MAKERERE INSTITTUTE OF SOCIAL DEVELOPMENT

DEPARTMENT OF BUSINESS STUDIES

PROGRAMME: DIPLOMA IN PURCHASING AND SUPPLY CHAIN

MANAGEMENT

YEAR II , SEMESTER I

COURSE UNIT: INTRODUCTION TO LOGISTICS MANAGEMENT

COURSE CODE: DPS 2108

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CHAPTER ONE
INTRODUCTION TO LOGISTICS MANAGEMENT

LECTURE ONE
Introduction
Logistics management is a critical component to achieve business goals. The term
logistics was originally associated with the military.
Eventually, the term has gradually spread to cover business activities and processes. In
terms of transportation, for example, this is a vital cost-containment key that every
logistics manager should consider.
If the company is working with carriers and courier, the products should be transported in
a timely, safe, and efficient manner, thereby managing company costs. There are certain
companies and establishments which offer logistics management services.
If you want your company to run in a timely and efficient manner, you have to choose a
company which provides logistics management services and make sure that they can
meet your business’ transportation needs.
Definitions
Logistics is therefore the function responsible for the flow of materials from suppliers
into an organization, through operations within the organization, and then outside to the
customers.
It is that part of the supply chain that plans, implements and controls the efficient,
effective flow and storage of goods, services and related information from the point of
origin to the point of consumption in order to meet the customer requirements.
In other words, companies depend on their logistics systems to move goods and materials
among the supply chain partners.
A supply chain is that network of organizations that are involved through upstream and
downstream linkages in the different processes and activities that produce value in form
of products and services in the hands of the ultimate customer or consumer.

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Activities/functions/scope of logistics management
Logistics activities/functions include the following;
(i) Procurement/purchasing; the flow of materials through an organization is
usually initiated when procurement sends a purchase order to the supplier.
This means that procurement finds suitable suppliers, negotiates the terms and
conditions, organizes delivery , arranges insurance and payment and does
everything needed to get materials into the organization.
(ii) In-ward transport; this actually moves materials from suppliers to the
organization’s receiving area. It chooses the type of transport (road, air, water,
and rail), finds the best transport operator, designs a route, makes sure that all
safety legal requirements are met and gets deliveries on time and at a
reasonable cost.
(iii) Receiving; this makes sure that materials delivered correspond with the order,
acknowledges receipts, unloads delivery vehicles, inspects materials for
damage and sorts them.
(iv) Warehousing/store; this moves materials into storage and takes care of them
until they are needed. Many materials need special care for example frozen
food, drugs, alcohol, in-bond chemicals that emit fumes, animals and
dangerous goods as well as making sure that materials can be delivered
quickly when needed. Warehousing also makes sure that materials have the
right conditions, treatment and packaging to keep them in good conditions.
(v) Stock control; this sets the policies for inventory. It considers the materials to
store, overall investments, customer service, stock levels, order sizes, etc.
(vi) Order picking; this finds and removes materials from the stores, typically
materials for a customer are located, identified, checked, removed from racks,
consolidated into a single load, wrapped and moved to a departure area for
loading into delivery vehicles.
(vii) Materials handling; this moves materials through the operations within an
organization. It moves materials from one operation to the next and also

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 moves materials picked from stores to the point where they are needed. The
aim of materials handling is to give efficient deliveries to customers.
(viii) Outward transport; this takes materials from the departure area and delivers
them to customers and this has concerns that are similar to in-ward transport.
(ix) Physical distribution management; this is a general term for activities that
deliver finished goods to customers including outward transport. It is often
aligned with marketing and forms an important link with downstream
activities.
(x) Recycling; returns and waste disposal; even when products have been
delivered to customers, the work of logistics may not be finished. There might
be for example problems with delivered materials. Perhaps, they were faulty
or too many were delivered or they were simply of the wrong type. In all these
three cases, they have to be collected and brought back.
Sometimes there are associated materials which are returned to suppliers for re-use. Some
materials are not re-used but are brought back for recycling and finally there are those
materials that can not be used again. These should be brought back for safe disposal e.g.
dangerous chemicals.
NB; Activities that return materials are called reversed logistics or reverse distribution.
(xi) Location; some of the logistics activities can be done in different locations.
Stocks of finished goods for instance can be held at the end of production,
moved to near-by warehouses, put into stores near to customers, passed on to
be managed by other organizations or a range of alternatives. Logistics has to
find put the best location for these activities or at least play a significant role
in decision making. It also considers related questions about the size and
number of facilities.
(xii) Communication; alongside the physical flow of materials is the associated
flow of information. This links all parts of supply chain, passing information
about products, customer demand, materials to be moved, timing, stock levels,
etc.
Other activities include; packaging, parts and service support, customer service and
demand forecasting.

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 NB; what is essential is that all activities must recognize that they have one primary
objective i.e. getting an efficient flow of materials;
Illustration of the above activities in logistics management/scope of logistics
management
1 2 3 4 5 6

Procurement
Transport Warehousing/ Materials Processing Storage at the
of raw storage at the handling at the regional
materials, factory store plant. warehouse,

Subassemblies, Depot or
intermediary
Manufactured
products,

Packaging &
other
materials.

Transportation
and delivery to
final
customer/consu
mer

Objectives of logistics management

(i) Rapid response; rapid response is concerned with a firm’s ability to satisfy
customer service requirements in a timely manner. This can be partly achieved
through the use of information technology which increases the capability to
postpone logistical operations to the latest possible time and then accomplish
rapid delivery of required inventory. The result is elimination of excessive
inventories traditionally stocked for anticipatory customer requirements.

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 (ii) Quality improvement; logistics seeks to achieve continuous improvement. If
a product becomes defective or if a service promises are not kept, little if any
value is added by logistics. Logistical costs once expended cannot be
reversed. In fact when quality fails, the logistical performance typically needs
to be reversed and then repeated.
(iii) Movement consolidation; one of the most significant logistical cost is
transportation cost, it is desirable to achieve movement consolidation and as a
rule, the larger the overall shipment and longer the distance it is transported,
the lower the transportation cost per unit.
(iv) Minimum inventory; the objective is to reduce inventory deployment to the
lowest level consistent with customer service goals to achieve the lowest
overall total logistics cost. However, the firm must ensure that it does not
completely run out of inventory because of the costs associated with such a
situation for instance production being at a standstill, loss of customer good
will etc.
(v) Minimum variance; variance is any unexpected event that disrupts system
performance. Variance may result from any aspect of logistical operations.
E.g. delays in expected time of customer order receipt, an unexpected
disruption in manufacturing goods arriving damaged at a customers’ location
or delivery to an incorrect location. All result in a time disruption in
operations that must be resolved.
(vi) Better customer service at low operating cost i.e. any service should not be
expensive compared to returns to the firm.

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MPORTANCE OF LOGISTICS MANAGEMENT
 Managers are able to update sales and inventory planning faster and more
frequently with the help of new technology. This enables factories to respond with
more flexibility to volatile market conditions.
 Efficient logistics system throughout the world economy is a basis for trade and a
high standard of living for the entire world.
 It has led to technological advancement more especially in the field of
information processing and communication.
 It promotes intervention marketing swiftly because it transforms the customer
attitude towards total cost approach instead of direct cost approach.
 Without logistics management, no marketing, manufacturing or project can
succeed for example companies’ 10% to35% of gross sales are mainly logistics
costs.
 The importance of logistics management lies in the fact that it really leads to
ultimate consumption of a sales contract i.e. the buyer is not interested in the
promises of the seller that they can supply goods at a competitive price but they
actually do so.
 Effective logistics management by a company gives it an edge over its
competitors. This is through provision of a system or process by which
customers’ needs can be met in a more efficient manner i.e. shipments in a more
accurate and fast manner than competitors do.
 It facilitates better services to the customer, this is through meeting their needs on
time.
 Effective logistics management provides an organization safety and security to the
goods in shipments for example car tracking systems of products in transit and
inventory stored after delivery immediately under effective and efficient system.
 Effective logistics management improves marketing opportunities through
identifying customer issues by continuous tracking of product orders and product
shipment data. This enables the business to spot exactly where a product has
gone, what product was originally ordered and shipped and what needs to be done
in order to fix problems with the order.

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  Through such an expert tracking and communication procedures, a business can
easily appease a dissatisfied customer and turn a bad situation into a good
marketing opportunity.
 In conclusion, logistics management significantly adds value to the products since
proper care and controls are imparted to products throughout all logistics
activities. This eventually results into production efficiency and more profits for
the organization.

End of lecture questions

1. Define the term logistics
2. Briefly describe the activities of logistics management
3. Mention the objectives of logistics management
4. Why is logistics important?

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LECTURE TWO
SUPPLY CHAIN MANAGEMENT.
Definitions
Supply chain management is a cross functional approach including managing the
movement of raw materials into an organization, certain aspects of the internal processing
of materials into finished goods and the movement of finished goods out of the
organization and toward to the end user.
A supply chain as opposed to supply chain management is a network of organizations
involved in upstream and downstream linkages in the different processes and activities
that produce value in form of goods and services in the hands of the ultimate customer or
consumer.
Upstream means “against the currents” and relates to the relationship between an
enterprise and its suppliers and the suppliers’ suppliers.
Downstream means “with the currents” and relates to the relationship between the
enterprise and its cust8omers, and the customers’ customers.
A supply chain can also be defined as a network of connected and interdependent
organizations mutually and cooperatively working together to control, manage and
improve the flow of materials and information from suppliers to end users.

Objectives of SCM

 To solve suppliers problems

 To improve customer’s service performance

 To reduce pre and post production inventory

 To minimize total cost of operations and procurement

 To achieve maximum efficiency in utilization of labor, capital and plant.

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 LOGISTICS VS SUPPLY CHAIN MANAGEMENT

LOGISTICS MANAGEMENT SUPPLY CHAIN MANAGEMENT

Logistics is concerned with getting goods and SCM is concerned with movement of
services where and when they required goods from raw material stage to the
end user
It works within a single organization It works in a coordination of various
organizations.
It is a part of supply chain management It is an extension of logistics
management
The concept of logistics is relatively old The concept of SCM is relatively new
It is a narrow concept It is a broader concept

TYPES OF SUPPLY CHAINS

(a) Direct supply chain; this is comprised of a company and a customer involved in
upstream and downstream flow of products, services, finances and information.
Illustration of a direct supply chain

Supplier Organization Customer

(b) Extended supply chain; this involves suppliers of the immediate supplier and the
customers of the immediate customer.

Supplier’s supplier Supplier Organization Customer Customers’

customer

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 (c) Ultimate supply chain; this involves all organizations involved in all the
upstream and downstream flows of products, services, finances and information from the
ultimate supplier to the ultimate customer.

3rd party Logistics provider

Ultimate Supplier Organization Customer Ultimate

supplier customer

Financial provider Market research firm

End of lecture questions

1. Define the term supply chain

2. Distinguish between upstream and downstream linkages as used in supply chain
management

3. With the help of illustrations, describe the different types of supply chains

4. Differentiate between supply chain and logistics management

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CHAPTER TWO

INFORMATION MANAGEMENT IN LOGISTICS

LECTURE ONE

Introduction

The goal of information in logistics is to deliver the right product, consisting of the right
information, at the right price and all of these are customer driven. If this goal is to be
achieved, knowledge workers should be better equipped with information for the task at
hand. However, organizations should enhance this by improving interaction with their
customers and machines being enabled to respond automatically to meaningful
information.

Types of information

(a) Primary/Firsthand information; this comprises of original materials that

were created first hand. This type of information is not filtered through
interpretation e.g. original research reported in journals, interviews, letters,
photographs, survey research such as market surveys, and public opinion
polls, etc.
(b) Secondary /second hand information; this is made up of accounts
written after the facts with the benefit of observation. It is comprised of
interpretations and evaluations of primary information. Secondary
information is not evidence but rather commentary on and discussion of
evidence. Examples include; books, commentaries, etc.

(c) Tertiary /third hand information; this is a collection of both primary

and secondary information e.g. encyclopedias, fact books, etc.

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The role /importance of information in Logistics Management

 Information helps in determining where facilities should be located depending

on the demand, taxes, rent, price, of the land in case of construction, etc.
 Setting of inventory levels; setting optimal inventory policies requires
information that includes demand patterns, cost of ordering.

 Transportation decision; deciding on transportation network, routings, modes,

shipment sizes all need proper information such as cost of transport mode, its
reliability, the nature of the items to be shipped, etc.

 Sourcing; information on product prices, quality, and delivery lead times etc. is
important in order to choose which supplier to source from.

 Pricing and revenue management; to set pricing policies, one needs information
on demand both its volume and various customer segments’ willingness to pay
and many supply issues such as the product margin, lead time and availability.
Using this information, firms can take intelligent pricing decisions to improve
their supply chain profitability.

 Knowledge of customer requirements; information enables organizations /

firms to know what customers want, how much inventory is in stock and when
more products should be produced or shipped.

 Performance of the supply chain; without information, a manager can only

make decisions blindly. Therefore information makes the supply chain visible to a
manager and with this visibility; a manager can make decisions to improve the
supply chain’s performance.

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The role of IT in Logistics Management

 Reduces order cycle time hence improving in the efficiency of the logistics
function through improved order tracking.
 Reduces manpower requirements especially where logistics activities are done
electronically.

 Reduction of errors as a result of mistakes done by human beings for example

arithmetic errors during stock taking, billing, etc.

 Reduces cases of malpractices and fraud because activities such as payment to

suppliers are done electronically hence eliminating the temptations on part of the
human resources.

 Improved customer service i.e. customers can easily receive what they ordered
for within the shortest time possible which is hard to achieve using the manual
system.

 Saves time in all the logistics activities for example instead of traveling to visit a
supplier abroad, the information required can be accessed electronically via
internet without having to travel.

 Reduction in paper work and all its challenges such as information getting
misplaced.

Challenges of using information technology in Logistics Management

(i) Customer service; at times the work is done incorrectly or not to the customer
requirements and yet it is the customer who ultimately determines what good

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 customer service is and what is not. This can be overcome by listening to and
meeting the clients’ needs i.e. make customer service job number one.

(ii) Some of the programs required for electronic transactions are very expensive for
some organizations to afford. For example Enterprise Resource Planning application
software is expensive to acquire.

(iii) In case of breakdown or malfunctioning, some of the logistics activities may come to
a standstill especially those that are performed electronically.

(iv) In case of undetected fraud, the loss is very high e.g. where the system has been
hacked into, all business secrets can be lost to competitors.

End of lecture questions

1. Briefly explain the role of information in managing logistics activities

2. How does IT facilitate managing logistics activities?

3. What challenges are likely to be faced by an organization using IT to manage its

logistics activities?

4. How can the above challenges be dealt with?

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CHAPTER THREE

TRANSPORTATION MANAGEMENT

LECTURE ONE

Overview of Logistics management

Transportation is an essential and major sub function of logistics that creates time and
place utility in goods. The manager is concerned with the need to sight a type of transport
which is most appropriate for a given delivery situation assuming there is a choice of
every consequence of the local infrastructure. The choice of transport mode is a
fundamental part of distribution management which should be analyzed carefully because
of the impact upon a company’s operational efficiency.

Transportation management covers the area of shipment scheduling / routing, freight

cost, carrier selection, shipment tracking and parcel management. It helps us to make the
best use of available resources and keeps informed on all transportation process.

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Failure to identify the appropriate mode of transport may cause the company to incur
higher costs than necessary and may provide a lower customer service level than is
potentially possible. The decision the choice of transport is extremely complex because
of the vast volume of choice available together with the numbers methods of examination
and evaluation of choice.

Every organization involved in physical distribution of goods requires transport services.

The nature of transport services will vary considerably depending on such factors like
nature of the product the size of the order, the service level required by the customer and
the alternative transport methods available. Once a transport method is selected, other
choices may include the equipment required, the method of finance and the operating
techniques to be adopted.

Every transport mode has its own unique characteristics mostly in matters such as;

 Speed
 Cost implications

 Reliability

 Security provision

 Environmental impact

 Suitability of the routes covered.

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MODES/TPYES OF TRANSPORTATION

(a) Road

Advantages:

 Speedy – Deliver the goods directly to the consignee very fast.

 Highly flexible – handling different types of goods

 Ultimate mode – consignment reaches the doorsteps of the customer.

 Low capital cost as compared to railways.

 Private or ‘for hire’ shippers available.

Disadvantages:

 Higher operating costs – due to fuel requirement and higher labor

requirement.
 Occasional fuel shortages – leads to delay in delivery.

 Strikes of carriers – due to disputes with government making the

transportation idle.

 Restrictive permits for licenses – imposed by the government all over the
country.

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 (b) Airlines; Air transport is mainly used for international transport and in emergency
rather than in normal times.

Advantages:

 It is the fastest mode of transportation.

 Fixed costs are lower than rail or road or pipeline.

 It brings distant markets closer.

 It overcomes the hassle and cost of setting up depots and service centers overseas.

 Full potential of peak seasonal demand can be exploited.

 Makes test marketing easy – Products can be shipped directly from the factory.

 It is suitable for perishable items

Disadvantages:

 Most expensive – Operating costs are highest.

 Generally used to transport small volume items.

 Certain categories of items are not allowed

 Require secondary mode of transport to deliver to ultimate customer

(c) Water Transport; This mode of transportation is the link between countries separated
by water. Water transport is classified into deep-water transportation and inland water
transportation on lakes, rivers or canals.

Advantages:

 Water transport has low capital costs and low operating costs.
 Suitable for heavy and bulk goods of large quantities.

 Private or ‘for hire’ shippers available in water transport.

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  Limited restrictions

 Reliability

Disadvantages:

 Water transport is limited due to availability of harbor.

 Water transport is the slowest mode of transportation.

 Require secondary mode of transport to deliver to ultimate customer.

 Deep-water ships designed for ocean and lakes are limited to shallow-water ports.

 Shallow water vessels like diesel-towed barges are flexible but are limited by their
range of operations and speed.

(d) Railways

Advantages:

 Railways is an inexpensive mode of transportation

 Railways are suitable for large quantities.

 Railways provide door deliveries for industries.

Disadvantages:

 Unreliable mode – especially for high value goods and directly usable consumer
goods.
 Railways lack flexibility of high-speed delivery.

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  Railways require modal combination along with roadways.

 Rail network needs a high capital investment due to right of way, switching yards,
and terminals.

(e) Pipeline; Pipeline mode of transportation facilitates the movement of liquids like
oils; crude petroleum products and water etc. In India more than 5,000 km of
pipeline exists for crude and petroleum products. Slurries, gases, vapors and
solids in powder form are also transported in pipelines.

Advantages:

 Pipelines are reliable mode – pilferage and loss of product is not possible.
 A pipeline being under ground, space occupation is minimal.

 Pipelines operate all the time except when it is shut down for maintenance.

 No need to bring back empty container or wagon.

Disadvantages

 Highest fixed costs – due to lying of pipeline but lowest operating costs.
 Pipelines are fixed – so the accessibility of product is limited on the route.

 Only liquid commodity can be transported.

Factors to be considered when choosing transport mode

The selection of a particular mode or combination of modes will depend on the

following;

(i) Whether the delivery is solely domestic or global. If delivery is

domestic, road transport may be suitable/appropriate. On the other hand,
if delivery is global, Air, Water and Rail transport may be appropriate.
(ii) Cost; rail transport is relatively cheaper compared to air and road.

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 (iii) Availability of the mode of transport, road transport is more available.

(iv) Flexibility of the mode of transport, road transport is more flexible as

compared to Pipeline, Rail, Water and Air.

(v) The speed of the mode; Air transport is more fast

(vi) Reliability of the mode, road transport is more reliable.

(vii) Suitability of the mode of transport; for example Air for perishables,
rail and water for bulky items.

(viii) Legal restrictions; air transport has more restrictions for example as
regards weight of the load to be transported.

Specifically the factors to be considered in the choice of transport mode have been
categorized by Slater in Gattoma (1990) into four categories;

(a) Customer characteristics; the key factor in terms of customer characteristics is

that in the final analysis, the delivery must be profitable. The main customer
characteristics to consider here include;

(i) Geographical location i.e. distance from the supplying depot. If the distance is too
far, air, rail, or water may be given consideration as the best alternatives.

(ii) Delivery point features (access); the mode used should be able to have access to the
delivery point.

(iii) Time restrictions; use a mode with relaxed time restrictions e.g. road as opposed to
air.

(iv) Size of order; in cases where the order is large, rail or water transport may be
appropriate.

(b) Product characteristics; essentially all product characteristics must be

considered but transport resources should not be over specified to deal with the

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 isolated and unusual product delivery particularly where alternatives may be
found or where transport may be hired for that purpose.

The main product characteristics to consider include;

(i) Weight; Rail transport is preferred for heavy weight products.

(ii) Size and shape; Water transport is preferred in case the size and shape of the
product are complex.

(iii) Fragile nature; Air transport is preferred for fragile or delicate products
such as glass, flowers, etc.

(iv) Dangerous nature; Pipeline transport is preferred for dangerous products

such as oil and gases.

(v) Value of the product; Air transport is preferred for high value products e.g.
diamonds and gold.

(c) Environmental characteristics; transport operations may be affected by

environmental factors in three ways;

(i) Other road users; these may have a significant impact upon operational efficiencies
particularly where heavy demand creates congestion and leads to missing time deliveries.

(ii) Operational constraints imposed by terrain; weather and legal restrictions

which restrict the type of vehicles used for particular routes.

(iii) Technological changes in equipment and infrastructure which may improve

productivity. Therefore, up to date knowledge of the environment is essential to operate
efficiently.

(d) Company characteristics; it is important that distribution management fully

understands all significant company policies to avoid over reacting to pressure

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 from customers or management and colleagues. The most important
characteristics to consider include

(i) Service level policy

(ii) Sales territories

(iii) Warehouse locations

(iv) Manufacturing locations

(v) Financial policies

(vi) Performance of competitors

End of lecture questions

1. Outline the five major modes of transport

2. What advantages and challenges are associated with each mode of transport
mentioned above in Qn. 1?

3. Briefly explain the factors to be considered when choosing a mode of transport

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LECTURE TWO

INTERMODAL TRANSPORTATION

Intermodal transportation is the use of more than one mode of transport to move a
shipment to its destination. Intermodal movements combine the cost and service
advantages of two or more modes in a single product movement. Benefits of long haul,
short time & flexibility are optimized for achieving overall cost reduction Depending
upon the type and amount of goods, time of delivery, and prices following three
Intermodal combinations are available:

(a) Piggy back: It is a coordination between railways and road transport. It is also
called as TOFC (Trailer on Flatcar) or COFC (Container on Flatcar). In
piggyback the motor carrier trailer placed on rail flatcar, which moves the trailer
by rail for a long distance. Then the motor carrier moves the trailer for short
distance for deliveries. Here the placement of a trailer on a railcar can lead to
damages.
(b) Fishy back: It is a coordination between waterways and road transport. In fishy
back, the truck or trailer rides on the ship for a small portion of its journey. This
service is provided in coastal waters between Atlantic and Gulf ports.

(c) Birdy back: It is a coordination between airways and road transport. In birdy back
the major portion of the journey is covered by airways then the cargo is
transported by trucks or trailers.

Others: Water and railways, air and railways, air and waterways, pipeline and water,
pipeline and roadways etc

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Cost structure in transportation management

Basically there are two cost contents involved in transportation process:

(a) Fixed cost ; Fixed cost is the expense related to the procedural part like cost of
documents, salaries of personnel, rent of the office etc. As per the product needs and the
environments, loading and unloading charges are included in fixed cost.

(b) Variable cost; Among all logistics factors, variable cost consumes main expenses. It
concentrates on the product related and market related aspects:

i) Product related aspects are the physical attributes of products, like:

 Density – e.g. density of sand is more than Cotton.

 Size / Shape – Transportation cost per unit weight decreases with the size of the
consignment.

 Space filling capacity – e.g. space-filling capacity of iron flat is more than that of
chairs or tables.

 Difficulties in handling – e.g. product like electronic items like TV are difficult to
handle since they are easily get damaged.

ii) Market related aspects are:

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  Distance to be traveled to customer – The cost increases with increase in the
distance.
 Government regulations, Road Taxes, etc

 Freight Traffic

 Domestic / International Transport

 Season Effect

Specific costs associated with transport management

Depending on the type of goods being moved, transportation may account for as much as
40% of the total cost of the item particularly if it is of relatively low value and bulky such
as agricultural commodities or construction materials.
But in case of very high value, low weight and bulk electronic goods, transport costs may
be less than 1% of the total purchase costs. It is not unusual in many firms to find that
significant percentage expenditures come from transport costs.
While target savings vary from firm to firm, many have found that only a modest effort to
manage transport costs efficiently will result in substantial savings.
A transporter/carrier must therefore take into consideration the following costs;
(i) Vehicle related costs; this is the cost a transporter or carrier incurs for the purchase or
lease of the vehicle to be used to transport goods .It is proportional to the number of
vehicles leased or purchased. It is incurred whether the vehicle leased is operating or not.
It is considered fixed for short term operational decisions by the carrier. For long term
strategic or medium term planning decisions; these costs are variable.
(ii) Fixed operating costs; these include any costs associated with terminals, airport
charges that are incurred whether vehicles are in operation or not. For operating
decisions, these costs are fixed. For planning and strategic decisions concerning the
location and size of facilities, these costs are variable. The fixed operating costs are
generally proportional to the size of the operating facility.

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(iii) Trip costs; these include the price of labor and the fuel incurred for each trip
independent of the quantity shipped.
(iv) Quantity related costs; this includes the costs of loading or unloading and a portion
of the fuel that varies with the quantity being transported. These costs are variable in all
transportation decisions unless labor for loading and unloading is fixed.
(v) Processing costs; this is the cost of loading and unloading orders from delivery
vehicles.
(vi) Service level costs; these are costs of not being able to meet delivery commitment. In
some cases it may be specified as part of the contract while in other cases, it may be
reflected in customer satisfaction. These costs should be considered in strategic planning
and operational decision.

End of lecture questions

1. What do you understand by the term intermodal transport?
2. Describe any three types of intermodal transport
3. Explain some of the costs associated with transport management

Research question
Assuming that you are a transport manager of a company such as MOVIT co. Ltd, what
challenges are you likely to face while executing your duties?

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CHAPTER FOUR: MATERIAL HANDLING AND PACKAGING

LECTURE ONE

MATERIAL HANDLING SYSTEM

Material handling is a process of movements of raw materials, WIP and finished goods
within a facility most efficiently at the lowest possible cost.

Objectives of MHS

1. To achieve efficiency in movement of products in & out of stores or warehouse.

2. To ensure movement of goods in right quantity

3. To ensure availability of products when and where required.

4. Effective utilization of available space, equipment and manpower.

5. To sort inbound shipments as per precise customer requirements

The scope of MHS

Activities performed during materials handling are as follows:

(a) During Receipt of Materials:

 Receipt of vehicle at nominated area

 Unloading the consignment from vehicles.

 Weighing, sampling and inspection of materials.

 Moving the materials to assigned storage space.

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  Documentation of materials received and sold.

 Management Information System

(b) During Dispatch of Finished Goods:

 Receipt of vehicle at nominated area

 Weighing, counting and packing of goods to be dispatched

 Movement of goods to the exit point

 Loading the products to transport vehicles

 Documentation of goods dispatched

 Management Information System

Classification of MHS

1. Manual System

Manual handling of materials is done when the weight of materials is low and distance to
be traveled is less. It is the cheapest option for material handling. Equipments required
are manual trolleys, racks, drawers, lockers etc.

2. Mechanical System

Mechanical handling of materials is done when the weight of materials is high and
distance to be traveled is more. It is the safest option for material handling.

Material Handling Equipment

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Forklift Trucks: They are lifting devices, can move loads both horizontally and
vertically.

Cranes: They are drag devices, either floor mounted or overhead mounted.

Conveyors: They eliminate re-handling before and after each function.

Carousels: several bins on an oval track keep rotating. The operator can choose required
bin to pick from. The system saves space and reduces walking time and distances.

3. Automated System

Automated handling of materials is done when the weight of materials is very high and
distance to be traveled is more as well as the warehouse space is limited. It is the best and
efficient option for material handling.

Material Handling Equipment

(a) Sortations: In Sortations, labels are read and the packages are delivered to right
docks for onward dispatch

(b) Robotics: It is a human like machine that can be programmed to perform one or
series of activities.

(c) Automated Storage and Retrieval System: It has following merits/advantages and
demerits/disadvantages.

Merits of ARS:

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  Reduction in labor cost and material handling costs
 Increase in productivity

 Increase accuracy and speed of services

 Reduce handling related product damage.

Demerits of ARS:

 It requires huge initial capital cost

 It has perpetual maintenance costs

 It cannot respond to the changing needs

 Downtime of equipment may cause interruptions.

 Its users require proper training.

Principles of MHS

(i) Planning: All material handling should be as a result of a deliberate planning.

(ii) Work Principle: Avoid unnecessary movement the products.

(iii) Ergonomic Principle: Human capacities and limitations must be recognized.

(iv) Unit Load Principle: Load should be of uniform size to have smooth material
flow.

(v) Standardization: Methods, equipment, controls and software should be

standardized.

(vi) Space Utilization: Available space should be used efficiently.

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 (vii) Automation: Operations should be automated wherever feasible to improve
efficiency.

(viii) Systems: All activities should be integrated to form a coordinated operational

system.

(ix) Environment: Environment impact and energy consumption should be

considered.

(x) Preventive Maintenance: Materials handling equipment should be regularly

maintained.

End of lecture questions

1. Define the term materials handling

2. Briefly describe the three major materials handling systems

3. What factors influence the choice of a materials handling system?

4. State the principles of an effective materials handling system

LECTURE TWO

PACKAGING, CONTAINERIZATION & WAREHOUSING

Packaging though an integral part of logistics, also affects marketing and production
function. Packaging helps in promotion of products and size, shape, material of the
package affects production labor efficiency.

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Logistical Functions of Packaging

(i) Containment: Packaging provides containment for products.

(ii) Protection: Protection from environment, pilferage, shocks of handling
and moving.

(iii) Cube Minimization: Reducing the space occupied by the product to cut
the freight charge. E.g. Round containers, oval shaped containers and
square shaped bottles, etc.

(iv) Weight minimization: Reducing the weight of the consignment to fully

utilize the capacity of the truck. E.g. Liquids are packed in plastic bottles
rather than glass bottles.

(v) Apportionment: Grouping goods into convenient unit for distribution.

E.g. mangos in boxes, milk bags in crates.

(vi) Facilitating handling & using: fruit juices in tetra packs, handling and
consumption by users.

(vii) Convenience: Facilitating handling, storage & reuse. E.g. ink cartridges
for printers, reusable corrugated boxes, bottles and refill packs.

(viii) Communication:

a. Content Identification – Product, manufacturer, universal code etc.

b. Tracking: Bar codes and scanners.

c. Handling Instructions: Fragile, This side up, temperature restrictions,

environment concerns, potential dangers etc.

Consumer oriented packaging vs. Logistics oriented packaging

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 (i) Consumer oriented packaging: Focuses on consumer convenience and appeal,
marketing consideration and display.
(ii) Logistics oriented packaging: Focuses on handling convenience and protection
during transportation, material handling and storage.

CONTAINERIZATION

Containerization is a technique of distributing goods in unitized form and making

convenient to establish an intermodal transport system. Containers are of standard size
i.e. 20 ft or 40 ft.

Benefits of Containerization:

(i) It eliminates need for intermediate handling at terminals.

(ii) Standardized containers help in saving on packaging materials and labor
for packaging.

(iii) Less risk of damage and pilferage.

(iv) Facilitates intermodal transportation without intermediate reloading.

Types of Containers:

(i) General Cargo Containers – for general cargo like garments metals etc.
(ii) Refrigerated Containers – for food items that require cold storage like
fish, meat.

(iii) Insulated Containers – for items that require airtight space like fruits
and vegetables.

(iv) Ventilated Containers – for items that require fresh air like coffee seeds,
tea leaves.

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 (v) Flat Containers – They have only flat base with no walls, used when
cargo the cargo is of odd size or very heavy like trucks.

(vi) Liquid Containers – They have main holes for loading and unloading of
liquid cargo like milk, oil.

(vii) Gas Containers – They have fixtures to fill or empty liquefied gas. E.g.
Liquid oxygen

WAREHOUSING
A warehouse refers to a place inventories/goods are stored before being used by the
organization or distributed to the final consumers. It may be indoors or outside a building.
This implies that stockyards are also included within the context of this definition.

Objectives of warehousing
 Maximize completion of orders on time and in full.
 Minimize the cost of warehouse operations.
 Maximize inventory turnover (i.e. minimize the time that materials stay in the
warehouse).
 Minimize response time to demand and errors in dispatches.
 Preserve the quality, value and security of the stored items.

Functions of warehousing
 Warehouses mainly perform the functions of movement, storage and information
transfer. Specifically, it is expected that any store /warehouse performs the
following functions depending on the nature of management philosophy in an
organization.
 Receipt of materials
 Issue of materials
 Dispatch of materials
 Maintaining safety and security in stores

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  Layout maintenance –how items, machines, and people are arranged in the stores
 Disposal management
 Breaking bulk
 Consolidating
 Some packaging and labeling may be done in the warehouse, etc.

Categories of warehouses
(i) General Merchandize warehouses.
(ii) Bonded warehouses.
(iii) Special commodity warehouses.
(iv)Bulk warehouses.

Considerations when locating a warehouse

 Proximity to suppliers and customers
 Availability of essential services e.g. health centers.
 Capacity of the site for future expansion
 Drainage and
 Security
 Clear and certain or rail access.
Note:
Read about reasons for holding stock, types of stock items, and stock costs.
Read everything about materials handling i.e. definition of materials handling, basic
considerations in materials handling, benefits of proper materials handling, materials
handling systems (automated, manual, and semi-automated), manual versus mechanical
materials handling; factors favoring both, disadvantages of manual handling and the
advantages of automated/mechanical handling, meaning and causes of double handling,
problems of double handling and how they can be minimized.

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End of lecture questions
1. Distinguish between logistics and consumer oriented packaging
2. Explain the functions of packaging in logistics
3. Briefly describe any four types of containers you know of
4. What are the benefits of containerization?
5. Explain the factors to be considered when locating a warehouse
6. State the objectives of warehousing
7. What are the functions of warehousing

Research question
Explain the factors to be considered before choosing a packaging material.

CHAPTER FIVE : LOGISTICS OUTSOURCING

LECTURE ONE
Definition of outsourcing

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This refers to the transfer of activities which were performed internally using internal
resources to a third party (outside providers). It is a management strategy by which major
non-core functions are transferred to specialist efficient external providers.
Activities in logistics management that can be outsourced include;
(i) Warehousing.
(ii) Waste disposal
(iii) Transport management
(iv)Packaging
Rationale /reasons for outsourcing
(i) Quality; the company /firm/organization may not be in position to meet the
quality requirements of the customer in terms of personnel, equipment, etc.
(ii) Cost; because the outsourced activity is a core competence to the third party,
it is easy for them to devise means of reducing costs which eventually benefits
the firm which has outsourced the activity i.e. it incurs less costs compared to
what it would incur if it performed the activity in-house.
(iii) Finance; the firm may have a limited budget to invest in some of these
activities. Therefore funds must be used for investment in core business
activities.
(iv) Core- business; a core business is a primary activity that enables an
organization to generate revenue. In order to concentrate on core business
activities, all non-core activities which are mainly supportive should be
outsourced.
(v) Co-operation; a co-operation between companies can lead to conflict. In
order to avoid such conflicts, those activities that are carried out by both
organizations should be subject to total outsourcing.

Benefits of outsourcing

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  Cost reduction; for example in wages and salaries.
 Cost certainty; this is because the contract price is agreed and under normal
circumstances, it should not be changed.
 Reduced capital requirements – in terms of plant and equipment.
 Specialized contractors are normally more efficient.
 Increased flexibility
 Reduced risks
 Improved consistency of service provision.
 Frees management time to concentrate on core activities.
 Frees up cash which would be spent on such activities

Risks /challenges associated with outsourcing

 Losing internal expertise or knowledge of processes or activities e.g.
compound cleaners, IT staff.
 Diluted corporate image; the name of the company may negatively be affected
because of the mistakes made by the third party provider.
 Reduced staff morale and ill feeling towards contractors if some staff are laid
off/dismissed.
 Reduced security/confidentiality of the organization’s secrets because the
third party provider may gain access to an organization’s sensitive/strategic
information while doing business together as partners.
 Over dependence on suppliers which may make the organization lose control
over its operations and eventually affect the quality of customers service
delivery.
 Lack of supplier flexibility; the supplier may not be in position to adjust to the
needs of the organization yet if an activity is being done in-house, flexibility
can be possible.
 High staff turnover because of the reduced morale and tight conditions they
are subjected to by the third party provider.

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  Unrealistic expectations of outsourcing; at times organizations expect that
all their problems will be solved as a result of outsourcing which may not
always be the case.
 Cost escalations such as failure to supply ambiguous requirements which are
costly to clarify.

Third and Fourth Party Logistics providers

Both third and fourth party logistics providers are terms used to describe providers of
outsourced logistics management functions. However, there is a slight difference between
these two i.e.
Third party logistics service providers are companies that provide a range of logistics
services to their clients. Their activities include;
Operating distribution centers, managing delivery of products through transportation fleet
or product value- adding services like re-packing.
Third party logistics providers provide one or more of the logistics activities relating to
the flow of products, information and funds that could be performed by the firm itself.
Fourth party logistics providers on the other hand use the assets of other organizations
to provide logistics services for example vehicles to transport goods, people may not
belong to the company, the warehouse may not belong to the company but it hires it.

Types of third party logistics providers (3PLs)

(i) Standard 3PL provider: this is the most basic form of a 3PL. They would
perform activities such as pick and pack, warehousing. For a majority of these
firms, 3 PL function is not their main activity.
(ii) Service developer; this type of 3PL provider will offer their customers
advanced value- added services such as ; tracking and tracing, crossing-
docking, specific packaging or providing a unique security system.
(iii) The customer adapter; this type of 3PL provider comes in at the request of
the customer and essentially takes over complete control of the company’s
logistics activities but do not develop a new service.

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 (iv) The customer developer; this is the highest level that a 3PL provider can
attain with respect to logistics activities. This occurs when the 3PL provider
integrates itself with the customer and takes over their entire logistics
function.

End of lecture questions

1. Define the term outsourcing

2. Outline any three activities in Logistics management that can be outsourced
3. What are the benefits associated with outsourcing some of the logistics activities?
4. Mention the challenges associated with outsourcing
5. Distinguish between 3rd and 4th party logistics providers
6. Outline any two types of 3rd party logistics providers

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CHAPTER SIX
MATERIALS PLANNING AND MANAGEMENT
LECTURE ONE
Definition of Materials Management
Materials management is an integrated functioning of purchasing and associated activities
so as to achieve the maximum coordination and optimum expenditure in the area of
materials.
It involves planning and maintaining stocks of materials, tools, general supplies etc. as
well as handling, classification, codification, ABC analysis and accounting for materials’
receipts and issues.

Objectives of materials management

 Provide both internal and external customers with the required service levels
in terms of quantity and order fill rates.
 Service level i.e. Number of times an item is provided on demand x 100
Number of times an item is demand
 Ascertain both current and future requirements. This is necessary to avoid
shortages as well as excesses.
 To keep related costs to minimum level as much as possible.

Methods used in materials planning and management

Different items experience different demand patterns and their demand is affected by
differing factors. It is therefore relevant to understand the aspect of dependent and
independent demand as used in materials planning and management.
This is because the methods used in planning and management depend on the nature of
demand of the materials as observed below;
(i) Independent demand items/materials; these are materials whose demand is
not affected by the demand or decisions about any other material e.g. cars and
other finished items. The methods used in planning and managing
independent demand materials include;

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 (a) The fixed order point system /Two bin system/Kanban; under this
system, the stock of each particular item is placed into two (2) bins. Stock
is initially taken from the first bin and when this bin is empty, a fresh
purchase order is placed of a fixed quantity to fill the empty bin. The fixed
quantity re-ordered is normally based on the EOQ (economic order
quantity).
(b) The periodic review system (topping –up- system); under this method,
the materials inventory position is reviewed periodically rather than at a
fixed order point. A variable quantity is ordered at each review to bring
the stock level back to maximum.
(c) The ABC Analysis/Model; under this method materials are divided into
three categories/classes i.e. A,B and C. Class A materials are those which
bring in high sales and are very expensive in terms of acquisition price,
class B are moderately expensive and generate medium sales while class C
are the greatest in quantity but generate less sales and are cheap to acquire.
Summary of the model and the recommended control on materials
Material Proportion of Proportion of Recommended control
category quantity annual spend
A 10% 60% Very careful planning and control
to avoid tying up capital
B 20% 30% Moderate control
C 70% 10% Loose/irregular control

Note: Category ‘A’ materials should be properly planned and continuously controlled or
monitored closely because they constitute a large percentage of total cost. Safety stocks
should be kept low and therefore there should be frequent ordering, whereas for category
‘C’ items, there should be less frequent ordering and higher safety stocks.
(d) The Just in Time Method (JIT); under this method materials are
obtained just in time for production to provide finished goods just in time
for sale. It requires coordination with suppliers so that materials arrive at
the right time prior to use. JIT reduces inventory costs associated with

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 carrying inventory. It is required that the company that uses JIT
manufacturing system must eliminate all sources of error/failure in the
system i.e. production, people, suppliers, equipment should work without
error/mistake. In this system, production does not commence until the
organization receives an order.

End of lecture questions

1. Define the term materials management
2. Describe the different methods used to manage independent demand items
3. Distinguish between independent and dependent demand items

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LECTURE TWO
(ii) Dependent demand materials/items; these are items whose demand is
dependent on other items or decisions about other items e.g. the demand for
tyres depends on the demand for vehicles, demand for bullets depends on the
demand for guns.
The methods used in planning and management of dependent demand materials/items
include the following;
(a) Materials Requirements Planning; this is an integrated approach to materials
management which takes into account the purchase and production programme. It is a
computer based system that uses software to convert the master schedule to the
requirements of raw materials, components and subassemblies, etc.
The aim of MRP is to make available either purchased or company manufacturing
assemblies just before they are required by the next stage of production or delivery.
The technique enables orders to be tracked throughout the entire manufacturing process
and assists purchasing and control departments to move the right supplies at the right
time to manufacturing or distribution points.
MRP has some similarities with Just In Time technique which involves making what the
customer needs, when it is needed and in the quantity needed using minimum resources
i.e. people, materials and machinery.

Comparison of Materials Requirements Planning (MRP) and Just In Time (JIT)

techniques of materials planning and management

Operating system x-tics MRP JIT

System ‘Push’ system ‘Pull’ system

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 Focus Bottle necks Quality
Inventory status Inventory no problem, Reducing inventory to
but the less the better zero
Administrative Increased Fewer
personnel
Scheduling MRP says ‘which job is JIT says ‘make it now’
next’
Work authorization Master production Kanban (2 bins)
schedule

(b) Enterprise Resource Planning

This is a business management system that enables managers from all
functions/departments to have a consolidated view of what is or not taking place
throughout the enterprise. It is an application software which integrates all the
departments or functions of an enterprise e.g. from finance i.e. keeping track of financial
information such as accounts receivable and payable, payroll and other financial and
management information throughout the enterprise.
Logistics can also be integrated into the system by keeping track of inventory levels,
warehouse management and transportation, etc.
Manufacturing; the system can track the flow of orders or products including MRP and
the coordination of manufacturing.
Supplier management; tracks the purchasing process from requisitioning to payment of
suppliers, monitors delivery of supplies and supplier performance.
Human resources; covers human resources management activities including planning,
training and job allocation.

Advantages of Enterprise Resource Planning (ERP)

 Faster inventory turnover; manufacturers; and distributors many
increase inventory turns and reduce inventory costs.
 Improved customer services; by providing the right product in the
right place at the right time thus increasing customer satisfaction.

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  Better inventory accuracy, fewer audits; an ERP system can
increase inventory accuracy while reducing the need for physical
inventory audits.
 Reduced set up times; ERP can reduce set up time by grouping
similar production jobs together with the efficient use of equipment
and minimizing down time by virtue of efficient maintenance.
 Higher quality work; ERP software with a strong manufacturing
component proactively pinpoints quality issues providing the
information required to increase production efficiency and reduce or
eliminate rework.
 Timey revenue collection and improved cash flow; ERP gives
manufacturers the power to proactively examine accounts receivable
before problems occur instead of just reacting which improves cash
flow.

Challenges associated with the ERP system

 ERP implementation is difficult; This is because implementation
involves fundamental change from functional to a process approach to
business.
 ERP systems are expensive; this is especially so when the
customization of standard modules to accommodate different business
involved. It has been estimated that some 50% of ERP
implementations fail to deliver the anticipated benefits and the cost is
often prohibitive for small enterprises.
 The cost of training employees to use ERP systems can be very high
for some organizations.
 There may be a number of unlimited consequences such as
employee stress and a resistance to change and sharing information
that was closely guarded by departments or functions.
 ERP systems tend to focus on operational decisions and have
relatively weak analytical capabilities.

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(c) Distribution Requirements Planning (DRP)
This is an inventory control and scheduling technique that applies MRP principles to
distribution of inventories. It may also be regarded as a method of handling stock
replenishment in a multi-echelon environment i.e. stepwise arrangement.
It means that instead of independent control of the same item at different distribution
points using EOQ formulae, the dependent demand at a higher echelon such as a central
warehouse is derived from the requirements of lower echelon such as regional
warehouses.
DRP is useful for both manufacturing organizations such as car manufacturers that sell
their cars via several distribution points such as regional or local distributors and purely
merchandising organizations such as supermarkets as seen below;
Illustration of the Distribution Requirements Planning technique/method

Central warehouse

Regional distribution Regional distribution Regional distribution

centers centers centers

Retail stores Retail stores Retail stores

LECTURE THREE

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STOCK CONTROL
Introduction
Every organization holds something in stock. Stock can be a nuisance, necessity or a
convenience. Retailers and wholesalers view stock as the control future of their business.
What they sell is what they buy and they aim to sell from stock rather than from future
deliveries which have yet to arrive.
Organizations such as manufacturers, health care institutions and other service providers
place stock in a subsidiary rather than a central position, but it is still an important
element in operational effectiveness and often appears on the balance sheet as the biggest
of current assets locking up a lot of cash.
Reasons for keeping stock
 The convenience of having items available as and when required without making
special arrangements.
 Cost reduction through purchase or production of optimum quantities: protection
against the effect of forecast error and inaccurate records.
 Provisions for fluctuations in sales or production.
 Reduce stock outs and the associated costs such as loss of customer good will.

Costs associated with stock management

There are three major types of costs associated with stock and they include;
(a) Acquisition costs; many of these are costs incurred in placing an order irrespective of
the order size e.g. whether the order size is 1 or 1000 toones, the cost will be the same.
Ordering costs include;
 Preliminary costs such as preparing the requisition, vendor selection and
negotiation.
 Placement costs such as order preparation, stationery, e-mails.
 Post-placement costs such as follow up, receiving goods, materials handling,
inspection, certification and payment of invoices.

(b) Holding costs; these are costs incurred for having stock and they are sub-divided
into;

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Costs proportional to the value of inventory, insurance costs, losses in value through
deterioration, obsolescence and pilferage (petty theft)
Costs proportional to the physical characteristics of inventory e.g. storage costs,
storage space, stores rates (rent), light, heat, power, etc.
(c) Stock out costs; this means costs of being out of inventory. They include;
 Loss of production output
 Cost of idle time and of fixed overheads spread over a reduced output.
 Cost of action taken to deal with the stock out e.g. buying from stockists at an
enhanced price, switching production and obtaining substitute materials.
 Loss of customer good will through inability to supply or late delivery.
(d) Disposal costs; these are costs associated with dealing away with stock e.g.
destroying obsolete stock.

Factors that affect the quantity of stock to be held

 The demand of the final product into which the bought out materials and
components are to be incorporated.
 The inventory policy of the undertaking.
 Whether demand for the final item is independent or dependent

ECONOMIC ORDER QUANTITY (EOQ)

The EOQ is the optimal quantity for an item of stock that minimizes total costs-both
ordering and holding costs at the same time. EOQ is appropriate for managing
independent demand items only.

Assumptions of EOQ
 Demand is uniform i.e. certain constant and continuous over time.
 Lead time is constant and certain.
 There is no limit on order size due to either stores capacity or other constraints.

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  The cost of placing an order id independent of the size of the order and the
delivery charge is also independent of the quantity delivered.
 The cost of holding a unit does not depend on the quantity in the store.
 All prices are constant and certain. There are no bulk purchase discounts.
 Exactly the same quantity is ordered each time that purchase is made.

Advantages of EOQ
 It offers solutions to inventory problems.
 It helps in finding appropriate levels of holding inventories.
 It facilitates the fixation of ordering sequence and the quantities so as to minimize
the total material handling costs.
Disadvantages of EOQ
 Discounts offered for bulk purchases suggest larger quantities than EOQ.
 In case of imported items, companies are forced to buy at least six months
requirements at a time.
 Seasonal supply factors force organizations to buy in large quantities.
 Large order quantities lower transport costs.

End of lecture questions

1. Why do organizations hold stock?
2. Briefly describe the different categories of stock held by organizations
3. What costs are associated holding stock?
4. What do you understand with the term double handling of materials?

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CHAPTER SEVEN NEW DEVELOPMENTS IN LOGISTICS MGT
LECTURE ONE
(a) CROSS DOCKING
Meaning of cross docking
Cross docking is a new logistics technique used in retail and trucking industries. This
practice involves receiving goods at one door and shipping them to the other door almost
immediately without putting them into the warehouse for storage.

Reasons for cross docking i.e. by-passing the warehousing functions

 If the destination is known such that the goods are delivered straight to the
customer.
 If the warehouse is nearing full capacity such that there is limited space for adding
stock.
 Incompatible goods with those already in the stores/warehouse.
 If goods are time sensitive e.g. perishables.
 If items are pre-packaged such that no internal operations are required on them
e.g. no need to break bulk, consolidation.
 Stockless purchasing i.e. buying for direct transport to the user without placing
items in the store/warehouse.
Advantages of cross docking
 It helps to reduce operating costs by eliminating handling and storage of
products.
 It helps to reduce inventory level by direct shipment to customers.
 It helps to increase sales by providing on time delivery to the customers.
 It encourages electronic communication between suppliers and retailers.

(b) Vendor Managed Inventory (VMI)

This is an inventory management technique in which inventory replacement decisions are
centralized with upstream manufacturers or distributors. The aim of VMI is to enable

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manufacturers or distributors eliminate the need for customers to re-order, reduce or
exclude inventory and avoid stock outs.
With VMI, customers no longer ‘pull’ inventory from suppliers rather inventory is
automatically ‘pushed’ to customers as suppliers check customers’ inventory or
inventories and respond to previously agreed stock levels.
Vendor managed inventory is particularly applicable to retail distribution and large
manufacturers. It can relieve the customer much of the expense of ordering and stocking
low MRO items.
Implementation of VMI illustrated

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The above model is based on the assumption that the customer has entered into a
collaborative or partnership agreement with a distributor under which the distributor
agrees to stock a specified range of items and meet specified service levels.

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In return the customer undertakes to buy the specified items solely from the distributor
and no longer keeps the items in stock.
There must therefore a high degree /level of trust between the customer and the
distributor.

Steps in the VMI model

1. The customer sends information on items sold to the distributor. This information may
be collected by barcoding and scanning and then transmitted to the distributor by or via
the internet.
2. The distributor processes the information and forwards an acknowledgment to the
customer giving details of the quantities and descriptions of the products to be delivered,
delivery date and destination, and then releases the goods.
3. The distributor collects details of all customers’ orders which are consolidated and sent
daily to the manufacturer via internet.
4. the manufacturer replenishes the distributor’s stock.
5. The distributor invoices the customer who remits payment.

Very large customers may transmit their requirements directly to the manufacturer from
whom they receive direct deliveries.

Advantages of VMI
(a) To the suppliers
 Demand smoothing: VMI information imposes forecasts of customers’
requirements thereby enabling manufacturers to plan production to plan
production meet customer demand.
 Long term customer relationships due to the high cost of switching to an
alternative supplier in case the customer wishes so.
 Enhanced operational flexibility – enabling production times and quantities to be
adjusted to suit the supplier.
(b) To the customers

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  Reduced administrative costs due to elimination of the need to monitor inventory
levels, paper to computer entries and reduced re-ordering costs.
 Enhanced working capital due to reduced inventory levels and obsolescence and
enhanced stock return with improved cash flow.
 Reduced lead times with enhanced sales and a reduction in lost sales due to stock
outs.

Disadvantages of VMI
(a) To suppliers
 Transfers of customer costs to the supplier. These include those relating to
administration and the cost of carrying increased inventory to meet customer
demands.
 Reduced working capital due to the enhanced inventory and administrative costs.

(b) To the customers

 Increased risk resulting from dependence on the manufacturer or distributor.
 Disclosure of potentially sensitive information to the supplier. The possession of
such information will put the supplier in a strong position when a contract is
renegotiated.
 Customers may be better positioned than suppliers to make replenishment
decisions. This is common when there is need to switch to substitute products
from competing manufacturers.

End of lecture questions

1. Define the term cross docking as used in logistics management
2. What advantages are associated with cross docking?
3. Under what circumstances is cross docking applicable?
4. What do you understand by the term vendor managed inventory?
5. Mention the advantages of VMI to both the supplier and the buyer/customer.

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Reading list

1. Kenneth Lyson & Brian Farrington (2006), Purchasing and Supply Chain
Management 7th edition, Pearson Education Limited.
2. CIPS (Chartered Institute of Purchasing and Supply) Study guide, Tactics and
Operations.
3. Robert M. Monczka, Robert B. Hand Field, Larry C. Guimpero, James L.
Patterson and Donald Watters, Purchasing and Supply Chain Management.

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