1

IE 306
Supply Chain and Logistics
Management
( As per APJ Abdul Kalam

Kerala Technological University)

Module 5
Mr . Nice Menachery
Assistant Professor
Dept. of Mechanical Engineering
Jyothi Engineering College
Cheruthuruthy
09895580629
 2

Sourcing Decisions in a Supply Chain

The Role of Sourcing in a Supply Chain
 Sourcing is the entire set of business processes required to
purchase goods and services.
 The most significant decision is outsource or perform in-
house.
 Outsourcing results in the supply chain function performed
by a third party.
 Will the third party increase the supply chain surplus
relative to performing the activity in house?
 To what extend do risks grow upon outsourcing?

Outsourcing makes sense if it increases the supply chain

surplus without increasing the risks!
 Sourcing Processes
 Once the outsourcing decision is made, sourcing processes
include:

 Outsource or perform in-house

 Supplier scoring and assessment

 Supplier selection and contract negotiation

 Design collaboration

 Procurement

 Sourcing planning and analysis

Benefits of Effective Sourcing Decisions
 Better economies of scale can be achieved if orders are aggregated

 More efficient procurement transactions can significantly reduce the

overall cost of purchasing

 Design collaboration can result in products that are easier to

manufacture and distribute, resulting in lower overall costs

 Good procurement processes can facilitate coordination with suppliers

 Appropriate supplier contracts can allow for the sharing of risk

 Firms can achieve a lower purchase price by increasing competition

through the use of auctions
 In-house or Outsource
How do third parties increase surplus?
 Third parties increase the SC surplus effectively if they are able to
aggregate SC assets or flows to a higher level than a firm itself!
 Capacity aggregation
 Inventory aggregation
 Transportation aggregation by transportation intermediaries
 Transportation aggregation by storage intermediaries
 Warehousing aggregation
 Procurement aggregation
 Information aggregation
 Receivables aggregation
 Relationship aggregation
 Lower costs and higher quality
 In-house or Outsource
Risks of Using a Third Party
 The process is broken

 Underestimation of the cost of coordination

 Reduced customer supplier contact

 Loss of internal capability and growth in third party power

 Leakage of sensitive data and information

 Ineffective contracts
 8

Logistics Providers
 The major difference 1/2/3/4 PLs:
 1st Party Logistics (1PL) were essentially firms that transported
consignments from point of origin to destination point. 1PLs typically
function like a courier service, moving goods from a manufacturing
point to a distribution or retail point.
 2nd Party Logistics (2PL) expanded their function to provide a
transport service over a specific segment. 2PLs take care of
transportation requirements, typically functioning as carriers.
 3rd Party Logistics (3PL) companies further expanded their vicinity
by providing bundled logistics services. Their services included
transportation, warehousing, cross-docking, inventory management,
packaging and freight forwarding. 3PLs are logistics service providers.
 The major difference 1/2/3/4 PLs:
 4th Party Logistics (4PL) has further advanced in this sector –
almost all aspects of the client’s supply chain are managed by the
4PL organization. The 4PL organization has an established joint
venture or long-term contract with the client and acts as a single
point of contact for all of the client’s supply chain and logistics
requirements.
 4PLs are also referred to as Lead Logistics Providers (LLPs). The
4PL company interacts with several logistics service providers to
get the supply chain management job done for their clients. At
times, a major 3PL company could form a 4PL organization
within its structure.
 5PLs could be in competition sooner with more e-commerce
options.
Third and Fourth Party Logistics Providers
 A Third party logistics, 3PL provider performs one or more of the
logistics activities relating to the flow of product, information and
funds.

 Traditionally, 3PLs focused on specific functions such as

transportation, warehousing and information technology.

 Since 1990s a broader range of SC services have been outsourced.

Customers seek players that can manage virtually all aspects of their
SC, i.e., 4PLs!

 A 3PL targets a function, a 4PL targets management of the entire

process.
 4PLs v/s 3PLs
1. Functionality :

3PL targets a single function, i.e., taking care of the client’s

logistics operations. 4PL integrates technology, resources and –
sometimes – other 3PLs to support the complete supply chain
management for the client.
 4PLs v/s 3PLs
2. Responsibility :
The broader responsibility and accountability of 4PLs is the
major differentiating factor between 3PLs and 4PLs. From a client
perspective, this means 4PLs take more control and ownership of
the processes under their jurisdiction. 4PLs contain all aspects of
supply chain, such as overseeing entire transport management,
managing and analyzing large amounts of inventory management
data, supervising warehousing operations, coordinating operations
such as cross-docking, packaging and freight forwarding, liaising
with 3PLs or other maritime/freight forwarding companies to get
the work completed for the client. On the other hand, 3PLs are
typically focused on logistics functions.
 4PLs v/s 3PLs
3. Impact on client’s performance :

4PL forms part of the client’s operational component and the

client relies on their data from 4PLs for some of their business
decisions. Thus, 3PLs are a logistics support system while 4PLs are
more involved in driving business performance.
 How do 4PLs add value?
 Outsourcing a noncore activity such as logistics does not guarantee
any growth in SC surplus.

 The fundamental advantage that a 4PL may provide comes from

greater visibility and coordination over the firm’s SC and improved
handoffs between logistics providers.

 This requires sophisticated information technology which is both

costly and needs expertise. Thus many 4PLs outsource this activity.
 Supplier Scoring and Assessment
 Supplier performance should be compared on the basis of the
supplier’s impact on total cost.
 There are several other factors besides purchase price that
influence total cost.
– Replenishment Lead Time – Pricing Terms
– On-Time Performance – Information Coordination
– Supply Flexibility Capability
– Delivery Frequency / – Design Collaboration
Minimum Lot Size Capability
– Supply Quality – Exchange Rates, Taxes,
– Inbound Transportation Cost Duties
– Supplier Viability
 17

Transportation in a Supply Chain

 The Role of Transportation in a
Supply Chain
 Movement of product from one location to another

 Products rarely produced and consumed in the same

location

 Significant cost component

 Shipper requires the movement of the product

 Carrier moves or transports the product

Modes of Transportation and their
Performance Characteristics
1. Air

2. Package carriers

3. Truck

4. Rail

5. Water

6. Pipeline

7. Intermodal
 Air
 Cost components

 Fixed infrastructure and equipment

 Labor and fuel

 Variable – passenger/cargo

 Key issues

 Location/number of hubs

 Maintenance schedules

 Crew scheduling

 Prices and availability

 Package Carriers

 Small packages up to about 150 pounds

 Expensive

 Rapid and reliable delivery

 Small and time-sensitive shipments

 Provide other value-added services

 Consolidation of shipments a key factor

 Truck
Significant fraction of the goods moved

Door-door shipment and shorter delivery than rail

Truckload (TL)

Low fixed cost

Imbalance between flows

Less than truckload (LTL)

Small lots

Hub and spoke system

May take longer than TL

 Rail
Move commodities over large distances

High fixed costs in equipment and facilities

Scheduled to maximize utilization

Transportation time can be long

 Water

Limited to certain geographic areas

Ocean, inland waterway system, coastal waters

Very large loads at very low cost

Slowest

Dominant in global trade

Containers
 Pipeline
 High fixed cost

 Primarily for crude petroleum, refined petroleum products,

natural gas

 Best for large and stable flows

 Pricing structure encourages use for predicable component

of demand
 Intermodal
 Use of more than one mode of transportation to move a

shipment

 Grown considerably with increased use of containers

 May be the only option for global trade

 More convenient for shippers – one entity

 Key issue – exchange of information to facilitate transfer

between different modes

 27

Transportation Infrastructure
and Policies
 Transportation Infrastructure
and Policies
Governments generally take full responsibility or played a

significant role in building and managing infrastructure

elements
Without a monopoly, deregulation and market forces help

create an effective industry structure

Pricing should reflect the marginal impact on the cost to

society
Contd..
 30

Design Options for a Transportation

Network
 Design Options for a Transportation
Network
A well-designed transportation network allows a supply chain to
achieve the desired degree of responsiveness at a low cost.
Three basic questions need to be considered when designing a
transportation network between two stages of a supply chain:-
1. Should transportation be direct or through an intermediate
site?
2. Should the intermediate site stock product or only serve as a
cross-docking location?
3. Should each delivery route supply a single destination or
multiple destinations (milk run)?
Contd..
The various transportation Network Structure are:-
1. Direct shipping

2. Direct shipping with milk runs

3. All shipments via central DC with inventory storage

4. All shipments via central DC with cross-dock

5. Shipping via DC using milk runs

6. Tailored network
 1. Direct Shipment Network
to Single Destination
With the direct shipment network to a single destination option,

the buyer structures the transportation network so that all

shipments come directly from each supplier to each buyer
location.

With a direct shipment network, the routing of each shipment is

specified, and the supply chain manager needs to decide only

the quantity to ship and the mode of transportation to use.
Contd..
The major advantage of a direct shipment transportation

network is the elimination of intermediate warehouses and its

simplicity of operation and coordination.

The shipment decision is completely local, and the decision

made for one shipment does not influence others.

The transportation time from supplier to buyer location is short

because each shipment goes direct.

Direct Shipment Network
to Single Destination
 2. Direct Shipping with Milk Runs
A milk run is a route on which a truck either delivers product

from a single supplier to multiple retailers or goes from multiple

suppliers to a single buyer location.

In direct shipping with milk runs, a supplier delivers directly to

multiple buyer locations on a truck or a truck picks up deliveries

destined for the same buyer location from many suppliers.

When using this option, a supply chain manager has to decide

on the routing of each milk run.

Contd..
 Direct shipping provides the benefit of eliminating
intermediate warehouses, whereas milk runs lower
transportation cost by consolidating shipments to multiple
locations on a single truck.

Milk runs make sense when the quantity destined for each

location is too small to fill a truck but multiple locations are

close enough to each other such that their combined quantity
fills the truck.
Direct Shipping with Milk Runs
 3. All Shipments via Intermediate
Distribution Center with Storage
Product is shipped from suppliers to a central distribution center

where it is stored until needed by buyers when it is shipped to each

buyer location.

Storing product at an intermediate location is justified if

transportation economies require large shipments on the inbound side
or shipments on the outbound side cannot be coordinated.

In such a situation, product comes into a DC in large quantities where

it is held in inventory and sent to buyer locations in smaller

replenishment lots when needed.
Contd..
The presence of a DC allows a supply chain to achieve

economies of scale for inbound transportation to a point close to

the final destination, because each supplier sends a large
shipment to the DC that contains product for all locations the
DC serves.

Because DCs serve locations nearby, the outbound

transportation cost is not very large.
All Shipments via Intermediate
Distribution Center with Storage
 4. All Shipments via Intermediate
Transit Point with Cross-Docking
Suppliers send their shipments to an intermediate transit point

(could be a DC) where they are cross-docked and sent to buyer

locations without storing them.

When a DC cross-docks product, each inbound truck contains

product from suppliers for several buyer locations, whereas

each outbound truck contains product for a buyer location from
several suppliers.

Major benefits of cross-docking are that little inventory needs to

be held and product flows faster in the supply chain

Contd..
Cross-docking also saves on handling cost because product

does not have to be moved into and out of storage.

Cross-docking is appropriate when economies of scale in

transportation can be achieved on both the inbound and

outbound sides and both inbound and outbound shipments can
be coordinated.
 5. Shipping via DC Using Milk Runs
 Milk runs can be used from a DC if lot sizes to be delivered to

each buyer location are small.

 Milk runs reduce outbound transportation costs by

consolidating small shipments
Shipping via DC Using Milk Runs
 6. Tailored Network
The tailored network option is a suitable combination of

previous options that reduces the cost and improves

responsiveness of the supply chain.

Here transportation uses a combination of cross-docking, milk

runs, and TL and LTL carriers, along with package carriers in

some cases.

The goal is to use the appropriate option in each situation.

High-demand products to high demand retail outlets may be

shipped directly, whereas low-demand products or shipments to
low-demand retail outlets are consolidated to and from the DC.
Contd…
The complexity of managing this transportation network is high

because different shipping procedures are used for each product

and retail outlet.

Operating a tailored network requires significant investment in

information infrastructure to facilitate the coordination.

Such a network, however, allows for the selective use of a

shipment method to minimize the transportation as well as

inventory costs.
 Contd..

Factors affecting tailoring

Customer density and distance

Customer size

Product demand and value

Contd..
Short Distance Medium Long Distance
Distance
High density Private fleet with Cross-dock with Cross-dock with
milk runs milk runs milk runs

Medium Third-party milk LTL carrier LTL or package

density runs carrier

Low density Third-party milk LTL or package Package carrier

runs or LTL carrier
carrier
Contd..
Product Type High Value Low Value

High demand Disaggregate cycle Disaggregate all inventories

inventory. Aggregate safety and use inexpensive mode
inventory. Inexpensive of transportation for
mode of transportation for replenishment.
replenishing cycle inventory
and fast mode when using
safety inventory.

Low demand Aggregate all inventories. If Aggregate only safety

needed, use fast mode of inventory. Use inexpensive
transportation for filling mode of transportation for
customer orders. replenishing cycle
inventory.
 Pros and Cons of various
transportation network options
Network Structure Pros Cons

Direct shipping No intermediate warehouse High inventories (due to large lot

Simple to coordinate size)
Significant receiving expense

Direct shipping with Lower transportation costs for small lots Increased coordination
milk runs Lower inventories complexity
All shipments via central Lower inbound transportation cost Increased inventory cost
DC with inventory through consolidation Increased handling at DC
storage

All shipments via central Low inventory requirement Increased coordination

DC with cross-dock Lower transportation cost through complexity
consolidation

Shipping via DC using Lower outbound transportation cost for Further increase in coordination
milk runs small lots complexity
Tailored network Transportation choice best matches needs Highest coordination complexity
of individual product and store
 52

Role of IT in Transportation
 Role of IT in Transportation
The complexity of transportation decisions demands use of IT
systems
IT software can assist in:

Identification of optimal routes by minimizing costs subject

to delivery constraints
Optimal fleet utilization

GPS applications
 54

Risk Management in Transportation

 Risk Management in Transportation
Three main risks to be considered in transportation are
1. Risk that the shipment is delayed
2. Risk of disruptions
3. Risk of hazardous material
Risk mitigation strategies
– Decrease the probability of disruptions
– Alternative routings
– In case of hazardous materials the use of modified containers,
low-risk transportation models, modification of physical and
chemical properties can prove to be effective
 56

Routing, Scheduling and sequencing in

Transportation
 Routing, Scheduling and sequencing in
Transportation
Routing

It is the process of establishing the most effective route at each

stop, which minimizes the travelling time or distance.

The most important factors of routing are the path and the

sequences that vehicle takes a stop.

 Contd..
Scheduling

It is the process of combining orders with routes and shifts I

order to satisfy the business rules and service constraints.

Sequencing

It is the process of deciding the order I which variety of jobs will

based on priority rules.

 Problems of route scheduling
1. Mileage that a vehicle can run in a day

2. Load that a vehicle can carry at a time

3. Return of the vehicle at the and of the day

 60

Vehicle Routing Problems

PLEASE REFER PDF NOTES