SC’OrEBMS.

COM – Elements of Logistics Management (Additional Notes)

ELEMENTS OF LIGISTICS MANAGEMENT

Logistics management consists of eight elements called wings of logistics. These are
discussed in a nutshell below.

1. Customer Order Processing

Flow of Actions

1. Filling up the order form

2. Deciding the specifications of the product
3. Deciding the quality check list of the product
4. Deciding the delivery schedule
5. Deciding the location of delivery

Important Factors

1. Cost of order processing

2. whether the company is capable of producing a component
3. Detailed list of specifications

Techniques

1. Electronic data Interchange (EDI)

2. E-ERP or CPFR
3. Web portal

2. Location Analysis

Flow of Actions

1. Cost of transportation of raw materials and finished goods

 Proximity to suppliers
 Proximity to customers
2. Availability and type of land
3. Availability of secondary resources
4. Availability of desired manpower at affordable cost
5. Communal harmony
6. Governmental regulation and taxation

Important Factors

1. Cost of operations as a percentage of sales

2. Shelf life of product

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3. Inventory Control

Flow of Actions
1. On hand inventory analysis
2. Communicating the quantity, quality and timing of material with the
supply points.
3. Getting the material of right quality, quantity and at right time

Important Factors

1. Inventory control at planning stage

2. Lead time
3. Cost vs. importance of raw material

Techniques

1. DRP and replenishment order control

2. Fixed order interval system
3. Economic order quantity with ROP system
4. Selective inventory control (ABC, VED, FSN analysis etc.)
5. Order forecasting using statistical tools

4. Material Handling

Flow of Actions

1. Type of material (Business significance like raw material, finished

goods etc.)
2. Material handling requirements of the material (Fragile, inflammable)
3. Cost ratio of material handling to material cost.
4. Material default location, identification and traceability

Important Factors

1. Material breakage
2. Pilferage
3. Cost of material handling
4. Number of handlings

Techniques

1. Operational research
2. Material flow analysis
3. Computerized material retrieval system
4. ASRS (Advanced Storage & Retrieval System)

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5. Packaging

Flow of Actions

1. Packaging requirement for the material (Refrigeration, Fragile etc.)

2. Primary packaging
3. Secondary packaging
4. Cost of packaging
5. Transportation requirement for packaging (Vibration proof, water or
moisture tight)

Important Factors

1. Protection to product
2. Holding the product
3. Communicating the message to customers
4. Customer requirement for packaging
5. Reverse logistics for packaging
6. Recycling of packaging material
7. Cost of packaging

Techniques

1. Standardized box packaging

2. Containerization of packaging
3. Direct part marking
4. ISO 14001
5. Recycling of packaging materials
6. Reusable packaging materials
7. Eco-friendly packaging materials
8. Bar coding
9. Bumpy bar coding
10. GPS tracking system
11. RFID

6. Transportation

Flow of Actions

1. Mode of transportation
2. Cost of product
3. Speed of transportation
4. Ambience requirement of material (Refrigeration, Vacuum)
5. Cost of transportation
6. Urgency of the product to customers

Important Factors

1. Urgency of the product

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2. Cost of product
3. Cost of transportation

Techniques

1. Containerized transportation
2. Cool Chain Transport (Refrigerated Vans/Containers)
3. Multi-modal Logistics
4. Milk Run Distribution systems
5. Cross Docking
6. Direct Shipment

7. Warehousing

Flow of Actions

1. Location of the warehouse

2. Inventory level at the warehouse
3. Storage requirement of the product
4. Packaging and repackaging requirement of the product
5. Shelf life of the product

Important Factors

1. Availability of space
2. Availability of proper material handling systems
3. Strategic location
4. Packing and Re-packing facilities
5. Information and allied services

Techniques

1. Third Party Logistics

2. Third party Warehousing

8. Customer Service

Flow of Actions

1. Contractual services offered to client

2. Type of customer service required for the product
3. Location of the service centre
4. Service level at the service centre
5. Cost of service vs. replacement

Important Factors

1. contractual requirement of customer service

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2. Service quality
3. Reverse logistics

Techniques

1. AMC (Annual Maintenance Contracts) and free replacements

2. Limited (free) trial period
3. Guarantee & warrantee
4. User clubs
5. Help lines, toll free number, call centers
6. CRM
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Quick Response Manufacturing (QRM)

In today’s world of competitive environment, one of the key success factors for
manufacturing firms in speed-not only speed of delivery, but of concept, design and
production. New opportunities open for those manufacturing firms, who can get
products to market before the competition and success hinges on the ability to move
quickly.
Quick response manufacturing (QRM) is a companywide strategy to cut lead times in
all phases of manufacturing and office operations. It can bring the manufacturing
firm's products to market more quickly and secure its business prospects by helping to
compete in a rapidly changing manufacturing arena.
QRM will not only make the manufacturing firm more attractive to potential
customers; it will also increase profitability by reducing non-value-added time,
cutting inventory and increasing return on investment.

Benefits of QRM for the manufacturing firm

 Decreases the manufacturing costs
 Increases the market share
 Fills customer orders faster
 Boosts product quality
 Introduces new products rapidly
 Eliminates waste and inefficiency
 Secures the manufacturing future of the firm

Thus we see that even though it is imperative to apply lean manufacturing to any
manufacturing firm, the manufacturing world is moving towards agile manufacturing
and quick response manufacturing which is the next step for survival in this
competitive era. But to approach agile manufacturing and quick response
manufacturing, the company requires to be using lean manufacturing methods, which
is a starting point. Agility can be built only from a firm foundation. Hence, the focus
of this project is on lean.

KEY CONCEPTS IN LEAN MANUFACTURING

As we have already seen, lean manufacturing is a concept which looks very simple
but its actual implementation would become difficult if certain basic concepts are not
understood properly by an organization going for the implementation of Lean
Manufacturing.

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Kanban System

The kanban system is an information system to harmoniously control the production

quantities in every process. It is a tool to achieve just-in-time production. In this
system what kind of units and how many units needed are written tin a tag-like card
called kanban. The kanban is sent to the people of the preceding process from the
subsequent process. As a result, many processes in a plant are connected with each
other. This connecting of processes in a factory allows for better control of necessary
quantities for various products. The kanban system is supported by the following:

• Smoothing of production
• Reduction of set up time design of machine layout
• Standardization of jobs
• Improvement activities
• Autonomation

A kanban is usually card put in a rectangular vinyl envelope. Two kinds are mainly
used: withdrawal kanban and production-ordering kanban. A withdrawal kanban
details the kind and quantity of product which the subsequent process should
withdraw from the preceding process, while a production-ordering kanban specifies
the kind and quantity of the product which the preceding process must produce. These
cards circulate within Toyota factories, between Toyota and its many co-operative
companies, and within the factories of co-operative companies. In this manner, the
kanban can contribute information on withdrawal and production quantities in order
to achieve just-in-time production.

Autonomation

In order to realize just-in-time perfectly, 100 per cent good units must flow to the
prior process, and this flow must be rhythmic without interruption. Therefore, quality
control is so important that it must coexist with the just-in-time operation throughout
the kanban system. Autonomation means to build in a mechanism a means to prevent
mass production of defective work in machines or product lines. Autonomation is not
automation, but the autonomous check of abnormality in the process.

The autonomous machine is a machine to which an automatic stopping device is

attached. In Toyota factories, almost all the machines are autonomous, so that mass-
production of defects can be prevented end machine breakdowns are automatically
checked. The idea of Autonomation is also expanded to the product lines of manual
work. If something abnormal happens in a product line, the worker pushes stop
button, thereby stopping his whole line.

Two-bin System

The Working of the System

To begin with, the stock from the first bin is consumed. The emptying of first bin
indicates that the stock has reached ROL and the replenishment action is initiated. The
quantities in the second bin are consumed during the replenishment period. This
system reduces the work involved in record keeping and entering (clerical) errors.

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Two containers of inventory; reorder when the first is empty, use the contents of the
second until order received.

This system operates on reorder level (R.O.L.) system and it physically segregates the
stock of entire items into two bins. The second bin contains quantity equal to R.O.L.
i.e. (LC + S) and it means to satisfy demand during the replenishment period. The
first bin contains the quantity = (Q – LC) to satisfy demand between the receipt of
materials and placing the next order. LC is the lead time consumption. Q is the order
quantity.

S = Safety stock
L = Lead time
C = Consumption rate
Q = Reorder quantity

JUST IN TIME (JIT)

JIT is a Japanese management philosophy, which has been applied in practice since
the early 1970s in many Japanese manufacturing organizations. It was first developed
and perfected within the Toyota manufacturing plants by Taiichi Ohno as a means of
meeting consumer demands with minimum delays. Taiichi Ohno is frequently
referred to as the father of JIT.

Toyota was able to meet the increasing challenges for survival through an approach
that focused on people, plants and systems. Toyota realized that JIT would only be
successful if every individual within the organization was involved and committed to
it, if the plant and processes were arranged for maximum output and efficiency, and if
quality and production programs were scheduled to meet demands exactly.

JIT manufacturing has the capacity, when properly adapted to the organization, to
strengthen the organization’s competitiveness in the marketplace substantially by
reducing wastes and improving product quality and efficiency of production.

There are strong cultural aspects associated with the emergence of JIT in Japan. The
Japanese work ethic involves the following concepts.
• Workers are highly motivated to seek constant improvement upon that
which already exists. Although high standards are currently being met, there
exist even higher standards to achieve.
• Companies should focus on group effort, which involves the combining of
talents and sharing knowledge, problem-solving skills, ideas and the
achievement of a common goal.
• Work itself takes precedence over leisure. It is not unusual for a Japanese
employee to work 14-hour a day.
• Employees tend to remain with one company throughout the course of their
career span. This allows the opportunity for them to hone their skills and
abilities at a constant rate while offering numerous benefits to the company.
• These benefits manifest themselves in employee loyalty, low turnover costs
and fulfillment of company goals.

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From above it is very clear what it needs to implement JIT successfully. In fact it also
suggests the critical reasoning behind the fact that why in India JIT is not 100 per cent
followed. One more significant thing to be considered here is the correct
interpretation of JIT. JIT is more of a manufacturing and waste elimination
philosophy than commodity purchasing technique. It originally referred to the
production of goods to meet customer demand exactly, in time, quality and quantity,
whether the customer is the final purchaser of the product 01 another process further
along the production line.

It has now come to mean producing with minimum waste. Waste is taken in its most
general sense and includes time and resources as well as materials. There are seven
types of waste namely:

 Waste from overproduction

 Waste of waiting time
 Transportation waste
 Processing waste
 Inventory waste
 Waste of motion
 Waste from product defects

Elements of JIT System

Successful JIT system is the logical outgrowth of the combination of the following
practices:
 Continuous improvement
 Attacking fundamental problems-anything that does not add value to the
product
 Devising systems to identify problems
 Striving for simplicity-simpler systems may be easier to understand, easier to
 manage and less likely to go wrong
 A product-oriented layout-produces less time spent in moving of materials and
parts
 Quality control at source-each worker is responsible for the quality of their
own output
 Poka-yoke: foolproof tools, methods, jigs etc. to prevent mistakes
 Total productive maintenance-ensuring machinery and equipment functions
perfectly when it is required, and continually improving it
 Good housekeeping-workplace cleanliness and organization
 Set up time reduction-increases flexibility and allows smaller batches
 Ideal batch size is 1 item per batch, i.e. single piece flow
 Multi-process handling-a multi-skilled workforce has greater productivity,
flexibility and job satisfaction
 Leveled/mixed production-to smooth the flow of products through the factory
 Kanban- simple tools to 'pull' products and components through the process
 Jidoka (Autonomation)-providing machines with the autonomous capability to
use judgment, so workers can do more useful things than standing watching
them work
 Andon {trouble lights}-to signal problems to initiate corrective action

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Benefits of JIT Systems

JIT system has a number of benefits, few major are mentioned below:

 Reduced levels of in-process inventories, purchased goods, and finished

goods.
 Reduced space requirements.
 Increased product quality and reduced scrap and rework.
 Reduced manufacturing lead times.
 Greater flexibility in changing the production mix.
 Smoother production flow with fewer disruptions.
 Worker participation in problem solving.
 Pressure to build good relationships with vendors
 Increased productivity levels and utilization of equipment.

It can be said in summary that JIT is the management philosophy, which emphasizes
on the waste elimination as well as vendor integration to create certainty in the
material planning process, which ultimately results into no inventory; and hence
inventory control means to follow JIT.

VENDOR MANAGED INVENTORY (VMI)

VMI can be defined as:

It is a streamlined approach to inventory and order fulfillment. With it, the supplier
and not the retailer, is responsible for managing and replenishing inventory. This is
done by using EDI, by electronic transfer of data over a network. It can also be seen
as a mechanism where the supplier creates the purchase orders based on the demand
information exchanged by the retailer/customer.

Vendor Managed Inventory (VMI) is basically evolved to facilitate the operations at

retail stores. It involves a continuous replenishment program that uses the exchange of
information between the retailer and the supplier to allow the supplier to manage and
replenish merchandise stock at the store or warehouse level. In this program, the
retailer supplies the vendor with the information necessary to maintain just enough
merchandise stock to meet customer demand. This enable the supplier to better
project and anticipate the amount of product it needs to produce or supply. The
manufacturer has access to the suppliers’ inventory data and is responsible for
generating purchase orders. VMI was first applied to the grocery industry, between
companies like Procter & Gamble (supplier) and Wal-Mart (distributor). But if
applied properly, VMI can provide the benefits of smoother demand, increased sales,
lower inventories and still reduced costs of lost sales to the other industries.

Benefits of VMI

1. Dual Benefits

1. Data entry errors are reduced due to computer-to-computer communications.

Speed of the processing is also improved.

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2. Both parties are interested in giving better service to the end customer.
Having the correct item in stock when the end customer needs it, benefits all
parties involved.
3. A true partnership is formed between the manufacturer and the distributor.
They work closer together and strengthen their ties.

2. Supplier Benefits

Reduced inventory: This is the most obvious benefit of VMI. Using the VMI process,
the supplier is able to control the lead time component of order point better than a
customer with thousands of suppliers they have to deal with. Additionally, the
supplier takes on a greater responsibility to have the product available when needed,
thereby lowering the need for safety stock. Also, the supplier reviews the information
on a more frequent basis, lowering the safety stock component. These factors
contribute to significantly lower inventories.

1. Reduced stock outs: The supplier keeps track of inventory movement and
takes over responsibility of product availability resulting in a reduction of
stock outs, thereby increasing end-customer satisfaction.
2. Reduced forecasting and purchasing activities; as the supplier does the
forecasting and creating orders based on the demand information sent by the
retailer, the retailer can reduce the costs on forecasting and purchasing
activities.
3. Increase in sales: Due to less stock out situations, customers will find the
right product at right time. Customer will come to the store again and again,
thereby reflecting an increase in sales.
4. Planning and ordering cost will decrease due to the responsibility being
shifted to the manufacturer.
5. The overall service level is improved by having the right product at the
right time.
6. The manufacturer is more focused than ever in providing great service.

On a whole, vendor managed inventory reduces transaction costs such as:

Purchasing
• Speeds transactions
• Streamlines communication between customer and supplier
• Eliminates paper-to-computer data entry
• Improves data accuracy
• Frees up staff to work on more productive activities

Inventory Management
• Delivery as needed cuts storage
• Helps you reduce inventory levels
• Reduces inventory obsolescence
• Improves inventory turns
• Improves fill rates
• Decreases lost sales

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Receiving
• Advance Ship Notice speeds up receiving
• Bar Coding cuts warehousing costs

Error Reduction
• Data entry mistakes are avoided
• Information flow is continuous

3. Manufacturers Benefits

1. Improved visibility results in better forecasting: Without the VMI process,

suppliers do not exactly know how their customers are going to place
orders. To satisfy the demand, suppliers usually have to maintain large
amounts of safety stocks. With the VMI process, the retailer sends the POS
data directly to the vendor, which improves the visibility and results in
better forecasting.
2. Reduces PO errors and potential returns: As the supplier forecasts and
creates the orders, mistakes, which could otherwise lead to a return, will
come down.
1. Improvement in SLA: Vendor can see the potential need for the item before
it is actually ordered and right product is supplied to retailer at right time
improving service level agreements between retailer and supplier.
2. Encourages supply chain cooperation: Partnerships and collaborations are
formed that smooth the supply chain pipeline. Visibility to the distributor’s
point of sale data makes forecasting easier.
3. Promotions can be more easily incorporated into the inventory plan.
4. A reduction in distributor ordering errors (which in the past would probably
lead to a return).
5. Visibility to stock levels helps to identify priorities. Before VMI, a
manufacturer has no visibility to the quantity and the products that are
ordered. With VMI, the manufacturer can see the potential need for an item
before the item is ordered.

JIT - II

Lance Dixon, the father of JIT-II describes it, as "This is the ultimate partnership
program for compatible customers and suppliers, because it is the next logical step in
the application of the management cycle to the value chain, through the management
of time within the supply chain. It represents the use of alignment and mobilization
strategies with suppliers using in-plant vendor representatives to achieve
breakthrough changes".

JIT system was based upon the synchronized planning between the buyer's needs and
the supplier's production capabilities. It will not produce any breakthroughs or
generate any major organizational transformation. It will result into proper materials
control across organizations. JIT-II can be regarded as a major catalyst for the
productive change across organizations and qualifies a toy component of the macro
logistics management model. In other words, we can say that JIT system assures the
un-interrupted incoming material supply as per demand, whereas JIT-II ensures the
un-interrupted production from manufacturing lines.

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In fact JIT-II eliminates the need for the sales planning activities from supplier
organization and the purchasing planning activities from the buyer organization,
which were carried out independently. Both the activities are carried out
simultaneously in JIT-II environment. This results into more integrated and realistic
plans to enable achieving targets. Typically, it automatically and naturally produces
the necessary element of coordination within two organizations without "follow-up".

The concept of JIT-II was developed by the BOSE Corp as a time saving, cost-cutting
approach to partnering with suppliers using the concept of concurrent engineering at
its source. It is based upon a mutual trust relationship here the supplier representative
is empowered to use the company's purchase orders to place orders, which in theory
replaces the purchaser and the supplier's salesperson. In practice, the supplier
representative is brought into the plant on a full-time baas. This person is allowed to
attend any product design meetings for his/her product and has full access to all
relevant facilities, personnel, and data. Purchasing staff is freed up from all the
paperwork and administrative tasks, allowing them to cultivate other skills such as
negotiating and sourcing. PO placement and communication is improved; time is
saved; material cost reduction is realized.

The benefits are substantial for both the customer and the supplier. JIT-II provides a
natural foundation for EDI, effective paperwork, and administrative savings Material
costs are reduced on an ongoing basis. Supplier personnel work onsite and perform
various planning and buying duties as well. Because supplier personnel interface
daily, increased insight leads to fewer schedule-change surprises. This results in
reduced inventory as the supplier plans directly from the customers MRP system on a
real time basis. Most remaining time is spent working with design engineering staff,
thus maximizing the opportunities of concurrent engineering and cost reduction.

JIT-II makes an old negative "backdoor selling" into a positive. The companies selling
directly into design engineering have been selected jointly by purchasing and
engineering management.

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DISTRIBUTION STRATEGIES

Distribution strategies can be of the following types:

 Cross docking
 Milk runs
 Direct shipping
 Hub and spoke model

Cross Docking

Traditional warehouses move materials into storage, keep them till they are needed
and then move them out to meet the customer demand. Cross docking co-ordinates the
supply and delivery so that the goods arrive at the receiving area and are transferred
straight away to the loading area, where they are put into delivery vehicles. In other
words, Cross docking is the movement of materials from the receiving docks directly

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to the shipping docks. It is said, "Cross docking is a flow through concept and we
don't want product to stop anywhere, because space, brick and mortar is getting very
expensive these days/'

Goods do not need to be placed in storage, creating a significant cost savings in

inventory and material handling. Cross docking helps reduce direct cost associated
with excess inventory by eliminating unnecessary handling and storage of product.
Fewer inventories means less space and equipment required for handling and storing
the products. This also means reduced product--damages and product obsolescence.
Thus, the step of filling a warehouse with inventory before shipping it out is virtually
eliminated. Cross docking shifts the focus from "supply chain" to "demand chain''.
For example, 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 helps retailers streamline the supply chain from point of origin to point of
sale. Cross docking also encourages electronic communications between retailers and
their suppliers.

Two Basic Forms Of Cross Docking

1. Basic Cross Dock: In this form the 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 Through Cross Dock: In case of the flow through concept, when the
materials arrive and they are in large packages, these packages are opened and broken
into smaller quantities, sorted, consolidated to deliver them to different customers and
transferred to vehicles.

Cross docking can develop to a phase where nothing actually moves through a
warehouse. The stock kept within vehicles is 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.

Benefits of Cross Docking

1. Cross docking helps to improve the speed of flow of the products from the
supplier to the store*.
2. It helps to reduce the costs as:
 The labour is removed from the job of storage (warehouses).
 It helps eliminate the two most expensive distribution operations i.e.
warehousing and storage.
3. Cross docking helps to reduce the amount of finished goods inventory that is
required to be maintained as safety stock.
4. Cross docking reduces costs and hence helps to save money.

Constraints

1. Cross docking requires a strong IT base and real-time information sharing

facilities, e.g. (Bar codes on cartons).

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2. Cross docking is appropriate for products with large, predictable demands

and also requires that the distribution centers should be set up such that the
benefits of economies of scale in transportation can be achieved on both the
inbound and the outbound side.
3. It requires a great degree of coordination and synchronization between the
incoming and "outgoing shipments which, in turn, relies on better
information and planning.
4. Further the product availability, accuracy and quality are also critical. The
company can't force other members of the supply chain to incur additional
costs or efforts so as to take the benefits of cross docking.

How Cross Docking Works

On receiving 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. This is illustrated in Figure –

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Milk Runs

A milk run is a route in which a truck either delivers product from a single supplier to
multiple retailers or goes from multiple suppliers to single retailer as shown in Figures
(a) and (b). In other words, in a milk run, 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. The main job of the supply chain manager is to decide on the routing of each
milk run.

Retail Stores

FIGURE (a) Milk runs from single supplier to multiple retailers.

FIGURE (b) Milk runs from multiple suppliers to single retailer.

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Benefits of Milk Runs

1. Reduces cost: Milk runs help to reduce the transportation costs by

consolidating shipments to multiple stores on a single truck. The use of milk
runs allows deliveries to multiple stores to be consolidated on a single truck,
resulting in a better utilization of the truck and somewhat lower costs.
2. Proximity of suppliers: The use of milk runs 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 geographical proximity.
3. Reduces inventory: Milk runs also help to reduce the amount of inventory
need to be kept as safety stock in the warehouses.

One of the major challenges faced by the milk run system of distribution is the high
degree of coordination and synchronization required among the members of the
supply chain.

Direct Shipping

Direct shipping refers to the method of distribution in which the goods come directly
from the suppliers to the retail stores as shown in Figure. In case of direct shipment
network, the routing of each shipment is specified and the supply chain manager only
needs to decide on the quantity to ship and the mode of transportation to use. This
system eliminates the need for the intermediate facilities that are otherwise required,
e.g. warehouses and distribution centers. The products that are generally distributed
through the method of direct shipping are certain perishable items, high volume
goods, high bulk items and specialty products

Suppliers Retail Stores

FIGURE Direct shipment network.

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Benefits of Direct Shipment

1. Elimination of intermediaries: The major advantage of direct shipment

network is the elimination of intermediate warehouses and the simplicity of its
operation and coordination.
2. Saves time: It 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.
3. Less damage: As the goods move directly from the supplier to the retailer
there is less handling of the products as a result there is less product damage.
4. Improved accuracy: Since the distribution is direct the invoices match
receiving records, correct products enter the store etc.

Challenges

1. Large retail stores: The direct shipment network is justified if the retail stores
are large enough. With the small size of retail stores the direct shipment
network tends to have high costs.
2. Higher costs: Due to the system of direct distribution the costs of transporting
the goods may he higher than other systems of distribution.
3. Hassle for store personnel: The shipment directly from the supplier to the
retailer poses a lot of hassles for the store personnel e.g. more deliveries,
paperwork, loading & unloading etc.
4. No safety stock: If there is certain problem in the shipment of goods from the
supplier, e.g. wrong goods are transported; goods are damages while
shipment etc. maintenance of no supply stock creates a problem.

Hub and Spoke Model

In case of the hub and spoke model the distribution model's hub is the location that
holds inventory for a large region, with each spoke .leading to a 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 amount of customers in a minimum amount of time.
In today's distribution environment, however, this goal can be attained in
many cases without a hub and spoke operation, which has a very high overheads. Hub
and spoke, these days, is often restricted to fulfilling the just-in-time needs of heavy
manufacturing industries. For example, if a company expands its operations, its
suppliers may move to the nearby areas so as to supply it more efficiently. In this
case, the company that expands is the hub and the suppliers are its spokes.
The type of product to be distributed, for instance, may necessitate a hub and
spoke operation. The products that cannot be air freighted are mostly distributed
through the hub and spoke model.
_____________________________________________________________________

Example

A leading example of the hub and spoke model of distribution is the Nicholas Piramal
Group. Nicholas Piramal is using the hub and spoke model to reduce the finished
goods inventory. Currently, the stock holding at the carrying and forwarding agent

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level is 30 days. Once all the hubs are set up, the response time will reduce to 10 to 2
days. Using the system, the inventory at the carrying and forwarding agent level
would go down to 7 days and at the hubs level would also be 7 days bringing down
the overall inventory level to 14 days. The company has already set up 2 hubs and
would be putting up 1 more. Some high volume products would be going directly to
the carrying and forwarding agent. The problem to get full truckload can be solved by
supplying to the hubs.

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Types of Warehouses

Companies might own private warehouses or rent space in public warehouses or both.
Both have their advantages and disadvantages. Owning a private warehouse brings
more control, ties up capital, and is less flexible if locations change.
On the other hand, public warehouses charge for rented space, provide
additional services for inspecting, packaging, shipping and invoicing goods but at a
cost and offer wide choice of locations and warehouse types.
Basic types of warehouses are:
 Bonded warehouses: Warehouses which are bonded under the Customs and
Excise Act and Municipal Corporation regulations, facilitating deferred
payment of customs, excise or octroi duty.
 Field warehouses: Field warehouses are those which are managed by a public
warehousing agency in the premises of a factory or company which needs the
facility for borrowing from a bank against the certification of goods in storage
or in process by an independent professional warehouseman.
 Cold storages: Cold storage facilities are provided for perishables against
payment of storage for the space utilized by different parties.
 Agricultural warehouses: Used for storing agricultural produce grown in a
certain area.
 Distribution warehouses: Ones located close to the manufacturing concerns
or consuming areas. These are designed to move goods rather than just store
them. They are large and automated warehouses designed to receive goods
from suppliers, take orders and deliver goods to customers.
 Buffer storage warehouses: These are built at strategic locations with
adequate transport and communication.
 Facilities: Used for storing food grains or fertilizers etc. by or for the
government for easy marshalling and supply to various far-off or nearby
consuming areas in response to the orders of the government or government
agencies.
 Export and import warehouses: They are located near the ports from where
international trade is undertaken.

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THIRD-PARTY LOGISTICS (TPL/3PL)

Third-party logistics refers to the concept of outsourcing the logistics and distribution
of a manufacturing or service firm to a logistics service provider so that the
manufacturing company can focus on its core competencies of new product
development manufacturing them and marketing the products.
The logistics and distribution activities add up to almost around 5 per cent to
the cost to thereby increasing the final cost of the product. In addition to this the
inventory costs add around 15 per cent to the cost of the product. To increase
operational efficiency it is necessary for firms to cut these costs to remain
competitive. So manufacturing firms outsource these activities to LSPs which in co-
ordination with the manufacturing firms' needs control inventory and reduce costs.
Third party logistics is the activity of outsourcing activities related to logistics
and distribution. The 3PL industry includes Logistics Solution Providers (LSPs) and
the shippers whose business processes they support. Companies opt for third party
logistics for the following reasons:
 Improved strategic focus: Using 3PLs companies can concentrate on their core
tasks and improve customer satisfaction.
 Resource constraints.
 Lowered costs: According to research reports companies can reduce their
inventory management costs by around 15-30 per cent. Also 3PL service
providers invest large sums of money in developing processes that aim to
achieve logistical excellence, which are unavailable to other companies.
 Expansion of markets: Outsourcing logistical activities to 3PLs allow
companies to get into new businesses, new markets or a new channel of
distribution quickly and with a limited outlay of cash.
 For more professional and scientific approach to logistical problems.
 For improvement in service levels with improved response time.
 For efficient management of inventory resulting in bettor utilization of
working capital.
 Increased flexibility: A 3PL contract provides for relatively short term
commitments as compared to building and maintaining the same resources by
the company itself, thus freeing up resources for other uses.

In addition to the logistics and distribution functions, 3PLs also perform functions
such as fund collection, providing information of goods movement consumer
demographics, warehousing and value-added activities such as assembling,
packaging, flow of funds and reverse logistics.

The Evolution of 3PLs

The evolution of 3PLs is closely coupled along with the evolution of SCM practices.
In the era of mass production, the role that LSPs performed was confined only to the
flow of goods from point of origin to the point of consumption. These types of LSPs
can be called as the first generation LSPs whose primary functionality was that of
transportation -activity.

With increased awareness the manufacturing firm began to closely collaborate with
the LSPs to handle both inward as well as outward movement of goods and some
sharing of information resulting in the birth of second generation LSPs. However the

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LSPs were still treated at an arm's length and with some suspicion. The suspicion
arose from the manufacturing firms' fears that the LSPs may provide information
related to the suppliers and consumers to their competitors. However, with the
increased use of information technology that increased the visibility of goods the
manufacturing company and the LSPs have come a long way to improve their
relationship and now work closely to improve the business of the firm. The LSPs
work in tandem with the manufacturing firm to meet their supply chain activities and
help manufacturing firms tap new markets because of their efficient and timely
distribution of products. The new breeds of LSPs even help the manufacturing firms
in designing their SCM strategy and in some cases the IT and communication
infrastructure have been closely integrated allowing both the LSPs and the
manufacturing firm to share information and aid in better decision-making.

The Infrastructure Required for a 3PL

The 3PL should have adequate infrastructure for servicing its customer requirements.
The following type of infrastructure is a prerequisite for a good 3PL.
1. Warehouse
2. Fleet of vehicles
3. Hardware and software to take care of information needs
4. Advanced material handling capabilities
5. Good team of consultants
6. Trained manpower
7. Reach in terms of geography

Selecting a 3PL Service Provider

Though manufacturing or even service companies stand to gain a lot from outsourcing
their logistics activities to 3PLs, the returns from such a relationship have not been
commensurate with the expected returns. This makes many critics to question the
validity of using a 3PL service provider, in turn making the process of selection and
evaluating the 3PL all the more important.

Steps While Considering a 3PL Service Provider

The unique challenges posed by the company when they outsource to a 3PL makes it
worthwhile for companies to answer a few questions for making their relationship
with the 3PL a success. The manufacturing company should consider the following
points:
 Knowing where to go: Companies should define their logistics management
goals and attempt to visualize their organization status after they have
outsourced their logistics activities. Many companies even employ outside
consultants to gauge whether there is a need of a 3PL alliance. The consultants
help the company to narrow down to a list of 3PLs and identify their would-be
partners.
 Knowing the needs and objectives: The manufacturing company should know
clearly its objectives for outsourcing their logistical activities and then attempt
to visualize the organization after it has outsourced their logistical activities.
Knowing the needs also helps the companies in selecting a 3PL that best fits in

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to their requirements. Setting objectives of the outsourcing function should be

a cross functional activity with participation of key personnel from all critical
departments of the company such as information systems, finance, marketing,
production, field staff, human resources and supply chain department.

The next step is to send out request or proposals or request for quotes from the short-
listed LSPs. There are several factors a company needs to evaluate before setting up
an alliance with LSPs. One of them is to know its objective in measurable quantities
and clarifying the same to the short listed firms. The company also considers the
value-added activities that they expect from the service provider. A major
consideration al this point is that the company should determine the need of system
integration with that of the LSP.
After getting proposals or quotes from LSPs the companies should do their due
diligence on the LSPs capacity and operational performance. Each LSPs should also
be evaluated on their long-term commitments to improve operational performance.
The LSP should also have some sectoral expertise and the company can find out if the
LSP has any client in the same sector. The background search on the 3PL provider
can give a lot of insights about the LSP's performance in the above stated areas.

3PL Implementation

Once the company has selected the service provider it must ensure that all the parties
involved in the transaction are integrated and coordinated properly for effective
implementation before signing the contract the company must make sure that both the
parties clarify the requirements properly so that it does not lead to ambiguity. Both the
parties should be clear about the service and performance expectations of each other
from the contract.
It is also necessary to ensure that the process of employing a 3PL has proper
support from the top management, because employing a LSP implies a major change
in the hierarchy and culture of the organization. In other words we can say that
employing a 3PL means that the visible face of the organization has changed to the
3PL. This requires a major change in the thinking of the marketing and sales
department as well as the removal of the in-house logistics staff and so must be dealt
with utmost sensitivity.

The Implementation Process

After the contract has been finalized the firms must begin to implement the contract
within both the organizations. For implementation there should be a comprehensive
plan and periodic checks should be conducted to ensure that the implementation is on
track. The review process is very crucial as any minor aberration in the decided
course of action could throw the whole implementation process off track resulting in
huge disruptions.
Communication plays a crucial role in the whole process and a mix-up in the
communication channels could result in loss of data and subsequently loss to the
manufacturing firm. This may eventually destroy the mutual trust between the two
parties resulting in the failure of the relationship. At this juncture it is important that
both parties share their information freely.
For effective communication to be ensured in the manufacturing as well as 3PL it is
helpful to maintain a one point contact who can effectively co-ordinate the interaction

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between both parties. This contact may be an account executive on both sides who
ensures that strategies in both the organizations are aligned. In addition to the account
executive an account manager may also be hired to manage the relationship. For day-
to-day activities there should be a team of support personnel.
In addition to all this the firm outsourcing to the 3PL should have a contingency plan
in place, in case negotiations with the service provider breakdown due to any reasons.

Measuring and Evaluating Performance

After the whole structure has been put in place the manufacturing firm needs to
realize that the service provider is an integral part of their business process and
commit its resources to invest in long-term relationship. However, at the same time it
must also realize that it needs to review the performance of the service provider as it
does with any business unit within the organization.
The manufacturing company should review the performance of die 3PL based
on the metrics of performance decided initially in the contract. The following are the
metrics of evaluating a 3PL:

Transportation
 On-time shipment: Percentage of shipments that leave on the designated
time/dale as against the total number of deliveries.
 On-time delivery: Percentage of shipments that reach the customer location
on the designated date as against the total number of shipments.
 Transportation cost per mile: How much it cost to transport a unit per mite
against the previous in-house process or against industry standards.

Warehousing
 Percentage of orders that the 3PL ships in exact quantity as against specified
on the shipping order.
 Per unit cost of warehousing.
 Cost of warehousing including the overheads.
 Ability of moving the goods from one dock to another within specified time
period.
 Number of cases handled per hour or per employee.
 Picking accuracy: Percentage of lines with errors vs. total number of lines.
 Order fulfillment.
 Item Fulfillment.
 Inventory accuracy: Number of errors in reporting inventory in
warehouses.
 Loss and damage: Loss and damage resulting from contractor negligence.

Cost
 Service costs: The number of times the service provider meets the targeted
reduction in costs.
 Cost reductions: Service provider initiatives to cut costs quarter to quarter.

Quality

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 Reports: Ability of service provider to supply reports to manufacturing firm

with the required information.
 Process improvement: Initiatives jointly developed by the manufacturing firm
and the 3PL to improve process performance.

Availability
 Customer satisfaction: Customer satisfaction surveys for the customers
serviced by, the 3PL.
 Handling routing: Excess /shortage of inventory in the warehouse indicating
improper warehousing.

In addition to these quantifiable metrics there are some other factors that should also
be considered while evaluating the 3PL. Some of these are listed below:
 Flexibility: Ability of the 3PL to make changes in the processes according to
the requirements of the manufacturing company.
 Support of top management: The top management of the service provider
plays a crucial role in making a commitment to a long-term relationship.
 Investments in infrastructure: The 3PL should also make considerable
investments on the Information Technology and communication front.
 Financial stability: A 3PL contract calls for major investments by the service
provider in the initial years for warehouses, fleets etc. and hence may not
realize any gains in the first one or two years. Hence, the financial stability of
the service provider is also crucial to the success of the alliance.

Operations of Indian 3PLs

The Indian 3PL industry is still in a stage of infancy as compared to their western
counterparts. The major operators having a presence in India are as follows:
1. Gati
2. Transport Corporation of India Ltd.
3. Blue Dart Logistics
4. DHL Logistics
5. FedEx
6. AFL Logistics

There are many other foreign operators who provide services in India and who have
come into the limelight. These players include Panalpina, Frans Maas, Excel
Logistics, and Bax Global.
The typical activities that are performed by the 3PL operators in India include
warehousing and transportation including full truck load and less than full truck load.
Initially the outsourcing activities were only confined to transportation activities.
However, there has been a change in the perspective of the outsourcing activities. The
3PL providers have moved from the role of transportation and are increasingly
undertaking total supply chain activities for clients.
However, these activities are becoming increasingly commoditized and what
differentiate one 3PL player from others are sectoral expertise and the value-added
services they offer.
Value Added activities of 3PL: The value added activities of a 3PL service provide
have seen them move from the role of a 3PL to operators offering financial services

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for fund routing and also information centers to give information to clients
regarding customer demographics.

Blue Dart Logistics

Blue Dart Logistics provides various e-business solutions to its customers for
information flow and increasing the visibility of goods. Some of the e-commerce
initiatives are given in Table

TABLE Some e-commerce initiatives of Blue Dart.

Sr. No. Tools Functionality

1 Track Dart Track status of shipment
2 Mail Dart Track shipments using mail
3 Location Finder Find service location
4 Transit Time Finder Check transit times for shipment
5 Billing Receive invoices online
6 Schedule a Pickup To schedule customer consignments picking
7 Waybill Generation Generate a waybill for consignments
8 Image Dart Tool for downloading proof of delivery

Some other value added-services that are offered are reverse logistics, kitting services,
and custom clearances.

Transport Corporation of India

TCI is an umbrella organization that provides services in the field of supply chain
management. It has other sister concerns such as TCI Seaways, TCI Logistics, XPS
cargo and Transystem. The main services offered by TCI are in the area of consulting,
transportation management services, warehousing services, IT and MIS reporting
services and other value-added services.

The following are the value-added services offered by TC1:

1. Reverse logistics
2. PDI/COD services
3. Kitting services
4. Custom clearance services
5. E-logistics
6. Risk and tax facilitating management

AFL Logistics Ltd

AFL Logistics provides the following services in the field of international logistics,
domestic logistics and supply chain management. It provides international logistics
solutions through its alliance with DHL Logistics.
The following are the value added services provided by AFL Logistics Ltd.:

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 Product Repair / Return Services

 Kitting / Pick and Pack
 Insurance, Sales & Octroi Management
 Multimodal Services
 Sales Promotion Management
 Collections & Banking Services
 Quality Assurance & Control Services
 MIS & Reporting

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FOURTH-PARTY LOGISTICS (4PL)

Fourth-party logistics was a term coined by Accenture Consulting in the mid 90s. The
term was coined as a result of an exhaustive survey carried out by the organization on
customer satisfaction, which indicated that the customer expectations regarding costs
by using 5FL service providers were not up to the mark. The survey also indicated
that the balance of risk-and-reward on which the 3PL business model is based had
tilted the rewards unjustly in favour of the 3PL service providers while the risks were
borne by the client organizations. This was because of the fee-based model of
outsourcing that the companies adopted that resulted in inflated costs of operations
with increase in the outsourcing business. As a result the supposedly dynamic nature
of the 3PL service provider had become a dynamic one.

To model a more dynamic relation Accenture coined the term 4PL with the following
definition:
"An integrator that assembles the capabilities, technology and resources of its own
organization and other organizations to design, build and run comprehensive supply
chain solutions."

For a firm to be 4PL it must have exhaustive skills in investing and maintaining the
infrastructure and resources that makes it the manager of multiple 3PL service
providers crucial to the client organization.
However, the definition of 4PL was misinterpreted by many 3PLs who thought 4PL
as a kind of 3PL plus service and began providing some value-added activities such as
assembling, picking and then marketing themselves as 4PL providers.

Key Components of a 4PL

Four Key Components a 4PL Must Assemble

1. CHANGE LEADER
 Supply-chain visionary
 Multiple Customer relationship
 Deal shaper and maker
 Supply-chain re-engineers
 Project management
 Service, Systems and information integrator
 Continuous innovation

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2. DECISION MAKERS
 Experienced logisticians
 Optimization engines and decision support
 Neutral positioning
 Manage multiple 3PLs
 Continuous improvement

3. INFORMATION
 IT System integration
 IT infrastructure provision
 Real-time data to information
 Convert data to information
 Provide info to point of need
 Technical support

4. ASSETS
 Transport asset provider
 Warehouse, cross-dock, property facility
 Manufacturing-outsourcing
 Procurement service
 Co-packing service

The Architect/Integrator

The 4PL should be the instigator of continuous innovations that help in maximizing
the use of 311- service providers to the client organization. The process of innovation
makes sure that the relationship between that of the 3PL and the client organization
does not remain a static one and is evolving continuously for the benefit of the client
organization. The change can come in process improvements or use of enhanced
technology for efficient utilization of resources.-

The Control Room

The control room is the brain and intelligence of the 4PL. It is the decision-making
components and should consist of experienced logisticians. Ideally, the control room
component should contain people from partner and client organizations who can
enhance returns with their collective intellect.

The Supply Chain Infomediary

The 4PL should have extensive resources and capabilities for collecting and
disseminating information to various partner organizations. It must use enhanced
technologies like GPS, GIS to increase visibility of goods. The 4PL provider must
also possess capabilities to integrate the disparate technologies of various 3PL and the
client organization so that sharing of information is complete. The 4PL is also the
nodal agency for converting raw data into meaningful information. An emerging trend
for information sharing is the use of web-based tools.

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The Resource Provider

Finally, the 4PL provider must also provide some resources that are critical to the
functioning of the conventional supply chain solutions. These resources include
warehousing, packaging etc.

Technology Component of 4pl

Though technology is not the only component of a 4PL provider, it is one of the key
components of disseminating information for being responsive to changes. And being
dynamic is one of the most important challenges of a 4PL service provider.

GPS Technology

GPS, global positioning system, is the only technology that can be used for
determining the position of any object on Earth, with a high amount of accuracy and
in any weather.

Key Components of GPS

GPS uses 3 main elements-space segment, user segment and the control segment.
GPS uses 24 satellites that orbit in space 11,000 nautical miles above the earth, which
comprises the space segment. The user segment consists of receivers, which can be
hand held or mount on a car. The control segment consists of five ground stations,
located around the world, which ensures the proper working of the satellites.

Use of GPS in Fleet Management

The use of GPS in fleet management helps to:

 Know whether the vehicle has traveled out of an approved area, or entered a
fenced-off zone.
 Know how long the vehicle has spent in various places or in transit each
working day.
 Determine vehicle and/or cargo status according to external inputs.
 Determine how long the vehicle has been in use.
 Eliminate unauthorized use of vehicles.
 Ensure that company vehicles are used legally.
 Determine the location of the stolen asset in case of theft.

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BENCHMARKING: INTRODUCTION AND CONCEPT

A benchmark is a standard of performance Benchmarking helps organizations identify

standards of performance in other organizations and to import them successfully to
their own. It allows organizations to discover where they stand in relation to others.
By identifying, understanding, comparing, and adapting ewe's own organization with
the outstanding practices and processes of others, an organization can target problem
areas, set levels of performance, and identify solutions to improve results. A public
sector organization can borrow the best practices of the private sector, and vice versa.

Organizations that accomplish a particular activity at the highest value, i.e. at the
lowest cost and/or quality or efficiency are considered best-in-class. In determining
what qualifies as world class, benchmarking asks the question: "who are we now, and
who do we want to be?" The best benchmarking efforts not only match the
performance of others but also motivate to exceed it.
Typically performed by internal personnel who already have a thorough
knowledge of the process under review, benchmarking looks beyond performance
measures and cost ratios. It considers the total organizational impact.
In benchmarking with comparison to others, an organization:
 Determines how leading organizations perform specific processes
 Compares their methods to its own
 Uses the information to improve upon or completely change its processes

Forms of Benchmarking

Benchmarking can take several forms, some of which are as follows;

 Internal benchmarking studies the practices and performance within the
organization itself.
 External benchmarking determines the performance of others, preferably
world class companies.
 Quantitative benchmarking allows organizations to measure progress toward
goals and to set improvement objectives in terms of specific performance
measures or metrics. An example of a metric benchmark might be "cycle time
is less than 25 hours" or "order fulfillment is less than 14 days." These1
metrics are very precise and based on detailed and careful analysis gleaned
from surveys or interviews.
 Process benchmarking examines how top performing companies accomplish a
specific process. These studies are undertaken through research, surveys,
interviews, and site visits. Process benchmarking studies often look at
organizations that have recently and successfully implemented reengineering
or improvement efforts.

It is important when benchmarking with these stellar organizations that you

gain a clear understanding of the scope of their project, the methodology they used,
the critical success factors they were able to identify, the challenges and opportunities
they faced in implementation and, finally, me important lessons they learned.
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