Market Logistics & Supply Chain

Management

SDM – Ch 15 1
 Materials Management
• Materials forms the largest single cost item in
most manufacturing companies – needs to be
carefully managed
• Materials management function includes
planning and control, purchasing and stores
and inventory control
• Materials management is the precursor to
logistics and supply chain management
Logistics……
2
 Logistics Defined
• Logistics means having the right thing, at
the right place, at the right time
• The procurement, maintenance, distribution
and replacement of personnel and materials
– Webster’s Dictionary
• The science of planning, organizing and
managing activities that provide goods or
services – Logistics World, 1997

3
 Logistics
• Functions: planning, procurement,
transportation, supply and maintenance
• Processes: requirements determination,
acquisition, distribution and conservation
• Business: science of planning, design and
support of business operations of
procurement, purchasing, inventory,
warehousing, distribution, transportation,
customer support, financial and human
resources
4
 Scope of Logistics
• Choice of markets
• Procurement
• Plant location and layout
• Inventory management
• Location and management of warehouses
• Choices of carriers, mode of transport
• Packaging decisions
• Relevant to all enterprises: manufacturing,
Government, Institutions, service
organisations
5
 Components of LOG
Management
Logistics Activities
Input Output
Customer service
Demand forecasting
Distribution •Marketing
•Natural
Communications Orientation
Resources Inventory control (competitive
(land, facilities Materials handling
Advantage)
Equipment) Order processing
Parts and service support •Time and
•HR
Plants and warehouse selection Place utility
•Finance Procurement •Efficient move
•Information Packaging
Return goods handling to customer
Salvage and scrap disposal
Traffic and transportation
Warehouse and storage

6
 Links and Flows
General material flow/ service flow

Information flow

Information flow

Customer’s Supplier’s
Customer Lead Firm Supplier
customer supplier

General cash flow

Outbound / Downstream logistics Inbound / Upstream logistics

Source: ICFAI 7
 Logistics and Marketing
• Interface on:
– Product design and pricing
– Customer service policies
– Sales forecasts and order processing
– Inventory policies and location of warehouses
– Channels of distribution and despatch planning
– Transportation to reach products to customers
• Production wants larger production runs to
minimise time spent on set up changes on the
machines. Marketing wants smaller runs of a
variety of products.

8
 Source: Michael Porter

The Value Chain

S Company Infrastructure
U
P Organisation, people, methods
margin
P
Systems & technology
P
O
R Procurement
T

Inbound Outbound Marketing Service

Operations
logistics logistics & sales

margin

SDM – Ch 15 Tata McGraw Hill Publishing 9

Primary activities
 Logistics Plan Outline
• Internal analysis (current position)
– Organisation
– Human resources
– Transportation
– Relations with internal customers
– Quality of product
– Quality of Service
• External / situation analysis
– Competitor logistics performance
– Trends
– External environment / economy
– Public, private and contract warehouse
– Public, private and contract carriage

Tata McGraw Hill Publishing 10

Principles of Logistics Excellence
Strategic
Link logistics to corporate
strategy
Organise comprehensively
Use the power of information
Emphasise human resources
Form strategic alliances
Operational
Focus on financial
performance
Target optimum service levels
Manage the details
Leveraging logistics volumes
Measure and react to
performance
11
Alling & Tyndall
 Logistics Focus Areas

Customer service related Operations related

Packaging Plant and warehouse site
Order processing location
Spare parts and service support Procurement
After sales Customer service Inventory control
support Materials handling
Demand forecasting Salvage and scrap disposal
Distribution communications Traffic and transportation
Return goods handling Warehousing and storage
Logistics may be confined to the company whereas SCM extends beyond

12
 Supply Chain Management
• Business context:
– Globalization of the market place
– Advances in technology
– Increasingly demanding, informed customer base
– Purchase decisions on dimensions of quality, price and
time
• Innovative supply chain:
– To meet customer driven challenges
– To reduce costs
– Improve service levels
– Enhance speed to market

13
 Supply Chain Integration
• Optimising the supply chain requires
supplier and customer involvement to
integrate processes, policies, systems,
database and strategies between
diverse trading partners

14
 Supply Chain Integration
Customer Analysis
Order Fulfillment
Purchasing/Supplier
Partnering

Integrated Inventory Management and

control
Storage & Supply Chain
Transportation Management

Demand & Lead

Manufacturing/ Time Management
Re-manufacturing/
Assembly
Materials
Inventory management…
Management 15
 Why Carry Inventory?
• Support production requirements
• Support operational requirements
• Maximize customer service – ensure
availability when needed – protect
against uncertainty
• Hedge against marketplace uncertainty
• Take advantage of order quantity
discounts
16
 Functions of Inventory
• Inventory serves as a buffer between:
– Supply and demand
– Customer demand and finished goods
– Requirements for an operation and the
output from the previous operation
– Parts and materials to begin an operation
and the suppliers of the materials
The shock absorber of business !
17
Factors Which Drive Inventory
• Target service level parameters
• Lot sizing practices
• Safety stock and safety time
conventions
• Volume discounts and purchase
arrangements
• Seasonal build up needs
18
 Categories of Inventory
• Anticipation – built in anticipation of future
demand – peak season, strike, promotion
• Fluctuation (safety) – to cover random,
unpredictable fluctuations in supply and
demand and lead time – to prevent disruption
in operations, deliveries etc
• Lot-size – to take advantage of quantity
discounts, reduce shipping, set up and
clerical costs – also called cycle stock
19
 Categories of Inventory
• Transportation – pipeline or movement
inventories – to cover the time needed to
move from one point to another – factory to
distribution point for example
• Hedge – for materials where prices are
volatile
• Maintenance, repair and operating supplies
(MRO) – to support M and O – spare parts,
lubricants, consumables etc
20
 Types of Inventory
• Obvious….
– Raw materials
– Work-in-process
– Finished goods – of primary concern to
marketing
– Maintenance, repair and operating (MRO)
supplies
– In-transit, pipeline
Performance measures…
21
 Performance Measures
• Inventory turns = Annual cost of goods
sold /average inventory in value
• Days of sales = inventory on hand /
average daily sales

22
 Types of Inventory Systems
• Pure Inventory – when and how much to
order. RM procurement. Simple
manufacturing operations
• Production Inventory – finite production
rates. Demand fluctuation. Products compete
for manufacturing capacity
• Production – distribution Inventory –
compete for production capacity. Geographic
placement of inventory for best service of
demand
23
 Types of Classification
• ABC category – most common for all
• HML - high, medium, low - similar
• FSND – fast moving, slow moving, non-moving,
dead – spare parts / FG
• SDE – scarce, difficult, easy to obtain –
procurement / Spares
• GOLF – govt, ordinary, local, foreign source –
procurement / Spares
• VED – vital, essential, desirable – spare parts / FG
• SOS – seasonal, off-seasonal - commodity

24
 ABC Inventory Analysis
• Based on Pareto’s law:
– A – 20% items worth 80% of value
– B – 30% items worth 15% of value
– C – about 50% items account for 5% of the usage
• Classify items based on the above criteria
• Apply degree of control in proportion to the
importance of the group

25
 Inventory Related Costs
• Unit costs – basic value of the item carried
• Ordering costs – generating and sending a
material release, transport, any other
acquisition costs
• Carrying costs – capital, storage, obsolescence
• Stock-out costs
• Quality costs – non-conforming goods
• Other costs – duties, tooling, exchange rate
differences etc

26
 Approaches for Controlling
Inventory
• Continuous review:
– Safety stocks and forecasting methods
– Excess and obsolete inventory
• Part simplification and re-design
• On-site supplier managed inventory
• Use of supply chain inventory management
systems, Materials Requirement Planning,
Distribution Requirement Planning etc
• Automated inventory tracking systems
• Supplier – buyer cycle-time reduction
Warehouse management…
27
 Stores Management
Objectives
• Providing efficient service to users
• Reduce cost of carrying goods
• Providing correct, updated stock figures
• Controlling inventory
• Preventing damage to or obsolescence of
materials
• Achieve all of the above with good
housekeeping
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 Functions
Warehouses

Material Customer Information Storage

handling service transfer function

Receive goods
Identify goods Temporary Permanent
Sort goods
Despatch to storage
Hold inventory
Recall, select goods
Marshal the shipment
Despatch the shipment
Prepare records and
advices
29
 Purpose of Warehousing
• To provide desired level of customer
service at the lowest possible total cost
• It is that part of the firm’s logistics system that
stores products (RM, Packing Materials, WIP,
FG) at and between point of origin and point of
consumption and provides info to
management on the status, condition and
disposition of items being stored
• Distribution warehousing relates mainly to FG
30
 Reasons for Warehousing
Service related
Maintain source of supply
Support customer service
policies
Meet changing market
conditions
Overcome time and space
differentials
Support JIT programs of
suppliers and customers
Provide customers with the right
mix of products at all times
Temporary storage of materials
to be disposed or re-cycled
Cost related
Achieve production economies
Achieve transportation
economies
Take advantage of Quantity
Purchase discounts and forward
buys
Least Logistics cost for a
desired level of customer
service
31
 Warehouses
• Support manufacturing
• Mix products from multiple facilities for
shipment to a single customer
• Break-bulk
• Aggregate
• Used more as a ‘flow-thru’ point than as
a ‘hoarding’ point
32
 Distribution Warehousing
• The objective is to set up a network of
warehouses closest to the customer
locations to service markets better and
minimise cost
• Could be C&FA s, depots or distribution
centers
• Macro location strategies:
– Market positioned
– Production positioned
– Intermediately positioned
33
 Distribution Center
• Warehouse designed to speed the flow
of goods and avoid unnecessary costs
• Speeds bulk-breaking to avoid inventory
carrying costs
• Helps to centralise control and co-
ordination of logistics activities
• Products can also be cross-docked
(one vehicle to another)
Market positioned..
34
 Market Positioned
• Warehouses located nearest to the final
customer
• Factors influencing are:
– Order cycle time
– Transportation costs
– Sensitivity of the product
– Order size
– Levels of customer service offered
Production positioned….
35
 In between…

Production Positioned
• Warehouses located close to the production facilities
or supply sources
• Not the same level of customer service as the earlier
one
• Serve as points of aggregation / collection for
products made in a number of plants
• Factors influencing are:
– Perishability of raw materials
– Number of products in the product mix
– Assortments ordered by customers
– Transport consolidation rates ex; FTL

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 Intermediate Positioned
• Mid point locations between the final
customer and the producer
• High customer service levels possible even if
products made in number of units

• Other macro approaches look at cost

minimisation or cost and demand elements to
maximise profitability
Transportation management….
37
 Transportation
• Very important in the Logistics function:
– Movement across space or distance adds value to
products
– Transportation provides time and place utility
• Role of transportation includes:
– Provides opportunity for growth under competitive
conditions
– Deeper penetration into markets
– Wider distribution means greater demand
– Can influence product prices favourably

Principles….
38
 Transportation Principles
• Continuous flow
• Optimise unit of cargo - stackability
• Maximum vehicle unit – capacity utilization
• Adaptation of vehicle unit to volume and nature of
traffic
• Standardisation
• Compatibility of unit load equipment
• Minimum of dead weight to total weight
• Maximum utilization of capital, equipment and
personnel

39
Process….
 The Selection Criteria
• Environmental analysis: shipper, carrier,
government regulations, public influence
• Deciding objectives
• Selecting mode
• Select transport type within the mode
• Define functions of transport
• Evaluation and control – customer perception
/ satisfaction, best practice benchmarking
40
 Cost Factors
• Can be product related or market related.
• Product related: density, stowability, ease or
difficulty of handling and liability
• Market related: competition, location of
markets, Government regulations, traffic in and
out of the market, seasonality of movements
and impact on customer service
• Five prominent modes:
– Road, rail, air, water and pipeline.
– Sixth one is use of Ropeways
41
 Customer Service Factors
• Consistency, dependability
• Transit time
• Coverage – door-to-door for example
• Flexibility in handling a range of
products
• Loss and damage performance
• Additional services provided
Reverse logistics…
42
 Comparison of modes……

Reverse Logistics
• Movement of goods from the market or
customer back to the company
• The need:
– Increased awareness of the environment
– Stringent legislation
– For some it is part of the business
– Profitability of dealing with scrap, surplus
• Surplus, obsolescence can result due to:
– Over optimistic sales forecasts, change in product
specs, errors in estimating material usage, losses
in processing or overbuying based on incentives
SDM – Ch 15 43
 Advantages of Rail
• Economy – more so for goods over
long distances
• Efficiency of energy
• Reliability – not affected by weather
conditions

44
 Disadvantages
• Uneconomical for small shipments and
short distances
• Not suitable for remote stations
• Costly terminal handling facilities
• Inflexible time schedules

Road transport…..

45
 Road Freight Advantages
• Through movement – direct from consignor to
consignee, no transshipment
• Flexibility – routes and loading routines can
be easily altered, operate day and night
• Less capital costs – for own fleet + immunity
from industrial action
• Fast turn-around – if articulated units like
tractors and trailers are used
• Minimum delays

46
 Disadvantages
• Susceptibility to weather and road conditions
– in spite of the best protection
• Unsuitability for heavy loads – rail transport
more economical for bulk loads
• Unsuitability for long distances – again the
rail telescopic rates are more favourable

Air transport….

47
 Air Transport Advantages
• Faster mode
• Reduction in cost particularly inventory
• Broad service range
• Increasing capabilities
• Disadvantages:
– High cost
– Weather affects flight conditions
– Limitations on heavy consignments
Water transport……48
 Water Transport
• Advantages:
– Mass movement of bulk
– Lowest freight cost
– Preferred for long haul of low value commodities
• Disadvantages:
– Not for quick transit
– Suitable for certain types on commodities only

Pipeline….
49
 Pipeline Movement
• Advantages:
– Reliable, continuous, all weather transport
– Low energy consumption – hence low cost
– Low maintenance and operating costs
– Underground, no space problem
– Can traverse difficult terrain
– Minimal transit losses
– Operation round the clock, safe
– Economies of scale – double the throughput for
only 30% additional cost
• Disadvantage is in the investment cost
Ropeways….
50
 Ropeways
• Advantages:
– In hilly or inaccessible areas
– Long and circuitous routes with streams / deep valleys
– For commodities capable of movement in ropeway
buckets
– Short haulages of less than 50 kms
– Areas where other carriers are uneconomical
• Disadvantages:
– Heavy investments
– Limitations on size and quantity of haul

How to decide on the right carrier?

51
 Carrier Selection
Traffic Related Shipper related Service related
Length of haul Size of firm Speed (transit time)
Consignment weight Investment priorities Reliability
Dimensions Marketing strategy Cost
Value Network of Customer relationship
Urgency production and Geographical coverage
Regularity of distribution Accessibility
shipment Availability of rail Availability of special
Fragility sidings vehicles / equipment
Toxicity Stockholding policy Monitoring of goods
Perishability Management Unitisation
structure
Type of packing Ancillary services –
System of carrier bulk breaking, storage
Special handling evaluation
required
52
 Chart of Relative Merits
Parameter Weight Rail Road Air Water Pipe Rope
age line way
Speed 30 5 6 8 4 3 3
Versatility 10 6 8 5 6 3 2
Reliability 20 6 8 5 5 7 4
Availability 10 7 8 5 6 3 2
Continuity of 10 6 7 5 5 8 3
service
Distribution cost 20 4 5 6 6 7 8
Total score 10 5.4 6.7 5.1 5.1 5.1 4.0
Overall ranking 10 2 1 4 5 5 6

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