & development
----------------------
computational resources, knowledge, ideas, and data, and can be
---------------------- freely exchanged and shared through the Internet. This enables
geographically dispersed research centers to work seamlessly together.
3. Marketing value Notes
a) Look bigger
----------------------
A well designed and presented web site can project an image that you
are a much larger business than what you really are. This can help ----------------------
when trying to win business from larger organisations and to establish
----------------------
credibility with new customers.
b) Use the internet to deliver products and services ----------------------
The internet is not just a communication channel; it is also a zero-cost ----------------------
delivery channel. Many products and services, which are traditionally
delivered as a physical object or as a physical service, can now be ----------------------
delivered virtually in the form of data. Books, music, video, training ----------------------
software, catalogues, advice, information, entertainment, customer
support, and much more can be transformed into data and delivered ----------------------
immediately through the internet to anywhere in the world. As a result,
the traditional barriers of global trading - such as time, distance and ----------------------
cost - have either been removed or minimised by e-commerce. ----------------------
c) Provide an extensive business profile and online information centre
----------------------
Uploading information to your web site on products, services,
support, prices, contact details, and news, makes it easy for prospects, ----------------------
customers, shareholders, job seekers, journalists, and employees to
find what they want at any time. ----------------------
d) Track response on the internet ----------------------

Campaign-specific email and web site address can be used to track ----------------------
the response to special promotional offers made online or offline.
This information can be very useful to quickly obtain feedback on the ----------------------
effectiveness of marketing activities, so that mid-campaign changes
----------------------
can be made to optimise effectiveness.
e) Send e-newsletters to customers and save time, postage and ----------------------
packaging
----------------------
Update your customers and suppliers immediately with news and
offers by email. Also, reinforce brand awareness and nurture customer ----------------------
loyalty. ----------------------
f) Clearly position your business
----------------------
By using keywords and other search engine ranking techniques,
it is possible to attract visitors who are actively seeking, and ----------------------
specifically interested in your business offerings. The internet can be
----------------------
a more accurately-targeted and cost-effective marketing medium than
traditional means. ----------------------
----------------------
----------------------

Notes 4. Sales value
a) Introduce another channel to market
----------------------
Your business website can take orders 24 hours a day, every day of
---------------------- the year, and is readily accessible to customers all over the world. A
successful business website can produce a highly profitable revenue
----------------------
stream.
---------------------- b) Automate interactive business processes
---------------------- The interactive nature of a website is ideal for capturing and simulating
a process and for making it globally accessible, with the help of the
---------------------- internet. Once you’ve done it, visitors from all other the world can
---------------------- then easily walk through your automated marketing, selling, buying,
and paying process, with a few clicks of a mouse. This idea can also be
---------------------- applied to customer service and support processes, where the visitors
help themselves to the information required.
----------------------
c) Lower the cost of order processing
---------------------- The direct cost-of-sale for an order taken from a web site should be
---------------------- lower than through traditional means (retail, paper based), as there
is no human interaction during the online electronic purchase order
---------------------- process. Also, electronic selling should virtually eliminate processing
errors, as well as be faster and more convenient for the visitor.
----------------------
d) No physical space limitations
----------------------
You can offer more products with an e-catalogue than you can
---------------------- physically stock on shelves.
---------------------- e) Buy and sell quicker

Requirements, brochures, quotations, purchase orders, delivery
---------------------- schedules, etc., can be emailed within seconds to your suppliers and
---------------------- customers all over the world. The whole process of buying and selling
can be made much more efficient and responsive using emails.
---------------------- f) Boost sales with exports
---------------------- Use your web site and email as a low cost way of extending the
geographical reach of your business marketing activities, and to
----------------------
develop a global export market for your products and services.
---------------------- g) Close sales faster
---------------------- Respond to prospect and customer enquiries in minutes rather than
days, presenting an image of professionalism and efficiency.
----------------------
h) Use a website for direct and indirect selling
---------------------- A website can be used as a direct marketing channel that cuts out
---------------------- the “middleman” and enables direct sales interaction with customers
and consumers. Alternatively, a website can provide information on
---------------------- products and services and brand-building corporate information, that

points the visitor to a local sales channel outlet, such as a retailer or Notes
supplier, giving contact information. This type of web site removes
all channel conflict as it is seen to be supporting the channel and ----------------------
generating leads for it.
----------------------
5. Procurement value
----------------------
 Cut procurement costs and improve efficiency
The e-Procurement systems can achieve the following business benefits: ----------------------
 73% reduction in transaction costs ----------------------
 70% to 80% reduction in purchase order processing cycles ----------------------
 5% to 10% reduction in prices paid
----------------------
Maverick buying is stopped and internal buyers benefit from being able to
place orders with many suppliers, using a single common interface such as ----------------------
a browser, as well as integrating with other order purchasing and financial
----------------------
functions within the enterprise.
6. Logistics value ----------------------
a) Optimise inventory levels ----------------------
By combining the flow of goods with the flow of information, it is ----------------------
possible to improve almost any process performed by a company,
both internal and external. With this information, inventory levels can ----------------------
be optimised, to reflect actual demand levels and correspondingly,
customers should be able to see online what current quantities and ----------------------
availabilities are. ----------------------
b) Provide information by self-service
----------------------
Integrated supply chains with free-flow of information through
the internet between customers, suppliers, and partners enables ----------------------
a participant in the chain to provide a self-service capability and
----------------------
automatic updating of warehouse management systems (WMS).
Consider the following possibilities when using the Web to share ----------------------
information:
----------------------
(i) Enable suppliers to give their customers pre-delivery advice. The web
can be used to tell customers what pallets are coming on which truck, ----------------------
what goods they hold, even what expiry dates the goods possess! This
----------------------
data can be used to allocate warehouse locations or arrange cross-
docking, if necessary. ----------------------
(ii) Empower customers to do their own order chasing and tracking ----------------------
through the warehouse from a web site.
(iii) Let suppliers see the inventory they supply, and move towards ----------------------
vendor management inventory and consignment stocking, using ----------------------
e-commerce methods.
----------------------

Notes (iv) Bring customers and suppliers closer to the inventory for obtaining
real-time order status. This also allows users to view suppliers’
---------------------- warehouses to obtain parts availability, or to see manufacturers or
third-party-logistics (3PL’s) company warehouses to check inventory.
----------------------
(v) View and manage multi-sites. Using WMS, intelligent-user interfaces
---------------------- can be created to visualise a user’s warehouse, locally, nationally,
and globally. Having a complete picture of stock and its location can
----------------------
make it easier and quicker to figure out the quickest way to replenish
---------------------- stock to the customer, by identifying which is the nearest or the best
fulfillment site for any order.
----------------------
(vi) Share resources. As e-commerce enables information flow between
---------------------- collaborating businesses, it becomes easier and simpler for internal
and non-competing organisations to share procurement, physical
---------------------- and logistical activities such as warehousing and distribution. It also
results in cost savings and efficiencies from sharing and economies of
----------------------
scale.
---------------------- Improve supply chain efficiency
---------------------- Internet and e-commerce methods enable real-time communications, and
dynamic interchange of data, up and down the supply chain. Information can
---------------------- be shared through emails, extranets, or by using middleware such as Microsoft
---------------------- Biz Talk, to enable legacy systems to transform an EDI document into an XML-
readable format, so that every e-commerce system can understand and interact
---------------------- with it, and vice versa. By having better visibility across the supply chain,
inventory levels can be reduced as supplies become predictable. With lower
---------------------- inventory levels, costs can be driven out of the supply chain.
---------------------- For a supply chain manager to decide whether or not his company is a good
candidate for making use of the values provided by e- business, he must go
---------------------- through the following list on the score card and rate the impact his company
---------------------- would have:
CRITERIA RATING
----------------------
Direct Sales
---------------------- Round the clock Access
Large product portfolio
----------------------
Quick market entry
---------------------- Flexible pricing, promotions
Price discrimination
---------------------- Quick fund transfers
---------------------- Lower stockouts
Automated process
---------------------- Impact on Inventory
---------------------- Impact on Facilities
Impact on Transportation
---------------------- Gathering Information

Rating: Notes
++ Very positive
----------------------
+ Positive
= Neutral ----------------------
- Negative ----------------------
- Very negative ----------------------
----------------------
Fill in the blanks.
----------------------
1. E-business between two organisations irrespective of their size may
be termed as _______. ----------------------
----------------------
1. One of the most important capabilities accorded to any business by
internet is as a cheapest platform of supply chain collaboration. ----------------------
----------------------
12.4 B2B e-BUSINESS AND B2C e-BUSINESS ----------------------
B2B e-business ----------------------
B2B e-business is simply defined as e-business between companies. This ----------------------
is the type of e- business that deals with relationships between and amongst
businesses. ----------------------
About 80% of e-business is of this type, and most experts predict that ----------------------
B2B e-business will continue to grow faster than the B2C segment. The B2B
market has two primary components: e-infrastructure and e-markets. ----------------------
1. E- infrastructure is the architecture of B2B, primarily consisting of the ----------------------
following:
----------------------
 Logistics - transportation, warehousing and distribution (e.g.- Procter
and Gamble) ----------------------
 Application service providers - deployment, hosting and management ----------------------
of packaged software from a central facility (e.g., Oracle and
Linkshare) ----------------------
 Outsourcing of functions in the process of e-business, such as Web- ----------------------
hosting, security and customer care solutions (e.g., outsourcing
providers such as eShare, NetSales, iXL Enterprises and Universal ----------------------
Access)
----------------------
 Auction solutions software for the operation and maintenance of real-
time auctions in the Internet (e.g., Moai Technologies and OpenSite ----------------------
Technologies)
----------------------

Notes  Content management software for the facilitation of Web site content
management and delivery (e.g., Interwoven and ProcureNet)
----------------------
 Web-based business enablers (e.g., Commerce One, a browser-based,
---------------------- XML enabled purchasing automation software)
2. E-markets are simply defined as websites where buyers and sellers interact
----------------------
with each other and conduct transactions.
---------------------- The more common B2B examples and best practice models are IBM, Hewlett
Packard (HP), Cisco and Dell, etc. Cisco, for instance, receives over 90% of its
----------------------
product orders over the Internet.
---------------------- Most B2B applications are in the areas of supply management (especially
---------------------- purchase order processing), inventory management (i.e., managing order-ship-
bill cycles), distribution management (especially in the transmission of shipping
---------------------- documents), channel management (i.e., information dissemination on changes
in operational conditions), and payment management (e.g., electronic payment
---------------------- systems or EPS)
---------------------- Benefits of B2B e-business in developing markets
---------------------- There are four important benefits of B2B e-business in developing markets, like
India. especially in the field of:
----------------------
(a) Transaction costs
---------------------- (b) Disintermediation
---------------------- (c) Transparency in pricing
---------------------- (d) Economies of scale and network effects.

a) Transaction costs
----------------------
There are three cost areas that are significantly reduced through the conduct
---------------------- of B2B e-commerce.
---------------------- i. First, is the reduction of search costs, as buyers need not go through
multiple intermediaries to search for information about suppliers,
---------------------- products and prices as in a traditional supply chain. In terms of effort,
time and money spent, the net is a more efficient information channel
----------------------
than its traditional counterpart. In B2B markets, buyers and sellers are
---------------------- gathered together into a single online trading community, reducing
search costs even further.
----------------------
ii. Second, is the reduction in the costs of processing transactions (e.g.
---------------------- invoices, purchase orders and payment schemes) as B2B allows
the automation of transaction processes and therefore, the quick
---------------------- implementation of the same compared to other channels (such as the
telephone and fax). Efficiency in trading processes and transactions
----------------------
is also enhanced through the B2B e-market’s ability to process sales
---------------------- through online auctions.
---------------------- iii. Third, online processing improves inventory management and

logistics.
b) Disintermediation Notes
Through B2B e-markets, suppliers are able to interact and transact directly
----------------------
with buyers, thereby eliminating intermediaries and distributors. However,
new forms of intermediaries are emerging. For instance, e-markets ----------------------
themselves can be considered as intermediaries, as they come between
suppliers and customers in the supply chain. ----------------------
c) Transparency in pricing ----------------------
Among the more evident benefits of e-markets is the increase in price
----------------------
transparency. The gathering of a large number of buyers and sellers in a
single e-market reveals market price information and transaction processing ----------------------
to participants. The Internet allows for the publication of information on a
single purchase or transaction, making the information readily accessible ----------------------
and available to all members of the e-market. Increased price transparency
----------------------
has the effect of pulling down price differentials in the market. In this
context, buyers are provided much more time to compare prices and ----------------------
make better buying decisions. Moreover, B2B e-markets expand borders
for dynamic and negotiated pricing wherein multiple buyers and sellers ----------------------
collectively participate in price-setting and two-way auctions. In such
----------------------
environments, prices can be set through automatic matching of bids and
offers. In the e-marketplace, the requirements of both buyers and sellers ----------------------
are thus aggregated to reach competitive prices, which are lower than those
resulting from individual actions. ----------------------
d) Economies of scale and network effects ----------------------
The rapid growth of B2B e-markets creates traditional supply-side cost- ----------------------
based economies of scale. Furthermore, the bringing together of a significant
number of buyers and sellers provides the demand-side economies of scale ----------------------
or network effects. Each additional participant in the e-market creates
value for all participants in the demand side. More participants form a ----------------------
critical mass, which attracts more users to an e-market. ----------------------
B2C e-Business
----------------------
Business-to-consumer (B2C) e-business (or business between companies
and consumers) involves customers gathering information, purchasing physical ----------------------
goods (i.e., tangibles such as books or consumer products) or information
goods (or goods of electronic material or digitised content, such as software, ----------------------
or e-books); also for information goods, receiving products over an electronic ----------------------
network. It is the second largest and the earliest form of e-business. Its origins
can be traced to online retailing (or e-tailing). Thus, the more common B2C ----------------------
business models are the online retailing companies such as Amazon.com,
Drugstore.com, Beyond.com, Barnes and Noble and Toys R us. Other B2C ----------------------
examples involving information goods are e-Trade and Travelocity. The more
----------------------
common applications of this type of e-business are in the areas of purchasing
products and information, and personal finance management, which pertains ----------------------
to the management of personal investments and finances with the use of online
banking tools. ----------------------

Notes B2C e-business reduces transactions costs (particularly search costs) by
increasing consumer access to information and allowing consumers to find the
---------------------- most competitive price for a product or service. B2C e-business also reduces
market entry barriers since the cost of putting up and maintaining a website is
---------------------- much cheaper than installing a “brick-and-mortar” structure for a firm. In the
case of information goods, B2C e-business is even more attractive as it saves
----------------------
firms from factoring in the additional cost of a physical distribution network.
---------------------- Moreover, for countries with a growing and robust web population, delivering
information goods becomes increasingly feasible.
----------------------
---------------------- 12.5 PRACTISING e-BUSINESS
---------------------- A supply chain manager, before setting up an e-business in practice, should

consider the following points:
----------------------
a) Integration of the internet with the existing physical network.
---------------------- b) Devise shipping pricing strategies that reflect costs.
---------------------- c) Optimising e- business logistics.
---------------------- d) Designing the e- business supply chain to easily handle returns.

e) Keep the customers informed throughout the order fulfillment process.
----------------------
a) Integration of the internet with the existing physical network
----------------------
A company cannot do business with the internet alone. It has to also take
---------------------- into consideration the other channels of distribution. E-business should
be well integrated with other channels of distribution in order to gain
---------------------- maximum advantage because no physical network can take the burden of
running a business alone. If all the physical channels are not integrated
----------------------
well, then discrepancies will occur. For example, a person selling clothes
---------------------- in a retail outlet might not be having all the colour and sizes available
with him at the outlet. But with the help of the internet, he can specify the
---------------------- various colours and sizes available which people can see and consequently
place their orders for. Thus, a company should use the internet with
----------------------
various channels of distribution in order to promote its products and derive
---------------------- maximum advantage. This process of integration is referred to as clicks
and mortar.
----------------------
b) Devise shipping pricing strategies that reflect costs
---------------------- When companies are selling products online, they must charge shipping
---------------------- costs to the appropriate customers. They must specify the shipping costs
to the customers based on their orders. Different orders will have different
---------------------- shipping costs, based on the total volume of the order, the size and the place
of destination of the order. Many companies do not specify the shipping
---------------------- costs and this, further complicates the matter. Also, some new companies
---------------------- in order to create a consumer base do not charge shipping costs initially, but
proper steps must be planned out by these companies in order to recover
---------------------- those costs later. Thus, proper shipping strategies must be devised in order
to run a business on the internet.
c) Optimising e- business logistics Notes
By optimising e- business logistics, we mean that companies should
----------------------
be able to deliver the smallest of packages to their customers in a cost
effective way. With smaller packages containing small products, it becomes ----------------------
critical for companies to exploit every possible opportunity to consolidate
shipments to lower the costs. For this companies may have to partner with ----------------------
other firms to consolidate shipments. To increase consolidation and reduce
----------------------
transportation costs, e- businesses must try to bundle an entire customer
order into a single package rather than multiple packages. ----------------------
d) Designing the e- business supply chain to easily handle returns
----------------------
It makes a lot of difference when a customer is buying a product online, and
when he is buying the product from a retail outlet. When a person is buying ----------------------
a product from a retail outlet he can physically look at the product, try the
----------------------
product and then make his decision then and there, but when a person buys
a product online he can just take a look at the picture of the product and ----------------------
thus, when he receives the product it may not be upto his expectations,
might disappoint him because of which he may want to return the product ----------------------
as it was not up to the mark.
----------------------
Such returns should be cleverly planned out by businesses. Many companies
including Gap.com have special retail outlets in order to handle returns of ----------------------
the customers, which is a good tactic to counteract such circumstances. ----------------------
Many companies might have to suffer losses in case of returns. Thus,
companies have to make sure of this aspect when running a business ----------------------
online, as it could spoil the reputation of a company.
----------------------
e) Keep the customers informed throughout the order fulfillment process
The most important point that a company must remember when designing ----------------------
a business online is that when a customer places an order, it is the duty ----------------------
of the company to inform the customer about the status of his (customer)
order. When a customer gives an order online, he expects to get a feedback ----------------------
from the company about the position of his order and not get just the
delivery date. The customer would want to know if the processing is going ----------------------
on smoothly according to his wishes and that if any disturbances are taking ----------------------
place. If a company does not inform the customer about the position of his
order, then the company will receive regular calls from the customer every ----------------------
time asking about the status of the order and this will eventually result in
the customer getting irritated, which might further destroy the reputation of ----------------------
the company. Thus, keeping the customer informed about his order being ----------------------
processed is very important, so that the customer feels that he is provided
good service by the company. ----------------------
----------------------
----------------------
----------------------

Notes
----------------------

1. E-markets are simply _______ where buyers and sellers interact.
----------------------
2. One important challenge in B2C e-business for consumer products is
---------------------- _____ of delivery of product to the consumers.
----------------------
---------------------- Activity 1
----------------------
Imagine that you are the supply chain manager of a printing company
---------------------- engaged in printing books, letterheads, brochures and catalogues. Do you
think you can increase your revenue by making use of the internet?
----------------------
---------------------- Summary
----------------------  e-Business is a term used to describe businesses run on the Internet, or
utilising internet technologies to improve the productivity or profitability
----------------------
of a business. IBM, in 1997, was one of the first to use the term when
---------------------- it launched a campaign built around the term. e-business is the easiest
way to reach out to the people involved in the supply chain. Through
---------------------- e-business customers anywhere in the world can just sit at home and order
products, it helps in saving time and also is a very easy and efficient tool
----------------------
to conduct business. It provides the advantage of variety, because now a
---------------------- person can view different types of commodities available with different
companies and can compare the prices and hence buy products which best
---------------------- suit their needs.
----------------------  e-Business is a term used to describe businesses run on the internet
or which utilise internet technologies to improve the productivity or
---------------------- profitability of a business. In a more general sense, the term may be used
to describe any form of electronic business which utilises a computer.
----------------------
Getting the right strategy and supply chain processes in place so that an
---------------------- Internet enabled system will, in fact, do the job it is designed for, requires
having a well-defined plan for servicing and retaining customers, and for
---------------------- improving return on investment.
---------------------- Business to Consumer e-business (B2C)
 e-Business of this type takes place between a company and a consumer.
----------------------
 In this case, the consumer comes directly in contact with the company
---------------------- and can view the company brochure or prospectus online along with their
---------------------- product and services and thus, make an order. This type of business reduces
the trouble of the consumers going to the retail outlets and buying their
---------------------- goods.

●● Example: ebay.com sells their products online directly to the consumers, Notes
and also delivers the goods to the consumers’ homes after the order has
been placed. ----------------------
Business to Business (B2B) ----------------------
●● e-Business of this type takes place between a company and a company.
----------------------
●● Many a time, one company is dependent on another company for raw material,
spare parts or other products which they require to manufacture their goods. ----------------------
●● The e-business framework consists of the role it plays in all the functions of ----------------------
a supply chain i.e. marketing, sales, research and development, logistics etc.
●● We are now going to discuss how the e- business framework is necessary ----------------------
for every function of the supply chain, its characteristics, how it can ----------------------
help in providing greater response to customers and how it can help in
lowering the costs for the firm. The e-business Framework consists of ----------------------
the role that e-business plays in all the functions of a supply chain i.e.
marketing, sales, research and development, logistics. ----------------------
●● e-business allows the flow all supply chain transactions involving ----------------------
the transfer of information, products and funds through the Internet.
e-business performs the following functions: ----------------------
i) Provides information on the products to all the participants of the ----------------------
supply chain
----------------------
ii) Allows placing orders with suppliers
iii) Allows customers to place orders ----------------------
iv) Filling and delivering the orders to customers ----------------------
v) Receiving payments from customers
----------------------
●● Two most important models of e-business are B2C e-business and B2B
e-business. ----------------------
●● It is very important to understand the framework of e-business so that ----------------------
supply chain managers can identify where the value lies, the magnitude of
the value and how the value provided by e-business can be best extracted ----------------------
after considering the effort involved in developing the e-business.
----------------------
●● The e-business framework consists of the role that e-business plays in
all the functions of a supply chain i.e. marketing, sales, research and ----------------------
development, logistics.
----------------------
Keywords ----------------------
 Communication technique: Techniques of e-business communication ----------------------
 B2C: Business to customer e-business ----------------------
 B2B: Business to Business e-business
----------------------
 e-Business Framework: It includes any process that a business
organisation conducts over a computer-mediated networking ----------------------

Notes  e-Markets: e-Commerce markets, the e-business framework consists of
the role it plays in all the functions of a supply chain i.e. marketing, sales,
---------------------- research and development
 Disintermediation: Through B2B e-markets, suppliers are able to interact
----------------------
and transact directly with buyers, thereby eliminating intermediaries and
---------------------- distributors.
----------------------
----------------------
1. What do you mean by e-business? Is there a difference between
---------------------- e-commerce and e-business?
2. What is an e-business framework? What benefits does this framework
----------------------
provide to the various departments of a supply chain?
---------------------- 3. Define B2B e-business and B2C e-business. Which among the two is
widely used? Explain the benefits of B2B e-business.
----------------------
4. For a supply chain manager to decide whether or not e-business is
---------------------- beneficial for the company, explain what issues must be analysed and
rated to come to a positive conclusion. Provide a scorecard for a company
---------------------- selling books in retail outlets.
---------------------- 5. Write short notes:
a) e-Business and e-commerce
----------------------
b) Business to business (B2B) e-business
---------------------- c) e-Business benefits to the customer
----------------------
----------------------
---------------------- 1. E-business between two organisations irrespective of their size may be
termed as B2B.
---------------------- 1. True
----------------------
Fill in the blanks.
---------------------- 1. E-markets are simply websites where buyers and sellers interact.
2. One important challenge in B2C e-business for consumer products is cost
----------------------
of delivery of product to the consumers.
----------------------
Suggested Reading
----------------------
1. Beyer, Swen. Supply Chain Performance Measurement & E-Business
----------------------
Supply Chain Management. GRIN Verlag Publication.
---------------------- 2. Zhang, Qingyu. E-supply Chain Technologies and Management. Idea
Group Publication.
SCM Measurement
UNIT
Structure:
13.1 Introduction
13
13.2 The Need for a New Approach to Performance Measurement
13.3 Towards a New Measurement Approach
13.4 SCM Measurement
Summary
Key Words
Suggested Reading
SCM Measurement 241

Notes
Objectives
----------------------
----------------------
• Explain the decisions in SCM
----------------------
• Describe the need for new SCM measures
---------------------- • Justify SCM measurement approach
---------------------- 13.1 INTRODUCTION
----------------------
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 un-measurable.
---------------------- Activities not under the direct control of an individual company (i.e. a
manufacturer) have to be measured and controlled (by the manufacturer and
---------------------- its supply chain partners), making the supply chain transparent, to a level not
---------------------- experienced before and leading the way for performance improvements. The
purpose of this note is to outline the relevance of research into supply chain
---------------------- measurement systems. Suggestions are developed about the specific content
and approach that research may need to take in aiming to contribute to the
---------------------- improvement of the competitiveness of supply chains. Apart from management
control studies, this notes uses studies in the logistics area. The area of logistics
----------------------
is used as an example of a set of activities that need to be measured on a different
---------------------- basis, following the emergence of supply chain management.
Supply chain management is characterised by control based on
---------------------- networking and integration of processes across functional, geographical and
---------------------- organisational interfaces (van Hoek, 1998a). The perspective of supply chain
management is its view of the final customer (van Dierdonck, 1997; Womack
---------------------- and Jones, 1996). This focus on interfaces in the operational process opposes
the traditional approach of control based on ownership and vertical integration
---------------------- with a view of the person one step higher in the hierarchy. The adoption of
the supply chain approach holds numerous consequences for individual sets of
----------------------
business activities, like logistics activities, as well as for the (now horizontal
---------------------- and not vertical) measurement and control of activities in the supply chain.
Figure 14.1 displays a number of these challenges to the organisation.
----------------------
Logistics optimisation is based on the notion that sub-optimisation at one
---------------------- point in the logistics organisation is permitted as long as that contributes to
overall optimisation. In a supply chain approach this notion is expanded
---------------------- across functional, geographical and organisational interfaces to a chain-wide
level. Of course, this may cause implementation difficulties, as this implies
---------------------- that individual companies may have to sacrifice internal efficiencies to overall
---------------------- chain-optimisation. The question then that arises is how to divide supply chain
revenues among players in the chain, when, additionally, there may not be one
---------------------- leading player in the supply chain to determine the division of benefits. Driven
by the customer focus, logistics can evolve from a cost-saving function (as
---------------------- in Ducker’s statement from the 1960s about the last frontier in cost savings

being physical distribution) to a value adding function as logistics services Notes
are fundamental in delivering value to customers. Another challenge for
organisations is the dominant focus of competitive strategy. Companies are no ----------------------
longer the units in the competitive battle; supply chains compete with each other
(Christopher, 1992). A complexity in that respect is that it is often complex to ----------------------
define what the supply chain is. Complexity may result from the fact that: ----------------------
 Supply chains consist of multiple layers of companies.
----------------------
 While companies may be involved in multiple supply chains (Cooper et
al., 1997) and the network, thus, is partial. ----------------------
 As integration is no longer based on large investments in vertical integration, ----------------------

but rather on interfaces, the network also becomes temporal; exit and entry
----------------------
barriers are lowered as capital investments can be shared among players.
----------------------
 Indeed, the format of the supply chain may change over time (Cooper et
al., 1997). ----------------------
 Not all interfaces in the supply chain deserve the same amount of integration, ----------------------
and close coordination. Determining the amount of management attention
needed for a particular interface is dependent on various factors (Cooper et ----------------------
al., 1997).
----------------------
These new characteristics of organisations have their effect on the
measurement of performance of activities in the chain. It is well known that ----------------------
managers tend to search for the answer to the question: “What’s in it for me?”
----------------------
It can be questioned to what extent existing measurement systems can help
answer this question. As a general statement, traditional measures may no longer ----------------------
apply, and new supply chain measurement may be needed. An indication of this
fact may be found in the fact that the World Class Logistics study published ----------------------
by the CLM (1995) was able to develop extensive insights into what logistics
----------------------
operations and competitiveness in the modern market-environment is all about.
The study did not succeed, however, in relating these world class logistics ----------------------
capabilities to the (traditional) performance measures such as ROI and gross
margin used in the study. A critical challenge for organisations may thus be to ----------------------
develop and implement new measurement systems that can direct management
----------------------
attention and effort to the areas for improvement in the modern supply chain
operating format. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
SCM Measurement 243

Notes Based on ownership Control Based on networking
---------------------- Vertical hierarchy Integration Across interfaces
---------------------- Cost saver Logistics Value adder
---------------------- Companies Competitive unit Supply chain
---------------------- Position Authority basis Contribution to competitiveness
---------------------- Static Organisation Partial, temporal
----------------------
---------------------- Fig. 13.1: Changes in organisations resulting from the adoption of supply
chain management
----------------------
13.2 T HE NEED FOR A NEW APPROACH TO
----------------------
PERFORMANCE MEASUREMENT
----------------------
Numerous studies have developed indications of how supply chain integration
---------------------- can contribute to the growth of multiple and individual players in the chain.
Van Hoek (1998b) for example, indicated that the contribution to customisation
---------------------- of individual logistics service suppliers can be expanded if they integrate
---------------------- upstream into the chain of their manufacturing clients by offering postponed
final manufacturing and related activities as an extension of transport and
---------------------- warehousing services. SMART (the new mini-car developed by Mercedes and
Swatch) provides an even more drastic indication of how measurement and
---------------------- control has to be adjusted or changed under the supply chain format.
---------------------- Figure 13.2 shows how the operational role of the automotive OEM decreases in
the value adding process (horizontal bar) as suppliers and distributors take over
----------------------
larger shares of operational activities and cross-functional and organisational
---------------------- integration is extended. SMART suppliers manufacture super-modules, like
complete steering wheel and steering columns and assemble them into the car,
---------------------- working from a workshop within the OEM’s factory. Distributors perform final
manufacturing and product modifications based on customer orders. As a result
----------------------
the OEM is almost entirely “squeezed out” of the operations, and control by the
---------------------- OEM now is based on managing interfaces, relations and contracts with supply
chain players. In this case the OEM cannot measure performance based on
---------------------- traditional measures like ROI and headcount only. However, control becomes
a critical concern as ownership and operational control are no longer limited to
----------------------
the OEM. What then should the measurement system look like?
----------------------
----------------------
----------------------
----------------------

Inputs OEM Distributors
Notes
Suppliers
modulers
products in
progress
----------------------
----------------------
Stage : Purchasing/Primary Manufacturing Final Manufacturing Distribution ----------------------

In progress : Inputs Outputs
Modules Supply Chain ----------------------
----------------------
Fig. 13.2: The “squeeze out” of the OEM calls for a different type of control
----------------------
----------------------
1. The original product manufacturers are expanding their share in ----------------------
house operations in supply chains. ----------------------
2. Line count fill rate of engineering valves for Keystone Ltd is 102%.
----------------------
----------------------
13.3 TOWARDS A NEW MEASUREMENT APPROACH
----------------------
Many authors have studied measurement in a supply chain context (see for
example, Cavinato, 1992; Ellram and Feitzinger, 1997 and Hergert and Morris, ----------------------
1989 for publications in various disciplines). Ploos van Amstel and D’hert
(1996) have indicated that the specific type of measures used for (logistics) ----------------------
activities differs, depending on the level of measurement (activity, functional
----------------------
area, between functions or between organisations) and the operational context.
Bechtel and Jayaram (1997) state that measurement in the supply chain may use ----------------------
integrated measures that are cross-functional and can be applied to the entire
process (for example, time from cash to cash) in order to avoid optimisation at ----------------------
one point in the chain without considering potential consequences at other points
----------------------
in the chain. This may cause some difficulty in practice as LaLonde and Pohlen
(1996) indicated, that existing and widely-published measurement systems like ----------------------
total costs of ownership and direct product profitability, are focused at particular
segments of the chain and are not explicitly focused at, or intended to be used ----------------------
for chain-wide measurement. Additionally, Bechtel and Jayaram (1997) state
----------------------
that available integrated measures such as time from cash to cash, percentage
of fill rate against customer specifications and total response times, sometimes ----------------------
make it difficult to incorporate cross-organisational interfaces, whereas there
are no measures addressing a combination of integrated and non-integrated ----------------------
measures. This combination may allow a player in a supply chain to assess the
----------------------
overall competitiveness of the chain as a whole, using integrated measures,
while enabling it to focus improvement efforts on its own performance, based ----------------------
on non-integrated measures. Scapens (1998) stated that modern measurement
systems should support innovative strategies like teamwork and that non- ----------------------
SCM Measurement 245

Notes financial measures, such as lead times, are to be further developed. Also, they
can supplement financial measures in approaches like the balanced scorecard.
---------------------- Modern ICT (e.g. ERP systems) are expected to enable this development.
---------------------- In short, it is not strange that Cooper et al. (1997) state that more research
is needed on measurement in the supply chain. They call for the development
---------------------- of metrics and an assessment of implementation barriers to overcome the
problems in implementing these metrics. In that respect they call for a practical
----------------------
and action-oriented research that aims to contribute to the actual application
---------------------- of new measurement systems. This may be supplemented with the purpose
of letting this measurement system actually contribute to the optimisation
---------------------- of supply chains. This can be related to the fact that control (operationalised
using performance measurement in the chain) is mentioned, together with
----------------------
planning, in the set of management components of the supply chain by Cooper
---------------------- et al. (1997). This suggests that the purpose of measurement and control in the
supply chain is to provide management with a set of actions that can be taken
---------------------- in improving performance and planning competitiveness-enhancing efforts.
This approach is called the design-oriented approach in management control
----------------------
literature (Vosselman, 1997). In that respect three steps may be fundamental to
---------------------- the development of a new measurement approach to provide input to the control
of supply chains:
----------------------
1. The extension of the supply chain definition to provide a context for
---------------------- measurement. Existing definitions do not explicitly provide a basis for
measurement. Cooper et al. (1998), for example, only point at measurement
---------------------- as one of the management components in their supply chain definition
framework.
----------------------
2. The development of new measures and the development of new benchmarks,
---------------------- based on these measures; in developing the new measurement format,
various aspects of the supply chain definition can be expected to affect the
---------------------- specific mix of measures used. The position of players in the chain (supplier,
manufacturer, wholesaler, service supplier) affects their contribution and
---------------------- relevant measures, the level of integration and the strategic approach may
affect the relevance of measures. Creating benchmarks based on the new
----------------------
measurement systems may contribute to directing management effort in
---------------------- optimising the supply chain.
3. The development of tools that can help support the implementation of the
---------------------- new measurement approach may be a crucial final step leading to the actual
---------------------- application of new measurement approaches. The tools cannot be limited
to the measurement system itself; they also need to include strategic trade-
---------------------- off and planning frameworks in order to assure executive “buy-in” and
commitment and initiate actual improvement processes in the supply chain.
----------------------
A First Step to The New Approach
---------------------- In management control literature, a number of aspects relevant for a
new measurement approach are specified (see Figure 13.3). In particular,
---------------------- Kaplan and Cooper (1997) point out the need for performance measurement
---------------------- to start to drive performance improvement and move away from the passive

administrative tradition. Using information in a feed-forward approach, as Notes
opposed to a feedback approach, can help in directing management attention
towards areas for strategic improvement. In that set-up, attention in performance ----------------------
measurement shifts from short to longer term. Finally, and most relevant in this
respect, they point out the need to include the entire chain in the measurement ----------------------
system (integrated measures).
----------------------
Passive administration Approach Proactive performance improvement
----------------------
Feedback Information use Feedforward
----------------------
Application
Operational Strategy
----------------------
Time span
Short term Long term
----------------------
Units (partial measures) Scope Whole chain (integrated measures)
----------------------
----------------------
Fig. 13.3: Evolution in management control
As a first step to the development of such a new supply chain ----------------------
measurement format, Figure 13.4 was developed. It sheds some initial light on ----------------------
the selection of relevant measures and a measurement approach, depending on
the strategic context and operational contribution of players in the supply chain ----------------------
competitiveness. The vertical bar reflects possible contributions of players in ----------------------
the chain to overall chain competitiveness. Cost savings, customer service and
overall chain integration are used, as they may reflect basic strategies for players ----------------------
in the chain. The horizontal bar reflects the stage of development of logistics
----------------------
in an organisation, as developed by Bowersox and Closs (1996), from logistics
as a cost-saver to logistics as a set of activities that can contribute to market ----------------------
creation.
----------------------
The framework may work as follows. When logistics is (still) dominantly
used as a cost saver and the contribution of players is in the area of costs (left ----------------------
bottom segment) relevant measures may be part per minute, percentage of ----------------------
logistics costs as a share of total costs, as traditionally used by suppliers. A
retailer that has reached the second stage of market penetration/market extension ----------------------
and is focused on delivering customer service (middle segment) may benefit ----------------------
from a measurement approach that, instead, uses fill rates and response times.
SMART, finally, uses logistics to create new markets, based on an innovative ----------------------
supply chain format (as described above) and is focused on integrating the entire
----------------------
chain (top right segment). Relevant measures used by SMART may be level of
commitment of individual players in the chain and percentage of customisation ----------------------
achieved with respect to customer orders and specific activities in the chain.
----------------------
----------------------
----------------------
SCM Measurement 247

Notes 13.4 SCM MEASUREMENT
---------------------- Figure 13.4 provides a first indication of how, in a supply chain approach
to performance measurement, the content of a measurement system may differ,
----------------------
depending on the supply chain operating format and the strategy approach or
---------------------- the evolution of strategies. Of course, the challenge now is to develop findings
that can contribute to the actual generation of a supply chain measurement
---------------------- system. If successful, the result may be that managers could see the areas where
---------------------- supply chain performance could be improved, so that they could focus attention,
leading to dramatically high new standards of performance, unmeasurable at
---------------------- present. It is promising that the Council of Logistics Management has launched
---------------------- such an initiative.
Contribution of Integration Ex : SMART
---------------------- organisations to supply chain
Ex : Retailer
competetiveness Customer
---------------------- service
Cost Ex : Traditional
---------------------- effectiveness suppliers
Cost saver Market penetration/ Market creation
---------------------- Market extension
---------------------- Strategy/Strategic Sophistication
---------------------- Fig. 13.4: Preliminary framework for a supply chain measurement system
---------------------- Supply Chain Metrics (or measurements) are used to track Supply
Chain performance. They can help you understand how well your company
---------------------- is operating. Supply Chain Measurement can cover many areas including
Procurement, Production, Distribution, Warehousing, Transportation and
----------------------
Customer Service. However, a strong performance in one part of the chain is
---------------------- not sufficient. Your Supply Chain is only as strong as its weakest link. Tracking
your Metrics allows you to view your performance over time, optimise your
---------------------- Supply Chain, identify problem areas, and to compare your company to other
like companies (benchmarking). Using the correct set of metrics can help you
----------------------
answer the question: Do we have the right balance between service and cost?
---------------------- But how do you optimise your Supply Chain’s performance? The first
---------------------- step is to understand how to measure. Although metrics do vary, we give you a
general overview of some of the common Supply Chain Measurements in use
---------------------- today.
---------------------- Backorder: An unfilled customer order. A backorder is demand (immediate

or past due) against an item whose current stock level is insufficient to satisfy
---------------------- demand. This calculation can vary. Some companies count items that are not
confirmed (not allocated) and past the Requested Delivery Date (or Requested
---------------------- Ship Date). Other companies may also count those items with stock confirmed,
---------------------- but past due.
----------------------

Backorders may be expressed in “pieces”, “SKU’s” or in “value”. Notes
Backorder calculations are often tracked at a variety of levels. Example:
Customer, Division, Total Company. ----------------------
Aged Backorder: Reports on backorders in past-due time buckets based ----------------------
on the Requested Delivery Date/Requested Ship Date.
----------------------
Supply Chain Balanced Scorecard
The Supply Chain Balanced Scorecard 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, OnTime
Delivery. ----------------------
3. Internal Business - Example: Adherence-To-Plan, Forecast Error. ----------------------

4.
Training - Example: In house Training Hours, APICS Membership/ ----------------------
Certification.
----------------------
While the Balanced Scorecard approach was not specifically designed
for the Supply Chain, it does give a good guidance for your core measures. The ----------------------
central idea is to focus on key metrics that have real meaning to your company.
You don’t want to get lost in a sea of numbers that don’t really mean anything. ----------------------
The Balanced 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. ----------------------
Here are just a few of the many Cycle Times you should consider for ----------------------
your Supply Chain. All of these measures should not only calculate the days (or
hours) from the start and finish, but also between the various steps in between. ----------------------
Customer Order Promised Cycle Time ----------------------
The anticipated or agreed upon cycle time of a Purchase Order. It is a gap
between the Purchase Order creation date and the RDD (Requested Delivery ----------------------
Date). ----------------------
Customer Order Actual Cycle Time
----------------------
The average time it takes to actually fill a customers 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. ----------------------
----------------------
SCM Measurement 249

Notes 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 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.
----------------------
Inventory Replenishment Cycle Time
---------------------- Measure of the Manufacturing Cycle Time plus the time included to deploy the
product to the appropriate distribution center.
----------------------
Cash to Cash Cycle Time
----------------------
The number of days between paying for Raw Materials and getting paid for
---------------------- product. Calculated by Inventory Days of Supply plus Days of Sales Outstanding
minus Average Payment Period for Material.
----------------------
Supply Chain Cycle Time
----------------------
The total time it would take to satisfy a customer order if all inventory levels
---------------------- were zero. It is calculated by adding up the longest lead times in each stage of
the cycle.
----------------------
DPMO: Defects Per Million Opportunities
---------------------- DPMO is a Six Sigma calculation used to indicate the amount of defects in a
process per one million opportunities.
----------------------
To calculate Total Number of Defects/Total Number of Opportunities for a
---------------------- Defect. Then multiply the answer by 1 Million.
---------------------- The challenge here is determining exactly what qualifies as a defect. Some
defects can pass through a quality inspection and have little impact on the end
---------------------- product. Other defects can result in rework or scrap.
---------------------- DPMO is sometimes used instead of Defect per Unit to allow for comparison
between processes with different levels of complexity.
----------------------
Six Sigma uses statistical analysis to measure a company’s performance by
---------------------- identifying defects in a manufacturing process. The goal of Six Sigma is to
reduce process output variation to + or - six standard deviations. This results in
----------------------
no more than 3.4 defects per million opportunities.
---------------------- Fill Rate definitions and calculations can vary greatly. In the broadest sense, Fill
Rate calculates the service level between 2 parties. It is usually a measure of
----------------------
shipping performance expressed as a percentage.
---------------------- Sample Fill Rate Metrics
---------------------- Line Count Fill Rate: The amount of order lines shipped on the initial shipment
versus the amount of lines ordered. This measure may or may not take into
---------------------- consideration the requested delivery date (see On Time Delivery) example -
---------------------- ABC Company orders 10 products (one order line each) on its Purchase Order
#1234. The manufacturer ships out 7 line items on March 1 and the remaining 3
---------------------- items on March 10. The Fill Rate for this Purchase Order is 70%. It is calculated
once the initial shipment takes place.
Calculation: Number of Order Lines Shipped on the Initial Order/Total Number Notes
of Order Lines Ordered (7/10 = 70%).
----------------------
SKU Fill Rate: The number of SKU’s (Stock Keeping Units) ordered and
shipped is taken into consideration. Above, we consider each Order Line to ----------------------
have an equal value (1). Here, we count the SKUs per Order Line.
----------------------
Example: If on Line 1, the order was for 30 SKU s of product “AB” and on line
2, they ordered 10 SKU s of item “AC”. If Line 1 ships on April 1 and line 2 on ----------------------
April 20, the SKU Fill Rate is 75%
----------------------
Calculation: Number of SKUs Shipped on the Initial Shipment/Total Number
of SKUs Ordered (30/40 = 75%). ----------------------
Case Fill Rate: The amount of cases shipped on the initial shipment versus the ----------------------
amount of cases ordered.
Example: ABC Company orders 6 products that total 200 cases, on its ----------------------
Purchase Order #1235. The manufacturer ships out 140 cases on 3/1/01 and the ----------------------
remaining 60 cases on 3/10/01. The Fill Rate for this Purchase Order is 70%. It
is calculated once the initial shipment takes place. The number of Order Lines ----------------------
is not considered in this calculation. This Fill Rate measure gives “weight” to
the order lines that are shipped out. ----------------------
Calculation: Number of Cases Shipped on the Initial Order/Total Number of ----------------------

Cases Ordered. (140/200 = 70%).
----------------------
Value Fill Rate: Same as above, except the order line value is used instead of
cases. ----------------------
Calculation: Value of Order Lines Shipped on the Initial Order/Total Value of ----------------------
the Order ($400/$500 = 80%)
----------------------
What happens if a customer orders 10 products, but then decides to expedite
just one of them? Should the other 9 products be counted as a Fill Rate “miss”? ----------------------
(1 shipped/10 ordered = 10%). The answer is no. You should factor rushed lines
out of your Fill Rate calculation. This can usually be done by identifying the ----------------------
routing code (as in an SAP system) or by the carrier (FEDX). ----------------------
*NOTE: “Shipped on the Initial Order” - This usually refers to the first shipment
out of the primary warehouse. Therefore, if an order line ships out of an alternate ----------------------
shipping facility and it ships out on/before the first shipment out of the primary ----------------------
warehouse, then it is considered a + to the Fill Rate.
Inventory Record Accuracy ----------------------
A common calculation is: ----------------------

Stratify SKUs: (annual usage standard cost) ----------------------
A items = items representing the top 80% of total dollars
----------------------
B items = items representing the next 15% of dollars C items = items representing
the bottom 5% of dollars ----------------------
----------------------
SCM Measurement 251

Notes Cycle count items (usually daily) using a random sample, within the following
groupings:
----------------------
A items = 4 times per year
---------------------- B items = 2 times per year
---------------------- C items = 1 time per year
---------------------- Items considered accurate if the actual on-hand quantity matches the perpetual
inventory quantity, within the following tolerances:
---------------------- A items = plus or minus 1% quantity variance from perpetual balance
---------------------- B items = plus or minus 3% quantity variance from perpetual balance
---------------------- C items = plus or minus 5% quantity variance from perpetual balance
Target should be absolute minimum of 95% for MRP/DRP to function
----------------------
effectively; 99% for best-in-class.
----------------------
Inventory Turns (Inventory Turnover): The number of times that a company’s
---------------------- inventory cycles or turns over per year.
---------------------- Calculation: A frequently used method is to divide the Annual Cost of Sales by
the Average Inventory Level.
----------------------
Example: Cost of Sales = Rs.36,000,000. Average Inventory = Rs.6,000,000.
---------------------- Rs.36,000,000/Rs.6,000,000 = 6 Inventory Turns
OR Inventory Turns can be a moving number.
----------------------
Example: Rolling 12 Month Cost of Sales = Rs.16,000,000. Current Inventory
---------------------- = Rs.4,000,000
---------------------- Rs.16,000,000/Rs.4,000,000 = 4 Turns
---------------------- Projected Inventory Turns: Divide the “Total Cost of 12 Month Sales Plan” by
the “Total Cost of Goal Inventory”.
---------------------- Example: The Total Cost of 12 Month Sales Plan is Rs.40,000,000. Total Cost
---------------------- of Goal Inventory = Rs.8,000,000
Rs.40,000,000/Rs.8,000,000 = 5 Projected Turns
----------------------
Although results vary by industry, typical manufacturing companies may have
---------------------- 6 turns per year. High volume/low margin companies (like grocery stores) may
have 12 turns per year or more.
----------------------
On Time Shipping Performance is a calculation of the number of Order Lines
---------------------- shipped on or before the Requested Ship Date versus the total number of Order
Lines. Throughout the following text, I refer to “shipped” ontime. BUT if
----------------------
actual “delivery” data is available, it may be substituted and compared to the
---------------------- Requested Delivery Date. (such as with an EDI#214).
---------------------- *On Time: Shipped on or before the requested ship date (except if the receiving
party does not accept early shipments).
----------------------

Sample OnTime Metrics Notes
On Time Line Count: The amount of order lines shipped OnTime versus the
----------------------
amount of lines ordered.
Example: ABC Company orders 10 products (one order line each) on its ----------------------
Purchase Order #1234. The Order has a Requested Ship Date of March 1. The
----------------------
manufacturer ships out 5 line items on February 28 and 2 items on March 1 and
the remaining 3 items on March 10. The OnTime LineCount for this Purchase ----------------------
Order is 70%. It is calculated based on the Requested Ship Date Or, if available,
substitute actual Delivery Date vs Requested Delivery Date. ----------------------
Calculation: Number of Order Lines Shipped on or before the Requested Date/ ----------------------
Total Number of Order Lines Ordered (7/10 = 70%).
----------------------
On Time SKU Count: The number of SKUs (Stock Keeping Units) ordered and
shipped is taken into consideration. Above, we consider each Order Line to ----------------------
have an equal value (1). Here, we count the SKUs per Order Line.
----------------------
Example: If on Line 1, the order was for 30 SKUs of product “AB” and on line
2, they ordered 10 SKUS of item “AC”. The Requested Ship Date is April 1st. If ----------------------
Line 1 ships on March 28 and line 2 on April 20, the the SKU Fill Rate is 75%.
----------------------
Calculation: Number of SKUs Shipped OnTime/Total Number of SKUs
Ordered (30/40 = 75%). ----------------------
OnTime Case Count: The amount of cases shipped OnTime versus the amount ----------------------
of cases ordered.
----------------------
Example: ABC Company orders 6 products that total 200 cases, on its Purchase
Order #1235. The manufacturer ships out 140 cases on 3/1/01 and the remaining ----------------------
60 cases on 3/10/01. The Requested Ship Date is 3/1. The Case OnTime Rate
for this Purchase Order is 70%. The number of Order Lines is not considered ----------------------
in this calculation. This OnTime measure gives “weight” to the order lines that
----------------------
are shipped out.
Calculation: Number of Cases Shipped OnTime/Total Number of Cases ----------------------
Ordered.
----------------------
(140/200 = 70%).
----------------------
OnTime Value Rate: Same as above, except the order line value is used instead
of cases. ----------------------
Calculation: Value of Order Lines Shipped OnTime/Total Value of the Order
----------------------
(Rs.400 / Rs.500 = 80%).
Perfect Order Measurement: As with most other Supply Chain Metrics, there ----------------------
are many variations to this measurement. ----------------------
The Perfect Order Measure calculates the error-free rate of each stage of a
Purchase Order. This measure should capture every step in the life of an order. ----------------------
It measures the errors per order line. ----------------------
----------------------
SCM Measurement 253

Notes But how do you capture errors? Let’s look at what happens when an error
occurs. Say for example, your warehouse picks up and ships the wrong item.
---------------------- Once the customer receives the order and notices the error, they contact the
manufacturer and notify them of the mistake. The manufacturer then enters a
---------------------- credit for the item not shipped and an invoice for the item shipped in its place.
---------------------- For almost all errors that occur, a corrective credit is issued. It is through an
analysis of these credits that you derive your metric. Most systems require a
---------------------- “reason code” to be used when entering a credit. Tracking these reason codes
and assigning them to a category allow you to group them for the Perfect Order
---------------------- Measure.
---------------------- Example:
---------------------- Order Entry Accuracy: 99.95% Correct (5 errors per 1000 order lines)
Warehouse Pick Accuracy: 99.2%
----------------------
Delivered on Time: 96%
----------------------
Shipped without Damage: 99%
---------------------- Invoiced Correctly: 99.8%
---------------------- Therefore, the Perfect Order Measure is 99.95% * 99.2% * 96% * 99% * 99.8%
= 94.04%
----------------------
There may be other fields used such as “The Sales Representative recommending
---------------------- the correct item” or the “FillRate”.
---------------------- Performance to Promise Dates: When a Distributor places a Purchase Order
against a Manufacturer, he has certain expectations on when he will receive
---------------------- the items ordered. His original expectation is the On Time Delivery Metric.
However, the manufacturer may give him a revised estimate as to when they
----------------------
expect to fill the order. The manufacturer’s promise is called the “Performance
---------------------- to Promise Date Metric”.
---------------------- Example: ABC Company Orders 2 Products on Purchase Order #1234, with a
Requested Ship Date of June 10.
---------------------- The first item is in-stock and ships on June 10th.
---------------------- The second item is on backorder. The manufacturer estimates that the 2nd item
will ship by July 1.
----------------------
The item is manufactured and ships out on June 28.
----------------------
The Performance to Promise Date is 100% (items ship ontime or early)
---------------------- *However, if the 2nd item does not ship till July 2nd, then it’s late. The
---------------------- Performance to Promise Date is 50%.
Transportation Metrics
----------------------
Freight cost per unit shipped: is calculated by dividing total freight costs by
---------------------- number of units shipped per period. Useful in businesses where units of measure
are standard (e.g., pounds). Can also be calculated by mode (barge, rail, ocean,
---------------------- truckload, less-than-truckload, small package, air freight, intermodal, etc.).

Outbound freight costs as percentage of net sales: are calculated by dividing Notes
outbound freight costs by net sales. Most accounting systems can separate
“freight in” and “freight out.” Percentage can vary with sales mix, but is an ----------------------
excellent indicator of the transportation financial performance.
----------------------
Inbound freight costs as percentage of purchases: are calculated by dividing
inbound freight costs by purchase dollars. It is important to understand the ----------------------
underlying detail. The measurement can vary widely, depending on whether
----------------------
raw materials are purchased on a delivered, prepaid, or collect basis.
Transit time: is measured by the number of days (or hours) from the time a ----------------------
shipment leaves your facility to the time it arrives at the customer’s location. It
----------------------
is often measured against a standard transit time quoted by the carrier for each
traffic lane. Unless you are integrated into your customers’ systems, you will ----------------------
have to rely on freight carriers to report their own performance. This is often an
important component of leadtime. Transit times can vary substantially, based on ----------------------
freight mode and carrier systems.
----------------------
Claims as % of freight costs: are calculated by dividing total loss and damage
claims by total freight costs. Generally measured in total and for each carrier. ----------------------
A high number generally indicates packaging problems, or process problems at
----------------------
the carrier.
Freight bill accuracy: is calculated by dividing the number of error-free freight ----------------------
bills by the total number of freight bills in the period. Errors can include incorrect ----------------------
pricing, incorrect weights, incomplete information, etc. It is generally measured
in total and for each carrier. ----------------------
Accessorials as percent of total freight: are calculated by dividing accessorials ----------------------
and surcharges by total freight expenditures for the period. Many freight carriers
will charge extra fees for trailer detention/demurrage, redelivery, fuel increases, ----------------------
and other expenses or extra services. Often, these are extra costs incurred due
to inefficient processes. ----------------------
Percentage of truckload capacity utilised: is generally used for shipments over ----------------------
10,000 lbs. It is calculated by dividing the total pounds shipped by the theoretical
maximum. For example, assume your trucks can hold 40,000 lbs. of product. ----------------------
During the prior month, there were 675 shipments totaling 22.95MM lbs. The ----------------------
percentage utilisation was 85%. The 15% unused capacity is an opportunity for
more efficiency. ----------------------
Mode selection vs. optimal: This is calculated by dividing the number of ----------------------
shipments sent via the optimal mode by the total number of shipments for the
period. To measure this, each traffic lane must have a designated optimal mode, ----------------------
based on freight costs and customer service requirements.
----------------------
Truck turnaround time: This is calculated by measuring the average time
elapsed between a truck’s arrival at your facility and its departure. This is an ----------------------
indicator of the efficiency of your lot and dock door space, receiving processes,
----------------------
and shipping processes. This also directly affects freight carrier profits your
business. ----------------------
SCM Measurement 255

Notes Shipment visibility/traceability percent: Calculated by dividing the total number
of shipments via carriers with order tracking systems, by the total number of
---------------------- shipments sent during a period. This is an indicator of the relative sophistication
of your carrier base, and one measure of the non-price value available from
---------------------- your carrier base.
---------------------- Number of carriers per mode: is calculated by counting the total number of
freight carriers used in a given period, by mode (ocean, barge, rail, truckload,
----------------------
LTL, small package, etc.). This is an indication of your volume leverage and
---------------------- control over the transportation function.
On-time pickups: are calculated by dividing the number of pick-ups made on-
----------------------
time (by the freight carrier) by the total number of shipments in a period. This
---------------------- is an indication of freight carrier performance, and carriers’ effect on your
shipping operations and customer service.
----------------------
Various Supply Chain Metrics
---------------------- Upside Flexibility: is the ability of a manufacturer to meet additional demand
---------------------- requirements. This is usually compared as a percentage over the original order.
This is protection for the buyer. It allows for the actual demand to be higher
---------------------- than the forecasted quantity.
---------------------- Inventory Rationalisation: is an analysis that categorises your inventory by

various categories. e.g.
----------------------  Current Inventory levels of A,B,C products
----------------------  Inventory turns of A,B,C
----------------------  Value of Slow Moving product (those products you may have more than
“x” number of weeks’ worth)
----------------------
Setting Goals for your Supply Chain Metrics
---------------------- Once you have an understanding of basic Supply Chain Metrics, focus on
---------------------- a limited number. Choose those metrics that will track your company’s true
performance. You don’t want to get into the trap of “analysis paralysis”. Over-
---------------------- analysis leads to confusion and sometimes conflicting goals. I would recommend
picking 5 - 7 key measures per functional area. These measures are sometimes
---------------------- referred to as KPI’s (Key Performance Indicators).
---------------------- Once you have identified these metrics, you should set your goals. This will
enable your organisation/department to track its performance to expectations.
---------------------- But how do you set these goals? How do you determine what to target? At what
---------------------- point have you achieved Supply Chain optimisation?
First, make sure you understand exactly what it is that you are measuring. What
----------------------
drives this measure? What causes failure? Where do you need improvement?
---------------------- Once you can answer these questions, you are in a better position to set your
goals.
----------------------
Benchmarking: One way to set your goals is Benchmarking. There are various
---------------------- benchmarking services, that for a fee, will compare your company to other

“like” companies. You submit your answers to a set of questions. Those answers Notes
are averaged in with other companies’ submissions. Averages are calculated and
World Class levels are set. ----------------------
As an example, if the average Fill Rate for your industry is 93% and you are ----------------------
performing at 80% level, then it’s obvious you need to set an aggressive goal.
However, if the industry average is 93% and you are at 94%, you may want ----------------------
to target a minimal gain. Your aggressive efforts should probably be focused
----------------------
in other areas. The caveat here is defining “like” industries. Make sure the
comparison you are making is a fair one. ----------------------
SMART goals
----------------------
Specific: Provide enough detail so that there is no question on what is being
measured and no question how the metric is calculated. You should be specific ----------------------
as to the measurement, goals and responsible people/department.
----------------------
Measurable: Here is where you use your metric. Make sure you have a reliable
system in place that will accurately measure your performance. ----------------------
Attainable: Will the Supply Chain projects you have scheduled for the year ----------------------
produce results that will achieve your goal? The person setting the goal and the
person responsible for achieving the goal should agree with the target. If results ----------------------
are unattainable or unrealistic, they will have a de-motivating effect on your ----------------------
employees.
Realistic: Don’t plan to do things if you are unlikely to follow through. It would ----------------------
be better to plan only a few things and be successful rather than many things and ----------------------
be unsuccessful. Your Supply Chain goals should be challenging, but realistic
in relation to the improvement projects you have in place. ----------------------
Timely: Identify when you are targeting to hit your goal. ----------------------
Example: Your current Fill Rate is 87% and your Supply Chain projects should
----------------------
improve your measure to 93%. But is the 93% goal for the final month of the
year OR is it averaged out over a specific timeframe? ----------------------
Supply Chain optimisation is difficult to achieve. But with the right metrics in ----------------------
place and proper goals set, you now know where to focus your improvement
projects. You have just got closer to Supply Chain optimisation. ----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. Inventory turns doubling would normally double _________; hence
it is an important measure of performance. ----------------------
2. Cash-to-Cash cycle begins when you _____ your raw materials. ----------------------
----------------------
----------------------
SCM Measurement 257

Notes
Activity 1
----------------------
---------------------- Let us assume that you are the supply chain manager of a company producing
toys. Do you think it is feasible for your company to have a website and gain
---------------------- the benefits from e-business?
----------------------
Summary
----------------------
The various supply chain measures primarily concentrate on following 4 points:
----------------------
 Total supply chain cost
----------------------
 Process capability
----------------------  Customer retention
----------------------  Process lead time
---------------------- In a highly competitive and high growth environment, a market responsive
and physically efficient supply chain would be essential.
----------------------
---------------------- Keywords
----------------------  SCM Measures: Parameters for SCM measurement.
 Balanced Scorecard: The Supply Chain Balanced Scorecard tracks a
----------------------
limited number of key metrics, which should be closely aligned to the
---------------------- company’s strategic objectives.
 SKU Fill Rate: The number of SKU’s (Stock Keeping Units) ordered
----------------------
and shipped is taken into consideration.
----------------------
---------------------- Self-Assessment Questions

---------------------- 1. What are the various decisions in SCM?
---------------------- 2. What is the need for developing a new approach to SCM measures?
3. Explain various SCM measures.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Answers to Check your Progress Notes

1. False ----------------------
2. False
----------------------
----------------------
Fill in the blanks.
1. Inventory turns doubling would normally double profitability; hence it is ----------------------
an important measure of performance. ----------------------
2. Cash-to-Cash cycle begins when you pay for your raw materials.
----------------------
1. Camerinelli, Enrico. Measuring the Value of the Supply Chain: Linking ----------------------
Financial Performance and Supply Chain Decisions. Gower Publishing.
----------------------
2. Frederick Ross, David. Competing Through Supply Chain Management.
Springer Publication. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
SCM Measurement 259

Notes
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The Indian Supply Chain Architecture
UNIT
Structure:
14.1 Introduction
14
14.2 SCM Practices in India
14.3 Linking Management Tool with Critical Supply Chain Processses
14.4 Governing the Manufacturing Mindset
14.5 Outsourcing - An increasing Trend for Mixed Reasons
14.6 Alignment of Supply Chain Strategy with Business Strategy
Summary
Key Words
Suggested Reading
The Indian Supply Chain Architecture 261

Notes
Objectives
----------------------
----------------------
• Discuss SCM practices in India
----------------------
• Describe industry participation in SCM implementation
---------------------- • Develop the SCM mindset
----------------------
14.1 INTRODUCTION
----------------------
Traditional organisational boundaries are a thing of the past. New realms
---------------------- of technology and convergence have created a plethora of new business
opportunities, as well as challenges, to be tapped and mastered. To compete
----------------------
successfully in today’s marketplace, organisations need concurrently to manage
---------------------- effectively and efficiently the activities of design, manufacturing, distribution,
service and recycling of their products and services to their customers. Velocity,
---------------------- visibility, scalability, innovation, customerisation and cost govern competitive
---------------------- advantage for organisations viewing the entire world as their market. Serving
the right customers, finding the right suppliers, and fostering trust with the right
---------------------- partners have a great impact on today’s as well as future business performance.
To attain these multi-criteria objectives, it has become imperative for
----------------------
organisations the world over, to tap the concepts of supply chain management
---------------------- (SCM) (Simchi-Levi et al., 2000; Sahay, 2000; Derocher and Kilpatrick, 2000).
---------------------- 14.2 SCM PRACTICES IN INDIA

----------------------
The genesis of the research can be traced to the first ever international
---------------------- conference on supply chain management in India,- “Supply chain management
for global competitiveness”, organised by the Management Development
---------------------- Institute, Gurgaon during November 1998. The conference received an
---------------------- overwhelming response from Indian industry and was addressed by the “Who’s
Who” of Indian industry. More than 600 delegates, both from India and abroad,
---------------------- participated during the two-day event and deliberated on issues facing supply
chain management in India. The proceedings of the conference were published
----------------------
in two volumes titled, Supply Chain Management for Global Competitiveness
---------------------- and Supply Chain Management in the Twenty-First Century.
---------------------- The international conference was a watershed event in exposing the focus
of Indian organisations on managing their supply chains. The entire research
---------------------- study has evolved out of the concern of the managers, expert professionals and
academicians participating in the conference, to address supply chain issues at
----------------------
the national level. The research team set out with the objective of first gauging
---------------------- the current status of supply chain management in the Indian industry in order to
address the felt concern of Indian policy makers and managers.
----------------------

However, the joint research was undertaken with the following scope of work: Notes
 To know the current practices of supply chain management followed in
----------------------
Indian organisations.
 To identify and develop appropriate measures for supply chain management ----------------------
processes and performance indicators.
----------------------
 To undertake a cross-cultural comparison with global practices.
----------------------
 To provide a benchmark for Indian companies looking to optimise their
supply chain operations. ----------------------
 To identify the drivers of enhanced supply chain performance. ----------------------
The respondents were requested to fill out a survey questionnaire from
----------------------
the perspective that best captured the supply chain and logistics issues faced by
their organisation. The objective of the questionnaire was to identify the extent ----------------------
of deployment of supply chain strategies, the structure of supply chains in
various industry sectors, the problems encountered in organising supply chain ----------------------
systems and the path being taken by organisations in strengthening supply chain
----------------------
management.
The data were evaluated using a number of all-India as well as industry- ----------------------
specific frameworks created for this research. Aggregate as well as discrete
----------------------
analyses were carried out giving due importance to sector, region and process to
assess the current state of supply chain management. The survey data were also ----------------------
rigorously analysed to get a snapshot view of the use of information technology
(IT) in managing supply chain in the Indian industry. ----------------------
----------------------
14.3 LINKING MANAGEMENT TOOLS WITH
CRITICAL SUPPLY CHAIN PROCESSES ----------------------
Customer service, demand management and inventory management ----------------------

rank high on the “criticality-scale” of supply chain processes, backed up by
management tools of total quality management (TQM), benchmarking and just- ----------------------
in-time (JIT). ----------------------
Customer service ranks as the most critical process for the respondents
(Figure 14.1). Among these, as many as 63.8 percent of organisations rate this ----------------------
as being “very critical” to their supply chain strategy. Following closely are ----------------------
demand management, inventory management and order processing/fulfilment
with more than 40 per cent of the respondent base in each category classifying ----------------------
them as “most critical”. The supply chain processes, like customer service,
demand management, inventory management and order processing/fulfilment ----------------------
show a sincere concern of the Indian organisations to improve customer service
as well as depicting their increasing understanding of the need to perfect ----------------------
customer-centric processes.
----------------------
----------------------
----------------------

Notes Warehousing
Promotion Planning
----------------------
Import Export Management
---------------------- Distribution Management
Transportation
----------------------
Product Development
---------------------- Manufacturing
Order Processing/Fulfilment
----------------------
Demand management
---------------------- Customer Service
0 1 2 3 4 5
---------------------- Criticality Score
---------------------- Fig. 14.1: Criticality of supply chain processes
---------------------- In terms of the present usage of management tools, TQM appears the
most mature tool (Figure 14.2) with over 50 percent of respondents using it. The
---------------------- tools of supply chain optimisation (SCO), JIT, ABC, BPR, enterprise resource
planning (ERP), benchmarking, CAD/CAM and TPM were in use by 30-40
---------------------- per cent of respondents. These are traditional time-tested management tools,
---------------------- which were actively pursued by management. But the business environment has
changed now. Interestingly, ERP, JIT, SCO have been in use for the last year to
---------------------- a certain extent. This is a step in the right direction for the Indian organisations
trying to perfect their supply chains.
----------------------
Optimised production technology
(OPT)
---------------------- Computer Integrated Manufacturing
(CIM)
---------------------- Activity Based Costing (ABC)
Total Productive Maintenance
(TPM)
---------------------- Enterprise Resource Planning (ERP)
Business Process Reengineering
(BPR)
---------------------- Computer Aided Design/
Manufacturing (CAD/CAM)
---------------------- Supply Chain Optimisation (SCO)
Just-in-Time (JIT)
----------------------
Benchmarking (BM)
Total Quality Management (TQM)
----------------------
---------------------- 0 1 2 3 4 5
Weighted Score for Length of Use
----------------------
Fig. 14.2: Usage of management tools
----------------------
In terms of current consideration for future usage, about one-third of
---------------------- the respondents were currently considering adoption of benchmarking, ERP,
SCO, total productive maintenance and/or ABC costing, and a fourth were
---------------------- currently considering TQM and/or BPR for actualisation of business objectives.
Benchmarking is the only tool that has withstood the sands of time because of
----------------------
the fact that this management philosophy helps organisations to move from one
step to another. One important dimension in this benchmarking is the fact that Notes
organisations have graduated from internal to external benchmarking. This has
helped businesses to learn from businesses outside the industry in order to reap ----------------------
extraordinarily high business success to their bottom line. Further in terms of
awareness and non-consideration, about half the respondents were either not ----------------------
aware of, or were not considering adoption of optimised production technology ----------------------
or computer integrated manufacturing even in the future.
----------------------

1. In India, advent of JIT or TQM has created ground for better supply ----------------------
chain practices.
----------------------
Fill in the blanks.
1. The Indian business is prone to favour _______ driven planning in ----------------------
spite of its potential and actual inefficiencies. ----------------------
----------------------
14.4 GOVERNING THE MANUFACTURING MINDSET
----------------------
Manufacturing drives supply chain performance in several situations,
requiring competence at the manufacturing and operations level of the supply ----------------------
chain. Globally while pull-based systems are being much talked about,
----------------------
only 15.9 per cent of organisations have turned to pull-based inventory
replenishment processes. Of the Indian respondents, 84.1 per cent indicate use ----------------------
of push-based inventory replenishment systems (Figure 14.8). In a push-based
system, the production decisions are based on long-term forecast. Typically, ----------------------
the manufacturer uses orders received from retailers’ warehouses to forecast
----------------------
customer demand, thereby taking a much longer time to react to the changing
marketplace. In order to make the system more responsive, organisations are ----------------------
adopting pull-based systems for inventory replenishment.
----------------------
Push 84%
----------------------
----------------------
Pull 16% ----------------------
----------------------
Fig. 14.3: Inventory replenishment process
A few companies (15.9 per cent) have turned to pull-based inventory ----------------------
replenishment process, where inventory is replenished by the supplier, based ----------------------
on movement of product on the shelves and amount of inventory remaining. As
a result the inventory replenishment process in a pull-based system, in which ----------------------
production is demand driven, coordinated with the actual customer demand.
----------------------

Notes It is surprising to note that in today’s environment where the customer can
almost expect his/her requirement to be customised, the push system dominates
---------------------- all Indian industries, where most industries still believe in manufacturing to
build up stocks. Obviously most companies believe in the principle that they
---------------------- should flood the distributor system with stocks, which would help increase off-
---------------------- takes, and ward off the fear of losing sales to competition.
Recent inventory management practices dictate achieving zero stock
----------------------
levels for finished goods and taking up of production against firm orders.
---------------------- However, only 11.1 percent of the respondents indicate pure MTO (make to
order) environment. A total of 47.9 per cent indicate planning for finished goods
---------------------- inventory based on orders booked or existing order backlog and 22.9 per cent
indicate planning for finished goods inventory based on manufacturing capacity
----------------------
(Figure 14.4).
---------------------- Based on Manufacturing Not Planned, Purely
Capacity 28% Make to Order 14%
----------------------
---------------------- Based on Outstanding
Orders 20%
----------------------
Based on Orders
---------------------- Booked 38%
---------------------- Fig. 14.4: Methods of inventory planning for finished goods
---------------------- Globally, the stockholding policy is a function of the product characteristics.
Core business products which exhibit highly predictable flow rates should have
---------------------- minimum (zero) stocks. Stock holding of seasonal products, which are slow
---------------------- moving, critical, perishable and whose peaks are relatively predictable, are to
be minimised, building them only during peak demand period. Fad products,
---------------------- with highly unpredictable levels of demand, high criticality and long lead times,
essentially must hold high levels of stocks thereby allowing safety margin for
---------------------- delivery, lead time and demand fluctuations.
---------------------- Inventories are a “Hindrance” to Supply Chain Responsiveness
The money blocked in the form of inventories - raw material, work-in-
----------------------
process (WIP) and finished goods - is a measure of the responsiveness of the
---------------------- supply chain to market demand. The inventory, expressed in terms of number
of days of sales, at any point of time determines the time taken to introduce a
---------------------- new product into the market and hence indicates the number of days the firm
is removed from the market. On an average, Indian organisations carry a total
---------------------- of 33.41 days of inventories as raw material and 14.25 days as WIP. The 6.44
---------------------- days of GIT, along with 16.09 days of finished goods, reflect the poor state of
supply chain infrastructure within the country (Table 14.1). Simple operational
---------------------- initiatives, viz. inter-modal transportation, cross-docking, FTL movements,
palletisation of stocks, global tracking systems could go a long way in reducing
---------------------- this component of supply chain inventories.
----------------------

Table 14.1: Inventory (in units of number of days of gross sales) Notes
Overall Industry sector
Inventory Average Lower Upper Lowest average Highest average ----------------------
bound bound
----------------------
Raw material 33.41 1 120 Consumer durables (25.00) Engineering (42.24)
Packing material 20.91 1 90 Electronics (17.33) Chemical (24.83)
Work in progress (WIP) 14.25 0.1 210 FMCG (4.40) Engineering (20.65)
Finished goods 16.09 1 40 Automotive (9.86) Consumer durables (23.33) ----------------------
Goods in transit (GIT) 6.44 0 85 Automotive (4.08) Electronics (11.00)
Accounts receivables 46.51 2 145 FMCG (15.91) Engineering (72.00) ----------------------
Accounts payables 45.00 2 127 Electronics (25.00) Consumer durables (60.00)
Inventory of CFAs/DCs
Inventory at distributors
14.48
16.77
2
3
50
45
Electronics (10.00)
Electronics (3.00)
Consumer durables (24.67)
Engineering (23.40)
----------------------
Inventory at retailers 13.48 1 45 Chemical (8.60) Automotive (30.00)
----------------------
The Indian industry, on an average, maintains an inventory turnover of
----------------------
10.9 turns for raw materials and 22.7 turns for finished goods in the supply
chain, which is very high compared to global standards. The inventory turnover ----------------------
indicates the velocity of the goods, i.e., the speed with which the goods move
and are replenished in the system. The downstream constituents of the supply ----------------------
chain - namely, CFAs/DCs, distributors, retailers - are a major carrier of
----------------------
inventories. Steps to reduce the inventory norms at the CFAs, distributors and
retailers would not only reduces the money blocked in inventories but also the ----------------------
cost required to carry those inventories. It would in turn increase the speed-to-
market as it would enable the Indian organisations to introduce products at a ----------------------
much faster pace and react faster to market conditions.
----------------------
14.5 OUTSOURCING: AN INCREASING TREND FOR ----------------------
MIXED REASONS
----------------------
Outsourcing is a popular management theme and continues to grow in ----------------------
popularity for Indian organisations. Transportation is the most outsourced
activity with warehousing and manufacturing falling way behind in the line. ----------------------
In both the private sector and the public sector, organisations are ----------------------
increasingly turning over various internal functions or sub-functions to outside
vendors. Recently however, the rule about what to outsource has been enlarged ----------------------
by considering everything outsourceable, regardless of whether it is a core
competency or not. Another viewpoint suggests that a firm should especially ----------------------
outsource non-core competencies since they do not need to be world class ----------------------
anyhow.
To find out the importance of outsourcing to Indian organisations, a set ----------------------
of nine processes were identified and the respondents were asked whether they ----------------------
outsourced them or not including the reason for outsourcing. The set of nine
activities included: ----------------------
(1) customer service ----------------------
(2) import/export management
----------------------
(3) information systems
----------------------

Notes (4) inventory management
(5) manufacturing
----------------------
(6) order processing
----------------------
(7) procurement
---------------------- (8) transportation
---------------------- (9) warehousing
---------------------- Transportation (95.7 per cent) was easily the most outsourced activity.
The next in line were warehousing (41.9 per cent) and manufacturing (36.7 per
---------------------- cent) though less than half the number of organisations have outsourced them,
till date, compared to transportation (refer to Figure 14.5). Among the major
---------------------- reasons cited for outsourcing, include improvement in process effectiveness (24
---------------------- percent), cost reduction (27 per cent), as well as strategic reasons (28 per cent)
(refer to Figure 14.6).
---------------------- Inventory Management
Order Processing
---------------------- Customer Service
Procurement
----------------------
Import/Export Mgmt.
---------------------- Information Systems
Manufacturing
---------------------- Warehousing
Transportation
----------------------
----------------------
0 10 20 30 40 50 60 70 80 90 100
---------------------- Percentage number of Respondents
---------------------- Fig. 14.5 : Degree of participation in developing supply chain

Strategic Reasons 26% Process Effectiveness 26%
----------------------
----------------------
----------------------
Investment Reasons
12%
----------------------
----------------------
Lack of Lower Cost
Internal 26%
---------------------- Capability
26%
----------------------
Fig. 14.6 : Major reasons for outsourcing of supply chain activities
----------------------
Regarding the future of outsourcing, transportation (27.8 per cent) as a
---------------------- process was the distinct choice of organisations to outsource even in the future.
No doubt, there has been an increase in the number of third party logistic
---------------------- providers. Following closely are information systems (16 per cent), import/

export management (14.2 per cent), and inventory management (12.2 per cent) Notes
as areas identified for outsourcing in the future.
----------------------
Thus it can be said that there is no magic wand that reveals whether a
function or sub-function is an outsourced candidate. Organisations outsource ----------------------
different activities for different reasons. For strategic outsourcing, therefore,
organisations must review the present status, contemplate the environment ----------------------
around them, assess their internal structures and capabilities, and decide what
----------------------
makes sense for their organisation to outsource or not to outsource.
----------------------
14.6 ALIGNMENT OF SUPPLY CHAIN STRATEGY WITH
----------------------
BUSINESS STRATEGY
----------------------
Enhancing customer service/satisfaction outscores all other objectives in
terms of their effectiveness to the supply chain management. At the same time, ----------------------
expanding revenue, reducing inventory cost and improving on-time delivery
follow closely in terms of supply chain priorities. Undoubtedly, all the four ----------------------
objectives stated above are the most vital and basic criteria for any supply chain
----------------------
management strategy to produce tangible results. Improvement in these metrics
has a direct effect on the bottom line of the organisation. Mapping supply ----------------------
chain objectives with the business objectives reveals that strategies for supply
chains evolve toward supporting corporate strategies (Table 14.2). Respondents ----------------------
emphasise enhancing customer service/satisfaction as the most important
----------------------
objective for effectiveness of supply chain management, very much in line
with the business objectives. Organisations actively use number of customer ----------------------
complaints (59.6 per cent), on-time deliveries (59.6 per cent) and order cycle
time (34.3 per cent) as popular customer service measures across all the industry ----------------------
sectors. The business objective of increasing customer satisfaction surpasses the
----------------------
objectives of maximising profit, increasing sales revenue, or delivering highest
value to shareholders. ----------------------
Table 14.2 : Aligning supply chain objectives with business objectives ----------------------
Focal area Business objectives Supply chain objectives Importance to
top management ----------------------
High : Customer service Maximise customer satisfaction Enhance customer service satisfaction 4.93
Highly reliable product 4.57
Best product performance 4.51
----------------------
Improving on-time delivery 4.43
Medium : profit Maximise profit Expanding revenues 4.56
----------------------
maximisation Deliver value to shareholders Reducing inventory costs 4.52
Increase turnover (sales) Lowest product cost 4.37 ----------------------
Increase return on investment Reducing order to delivery cycle time 4.33
Reducing lead time 4.28 ----------------------
Reducing transportation costs 3.96
Reducing warehouse costs 3.68 ----------------------
Low : operational Increase earnings per share Flexibility of production volume 4.17
excellence Flexibility of product mix 3.90
Innovating new product/services 3.88
----------------------
Reducing rationalising supplier base 3.64
Expanding width/depth of distribution 3.62 ----------------------
Offer broad product line 3.50
Having products in stock 3.43 ----------------------

Notes The Impact on Business Performance
The long-term payback of planning and implementing a world-class
----------------------
supply chain can be profound. In fact, it means drawing attention to specific
---------------------- benefits like sales revenue enhancements, lower operating costs, or higher
market share or customer base and the like. The challenge is, how much can
---------------------- successful implementation or redesign of supply chain bring to the bottom line?
According to Timothy Brown, of Andersen Consulting, Supply Chain Design
----------------------
Group, supply chain redesign is known to have saved organisations close to
---------------------- $100 million.
The majority of organisations (43.2 per cent) cited integration of processes
----------------------
with suppliers and customers as the biggest benefit associated with supply chain
---------------------- integration, followed by reduction in cycle time (28.1 per cent), fundamental
improvement through re-engineering (27.4 per cent) and improved productivity
---------------------- (22.6 per cent).
---------------------- Respondents indicated extent of benefits on various indicators. An
average across the respondents is indicated in Table 14.3. The majority of
---------------------- organisations expect improvements, of over 30 per cent, in order-to-delivery
cycle time, perfect order rates and inventory turnover through supply chain
----------------------
implementation.
---------------------- Table 14.3: Improvements achieved with supply chain implementation
---------------------- Measurable indicators Extent of improvement (%)
---------------------- 1. Sales revenue increased 20.2
2. Profits increased 15.5
---------------------- 3. Order to delivery cycle time reduced 32.8
4. Inventory reduction:
----------------------
Raw Material 25.1
---------------------- WIP 38.1
Finished goods 32.1
---------------------- 5. On-time delivery improved 33.4
---------------------- 6. Customer base increased 27.7
Although most business executives agree that supply chain management is
---------------------- becoming critical to profitability and corporate competitiveness, very few firms
---------------------- have been successful in translating the vision into an actionable framework of
strategies, tactics and measures. The business case for supply chain management
---------------------- improvements and the potential for dramatic gains in operational performance
are well known. Unfortunately, accompanying the dramatic growth has been the
---------------------- rising evidence that many implementation efforts tend to be late, over-budgeted,
---------------------- and when declared complete do not tend to meet the corporate expectations.
This is likely to continue till the prerequisites for change, namely pressure for
---------------------- change, clear shared vision, capacity for change and actionable steps are not
taken care of.
----------------------
----------------------

SCM AT MARICO: Notes
Marico Industries Limited (Marico) is one of India’s leading fast moving
consumer goods (FMCG) companies with well-entrenched brands in edible ----------------------
oils, hair care and, natural care that have enviable market positions. Over the
years, Marico has registered consistent growth rates, and developed into a Rs. ----------------------
900 crores company.
----------------------
Distribution is the heart of an FMCG company and to sustain its market
share and growth rates, it is imperative for an FMCG company to have a ----------------------
robust distribution infrastructure. However, this very growth exposed the
shortcomings of Marico’s highly regarded distribution network, forecasting, ----------------------
planning, and supply chain processes. Marico was quick to put the finger on the
pulse. Working swiftly, the company took several initiatives to cut escalating ----------------------
supply chain network problems.
----------------------
Marico took a ‘big bet, big-bang’ approach. It put together massive
resources and with the commitment of the management, it worked to redesign ----------------------
processes and implement a fully integrated system. The system comprised a
suite of ERP business applications, SCM planning tools and an information ----------------------
warehouse. These initiatives laid the groundwork for major developments,
including technology-supported partnerships with major distributors. ----------------------
With vendor-managed inventory (VMI) and a system for online exchange ----------------------
of distributor sales and other information in place, Marico expected to forecast
inventory levels more accurately at the company end as well as the distributor ----------------------
point.
----------------------
The integrated systems and processes brought about improved visibility
for Marico in internal operations and helped the company to move a step closer ----------------------
to the consumer. The VMI initiative and connecting major distributors and their
sales data to ERP and planning made all this possible. This led to reduction ----------------------
in sales skew and decreased stock-outs at the distributor point. Marico has
improved service by decreasing stock-outs at the depot from 21% to 9% and at ----------------------
the distributor level from 30% to 15%. It also reduced supply chain exception
cost by 64% and average total inventory by a fourth from 29 days to 22 days. ----------------------
----------------------
----------------------
Match the following focal areas with functional areas in supply chain. ----------------------
i. Customer Service a. Flexibility of product mix ----------------------
ii. Profit b. On-time delivery
----------------------
iii. Operational efficiency c. Reduced inventory
1. SCM at Marico used ______________ as technique of development. ----------------------
----------------------
----------------------
----------------------

Notes
Activity 1
----------------------
---------------------- 1. Imagine that you are the supply chain manager of a shipping company,
exporting goods from one country to another. Is it possible for you to
---------------------- track shipments and see at which destination the ship has delivered the
goods and when it is going to reach the final destination?
----------------------
2. Imagine that you are the supply chain manager of a company selling
---------------------- computers. Do you think it is beneficial for the company to have
a website that can enable it to reach a large base of customers and
----------------------
perform transactions with other buyers on the internet?
----------------------
Summary
----------------------
 Supply chain management has made inroads in the operations of Indian
----------------------
organisations. A lot of them have evolved their supply chain strategies and
---------------------- are now in the phase of implementing them. Interestingly, India has its
own set of peculiarities about the functioning of consumer markets, which
---------------------- shapes the demand management process - the force which influences
---------------------- supply chain strategy, design, planning, initiatives and management.
 The steps are neither simple nor easy. But the results are mind-boggling.
---------------------- Worldwide, organisations which have addressed and perfected these
---------------------- have benefited from enhanced sales revenues, higher profit margins and
improved customer service performance. They have drastically reduced
---------------------- logistics costs and inventory investments, while at the same time enhanced
response speed of order-fulfillment. More important, their shareholder
---------------------- values have multiplied. In a nutshell, they have ended up enhancing wealth
---------------------- and creating value for all the stakeholders continuously. The results of not
perfecting these paradigms of supply chains could see just the reverse.
---------------------- Those who ignore these paradigms will see their customers disappear in
the face of competition.
----------------------
---------------------- Keywords
----------------------  SCM practice: SCM implementation in industry.
----------------------  Critical SCM: The Supply chains in which Customer service, demand
management and inventory management rank high on the “criticality-
---------------------- scale” of supply chain processes, backed up by management tools of total
quality management (TQM), benchmarking and just-in-time (JIT).
----------------------
 Alignment: The matrices in which objectives of supply chain are the base
---------------------- for supply chain management strategy to produce tangible results.
----------------------
----------------------

Notes
----------------------
1. Give a list of Indian companies with significant contribution in SCM.
2. What is the impact of SCM strategy on business performance? ----------------------
3. Compare supply chain strategy with business strategy. ----------------------
4. Describe the manufacturing mindset. ----------------------
5. Depict the SCM practices in India.
----------------------

1. True
----------------------
Fill in the blanks.
----------------------
1. The Indian business is prone to favour push driven planning in spite of its
potential and actual inefficiencies. ----------------------
Match the following focal areas with functional areas in supply chain.
----------------------
i. –b
----------------------
ii. –c
iii. –a ----------------------
1.
SCM at Marico used Vendor managed Inventory as technique of ----------------------
development.
----------------------
1. Graham, Gary. Exploring Supply Chain Management in the Creative ----------------------
Industries. Emerald Group Publishing.
----------------------
2. Lee, Hau and Chung-Yee Lee. Building Supply Chain Excellence in
Emerging Economies. Springer Publication. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

References Notes
----------------------
R. Michael Donovan is a management consultant in Framingham, Mass. He can ----------------------
be reached at (508)788-1100. Readers may obtain other educational material
through the Web site www.rmdonovan.com ----------------------
Ainsworth, W.A., Gold, S.Y., 1995, Logistics Management and Technology: ----------------------
1995 Benchmarking Study, KPMG Peat Marwick LLP, Chicago, IL.
----------------------
Best, M., 1990, The New Competition, Harvard University Press, Cambridge,
MA. ----------------------
Byrne, P.M., Markham, W.J., 1993, “Global Logistics: Only 10 per cent of ----------------------
companies satisfy customers”, Transportation and Distribution, 34, 12, 41-5.
----------------------
Cilliers, W.W., Nagel, P.J.A., 1994, “Logistics trends in South Africa”,
International Journal of Physical Distribution & Logistics Management, 24, 7, ----------------------
4-14. ----------------------
Cooper, M.C., Lambert, D.M., Pugh, J.D., 1997, “Supply chain management: ----------------------
more than a new name for logsitics”, The International Journal of Logistics
Management, 8, 1, 1-14. ----------------------
Cox, A., 1999, “A research agenda for supply chain and business management ----------------------
thinking”, Supply Chain Management: An International Journal, 4, 4, 209-12.
----------------------
Davenport, T.H., 1993, Process Innovation, Reengineering, Work through
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Davis, T., 1993, “Effective supply chain management”, Sloan Management ----------------------
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----------------------
Derocher, R.P., Kilpatrick, J., 2000, “Six supply chain lessons for the millennium”,
Supply Chain Management Review, 34-40. ----------------------
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----------------------
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----------------------
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----------------------
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----------------------
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---------------------- Prentice-Hall, Englewood Cliffs, NJ.
Helper, S., 1991, “How much has really changed between US automakers and
----------------------
their suppliers?”, Sloan Management Review.
---------------------- Houlihan, J.B., 1985, “International supply chain management”, International
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----------------------
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---------------------- Chain Management Review, 1, 6-7.
---------------------- Lee, H., Billington, C., 1992, “Managing supply chain inventories: pitfalls and
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----------------------
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---------------------- International Journal of Physical Distribution & Logistics Management, 26, 10,
79-95.
----------------------
Novack, R.A., Langley, C.J., Jr, Rinehart, L.M., 1995, Creating Logistics Value:
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---------------------- Ross, D.F., 1998, Competing through Supply Chain Management, Chapman &
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----------------------
Sahay, B.S., 2000, Supply Chain Management for Twenty First Century,
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---------------------- Simchi-Levi, D., Kaminsky, P., Simchi-Levi, E., 2000, Designing and Managing
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---------------------- Stevens, G.C., 1989, “Integrating supply chain”, International Journal of Physical
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----------------------
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Tyndall G., Gopal, C., Partsch, W., Kamauff, J., 1998, Supercharging Supply
----------------------
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Ballé, M., 1995, The Business Process Re-Engineering Action Kit, Kogan Page, Notes
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----------------------
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----------------------
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----------------------
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----------------------
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----------------------
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----------------------
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----------------------
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----------------------
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----------------------
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----------------------
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----------------------
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----------------------
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----------------------
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----------------------
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----------------------
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----------------------
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----------------------
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---------------------- Tidd, J., 1994, “The link between manufacturing strategy, organization and
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----------------------

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SUPPLY CHAIN MANAGEMENT

(FOR PRIVATE CIRCULATION ONLY)

COURSE DESIGN AND REVIEW COMMITTEE

Published by Symbiosis Centre for Distance Learning (SCDL), Pune

Copyright © 2016 Symbiosis Open Education Society

Unit No. TITLE Page No.

Introduction to Supply Chain Management (SCM) 1

---------------------- • Evaluate the need for SCM

---------------------- Supply Chain Management is a total system approach to managing the

Supply Chain Management is the discipline which encompasses the ----------------------

Introduction to Supply Chain Management (SCM) 3

---------------------- Check your Progress 1

---------------------- 1.4 DECISION PHASES IN SCM

4 Supply Chain Management

Introduction to Supply Chain Management (SCM) 5

---------------------- 1.5 PROCESS OF SCM

---------------------- Customer Order

---------------------- Fig 1.1: Cycles of a supply chain process

ii) Customer order entry ----------------------

Customer order cycle ----------------------

Customer order entry Customer order fulfillment ----------------------

Introduction to Supply Chain Management (SCM) 7

---------------------- Retail Order Trigger Retail Order Receiving

---------------------- Retail Order Entry Retail Order Fulfillment

---------------------- Fig. 1.3: The Replenishment Cycle

8 Supply Chain Management

The manufacturing cycle ----------------------

Fig. 1.4: The Manufacturing Cycle ----------------------

i) Order arrival ----------------------

ii) Production scheduling ----------------------

Introduction to Supply Chain Management (SCM) 9

10 Supply Chain Management

Replenishment cycles ----------------------

Fig. 1.6: The push and pull process ----------------------

3. Supplier Relationship Management (SRM) ----------------------

Introduction to Supply Chain Management (SCM) 11

---------------------- SRM ISCM CRM

12 Supply Chain Management

Introduction to Supply Chain Management (SCM) 13

---------------------- Check your Progress 2

e) Transportation channels ----------------------

a) Transportation - best way to get the product to the customer ----------------------

b) Location of distribution centers in order to keep customer service high ----------------------

Introduction to Supply Chain Management (SCM) 15

16 Supply Chain Management

a) Understand the customer uncertainty and supply chain uncertainty ----------------------

Introduction to Supply Chain Management (SCM) 17

---------------------- A customer placing an emergency order would expect high product

---------------------- iv) Tolerable response time

---------------------- These factors can be summarised as follows:

18 Supply Chain Management

Introduction to Supply Chain Management (SCM) 19

---------------------- 1. Certain demand and predictable supply

---------------------- Zone of Strategic Fit

---------------------- Product Implied demand Product

---------------------- Fig. 1.7: Changes over the product life cycle

20 Supply Chain Management

We know that in order to achieve a strategic fit, a company needs to ----------------------

Introduction to Supply Chain Management (SCM) 21

---------------------- It is important to note that the term Information is not misunderstood as

22 Supply Chain Management

e) Difficulty in execution of strategies ----------------------

a) Increase in product variety ----------------------

Introduction to Supply Chain Management (SCM) 23

---------------------- 2. Delighting customers by adding variety to a product range would

 Finally, we discussed the importance of supply chain management

 Predictable variability can be defined as the change in demand for a ----------------------