1

What is Logistics Management?
• The objective is to plan and coordinate all the activities
necessary to achieve desired level of delivered service
and quality at lowest possible cost.
• The scope of logistics include the entire gamut of
activities starting from the procurement and management
of raw materials through to delivery of final product to
the customer.
• The ultimate purpose of any logistics system is to satisfy
the customer by establishing linkages of people at all
levels in the organization directly or indirectly to the
market place.
2
• As it is getting increasingly difficult to maintain a
competitive edge through product alone, customer
service has started to provide the distinctive
difference between one company‟s offer and that of
its competitors.
• The underlying concept is “ The process of
strategically managing the procurement, movement
and storage of materials, parts and finished inventory
and the related information flows through the
organization and its marketing channels in such a
way that the current and future profitability are
maximized through the cost effective fulfillment of
orders.”
3
Competitive Advantage

Customers seeking benefits at acceptable cost
Company A
(Asset utilization)
Company B
(Asset utilization)
Cost differential
4
Source of Competitive
Advantage
• Competitive advantage is the ability of an
organization to differentiate itself in the eyes
of the customer, from its competition, and to
operate at a lower cost and hence greater
profit.
• Competitive advantage helps organizations to
achieve commercial success which mainly
depends upon two factors – cost advantage
and value advantage.
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Commercial success
Cost advantage
Value advantage
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• Cost advantage or Productivity advantage
- Characterized by low cost of production due to
greater sales volume, economies of scale enabling
fixed costs to be spread over a greater volume and
the impact of the „experience curve‟.
• Value advantage is in terms of product offering a
differential „plus‟ over competitive offerings.
- Based on marketing concept that customers that
„customers don't buy products, they buy benefits‟.
- Benefits may be intangibles and may not relate to
specific product features.
- It can be an image or reputation or even some
functional aspects.

7
• Adding value through differentiation is
extremely powerful means of achieving
competitive edge in the market.
• One of the significant method of adding
value is service.
• Service helps in developing relationship with
the customers through provision of an
augmented offer.
• Augmentation takes many forms such as
delivery services, after-sales services,
financial packages, technical support etc.
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Productivity and Value Matrix

Commodity Market
(1)
Cost Leader
(2)
Service Leader
(3)
Cost and Service
Leader
(4)
Productivity Advantage




V
a
l
u
e

A
d
v



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• For companies in quadrant (1), the market is
uncomfortable place as their products cannot be
differentiated from their competitors‟ offerings as
they do not have any cost advantage. These are
commodity markets.
• Companies in quadrant (2), adopt cost leadership
strategies. Traditionally, these are based on
economies of scale gained through volume.
• Another route to achieving cost advantage is through
logistics management. As logistics constitutes a major
proportion of total costs, reengineering logistics
processes results into substantial cost reduction.
10
• Companies in quadrant (3), seek differentiation
through service excellence since markets are
becoming more and more service sensitive.
• Customers expect greater responsiveness and
reliability from the suppliers, reduced lead times,
just-in-time delivery, and various other value added
services.
• Services strategies can be developed through
enhanced logistics management.
• Companies in quadrant (4) are distinctive in value
they deliver and are also cost competitive.
• Competitors find it hard to attack these companies
which try to excel in all the value chain activities.
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Value Chain Activities

Value Chain Activities
Primary Activities
•Inbound Logistics
•Operations
•Outbound Logistics
•Marketing & Sales
•Service
Secondary Activities
•Infrastructure
•Human Resource Management
•Technology Development
•Procurement
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• Primary activities represent the functional
areas like arranging inputs for transforming
them into output, and managing distribution,
marketing, sales, and services.
• The secondary activities facilitate the
integration of all the functions across the
entire organization.
• The companies can achieve competitive
advantage and create differentiation by
organizing and performing these activities
more efficiently or in a unique manner than
their competitors.
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Factors affecting value and
productivity advantage
A. Productivity advantage
- Capacity utilization
- Asset utilization
- Inventory reduction
- Integration with the suppliers.
B. Value advantage
- Customized services
- Reliability
- Responsiveness.

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Underlying Philosophy Behind
Logistics Concept

Suppliers Procurement Operation
Distribution Customers
Materials Flow
Information Flow
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• The objective of logistics is to link the market
place, distribution network, the manufacturing
process and procurement activity, so as to
provide higher levels of services to the
consumers yet at a lower cost.
• Scope of logistics management encompasses
management of raw materials and other inputs
through the delivery of the final product.
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How do we define logistics
management?
• A process of satisfying customer needs through
coordination of materials and information flows that
extend from the market through the firm‟s operation
and beyond that to the suppliers.
• A shift to an integrated orientation from the
conventional manufacturing or marketing
orientation.
• Traditionally, manufacturing and marketing have
been considered as separate activities each having
different priorities.
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• Manufacturing priorities and objectives are
concerned with achieving operating efficiencies
based on long production runs, minimized set ups
and changeovers, and product standardization.
• Marketing priorities and objectives are concerned
with achieving competitive advantage based on
varieties, high service levels, and frequent product
changes.
• Customer orientation and cost competitiveness has
been integrated by introducing flexible
manufacturing systems, practicing inventory
management policies based on manufacturing
requirement planning and just-in-time inventory
policy, laying sustained emphasis on quality and
integrating supply side issues in strategic plans.
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How do we define supply chain?
• A network of organizations that are having
linkages, both upstream and downstream in
different processes and activities that produce
and deliver value in the form of products and
services in the hands of ultimate consumer.

Customers Retailers Shirt Manufacturer
Weavers
of Fabrics
Yarn/Fibre
mfrers
Downstream
Upstream
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• A shirt manufacturer is a part of supply chain
that extends upstream through the weavers of
fabrics to the spinners and the manufacturers
of fibres, and downstream though
distributors and retailers to the final
consumers.
• Though each of these organizations are
dependent on each other yet traditionally do
not closely cooperate with one another.
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Is Supply chain management
same as vertical integration?
• SCM is not the same as vertical integration.
• Vertical integration implies ownership of upstream
suppliers and downstream customers.
• Earlier, vertical integration used to be the desirable
strategy but increasingly the companies are focusing
on their core business i.e. the activities that they do
really well and where they have a differential
advantage.
• Everything else is outsourced.
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Implementation of SCM through
Logistics Management
• SCM raises the challenge of integrating and
coordinating the flow of materials from multitude of
suppliers, including offshore, and similarly managing
the distribution of the finished product by way of
multitude intermediaries.
• Transferring costs upstream or downstream leads to
logistics myopia as all costs ultimately will make
way to the final market place to be reflected in the
price paid by the end user.
• The prime objective of SCM is to reduce or eliminate
the buffers of inventory that exists between the
organizations in a chain through sharing of
information on demand and current stock levels.
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How does Logistics differ from
SCM?
• Logistics management is primarily concerned with
optimizing flows within the organization.
• Supply chain management deals with integration of
all partners in the value chain.
• Logistics is essentially a framework that creates a
single plan for flow of products and information
through a business.
• Supply chain builds upon this framework and seeks
to achieve linkage and coordination between
processes of other entities in the pipeline i.e.
suppliers and customers, and organization itself.
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Impact of Logistics and
Customer Service on Marketing
• Traditionally, marketing has focused on end-
customer or consumer, seeking to promote brand
values and to generate a „demand pull‟ in the market
place for company‟s products.
• Due to shift in power in marketing channels,
companies are realizing to develop strong relations
with such intermediaries like large retail outlets to
create a customer franchise as well as consumer
franchise.
• The impact of both strong consumer franchise and
customer franchise can be enhanced or diminished by
effectiveness of suppliers‟ logistics system.
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Consumer
Franchise
•Brand values
•Corporate image
•Availability
Customer
Franchise
•Customer
Services
•Partnership
•Quick
Response

Supply Chain
Efficiency
•Flexibility
•Reduced
Inventory
•Low cost
supplier



Marketing
Effectiveness
•Market
Share
•Customer
Retention
•Superior
ROI


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Activities Included in Logistics
• Logistics competency is achieved by
coordinating the following functional areas.
- Network design
- Information
- Transportation
- Inventory
- Warehousing, material handling and
packaging.
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Network Design
• Network design is the prime responsibility of
logistics managers since a firm‟ facilities and
structure is used to provide products and materials
to the customers.
• Logistics facilities typically include manufacturing
plants, warehouses, cross-dock operations, and retail
stores.
• Determining the number and type of facility
required, their geographic locations, and the work to
be performed at each is an important part of network
design.
• In certain situations, some of the facility operations
may be outsourced to service specialists.
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• Network design determines the type of the
inventory and the quantity to be stocked at each
facility, and the assigning of customer orders
for shipment.
• Network of facilities also includes information
and transportation as a part of entire structure
from where logistical operations such as
processing of customer orders, maintaining
inventory and material handling are performed.
• The network design must consider
geographical variations.
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• The factors influencing modifications of
network design are:
(a) Change in demand and supply
(b) Product assortments
(c) Changes in suppliers‟ source of supplies.
(d) Manufacturing requirements.
• The first step towards achieving competitive
advantage lies in superior network design,
as the real competition is not between two
companies but between efficiency and
effectiveness in managing their supply chain
network.

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Information

Deficiencies in the quality of information


Incorrect information
with respect to trends may cause
•Inventory
shortage
•Over commitment




Incorrect information
relating to a specific
customer‟s requirements
leads to
•Processing of incorrect
orders creating additional
costs.
•Reduced sales

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• Forecasting and order management are the
two areas of logistical work that depend on
information.
(a) Forecasting enables to decide on positioning
of inventory to satisfy anticipated customer
requirements.
(b) Order management involves handling of
specific customer‟s requirements, both
external as well internal.
- External customers are those that consume
the product or service, or trading partners
that purchase the products or services for
resale.

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- Internal customers are organizational units
within a firm that require logistical support
to perform their designated work.
(c)The process of order management involves
- Receipt of an initial order
- Invoicing
- Delivery, and
- Collection.
• Incorrect information and delays in order
processing can cripple the logistics
performance; thus quality and timeliness are
the key issues in logistical operations.




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Transportation
• Transportation is the operational area of
logistics that geographically positions the
inventory i.e. provides for place utility.
• Companies accomplish transportation in
three different ways:
(a) A private fleet of vehicles may be operated.
(b) Contracts may be entered into with
transport companies.
(c) The service of different transport
companies may be engaged on an
individual shipment basis.

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Factors affecting transportation
performance

Transportation performance
Cost
Speed
Consistency
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A. Cost of transportation
- The payment for movement between two
geographical locations and expenses related to
administration and and maintaining in-transit
inventory.
B. Speed of transportation
- The time required to complete a specific
movement.
- Transport firms capable of providing faster
services normally charge higher rate.
- The faster the transportation services, shorter is
the time interval during which the inventory is in
transit and unvailable.

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C. Consistency of transportation
- Refers to variations in time required to
perform a specific movement over a number
of shipments.
- Consistency is a measure of dependability of
transportation.
- Inconsistency in transportation leads to
inventory safety stocks required to protect
against unpredictable service breakdowns.
+Speed and consistency combine to create
quality aspect of transportation.
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Inventory
• The objective is to achieve the desired
customer service with minimum inventory
commitment, consistent with lowest total cost.
• Excessive inventories may be helpful in
compensating for deficiencies in network
design but ultimately result into higher total
logistics cost.
• The best practice of inventory management is
to achieve maximum turnover while satisfying
customer commitments.
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Warehousing, Material Handling,
And Packaging
• Merchandise needs to be warehoused at selected
times, transport vehicles material handling for
efficient loading and unloading and goods are most
efficiently handled when packaged together into
shipping cartons or other type of containers.
• The logistical activities carried out in warehouse are
sorting, sequencing, order selection, transport
consolidation and sometimes product modification
and assembly.
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• Within the warehouse, products must be
received, moved, sorted, and assembled to
meet customer order requirements and for
these activities material handling becomes
significant.
• Products packed in cans, bottles or boxes are
handled more efficiently when combined into
larger units such as Master Cartons.
• Master units can further be consolidated into
large units such as pallets, containers etc.
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Inventory Management Policy
• The following factors are required to be
considered while formulating inventory
management policy.
- Customer segmentation
- Product requirements
- Transport integration
- Time-based requirements
- Competitive performance.
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Customer Segmentation
• The profitability of business depends upon the
products purchased by the customers, sales volumes,
prices, value-added services required and
supplementary activities to develop and maintain an
ongoing relationship.
• Some customers are highly profitable and have
growth potential, while others do not.
• Hence, highly profitable customers constitute the
core market for an enterprise and inventory strategies
need to be focused on meeting requirements of such
core customers.
• Inventory priorities designed to support core
customers come out of effective segmented logistics.
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Product Requirements
• Applying Pareto‟s principle, firm‟s 20% of
all products marketed account for more than
80% of total profits.
• Offer high availability and consistent delivery
on more profitable products, though sometimes
high –level support of less profitable items
becomes necessary to provide full-line service
to core customers.
• Not advisable to provide high service
performance on less profitable products
purchased by non core customers.
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• Thus, it may be desirable to hold slow-moving
or low profit items at a central distribution
warehouse whereas core customers may be
served by fast, reliable air services.
• Orders to fringe customers may be delivered
by less expensive ground transportation.
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Transport Integration
• A sound inventory management strategy
would be to stock sufficient products at
warehouse to be able to arrange consolidated
shipments to a customer or a geographic area.
• The corresponding savings in transportation
may more than offset the increased cost of
holding the inventory.
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Time-Based Requirements
• Time-based arrangements reduce the overall
inventories by developing the capability to respond
rapidly to exact to exact manufacturing or retail
customers.
• If the products/materials can be delivered quickly, it
may not be necessary to maintain inventories at
manufacturing plants/ retail stores.
• If replenishment can be achieved rapidly less safety
stock will be required and instead of stockpiling and
holding safety stock the requirement will be to
receive the exact quantity of inventory at the time
required.
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• Time-based programmes tend to reduce
shipment sizes, which in turn increases the
number, frequency, cost of shipments and
hence higher transportation cost.
• An effective logistical arrangement will be to
achieve a trade-off resulting into desired
customer service at the lowest total cost.
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Competitive Performance
• Sound inventory management policy is
designed to gain customer service advantage
or neutralize a strength that a competitor may
be enjoying currently.
• As inventories exist across a logistical system
for various reasons, the policy should be
viewed from holistic cost perspective.
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Integrated Logistics

Customers
Physical
distribution
Manufacturing
support
Procurement
Suppliers
Inventory Flow
Information Flow
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• Information from and about customers flows
through the enterprise in the form of sales activity,
forecasts and orders.
• Information is then translated into manufacturing
and purchasing plans.
• The materials are then procured,value addition
takes place along with the inventory flow
ultimately resulting into transfer of ownership of
finished products to the customers.
• The process of integration is not restricted to
manufacturing companies alone, the retailing and
wholesaling firms link physical distribution and
purchasing since manufacturing is not required.
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• The entire process of integration can be
viewed in terms of two interrelated activities.
- Inventory flow, and
- Information flow

Inventory Flow
Physical
distribution
Manufacturing
support
Procurement
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Physical Distribution
• Establishes linkage of marketing channel with its
customers facilitating the movement of a finished
product to the final destination of a marketing
channel.
• Would need a proper marketing effort resulting into
desired assortment being delivered when and where
needed.-Outbound logistics.
• Fulfills objective of implementation of time and
space dimension of customer service as an integral
part of marketing.
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Manufacturing Support
• Concerned with managing work-in-process
inventory as it flows between the stages of
manufacturing.
• Formulates a master production schedule that
subsequently facilitates arranging for timely
availability of materials, component parts,
and work-in-process inventory.
• Is not concerned with ‘how’ production
occurs but rather ‘what,’ ‘when’, ‘where’
products will be manufactured.

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Difference between Physical distribution
and Manufacturing Support
• Physical distribution attempts to serve the
desires of the customers and therefore must
accommodate the uncertainties of consumer
and industrial demand.
• Manufacturing support involves movement
requirements that are under the contol of
manufacturing enterprise.
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Procurement
• Concerned with purchasing and arranging in-
bound movement of materials, parts, and/or
finished inventory from suppliers to
manufacturing or assembly plants ,
warehouses, or retail stores thereby ensuring
availability of materials/ assortments where
and when needed. -Inbound logistics.
• In a given marketing situation, manufacturers‟
physical distribution is same as retailers‟
procurement operations.
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Information Flow
A. Planning & Coordination Flows
- Nature & Location of customers
- Required products & services matching to needs of
customers.
- Limitations or bottlenecks within manufacturing
capabilities thus helping to decide outsourcing
requirements.
- Requirements of logistical facilities based upon
forecasting.
- MPS and MRP to support manufacturing
/procurement requirements.
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B. Operational Flow
- Order management and processing
- Procurement
- Inventory management
- Transportation and shipping
+Advantages of effective operational flows
- Allocates and assigns inventory/ assortments to
customers according to predetermined priorities.
- Use of information technology in deploying
inventory to ensure effective performance of
logistical system.
- Consolidating orders to achieve freight economies
and making correct documentation.
- Facilitate purchase order preparation, amendments
and release to ensure overall supplier compliance.

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Logistical Performance Cycles
• The logistical integration through performance
cycles provides interface and link the
suppliers, the firm and its customers by means
of communication and transportation.


Performance Cycle
Transaction creating
activities
Physical fulfillment
activities
Advertising & Selling Physical distribution
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Physical distribution performance
cycle

Customer order
Order transmission
Order processing
Order selection Order transportation
Order delivery
to the customer
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Significance of physical
distribution performance cycle
• As it links a firm with its customers, it helps create
marketing and manufacturing initiatives into an
integrated efforts.
• It resolves conflicting interface between marketing &
manufacturing.
- As marketing is dedicated to delighting customers, it
would like to maintain broad product line with high
inventory regardless of each product‟s profit
potential. By doing so, any customer's requirement,
no matter how small or large would be satisfied.
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- Traditional mindset in manufacturing is to
control cost, which is achieved by long
production runs. Continuous manufacturing
processes maintain economies of scale and
reduce per unit cost. Therefore, a narrow line
of products is mass produced.
- Inventories are kept to resolve the inherent
conflict between these two philosophies.
- The above is achieved by forward deployment
of inventory throughout the logistical system
in anticipation of future sales on the basis of
forecasted information.

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How to reduce physical
distribution operational variance
• Improve accuracy of forecast

• Improve order management and
coordination with the customers.

• Have responsive and flexible cycle.
61
Manufacture Support
Performance Cycle
• It provides production logistics being positioned
between the physical distribution and procurement
operations of a firm.
• Movement and storage of product, materials, and
semi-finished parts and components between
enterprise facilities represent the responsibility of
manufacturing support logistics.
• In context of wholesale & retail trade, it implies
selection of assortment of inventory to be moved to
the next level of value chain.
• Basically, supports what, where and when of the
production and not how.

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Features of manufacturing
support performance cycle.
• Initiates provision of materials and externally
manufactured components at a place and time
needed.
• Operations are restricted to dock-to-dock movement
within the firm and where intermediate storage is
required.
• After completion of manufacturing cycle the finished
goods inventory is allocated and deployed either
directly to the customers or to distribution
warehouses for further customer shipment.
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Procurement Performance Cycles

Sourcing
Order placement and
Expediting
S
U
P
P
L
I
E
R
S
Transportation
Receiving
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• The procurement operations are identified as inbound
logistics.
• International procurement often requires large
shipments necessitating the use of barges, ocean
going vessels, trains and multiple truckloads for
transportation.
• The lower value of materials and components as
compared to finished product implies greater trade-
off between higher cost of maintaining inventory in
transit and the use of low cost modes of transport.
• As the cost of maintaining inventory in the pipeline
is less per day than the cost of maintaining finished
inventory, there is no benefit for paying higher
freight rates for faster inbound transport.
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• Procurement performance cycles are
invariably longer excepting in those cases
where the value of material or component may
justify paying higher freight rates for faster
inbound transport.

• A critical issue in procurement is uncertainty
in respect of price change, and/or supply
discontinuity.


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Reducing performance cycle
uncertainties
• Use of electronic data interchange
• Monitoring daily changes in workloads
• Human resource availability
• Availability of specialized unloading and
loading handling equipments
• Establishing safety stock/ buffer inventory to
cover variances so as to avoid delays.
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A few terms used in Inventory
Management
• Buffer stock= {Average lead time}x{Average usage
rate}.
• Safety stock= Average usage during the extension of
lead time.
• Reserve stock= Excess usage requirement during the
average lead time.
• Re-order level= B.S.+ S.S.+ R.S.
• Minimum Inventory Level= S.S.+R.S.
• Max. Inventory Level= {Minimum Level} + {Order
quantity}
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• Average Inventory Level= (Min.
level+Max.level)/ 2
• In case of periodic review the buffer stock will
be modified to {Average consumption
rate}x{Average lead time+Review period}
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Inventory Planning
• Ideally, if the forecast is done accurately, there
will not be any need for an inventory.
• Most warehousing would vanish, product
would move with less handling requirements
from warehouses to customers.
• However, in real life situations, the thrust is on
reducing inventory and maintain proper
customer service and optimal inventory levels.
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Inventory decisions-High risk &
high cost
• Without the proper inventory assortment, marketing
may find that sales are lost and customer satisfaction
declining.
• Overstocks increase cost and reduce profitability
through added warehousing, working capital
requirements, deterioration, insurance, and
obsolescence.
• As the significance percentage of assets are inventory
related, a reduction of firm‟s inventory by a few
percentage points can lead to dramatic improvement
in profits.
• ROI= (Profit/ Fixed assets +Current assets)
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• Substantial improvement in the productivity of
inventory can be achieved by re-engineering
supply chain processes.
• Poor inventory management may lead to stock
outs and hence cancellation of customers
orders, overstocking leading to insufficient
storage space and increase in the number and
rupee value of obsolete products.
• Consequently, inventory management has a
large financial impact on the firm.
• Investments blocked in inventory cannot be
used to obtain other goods or assets that could
improve the enterprise performance.


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Types of Inventory
• Broadly there are three types of inventory
- Manufacturing inventory
- Wholesale inventory
- Retail inventory
(a) Manufacturing inventory
- Manufacturer‟s inventory commitment starts with
raw material and component parts, including work-
in-process, and ends with finished goods.
- Manufacturer needs to transfer the finished goods
inventory to warehouses in closer proximity to
wholesalers and retailers.
- Manufacturer‟s inventory commitment is relatively
deep and has long duration.
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(b) Wholesale inventory
- Wholesaler purchases large quantities from
manufacturers and sells small quantities to retailers in
order to provide retail customers with assorted
merchandise from different manufacturers in smaller
quantities.
- Thus wholesaler risk exposure is narrower but deeper
and of longer duration than that of retailers.
- In case of seasonal goods, the wholesaler is forced to
commit inventory, far in advance of selling, thus
increasing the depth and duration of risk.
- The current trend of expansion of product lines has
increased the width of inventory risk.
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(c) Retail inventory
- Retailer inventory risk is wide but not deep.
- The emphasis is more on inventory velocity.
- Inventory velocity is measured by inventory turnover.
- The risk is undertaken on variety of products but for a
given product the risk is not deep relatively. The
exception is specialty retailer where the depth and
duration will be longer as they handle narrower lines.
- For instance, retailers‟ risk is spread across more than
10,000 SKUs, a general merchandise and food store
may carry around 25,000 SKUs and a full line
department store may have as many as 50,000 SKUs.

75
Functions underlying inventory
commitments
A. Geographical Specialization
- It allows for geographical specialization for
individual operating units.
- The need for geographical specialization arises
because various factors of production viz. power,
materials, water, labour, manufacturing facilities are
located at a considerable distance from the major
markets.
- For instance, tyres, batteries, transmission
equipments and springs for an automobile
assembly. The production facilities for each of the
these are traditionally located near the source of
materials to minimize transportation cost.

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- This strategy leads to specialization of manufacturing
each automobile component and hence economically.
- This will also involve internal inventory transfer to
completely integrate various components into final
assembly.
- Thus, manufactured goods from various locations are
collected at a single warehouse and then combined as
a consolidated/ assorted shipment.
- P&G uses distribution centres to combine products
from its laundry, food, and healthcare divisions to
offer the customer a single integrated shipment.
- Economies gained through geographical
specialization invariably offset increased inventory
and transportation cost.

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B. Decoupling
- Provides for increasing operating efficiency within a
single manufacturing facility by stockpiling work-in-
process inventory between production operations.
- Decoupling enables manufacturing and distribution of
economic lot sizes in anticipation of sales thus
ensuring large sized shipments with minimum freight
cost.
- Decoupling permits products manufactured over a
period of time to be sold as an assortment.
- Decoupling increases the operating efficiency at a
single location while geographical specialization
includes multiple locations.
- However, JIT,DRP etc have reduced the economic
benefits of decoupling considerably.


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C. Balancing Supply and Demand
- Balancing is concerned with elapsed time between
consumption and manufacturing as balancing
inventory reconciles supply availability with demand.
- Particularly useful in linking variations of
consumption with manufacturing in case of seasonal
products.
- Balancing seasonal production and year round
consumption such as orange juice or year round
production and seasonal consumption of blankets or
knitting wool.
- In case of sort selling season, manufacturers,
wholesalers and retailers are forced to take an
inventory position far in advance of peak selling
season.
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- From retailers‟ perspective, an inventory position is
planned six months prior to the peak selling period.
- The main function of balancing supply and demand
is to ensure that investment in stocks is liquidated
completely within the season.
D. Buffer Uncertainties
- Safety stock protects against two types of
uncertainties:
- (a) Demand in excess of forecast during the
performance cycle. For instance, customers‟ request
of more or less units than planned.
- Delays in the performance-cycle length itself. For
instance, delay in order receipt, order processing, or
transportation.



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Inventory Management Strategy
• Companies can postpone positioning of inventory
by maintaining stock at the plants or they may
decide to place more products in local distribution
centres to have it closer to the market.
(a) Manage inventory at each distribution centre
independently.
(b) Consider inventory interdependence across
distribution sites by managing inventory centrally.
(c) Ensure more coordination and communication in
case of centralized inventory management.
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Inventory Cost Consideration
1. Origin purchase consideration
2. Transportation cost.
(a) Origin purchase means the buyer is responsible for
freight cost and product risk when the product is in
transit.
(b) Depending on the delivery terms, the buyer
assumes full risk on inventory at the time of
shipment.
(c) Depending on the payment terms, transit inventory
would be a part of enterprise's average inventory
and therefore subject to an appropriate charge.
(d) Transportation cost must be added to purchase
price to obtain an accurate assessment of the value
of goods tied up in inventory.
82
• After the inventory is received, the amount
invested in the product must be increased by
transportation expenses.
• Thus, inventory carrying cost should be
assessed on the combined cost of the product
plus transportation.
83
Inventory Control Procedures

Perpetual Review Periodic Review
84
Perpetual Review
• Inventory status is reviewed to determine
replenishment needs.
• Implemented through a reorder point and
order quantity.
+ROP= D x T + SS, where
• ROP= reorder point in units
• D= average daily demand in units
• T= average performance-cycle length in days
• SS=safety or buffer stock in units.



85
• The following are considered in perpetual
review:
- On hand inventory represents quantity that is
physically present in the particular distribution
facility.
- On-order inventory represents quantities that
have been ordered from suppliers.
- If on-hand plus on-order quantity is less than
or equal to the established reorder point,
inventory control process will initiate another
replenishment order.
86
- Mathematically, this can be stated as
- If I+q s ROP then order Q, where
(a) I= inventory on hand
(b) q= inventory on order from suppliers
(c) ROP = re-order point in units
(d) Q= order quantity in units.
• Average inventory level for a perpetual review
system is calculated as
(a) I = Q/2 + SS, where
- I= average inventory in units
- Q= order quantity in units, and
- SS= safety stock in units
• The assumption is that P.O. will be placed when the
reorder point is reached and there is a continuous
monitoring of inventory system.





87
Periodic Review
• The inventory status is reviewed at regular intervals
such as weekly or monthly.
• The re-order point is adjusted to consider the
extended intervals between reviews.
• The formula for calculating the periodic review
reorder point is
+ROP= D( T + P/2) +SS, where
- ROP= re-order point
- D=average daily demand
- T= average performance cycle length
- P=review period in days
- SS= safety stock
88
• Average inventory for periodic review is
represented as I= Q/2 + (P x D)/2 + SS,
- I= average inventory in units
- Q= order quantity in units
- P= review period in days
- D= average daily demand
- SS= safety stock.
• Because of the time interval introduced by
periodic review, periodic control systems
generally require larger average inventories
than perpetual system.
89
Inventory Planning Methods

Fair Share
allocation
Distribution
Requirement
Planning
90
Fair Share Allocation

Plant Warehouse
Inventory- 600 units
Distribution
Centre-1
Distribution
Centre-2
Distribution
Centre-3
Inventory= 50 units
Daily use= 10 units
Inventory= 100 units
Daily use= 50 units
Inventory= 75 units
Daily use= 15 units
91
• Fair share allocation provides each
distribution facility with an equitable or fair
share of available inventory from a common
source such as a plant warehouse.
• Assuming that from a total inventory units of
600 it is desirable to retain 100 units at plant
warehouse; 500 units are available for
allocation.
• First we need to determine the number of
days‟ supply.


92
+DS = (A +E I
j
)

/ E D
j ,
where
- DS= no. of days supply for distribution
centre inventories.
- A= inventory units to be allocated from the
warehouse
- I
j
= inventory in units for distribution centre j.
- D
j
= daily demand for distribution centre j
+In the above example,
• DS = {500 + ( 50+100+75)} / (10+50+ 15)
• DS= {500 + 225} /75 =725/75 = 9.67 days

93
• Thus, fair share allocation means that each
distribution centre should be brought up to 9.67 days
stock.
• The amount to be allocated to each distribution
centre is determined as under:
+A
j
= (DS – I
j
/D
j
) x D
j
, where
- A
j
= amount allocated to distribution centre j
- DS= number of days supply that each distribution
centre is brought upto.
- I
j
= inventory in units for distribution centre j
- D
j
= daily demand for distribution centre j
- Thus, the amount allocated to distribution centre 1
will be
+A
1
= (9.67- 50/10) x 10 = (9.67- 5) x 10= 4.67x 10=
46.7 or 47 units.






94
+A
2
= (9.67-100/50)x50=(9.67-2.00)x50=383.5 or
384.00
+A
3
= (9.67-75/15)x15=(9.67-5.00)x15=70 units.
• However, does not consider site specific factors.
- Difference in performance cycle.
- Economic order quantity.
- Safety stock requirements.


95
Distribution Requirement
Planning
• Logical extension of manufacturing requirement
planning (MRP).
• Operates in an independent environment where
uncertain customer demand determines inventory
requirements.
• Requires forecast for each distribution centre and
SKU as well as adequate lead-time to allow product
movement.
• Errors may creep in because of prediction of demand
at wrong location or at wrong time.
• Requires consistent and reliable performance cycles
for movement between distribution facilities.
96

Plant Warehouse
Regional warehouse Regional warehouse
Distribution
centre
Distribution
centre
Distribution
centre
Distribution
centre
Distrib
ution
centre
Distribution centre
C U S T O M E R S
97

Raw Materials Warehouse
Part A Part B
Sub-assembly A
Part C Part D Part E
Sub assembly B
Sub assembly C
Final Assembly (Manufacturing)
Plant Warehouse
98
• DRP/MRP system integrates finished goods, work-in-
process, and materials planning.
• DRP provides a schedule for each SKU and each
distribution facility.
• For each planning period, the schedule will report the
following:
- Gross requirements reflecting demand from customers
being catered to by different distribution facilities.
- Scheduled receipts i.e.replenishment shipments
planned for arrival at the distribution centre.
- Anticipated week ending total deliveries.
- Projected on-hand inventory i.e. prior week‟s on-hand
inventory- current week‟s gross requirement +
scheduled receipts.

99
Benefits of DRP
• Improved service levels by increasing on –time
deliveries and decreasing customer complaints.
• Better planning of new product launches.
• Improved ability to anticipate shortages so that
marketing efforts are not expended on products with
low stock.
• Reduced distribution centre freight costs resulting
from coordinated shipments.
• Improved inventory visibility and coordination
between logistics and manufacturing.
• Reduced warehousing space requirements because of
inventory reductions.
100
Demand Forecasting
• Forecasting process comprises of two
elements
(a) Nature of demand, and
(b) Forecast components

Nature of Demand
Dependent demand Independent demand
101
Dependent versus Independent
Demand
• Vertical dependent is characterized by
sequence of purchasing and manufacturing,
such as number of tyres used for assembly
of automobiles.
• Horizontal dependent occurs in a situation
where an attachment, promotion item or
operator‟s manual is included with each item
shipped.
(a) The demanded item may not be required to
complete the manufacturing process but may
be needed to complete the marketing process.
102
(b) Once manufacturing plan for base item is
determined , requirements of components/
attachments can be calculated directly and no
separate forecasting is done.
• Independent demands are ones that are not related
to the demand for another item.
• For instance, demand for refrigerator is not related
to the demand for milk.
• Independent demand items are forecasted
individually.





103
Forecast Components
1. Base demand
2. Seasonal factors
3. Trends
4. Cyclic factors
5. Promotions
6. Irregular quantities.
• Mathematically forecast is expressed as
+F
t+1
= (B
t
x S
t
x T
t
x C
t
x P
t
) + I, where
- F
t+1
= forecast quantity for period t+1
104
- B
t
= base level sales demand (average sales level)
for period t+1
- S
t
= seasonal factor for period t
- T= trend component (quantity increase or decrease
per time period)
- C
t
= cyclic factor for period t
- P
t
= promotional factor for period t
- I= irregular or random quantity.
+ All forecasts may not include all components.
A. Base demand is based on average demand over an
extended period of time.
(a) There is no seasonality, trend, cyclic or
promotional component.



105
B. Seasonal component is characterized by upward
and downward movement in demand pattern,
usually on annual basis e.g. emand for woollen
blankets is at peak during winter months and
lowest during summer.
(a) Seasonality at wholesale level precedes consumer
demand by approximately one quarter.
(b) An individual seasonality factor of 1.2 indicates
that sales are projected at 20% higher than an
average period.
C. Trend Component exhibits long range movement in
sales over an extended period of time.
(a) Trend may change number of times over the entire
product life cycle.

106
(b) For instance, a reduction in birth rate implies
reduction in demand of disposal diapers.
(c) Trend component influences base demand as
B
t+1
= B
t
x T, where
- B
t+1
= base demand in period t+1
- B
t
= base demand in period t, and
- T= periodic trend index.
D. Cyclic component are known as business
cycles.
(a) Economies swing from recession to
expansion every three to five years.


107
E.Promotions are initiated by the firm‟s marketing
activities such as advertising, and various other
schemes.
(a) Sales increase during promotion as the consumers
take advantage of promotional schemes thus leding
to liquidation of inventories.
(b) Promotion can either be the deals offered to the
consumers or deals offered to the trade (wholesalers/
retailers).
(c) Promotions if offered on regular basis at the same
time every year will resemble a seasonal component.
F. Irregular components include random or
unpredictable quantities that do not fit into any other
category hence are impossible to predict.
(a) By tracking and predicting other components the
magnitude of random component can be minimized.

108
Forecast Approaches
A. Top-Down Approach
Plant Distribution Centre
Field
Distribution
Centre# 1
Forecast
4000 units

Field
Distribution
Centre#2
Forecast
3000 units

Field
Distribution
Centre#3
Forecast
2000 units
Field
Distribution
Centre#4
Forecast
1000 units
109
• Assume the firm has an aggregate monthly
forecast for the entire country as 10,000 units
and it use four distribution centres to service the
demand with a historical split of 40, 30, 20, and
10 per cent respectively.
• Forecasts for individual distribution centres will
be projected to be 4,000, 3000, 2,000 and 1,000
respectively.
• In top-down approach a national level SKU
forecast is developed and then the forecasted
volume is spread across locations on the basis
of historical sales pattern.
110
B. Bottom-up Approach
• Decentralized approach since each distribution
centre forecast is developed independently.
• Results into more accurate forecast as it tracks
and considers demand fluctuations within
specific markets.
• Requires more detailed record keeping and is
more difficult to incorporate demand factors
such as impact of promotion.
+Trade-off the detail tracking of bottom-up
approach with data manipulation ease of top-
down approach.
111
Components of Forecasting
Process

Orders
History
Tactics
Forecast
database
Forecast Administration
Forecast
Technique
Forecast
Support
System
Forecast Process
Forecast
Users
Finance
Marketing
Sales
Production
Logistics
112
A. Forecast data base keeps information about
• Orders
• Order history
• Tactics used to obtain orders such as promotions,
schemes, special promotional programmes.
• State of economy and competitive actions.
B. Forecast process integrates forecast techniques,
support system and administration.
• Two prominently used forecasting techniques are
time series and correlation modelling.
• Forecast support system is the capability to gather
and analyze data, evaluate impact of promotion,
develop forecast and communicate to the relevant
personnel.
113
Issues addressed by Forecast
Administration
• Who is responsible for developing the forecast?
• How is forecast accuracy and performance
measured?
• How does forecast performance affect job
performance, evaluation and rewards?
• Do the forecast analysts understand the impact
of forecasting on logistics operations?
• Do they understand the differences in various
forecasting techniques?

114
Transportation
• Transportation decisions are more strategic ones
closely linked with inventory decisions.
• Decisions are based on trade-off between the cost of
using a particular mode of transport with the cost of
inventory associated with that mode.
• For instance, air shipments may be fast, reliable , and
warrant less safety stocks; they are expensive whereas
shipping by sea or rail may be much cheaper but they
necessitate holding relatively large amount of
inventory to protect against the inherent uncertainty
associated with them.
115
• Customer service levels and geographic
locations are important aspects in transportation
decisions.
• Transportation accounts for roughly 30% of the
logistics costs and therefore operating
efficiencies become important aspects .
• Shipment sizes i.e. consolidated bulk shipments
versus smaller lot sizes; routing and scheduling
of vehicles become important part of
company‟s transport strategy.
• Transportation is one of the most visible
elements in the logistics operation.
116
Transportation Functionality
Product Movement Product Storage
117
A. Product Movement
- Primary function is the movement up and down the
value chain.
- As transportation uses temporal, financial and
environmental resources, the movement of materials
should take place only when it enhances the product
value.
(a) Uses temporal resources because the product is
inaccessible while in transit.
- Due to JIT strategies transit inventories are
becoming more significant thereby reducing
manufacturing and distribution centre inventories.
(b) Expenses incurred internally for private fleet of
vehicles or externally for commercial or public
transportation constitute financial resources.



118
(c) Transportation consumes fuel and oil and also
creates environmental expenses through
congestion, air pollution and noise pollution.


Objectives of Transportation


Move product
from original
location to
prescribed
destination while
minimizing temporal,
financial and environmental
Costs.


Minimize
expenses
incurred
due to
loss and
damage.
Meet customer
demand regarding
delivery and
shipment
information
availability

119
B. Product Storage
- Temporary storage through vehicles becomes
expensive as in-transit storage is required to be
moved again in a short duration of time.
- Sometimes temporary storage becomes
advantageous as the cost of unloading and
reloading the product in a warehouse may
exceed the daily charge of storage in
transportation vehicles.
- Many times where the warehouse space is
limited, utilizing transportation vehicles
becomes a viable option.
120
• The options available to a transporter in case of
warehouse space constraints are
(a) Instruct driver to take a circuitous or indirect route
to its destination, as the transit time would be
greater as compared to direct route. Thus transport
vehicle is used as temporary storage option.
(b) Change the shipment destination i.e. temporary
storage is achieved through diversion.
- For instance, product that is, say, scheduled initially
from Mumbai to Hyderabad gets diverted mid way
to Vishakapatnam (Vizag) as Vizag warehouse may
be in greater need of product and has the storage
capacity.
121
- Traditionally, the telephone was used to direct
diversion but nowadays satellite
communications between headquarters and
vehicle handle such tasks more efficiently.
- Though product storage in vehicles can be
costly, it can be justified from a total cost
perspective when loading, unloading costs,or
capacity constraints are considered.
122
Principles of Transportation
Economies of Scale
Economies of Distance
123
A. Economies of Scale
• Transportation cost per unit of weight decreases
when the size of the shipment increases i.e.
shipments that utilize the entire vehicle‟s
capacity like truck load (TL) cost less per kg
than less than truck load (LTL) shipments.
• Fixed costs in transportation include
administrative costs of taking transportation
order, time to position the vehicle for loading or
unloading, invoicing and equipment cost.
• It costs as much to administer a shipment of 1
kg as it does to administer a 1000 kg shipment.
124
B. Economies of Distance
• Transportation cost per unit of distance
increases at a decreasing rate as distance
increases. Also called “Tapering Principle”
• For instance, a shipment covering a distance of
800 kilometers will cost less than two
shipments of same combined weight covering
400 kms.
• Fixed expenses incurred to load and unload the
vehicle get spread over more kilometers
resulting in lower overall per kilometer charges.




125
Tapering Principle

Distance
C
O
S
T
126
Participants in Transportation
decisions

Government
Shipper
Carrier Consignee
Public
127
Role and Perspective of each
party
A. Shippers and Consignees‟ Expectations
• Move the goods from origin to destination
within a prescribed time at the lowest cost.
• Specified pick up and delivery times,
predictable transit time, zero loss and damage,
accurate and timely exchange of information
and invoicing.
128
B. The Government Role
• Stable and efficient transportation environment
to sustain economic growth.
• Product availability throughout the country at a
reasonable cost.
• Providing right-of-way such as road or railways
or air traffic control system.
C. The Public concerns
• Accessibility, cost effectiveness and protection
of environmental and safety standards.
• Development of transport infrastructure to have
goods from global sources.

129
Features of Different Modes of
Transportation

Modes of Transportation
Rail
Highway Water Pipeline
Air
130
A. Rail
- Capability to transport large shipments
economically with more frequency.
- High fixed costs because of expensive
equipment, right of way, switching yards, and
terminals.
- Variable cost per kg/km has been consierably
reduced by electrification.
- Bulk industries and heavy manufacturing use
railways more frequently.
- Can improve effectiveness of transportation
by having alliances with other modes.

131
B. Highway
- Growth of motor carrier industry has resulted
into door-to-door operating flexibility and
speed of inter-city movement.
- Compared to railways, motor carriers have
relatively small fixed investments in terminal
facilities and operate on publicly maintained
highways.
- Variable cost per kilometer is high because a
separate driver and cleaner are required for
each vehicle.
- Labour cost is also high because of the need
for substantial dock labour.

132
Cost Structure in respect of
Motor Transport

Fixed costs
such as
overheads
and vehicle
cost are
low relative
to railway

Variable costs
such as driver,
fuel, tyres and
repairs are
high relative
To railways.
133
• Motor carriers are best suited to handle small
shipments moving short distances.
• Favour light manufacturing and distributive
traders, short distances and high value
products.
• Have captured significant market share of
railways in medium and light manufacturing
industries.
• Because of delivery flexibility, motor transport
has captured almost all freight moving from
wholesalers or warehouses to retail stores.
• Higher cost in replacing equipment, higher
wages to driver and other dock labour.
134
C. Water
- Capacity to move extremely large shipments.
- Fixed costs are somewhere between rail and motor
carriers.
- Though water carriers have to develop and operate
their own terminals, the right-of-way is developed and
maintained by the government, resulting into
moderate fixed costs compared to rail and highways.
- Low variable cost makes this an attractive mode when
low freight rates are desired and speed is secondary
consideration.
- Typically bulk commodities such as mining ,
chemicals, cement, and certain selected agricultural
products are transported by ocean going vessel.
135
- Unless the point of origin and point of destination are
adjacent to a waterway, it needs to be supplemented
by rail or trucks.
D. Pipelines
- Used for transporting natural gas, manufactured
chemicals, pulverized dry bulk materials such as
cement and flour via hydraulic suspensions, sewage
and water within the cities and municipalities.
- Operate on 24x7 basis are limited only by commodity
changeover and maintenance.
- No empty container or vehicle that must be returned.
- Highest fixed cost an lowest variable cost.
- High fixed costs due to right-of-way, construction and
requirements for control station and pumping
capacity.
-


136
- As pipelines are not labour intensive, variable
operating cost is extremely low once the pipeline is
constructed.
- Inflexible and limited to products in the form of gas,
liquid or slurry.
E. Air
- Significant advantage lies in the speed with which a
shipment can be transported.
- Though the freight cost is very high, the same may be
trade-off with reduced warehousing or inventory.
- Characterized by load size constraints and aircraft
availability.
- Fixed cost associated with aircraft purchase and
requirements for specialized handling systems is low
as compared to rail, water and pipeline.
-





137
- Airways and airports are generally
developed and maintained with public funds.
- Airfreight variable cost is extremely high as
a result of fuel,maintenance and intensity of
in-flight and ground crew.
- Airfreight is justified in following situations:
(a) High value products
(b) Perishables
(c) Limited marketing period.
(d) Emergency.
138
Nature of Traffic versus Mode of
Transportation

Mode Nature of Traffic
Rail Extracting industries, heavy manufacturing,
agricultural commodities
Highway Medium and light manufacturing, distribution
between wholesalers and retailers.
Water Mining and basic bulk commodities, chemicals,
cement, agro-based products.
Pipeline Petroleum, gases, slurry.
Air Emergency, perishables, limited marketing period,
high value premium products.
139
Cost Structure for Each Mode of
Transportation

Mode Fixed Cost Variable Cost
Rail High- equipment terminals, tracks etc. Low
Highway Low-highways provided by public funds Medium- fuel, maintenance.
Water Medium- ships and equipment Low-capability to transport
large amount of tonnage.
Pipeline Highest-rights-of-way, construction,
control stations, pumping capacity.
Lowest-no labour cost of
any significance.
Air Low-aircraft and cargo handling system. High-fuel, labour and
maintenance.
140
Transport Economies
• Distance
• Volume
• Density
• Stow ability
• Handling
• Liability
• Market factors
141
A. Distance
- Cost curve increases at a decreasing rate as a
function of distance and is known as tapering
principle.
- Cost curve does not begin at the origin because of
the fixed costs associated with shipment pick up and
delivery regardless of distance.
- Tapering effect comes into existence, as the longer
movements tend to have a higher percentage of inter-
city rather than urban kilometers.
- Frequent intermediate stops, typical of urban
kilometers, and additional loading and unloading add
to the costs.
- Inter-city miles are less expensive since more
distance is covered with same fuel as a result of
higher speed.
142
B. Volume
- Transport cost per unit of weight decreases as load
volume increases.
- Fixed costs of pick up and delivery as well as
administrative costs get spread over additional
volumes.
- Smaller loads must be consolidated into larger loads.
C. Density
- Transportation cost per unit declines as product
density increases.
- In terms of weight and space, an individual vehicle is
constrained more by space than by weight. Once is
the vehicle is full, it is not possible to increase the
amount carried even if the product is lightweight.
143
- Higher density products allow fixed costs to be
spread across additional weight, as a result the
products are assessed at a lower transport cost per
unit.
- Attempts are made to increase product density so that
more can be loaded in a vehicle to utilize its capacity.
D. Stow ability
- Refers to product dimensions and impact of the same
on vehicle utilization.
- Odd sizes and shapes as well as excessive weights
and lengths do not stow well and typically waste
space.
- Though density and stow ability are similar, products
may have same density that stow differently.
144
- Items with regular shapes are easier to stow than odd
shaped items.
- While the steel blocks and rods have the same
density, rods are more difficult to stow because of
their length and shape.
E. Handling
- Special handling equipments may be required for
loading or unloading trucks, trains, or ships and the
unitization/ palletization affects the handling cost.
F. Liability
- Product characteristics such as susceptibility to
damage, perishability, susceptibility to to theft,
susceptibility to explosion affect the risks and hence
claims.

145
G. Market factors
(a) Back-haul i.e. vehicle returning back to the
point of origin with load.
(b) Dead head to be avoided because empty
returns incur labour, fuel, and maintenance
costs.
(c) Thus design of logistics system must add
back-haul movement wherever possible.
146
Multimodal Transport System
• Multimodal or Intermodal transport refers to
journeys that involve two or more different
modes of transport.
• For instance, if materials are moved from
Lanchow in central China to Warsaw in Poland
goods may be loaded on to trucks, transferring
them onto rails for a journey across China to
Shanghai, then ship to Rotterdam, back into
rails to cross Europe, then truck for local
delivery.

147
• For Logistics managers intermodal services become
necessary because of their characteristics and costs.
• For example, limited accessibility of air transport
requires coordination with a land carrier to make the
pick ups and deliveries.
• Similarly, inaccessibility applies to rail, water and
pipeline but not to the motor which has a definite
advantage here.
• The intermodal services maximizes the primary
advantages inherent in the combined modes and
minimize their disadvantages.
• The combined services will have both good and bad
aspects of the utilized modes.
148
• For instance, coordinate of rail and water will
have a lower total cost than an all-rail
movement but higher cost than that of all-water.
• Likewise, combined system transit time will be
lower than all water movement but higher than
all-rail.
• The decision to use multi-modal system must
consider the effect on total logistics costs.
• The aim of intermodal transport is to combine
the benefits of several separate modes but avoid
the disadvantages of each, like, combining the
low cost of shipping with flexibility of the road,
or getting the speed of air with the cost of road.
149
• However, each transfer between modes causes
delays and adds costs of extra handling.
• Intermodal transport works well when transfer
can be done efficiently.
• Transfer of motor carrier trailer to another
transport mode is facilitated through
containerization.

150
Choice of Mode
• Factors influencing the choice of mode are as under:
- Bulkiness of the materials; heavy items would be
shipped by ocean going vessels.
- Value of materials; expensive items raise inventory
costs and thus encourage faster modes.
- Criticality of materials; even low unit value items that
hold up the operations need fast and reliable transport.
- Susceptibility to market changes; operations that
respond quickly to changes cannot wait for critical
supplies using slower transport.
- Reliability with consistent delivery is important.
151
- Cost and flexibility to negotiate rates.
- Reputation and stability of carrier.
- Susceptibility to loss, theft and pilferage
- Schedule and frequency of delivery.
- Special facilities available
• Limitations of Multimodal system
- Sometimes carriers are reluctant to participate.
- Willingness to coordinate in respect of moving
the product is higher when any one carrier is
incapable to transport in its entirety.


152
Containerization

• Container is large rectangular box into which a firm
places commodities to be shipped.
• After initial loading, the commodities themselves are not
rehandled until they are unloaded at their final
destinations.
• Throughout the movement, the carrier handles the
container, not the commodities.
• The shipper can transfer the container from one mode to
another, eliminating the need to handle the commodities
each time thus reducing handling costs, damage costs,
theft, pilferage and the time required to complete the
modal transfer.

153
• Many firms that modify their material
handling systems to include cranes, forklift
trucks, and other equipment capable of
handling large, heavy containers have found
containerization to be desirable avenues for
increasing productivity and controlling
material handling costs, especially in periods
of continually increasing labour costs.
• As the objective of intermodal transport
system is to provide virtually seamless
journey, the best way to achieve same is to use
modular or unitized loads.
154
Piggyback –Trailer on Flat Car
• TOFC is a specialized form of containerization
in which rail and motor transport coordinate.
• Carrier places motor carrier trailer on a rail
flatcar, which moves the trailer by rail for long
distance.
• A motor carrier then moves the trailer for short
distance pickups and deliveries.
• This service combines the long-haul, low cost
advantage of rail with accessibility of motor.
• Piggyback services mostly move under contract.
155
Material Handling
• The primary material handling objective is to
efficiently move large quantities of inventory into
and specific customers orders out of the warehouse.
• The functions performed in a warehouse are
classified as movement or Handling and storage.
• Movement or handling is emphasized and storage is
secondary.
• Handling is divided into
- Receiving
- In storage handling , and
- Shipping
156
• An extremely important aspect of logistics is the
productivity potential that can be realized from
capital investment in material-handling
equipment.
• Specialized handling equipment is required for
unloading bulk materials such as for solids, fluids,
or gaseous materials.
• The guidelines suggested in designing the material
handling systems are:
(a) Equipment for handling and storage should be as
standardized as possible.
(b) When in motion, the system should provide
maximum continuous flow.
(c) Investment should be made in handling rather
than stationery equipment.

157
(d) Handling equipment should be utilized to the
maximum extent possible.
(e) In selecting handling equipment, the ratio of
deadweight to payload should be minimized.
(f) Whenever possible, gravity flow should be
incorporated in the system design.
• The handling systems can be classified as
under:
- Mechanized
- Semi automated
- Automated, and
- Information directed.




158
Mechanized Systems
A. Forklift Trucks
• Forklift trucks can move loads of master
cartons both horizontally and vertically.
• A pallet or slip sheet forms a platform upon
which master cartons are stacked.
• A slip sheet is a thin sheet of solid fibre or
corrugated paper and are used for situations
when product is handled only a few times.
• A forklift truck normally transports a
maximum of two unit loads i.e. two pallets at
a time
159
• High stacking trucks are capable of up to 40 feet of
vertical movement.
• Even trucks capable of operating in aisles as narrow as
56 inches ar also found in warehouses.
• The significance of narrow-aisle forklift trucks has
increased as warehouses seek to increase rack storage
density and overall storage capacity.
• Forklift trucks are not economical for long distance
horizontal movements because of high ratio of labour
per unit of transfer.
• Most effectively utilized in shipping and receiving
and placing merchandise in a predetermined storage
space.
• Common sources of power are propane gas and
electricity.
160
• Many forklift operations are utilizing radio
frequency data communication to speed up
load put away and retrieval assignments.
• Under the above system, workers receive their
assignments through either handheld or vehicle
–mounted RF terminals.
• RF technology provides real-time
communication capability to central data
processing systems, and when combined with
bar code scanning of cartons and pallets,it
allows fork lift operators to receive and update
item status inquiry, material orders and
movement and inventory adjustments.

161
B. Walkie-Rider Pallet Trucks
• Low cost, effective method of material
handling.
• Highly versatile low-lift pallet and/or skid
handlers with load capabilities from 3,000 to
8,000 lbs.
• Typical applications include loading and
unloading, order selection and shuttling over
longer distances throughout the warehouse.
• Popular in grocery warehouses.
• Electricity is the power source.

162
C. Towlines
• Either in-floor or overhead mounted drag devices.
• The major advantage is the continuous movement but
lacks flexibility of forklift trucks.
• Most common application is for order selection within
the warehouse. Order selectors place merchandise on a
four wheel trailer, which is then towed to the shipping
dock.
D. Conveyors
• Conveyors are classified according to power, gravity
or roller/belt movement.
• Portable gravity style roller conveyors are often used
for loading and unloading.
• In some cases these are transported on the over-the-
road trailers to assist in unloading at the destination.
163
Semi automated Handling
+ Semi automated system supplements a mechanized
system by automating a specific handling
requirements.
+ Semi automated warehouse is a mixture of
mechanized and automated handling.
A. Automated-Guided Vehicle Systems
• Performs similar kind of handling function as a
mechanized tow tractor with a trailer.
• The essential difference is that an AGVS does not
require an operator and is automatically routed and
positioned at destination with intervention of the
operator.
164
• Typical AGVS equipment relies on an optical
or magnetic guidance system.
• In the optical application, tape is placed on the
warehouse floor, and the equipment is guide by
a light beam that focuses on the guide path.
• A magnetic AGVS follows an energized wire
installed in the floor.
• The primary advantage is the elimination of a
driver and newer AGVS use video and
information technology to follow paths without
the need for fixed tracks.

165
B. Sortations
• Typically used in combination with conveyors.
• The products are selected in the warehouse, they are
sorted as per specific specific shipment docks and
taken onto the conveyors for moving out.
• Master cartons have a distinguishing code, these are
read by optical scanning devices and automatically
routed to the desired locations.
• The rate of flow is customized to meet changing
requirements.
• The benefits are
(a) Reduction in labour, and
(b) Increase in speed and accuracy.
166
C. Robotics
• Humanlike machine that can be programmed
by microprocessors to perform various
activities.
• Robots are use in warehouses to break down
and build unit loads to accommodate exact
merchandise requirements of a customer‟s
orders.
• In break down process, the robot is
programmed to recognize stocking pattern and
place products in the desired position on a
conveyor belt.
• Similarly, robots are used to build unit loads.




167
• Robots are used effectively in warehouses
where prevailing environments make it
difficult for humans to work such as high
noise areas and extreme temperatures like cold
storage freezers.
• The capability to incorporate artificial
intelligence in addition to speed,
dependability, and accuracy makes robotics an
attractive alternative to traditional manual
handling systems.
168
Automated Handling
• Substitutes capital investment in equipment for labour
required in mechanized handling systems.
• Though operates faster and more accurately, requires
high degree of capital investment and complex to
operate.
• Most automated systems are custom deigned and
constructed for each application.
• Automated handling concentrates on order selection
system at the master carton level as well as on high
rise storage and retrieval system.
169
A. Order Selection System
• The handling of fast moving products in master
cartons is fully automated from the point of
merchandise receipt to placement in over-the-road
trailers.
• Such systems use an integrated network of power
and gravity conveyors linking the storage.
• System is controlled by computer coupled with
inventory and order processing systems of
warehouse.
• Upon arrival, merchandise is automatically routed to
storage position and inventory records are updated.
• Upon order receipt, merchandise is unitized to
vehicle size and schedules made for selection.

170
• At an appropriate time, all merchandise is selected in
loading sequence and automatically transported by
conveyor to th loading dock.
• The only manual handling of merchandise occurs
while stacking into transport vehicle.
B. Automatic Storage and Retrieval System (ASRS)
• High rise handling systems are fully automated from
receiving to shipping.
• The components of this system are storage racks,
storage and retrieval equipment and control systems.
• The high rise are the vertical storage racks up to the
height of 120 feet.

171
• The storage and retrieval machine travels
back and forth with the primary objective of
moving products in and out of storage.
+Functions of storage & retrieval equipment
(1) To reach the desired position rapidly.
(2) To deposit or retract a load of merchandise.
(3) To ensure merchandise flowing from
production is automatically stacked to create
a unit load.
(4) To transport the unit load to the high rise
storage area by power conveyor.

172
C. Information-directed Systems
• All material handling movements are directed
and monitored by the command of
microprocessors.
• To begin with all required handling
movements are fed into the computer for
analysis and equipment assignment.
• Analysis of handling requirements and
equipment assignment is done in such a way
that direct movements are emphasized and
deadhead movements are minimized.
• Work assignments are provided to individual
forklifts by terminals located on the truck.
173
• Communication between the computer and the
truck uses radio frequency (RF) waves with
antennae located on the forklifts and high up
in the warehouse.
• Information-directed systems can increase
productivity by tracking material handler
performance and allowing compensation to be
based on activity level.
• A single handling equipment may be involved
in loading or unloading several vehicles,
selecting many orders, and completing several
handling assignments, thus increasing the
complexity of work direction.
174
Packaging
• Packaging can be categorized into two types viz.
(a) Consumer packaging, which has a marketing
emphasis, and
(b) Industrial packaging, which has more of logistics
emphasis.
A. Consumer Packaging (Marketing Emphasis)
- Consumer packaging design focuses on customer
convenience, market appeal, retail shelf utilization,
and product protection.
- Large containers and odd sizes may increase the
consumer visibility but make poor logistical
packaging.
175
• For example, shipping products fully
assembled such as motorcycles results in
substantial reduction in density.
• A low density package would mean higher
transportation costs and greater warehousing
requirements.
B. Industrial Packaging (Industrial emphasis)
- Individual products or parts are normally
grouped into cartons, bags, bins, or barrels for
handling efficiency.
- These containers are used to group individual
products and are referred to as master
cartons.
176
• When master cartons are grouped into larger
units for handling, the combination is
referred to as containerization or unitization.
• The master carton and the unitized load
provide the basic handling unit in the
logistics channel.
• The weight, volume, and fragility of the
master carton in an overall product line
determines transportation and material
handing requirements.
• If the package is not designed for efficient
logistical processing, overall performance of
the system would suffer.

177
• Standardization of master carton facilitates
material handling and transportation.
• Standardization of master carton is beneficial even
in context of retail backend operations.
(a) For instance, in case of shoe store as the contents
of each master carton are known, it is not
necessary to search through many cartons for a
particular style or size of shoe.
(b) Allows master cartons to be more efficiently
stacked, resulting in to less backroom congestion.
(c) Complete identification of master carton contents
facilitates completion of retail inventory and
merchandise reorder.
178
• Standardized cartons are selected to achieve
maximum conformity in increasing the density in the
trailer thereby eliminating dead space in stacking.
• The end result of standardized master carton usage is
substantial reduction in total cost combined with an
effective material handling system at both
warehouse and the retail store.
• In situations, when master cartons of more than one
size are required, extreme care should be taken to
arrive at an assortment of compatible units.
• These different sizes of master cartons should result
into modular compatibility.
179
How to design an Ideal Package?
• Invariably, logistical considerations alone
cannot fully dominate package design.
• The ideal package for material handling and
transportation would be a perfect cube having
equal length, depth, and width with
maximum possible density but such a
package does not exist in practice.
• Thus, logistical requirements should be
evaluated along with manufacturing,
marketing, and product design considerations
when standardizing master cartons.
180
• Another critical issue to be considered in package
design is to determine the degree of protection
required to cope with the anticipated physical and
climatic environments.
• The package design and material should combine to
achieve the desired level of protection without
incurring the expense of overprotection.
• In most cases the cost of absolute protection will be
prohibitive and therefore the package construction
should be a proper blend of design and material.
• Three broad functions of packaging are
- Damage protection, Utility/ efficiency, and
Communication.
181
A.Damage Protection
• A major function of the master carton is to protect
products from damage while moving and being
stored in the logistical system.
• Master carton also serve as a deterrent to pilferage.
• Achieving desired degree of protection involves
tailoring the package to the product and selecting
proper material for package construction.
• The determining factors are the value and fragility of
the product; higher the value, the greater is the
justification for nearly absolute protection.
• If the product is fragile and has high value, then the
cost of absolute protection can be significant.
182

Cost of Packaging

L
o
s
S

B
y

D
a
m
a
g
e

183
• The susceptibility to damage of a given
package is directly related to the environment
in which it moves and is stored.
• Product fragility can be measured by
product/package testing by means of shock
and vibration equipment.
• If packaging requirements and cost are
prohibitive, alternative product designs can be
evaluated utilizing the same testing
equipment.
• The end result is the determination of the
exact packaging required to protect the
product.
184
• During the logistical process, common causes
of product damage are vibrations,
impact,puncture, and compression.
• Stacking failure can also result in damage
while the product is in storage.
• The potential physical damage of poor
stacking ranges from surface scuffing and
marring to complete product crushing,
buckling and cracking.
• Typical methods of securing the packages are
strapping, tie-downs, and use of various
dunnage materials that limit vibrations and
shock.
185
B. Efficiency/ Utilization
• Logistical operations are affected by
packaging utility i.e. from truck loading and
warehouse picking productivity to
transportation and storage space utilization.
• Logistical activity output can be described in
terms of packages, such as number of cartons
loaded per hour into a trailer, number of
cartons picked per hour in a warehouse or
distribution centre.
• Material handling efficiency is also strongly
influenced by the unitization of packages.
186
• An important part of packaging relating to
storage and material handling is the concept of
unitization.
• Unitization describes the physical grouping of
master cartons into one restrained load for
material handling or transport.
• Concept of containerization includes all forms
of unitization, from taping two master cartons
together to the use of specialized transpotation
equipment.
• All types of containerization have the basic
objective of increasing material handling
efficiency.
187
+Benefits of Unit Loads
- Unloading time and congestion at destination
is minimized.
- Products shipped in unit load quantities
facilitate material handling and inventory can
be positioned rapidly for order selection.
- Damage in transit can be reduced by unit load
shipping and specialized transportation
equipment.
- All above factors lead to reduction in logistical
cost.

188
- A unit load can increase damage potential if it
is not properly restrained during handling or
transport.
- Standard method of imparting stability to unit
load include rope ties, steel strapping,
adhesives, wrapping- both shrink wrap as well
as stretch wrap.
C. Communication
• Critical to content identification, tracking, and
handling as the these are becoming necessary
to total channel success.


189
(a) Content Identification
- A very obvious communication role is identifying
package contents for all channel members.
- The typical information includes manufacturer,
product, type of container i.e. can or bottle, count
and product code number.
- The carton information is used to identify product
for receiving, order selection, and shipment
verification.
- Visibility is the major consideration, and material
handlers should be able to see the label from
reasonable distances in all directions.
- High value products often have small labels to
minimize the temptation of theft.

190
(b) Tracking
- A well controlled material handling system
tracks product as it is received, stored,
retrieved, and shipped.
- A good control on movement reduces product
loss and pilferage and is useful for monitoring
employee productivity.
- Low cost scanning equipment, and
codification increases the tracking capabilities
and effectiveness.
191
(c) Handling Instructions
- Final role of logistics package is to provide
handling and damage instructions.
- The information should be provided about any
special product handling considerations such
as glass containers, temperature restrictions,
stacking considerations, or potential
environments concerns.
- If the product is dangerous, such as an
explosive chemical , the packaging should
provide instructions for ealing with spills and
container damage.

192
Channel Integration-PCM
• Packaging, Containerization, and Material handling
represent integral parts of the logistical operating
system; as all three areas influence each other.
• For instance, automated handling cannot be
efficiently designed without a high degree of master
carton standardization, which in turn provide the
opportunity to containerize individual products.
• The integration between material handling capability,
transportation, warehousing, inventory policy and
packaging communication into customer‟s logistical
system leads to minimum handling during the
exchange of merchandise.
• This type of integration is commonly found in
physical distribution.
193
Scrap/Waste Disposal

Scrap
Material Input
Material
Processing
Material
Output
Recycle Disposal
194
A. Scrap
• Scrap is a waste created while processing the
materials.
• The process scrap is unavoidable extra material
removed from the stock of material while
generating a component.
• For example, while making a machined component
some material has to be removed in the form of
chips.
• Quite often, while manufacturing any component
some dimensions are not maintained and the lot is
scrapped as these cannot be used in the assembly of
the product.
195
B. Surplus
• When the project or product needs a specific quantity
of the item, extra leftover cannot be used and this
quantity is called surplus.
• The surplus quantity has to be disposed off.
C. Obsolete
• When the item cannot be used in the product/ project
due to changes that might have taken place in respect
of dimensions, shape, colour etc, these are called
obsolete items.
• Changes ay occur due to defect in product design, or
shelf life etc.
• These components have to be scrapped/ disposed off.



196
Wastivity of a System
• Wastivity of the system is defined as the ratio of the
waste to the input.
• Wastivity= Waste / Input
• Gross wastivity= Total waste generated/ Total input.
• All waste is not the waste, some part of it can be
recycled.
• Net waste={Total waste generated}-{Waste recycled
within the system}.
• Net wasitivity= Waste which cannot be recycled/
Total input.
• Wastivity assesses the productivity for each type of
input. Both wasitivity and productivity are
complementary to each other.

197
Issues to be addressed
• Quick identification of the waste generated.
• Separation of different types of waste.
• Economic reduction.
• Efficient collection and handling.
• Recycling, and effective disposal without
affecting the environment.
• Designing a suitable „waste control
programme‟.

198
Recycling /reusing/ disposal of
waste/ surplus/ scrap.

- Recycling refers to the use of bad quality outputs
(rejects) or wastes as inputs to the same process or
system e.g. reusing plastic scrap.
- Use the scrap for producing by-products.
- Transfer the surplus from one department to another.
- Sell the scrap/surplus as raw materials to other user
factories, external agents, or even to the employees.
- Sell scrap through advertisement and auctioning.
- Return the surplus to the vendor, if possible.
- Donate rejected material to charitable organizations to
gain social respect.


199
Warehousing
• The primary purpose of a warehouse management is to
control the movement and storage of materials within
an operation.
• Warehousing can be viewed as a place to store
inventory as well as a facility for switching the
inventory.
• Warehousing is becoming significant to achieve the
following objectives:
- To reduce inventory
- To reduced labour costs
- To increase storage capacity
- To increase customer service
- To increase inventory accuracy.

200
• Typically, the warehouses received
merchandise by rail or road and the materials
were moved manually to a storage area within
the warehouse and piled up on the floor in
stacks manually.
• Due to above, though different products were
stored in the same warehouse it was difficult to
identify the merchandise with respect to a
particular order.
• On the receipt of the customer orders, products
were handpicked and placed on the wagons and
these wagons were pushed out of shipping area.
201
• As the labour was inexpensive, human resources were
used extensively and no consideration was given to
efficiency utilization, work methods, or material
handling.
• Inspite of poor efficiency, warehouses continued to
provide a necessary bridge between production and
marketing.
• With the improved techniques of forecasting and
production scheduling the need to build up inventory
was considerably reduced.
• Also, delays during manufacturing process reduced as
the production became more coordinated.
• Seasonal products continue to require warehousing.
• The overall need to store materials to support
manufacturing has been reduced.
202
• In context of retailing, the department stores
face the necessity of stocking an increased
variety of products and are unable to order in
sufficient quantities from a single supplier to
enjoy the benefits of consolidated shipment.
• Direct ordering from manufacturers becomes
prohibitively expensive due to high cost of
transporting small shipments.
• This necessitates the need for warehousing to
provide timely and economical inventory
assortments.
• At wholesale level, the warehouse becomes a
support unit for retailing.
203
• In context of manufacturing, companies
producing products at multiple locations,
efficient warehousing becomes a method for
reducing material and parts storage and
handling costs while optimizing production.
• For implementing JIT and stockless
production strategies warehousing becomes an
integral part of entire value chain.
• As the basic objective of JIT is to reduce
work-in-process inventory, manufacturing
needs to supported by highly dependable
delivery.
204
• In a country as large as India, this is possible
only by having strategically located
warehouses.
• The stocks can be held at a central warehouse
thereby reducing the need to maintain
inventory at each assembly plant.
• Using consolidated shipments, materials are
purchased and transported to the supply
warehouse and then distributed to
manufacturing plants as and when needed.
• A fully integrated warehouse is a vital
extension of manufacturing.
205
• In context of outbound logistics, warehouses have
made possible the direct shipment of mixed/
assorted products to the customers thereby
enhancing the service capabilities.
• The direct assorted shipments have two advantages,
namely,
(a) Reduced logistical cost because the full product
assortment can be delivered while taking the
advantage of benefits obtained through consolidated
transportation.
(b) More competitive advantage for the manufacturers
due to speedier shipments and mixed lots.
• Recently, warehouses have been able to increase
productivity due to effective use of Information
Technology.

206
Role of Warehousing in
Logistical System
• Provision of strategic storage, though an effective
distribution system should not have the necessity of
inventory for an excessive length of time,
sometimes storage becomes inevitable.
• Acting as a switching facility
• Provision of economic and service benefits.

207
Economic Benefits

Consolidation Break-bulk
Cross-docking Postponing
Stock
piling
208
Consolidation

Plant A
Plant B
Plant C
Consolidation
warehouse
Customers
A B C
209
• The benefits and features are
- Realization of lowest possible transportation
rate.
- Reduction of congestion at a customer‟s
receiving dock.
- Manufacturing plants can use warehouse as a
forward stock location or as sorting and
assembly facility.
- Combines the logistical flow of small
shipments to a specific market area.
- A single firm may use consolidation
warehousing or a number of firms may join
together and hire the consolidation service.

210
Break-bulk

Plant A
Break-bulk warehouse
Customer A
Customer B
Customer C
211
• Break-bulk operations receive combined
orders from manufactures and ships them to
individual customers.
• Break-bulk warehouse splits individual orders
and arranges for local delivery.
• Cross-dock facility is similar to break-bulk
except that it involves multiple manufacturers.
• In transit-mixing and release as well as
manufacturing support are also included in
cross dock facility.
212
Cross-docking

Company A or Plant A
Company B or Plant B
Company C or Plant C
Distribution
centre
Customer A
Customer B
Customer C
213
In Transit mixing and release

Plant A
Plant B
Plant C
Warehousing
Transit
mixing
point
Product D
Customer X
Customer Y
Customer Z
Customer W
214
Manufacturing Support

Vendor A
Vendor B
Vendor C
Manufacturing
warehouse
Assembly
plant
215
• The features and benefits of cross-dock
facilities are:
- The full trailer loads of product arrive from
multiple manufacturers and as the product is
received it is sorted and allocated to customers.
- The product is then moved across the dock to
be loaded onto the trucks destined for
appropriate customer.
- The trucks are then transported to retail outlets
once the same have been filled with the mixed
product from multiple manufacturer.

216
Processing/Postponement
• Warehouses can also be used to postpone, or delay
production by performing processing and light
manufacturing activities.
• A warehouse with packaging and labelling capability
allows postponement of final production until actual
demand is known.
+For example, vegetables can be processed and canned at
the manufacturer‟s end without pre-attached labels.No
pre-attached labels means the product does not have to
be committed to a specific customer.Once a specific
customer order is received, the warehouse can
complete final processing by adding label and
finalizing the packaging.
217
Stockpiling
• Useful for seasonal storage such as:
- Blankets and Knitting wool are produced year round
and primarily sold during a very short marketing
period.
- Agricultural products are harvested at specific times
with subsequent consumption throughout the year.
• In both the above situations, stockpiling becomes
necessary to support the marketing efforts.
• Stockpiling provides for a buffer inventory allowing
for a balance between the availability of materials
and the market demand.




218
Service Benefits

Spot Stock Assortment Mixing
Production
support
Market
presence
219
Spot Stock
• Used often in physical distribution particularly in case
of seasonal products.
• Selected amount of firm‟s product line is placed or
spot stocked in a warehouse to fill customer orders
during a critical market period.
• Spot stocking allows inventories to be placed in a
variety of markets adjacent to key customers just prior
to a peak selling period of season.
• For examples, suppliers of agricultural products to
farmers often use spot stocking to position their
products closer to market during growing season and
once the sales season is over, the remaining inventory
is withdrawn to central warehouse.
220
Assortment
• Assortment warehouse stocks product combinations in
anticipation of customer orders.
• Assortment represents multiple products from different
manufacturers or special assortments as specified by
the customers.
+For instance, a wholesaler of athletic clothing would
stock products from number of clothing suppliers so
that the customers can be offered assortments.
+Wholesalers would create a specific uniform for the
team including shirts, pants, and shoes.
221
• Advantages of Assortment warehouses
- Improves services by reducing the number of
suppliers that customer must deal with.
- The combined assortments allow large
shipment quantities leading to reduced
transportation costs.

222
Mixing
• Several shipments from different manufacturers are
involved. Quite similar to break-bulk process.
• Truckloads of products are shipped from
manufacturing plants to warehouses and each large
shipment enjoys lowest possible transportation cost.
• Upon arrival at the mixing warehouse, factory
shipments are unloaded and desired combination of
each product for each customer is selected.
• An effective service benefit because inventory is
sorted to precise customer specification.

223
Production Support
• Production support warehouses provides a
steady supply of components and materials to
assembly plants.
• The safety stocks of items purchased from
outside vendors are justified because of long
lead time or variation in usage.
• Production support warehousing is used to
supply processed materials, components, and
subassemblies into assembly plant in an
economic and timely manner.
224
Market Presence
• Perceived by marketing managers as an
advantage of local warehouses.
• Local warehouses and hence local inventory
can be more responsive to customer needs and
offer quicker delivery than more distnt
warehouses.
• Local warehouse may enhance market share
and potentially increase the profitability.

225
Warehouse Design
• Principles to be considered in warehousing
designing are:
1. Design criteria
2. Handling technology
3. Storage plan
A. Design criteria
- Factors to be considered are:
(a) Number of storeys in the facility
(b) Height utilization, and
(c) Product flow
226
(a) Number of storeys in the facility
• Ideally, the warehouse design should be limited to a
single storey so that the product is not required to be
moved up and down.
• Use of elevators to move product from one floor to
the next requires time and energy and hence cost.
• Elevators can also become bottlenecks in product
flow since many material handlers usually compete
for a limited number of elevators.
• Hence, as far as possible, warehouses should be
limited to a single storey unless it is situated in
Central Business District where land is restricted or
expensive.
227
(b) Height utilization
• Maximum usage of available space by allowing
for the optimum utilization of height on each
floor
• Maximum effective warehouse height is limited
by safe lifting capabilities of material-handling
equipment such as forklifts and fire safety
regulations.
(c) Product flow
• Design should allow for straight product flow
i.e. product should be received at one end of the
building, stored in the middle, and then shipped
from the other end.

228
Design of a typical warehouse

Receiving area
Bulk storage
area
Rack storage
area
Order picking area
Packaging or unitizing area
Stacking area
Finished product flow
229
B. Handling Technology
• Focuses on effectiveness and efficiency of material
handling technology and primarily takes into account
the following:
- Movement continuity, and
- Economies of scale in movement.
(a) Movement continuity
- It is better for a material handler or a handling
equipment to make a longer move than to have a
number of handlers make numerous, individual,
short length moves.
- Exchanging the product between handlers or moving
it from one equipment to another wastes time and
increases the potential for damage.
230
(b) Economies of scale in movement.
- Warehousing activities should be designed to move a
group of cases such as master cartons or containers, as
grouping or batching reduces the number of activities
and hence the cost.
C. Storage plan
• High sales volume or fast moving products should be
stored in a location that minimizes the distance it is
moved such as low height storage racks.
• The objective is to minimize the travel distance and
also the need for extended lifting.
• Low sales volume or slow moving product can be
assigned locations that are distant from the centre or
higher up in the storage rack.







231
Storage plan based on product
movement

Storage space
for low volume
products

Storage space
for low volume
products


Storage space
for low volume
products


Storage space
for low volume
products


Storage space
for low volume
products



Storage space
for low volume
products


Storage
Space
For
High
Volume
products
Primary
gangway
232
Warehousing strategies

Private Public
Contract
233
Private Warehouses
• Operated by the firm owning the product i.e.
facility may either be owned or leased.
• Quite often the warehouses requiring specific
material handling activities designed to fit exact
needs of the firm may not be available on hire.
• Generally efficient warehouse should be
planned around a material handling system in
order to encourage maximum efficiency of
product flow.
• Firms with specialized customers or products
often develop their own warehouse.

234
Public Warehouses
• Classified on the basis of range of specialized
operations performed, as under
(a) General merchandise e.g. paper, small home
appliances and household maintenance goods.
(b) Refrigeration facilities to preserve food
products, pharmaceutical medicines and
certain chemicals requiring specific ambient
temperature.
(c) Bulk commodities requiring specialized
material handling systems such as liquid
chemicals, tres, and textile fabrics.
235
(d) Bonded,licensed by the government to store
goods prior to payment of custom duties, taxes
etc.
(e) Furniture requiring special handling systems.
(f) Provide greater flexibility in operations since
warehousing becomes the core business.
(g) Due to high volume operations., fixed costs
get spread over and justify more efficient
handling operations.
(h) Transportation economies are leveraged by
delivery of loads representing various
customers.


236
(i) Public warehouses charge a client a basic fee
for handling and storage based on number of
cases or the weight handled.
(j) When economies of scale are nt posible in a
private warehouse, public warehousing may
be a low cost alternative.



237
Contract Warehouses
• Contract warehouses provide all logistics
activities such as
(1) Transportation
(2) Inventory control
(3) Order processing
(4) Customer services, and
(5) Returns
• Assume total responsibility for enterprises
that desire only to manufacture and market.


238
How firm utilize warehousing
facilities?
• A private or contract facility may be used to cover
regular year round requirements.
• Public facilities are used to handle peak season.
• In many cases central warehouse may be private, while
market or field warehouse are public warehouse.
• Where the warehouse space is fully utilized at least 75-
80% of the time, private facility may be more efficient.
• A firm may find private warehousing to be more
justified at certain locations on the basis of distribution
volume, while in other cases public warehousing may
be the least cost option.
239
• Some customer groups may be served better from a
private warehouse, while a public warehouse may be
appropriate for others.
• Where the customers can be served better by local
presence of the products, private or contract facility
may be useful.
• Public and contract warehousing increases the
potential for industry synergy.
+For example, firms in grocery business share public
warehousing facilities with other suppliers serving the
same industry.
+The benefit is the reduced transportation cost due to
joint use of same public warehouse allowing for
frequent delivery of consolidated loads from multiple
suppliers.


240
• Public and contract warehouses demonstrate more
responsiveness as they offer location flexibility.For
example, in-season demand for agricultural chemicals
require warehouses to be located near markets to serve
customers better. After growing season, local
warehouse become unnecessary.
• Public and contract warehouses generally offer better
economies of scale, as they are able to design
operations and facilities to meet higher volumes of
multiple clients.
• Contract warehousing facilities can provide complete
logistical support such as transportation, order
processing, inventory control, storage and other
administrative assistance in an integrated manner.
241
Warehouse Functions

Movement
Storage
Receiving
In-storage
handling
Shipping
Planned
storage
Extended
storage
242
A. Movement: Receiving, In-storage handling
and shipping.
(a) Receiving-Activities involved are
- Unloading the transportation vehicle, which
in most cases is done manually.
- In Indian context, limited automated and
mechanized methods have been developed
that are suitable to varying product
characteristics.
- The product is hand-stacked on pallets to
form unit load for movement efficiency.

243
(b) In-storage handling
- On receipt of the product, the merchandise is
transferred within the warehouse to position for
storage or order selection.
- On receipt of order, the required products are
accumulated and transported to a shipping area.
- The entire operation helps in selection process for
grouping materials, parts, and products into
customers‟ orders.
(c) Shipping
- Involves checking and loading orders onto
transportation vehicles.
- Shipping in unit loads leads to considerable saving of
time in loading the vehicle.
- Checking is important at a point when merchandise
changes ownership as a result of shipment.
244
B.Storage: can be either planned or extended.
(a) Planned storage
- Storage for basic inventory replenishment is referred
to as a planned storage.
- Duration varies depending on the performance cycle
length.
(b) Extended storage
- Sometimes storage may be required for several
months prior to customer shipment.
- Seasonal items require storage to wait for demand or
to spread supply across time.
- Erratic demand, product conditioning, speculative
purchases and discounts call for extended storage.


245
Warehouse Site Selection Process
• Traditionally, sales were key drivers in influencing
warehouse site selection.
• Companies satisfied the needs of their sales force by
building warehouses with the hope to increase market
presence and hence revenue.
• Many companies still believe that in order to succeed
in certain markets,they must have a warehouse
presence.
• While this may be the case in for some industries such
as food where the warehouses must deliver the
products to customers in a timely manner; there are
alternatives to building warehouses.
246
• Before making a site selection companies must
closely examine the current distribution network and
the impact of adding , subtracting or consolidating
facilities for the entire organization.
• Many factors come into play when analyzing the
impact a new warehouse will have on the
company‟s distribution network. These are:
- Quantitative variables
(a) Cost drivers, tangible and relatively easy to define.
(b) Demand potential and trends, consumption pattern,
transportation requirements and costs, labou costs,
facility costs and utility cost.
247
- Qualitative variables
(a) More difficult to understand and to measure.
(b) Customer service levels and top management
preferences.
• Once all the data is collected, the actual analysis
is done depending on the number of alternative
location strategies.
• The company should be able to select the best
site according to cost, operating factors, and
expected customer service levels.
• The idea is to ensure the greatest return on
investment.

248
The Square Root Law
• The square root law states that “The total inventory in
a system is proportional to the Square Root of the
Number of Locations at which a product is stocked.”
• The significance of The square Root Law is that a
firm currently operating out of five warehouses which
centralizes to one warehouse can theoretically reduce
inventory carried in stock by 55 percent.
• This will of course result in large savings in
inventory carrying cost which will be slightly offset by
more rapid transport to meet current delivery service
levels.
249
• It is recognized that the inventory tends to
increase as the number of locations increase.
• While the reduction of inventory and number
of locations for keeping finished products are
desired, the companies must do so without
reducing service to customers.
• The square root law determines the extent to
which inventory reduces by reducing the
number of locations.
• An important assumption is the total customer
demand remains same.

250
• The Square Root Law states that the total
inventory in a future number of warehouses is
determined by multiplying the total inventory at
the existing warehouses by the square root of
number of future warehouses divided by
number of existing warehouses.
Mathematically, it is represented as under:
• L = [(L
1
) x {\ (W
2
† W
1
) }], where
• L= Total inventory in future warehouses
• L
1
= Total inventory in existing warehouses
• W
1
= Number of existing warehouses
• W
2
= Number of future warehouses.

251
• For example, In a company there are 40
warehouses and the existing inventory is
2,00,000 units. If the number of warehouses
are reduced to 10 what will be impact on total
inventory.
• L
1
= 2,00,000
• W
1
= 40
• W
2
= 10
L= [(2,00,000) x {\ (10† 40 )}] = 1,00,000
• Thus, inventory will consist of 1,00,000 units
giving a reduction of 50%.
• Conversely, if the number of warehouses are
increased, the total inventory will increase.


252
• Assumptions are
(1) Inventory transfer from one warehouse to
other is not done.
(2) Lead time does not vary.
(3) Customer service level does not change
from any warehouse.
(4) Demand level is well distributed from all
warehouse.
253
Warehouses as Distribution
Centres
¬Distribution strategies can be of following types
• Cross docking
• Milk runs
• Direct shipping
• Hub and spoke model
• Pool distribution
254
A. Cross Docking
- Cross-docking co-ordinates the supply and delivery
so that the goods arrive at the receiving area and
transferred straight away to the loading area, where
they are put into delivery vehicles.
- Cross docking is a flow-through concept as it is not
desirable to interrupt flow of products anywhere,
because space, brick and mortar is getting very
expensive these days.
- Cross docking shifts the focus from “supply chain” to
demand chain”.
- The stock coming into cross docking centre has
already been pre-allocated against a replenishment
order generated by a retailer in the supply chain.
- Cross docking encourages electronic communications
between retailers and their suppliers.

255
- There are two forms of cross docking
(1) Basic cross Dock
• In this form packages are moved directly from the
arriving vehicles to the departing ones.
• This form of cross docking does not need a
warehouse and a simple transfer point is enough.
(2) Flow though Cross Dock
• In this case, when the materials arrive and they are
in large packages, these packages are opened and
broken into smaller quantities, sorted,
consolidated and transferred to vehicles for
delivering to different customers.

256
- Cross docking can be developed into a phase
where nothing actually moves through a
warehouse.
- The stock kept within the vehicles are referred
to as “stock on wheels”.
- Nowadays, wholesalers use the method of drop-
shipping, where they do not keep the stock
themselves, but coordinate the movement of
goods from the upstream suppliers to the
downstream buyers.
257
How Cross Docking Works?

Receiving
Sorting
Shipping
258
• On receiving the goods workers put them in
lanes corresponding to the receiving doors.
• A second team of workers sort the goods into
shipping lanes from which a final team loads
them into outbound trailers.
¬Benefits of Cross Docking
• Helps to improve the speed of flow of the
products from the supplier to the stores.
• Helps to reduce the cost as the labour is
removed from the job of storage as well as by
eliminating warehousing/storage.
259
• Helps to reduce the amount of finished goods
inventory that is required to be maintained as
safety stock.
¬Constraints of Cross Docking
• Requires a strong IT base and real time
information sharing facilities e.g. Bar codes on
cartons.
• Appropriate for products with large, and
predictable demands.
• Requires that distribution centres should be set
up such that the benefits of economies of scale
in transportation can be achieved on both the
inbound and outbound side.


260
• Requires a great degree of coordination and
synchronization between the incoming and outgoing
shipments which, in turn, relies on better information
and planning.
• Product availability, accuracy and quality aspects are
critical.
B. Milk Runs
• A milk run is a route in which a truck either delivers
product from a single to multiple retailers or goes from
multiple suppliers to a single retailer.
• In other words, a supplier delivers directly to multiple
retail stores on a truck or a truck picks up deliveries
for many suppliers of the same retail store.

261
Milk runs from single supplier to
multiple retailers

Retail Store 1

Retail Store 2

Retail Store 3
Retail Store 4
Retail Store 5
Supplier
Retail Store 6
262
Milk runs from multiple suppliers
to single retailer.

S 1
S 2
S 3
S 4
S 5
S 6
Retail Store
263
¬Benefits/ Limitations of Milk Runs
• Milk runs help to reduce the the transportation costs by
consolidating shipments to multiple stores on a single
truck .
• Milk runs allow deliveries to multiple stores to be
consolidated on a single truck, resulting in a better
utilization of the truck and somewhat lower costs.
• The use of milk run is helpful if very frequent, small
deliveries are needed on a regular basis and either a set
of suppliers or a set of retailers is in geographic
proximity.
• Helps to reduce the amount of inventory to be kept as
a safety stock in the warehouses.
• High degree of coordination and synchronization
required among the members of supply chain.
264
C. Direct Shipping
• Direct shipping refer to the method of distribution in
which goods come directly from the suppliers to the
retail stores.
• In this case, routing of each shipment is specified and
the supply chain manager needs to decide on the
quantity to ship and the mode of transportation to use.
• This system eliminates the need for the intermediates
facilities such as warehouses and distribution centres.
• Goods that are generally distributed through the
method of direct shipping are certain perishable items,
high volume goods, high bulk items and specialty
products.

265
Direct Shipment Network

S 1
S 2
S 3
S 4
R 1
R 2
R 3
R 4
R 5
R 6
266
¬Benefits/Limitations of Direct Shipment
• The major advantage of direct shipment network is the
elimination of intermediate warehouses and the
simplicity of its operation and coordination.
• Saves a lot of time as the time required for distribution
of goods from the supplier to the retail store would be
short because each shipment goes direct.
• As goods move directly from the supplier to the retailer
there is less handling of the products as a result there is
less product damage.
• Since the distribution is direct, the invoice match
receiving records resulting into ease of maintaining
store records.
267
• The direct shipment network is justified if the
retail stores are large enough because with the
small size of retail stores the direct shipment
network tends to have high costs.
• Direct shipment from the supplier to the retailer
poses a lot of hassles for the store personnel e.g.
more deliveries, paperwork, loading and
unloading etc.
• Due to uncertainties of shipments from suppliers
such as delay in transportation, wrong goods
supplied, transit damage make it necessary to
maintain safety stock.
268
D. Hub and Spoke Model
• In this model, the distribution hub is the
location that holds inventory for a large
region, with each spoke leading to smaller
distribution centre, which houses inventory for
a smaller region.
• The main driver of the hub and spoke model is
the proximity to the customer, with the goal
being to supply to a maximum numbers of
customers in minimum time.
• Currently, Hub and Spoke model is restricted
to fulfilling the just-in-time needs of heavy
manufacturing industries.

269
• If a company expands its operations, its suppliers
may move to nearby areas so as to supply it more
efficiently. In this case, company that expands is the
hub and suppliers are its spokes.
• The type of product to be distributed largely
necessitates a hub and spoke operation.
• The products that cannot be air freighted are mostly
distributed through hub and spoke model.
E. Pool Distribution
• Pool distribution is the distribution of product to
numerous destination points- customers, stores, stop
points within a particular geographic region.

270
• Pool distribution is is useful when high
frequency regular shipments in LTL quantities
are involved.
• Pool distribution represents an excellent cost
effective alternative to the higher cost of
individual LTL shipments.
• Instead of LTL direct, product is shipped to
regional terminals in truckload quantities.
• There it is offloaded, then segregated and sorted
by delivery point then reloaded on local delivery
trucks for delivery to the individual destinations.
271
Normal LTL and pool
distribution

S 1
R 1
R 2
R 3
R 4
272

S 1 W 1
R 2
R 1
R 3
R 4
273
¬Benefits
• When you have multiple shipments bound for
specific region, pool distribution is simple cost
effective alternative to LTL.
• Merchandise reaches retail stores speedily.
• Less handling than normal LTL service and
hence reduced claims.
• Meet customer delivery requirements.Handle
peaks in business effectively.
274
Storehouse Operations

Storage Systems
The Receipt System
Physical Upkeep
and Maintenance System
Issue system
275
• System design should not only permit
matching of present requirements with the
existing supplies, but also must take care of
the future growth potential an demands.
• Stores must act as a buffer between
procurement and various other consuming
departments to ensure timely receipts, storage,
upkeep, handling, accounting, issues and
disposals.
• Primarily stores must render effective services
to all internal customers.
276
Regular Activities of Stores
• To receive the materials, check them for quantity,
coordinate for inspection and quality checks and
prepare the goods receipt note.
• To approve the accepted materials, prepare the
rejection notes, and complete the formalities for bill
payment.
• To take into stock the accepted materials; store them
in respective locations as predetermined.
• To prepare issue vouchers; make actual issues for
disposals and account for them.
• To keep the purchasing people well informed through
systematic indents and other reports.
277
• To keep the storage place clean for facilitating
handling movements and observe all safety measures
and security regulations.
• To ensure easy storage, minimum pilferage, proper
identification, and quick retreival with minimum waste
of time and efforts.
• To establish, maintain and update rationalized system
of codification.
• To analyze the consumption and issues from stock
records and establishing norms.
• To highlight abnormal consumption, accumulation,
obsolescence and surpluses.
• To arrange for periodic review, physical verification,
and ensure proper accounting.
• To supervise for smooth functioning.

278
Choosing the most suitable
storage system
¬Any storage system is a compromise between
the use of space and the use of time. The basic
systems of storage are:
• Fixed location
• Random location
• Zoned location
¬Fixed location means that stock can be found
immediately without a complex system of
recording but there can be a considerable
waste of space.
279
¬Random location means space is better utilized, but
accurate and elaborate records have to be kept about
where the materials are.
¬Zonal location means that goods of a particular group
are stored in a given area. They may be either
randomly stored in a zoned location or stored
according to fixed location.
¬ A large mechanized stores is characterized by
grouping together the fast moving or high turnover
goods, and medium and slow moving items.
¬ Fast moving materials are usually positioned near the
input and output end of a store with the objective of
reducing travel time and thus speeding the process
throughout.
280
Centralization and
Decentralization of Stores
• Centralization helps to ensure economy, effect
better control, reduce manpower needs and is
suitable for small installations.
• Centralization makes it difficult to provide
service to various work centres scattered in
different locations.
• Decentralization on the other hand is
advantageous to workshops lying scattered in
wide areas so that the various stores may be
kept near production shop floors.
281
Variety Reduction
• Many times purchases are made to meet urgent
requirements and these materials become slow moving
or even totally dead stock within a short period.
• Quite often, purchases are not linked with stock
availability because of the fact that many items are not
properly identified and included in the stores catalog.
• Variety reduction would require
- Periodic review of non-moving and slow moving
items.
- Eliminating non-moving and obsolete items.
- Deliberate elimination of duplicate and unnecessary
items held in the stock.

282
Standardization
• Mass production techniques are based on the
principle of uniformity and interchangeability
of many parts, components and materials used
in production process.
• Standard products can be manufactured on a
mass scale and their production cost can be kept
to minimum.
• Standardization leads to cheaper and easier
procurement and the cost of replacement can
also be reduced.
283
• In India, Bureau of Indian Standards/ Indian Standards
Institution is the national body that deals with
standardization at national level.
• The standardization can be done in respect of products,
processes, materials, parts, components etc.
• With the help of frequency distribution, it is easy to
ascertain the sizes and types most frequently used and
which can be retained as standard sizes and types.
• Standardization enables industry to have a better control
on inventory, achieves economy of materials and parts,
avoids wastages, plans for disposal of unwanted stock,
and overall reduction in stocks.
• Through standardization and variety reduction,
rationalized codification becomes becomes easier.


284
Classification and Codification
• Invariably, a large number of unnecessary items in
inventory can be traced to different and misleading
nomenclature, faulty numbering and use of trade or
brand names to describe the same items.
• It is useful to classify the materials in relation to their
basic characteristics thereby bringing together all closely
similar materials and parts together irrespective of their
functions.
• A standard numerical coding is used for the purpose of
purchase, stores and issue thus resulting in reduction of
long, and ambiguous descriptions.
285
Ways to classify and codify
• The first step is to know the basic nature and
characteristics of all materials used in an
enterprise.
• Classify the materials in broad categories and
then group and subgroup them in logical
progression of kinds, types and sizes etc. The
examples are:
(a) Raw materials
(b) Semi-processed materials
(c) Mechanical products and equipments



286
(c) Mechanical products and equipments
(d) Electrical products and equipments
(e) Chemicals, allied products, chemical
processing equipments
(f) Laboratory chemicals and supplies
(g) Office equipments and supplies
• After classification as per the nature and use, a
code or symbol is allocated to each of them.
• The code or symbol should be simple, flexible
and adaptable to changing situations.




287
Codification System
1. Alphabetic system
2. Numeric system
3. Decimal system
4. Alphanumeric system- a combination of
alphabetical and numeric system
5. Brisch system
6. Kodak system
288
Alphabetical system
• Alphabets become the basis for allotting the
codes. The first alphabet of the name of the
material becomes the starting point of
codification.
• This system is suitable when the numbers of
items are not very large and also availability of
codes is limited.

289

Class Group Code
Raw Materials
Iron Bars, M.S. IR-BS-MS
Iron Bars, Bright Steel IR-BA-BS
Iron Melted IR-MEL
Iron Mould IR-MLD
Iron Ore IR-OR
Iron Pig IR-PG
Iron Sheets, M.S. IR-SH-MS
Iron Sheets, Bright
Steel
IR-SH-BS
290
Numerical System
• System is based on numbers-either simple numbers,
or block number or dash or stroke numbers.
(a) Simple numbers
- One number is alloted against each material, while
certain other numbers are kept as provision of other
items.
(b) Block number
- The numbers are designed so that materials of similar
nature or block come under one block e.g. raw
materials under one block of 1-1000; consumables
and lubricants under 1001-2000; packing materials
under 2001-3000.

291

Materials Simple number
Raw materials 01
Iron ore 05
Iron. melted 07
Iron, bright 08
Iron, steel 09
Iron, pig 06
Iron sheets 10
Iron, bars 11
Iron, mould 12
292

Materials Block numbers
Raw materials 1-1000
Iron ore 1-10
Iron, pig 11-20
Iron, melted 21-30
Iron, bright 31-40
Iron, steel 41-50
Iron, sheets 51-60
Iron, bars 61-70
Iron,mould 71-80
293

Codification according to
the Category of materials

Iron 1-100
Steel & allied products 101-200
Copper 201-300
Nickel 301-400
Alloy 401-500
294
(c) Dash/Stroke number

Materials Dash/stroke number
Raw materials 15
Iron ore 15-1 or 15/1
Iron, pig 15-2, or 15/2
Iron melted 15-3, or 15/3
Iron, bright 15-4, or 15/4
Iron, steel 15-5, or 15/5
Iron, sheets 15-6, 15/6
Iron, bars 15-7, 15/7
Iron, moulds 15-8, 15/8
295
Decimal system
• Within the range of ten numerals 0-9, some
significance is attached to every digit in the
code and whole range of items in stores can be
codified.
• Generally 7 to 8 digits are found to be
sufficient for all practical purposes but it may
be extended up to 10 digits in order to
accommodate any other characteristics of the
material.
• As a first step, the entire range is classified
under broad categories.

296
• Further, classification is done for type, size,
grade, shape, conditions, etc.
• The first digit signifies the broad class, the
second digit signifies the group, the third digit
signifies the sub-group. fourth digit signifies
the type, the fifth digit signifies the size, sixth
digit signifies the grade, seventh digit signifies
the shape, the eighth digit signifies the
condition etc.
• Generally the primary classification should
not be extended to more than 10 broad classes.
297

Materials Code
Number
Materials Code
Number
Raw Materials including
ferrous & non-ferrous
metals
0 Electrical equipment,
accessories and fittings
5
Steel sections-rolled, flat
and square
1 Capital machinery
including spares and parts
6
Casting and forgings 2 Jigs, tools and fixtures-
production stores
7
Mechanical assemblies,
sub-assemblies,
components and
accessories
3 Fuels, lubricants,
chemicals and allied items
8
Work in progress,
comprising of sub
assemblies, components
and semi finished goods.
4 Miscellaneous stores 10
298
Combined alphabetic and
numeric system

Main class Sub group-I Subgroup-II


Code
Carbon CB
Carbonic acid 11 CB-11
Carbon Monoxide 12 CB-12
Carbon Dioxide 13 CB-13
Manganese MN
Manganese Acetate 21 MN-21
Manganese Dioxide 22 MN-22
Manganese Oxalate 23 MN-23
299

Main class Subgroups-I Subgroups-II Code
Phosphorus PH
Phosphoric Acid 51 PH-51
Phosphorus Pentoxide 52 PH-52
Phosphorus Trioxide 53 PH-53
Sulphur SP
Sulpherous Acid 81 SP-81
Sulphuric Acid 82 SP-82
Sulphur Oxide 83 SP-83
300
Brisch System
• Quite similar to numerical system in which 7-digit
numerical code assigned to each item.
• The materials are grouped as under:
(a) Primary materials
(b) Over the shelf items purchased
(c) Components according to company‟s own design.
(d) Assemblies and subassemblies.
(e) Tools, jigs and fixtures etc.
• Materials are further subdivided according to their
class characteristics.
• By establishing differences at various levels, thy are
again sub-divided at sill lower levels.
301
Kodak system
• First step is to classify on the basis of purchase
category.

Class code Materials
00-10 Raw and semi-processed materials
11-20 Machinery and mechanical equipment
21-30 Mechanical products and loose tools
31-40 Electrical products and equipments
41-50 Chemicals and chemical processing
equipments
51-60 Chemicals and allied products
61-70 Furniture and fixtures
302

71-80 Office, laboratory equipments
and stationeries
81-90 Fuels and lubricants

303
• In the second step, sub classification details of
the materials, say, class code 21-30 i.e.
mechanical products and loose tools is
provided.
304
Principals of Logistics
Information
• Information flow is a key element of logistics
information.
• The common forms of logistics information are:
- Customer and replenishment orders
- Inventory requirements
- Warehouse work orders
- Transportation documentation
- Invoices.
• Traditional paper-based information flow results in slow,
unreliable, and error-prone information transfer thereby
increasing operating cost and decreasing customer
satisfaction.


305
• As technology costs are declining and usage is
easier, logistics managers are managing
information electronically at reduced logistics
expenses with increased coordination resulting in
enhanced services by offering better information
to customers.
• The specific technologies include electronic data
interchange (EDI), personal computers, artificial
intelligence, wireless communications,bar coding
and scanning.

306
• For effective logistics information, timely and
accurate information flow is critical because of the
following three reasons.
(1) Customers perceive that information about order
status, product availability, delivery schedule and
invoices is necessary element of total customer
service.
(2) Information can reduce inventory by minimizing
demand uncertainty.
(3) Information facilitates allocation of resources for
achieving strategic advantage.





307
Information Functionality
• Logistics information system links logistics
activities into an integrated process that is built
on the following four levels of functionality.
1. Transaction system
2. Management control
3. Decision analysis
4. Strategic planning
308
¬Transaction system:
• Initiates and records the individual logistics
activities in a sequence as given under:
1. Order entry
2. Inventory assignment
3. Order selection
4. Shipping
5. Pricing
6. Invoicing
7. Customer inquiry

309

Customer order
receipt
Inventory assigned
to the order
Directing material
handlers to
select the order
Movement, loading
and delivery of order
Printing of
invoice for
payment
310
¬Management control
• Focuses on performance measurement and
reporting.The common performance measures
include:
1. Financial
2. Customer service
3. Productivity
4. Quality
• A few examples are:
(a) Transportation and warehousing cost per kg.-
Cost measure
(b) Inventory turnover-Asset measure
311
(c) Case fill rate-Customer service measure
(d) Cases per labour hour-Productivity measure
(e) Customer perception-Quality measure.
¬Decision analysis
• Vehicle routing and scheduling
• Inventory management
• Facility location
• Operational trade-offs and arrangements e.g.
vertical integration versus third party
outsourcing.


312
¬Strategic planning
• Strategic alliances with various value chain
members.
• Development of firm capabilities and scanning
market opportunities.
• Customer responsiveness to improved
services.
313
Principles of designing LIS
applications
• The principles underlying the designing of
logistics information systems applications are:
1. Availability
2. Accuracy
3. Timeliness
4. Exception-based LIS
5. Flexibility
6. Appropriate format

314
1. Availability
- Rapid availability of information is extremely
necessary to respond to customers and improve
management decisions.
- Customers frequently need quick access to
inventory and order status information regardless of
managerial, customer, or product order location.
- Many times it warrants the need for decentralized
logistics operations so that information system is
capable of being accessed and information updated
from anywhere in the country or even the world.
- Information availability reduces substantially the
operating and planning uncertainty.

315
2. Accuracy
- Logistics information must accurately reflect
both current status and periodic activity for
customer orders and inventory levels.
- „Accuracy‟ is the degree to which LIS reports
match actual physical counts or status.
- In case of low consistency between physical and
information system inventory levels, buffer stock
becomes necessary to accommodate the
uncertainty.
- Increased information accuracy reduces
inventory requirements.


316
3. Timeliness
- Timeliness refers to the delay between the occurrence
of an activity and the recognition of that activity in the
information system.
- Logistics information must be timely to provide quick
management feedback.
- Timely information reduces uncertainty and identifies
problems, thus reducing inventory requirements and
increases decision accuracy.
- When a continuous physical product flow may exist
such as “work in process” to “finished goods”,
information system providing inventory status may be
updated on an hourly, shift, or daily basis.
- Real time or immediate updates are timelier but result
in increased record-keeping efforts.
317
4. Exception-based LIS
- LIS should be strongly exception oriented and utilized
to identify decisions that require management
attention, particularly in respect of very large orders,
products with little or no inventory, delayed
shipments, and declining operating productivity.
5. Flexibility
- LIS must be able to provide data tailored to meet the
requirements of a specific customer.
- For example, some customers may want invoices
aggregated across certain geographic boundaries or
divisions or retailer.
- Retailer „A‟ may want individual invoices for each
store, while Retailer „B‟ may desire an aggregated
invoice that totals all stores.
318
6. Appropriate Format
- Logistics reports and screens must contain right
information in the right structure and sequence.
- For example, LIS showing a distribution centre
inventory status with one product and one
distribution centre listed per screen.
(a) This format will require customer service executive
check inventory status at each distribution centre
when attempting to locate inventory to satisfy a
specific customer order.
(b) This implies that if there are five distribution centres,
a review and comparison of five computer screens is
required.

319
(c) Appropriate format would provide a single screen
with inventory status for all fve-distribution centres.
(d) The combined screen makes it much easier for a
customer service executive to identify the best source
for the product.
(e) This can be considered as an appropriate format as
one single screen or report contains and effectively
presents all relevant information for a decision maker.
- An effective format should integrate past and future
information regarding on hand inventory, demand
forecast, and planned receipts for each single tem at a
distribution centre.




320
Logistics Information Systems

Planning & Coordination
Flows

-Capacity Plan
-Logistics Plan
-Manufacturing Plan
-Procurement Plan
Operating Flows

-Order management
-Order processing
-Distribution operations
-Transport & shipping
-Procurement

321
A. Planning & Coordination Flows
- Capacity Plan
• Developed keeping in mind the internal and external
manufacturing , warehousing, and transportation
resources.
• For each product, capacity plans determine the
“where”, “when” and “how much” for production,
storage, and movement.
• Capacity problems can be resolved either by resource
acquisition or alliances i.e. contract manufacturing or
facility leasing.
• Estimating production capacity requirements through
prior scheduling or contract manufacturing helps in
managing capacity constraints.

322
• Postponement of production or delivery i.e. by
delaying production and shipment until specific
requirements are known and capacity can be
allocated is another method of solving such
problems.
• Sometimes, it may become necessary to offer
customer incentives such as discounts or
allowances in order to postpone delivery.
• Capacity constraints have a major influence on
monthly or weekly production for each
manufacturing location.
323
- Logistics plan
• The future logistics requirements are based on
forecasts, customer orders and sales promotions.
• The forecasts are based on sales and marketing
inputs in conjunction with historical activity levels.
• Customer orders include current orders, future
committed orders, and contracts.
• Mathematically, logistics requirements can be
computed as
¬Forecasts(sales/marketing inputs, historical trends)
+ Customers orders(current orders, future committed
orders, contracts)+ Promotions(sales promotion,
advertising)= Period demand – Inventory on hand-
Planned receipts = Period logistics requirements.

324
• Logistics requirements must be integrated with
both capacity constraints and manufacturing
requirements to achieve the best performance.
- Manufacturing Plan
• Facilitate scheduling of production resources and
resolve day-to-day capacity bottlenecks within the
materials management system.
• Primarily, bottlenecks may result from raw
materials shortages or daily capacity limitations.
• Manufacturing requirements determine the master
production schedule (MPS), manufacturing
requirement plan and consequently material
requirement plan(MRP-I/II).
325
• MPS defines weekly or daily production and
machine schedules, whereas MRP coordinates
the purchase and arrival of materials and
components to support the manufacturing plan.
• Both logistics requirements and manufacturing
requirements must operate in parallel.
- Procurement Plan
• Procurement plan schedules material releases,
shipments, and receipts.
• The requirement schedule is used for purchase
negotiations and contracting.
326
B. Operating Flows
¬Operating flows include the information
activities required to receive, process, and
ship customers orders and to coordinate the
receipt of purchase orders. These include:
1. Order management
2. Order processing
3. Distribution operations
4. Transportation and shipping
5. Procurement
327
- Order management
• Involves entry and maintenance of customer
orders using communication technologies such
as mail, phone, fax, or EDI.
• Offers information regarding inventory
availability and delivery dates to establish and
confirm customer expectations.
• Order management in combination with
customer service representatives form the
basic interface between the customer and
enterprise LIS.
328
- Order processing
• Involves assigning and allocating available inventory
to customer and replenishment orders.
• Allocation may take place on a real time basis or
batch mode.
• Batch mode means orders are grouped for periodic
processing, such as day or shift.
• Order processing also includes selection of order
from distribution centre or warehouse and pack it for
shipment.
• Order processing also includes selection of order
from distribution centres or warehouses and pack it
for shipment.
329
- Distribution operations
• Distribution operations must have synergy with
inventory control and warehousing systems.
• LIS in distribution operation would include product
receipt, material movement, and storage and order
selection.
• In a batch environment, LIS guides tasks done by
each material handler handling forklifts, pallets etc in
the warehouse.
• In a real-time time environments, the technologies
like bar coding, automated handling equipment are
used to reduce time elapsed between the decision and
action.
330
- Transport and shipping
• The activities include shipment planning,
scheduling, shipment consolidation, transport
documentation generation, and carrier
management.
• Historically, transportation and shipping
emphasizes generation of documentation and
rate generation.
• Modern LIS in transportation and shipping
lays more stress upon auditing, routing and
scheduling, invoicing, reporting and
performance monitoring.

331
- Procurement
• Includes management of purchase order
preparation, amendment, release, vendor
evaluation and vendor rating.
• Procurement LIS must be able to track and
coordinate material receipt, facility capacity,
inbound and outbound movements, and
performance measurement.
332
Application of Information
Technology
¬The specific technologies that have widespread
use in logistics are:
1. Electronic Data Interchange (EDI)
2. Personal Computers
3. Artificial intelligence
4. Communication technology
5. Bar coding and scanning
333
1. Electronic Data Interchange
• Intercompany computer-to-computer
exchange of business documents in standard
formats.
• Determines capability of communicating
information between two organizations
electronically instead of traditional mail,
courier or even fax.
• LIS would consist of real time data on
inbound material flows, production status,
product inventories, customers‟ shipments and
incoming orders.
334
• Can be visualized in two different perspectives viz.
external perspective and internal prospective.
(a) External perspective includes need to communicate
order shipment and billing information with vendors,
financial institutions, transport carriers, and customers.
(b) Internal perspective includes exchange of information
on production schedule and control data.
• Benefits of EDI are:
(a) Increased internal productivity though faster
information transmission as well as reduced
information redundancy.
(b) Better accuracy by reducing the number of times and
individuals involved in data entry.
(c) Improved channel relationship.
(d) Increase ability to compete internationally.
335
(e) Reduced labour cost associated with printing,
mailing, and handling paper-based
transactions, telephone and other clerical
activities.
2. Personal computers
• Low cost and high portability with a capability
of bringing accurate and timely information to
the decision maker whether in office, at the
warehouse, or on the road.
• Responsiveness and flexibility offered by
decentralized PCs results in more focused
service capability.



336
• The use of LAN , WAN and Client/server
architecture offers benefits of decentralization,
responsiveness and flexibility throughout the
enterprise.
• The client/server network can globally track
inventory in motion,provide shipment
information to the customers when desired and
also facilitate decisions regarding facility
location, inventory analysis, routing and
scheduling.
• The decisions are invariably in respect of
(a) Which markets to serve?
(b) Which product to pick next in the warehouse?

337
(c) Driver reporting and deliver information.
(d) Reporting vehicle location
(e) Identifying lowest-cost fuel stop.
3. Artificial Intelligence
• Aimed at making computers imitate human
reasoning and are more concerned about
rationalizing rather than numeric processing.
• The applications are:
(a) Carrier selection
(b) International marketing & logistics
(c) Inventory management


338
4. Communication technology
• Application of radio frequency, satellite
communications, and image processing
technologies can relate quickly to the product
movement and decentralization.
(a) Radio frequency:
- used within relatively smaller areas such as
distribution centres to facilitate two-way
information exchange
- Real-time communication with material
handlers such as fork lift drivers and order
selectors.



339
- Updating instructions and priorities to fork lift
drivers on real time basis.
(b) Satellite communication
- Useful for providing a fast and high volume
information around the globe.
- Communication dishes on the top of vehicles
allow communication between driver and
shippers.
- Provides up-to-date information regarding
location and delivery and allows dispatchers
to redirect trucks in response to need or traffic
congestion.
340
- Used by the retail chains to transmit quickly daily sales
to headquarters that helps in activating store
replenishment and also to provided input to marketing
regarding local sales pattern.
(c) Image processing
- Relies upon fax and optical scanning technology.
- Used in transmission of fright bill information
- Proof of delivery receipt
- Bills of lading.
• As the consignment gets delivered to customers,
supporting documents are sent to image processing
locations where it is electronically scanned and logged
onto the system.
341
• Electronic images of documents are then
transmitted to main data centre where they are
stored on optical laser disk and customers can
access the documents through computer
linkages or phone call to the service
representatives.
• As the customers experience the competitive
benefits of real time information transfer, there
will be increase demand for this communication
technology.


342
Information sharing though
geostationary satellite

Geostationary satellite
Retail
store
Head office
Transport
company
343
• Geostationary satellite communication
technology has facilitated real time
information transmission and sharing amongst
the company, its transporters, and retail
outlets.
344
5. Bar Coding and Scanning
• Typical applications include tracking receipts at the
warehouse and sales at the retail stores.
• Bar coding involves placement of readable codes on
the items, cartons, containers and even railcars.
• These bar codes distinguish package size and flavours
and reduce errors when receiving, handling, or
shipping product.
• While the requirements of retailers are individual
item, the shippers and carriers are concerned with
contents of pallets, containers or cartons.
• It is important to include as much information as
possible in the smallest area.


345
• The limitation, however, is “smaller and more
compact codes increase the potential for scanning
errors.”
• A scanner optically collects the bar code data and
converts them to usable information.
• The applications of bar code and scanning are:
(a) Point-of-sales (POS) in retail stores, receipts,
accurate inventory control, tracking of each stock-
keeping unit (SKU) sold, replenishment, and
providing timely information beneficial to all
channel members.
(b) Facilitating material handlers track product
movement, storage location, shipments and
receipts.
346
Impact of IT on Logistics

Logistics
requirements
Current
Information
Technology
+
Competitive
edge
=
Continuous interaction between the logistics
requirements and the information technology
accelerates integrating complete logistics activities
in an organization and consequently giving company
a competitive edge.
347
Enterprise Resource Planning
(ERP)
• ERP is an information technology industry
term for integrated, multi-module application
software packages designed to serve and
support several business functions across an
organization.
• A strategic tool that helps the organization
improve operations by integrating business
processes and helping to optimize the
allocation of available resources.
348
• These systems are commercial software packages that
facilitate collection and integration of information
related to various areas of an organization such as
finance, accounting, human resources, inventory,
procurement, and customer services.
• ERP acts as a core information centre of the
organization that leads to better understanding of its
business, direct resources, and plan for future.
• The systems enable the organization to standardize
and improve its business processes to implement best
practices for their industry.
• The popular ERP packages in the market are SAP,
Oracle Financials, BAAN, Peoplesoft, and JD
Edwards.

349
Lean Manufacturing
• Lean manufacturing is a business initiative
to reduce waste in manufactured products.
• The waste may be from the production
process or from any part of the organization.
• The basic idea is to reduce the cost
systematically throughout the product and
production process.
• Basic concepts an organization must have
before implementing lean manufacturing are:
(a) Continuous flow
(b) Standardized flow


350
(c) Value stream
(d) Value added activities
(e) Pull production
¬Continuous flow
- Refers to the flow of material from inventory i.e. raw
materials to the finished goods stage.
- Processing of the materials from raw material to the
finished good stage should be continuous and there
should not be any delays or waiting time in between
as it leaps up to the increase in cost of production for
a particular product.
- Waiting time can occur due to various reasons such as
change in set up, replacing a broken or damaged tool
etc.



351
- Thus the aim of organization should be to reduce the
waiting time and to make manufacturing process a
continuous process without any stoppages in between
for the flow of materials from the raw material stage
to the finished goods stage.
¬Standardized work
- Refers to improved layout, work sequence, and work
methods.
- Involves training of people to develop efficient work
flows considering safety, quality, quantity and use of
resources.
- Standardized work would eliminate wastages thereby
improving work.
352
¬Value Stream
- All activities required to bring a physical product
through the manufacturing and other business processes
starting from acceptance of raw materials or components
to delivery of the finished product. These would include
(a) The delivery of the raw materials
(b) The quality procedure to be followed to accept the
material.
(c) The loading of the raw material on the poduction line.
(d) The manufacturing of tools for the production of the
finished product.
(e) The set up time required for manufacturing a particular
product.
(f) The removal of the finished product from the production
line and its packaging.

353
(g) The value stream is mapped to analyze all steps
from start to finish and redesign them to ensure that
they add value to the final product.
¬Value-added activities
- Activities in the value stream are identified as value-
added (VA) or non-value added (NVA).
- VA activities are those activities that add value to the
product and the value addition can be in any form like
the machine that converts the raw materials to the
finished products.
- NVA activities are those activities which do not add
any value to the finished product like the movement
of the semi-finished good from one machine to
another.
354
- These activities should be eliminated as much
as possible as instead of adding value to the
finished product they add more cost to the
product.
- Some NVA activities are unavoidable such as
quality checking procedures at various stages
of the manufacturing process.
- These quality procedures even though, do not
add any value to the final product, are required
as they are very much essential for the finished
product to be of the required quality.
- Once mapped, the value stream activities are
identified as VA or NVA.
355
¬Pull production
- Materials are supplied when needed, avoiding
unnecessary WIP and the flow of materials through
the system.
- This ensures that work is performed only when
required, there is no waiting time and leading to
reduced production cost and consequently the cost of
finished product.
- The main concern here is the availability of the right
material at the right time.
- This may be a problem for a company which does
not have a vendor relationship programme in place as
the vendors might delay the delivery of material
resulting in a delay in production which in turn leads
to the increase in the cost of the product.
356
• Lean manufacturing takes into account all the
concepts mentioned and tries to decrease the
the cost of production which in turn leads to
decrease in the cost of the finished product.
• Lean addresses the waste of time during set up
by trying to minimize the set up time rather
than minimizing the number set ups.
• Rather than reducing the number of products
or putting new machines on the shop floor, it
tries to minimize the set up time by analyzing
the requirements of different components for
all the set ups on a particular machine.
357
• Lean manufacturing coordinates with all the supply
lines-internal and external-and links all parts of value
stream thus saving time and minimizing production
delays
• Internal supply line corresponds to the WIP material
being shifted from one machine to another or from
stores to a machine or raw materials from the
inventory to the production line.
• The external supply line corresponds to the supply of
raw materials by vendors on time so that the
machines can be put into production as soon as the
production plan is complete.
• The identification of VA and NVA activities at all
parts of value stream is carried out extensively and
focus is on how to minimize NVA activities.
358
• Emphasis is also on pull production so that the
waiting time for the materials before they are
loaded on to a machine for processing is
reduced as it helps in reducing the cost of
production.
• Thus, the basic idea of lean manufacturing is
to reduce waste and Toyota is pioneer in
developing and implementing this system
popularly known as „Toyota Production
System.‟
359
Misconceptions and Misgivings
of Lean Manufacturing
¬Some of the most frequent misconceptions and
misgivings of lean manufacturing are:
(1) Lean manufacturing should give results as soon as it is
implemented.
(2) It is confined to an internal implementation in an
organization and should not be extended to suppliers.
(3) Leads to retrenchment of personnel as the very idea of
going lean is to streamline the processes and remove
waste from the system.
360
• How it functions is the not the responsibility of
the employees of an organization but only of
those few who are implementing lean
manufacturing in the organization.
• It can function only on the shop floor and
cannot be applied to the other activities of an
organization.
• If one technique is successful in implementing
lean in one organization, it has to be successful;
in another organization as well.
• It provides solutions to all the problems.
361
Lean Manufacturing and SCM
• In world of lean, manufacturing companies try to
produce only what has been demanded by the
customer, and only when that product is required.
• But why should it stop there? What about the rest of
the supply chain?
• To optimize the benefits of lean throughout the
supply chain, it is essential for manufacturing
company to build a partnership with its suppliers, as
if they were departments within their own company.
• The partnership works on the premise that
manufacturing company will pull only what it
consumes and nothing more.
362
• The suppliers replace what manufacturing
company has consumed and nothing more.
• In this way inventories are maintained at their
minimum for both supplier and customer.
• Achieving this level of trust and efficiency
with company‟s supplier will require frequent
communication and extensive sharing of
information.
• Successful partnership would result from
inviting each other to strategic planning
sessions, attending each other‟s events for
removing waste/ process improvements and
other joint activities.
363
• To create an effective supplier-customer
relationships, it is advantageous to develop a
two-way service level agreement (SLA).
• SLA forces both parties to clarify the
relationship by establishing the type and level
of service to be provided by your supplier and
what types of quality inputs required from
you.
364
Key Approaches to make lean
successful throughout Supply Chain
• Manufacturing companies must share information to the
very detailed level to help suppliers see the savings
potential.
• Manufacturing companies must be committed to long-term
implementation of lean strategies and not just a “flavour of
the month”.
• Manufacturing companies must give support t its suppliers
support in terms of training and troubleshooting.
• Manufacturing companies must demonstrate the potential
benefits of lean not only for their own company but also
for all their suppliers covering both bottom line and
service points of view.
365
Difference between mass production
& lean production

Attributes Mass production Lean production
Customer satisfaction Makes what
engineers want in
large quantities at
statistically
acceptable quality
levels.
Makes what
customers want with
zero defects and only
in quanities wanted
by the customers.
External relations Based on price Based on long-term
relationship building.
Information
management
Based on reports
generated by and for
managers.
Rich in information
based on control
systems maintained
by employees.
366

Culture Obedience, loyalty
and subculture of
labour strife
Based on long-term
development
Production/
Purchases
Large inventories,
Massive purchases,
minimal skill,
assembly line,
batches
Cell type layout, zero
inventory, single
piece flow.
Engineering Isolated genius model Team based model
Demand Management Forecasting Customization
367
• The basic element are waste elimination,
continuous one piece workflow, and customer
pull.
• Focus of above in the areas of cost, quality
and delivery forms the basis for a lean
production system.
¬Benefits of lean manufacturing
• Waste reduction by 80%
• Production cost reduction by 50%
• Manufacturing cycle time decreased by 50%
• Labour reduction by 50% while maintaining
or increasing throughput.

368
• Inventory reduction by 80% while increasing
customer service levels.
• Capacity in current facilities increase by 50%.
• Improved cash flow through increasing
shipping and billing frequencies.
¬Components of lean production system
• Flexible manufacturing
• Just-in-time
• Outsourcing
• Lean supply chain
• ERP & CRM
• E-business and EDI.

369
Integration of Lean manufacturing and
SCM.
1. Reduce the supply base
- Reduce the number of suppliers for each
commodity of purchases to a minimum, a
few or often only one.
2. Develop strategic long term partners
- Develop supplier partners, especially in the
commodities key to the company‟s growth
and future success.
- Plan and execute for a long term relationship
and exchange information.

370
3. Manage supplier with commodity teams
- Involve cross functional teams for strategic
issues with key suppliers.
- Above will help in considering total cost than
immediate price in purchase decisions.
4. Certify suppliers
- Create and use a certification process that
challenges suppliers and make them proud to
be certified.
- Ensue that the certification process contains
the criteria important to your company.
- Recognize certified suppliers publicly.
371
5. Connect to suppliers with Internet Technologies
- Exchange data pertaining to quality, schedules,
engineering change, prototypes and pilot runs, return
goods, order status, capacity planning, etc.
- Customize web page for key suppliers.
6. Collaborate with suppliers
- Make buying decisions based on total cost of
ownership.
- Inform suppliers as soon as new orders arrive.
- Eliminate incoming inspection.
- Buy complete, tested subassemblies.
- Let suppliers choose where to buy components from
an approved list.
372
- Give incentives to companies to locate their
plants nearby to reduce delivery time and
encourage frequent , small daily deliveries.
- Train and help suppliers to be compatible with
their production systems.
- Certify suppliers and eliminate incoming
inspection.
- Let suppliers choose where to buy
components from an approved list.
7. Outsource for right reason
- Focus on ore competencies and outsource the
rest.





373
- Purchase completed assemblies, tested and
ready to go on the assembly line.
- Allow suppliers to participate in design and
subsequently build and test assemblies.
- Provide suppliers drawings, blue prints and
other information quickly.

374
Supply Chain Vulnerability &
Ethical Issues
• The fundamental principles are:
- Loyalty to your organization.
- Justice to those with whom you deal.
- Faith in your profession.
• Demonstrate loyalty to the employer by diligently
following the lawful instructions of the employer,
using reasonable care in exercising granted authority.
• Avoid any personal business or professional activity
that would create a conflict between personal
interests and the interests of the employer.

375
• Avoid soliciting or accepting money, loans, or
preferential discounts, gifts, entertainment,
favours or services from present or potential
suppliers that might influence, or appear to
influence, supply management decisions.
• Handle confidential or proprietary information
with due care.
• Promote positive supplier relationships
through courtesy and impartiality.
• Avoid improper reciprocal agreements.
• Conduct supply management activities in
accordance with national and international
laws, customs and practices.
376
Recommended guidelines
• Situations may occur in which, through unanticipated
circumstances, a business relationship transpires with
a personal friend. The perception as well as potential
of a conflict of interest should be discussed with
management, and a reassignment of procurement
responsibility should be considered.
• Business meeting locations should be carefully
chosen. Environments other than the office may be
perceived as inappropriate by the business
community or by co-workers.
• Conversation that centres around excessively on
personal affairs should be avoided.
377
• Obtain the maximum value for monies expended as
agent for the employer.
• Avoid using the employer‟s purchasing power to
make purchases for specific individuals‟ nonbusiness
use.
¬Conduct to be Avoided
• Engaging in business or employment in an
organization that is a supplier to the employer
• Lending money to, or borrowing money from any
customer or supplier.
• Using the organization‟s name (unless authorized) to
lend weight or prestige to sponsorship of a political
party or cause, or endorsing the product or service of
another organization.
378
• Ownership of stocks in a supplier of goods or
services should be reported to the employer for
review to avoid the potential for impropriety.
Interests by members of the professional‟s immediate
family are considered to be of the same significance
as direct ownership.
¬How to deal with issues of influence?
• Exercise extreme caution in evaluating the
acceptance of gifts and the frequency of the same.
• Establish nominal value in organization policy to
address supplier‟s offerings of nominal value as a
gesture of goodwill or for public relations purposes.
• Refuse gifts exceeding nominal value, and return
them with a polite explanation.




379
• Seek direction of management if it appears that
business relationship may be impaired o appear to be
impaired by refusal of a gift or entertainment.
• Occasionally, during the course of business, it may
be appropriate to conduct business during meals.
• Such meals should be for a specific business purpose
and frequent meals with the same supplier should be
avoided.
• The supply management professional should be in a
position to pay for meals as frequently as the
supplier. Budgeting is recommene for this business
activity.
380
¬International practices
• In some cultures, business gifts, meals, entertainment
are normal and expected while in other cultures,
business is transacted at arm‟s length and business gifts,
meals and entertainment are viewed as inappropriate.
• Supply management professionals must understand
such variations and establish policies and procedures to
deal effectively with suppliers from different cultures.
• Suppliers also should be informed of organization‟s
policies with respect to business gifts, meals, and
entertainment.
• Supply management professionals should act
courteously to supplier‟s representatives who may
inadvertently act contrary to organization's policies.
381
¬Confidentiality & proprietary information
• Confidential & proprietary information would
include quotation/ bids, cost sheets, financial
information, wage and salary scales, personal
information about employees, officers and directors,
product design, supply sources or supplier
information etc.
• It is the responsibility of the individual sharing
confidential or proprietary information to ensure that
recipient understands his or her obligation to protect
such information.
• Supply professionals are cautioned not to divulge
such information unless it is required to be shared.
382
¬Dealing with reciprocity
• When supply management professionals or their
organizations give preference to suppliers because
they also customers or when organization influences
a supplier to become a customer, the professional or
the organization is engaging in a practice known as
reciprocity.
• Dealing with a supplier that is also a customer may
not constitute a problem if, in fact, the supplier is one
of the best sources.
• Supply professional should not get influenced by
sales or marketing professionals to engage in
reciprocity.
383
• List of suppliers should not be provided to sales or
marketing department for their use in pursuing
improper reciprocal arrangement.
• When making sourcing decisions, supply
professionals must be especially careful when
dealing with suppliers that are customers.
¬Applicable laws
• Supply management professionals must be aware of
the following laws:
(a) Contract and commercial laws
(b) Trade regulations
(c) Government procurement regulations
(d) Patents, copyrights, trademark laws.
(e) Transportation and logistics laws and regulations
(f) Environmental laws.
384
Outsourcing
• Organizations outsource to address specific
business issues and opportunities.
• Typically, the issues and opportunities an
organization faces will fall in one or more of
three general categories
(a) Tactical
(b) Strategic, and
(c) Transformational
385
Tactical reasons for Short-term
Outsourcing
• Reduce and control operating costs
- Most important tactical reason for outsourcing is
to reduce or control operating costs.
- Access to the outside provider‟s lower cost
structure is one of the compelling short term
benefits of outsourcing.
- Certain research studies have found companies
reporting an average 9% reduction in costs due
to outsourcing.
386
• Freeing capital for investment
- Outsourcing reduces the need to invest capital funds in
non-core business functions.
- Thus, funds are available for investment in core areas.
- Improves financial measurements of the firm by
eliminating the need to show return on equity from
capital investments in non-core areas.
• Cash infusion
- Outsourcing sometimes involves the transfer of assets
from the customer to the service provider.
- Equipments, facilities, vehicles, and licenses used in
current operations are sold to the service provider as a
part of transaction resulting in cash payment.
- This cash can be used in other parts of the operation.
387
• Unavailability of resources internally
- Companies outsource because they do not have access
to the required resources-human, capital or intellectual.
- For instance, if an organization is expanding its
operations, especially into new geographic area,
outsourcing is viable and important alternative to
building the needed capability from the ground-up.
• Functions difficult to manage or out of control
- Introducing best in class management and business
processes a service provider offers can be quick way to
bring control to a situation.
388
Strategic Reasons for Long-term
Outsourcing
• Improve business focus
- Allows the company focus on broader business
issues while having operational details assumed
by an outside expert.
• Provides access to world-class capabilities
- Partnering with an organization with world class
capabilities can offer access to new technology,
tools,and techniques that the organization may
not currently possess.
389
• Frees resource for other purpose
- Outsourcing permits an organization to redirect
its resources from non-core activities towards
building knowledge base skills having long term
pay back and impact on innovation.
390
- Better career opportunities for personnel who switch to
the outsourcing provider.
- More structured methodologies, procedures,
procedures, and documentation.
- Competitive advantage through expanded skills.
• Provides acceleration to reengineering efforts.
- Outsourcing is a powerful tool for Business Process
Reengineering.
• Shared risks & quick response
- When companies outsource they become more flexible,
more dynamic, and better able to adapt to changing
opportunities.
- Companies can respond quickly to customers to resolve
delivery and any other service related issue.

391
Transformational Reasons for
Outsourcing
• Helps respond to shortening product life cycles
- Companies facing shortening of PLC are using
outsourcing to concentrate their time and efforts
to market.
• Redefines relationships with suppliers and
business partners.
- Outsourcing transforms the entire supply chain
by shortening the chain and provides additional
services transforming the customer experience.
392
• Helps in surpassing the competitors
- Amazon.com changed retailing due to new technology,
and a cadre of outsourcing providers.
- Change was effected by partnering with the third party
providers who could manage call centres, process
orders, and fulfill orders.
• Helps to enter new markets with reduced risks
- Firms move into new markets or new opportunities with
little experience, particularly in the areas of e-
commerce.
- Service providers like IBM Global Services are helping
brick and mortar firms create entirely new customer
base on-line.
393
Concept of Outsourcing
• When an enterprise identifies a need for a specific
product or service, it has to decide whether to make the
product and perform the service internally (make) or to
purchase the requirement from an external source
(buy).
• Make-versus-buy decision centres around the economic
trade-off associated with each option.
• Outsourcing decisions examine not only the firm that
has the lowest cost but also which one can produce or
market the product better or perform superior service.
• Calls for assessment of strategic core competency.
394
• For instance, for a firm to evaluate whether to own a
private fleet of trucks or outsource by hiring carriers,
not only the current rates and costs are important but
also the long-term cost trends.
¬Specialization
• Outsourcing decision is taken by considering the
specialized skills that differentiate the company from
its competitors.
• For instance, a transport company can implement a
satellite tracking service capable of quickly pinpointing
the location of a truck so that it can provide customers
with accurate delivery status information.
• This technology will provide the transport company a
unique competitive advantage for customers who value
the availability of instantaneous information tracking.
395
• Thus, the company will stand to gain by
outsourcing transportation by obtaining
specialized skills rather than develop the ame
capability internally.
Logistical Measurement
• In order to optimize the performance of logistics
system it is essential to evaluate the same and control
it.
• To have a better track of logistical system we need to
divide the measurement into:
- Internal performance , and
- External performance.
• Dimensions of Performance measurement
(1) For performance measurement, first step is to improve
the quality of information that must be obtained to
measure, compare and guide logistical performance.

396
(2) Secondly, the old reporting formats need to be
redesigned to take advantage of the new
computer-based control systems.
→ Objectives

397
Objectives for developing & implementing
performance measurement system.
Monitoring Controlling Directing
• Monitoring
- Measures and tracks the historical logistics performance for
reporting to management and customers.
- Typical monitoring includes service levels and logistics cost
components.
• Controlling
- Measures and tracks ongoing performance and is used to review
a logistics process in order to bring into compliance when it
exceeds control standards.
- For example, “transportation –damage tracking”.
- By having a system periodically reporting the product damage,
logistics management can identify the cause and modify the
packaging or loading process.


398
• Directing
- Refers to the methods designed to motivate
personnel.
- Typically, it would include “pay for
performance” practice used to encourage
warehouse or transportation personnel to
achieve higher levels of productivity.
• An example:
- Consider the material handlers in the warehouse
or delivery boys who are paid for eight hours of
work based on standard production rate.

399
- When the material handlers/ delivery boys
complete the assigned tasks in less than the
allotted time, they are given bonus.
- If the employees require more than the allotted
time, the disincentive is that they are
compensated for the additional time.

400
Perspective of Performance
Measurement
• Performance measurement perspective refers to activity
based measures as well as process based measures.
• Focus is on individual tasks required to process and ship
orders, efficiency and effectiveness of work efforts.
A. Activity Based Measures
- Emphasize on the individual tasks required to process
and to ship orders such as:
• Customers orders entered
• Cases received from suppliers
• Cases shipped to customers.
401
Objectives of Activity Based
Measures
• To record the level of activity
- Example: Number of cases
• To record the level of productivity
- Example: Cases per labour hour.
• The typical activity-based measures are:
(1) Order entry time per order
(2) Deliver time per order
(3) Order selection time per order.


402
(4) Inquiry time per order
(5) Order entry time per customer
(6) Order selection time per customer
(7) Delivery time per customer
(8) Order selection time per product
(9) Delivery time per product.
B. Process based measures
• The above stated activity based measures record
the level of activity/productivity but do not
measure the performance of overall process of
satisfying the customers.


403
• For instance, the order takers may be rated high
with respect to activity based measurement on
the basis of number of calls per hour; they may
fair poorly in overall satisfaction process as
they fail to listen carefully to customers.
• It is important that performance measures take
into account the overall process perspective.
• Thus, process based measures refer to the
customer satisfaction delivered by the entire
supply chain.

404
Internal Performance Measurement
• Internal performance measurement focuses on
activities required to serve customers.
• Measurement of these activities and the
comparison thereof with the standards is
necessary to improve performance, motivate and
reward employees.
• Also focuses on comparing activities and
processes to previous operations and/or
objectives in terms of cost, customer service
and productivity measures.
405
• Cost
- Reflects in percentage, the actual cost incurred
to accomplish a specific operating objective, by
business units like manufacturers, wholesalers,
retailers etc.
- The typical cost performance measures are:
(a) Cost per unit
(b) Warehouse costs
( c) Inbound freight
(d) Order processing
(e) Cost as a percentage of sales


406
(f) Administrative costs
(g) Outbound freight
(h) Direct labour
• Customer Service
- Focuses on the customer service provided by
the manufacturers, wholesalers, and retailers.
- Typically these services include
(a) Fill rate
(b)Stock outs
(c) Shipping errors

407
(d) On time delivery
(e) Back orders
(f) Cycle time
(g) Customer feedback
- These measures examine a firm‟s relative
ability to satisfy customers.
• Productivity measures
- Establishes a relationship (usually a ratio or an
index) between output (goods and/or services)
produced and quantities of inputs (resources)
utilized by the system to produce that output.



408
- The typical logistics productivity performance
measures reported as used by manufacturers,
wholesalers and retailers are:
(a) Units shipped per employee
(b) Units per labour (Rs)
(c) Order per sales representative
(d) Comparison with historical data
(e) Comparison with standards set
(f) Productivity index

409
Types of Productivity Measures
¬There are three types of productivity measures- static,
dynamic and surrogate.
• Static productivity measures
- When all the outputs and inputs in a given system for a
specific period are included, it is considered static as it
is based on only one measurement.
• Dynamic productivity measures
- When outputs and inputs in a system for one period
compare with another period, the result is dynamic
productivity index.





410
- For example: (Outputs 2008/Inputs 2008) ÷
(Outputs 2007/Inputs 2007)
• Surrogate productivity measure
- Represents factors that are not typically
included in the productivity but have high
impact on the same.
- Examples are customer satisfaction, profit,
effectiveness, and efficiency.


411
Asset Measurement
• Focus is on how fast liquid assets such as inventory as well as
how well fixed assets generate return on investment.
• Typical logistics asset measurement measures, (often reported
as percentage), used by manufacturers, wholesalers, and
retailers are:
(a) Inventory turnover
(b) Inventory carrying costs
(c) Inventory levels (no. of days)
(d) Obsolete inventory
(e) Return on net assets
(f) Return on investment
412
Quality Measurement
• Refers to process oriented evaluation to
determine the effectiveness of a series of
activities rather than an individual activity.
• The typical quality measures, reported as
percentage, used by manufacturers, wholesalers,
and retailers are:
- Frequency of damage
- Damage reported in rupees
- Number of customer
- Cost of returned goods 413
Perfect Order
• Perfect order represents ideal performance.
• It measures order entry, credit clearance,
inventory availability, accurate picking, on-time
delivery, correct invoicing, payment without
deductions.
• The perfect order represents the following
standards:
- Complete delivery of all items requested.
- Delivery as required by customer with one-day
tolerance.

414
- Complete and accurate documentation
supporting the order, including packing lists,
bills of lading, invoices.
- Faultless installation, correct configuration, no
damage.
¬ Perfect Order Busters
1. Order entry error
2. Missing information e.g. missing code
3. Non-availability of ordered item
4. Inability to meet shipment date
5. Picking error

415
6. Inaccurate packing list/ documentation
7. Late shipment
8. Late arrival
9. Early arrival
10.Damaged shipment
11.Invoicing error/ overcharging/deductions
12.Errors in payment processing
¬ Best logistics organization report achieving a
55 to 60 per cent perfect order performance,
while most organizations report less than 20
per cent 416
External Performance Measurement
¬Done on the basis of customer perception
measurement and best practice benchmarking.
• Customer Perception Measurement
- Refers to regular measurement of customer
perceptions that is obtained through company or
industry sponsored surveys or by systematic follow
up.
- The most important measurement of customer
perceptions are regarding:
(1) Availability
(2) Performance cycle length




417
3. Information availability
4. Product support services
¬Consultants and industry associations administer
these measurements.
• Best Practices Benchmarking
- Benchmarking may be carried out in relation to
operations of both competitors and leading firms in
related and non-related industries.
- Typically, organizations are using benchmarking in
important strategic areas to calibrate logistics
operations.
- Benchmarking provides the foundation for customer
satisfaction and the perfect order.



418
¬The key areas of benchmarking are as under:
• Asset management
• Cost
• Customer service
• Productivity
• Quality
• Technology
• Transportation
• Warehousing
• Order processing
• Materials handling


419
¬The best practice benchmarking focuses on
practices and processes of a comparable
organization.
¬The areas of review include identifying key
performance measures and tracking historical
and current performance levels.
¬Methods of benchmarking
1. By taking help from published logistics data
available, periodicals, consultants, and
university researchers.

420
2. By benchmarking privately against
noncompetitive firms in one‟s own or a related
industry.
3. By creating a strategic alliance with the
organization(s) that systematically share
benchmark data on a regular basis.
- These alliances require more effort to maintain
but usually provide substantial information.


421
Benchmarking at Xerox
• Stage 1
1. Identify what is to be benchmarked
2. Identify comparative companies
3. Determine data collection method and collect data
• Stage 2
1. Determine current performance levels
2. Project future performance levels
3. Communicate benchmark findings and gain
acceptance
422
• Stage 3
1. Establish functional goals
2. Develop action plans
• Stage 4
1. Implement specific actions and monitor
progress
2. Re-calibrate benchmarks
423
Logistics Costing
• Logistics related costs are dynamic and do not
readily fit with traditional accounting methods.
• The accounting difficulties become more
pronounced when trying to determine costs for a
particular operation or a particular customer.
• Activity-based costing can be used to help firms
manage and to benchmark logistics costs.
• Based on this, one can evaluate their logistics
costs, in total or by function.
424
• Total logistical cost is the basic integrative
concept in logistical network design.
- For example, the use of expensive airfreight in
a situation wherein speed and dependability of
air delivery would reduce other costs such as
warehousing and inventory.
- In such situation, high cost premium
transportation would be justified by
achievement of lower total cost.

425
Logistics Performance Evaluation
• It is important to identify costs associated with
performing specific logistics tasks such as
warehousing expenses for specific SKU.
• Though the cost of logistics function is given in
most accounting systems , allocation of logistics
costs broken down to individual activities is not
given.
426
Deficiencies of Traditional Accounting
System
1. Reporting of transportation expenditure
- In many purchasing situations the freight is
not reported at all as a specific costs as many
times products are purchased on delivered
basis, which includes transportation cost.
- Progressive procurement procedures require
expenses for all services including
transportation are identified separately from
purchase cost for evaluative purposes.

427
2. Failure to specify and assign inventory cost
- Insurance and taxes are not identified and
assigned resulting in ambiguity in reporting
inventory cost.
- The financial burden for assets committed to
materials, work-in-process and finished goods
inventory is not identified , measured, and
separated from other forms of capital expense
incurred by the enterprise.
- Brand Manager should be held responsible for
his brand‟s inventory carrying cost.

428
Activity Based Costing
• Relies on the concept that expenses need to be
assigned to that activity that consumes a
resource rather than to an organizational budget.
• For example, assume that the two products,
produced in the same manufacturing facility,
require different assembly and handling
procedures.
- Out of the two products, one may need
additional equipment or labour for assembly or
packaging operations.
429
- If total labour and equipment costs are allocated to the
products on the basis of sales or the number of units
produced, then both the products will be charged for
additional assembly and packaging operations required
by only one of them.
- This will reduce the profitability of that product which
did not require additional equipment or labour because
this product will be paying for the operations it did not
need.
- In the context of manufacturing, the fair share of all
overheads and operating cost factors should be
identified and assigned to a specific product.

430
• Logistical activity based costing must provide the
managers detailed information about the profitability of
a specific customer, order, product, or service.
→ Cost Identification
• The costs associated with the performance of a logistics
function are:
(1) Forecasting
(2) Order management
(3) Transportation
(4) Inventory
(5) Warehousing
(6) Packaging

431

432
Logistics Costs
Direct Costs
Indirect costs Overheads
• Direct or operational costs
- Expenses incurred specifically by performance
of logistics work.
- Include cost of transportation, inventory costs,
warehousing costs, and material handling costs.
- For example, Transportation costs for an
individual truckload order can be directly
attributed to a specific order.
- Similarly, direct administrative cost of logistic
operation can be isolated.
433
• Indirect expenses
- For example, cost of capital invested in real estate, cost of
transportation equipment, prime rate of interest, an alternate use
of capital and expected rate of return..
- Indirect costs are attributed to logistical activities by managerial
judgment and are difficult to isolate.
- The question is how indirect cost such as equipment cost
associated with the warehouse should be allocated to the customer
order shipped from the warehouse?
- This can be answered by allocating the cost on the basis of the
average cost per unit.
- As a general rule, a specific cost is not assigned to logistical
factors unless it is under the managerial control of logistics
organization.

434
Cost Formatting
• The typical way to format activity-based costs is to
assign expenses to the event being managed.
• For instance, to analyze a customer order, all costs that
result from associated performance cycle contribute to
total activity cost.
• The areas of analysis in logistics activity based costing
are
1. Customer orders
2. Channels
3. Products
4. Value-based services


435
• Three common ways of formatting are:
1. Functional grouping
2. Allocated grouping
3. Fixed-variance grouping.
• Functional grouping
- All expenditures for direct and indirect logistical
services performed in a specified operating time are
formatted and reported under sub-accounts
classification.
- By doing so a total cost statement can be constructed
for comparison of one or more operating periods.

436
• Allocated cost formatting
- Overall logistical expenditure is assigned to a measure of
physical performance.
- This will generate logistical cost per tonne, per unit, per
product line, per order etc.
- This method becomes useful for comparative analysis of
operating results.
• Fixed-variance grouping
- Consists of assigning costs either fixed or variable to the
operating expenditure that result from different volumes
of activity.
- The formatting will use use fixed and variable costs
separately.



437
- Fixed costs do not directly vary with volume
such as cost of delivery truck.
- These costs would remain as it is even if the
volume were reduced to zero.
- However, cost of diesel to operate the truck is
variable, as the total cost would depend on how
frequently the truck is driven.
- Use of fixed and variable cost formatting
provides a convenient way to control expenses
in logistical system design.
438
Total Cost Presentation
• For the purpose of presenting logistical total cost
analysis, the focus remains on inventory and
transportation.
• Both inventory and transportation expenses can
be represented in a format that includes both
activity and functional cost relationship.
• For example, communication costs associated
with order processing, warehousing storage and
material handling can be classified under the
inventory umbrella.

439
• In terms of inventory, total cost includes all expenses
related to inventory carrying cost and customer
ordering.
- Inventory carrying cost includes taxes, storage, capital,
insurance, and obsolescence.
- Cost of ordering includes the full expense of inventory
control, order preparation, communications, updating
activities, and managerial supervision.
- The total cost of transportation includes hiring
expenses, accessorial charges, costs related to hazards
incurred in various modes of transport, and legal and
associated administrative expenses.

440

441
Logistical Operations
Spatial dimension Temporal Dimension
• Transportation deals with spatial (geographical)
dimensions of logistical operation by positioning the
product where the customer wants.
• Inventory involves the rate at which the capital assets
are used (temporal) to meet the customer requirements
by having the product available when customer wants
to purchase.
• Classification of costs in terms of inventory or
transportation provides for the trade-off determining
the cost justification for logistical network design.
• The basic purpose of activity based costing is to give
managers a better perspective of the total cost
associated with the performance of a specific activity.
442
Summary of Costs- Transportation and inventory
account for 80-90 per cent of total logistical expenses
• Inventory carrying costs include
- Expenses on tax, storage, capital insurance etc.
- Costs incurred to avoid obsolescence.
- Material handling and packaging
- Cost on updating activities including data processing in
receiving, managing and controlling inventory.
• Transportation related costs include
- Direct costs such as freight rate and accessorial charges.
- Indirect costs such as the cost incurred on liabilities not
protected by the carriers, and the managerial costs.


443
Mission Based Costing
• The premises this system is based on are as
under:
- It should mirror the materials flow i.e. it should
be capable of identifying the costs that result
from providing customer service in the market
place.
- It should be capable of enabling separate cost
and revenue analysis to be made by customer
type and by market segment or distribution
channel.

444
• This system overcomes dangers inherent in
dealing with the averages like average cost per
delivery since average cost can conceal
substantial variations either side of the mean.
• A useful concept of „mission‟ emerges to
address above problems.
• In context of logistics mission is a set of
customer service goals to be achieved within a
particular product/market.
• Missions can be defined in terms of the type of
market served, by which products and within
what constraints of service and costs.
445

446
Distribution
mission A
Distribution
mission B
Distribution
mission C
Purchasing
Production
Sales
Marketing
Transportation
Etc
• The successful achievement of defined mission goals
involves inputs from large number of functional areas
within the firm.
• An effective mission based logistics costing system
would seek to determine total systems cost of meeting
desired logistic objective i.e. the output of the system
and the costs of the various inputs involved in meeting
these outputs.
• The figure shown is indicative how three distribution
missions may make a differential impact upon
functional area costs.
• In this system of costing the functional budget is
determined by the demands of the mission it serves.
447

448
Functional
area 1
Functional
area 2
Functional
area 3
Functional
area 4
Mission A
Mission B
Mission C
Functional
area inputs
Total
mission
cost
100
50
70
220
90
70
30
190
20
200
50
270
80
20
70
170
290
340
220
850
• The cost per mission is identified horizontally and from
this the functional budgets may be determined
vertically.
→How does this approach work?
• Firstly, the functional areas associated with a particular
distribution mission is identified e,g. transport,
warehousing, inventory etc.
• Secondly, incremental costs for each functional area
incurred as a result of undertaking that mission must be
isolated.
• In incremental costs, the sunk costs are not included as
these would be still incurred even if the mission were
abandoned.

449
• In determining the costs of a functional area
e.g. transport , attributable to a specific mission,
the question should be asked:
- What costs would we avoid if this
customer/segment/channel were no longer
serviced?
- These avoidable costs are the true incremental
costs of servicing customer/ segment/channel.
- Often they will be substantially lower than the
average cost because so many distribution costs
are fixed and/or shared.
450
- For example, a vehicle leaves a Mumbai
Depot to make deliveries in Kalyan and
Nashik.
- If those customers in Kalyan abandoned but
those in Nashik retained, what would be the
difference in the total cost of transport?
- The answer would be – not very much.
- However, if the customers in Nashik were
dropped, but not those in Kalyan, there would
be greater savings of costs because of the
reduction of kilometers travelled.
451
• This approach becomes powerful when combined with
a customer revenue analysis, because even customers
with low sales off take may still be profitable in
incremental cost terms, if not on average cost basis.
• In other words the company would be worse off if
those customers were abandoned.
• Mission based costing helps in determining
profitability analysis for customers, market segments
or distribution channels.
• Customer profitability attempts to relate the revenue
produced by a customer/market segment/ distribution
channel to the costs of servicing that customer/market
segment/channel.
452