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.
1
• 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.”
2
 Competitive Advantage

Customers seeking benefits at acceptable cost

Company A Company B
(Asset utilization) Cost differential (Asset utilization)

3
 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. 4
 Commercial success

Cost advantage Value advantage

5
• 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. 6
• Adding value through differentiation is
extremely powerful 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.
7
 Productivity and Value Matrix

V Cost and Service

a Service Leader
Leader
l (3)
(4)
u
e
Commodity Market Cost Leader
A (1) (2)
d
v Productivity Advantage

8
• 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.
9
• 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.
10
 ValueValue
Chain Activities
Chain Activities

Primary Activities
•Inbound Logistics Secondary Activities
•Operations •Infrastructure
•Outbound Logistics •Human Resource Management
•Marketing & Sales •Technology Development
•Service •Procurement

11
• 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. 12
 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. 13
 Underlying Philosophy Behind
Logistics Concept
Materials Flow

Suppliers Procurement Operation Distribution Customers

Information Flow

14
• 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.

15
 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. 16
• 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.
17
 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.
Weavers Yarn/Fibre
Customers Retailers Shirt Manufacturer
of Fabrics mfrers

Downstream Upstream

18
• 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.

19
 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.
20
 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.

21
 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. 22
 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.
23
 Supply Chain Marketing
Customer Efficiency Effectiveness
Franchise •Flexibility •Market
Consumer
•Customer •Reduced Share
Franchise
Services Inventory •Customer
•Brand values
•Partnership •Low cost Retention
•Corporate image
•Quick supplier •Superior
•Availability
Response ROI

24
 Product Life Cycle Versus Logistics
Planning Framework
• Logistics can be positioned to provide far more
than the passive support for marketing.
• The need for viewing logistical requirements
across market life of a product becomes
significant to design framework of logistics.
• This illustrates the competitive conditions a firm
experiences during the different phases of
product life cycle.
25
• The four stages of PLC are:
(a) Introduction,
(b) Growth,
(c) Saturation-maturity, and
(d) Obsolescence-decline.
 Changing nature of logistical requirements
across the life cycle.
(a) Introduction
• During the introduction stage of a new
product, high product availability and
logistical flexibility are required. 26
• Since the primary objective at introductory stage is to
gain a market foothold, having inventory available to
customers is critical.
• The logistical support for new products must also
enable a firm to provide rapid and consistent
replenishment.
• As no historical records are available and forecasts are
at best projections, it would mean replenishment plans
need to be contingency based.
• Typically, a high degree of advertising and promotion
is required during the introductory stage as potential
customers are informed of a product’s attributes and
persuaded to make initial purchases.
27
 For instance, a retail chain may agree to stock a
new product on a trial basis only if it is
accompanied by a trade promotional discount or
a slotting allowance.
• If the product gain customer acceptance, rapid
inventory replenishment will be required.
• Inventory shortages or erratic delivery during this
critical time could dilute the marketing strategy.
• If the product fails to gain customer acceptance,
there is a high probability that this will occur
during product introduction.
28
• Since, at introductory stage the market position is not
secure, shipment sizes tend to be small and order
frequency erratic.
• As a result of the above characteristics the logistical
costs typical of introductory service are high.
• Thus, logistics plays a significant role in the integrated
marketing.
Impact of new-product development on logistics
• As the businesses are laying more emphasis on new
product development, logistical systems have to be
designed to accommodate a wider variation in product
lines and associated stocking unit.
29
• Special handling, transportation, and packaging
requirements will increase as the product lines
expands.
• If the expanded product lines require special
equipment such as refrigerated trucks, or rail
tankers, the task of logistics becomes even
more complex.
• Another consideration at introductory stage is
to serve different markets through multiple
channels.
• As markets expand, products are sold to
typically smaller group of customers and
through multiple channels.
30
• This results into fragmentation of product volume
across theses expanded channels, resulting in less
opportunity to consolidate logistical volumes for cost
control.
• The third consideration in the introductory stage is that
more than half of all new products do not enjoy
sufficient longevity in the market place to recover their
development costs.
• From logistical view point, it is difficult to project
which products will be winners and which will lose.
• To increase the probability of success, a strong
logistical support needs to be provided during
introduction.
31
• Also, inventory stockpiling and providing
logistical support in anticipation of sales that
may never materialize can be expensive.
Thus, new product logistics is a balancing act
between providing sufficient logistical support
and avoiding too much support or commitment
during new-product introduction.
(b) Growth
• At growth stage of life cycle, the product
achieves a reasonable degree of market
acceptance and sales become somewhat
predictable. 32
• Logistical emphasis shifts from a need to
service at any cost to a balanced service/ cost
performance.
• The key is to achieve break-even volume as
soon as possible and then expand market
coverage.
• Since products gain increased customer
acceptance, the potential exists to achieve a
high-level of profitable transactions during the
growth stage.
• Market penetration expands at an increasing
rate.
33
• The retail outlets sell the products at an
increasing volume offering maximum
opportunity for achieving logistical economies
of scale.
• In this stage of prosperity of PLC, a firm’s
basic customer service commitment to support
a product is formulated.
(c) Saturation-Maturity
• This stage is characterized by intense
competition.
• A successful product typically generates
competition from a variety of substitutes.
34
• Logistical performance during saturation stage typically
becomes highly selective.
• Companies update their service commitments and offer
unique value added services in an effort to create
loyalty among major customers.
• Increased expenditures may be allocated to logistical
performance to ensure exceptional service to key
customers.
(d) Obsolescence-decline
• When the product is dying, management is balancing
the alternatives of product closeout or restricted
distribution.
• Logistical performance must be positioned to support
on going business without taking excessive risk in the
event that a product is required to be eliminated.
35
• Thus, minimum risk becomes a more important goal
than achieving the lowest per-unit cost of logistics.
Summary
1. New product introductions require high levels of
logistical performance and flexibility to
accommodate rapid changes in volume projections.
2. This emphasis shifts towards service/cost
rationalization during the growth and saturation-
maturity stages of life cycle.
3. At the obsolescence-decline stage a firm needs to
position logistics to minimize the risk.
4. A logistics system must be designed to maintain
flexibility and be capable of adjusting to counter a
competitive activity at any specific point in time.
36
 Activities Included in Logistics
• Logistics competency is achieved by
coordinating the following functional areas.
- Network design
- Information
- Transportation
- Inventory
- Warehousing, material handling and
packaging.

37
 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. 38
• 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.
39
• 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.
40
 Information
Deficiencies in the quality of information

Incorrect information
Incorrect information relating to a specific
with respect to trends may cause customer’s requirements
•Inventory leads to
shortage •Processing of incorrect
•Over commitment orders creating additional
costs.
•Reduced sales
41
• 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.
42
- 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. 43
 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. 44
Factors affecting transportation
performance
Transportation performance

Cost Speed Consistency

45
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. 46
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.
47
 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. 48
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.
49
• 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.

50
 Integrated Logistics

Inventory Flow

Physical Manufacturing
Customers Procurement Suppliers
distribution support

Information Flow

51
• 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.
52
• The entire process of integration can be
viewed in terms of two interrelated activities.
- Inventory flow, and
- Information flow

Inventory Flow

Physical Manufacturing
Procurement
distribution support

53
 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.
54
 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. 55
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.

56
 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.
57
 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 Physical fulfillment

activities activities

Advertising & Selling Physical distribution

58
 Physical distribution performance
cycle

Order processing Order transmission Customer order

Order selection Order transportation Order delivery

to the customer

59
 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. 60
- 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. 61
 How to reduce physical
distribution operational variance
• Improve accuracy of forecast

• Improve order management and

coordination with the customers.

• Have responsive and flexible cycle.

62
 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.
63
 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. 64
Procurement Performance Cycles

Sourcing Order placement and S

Expediting U
P
P
L
I
E
R
Receiving Transportation
S

65
• 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.
66
• 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.

67
 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.

68
 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
69
quantity}
• 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}

70
 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.

71
 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)
72
• 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. 73
 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. 74
(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.
75
(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.
76
 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. 77
- 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.
78
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. 79
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. 80
- 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.
81
 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.
82
 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.
83
• 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.

84
 Inventory Control Procedures

Perpetual Review Periodic Review

85
 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.
86
• 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.
87
- Mathematically, this can be stated as
- If I+q  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.
•

88
 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 89
• 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. 90
 Inventory Planning Methods

Distribution
Fair Share Requirement
allocation Planning

91
 Fair Share Allocation
Plant Warehouse
Inventory- 600 units

Distribution Distribution Distribution

Centre-1 Centre-2 Centre-3

Inventory= 50 units Inventory= 100 units Inventory= 75 units

Daily use= 10 units Daily use= 50 units Daily use= 15 units

92
• 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.

93
DS = (A + Ij ) /  Dj , where
- DS= no. of days supply for distribution
centre inventories.
- A= inventory units to be allocated from the
warehouse
- Ij= inventory in units for distribution centre j.
- Dj = 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
94
• 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:
Aj = (DS – Ij /Dj ) x Dj, where
- Aj = amount allocated to distribution centre j
- DS= number of days supply that each distribution centre is
brought upto.
- Ij = inventory in units for distribution centre j
- Dj= daily demand for distribution centre j
- Thus, the amount allocated to distribution centre 1 will be
A1= (9.67- 50/10) x 10 = (9.67- 5) x 10= 4.67x 10= 46.7 or 47
units.

95
A2= (9.67-100/50)x50=(9.67-2.00)x50=383.5
or 384.00
A3= (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.

96
 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. 97
 C USTOMERS

Distribution centre
Distribution
centre
Distrib
Distribution Distribution Distribution ution
centre centre centre centre

Regional warehouse Regional warehouse

Plant Warehouse 98
 Plant Warehouse

Final Assembly (Manufacturing)

Sub-assembly A Sub assembly B Sub assembly C

Part A Part B Part C Part D Part E

Raw Materials Warehouse 99

• 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.
100
 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.
101
 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. 102
• 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. 103
 Transportation Functionality

Product Movement Product Storage

104
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.

105
 (c) Transportation consumes fuel and oil and also
creates environmental expenses through
congestion, air pollution and noise pollution.

Objectives of Transportation

Move product Meet customer

from original Minimize
demand regarding
location to expenses
delivery and
prescribed incurred
shipment
destination while due to
information
minimizing temporal, loss and
availability
financial and environmental damage.
Costs. 106
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. 107
• 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.
108
- 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.

109
 Principles of Transportation

Economies of Scale Economies of Distance

110
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.
111
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.
112
 Tapering Principle

C
O
S
T

Distance
113
 Participants in Transportation
decisions

Public

Government

Shipper Carrier Consignee

114
 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.

115
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.
116
Features of Different Modes of
Transportation
Modes of Transportation

Rail Highway Water Pipeline Air

117
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. 118
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. 119
 Cost Structure in respect of
Motor Transport

Fixed costs Variable costs

such as such as driver,
overheads fuel, tyres and
and vehicle repairs are
cost are high relative
low relative To railways.
to railway 120
• 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. 121
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.
122
- 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.
- 123
- 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.
- 124
- 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.
125
 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.
126
 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, Lowest-no labour cost of

control stations, pumping capacity. any significance.

Air Low-aircraft and cargo handling system. High-fuel, labour and

maintenance.

127
 Transport Economies
• Distance
• Volume
• Density
• Stow ability
• Handling
• Liability
• Market factors

128
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.

129
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.
130
- 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.
131
- 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.
132
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.

133
 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.
134
• 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.
135
• 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.
136
• 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.

137
 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.
138
- 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.
139
 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. 140
• 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.
141
 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.
142
 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 143
• 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. 144
(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. 145
 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 146
• 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. 147
• 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.
148
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.
149
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-
150
road trailers to assist in unloading at the destination.
 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
151
operator.
• 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.
152
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. 153
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.
154
• 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.

155
 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.
156
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.
157
• 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.
158
• 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. 159
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. 160
• 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.
161
 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. 162
• 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. 163
• 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. 164
• 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.
165
• 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.
166
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. 167
• 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.
168
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.
169
L
o
s
S

B
y

D
a
m
a
g
e
Cost of Packaging

170
• 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. 171
• 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. 172
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. 173
• 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. 174
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.
175
- 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.
176
(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.
177
(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.

178
(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. 179
 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.
180
 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.
181
• 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.
182
• 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. 183
• 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. 184
• 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. 185
• 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. 186
• 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. 187
 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.

188
 Economic Benefits

Consolidation Break-bulk Cross-docking Postponing

Stock
piling

189
 Consolidation

Plant A

Customers
Plant B Consolidation
warehouse A B C

Plant C

190
• 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.191
 Break-bulk
Customer A

Break-bulk warehouse Customer B

Plant A

Customer C

192
• 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.

193
 Cross-docking

Company A or Plant A Customer A

Company B or Plant B Distribution

Customer B
centre

Company C or Plant C Customer C

194
In Transit mixing and release
Customer X
Plant A
Warehousing
Transit
Customer Y
mixing
Plant B point
Customer Z

Product D
Plant C
Customer W

195
 Manufacturing Support

Vendor A

Manufacturing Assembly
Vendor B warehouse plant

Vendor C

196
• 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. 197
 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.
198
 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.

199
 Service Benefits

Production Market
Spot Stock Assortment Mixing
support presence

200
 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.
201
 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.

202
• 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.

203
 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.

204
 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.
205
 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.

206
 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 207
(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.
208
(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. 209
Design of a typical warehouse
Receiving area

Bulk storage Rack storage

area area

Order picking area

Packaging or unitizing area

Stacking area

Finished product flow 210

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.
211
(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.

212
 Storage plan based on product
movement
Storage space Storage
Storage space
for low volume Space
for low volume
products For
products
High
Storage space Volume
Storage space
for low volume products
for low volume
products products

Storage space Primary Storage space

for low volume gangway for low volume
products
products
213
 Warehousing strategies

Private Public Contract

214
 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.
215
 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.
216
(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. 217
(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.

218
 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.
219
 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. 220
• 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. 221
• 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.222
 Warehouse Functions

Movement Storage

Receiving In-storage Planned Extended

Shipping
handling storage storage

223
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.
224
(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. 225
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.226
 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. 227
• 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.
228
- 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. 229
 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.
230
• 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.
231
• 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 = [(L1) x { (W2÷ W1) }], where
• L= Total inventory in future warehouses
• L1= Total inventory in existing warehouses
• W1= Number of existing warehouses
• W2 = Number of future warehouses. 232
• 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.
• L1= 2,00,000
• W1= 40
• W2= 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.233
• 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.

234
 Warehouses as Distribution
Centres
Distribution strategies can be of following types
• Cross docking
• Milk runs
• Direct shipping
• Hub and spoke model
• Pool distribution

235
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. 236
- 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. 237
- 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.

238
How Cross Docking Works?
Shipping

Sorting

Receiving
239
• 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.
240
• 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. 241
• 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.
242
Milk runs from single supplier to
multiple retailers
Retail Store 1

Supplier
Retail Store 2

Retail Store 3

Retail Store 4

Retail Store 5

Retail Store 6 243

Milk runs from multiple suppliers
S1
to single retailer.
Retail Store
S2

S3

S4

S5

S6 244
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. 245
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.
246
 Direct Shipment Network
R1
S1

R2

S2
R3

S3
R4

R5
S4

R6
247
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.
248
• 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. 249
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. 250
• 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.

251
• 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. 252
 Normal LTL and pool
distribution

S1 R1

R2

R3

R4

253
 R1

R2
S1 W1

R3

R4

254
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.

255
 Storehouse Operations
Storage Systems

The Receipt System Physical Upkeep

Issue system
and Maintenance System

256
• 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.
257
 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
258
systematic indents and other reports.
• 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. 259
 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. 260
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. 261
 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. 262
 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.
263
•
• 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.

264
• 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.

265
 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

266
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
267
Customer order Inventory assigned Directing material
receipt to the order handlers to
select the order

Printing of
Movement, loading
invoice for
and delivery of order
payment

268
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 269
(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.
270
Strategic planning
• Strategic alliances with various value chain
members.
• Development of firm capabilities and
scanning market opportunities.
• Customer responsiveness to improved
services.

271
 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
272
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.
273
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.
274
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. 275
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. 276
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.
277
(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.
278
 Logistics Information Systems

Operating Flows
Planning & Coordination
Flows -Order management
-Order processing
-Capacity Plan -Distribution operations
-Logistics Plan -Transport & shipping
-Manufacturing Plan -Procurement
-Procurement Plan

279
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.
280
• 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.
281
- 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.
282
• 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). 283
• 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. 284
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
285
- 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.
286
- 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. 287
- 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.
288
- 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. 289
- 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.

290
 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

291
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. 292
• 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.
293
(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. 294
• 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?
295
(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 296
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. 297
- 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. 298
- 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.
299
• 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.
300
 Information sharing though
geostationary satellite
Geostationary satellite

Retail Transport
Head office company
store
301
• Geostationary satellite communication
technology has facilitated real time
information transmission and sharing amongst
the company, its transporters, and retail
outlets.

302
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. 303
• 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
304
receipts.
 Impact of IT on Logistics
Current
Logistics + = Competitive
Information
requirements edge
Technology

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. 305
 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

306
 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.
307
• 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.
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• 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.

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 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.
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• 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.

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- 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. 312
 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.
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• 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.
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 Logistical Measurement
Dimensions of Performance Measurement
• The first step is to improve the quality of
information that logistics managers must obtain
to measure, compare and guide logistical
performance.
• Secondly, the old reporting formats need to be
redesigned to take advantage of the new
computer-based control systems.

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 Objectives for developing & implementing
performance measurement system

Directing
Monitoring Controlling

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• Monitoring
- Measures and tracks the historical logistics
performance in respect of service levels and
cost components.
• Controlling
- Measures and tracks ongoing performance in
order to bring it into compliance when it
exceeds control standards.
- For instance, “transportation damage tracking”
system by periodically reporting the product
damage, helps management to identify the cause
and modify the packaging or loading process.
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• Directing
- Refers to the methods designed to motivate personnel.
- Includes “pay for performance” practice to encourage
warehouse or transportation personnel to achieve higher
levels of productivity.
- For instance, consider the material handlers in the
warehouse or delivery boys who are paid for eight
hours of work based on standard production rate.
- When the material handlers/ delivery boys complete the
assigned tasks in less than the allotted time, they are
given a bonus.
- If employees require more than the allotted time, they
are not compensated for the additional time. 318
 Activity Based Measures
• Activity based measures emphasize the individual
tasks required to process and ship orders such as,
customer orders entered, cases received from
suppliers, and cases shipped to customers.
• The objective is to record the level of activity, i.e.
number of cases , and/ or level of productivity i.e.
cases per labour hour.
• The typical logistics activity-based measures are
(a) Order entry per order.
(b) Delivery time per order.
(c) Order selection time per order.
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• Inquiry time per order.
• Order entry time per customer.
• Order selection time per customer.
• Delivery time per customer.
• Order selection time per product.
• Delivery time per product.

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 Process Based Measures
• The activity based performance measures record the
level of activity/ productivity but do not measure the
performance of overall process of satisfying the
customers.
• 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 fare poorly in
overall satisfaction process as they fail to listen
carefully to customers.
• Thus, process based measures refer to the customer
satisfaction delivered by the entire supply chain.
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 Internal Performance Measurement
• Focuses on activities required to serve
customers.
• Measurement of these activities and comparison
thereof with the standards is necessary to
improve performance, motivate and reward
employees.
• Emphasizes on comparing activities and
processes to previous process operations and/or
objectives in terms of cost, customer services
and productivity measures.
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(a) 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:
• Cost per unit
• Warehouse costs
• Inbound freight
• Order processing
• Cost as a percentage of sales
• Administrative costs
• Outbound freight
• Direct labour.
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(b) Customer service- Focuses on the customer service
provided by the manufacturers, wholesalers, and
retailers. Typically, these services include:
• Fill rate
• Stock outs
• Shipping errors
• On time delivery
• Back orders
• Cycle time
• Customer feedback
• Sales force feedback.

- The above measures examine a firm’s ability to satisfy

customers.
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(c) Productivity measures- establishes a
relationship between output produced and
quantities of inputs utilized by the system to
produce that output. The typical productivity
performance measures reported as used by
manufacturers, wholesalers and retailers are:
• Units shipped per employee
• Units per labour (Rs)
• Order per sales representative
• Comparison with historical data
• Comparison with standards set.
• Productivity index
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 Productivity measures are hard to assess
due to
• Difficulty in measuring outputs and inputs
utilization.
• Constantly changing inputs and output
mix
• Difficulty in obtaining/ non-availability of
data.

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 Asset Measurement
The typical logistics asset management
measures, reported, reported as percentage, used
by manufacturers, wholesalers, and retailers are:
• Inventory turnover
• Inventory carrying costs
• Inventory levels (no. of days supply)
• Obsolete inventory
• Return on net assets.
• Return on investment 327
 Quality Measurement
Refers to process orientation 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 returns
• Cost of returned goods.
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 Perfect Order
• Represents an ideal performance
• Measures order entry, credit clearance,
inventory availability, accurate picking, on-
time delivery, correct invoicing, payment
without deductions.
• The perfect order represents the following
standards:
(1)Complete delivery of all items requested.
(2)Delivery as required by customers with one-
day tolerance. 329
(3) Complete and accurate documentation
supporting the order, including packing lists,
bills of lading, invoices.
(4) Faultless installation, correct configuration,
no damage.
Perfect Order Busters
• Order entry error
• Missing information e.g. product code.
• Non-availability of ordered item
• Inability to meet shipment date.
• Picking error.
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• Inaccurate packing list/ documentation.
• Late shipment
• Late arrival
• Early arrival
• Damaged shipment
• Invoicing error/ overcharging/ deductions
• Error in payment processing
 Best logistics organizations report achieving a
55 to 60 percent perfect order performance,
while most organizations report less than 20 per
cent.
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