BUSINESS LOGISTICS AND SUPPLY CHAIN MANAGEMENT- ABBAS USMAN

KADUNA STATE UNIVERSITY

SCHOOL OF POSTGRADUATE STUDIES

DEPARTMENT OF ACCOUNTING

LECTURE NOTE

BUSINESS LOGISTICS AND SUPPLY CHAIN MANAGEMENT (MPSM 851)

MASTERS IN PROCUREMENT AND SUPPLY CHAIN MANAGEMENT

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 MASTERS IN PROCUREMENT AND SUPPLY CHAIN MANAGEMENT

COURSE DESCRIPTION

The aim of this course is to provide students with the ability to analyse the principles of logistics
and the way in which the management of the supply chain can lead to competitive advantage and it
can also help the students with the critical awareness of the individual elements of the supply chain
process and to apply the principles of logistics management practice within the current business
environment.

LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Traditionally most organisations have viewed themselves as entities that exist independently from
others and indeed need to compete with them in order to survive. However, such a philosophy can
be self-defeating if it leads to an unwillingness to co-operate in order to compete. Behind this
seemingly paradoxical concept is the idea of supply chain integration.

The supply chain is the network of organisations that are involved, through upstream and
downstream linkages, in the different processes and activities that produce value in the form of
products and services in the hands of the ultimate consumer. Thus, for example, a shirt
manufacturer is a part of a supply chain that extends upstream through the weavers of fabrics to the
manufacturers of fibres, and downstream through distributors and retailers to the final consumer.
Each of these organisations in the chain are dependent upon each other by definition and yet,
paradoxically, by tradition do not closely co-operate with each other.

Supply chain management is not the same as normally implies ownership of upstream suppliers
and downstream customers. This was once thought to be a desirable strategy but increase business’
other
words the things they do really well and where they have a differential advantage. Everything else
is–in other outsourced word sitisprocured outside the firm. So, for example, companies that
perhaps once made their own components now only assemble the finished product, e.g. automobile
manufacturers. Other companies may also subcontract the manufacturing as well, e.g. nike in
footwear and sportswear. These companies have sometimes been termed ‘virtual’ or ‘network’
organist.
Clearly this trend has many implications for supply chain management, not the least being the
challenge of integrating and co-ordinating the flow of materials from a multitude of suppliers,
often offshore, and similarly managing the distribution of the finished product by way of multiple

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intermediaries.
What is logistics management in the sense that it is understood today? There are many ways of
defining logistics but the underlying concept might be defined as:

Logistics is the process of strategically managing the procurement, movement and storage of
materials, parts and finished inventory (and the related information flows) through the organisation
and its marketing channels in such a way that current and future profitability are maximised
through the cost-effective fulfillment of orders.
The definition of supply chain management adopted in this paper is:

Supply chain management is the management of upstream and downstream relationships with
suppliers and customers in order to deliver superior customer value at less cost to the supply chain
as a whole.
Thus, the focus of supply chain management is upon the management of relationships in order to
achieve a more profitable outcome for all parties in the chain. This brings with it some significant
challenges since there may be occasions when the narrow self-interest of one party has to be
subsumed for the benefit of the chain as a whole.
Whilst the phrase ‘supply chain management’ should really be termed ‘demand chain manag be
driven by the market, not by suppliers. Equally the word ‘chain’ shou ‘network’ since there will
normally be multi well as multiple customers and customers’ cu
Supply Chain Encompasses……..

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Porter’s Value Chain Analysis

This article explains the Porter’s Value, developed Chain by Michael Analysis Porterin practical way.
After reading you will understand the basics of this powerful management tool.

What is a Value Chain Analysis?

The value chain alsoue Chain known Analysis is as business Porter’s management Val concept that
was developed by Michael Porter. In his book Competitive Advantage (1985), Michael Porter
explains Value Chain Analysis; that a value chain is a collection of activities that are performed by a
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company to create value for its customers. Value Creation creates added value which leads to
competitive advantage. Ultimately, added value also creates a higher profitability for an organization.

Porter’sValue Chain Analysis

The strength of the Porter’s Value Chain An Analysis focuses on the systems and activities
with customers as the central principle rather than on departments and accounting expense
categories. This system links systems and activities to each other and demonstrates what effect this
has on costs and profit. Consequently, it (Value Chain Analysis) makes clear where the sources of
value and loss amounts can be found in the organization.

The Value Chain activities

Porter’s Value Chain Analysis consists of a support activities. Primary activities have an immediate
effect on the production, maintenance,
sales and support of the products or services to be supplied. These activities consist of the
following elements:

Inbound Logistics
These are all processes that are involved in the receiving, storing, and internal distribution of the
raw materials or basic ingredients of a product or service. The relationship with the suppliers is
essential to the creation of value in this matter.

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Production
These are all the activities (for example production floor or production line) that convert inputs of
products or services into semi-finished or finished products. Operational systems are the guiding
principle for the creation of value.

Outbound logistics
These are all activities that are related to delivering the products and services to the customer.
These include, for instance, storage, distribution (systems) and transport.

Marketing and Sales

These are all processes related to putting the products and services in the markets including managing
and generating customer relationships. The guiding principles are setting oneself apart from the
competition and creating advantages for the customer.

Service
This includes all activities that maintain the value of the products or service to customers as soon
as a relationship has developed based on the procurement of services and products. The Service
Profit Chain Model is an alternative model, specific designed for service management and
organizational growth.

Support activities of the Value Chain Analysis Support activities within the Porter’s Valu they
form the basis of any organization. In the figure dotted lines represent linkages between a support
activity and a primary activity. A support activity such as human resource management for
example is of importance within the primary activity operation but also supports other activities
such as service and outbound logistics.

Firm infrastructure
This concerns the support activities within the organization that enable the organization to maintain its
daily operations. Line management, administrative handling, financial management are examples of
activities that create value for the organization.

Human resource management

This includes the support activities in which the development of the workforce within an
organization is the key element. Examples of activities are recruiting staff, training and coaching of
staff and compensating and retaining staff.

Technology development

These activities relate to the development of the products and services of the organization, both
internally and externally. Examples are IT, technological innovations and improvements and the
development of new products based on new technologies. These activities create value using
innovation and optimization.
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Procurement

These are all the support activities related to procurement to service the customer from the organization.
Examples of activities are entering into and managing relationships with suppliers, negotiating to arrive at
the best prices, making product purchase agreements with suppliers and outsourcing agreements.
Organizations use primary and support activities as building blocks to create valuable products, services and
distinctiveness.
Using the Porter’s Value Chain Analysis

Porter’s Value Chain Analysis: There are four use of the Value Chain as an analysis model. By
following these basic steps the organizationcan be analyzed using the Value Chain.

Step 1: Identify sub activities for each primary activity For each primary activity, sub-activities
can be determined that create a specific value for an organization.

There are three categories of sub activities, namely:

• Direct activities (for instance online sales from Marketing& sales)

• Indirect activities (for instance keeping the CRM up-to-date from Marketing& sales
or organizing a golf tournament for customers)
• Quality assurance (Proofreading and editing advertisements from Marketing& sales).

Step 2: identify sub activities for each support activity

Here it concerns the idea how value support activities such as firm infrastructure, human resource
management, technology development and procurement can create value within the primary
activities. Use the same distinction as in step 1 for direct and indirect activities and quality
assurance. For example, consider how human resource management can create value to inbound
logistics, marketing & sales and service. This will also have to be done for the other support
activities.

Step 3: identify links

This is a crucial and time-consuming step because this is about finding the links between the added
value you have identified. This part is of importance for an organization when it concerns
increasing competitive advantage from the value chain. For example, a development within a
CRM solution can have a link with increasing production and sales volumes through certain
investments. Another example is the link between the complaints that have been recorded within
the primary activity and the increase of unfilled vacancies (human resource management)
within the primary activity outbound logistics.

Step 4: look for opportunities/ solutions to optimize and create value After you have completed the
value chain analysis it is important to determine what activities are to be optimized in order to
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create added value. This is about quantitative and qualitative investments that can eventually
contribute to increasing your customer base, competitive advantage and profitability. Creating
business cases will help you give priority and return on investment (ROI) to the possibly required
added value creation of a primary or support activity.

Service Profit Chain

This article explains the theory of the Service Profit Chain in a practical way. After reading it, you
understand the core of this strategy theory.

What are the Service Profit Chain?

The American economists W. Earl Sasser Jr. and Leonard A. Schlesinger and American businessman
James L. Heskett, published their ground-breakingThe Service book Profit“ Chain –How leading
companies link profit and growth to loyalty, satisfaction and value” in 1997, including an explanation of
the Service Profit Chain. The basic principle of the Service Profit Chain theory revolves around the fact that
customer satisfaction starts with good staffing and treatment of ones own employees. Committed
employees are sociable and convey this to the customer.

Connection

As it turns out, successful companies remain at the top because they manage their Service Profit Chain well.
Apparently, there is a link between service on the one hand and profit on the other.

This connection consists of anieslinks; have aquantifiable hence the set of relationships that
directly link profit and growth to the many aspects of service. The

Service Profit Chain involves customer loyalty, customer satisfaction, employee loyalty, employee
satisfaction and productivity. This way, strong links develop between:

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1. Profit –Customer loyalty

2. Employee loyalty –Customer loyalty

3. Employee satisfaction –Customer satisfaction

Based on the concept of the service-profit chain, a company should establish a link between
employees and customer experience on the one hand and create profit and growth on the other. The
different relationships reinforce each other; satisfied customers contribute to employee satisfaction,
loyal employees contribute to customer loyalty, and this customer loyalty will eventually result in
profit.

STEPS

The Service Profit Chain shows that a comp customer and employee satisfaction. The model
consists of sequential links that lead to success.
Each link consists of so-called KPIs; Key Performance Indicators. In other words, these are crucial
performance indicators; variables that are used to analyse the performance of a company, brand or
product. The success of an organisation is measured with KPIs. These links can be compared to
steps that need to be taken. The goal of these steps is to make a company uccessful. Each step can,
as it were, be in result in profit and growth for a company. It involves the following seven steps:

Step 1 –Internal: service quality

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The first few steps of the Service Profit Chain involve employees. An organisation can only be
successful if it invests in its own employees. This means that a safe work environment should be
created, employees should be involved in the decision making process and should work together in
a pleasant atmosphere. A company can achieve this by investing in their employees, to support,
train and invest in the development of its employees. All to an extent that hiring, remuneration and
development policy are important components of this first step. New employees with the right
attitude, can contribute to the internal service quality. By rewarding employees, they are motivated
to be actively engaged in the organisation. With training, education and course options, employees
are in a better position to be fully committed to a company. The internal service quality will
subsequently lead to employee satisfaction.

Step 2 –Employee satisfaction

One step cannot be achieved without the other. To satisfy employees and keep them satisfied, the
same amount of attention must be devoted to them as is devoted to customers. Engaged employees
are more productive, enabling them to provide a better service. They pass on their enthusiasm,
leading to a positive image. Their job satisfaction has a positive effect on attracting and retaining
customers. This so-called customer value can only be generated by satisfied employees. This
results in loyal and productive employees.

Step 3 –Loyal and productive employees

Committed employees are loyal to their company, department and colleagues. They feel closely
involved in the organisation and its joint goal. Therefore, they are more productive and feel very
responsible for any end result. In this context, every employee is an ambassador of the organisation
and passes this view on to the customers. The deeper need of each individual employee is
important in order to make them even more loyal and productive, so they can perform their job
with pleasure.

Step 4 –Value proposition for the customer

The external value proposition for the customer is also referred to as the customer value. Why
does a customer choose a specific product or brand or to only do business with a company the
customer is already familiar with? Of course, the product or service itself is important, however the
customer value is mainly created by the employees of the company in question. They ensure a
customer values the way he/she is assisted and addressed. Satisfied employees truly care about the
company and are able to convey this to their customers in a good and honest manner. As a result,
the service they provide will increase and their attention will be sincere. Customers appreciate this.
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Step 5 –Customer satisfaction

Step 5 and 6 are related and are directly linked. Customer loyalty is a result of customer
satisfaction; a dissatisfied client will not be loyal and will not place a new order. The more satisfied
a customer, the greater the chance that the customer will return for repeat business or place larger
orders. Satisfied customers are seen as free publicity; they are ambassadors of the company and
can recommend products and/or service in their environment with full enthusiasm.

Step 6 –Customer loyalty

A customer is loyal if he/she goes to the same company for a subsequent purchase, irrespective of
whether or not the product or service is provided cheaper by a competitor. The customer
deliberately chooses to do so and wishes to be helped by the company he/ she is already familiar
with and has had positive experiences with. This customer loyalty will subsequently result in more
growth and a higher profit for the company. If all customers are assisted well and are provided with
the right service, this would be an excellent investment for the future. Customers will continue to
return by their own accord.

Step 7 –Profit and growth

Profit in the Service Profit Chain is not the goal, it is the result. As you can conclude from the
previous steps, all additional purchases will ensure that the company will make a profit and grow.
Satisfied customers have the strength of word of mouth advertising; they contribute to the positive
image of the company.

LEADERSHIP

Each step in the Service Profit Chain is a condition that leads to profit. Your own employees are
key to customer satisfaction and loyalty. Without the first step, there is no second step and without
the second step there is no third step etc. Leadership plays an essential role in this chain. It is the
manager’s task to create a culture in which and can flourish. On the other hand, managers are
expected to focus on customer service and service provision. Every manager is responsible for
being the link between employees and customers and to follow and monitor the entire process.
Therefore, managers invest a lot of time in hiring the right employees and will do anything to
include them in the decision making process and help them improve. In order to get committed
employees, managers must look at everyone’s individual role and encourage an service-profit
chain will have the potential to succeed.

Now it’s your turn Could you use this theory to benefit your business? Do you recognize the
practical explanation or do your have any additions?
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MANAGING THE ‘4RS’

As we move rapidly into the era of supply chain competition a number of principles emerge to
guide the supply chain manager. These can be conveniently summarised responsiveness, reliability,
resilience and relationships.

1. Responsiveness

In today’s-in-time just world the ability to respond-shorter to time-frames has become critical. Not
only do customers want shorter lead times, they are also
looking for flexibility and increasingly customised solutions. In other words, the supplier has to be
able to meet the precise needs of customers in less time than ever before. The key word in this
changed environment is agility. Agility implies the ability to move quickly and to meet customer
demand sooner. In a fast-changing marketplace agility is actually more important than long-term
planning in its traditional form. Because future demand patterns are uncertain, by definition this
makes planning more difficult and, in a sense, hazardous. In the future, organisations must be
much more demand-driven than forecast driven. The means of making this transition will be
through the achievement of agility, not just within the company but across the supply chain.
Responsiveness also implies that the organisation is close to the customer, hearing the voice of the
market and quick to interpret the demand signals it receives.
2. Reliability

One of the main reasons why any company carries safety stock is because of uncertainty. It may
be uncertainty about future demand or u delivery promise, or about the quality of materials or
components. Significant improvements in reliability can only be achieved through re-engineering
the processes that impact performance. Manufacturing managers long ago discovered that the best
way to improve product quality was not by quality control through inspection but rather to focus
on process control. The same is true for logistics reliability. One of the keys to improving supply
chain reliability is through reducing process variability. In recent years there has been a
considerable increase in the use of so-called ‘six sigma’e concept of methodologies six sigma in
essence. these tools are designed to enable variability in a process to be reduced and controlled.
Thus, for example, if there is variability in order processing lead times then the causes of that
variability can be identified and where necessary the process can be changed and brought under
control through the use of six sigma tools and procedures.

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3. Resilience

Today’s marketplace is characterized by high business, economic and political environments are
increasingly subjected to unexpected shocks and discontinuities. As a result, supply chains are
vulnerable to disruption and, in consequence, the risk to business continuity is increased. Whereas
in the past the prime objective in supply chain design was probably cost minimization or possibly
service optimization, the emphasis today has to be upon resilience. Resilience refers to the ability
of the supply chain to cope with unexpected disturbances. There is evidence that the tendencies of
many companies to seek out low-cost solutions because of pressure on margins may have led to
leaner, but more vulnerable, supply chains. Resilient supply chains may not be the lowest-cost
supply chains but they are more capable of coping with the uncertain business environment.
Resilient supply chains have a number of characteristics, of which the most important is a
business-wide recognition of where the supply chain is at its most vulnerable. Managing the
critical nodes and links of a supply chain, becomes a key priority. Sometimes these dependence on
a single supplier, or a supplier with long replenishment lead times, or a bottleneck in a process.
Other characteristics of resilient supply chains are their recognition of the importance of strategic
inventory and the selective use of spare capacity to cope with ‘surge’ effects.

4. Relationships

The trend towards customers seeking to reduce their supplier base has already been commented
upon. In many industries the practice of ‘partnership source suggested that the benefits of such
practices include improved quality, innovation sharing, reduced costs and integrated scheduling of
production and deliveries. Underlying all of this is the idea that buyer/supplier relationships should be based
upon partnership. Increasingly companies are discovering the advantages that can be gained by seeking mutually
beneficial, long-term relationships with suppliers partnerships. From t can prove formidable barriers
to entry for competitors. The more that processes are linked between the supplier and the customer the
more the mutual dependencies increase and hence the more difficult it is for competitors to break in. Supply
chain management by definition is about the management of relationships across complex networks of
companies that, whilst legally independent, are in reality interdependent. Successful supply chains will be those
that are governed by a constant search for win-win solutions based upon mutuality and trust. This is not a
model of relationships that has typically prevailed in the past. It is one that will have to prevail in
the future as supply chain competition becomes the norm. These four themes of responsiveness,
reliability, resilience and relationships provide the basis for successful logistics and supply chain
management.

LOGISTICS MANAGEMENT INFORMATION SYSTEM AND E-FULFILMENT

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A logistics management information system (LMIS) is a system of records and reports used to
aggregate, analyse, validate and display data (from all levels of the logistics system) that can be
used to make logistics decisions and manage the supply chain. The primary purpose of the LMIS is
to manage the logistics of ensuring a smooth supply chain and that the data it generates are also
relevant for monitoring key indicators of a system performance. Logistics MIS data elements
include stock on hand, losses and adjustments, consumption, demand, issues, shipment status, and
information about the cost of commodities managed in the system.

When automating a logistics and supply chain management system, there are procedures/processes
that expected to be followed and these are:

i. Preliminary Study

ii. Feasibility Study

iii. System Investigation

iv. System Analysis and Design

v. System Implementation

vi. Review and Maintenance

PRELIMINARY STUDY: This involves an analysis of the logistics information requirement.

Such an analysis is carried out in conjunction with other parties/firms involved, so that their actual
requirement can be identified, rather than likely requirement. The purpose of preliminary study is
to establish whether there is a need for a new system and if so to specify the objectives of the
system.

FEASIBILITY STUDY: This involves a brief review of the existing system and the identification of a range of
possible alternative solutions. One will usually be recommended on the basis of its costs and benefits, although it
is possible for a decision not to proceed to result.

SYSTEM INVESTIGATION: This is a fact-finding exercise which investigate the existing

system to assess its problems and requirement and to obtain details of data volumes, responses,
times and other key indicators. This study is far more detailed and comprehensive than the
feasibility study.

SYSTEM ANALYSIS AND DESIGN: This is a technical phase which considers both
computerized and manual procedures addressing a particular input, output, program design, life

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design and security. A detailed specification of the new system is produced. This process examines
why current method are used, what alternatives might achieve the same or better result, what
restricts the effectiveness of the system and what performance criteria are required from the
system.

SYSTEM IMPLEMENTATION: This development comes through design to operations. It

involves acquisition or writing of software, program testing, file conversion or set up, acquisition
and installation.

REVIEW AND MAINTENANCE: This is an on-going process which ensures that the system
meets the objective set during the feasibility study accepted by users and that its performance is
satisfactory.

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Collaborative Planning, Forecasting and Replenishment

Over the last 25 years or so, a number of breakthroughs have occurred in collaborative working in
supply chains. Many of these initiatives have originated in the retail sector but the ideas have
universal application. The underpinning logic of all these collaborative initiatives has been the idea
that through sharing information and by working together to create joint plans and forecasts, both
the supply side and the demand side of the supply chain can benefit.

Collaborative planning, forecasting and replenishment (CPFR) is the name given to a partnership-
based approach to managing the buyer/supplier interfaces across the supply chain. The idea is a
development of vendor managed inventory (VMI). VMI is a process through which the supplier
rather than the customer manages the flow of p operations. This flow is driven by frequent
exchanges of information about the actual off-take or usage of the product by the customer. With
this information the supplier is able to take account of current inventories at each level in the chain,
as well as goods in transit, when determining what quantity to ship and when to ship it. The
supplier is in effect managing the customer’s inventory on the customer’s beha orders; instead the
supplier makes decisions on shipping quantities based upon the information it receives direct from
the point-of-use or the point-of-sale, or more usually from off-take data at the customer’s
distribution use this information to centre fore cast future. The requirements and hence to utilise
their own production and logistics capacity better.

BUSINESS LOGISTICS AND SUPPLY CHAIN MANAGEMENT- ABBAS USMAN

Under conventional replenishment systems both sides need to carry safety stock as a buffer against
the uncertainty that is inevitable when there is no visibility or exchange of information.

With VMI the need to carry safety stock is information for inventory’. CPFR is in effect
collaboration amongst supply chain partners a step further. Underpinning CPFR is the creation of
an agreed framework for how information will be shared between partners and how decisions on
replenishment will be taken. A key element of CPFR is the generation of a joint forecast which is
agreed and signed off by both the supplier and the customer.

Figure 4.10 presents a nine-step model for the implementation of CPFR programmes developed by
the US-based organisation VICS (Voluntary Inter-Industry Commerce Standards).

Whilst many of the early CPFR pilot implementation exercises were in retail environments, there
is no doubt that these principles can be applied successfully in most industries. A study by
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Accenture1 highlights a number of significant benefits that can flow from successful CPFR (see
box below).

• Reduce capital investment

Companies reaching critical mass with their CPFR initiatives may also harvest additional benefits
from a reduction in capital investment. Reducing warehousing capacity is possible for the
collaboration partners in the long term through the increased supply chain visibility and a reduction
in uncertainty. Increased forecast accuracy alongside collaborative long-term planning reduces the
need to build up inventories or production capacity to cover unexpected changes in demand.

• Decrease cost of goods sold

The results from the pilots have shown that CPFR can significantly impact the cost of goods sold.
In particular, reductions in inventory, product obsoletes, changeover times and transportation costs
can be achieved. Based on an improved forecast accuracy and long-term planning, trading partners
are able to reduce inventory levels along the supply chain, stabilise production runs, improve truck
fill rates and reduce obsoletes after promotions.
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• Increase sales revenue
Reducing the incidence of out-of-stocks at the point of sale (increase in on shelf availability)
improves the service to the consumer and reduces lost sales. Furthermore, the continued
availability of the products increases consumer satisfaction and therefore benefits store loyalty for
the retailer and the product loyalty for the manufacturer.
Source: ACCENTURE ECR EUROPE

E-FULFILMENT

Electronic commerce not only revolutionized the way goods are sold, but how they are delivered.
The tenets of one-to-one marketing that online firms are adopting must be carried over to their
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fulfillment operations, and this is creating mass-scale chaos. Customers demand customized
products delivered at very high speed with complete order flexibility and convenience. Today’s
online customers want t moment they click the Buy button until the moment the package arrives on
their doorstep, and be able to reroute packages, determine delivery costs and time-in-transit, and
break up their orders for multiple ship-to addresses. The shift of power from the seller to the buyer
is creating a new era of expectations, and buyers - whether they are consumers or businesses –say
they will not tolerate experiences such as partia product return policies, or surprise backorders.

E-fulfillment is all about meeting customer expectation and satisfaction –a process that begins with
accepting the customer order and ends with the customer receiving exactly what he or she wants,
when and where he or she wants it (Tarn et al., 2003). Agatzet al. (2008) defined e-fulfillment as
the purchasing, warehousing, delivery and sales stages of the supply chain. Pykeetal.(2001)
suggested that product returns is a part of e-fulfillment and proposed five e-fulfillment processes:
order capture, order processing, pick and pack, ship and after-sales service which includes returns
handling. Agatz et al. (2008, 2013), Davis-Sramek et al. (2008), Lee and Whang (2001), Pyke et al.
(2001), Ricker and Kalakota (1999) and Tarn et al. (2003) also defined various stages of the e-
fulfillment process. E-fulfillment can be broadly classified into two categories: order procurement
and order fulfillment. Order procurement involves order capturing and processing while order
fulfillment involves picking and packing, shipping, after-sales service and returns handling.

E-fulfillment can also be defined as the integration of people, processes and technology to ensure
customer satisfaction before, during and after the online buying experience. Note that fulfillment
differs from delivery in that delivery means merely unloading physical goods at a specific location.
Fulfillment means meeting customer expectations, which involves an e-fulfillment provider
serving the last kilometer between vendor and customer.

Online businesses have three options for handling e-logistics and e-fulfillment: they can perform
the functions themselves in-house, they can outsource the functions to a third-party, or they can use
drop-shipping.

There are some definite arguments in favor of outsourcing. When distribution is not a company’s
petency, core out sourcing com the function can help a company grow by allowing it to focus on its
mission-critical activities. Businesses that outsource fulfillment can also deploy sites quickly, with
minimal capital investment, while maintaining the confidence that customers will receive the level
of service they expect. If an e-business is successful, the ability to handle large volumes very
quickly becomes of paramount importance. By outsourcing, an e-business is able to plug into the
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third-party’s infrastructure which should bero bust enough to handle the increased activity.

Outsourcing also alleviates the need to hire internal logistics and fulfillment staff, and to build and
equip expensive warehouses. Third-party providers have the advantage of capturing and processing
the details of thousands of transactions. The sheer quantity of data can be very useful for trending
and improving sales and customer service. In fact, a new type of third-party providers, Logistics
Visibility Providers (LVPs), specialize in capturing, cleansing, verifying and analyzing the data
from all other logistics service providers in order to facilitate supply chain visibility.

There are also some distinct disadvantages to outsourcing, chief among them being the loss of
control. Regardless of whom an e-business outsources to, it is still responsible for the quality of the
customer relationship, and it is liable if anything goes awry. The truth is, few logistics outsourcers
have figured out how to do ecommerce fulfillment well.

Qualified e-logistics providers must depend on integrated IT systems and complex software to
manage the dynamic flow of products. The quality of information must be much better than that of
traditional outsourcers, so that companies can have visibility into their supply chains. Better
information also reduces inventory throughout the supply chain, enabling companies to react
quickly to market changes. But better supply chain visibility changes the face of physical
distribution. Since companies do not need to stock as much inventory, e-logistics providers must
store and transport unit-sized shipments rather than traditional pallet-sized shipments. This requires
a complete overhaul of business processes.

3RD PARTY LOGISTICS

Outsourcing of logistics function is a business dynamic of growing importance all over the world.
A growing awareness that competitive advantage comes from the delivery process as much as from
the product has been instrumental in upgrading logistics from its traditional backroom function to a
strategic boardroom function (Razzaque and Sheng, 1998). In order to handle its logistics activities
effectively and efficiently, a company may consider the following options –it can provide the
function in-house by making the service, or it can own logistics subsidiaries through setting up or
buying a logistics firm, or it can outsource the function and buy the service. Currently, there has
been a growing interest in the third option, i.e. outsourcing of logistics functions to third party
logistics service providers. Outsourcing, third party logistics services (3PL) and contract logistics
generally mean the same thing (Lieb, Millen and Wassenhove, 1993). It involves the use of
external companies to perform logistics functions, which have traditionally been performed within

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an organization. The functions performed by third party logistics service providers can encompass
the entire logistics process or select activities within that process.

A key rationale for outsourcing of logistics functions is the intensified globalization of businesses.
During the last two decades, globalization has emerged as a major force of shaping business
strategies, leading firms to develop products designed for a global market and to source
components globally (Cooper, 1993). This has led to more complex supply chains requiring larger
involvement of managers in logistics functions. Lack of specific knowledge of customs, tax
regulations and infrastructure of destination countries has forced firms to acquire expertise of
third-party logistics service providers. As a result, firms are concentrating their energies on core
activities and leaving the rest to specialist firms (Byrne, 1993; Foster and Muller, 1990; Trunick,
1989).

An equally important development that is impacting the logistics industry is the increased
emphasis on supply chain management as a source of competitive advantage. In the last two
decades, the quest for time-based competence led initially to a rapid adoption of new
manufacturing methods like just-in-time, flexible manufacturing systems, computer aided
manufacturing and so on by organizations. These methods have brought about significant
improvements in supply chain performance through their focus on compressed manufacturing lead
times and improved quality. However, further enhancements in supply chain performance will
necessitate speeding the flow of information on orders to upstream supply chain partners, and
expediting logistics activities like storage and delivery of materials or products through the entire
supply chain (Bhatnagar, Sohal & Millen, 1999). Usage of third-party logistics services is a
strategic decision and hence it is necessary to perceive and quantify the impact it has on business
performance. The purpose of engaging in third party relations is seldom cost reduction alone, but a
combination of service improvements and efficient operations.

Logistics is therefore emerging as a key frontier of competition in the future. Good logistics
performance requires a trade-off between the need to reduce overall supply chain inventory and
lead times, while simultaneously capturing economies of scale and improving customer service for
enhanced business performance. Versatility of third-party logistics service providers enables them
to maintain this trade-off by turning fixed costs into variable costs for companies using their
services (Trunick, 1989). The use of third-party logistics service providers has gained prominence
in this context.

Third party logistics plays a significant role in reduction of production cost as well as increment of
customer satisfaction. It works as intervene between manufacturer and customer. 3PLs
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consolidates transportation as well as warehousing and offers such services to managers who
wanted to reduce operation cost. It is the business of managing various elements of the supply
chain via contract or outsourcing. A 3PL pr requirements, which may include transportation,
inventory optimization, warehousing, order fulfillment, or the integration of these and other
functions. moreover, 3PL providers to offer ten key services, including strategic capacity, logistics
expertise, network analysis, mode and load optimization, cost-containment strategies, vendor
compliance management, system support, actionable business intelligence, best practice sharing,
and risk profile reduction.

Third-party logistics is simply the use of an o materials management and product distribution
function. A relationship between a shipper and third party which, compared with the basic services,
has more customized offerings, encompasses a broad number of service functions and is
characterized by a long-term, more mutually beneficial relationship. Third party logistics providers
are independent companies providing single or multiple logistics services to a purchasing
company. Third party logistics providers, although they do not hold ownership of the product for
distribution, are legally bound and responsible to perform the requested activities of the purchasing
company. The relationship between the two parties is long-term and beneficial.

There are many reasons that encourage companies to outsource "in-house" businesses to 3PL and
they are:

i. Concentrate on core activities and processes

ii. Improve customer service level
iii. Integrate the entire supply chain
iv. Reduce conflict and reciprocate on mutual goal-related matters
v. Increase efficiency, stability and flexibility
vi. Establish market legitimacy
vii. Avoid extensive capital expenditures
viii. Increase productivity
ix. Reduce risk, uncertainty and fluctuation
x. Leverage resources
xi. Improve expertise, market knowledge and data access
xii. Create a competitive advantage either locally or globally
xiii. Reduce personnel and equipment costs.

Initially, third party logistics provided some primary services which include transportation and

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warehousing but nowadays third-party logistics shows the provision of many other services which
reduces the contact distance between manufacturer and customer. So, 3PL provides the following
services:

•Carrier-3PLselectionhelpsinthe of carrier so that damage of the product while transportation can

be minimized.

•Development of- Accordingdistributiontothisfunction,3PL develop strategy the distribution

strategy of product in different department so, that firms can supply product in less time to
customers.

•Freight bill- Accordingpaymenttothisfunction,and3PL audit reduce the time required for billing of
transportation of firm by providing bill payment service. Through such service of 3pl, firm can
concentrate of core works.

•Information-With the help system of information technology, 3PL has developed a service
through which a customer can directly contact with a manufacturer. 3PL transfers information of
order from customer to manufacturer.

•Freight - Accordingdistributiontothisservice,3PL distributes a transportation of product as per the

category. Such kind of function helps to manufacturer to provide the delivery at right time and
right place.

•Product-Customers return scan the products to manufacturer through 'product return service' of
3PL. Such service reduces the time of customers of product return because generally 3PL picks up
a product from customer and the handovers it to manufacturer. After that, customer gets a finished
new product from manufacturer through 3PL.

•Freight -consolidationAccordingtothisservice,3PLcombines the process of freight into one process

so that freight services can work together to reduce the time of delivery.

•Product-According marking to this service, 3PL reduces the time of packaging and labelling of
product. Such functions improve the productivity of product.

•Route and network-3PLhelps to optimization decide better route for the delivery of a product. So
that a firm can reduce cost of freight.

With all above functions, 3PL also provides a service of customer brokerage, Consulting service,
customer clearance, cross docking, export operation, export licensing assistance, expedited
delivery, transportation, warehousing, EDI capability, selected manufacturing activities, shipment
planning, traffic management, product repair, product modification, product marking, product
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assembly, pickup and delivery, overseas sourcing, overseas distribution, order management, order
entry and processing, inventory management, product return, management and performance
reports, replenish inventory, rate negotiation, intermodal services, Import operations, export
operations, Fleet operations.

From the above diagram we can conclude that logistics intervenes in between customers and
manufacturers. In this system, customer's orders their product from online shopping sites. After
that logistics companies get the information (order) of customers. Furthermore, logistics company
transfers information of order to manufacturers. After getting the information of demand of
customers, manufacturer sends the product to customers through logistics. Logistics plays an
important role in transportation of product from manufacturer to customers. In this system, two
most prominent methods of billing procedure take place. These are, cash on delivery and online
transaction. With the help of cash on delivery method, customers can pay the billing amount after
the delivery of product. With the help of online transaction customers can pay billing amount
through two tools such as Enterprise Resource Planning (ERP), Electronic Data interchange (EDI)
and customer relationship management and the ability to link one activity with another. These tools
not only improve the business processes but also build infrastructure for automated information
exchange between suppliers and customers that is liked with increased customer
profitability/satisfaction. Also, customers can return or exchange products with free of cost.
Customer gets the product in very less rates because logistics companies have reduced the role of
local dealers so that they get product directly from firm.

4TH PARTY LOGISTICS

4PL was originally defined by Accenture as a trademark in 1996 and defined as "A supply chain

26
integrator that assembles and manages the resources, capabilities, and technology of its own
organization with those of complementary service providers to deliver a comprehensive supply
chain solution.", but is no longer registered.

4PLs have also been referred to as "Lead Logistics Providers". Now a new crop of companies have
emerged who are actual transportation companies too. While a 4PL is sometimes described as non-
asset-owning service provider, their role is to provide broader scope managing of the entire supply
chain.Fourth-Party Logistics Providers, or 4PLs, are integrators that manage a company's supply
chain from end to end, often hiring subcontractors. Another term for a 4PL is a Lead Logistics
Provider (LLP). The prototypical 4PL not only locates and manages specialized service providers,
but also advises on the design of the entire process. 4PLs have several other distinguishing
characteristics: reliance on sophisticated information technology systems to link up closely with
the shipper's organization, and creation of a separate organization—perhaps a joint venture
between the shipper and the 4PL—dedicated to managing that shipper's supply chain.

REVERSE LOGISTICS

As the power of consumers is growing, the product return for customer service and customer
retention has become a common practice in the competitive market, which propels the recent
practice of reverse logistics in companies. Many firms attracted by the value available in the flow,
have proactively participated in handling returned products at the end of their usefulness or from
other parts of the product life cycle. Reverse logistics is the flow and management of products,
packaging, components and information from the point of consumption to the point of origin. It is
a collection of practices similar to those of supply chain management, but in the opposite direction,
from downstream to upstream. It involves activities such as reuse, repair, remanufacture, refurbish,
reclaim and recycle. For the conventional forward logistics systems, the flow starts upstream as
raw materials, later as manufactured parts and components to be assembled and continues
downstream to reach customers as final products to be disposed once they reach their economic or
useful lives. In reverse logistics, the disposed products are pushed upstream to be repaired,
remanufactured, refurbished, and disassembled into components to be reused or as raw material to
be recycled for later use.

“The term reverse logistics (RL), which ha managerial/academic vocabulary, is a process by which
a manufacturing company governs the

27
return of its products, parts and materials from the consumption sites, in order to reuse them,
recover their residual value, or to dispose

In the forward system, the eventual goal is to serve the end customers, while in a reverse system
the targets are secondary customer groups, and firms have to implement obligatory returning
process from the end-use customers. Therefore, much coordination and adjustment are necessary in
implementing the push and pull systems in reverse logistics. Guide et al (2001) studied seven
characteristics that distinguish reverse supply systems from the features of forward logistics:

• Return uncertain timing and quantity of returns, which adds a degree of unrest to demand
management and inventory control.

• A need to balance returns. Too many items returned will cause a firm to penalize
unnecessary port inventory cost.

• Disassembly is a necessary process in remanufacturing, but the rate of recovery is

uncertain, which brings difficulty to control sequential operations.

• Uncertainty in materials recovered from returned items, which raises the question of
coordinating inventory.

• The requirement for a reverse logistics network. Companies should establish collection
centers and remanufacturing centers to coordinate the return and remanufacturing process.

• Complication of material matching restrictions. Customers often require some components

of the product and will cause a problem that customer satisfaction when a part is not
obtained.

• Stochastic routing problems for materials in the repair and remanufacturing operations.
This feature will bring in variability in operation causes coordination and control problem
in reverse operation.

COMPONENTS OF REVERSE LOGISTICS

1. Return type

Products, parts and materials are frequently reverse logistics cycle for different reasons at different
points in the life cycle of the product of each element. There are four major returns in practice
(Krikke et al, 2004):

• End of life return (EOL): this return takes place when the product life cycle of the item
comes to an end.

• Commercial return: the reasons that these returns are made include wrong orders, customer
dissatisfaction, defects, problems with installation etc.
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• End of use return: this category encompasses returned items after some period of operation
due to end of lease, trade-in or product replacement. The products may be refurbished or
repaired to be sold in an alternative market or in a geographically different market.

• Reusable items: products in this classification are separate parts of major products such as
reusable containers and pallets, recycled toner bottles, etc.
There have also been many studies on inventory control for reverse flows, aiming at integrating the
reverse flow into the man

2. Recovery options

The first step in reverse logistics with respect to recovery program is to collect the items. Firms
have different collection systems and strategies contingent on the type of product. With the
products collected, firms sort the items based on the condition of the product (Jayaraman, 2006).

Then companies seek to extract value out of the products or components as much as possible by
assigning the returned items into an appropriate recovery method. Based on the literature, the
recovery options are: reuse, remanufacturing and recycling.

Reverse logistics is concerned with planning decisions and scheduling issues involved in
manufacturing, warehousing, shipping, collection and reprocessing of used products, damaged
products, unwanted products, outdated products and shipping/packaging materials.

There are various reasons why those products are taken back instead of being thrown away: they
can be recycled to get reusable raw materials; after refurbishment or repair, they can be resold on
the market to gain more profit, they have to be reprocessed to comply with government regulations
and environmental law etc.

3. Secondary market

New products are generally transacted in the primary market. The channel process of the primary
market, as described by the forward supply chain system, is that flows are from factory to
manufacturer’s distribution center, to re end customer.
However, some retailers or remanufacturers face how they have to sell remanufactured products
since the markets for used products are subdivisions of the primary market and are interwined.

A secondary market is defined as a selling channel outside of the primary market, mainly to
salvage or overstock brokers (Tibben-Lembke, 2004). Even though, secondary markets are
important transaction places, the structure or sales channels in the secondary markets have not

29
been well documented in comparison to the operational aspects of the reverse supply chains
system.

4. Network design for reverse flows

Even though network formulation in the context of forward flow systems has been widely studied,
the system performing forward activities in a traditional supply chain is not directly applicable to
the network structure of reverse logistics since the forward flow system is nor originally designed
to handle returned products.

Due to on-equipment of handling return products in the forward system and different cost
structures, such as the costs of collecting, classifying, testing and disassembling returned goods
that occur only in the reverse channel but not in the forward system (Jayataman, 1999).

Fleischmann et al (1997) also indicated that the reverse channel is not necessarily a symmetric
picture of forward distribution.

The studies on network design for reverse flows mainly focus on the design of logistics structures
for shipping used/returned products back to the facilities.

Among the more recent results, Fleischmann et al (2000, 2001) studied the network design
problems and analyzed the impact of reverse flows on network designs and operational
performance of a supply chain.

The general processes associated with reverse logistics are described as follows (Fleischmann et al,
1997):

• Collection: refers to all activities rendering used products available and physically moving
them to some point for further treatment. Collection may include purchasing, transportation and
storage activities.

• Inspection/separation: denotes all operations which determine whether a given product is in

fact reusable and in which way. Thus, inspection and separation result in splitting the flow of used
products according o distinct reuse options. Inspection and separation may encompass
disassembly, shredding, testing, sorting and storage steps.

• Re-processing: means the actual transformation of a used product into a usable product
again. This transformation may take different forms including recycling, repair and
remanufacturing. In addition, activities such as cleaning, replacement and reassembly may be
involved.

30
• Disposal: is required for products that cannot be re-used for technical or cost reasons. This
applies to products rejected at the separation level due to excessive repair requirements but Also to
products without satisfactory market potential, due to obsolescence. Disposal may include
transportation, landfilling and incineration steps.

• Re-distribution: refers to directing reusable products to a potential market and to physically

moving them to future users. This may include sales, transportation and storage activities.

Importance of Reverse Logistics

Reverse logistics (RL) is becoming an important aspect of supply chain management. Many
companies that, previously, did not devote much time or energy to the management and
understanding of reverse logistics have begun to pay attention. Firms have begun to benchmark
return operations with bestin-class operators. Third parties specializing in returns have seen
demand for their services greatly increased. (Arun & Kwan, 2003)

The growing environmental concern worldwide, forced companies to engage in reverse logistics,
such as re-use of products and materials and recycling. Practically, most of the companies deal
with returns of some nature because of issues such as marketing returns, damage or quality
problems, overstocks, refurbishing or remanufacturing. Handling returns present a great challenge
for companies, while in many cases becomes a necessity for keeping customers satisfaction to a
certain level. Reverse logistics operations in a supply chain may be considered as an introduction
to innovative services of a company's portfolio. They may have an important impact on a firm's
strategic performance in terms of market effectiveness, as well as, internal cost efficiency. Through
reverse logistics innovation, it may be possible to expand revenue through market growth due to
account customization, service augmentation, and improved customer satisfaction. Reverse
logistics is becoming an area of competitive advantage.

Kokkinaki concluded that reverse logistics is necessary for the following reasons:

• Positenviveronmental impact: legislations acts

require manufacturers to develop a policy for the collection and reuse of products at the end of
their life cycle.

• Competitiveness advancement: turns leads to reduced efficient costs, increased han profits and
improved customer service.

• Regaining value: efficient reverse logistic or recycling materials.

31
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