UNIT-IV

UNIT-IV
Sourcing, Transporting and Pricing Products: sourcing decisions and transportation in supply chain – infrastructure
suppliers of transport services – transportation economics and pricing – documentation - pricing and revenue management
Lack of coordination and Bullwhip Effect - Impact of lack of coordination. - CRM –Internal supply chain management.

 SOURCING DECISIONS IN SUPPLY CHAIN:

The sourcing Decisions:

Sourcing decisions are high-level, often strategic decisions regarding which products/services will be
made in-house (known as in sourcing) and which will be purchased from the firm’s supply chain partners
(known as outsourcing). The sourcing decision is also known as “make-or-buy decision”.

The sourcing (or outsourcing) decision is critical to supply chain managers because it defines their
responsibilities. For example, if decides to outsource a product or service, the emphasis shifts to the
purchasing activities associated with identifying the most qualified suppliers and managing the buyer-
supplier relationship. Also supply chain managers need to address the outsourcing of supply chain
activities based on the following two questions:

 Will the third party (i.e., supplier) increase the supply chain profitability as compared to
performing the activity in-house?

 To what extent do risk increase upon outsourcing?

Objectives of Sourcing:
The objectives of the sourcing and procurement can be outlines as under:
1. Avail materials, supplies and equipment at the minimum possible costs.
2. Ensure continuous flow of production.
3. Increase asset turnover.
4. Develop alternative source of supply.
5. Establish and maintain good relations with suppliers.
6. Achieve maximum integration with other departments of company:
 Production department
 Engineering department
 Marketing department
 Finance department
 Personnel department

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Principles of Sourcing:
1. Right price 6. Right quality
2. Right time 7. Right source
3. Right quantity 8. Right attitude
4. Right contracts 9. Right material
5. Right transportation 10. Right place of distribution
Process of Sourcing:
Once a decision to outsource is taken, the sourcing processes starts. The following are the steps involves:

1. Supplier Scoring and Assessment: It is the process used to rate the performance of the supplier.
The basis of comparison between suppliers in their impact on the supply chain surplus and total
cost. In addition to the price charged by as supplier for the product or service offered, other
characteristics such as supply lead time, reliability to supply, quality and design capability also
affect the total cost of doing business with a supplier. A good supplier scoring and assessment
process must identify and track performance along all dimensions that affect the total cost of
doing business with a supplier.

2. Supplier Selection: The output from the supplier scoring and assessment is used to identify the
appropriate supplier(s). A supply contract is negotiated with the selected supplier(s). a good
contract should take into account all factors that affect supply chain performance and should be
designed to supply chain performance and should be designed to increase supply chain profits so
as to benefit both the supplier and the buyer.

3. Design Collaboration: Since about 80% of a product is determined during the product design
stage, it is crucial that suppliers are actively involved at this stage. Design collaboration facilitates
the supply and the manufacturer to work together when designing components/parts for the final
product. It also ensures that the manufacturing firm can effectively communicate only design
changes to all parties involved with designing and manufacturing the product.

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4. Procurement: Once the product design has been completed, procurement process follows:
procurement is the process whereby the supplier supplies products in response to orders placed by
the buyer. Procurement process endures that orders are placed and delivered on schedule at the
lowest possible overall cost.

5. Sourcing Planning and Analysis: Its role is to analyze expenditure incurred across various
suppliers and component categories in order to identify opportunities for reducing the total cost.
Effective sourcing processes within a firm can improve profits for the firm and total supply chain
surplus in many ways. The drivers of improved profits must be clearly identified when making
sourcing decisions.
Methods of Sourcing:
The materials, parts, tools, equipment, supplies, etc. required in the industry are purchased by different
methods. Depending upon the size of the industry, nature of the material and quantity of the materials
required, the different methods of purchasing are:
1. Purchasing by requirements
2. Market purchasing
3. Contract purchasing
4. Purchasing for specified period
5. Speculative purchasing
6. Group purchasing
1. Purchasing by Requirements: This method is also called as “hand-to-mouth buying”. In this method the
materials are purchased whenever the need arises. This method is adopted in the following cases:
a. For purchasing materials which are not required frequently.
b. To fulfill the emergency production needs.
c. Frequent purchases in small quantities are advantages when the prices are falling or unsteady, or
when the companies’ requirements are unsteady.
2. Purchasing for Specified Period: In this method the standard materials like oil, coolants, stationary and
other materials required regularly for the operation and maintenance of the plants, offices and other
departments are purchased in quantities sufficient for specific future period, production schedules are
usually the controlling factors in determination of the period.

3. Market Purchasing: This method takes the full advantage of prevailing market conditions and price
fluctuations. The material requirements based on production planning are calculated and market trends are
analyzed before making purchases. The materials are purchased in advance of future need when the
prices are low and likely to arise in future.

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4. Speculative Purchasing: Speculative purchasing is an attempt to gain considerable profit by buying an

excess of materials when prices are considered to be at low point. Unlike market purchasing, it makes
price trends the primary factor in buying and gives less regard to the strict material requirements of the
business.

5. Contract Purchasing: In this method contracts are given to suppliers to supply the material at agreed
prices for a certain period (say 2-3 years). The contract is subjected to review with an appropriate period
of notice. Many concerns dealing in large quantities of basic materials like pig iron, steel, coal etc. Prefer
to supply the materials on contract basis over a period of time.

6. Group Purchasing: In this method, the materials are purchased in groups or lots in one order instead of
placing separate orders for each item.

Sourcing Strategies:

Once the decision has made to outsource a product or service, the buying firm has to choose
between (i) single sourcing and (ii) multiple sourcing. In single sourcing, the buying firm depends on a
single supplier for all or nearly all of a particular item or service. In multiple sourcing, the buying firm
shares its business across multiple suppliers for the same item or service.

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Strategic Sourcing Management: The major activities associated with strategic sourcing management
are as follows:
1. Supplier Identification: Finding suppliers to meet existing or anticipated purchase needs.
2. Supplier Evaluation and Selection: Determining whether suppliers are capable of meeting the
needs.
3. Supplier Management: Ongoing management of the supply base.
4. Supplier Development and Improvement: Taking actions to improve overall supply-base
performance.
5. Supplier Integration into On-going Processes: Involving suppliers in new product development
and new process development.

 TANSPORTATION IN SUPPLY CHAIN:

Transportation is a key decision area within the logistics mix and plays a major role within a supply
chain. Transportation costs may represent approximately 40 to 50 percent of total logistics costs and 4 to
10 percent of the selling price of the products for many firms. Transportation decisions directly affect the
total logistics cost. Costs in the other functional areas of the firm and costs within other logistics channel
members. Therefore, the supply chain managers should examine the role of transportation with a supply
chain and identify trade-offs that need to be considered when they make transportation decisions.

Any supply chain’s success is closely linked to the appropriate use of transportation. Managers who are
made responsible for transportation decisions within a supply chain should be able to make transportation
strategy and design, planning and operational decisions based on the understanding of all the pros and
cons of their decisions.

According to Burkart and Medilk, “Transportation can be defined as the means to reach the destination
and also the means of movement at the destination”.

Modes of Transportation:

There are five basic transportation modes are rail, highway, water, pipeline and air but package carrier
and inter-model systems are the recently emerged transportation forms. The relative importance of each
mode can be measured in terms of system mileage, traffic volume, revenue, and the nature of traffic
composition. Each mode is discussed with respect to these measures.

1. Roadways: Road transportation is the promising means of agricultural and industrial advancement of a
country. It is suitable for short and medium distances where other means are unable to reach. It provides

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the basic infrastructure to bring trade and commerce from the remote rural areas to urban areas or vice-
versa, and brings far-off villages into the mainstreams of national life, ensuring connectivity.

Advantages of Road Transport: Disadvantages of Road Transport:

a. Door-to-door services a. Seasonal nature
b. Flexible services b. Accidents and breakdown
c. Suitable for short distance c. Unsuitable for long distance and bulky
d. Lesser risk of damage in transmit traffic
e. Rapid speed d. Slow speed
e. Lack of organization
2. Railways: Across the world, railways have played an important role in the industrialization and
development of nations. It was the primary means available for movement of raw material and finished
goods and all countries have heavily relied on railways in the initial stage of industrialization and
development. Railways commonly haul heavy materials, chemical, and farm products, as well as low-
value products and an increasing number of automobiles. Many companies locate factories near major
rail lines for convenient loading and unloading.
Advantages of Rail Transport:
a. Convenience
b. Faster than road transport
c. Efficient transportation of large loads over long distance
d. Reliable and safe transport under all weather conditions
e. Most economical for low value, high density and high volume products
Disadvantages of Rail Transport:
a. Expensive for carrying goods and passengers over short-distance
b. Inflexible for loading or unloading of goods at any place
c. It involves heavy losses of life as well as goods in case of accident
d. Higher costs for packaging
3. Waterways/Sea: Waterways transportation are cheapest method of shipping heavy, low-value, non
perishable goods such as ore, coal, grain, and petroleum products. Water carriers offer considerable
capacity. It can haul at least ten times the weight of one rail car, and ocean going vessels can haul
thousands of containers. The shipping industry is divided into several parts such as: (i) Liner service, (ii)
Tramp shipping, (iii) Industrial services and (iv) Tanker operations.
The shipping fleet across the world comprises of tankers, dry bulk carriers, container ships and
special vessels. In India tankers account for 33% of the total fleet while dry bulk carriers contribute 32%
of the total GRT (Gross Registered Tonnage) of the shipping fleet.

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Advantages of Water Transport: Disadvantages of Water Transport:

a. Import for foreign trade a. Limited area
b. Development of shipping is essential for b. Slow speed
defense of the country c. Less safety
c. Cheapest and slowest of transport d. Deterioration of gods
d. Transport of heavy goods
4. Airways: Compared to all other modes of transport, air transport is the least hazardous in nature. Air
transportation is costly and is used only for highly perishable commodities and items, whose life is short
and value is high. Air cargo traffic is concentrated around gateway airports such as Mumbai, Channai,
Delhi, Kolkata and Mangalore. These airports handle 87% of air cargo traffic in India. Due to prospects
of increase in air cargo traffic in India, the government is investing private participation in air
transportation and its related infrastructure (airports), to take care of the growing passengers and cargo
traffic needs in the future.
Advantages of Air Transport: Disadvantages of Air Transport:
a. High speed a. Risky
b. Quality service b. Very costly
c. No infrastructure investment c. Small carrying capacity
d. Easy access d. Unreliable because these are controlled
e. No physical barriers by weather condition
f. Essential for national defense e. Huge investment
5. Pipelines: A pipelines as a mode of transportation was first developed by Samuel van Syckel in 1870 to
transport petroleum at Pithole, Pennsylvania. Twenty years later, the standard oil company of
Northwestern Pennysylvania changed the face of transportation. Though petroleum was the first product
transported in this manner, pipelines became useful for several other commodities such as coal in slurry
form, iron ore fines in slurry form, chemicals, natural gas, etc. the basic advantage of pipelines is that
they reduce operational costs, through the initial investment is high. In India, pipelines are used for oil
transportation by all public and private sector petroleum refineries.
Advantages of Pipeline Transport:
a. It is less in pipeline transportation as compared to other modes
b. It offers large-scale economies of scale in transportation liquid petroleum products
c. Eco-friendly
d. It is flexible, as the volume transported can be increased/decreased quickly
e. Low operational cost

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Disadvantages of Pipeline Transport:

a. High initial cost
b. Long transit time
c. Leakage in pipelines
6. Ropeways: In India more than 16% of the geographical area is hilly. Transportation in such areas is a
problem because of the long circuitous routes. The transportation of goods and essential commodities to
the hilly area is sometimes crucial because of their strategic importance in the country’s defense
program. In view of oil shortage, ropeways can prove more economical and faster than road transport,
particularly in hilly areas.
Advantages of Ropeways Transportation: Disadvantages of Ropeways
a. Eco-friendly Transportation:
b. High accessibility a. Limited scope of operation
c. Economical b. Slowest mode of transportation
d. Faster coverage
Selection of a Mode of Transportation:
The selection of a mode of transportation or service offering with a mode of transportation
depends on a variety of service characteristics such as:
1. Freight rates
2. Reliability
3. Transit time
4. Loss, damage, claims processing and tracing
5. Shipper market consideration and
6. Carrier consideration

 INFRASTRUCTURE SUPPLIERS OF TRANSPORTATION SERVICES:

Transportation services are offered by a combination of suppliers. Historically, government policy limited
providers to single-mode operation. This restriction was designed to promote competition between modes
and thus limit the potential for monopoly practices experienced in the early railroad era. The limitations
were lifted following deregulation so that carriers could develop integrated intermodal services to more
efficiently and effectively meet the offered by different carrier types are described with examples below:
Suppliers of Transportation Services:
1. Single Mode Operators
2. Specialized Carriers
3. Intermodal Operators
4. Non-Operating Intermediaries

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1. Single Mode Operators: The most basic carrier type is a single mode operators service utilizing only one
transport mode. This degree of focus allows a carrier to become highly specialized, competent, and
efficient. However, the approach creates significant difficulties for intermodal transport because it
requires negotiation and a transaction with each individual carrier. For example, Airlines are example of
a single-mode carrier for both freight and passenger service since they only offer service from airport to
airport. The shipper or passenger is responsible for movement to and from the airport. A series of single-
mode operations requires more management effort and, thus, increase cost.
2. Specialized Carriers: Over the past several decades a serious problem existed in small-shipment
transportation. It was difficult for a common carrier to provide a reasonably priced small-shipment service
because of significant overhead cost associated with terminal and line-haul service. This overhead forced
motor carriers to assign a minimum charge for handling any shipment regardless of its size. Railroads do
not offer small-shipment service. As a result of the minimum charge and the lack of low-cost railroad
alternatives, an opportunity existed for companies offering specialized service to enter the small-shipment
or package-service market. Package-service provides both regular and premium services.
(i) Basic Package Services: Numerous carriers offer delivery services within metropolitan areas.
Other carriers offer package delivery service on a national and global basis. The most
recognizable carriers are United Parcel Service (UPS), the United States Postal Service (USPS),
Federal Express Ground, and DHL Express.
The original service offered by UPS was contract delivery of local shipments for
department stores. Today, UPS offers a diverse range of package services. In fact, UPS has
expanded its scope of overall operating authority by shipping packages that conform to
specialized size and weight restrictions nationwide and globally for consumers and business
enterprises. While UPS provides logistical services related to all types of products, specialization
in small packages enables a cost effective overnight service between most cities within 300 miles.
(ii) Premium Package Services: Several carriers- such a Federal Express (FedEx), UPS, Emery
Worldwide, and DHL, have entered the package or premium transportation market over the past
two decades. Most organizations that provide routine package service also offer premium
services. UPS, for example, offers next-day and second-day delivery, while the U.S. Postal
Service provides priority delivery.
The first widely recognized premium package service was provided by Federal Express
in 1973. FedEx offers nationwide overnight service utilizing a fleet of dedicated Cargo aircraft.
The original FedEx service attracted attention because of the innovating line-haul plan in which
all packages were flown nightly to a terminal hub located in Memphis, Tennessee, for storing and

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redistribution. FedEx, original service offering has been considerably expanded by reducing
package sizes and weight restrictions and by adding global destinations.
The potential for rapid growth in parcel service has attracted many competitors in to
overnight premium package service. In addition to specialized firms like FedEx, UPS, Airbone
Freight, Emery Worldwide and Purolator Courier, major motor carriers and Airlines have begun
to offer competitive services. These services appeal to commercial business because they satisfy
demand for rapid delivery.
3. Intermodal Transportation: This transportation combines two or more modes to take advantage of the
inherent economies of each and thus provide an integrated service at lower total cost. Many efforts have
been made over the years to integrate different transportation modes. Different modes of intermodal
transportation are:

(i) Piggy Back: It is a combination of rail and road. The containers are placed on railway flat-cars and
transported by rail from one terminal to another. After reaching the destination terminal, they can be
placed on trailers and transported by roads which are also called as TOFC that is Trailer on Flat Car
or COFC- Container on Flat Car. The best known and most widely used intermodal system is the
trailer on a flatcar (TOFC). Piggyback or trailer – on flatcar is specialized form of containerization in
which rail and transport coordinate. In piggyback, the carrier places the carrier trailer on a rail flatcar,
which moves the trailer by rail for long distances. And then motor carrier moves the trailer for short
distances for pickups and deliveries.

(ii) Fishy Back: It is a combination of road and water transport. Fishy back/ train ship/ containership are
examples of the oldest mode of the intermodal transport. They utilize waterways, which are one of the
least expensive methods for line- haul movement. The fishy back, train ship and container ship
concepts load a truck trailer, railcar, or container on to ship for the line- haul move. Such services are
provided in coastal waters between Atlantic and Gulf ports, from the great lakes to coastal points and
along inland navigable waterways.

(iii) Birdy Back: It is a combination of road and airways and is generally used in International shipments.
Local cartage is a vital part of every air\ movement because air fright must eventually transport from
the airport to the final delivery destination. Air- truck movements usually provide service and
flexibility comparable to straight motor freight.

4. Non-Operating Intermediaries: other transportation service providers are non-operating intermediaries

that typically do not own or operate equipment but broker the services of other firms. Their function is
somewhat analogues to that of wholesalers in marketing channels. A typical non-operating intermediary

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might begin by aggregating a quantity of small shipments from various shippers and then purchasing
intercity transportation on a volume-rate basis.

The intermediary typically offers shippers a rate lower than the corresponding common carrier
rate for the shipment size. The profit margin of the intermediary is the differential between the rate
charged the shipper and the cost transport service purchased from the carrier. The primary intermediaries
are:

(i) Freight Forwarders: Freight forwarders are for-profit businesses that consolidate small
shipments from various customers into a bulk load and then utilize a common carrier (surface or
air) for transport. At the destination, the freight forwarder splits the bulk load into the original
smaller shipments. Local delivery may or may not be included in the forwarder’s service. Freight
forwarders accept full responsibility for shipment performance.

(ii) Shipper’s Association/Co-operative and Agents: These are operationally similar to freight
forwarders in that they consolidate individual small loads into bulk shipments to gain cost
economies. However, shippers’ associations are voluntary non-profit entities where members,
operating in a specific industry, join to manage small-shipment purchases. Typically, member
purchase products from common sources or the sources of supply are located in one area.
Usually, purchase orders occur frequently, but in small lot sizes.

(iii) Brokers: They are intermediaries that co-ordinate transportation arrangements for shippers,
consignees, and carriers. They also arrange shipments for exempt carriers and driven who own
their trucks. Brokers typically operate on a commission basis. Prior to deregulation, brokers
played a minor role in logistics because of service restrictions. Today, brokers provide more
extensive services such as shipment matching, rate negotiation, billing, and tracing. The entire
area of brokerage operations is highly adaptable to internet based transactions and is increasing in
importance as a result of increased globalization.

 TRANSPORTATION ECONOMICS AND PRICING

Transportation economics and pricing are concerned with the factors and characteristics that determine
transport costs and rates. To develop an effective logistics strategy and to successfully negotiate transport
agreements, it is necessary to understand the economies of industry. A discussion of transportation
economics and pricing requires coverage of the following four topics:
1. Economic Factors 3. Pricing Strategies
2. Transportation Costs 4. Transportation Rates

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1. Economic Factors: Transport economics is influenced by seven factors. These factors are important
while developing transportation rates. The specific factors are discussed below. In general, the sequence
reflects the relative importance of each factor. The specific characteristics are discussed below:
(i) Distance: Distance is a major influence on transportation cost since it directly contributes to
variable cost, such a labor, fuel, and maintenance. The below illustrates two important points:
 First, the cost curve does not begin at the origin
because there are fixed costs associated with
shipment pickup and delivery regardless of
distance.
 Second, the cost curve increases at a decreasing
rate as a function of distance.
This characteristic is known as the tapering
principle, which results from the fact longer
movements tend to have a higher percentage of
intercity rather than urban miles.

(ii) Volume: The load volume relationship reflects

economies of sales in transportation activities. This is
shown in the below figure.
 The curve indicates that transportation cost per
unit of weight decreases as load volume
increases.
 The relationship is limited to the maximum size
of vehicle.
Economic transportation requires the consolidation of
small loads into larger loads to take advantage of
scale economies.

(iii) Density: The third economic factor is product density

which incorporates weight and space considerations.
These are important since transportation cost is usually
quoted in terms of price per unit of weight, such as
amount per ton or amount per hundred weights.

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In terms of weight and space, an individual vehicle is constrained more by space than by weight. Once a
vehicle is full, it is not possible to increase the amount carried even if the product is light. Since actual
vehicle labor and fuel expenses are not dramatically influenced by weight, higher density products allow
relatively fixed transport cost to be spread across additional weight.
The above figure illustrates the relationship of declining transportation cost per unit of weight as product
density increases.
(iv) Stowability: It refers to vehicle space utilization as is reflected by product dimensions. Add sizes
and shapes, as well as excessive weight or length, do not stow well and typically waste space. For
example, while steel blocks and roads have the same density, rods are more difficult to stoe
because of their length and shape.
Stowability is also influenced by the shipment size; sometimes large number of items can
be “nested” that might otherwise be difficult to stow in small quantities.
(v) Special handling equipment may be required for loading or unloading trucks, railears, or ships.
Furthermore, the manner in which products are physically grouped together (e.g., taped, boxed, or
palletized) for transport and storage also affects handling cost. (Reduced).
(vi) Liability: Liability includes six product characteristics that primarily affect risk of damage and
the resulting incidence of claims. These specific product considerations are:
 Susceptibility to damage
 Property damage to freight
 Perishability
 Susceptibility to theft
 Susceptibility to spontaneous combustion or explosion, and
 Value for kilogram
(vii) Market Factors: Since transportation vehicles and drivers must return to their origin, either they
must find a load to bring back (back-haul) or the vehicle is returned empty (deadhead). When
deadhead movements occur, labor, fuel, and maintenance costs must be charged to the shipper.
Thus, the ideal situation is for “balanced” moves where volume is equal in both directions.
However, this is rarely the case because of demand imbalances in manufacturing and
consumption locations.
2. Transportation Costs: In addition to the basic cost charged for movement of goods, the total
transportation cost reflects a large number of other factors, such as transit time costs, obsolescence and
deterioration costs, productive packaging costs, and transit insurance costs, etc. these components are
discussed below:

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(i) Transit Time: This element reflects the temporal cost of transportation. From total logistics cost
point of view, cost of inventory in transit is a very significant factor. The longer the transit time of
a particular mode of transport, the inventory is inaccessible to the user. This adds to the safety
stock the company has to carry and the requirement of working capital. The transportation cost
must consider that if inventory is available after a longer period of time, it will result in higher
total costs.
(ii) Obsolescence and Deterioration Cost: There are certain categories of products which are
perishable and delicate in nature, whose physical attributes deteriorate over a period of time,
gradually resulting into devaluation of the product.
(iii) Protective Packaging Costs: For many products, there may be requirements of special
packaging. This cost is also a part of the total transport cost. For example, if a product is shipped
using a container, it may require less protective packaging for safe shipment in comparison being
shipped in a truck.
(iv) Insurance Cost: Goods in transit insurance covers property against loss or damage while it is in
transit from one place to another or being stored during a journey. This insurance can be for
goods being distributed in company’s vehicle or by a third-party carrier, both domestically and
abroad.
(v) Class Rates: In transportation terminology, the price per kilogram to move a specific product
between two locations is referred to as the rate. The rate is also called the tariff. The classification
does not define the price charged for movement of a product. It refers to a product’s
transportation characteristics in comparison to other commodities.
Classification of individual products is based on a relative percentage index of 100. Class
100 is considered the class for an average product, while other classes run as high as 500 and as
low as 35. Each product is assigned an item number for listing purposes and then given a
classification rating. As a general rule, the higher the class rating, the higher the transportation
cost for the product.
Products are also assigned different ratings on the basis of packing. Glass may have a
different rating when shipped loose, in crates, or in boxes than when shipped in wrapped
protective packing. Very often, packaging differences influence product density, stowability, and
liability. The same product may be differently classified depending on where it is being shipped,
shipment size, transport mode, and product packaging.

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(vi) Other Costs: Common costs, such as terminal or management expresses are often allocated to a
shipper according to a level of activity like the number of shipments handled. Other costs may
also include local taxes, octroi, toll taxes etc. these are generally applicable in case of road
transportation.
(vii) Joint Costs: These costs are expenses unavoidably created by the decision to provide a particular
service. For example, when a carrier transports a truckload from point A to point B, there is an
implicit decision to incur a “joint” cost for the back-haul from point B to point A. either the cost
must be covered by the original shipper firm A to B, or back-haul shipper must be found. These
costs have significant impact on transportation charges as in the absence of an appropriate back-
haul shipper; the original shipper pays for an empty trip.
3. Pricing Strategies: While setting rates to charge, shippers and carriers can adopt one or a combination of
two out of the following alternative pricing strategies. The major objective behind adoption of alternative
strategies is to bring about a trade-off between the cost of service rendered by the carrier and the value of
the service to the shipper.
(i) Cost of Service Strategy: This is the simplest pricing strategy for transportation service. In this
strategy, a “build-up” approach is adopted where transport service provider determines a rate
based on the cost of providing the service plus a profit margin to get predetermined return. For
example, cost of transport service to be provided is Rs.5000 and the profit mark-up is 10%, the
carrier would charge the shipper Rs.5, 500. This strategic approach is widely used in the case of a
highly-competitive environment because it provides a base or minimum transportation charge.
(ii) Value of the Service Strategy: This strategic approach refers to fixation of transportation charge
on the basis of value of the service required by the shipper. Currently, logistics manager of the
enterprise are not expecting mere movement of goods from origin to destination from their
carriers but they need value-added services in terms of total logistics solution.
Hence, in this approach, transportation charges are fixed on the basis of the perceived
shipper value rather than the cost of actually providing service. This approach is most suitable in
the case of transportation of higher-value goods and shorter and fixed replenishment cycle time
assured by the firm.
(iii) Combination Strategy: As the time itself depicts, this alternative strategy is a combination of
earlier discussed two approaches. This strategy refers to establishment of the transport price at
some intermediate level between the cost of service minimum and the value of service maximum.
Practically, this strategy alternative is widely used by the carriers. However, logistics managers
must be aware of minimum and maximum rates. So that they can negotiate with the carriers
appropriately.

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4. Transportation Rates: In constructing an effective distribution network design model it is important to

estimate transportation costs. An important characteristic of most transportation rates, including truck, ral,
and others, is that the rates are almost linear with distance but not with volume. Now distinguishing here
between transportation costs associated with an internal and external fleet.
(i) Class Rate: These rates are those which are overhead or maximum rates and are usually based
upon distance. The class rates are standard rates that can be found for almost all products or
commodities shipped. They are found with the help of a classification tariff that gives each
shipment a rating or a class.
The intent of the class rate system is to simply the process for pricing freight with
inherently different freight characteristics. Rather than have a quick price/rate for each and every
commodity, articles with similar freight characteristics are assigned to common freight “class”.
There are 18 different classes identified by a numeric value. They range from a low of class 50 to
a high of class 500. The logic is, the lower the class the lower the price. The governing
publication for the class rate system is the National Motor Freight Classification which is issued
annually. The principle factors used in the freight classification process are: Four transportation
characteristics (per NMFC).
 Density
 Stowability
 Handling
 Liability
In the simplest terms, low-value freight that is easy to handle, unlikely to damage and dense will
receive lower class ratings than expensive, light, bulky freight which is high susceptible to
damage.
(ii) Commodity Rates: These rates are the special or specific rates published without regard to
classification. Commodity rates are those which apply on particular commodities between
particular points. Commodity rates are usually lower than class rates or class rates exceptions and
are based upon “volume” movements where special rates are required by particular necessity.
Competition is the major consideration influencing the establishment of commodity rates.
Commodity rates are usually lower than the class rates and are for movements of a
specific commodity from one stated point to another. One estimate is that commodity rates
account for a majority of rail, truck, and water tonnage but not the number of shipments. To the
extent that more shipments would be made under commodity rates, the rate signification objective
of the class rate system has been defeated.

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(iii) Exception Rate: Class rate exceptions, generally lower than the class rates themselves and
designed to take a commodity out of the full class rate category. Exception rates, or exceptions to
the classification, are special rates published to provide shippers lower rates than the prevailing
class rate. The purpose is to provide special rate for specific area, origin destination or
commodity when either competitive or high volume movements justified it.
 DOCUMENTATION RELATED TO TRANSPORTATION:
There are several types of transport documentation required to perform each transport movement.
Information is provided through a variety of transport documentation in transport decision making. The
transport documents can be classified into two major parts for the sake of understanding. The
classification is as follows:
1. Primary Transport Documents:
(i) Bill of Lading: A document issued by a carrier, or its agent, to the shipper as a contract of carriage of
goods. It is also a receipt for cargo accepted for transportation, and must be presented for taking
delivery at the destination. Among other items of information, a bill of lading contains: Consignor’s
and consignee’s name, Name of the ports of departure and destination, Name of the vessel, Date of
departure and arrival, Itemized list of goods being transported with number of packages and kind of
packaging, Marks and numbers on the packages, Wight and/or volume of the cargo, Freight rate and
amount. Bill of lading can be further divided into two parts:
a. Straight Bill of Lading: In a straight bill of lading (non-negotiable bill of lading) the title to the
goods is conferred directly to a party named in the letter of credit (the importer usually), as such
the title to the goods is not transferred to another party endorsement. In other words, the bill of
lading is not negotiable.
b. Order Bill of Lading: In an order bill of lading (negotiable bill of lading) the title to the goods is
conferred to the order shipper to protect their interest. To obtain the title of the goods, the
consignee must pay the goods invoice value to obtain the original copy of the order bill of lading
that must be presented to the carrier for delivery.
(ii) Freight Bill: This bill represents a carrier’s method of charging for transportation services performed.
It is developed using information contained in the bill of lading. The freight bill may be either prepaid
or collected. A prepaid bill as the name suggests means the transporter is paid prior to performance.
On the other hand a collect bill shifts the responsibility of payment on the consignee.
(iii) Shipping Manifest: It lifts individual consignees when multiple shipments are placed on a single
vehicle. Each shipment requires a bill of lading. The manifest lists the stop, bill of lading, weight and
case count for each shipment. The objective of the manifest is to provide a single document that

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defines the contents of the total load without requiring a review of each individual bill of lading. For
single stop shipments, the manifest is the same as bill of lading.
2. Secondary/ Other Transport Documents:
(i) Export Declaration: After the buyer and seller reach an agreement as to sales and credit terms, the
exporter files with exit port customs an export declaration, which provides the Department of
Commerce with information concerning the export shipments nature and volume. The required
information usually includes a description of the commodity, the shipping weight, a list of the marks
and numbers on containers, the number and dates of any required export license, the place and
country of destination, and the parties to the transportation.
(ii) Export License: A company requires an export license to export goods from any country. These
licenses fall into one of two categories: The general license allows the export of most goods without
any special requirements. The commodities this license covers are general in nature and have no
strategic value to the country.
On the other hand, certain items whose export the government wishes to control require a
validated export license. Commodities requiring this type of license include military hardware, certain
high-tech items such as microprocessors and super computers, and other goods for which control is in
the national interest.
(iii) Invoices: The commercial invoice, which the seller uses to determine the commodity’s value and
other charges, is basically the seller’s invoice for the commodities sold. The letter of credit and
companies or agencies often require this invoice to determine the correct value for insurance purpose
and for assessing import duties.
Some countries have special requirements (language, information required, etc) for the
commercial invoice. Many countries also require a special form called a consular invoice for any
incoming shipments. The consular invoice, which allows the country to collect import statistics, is
usually written in the importing nation’s language.
(iv) Carnet: When a seller makes a shipment in a sealed container, a carnet is often issued. A carnet
indicates that the shipment has been sealed at its origin and will not be opened until it reaches its final
destination. The carnet may then pass in the transit through intermediate customs points without
inspection. Carnets are very useful for intermodal shipments and for containers crossing several
national boundaries between origin and destination. Much of the overland shipment in Europe travels
under carnet,
(v) Liability: The primary bill of lading contract terms concern the ocean carnet’s liability. The carriage
of goods by sea Act of 1925 states that the ocean carrier is required to use due diligence to make its
vessel seaworthy and is held liable for losses resulting from negligence. The shipper is liable for loss

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resulting from perils of the sea, acts of God, act of public enemies, inherent defects of the cargo, or
shipper negligence. Thus, the liability of the ocean carrier is less than that imposed upon a domestic
carrier.
The term of sales may also require a certificate of insurance. This certificate will state that the
buyer or seller has obtained insurance adequate to cover any losses resulting during transit.
(vi) Dock Receipt: After the carrier has delivered the goods at the dock, the steamship agent issues a
dock receipt indicating that the domestic carrier has delivered the shipment to the steamship
company. This document can be used to show compliance with a letter of credit’s payment
requirements and to support damage claims.
(vii) Airway Bill: Another increasingly important document is the Universal airway bill, a standardized
document that air carriers use on all international air shipments. By reducing required paperwork to
one document, the carrier reduces processing costs. Having a standardized document also help to
speed shipments through customs.

 PRICING AND REVENUE MANAGEMENT IN SUPPLY CHAIN

Pricing is a factor that gears up profits in supply chain through an appropriate match of supply
and demand. Revenue management can be defined as the application of pricing to increase the profit
produced from a limited supply of supply chain assets.

Ideas from revenue management recommend that a company should first use pricing to maintain
balance between the supply and demand and should think of further investing or eliminating assets only
after the balance is maintained.

The Role of RM in SCs

 Revenue management is the use of pricing to increase the profit generated from a limited supply of
supply chain assets
 SCs are about matching demand and capacity
 Prices affect demands
 Yield management similar to RM but deals more with quantities rather than prices
 Supply assets exist in two forms
 Capacity: (expiring) Capacity assets in the supply chain are present for manufacturing,
shipment, and storage.
Inventory: (often preserved) Inventory assets are present within the supply chain and are
carried to develop and improvise product availability.

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 Revenue management may also be defined as offering different prices based on customer segment,
time of use and product or capacity availability to increase supply chain profits
 Most common example is probably in airline ticket pricing
 Pricing according to customer segmentation at any time
 Pricing according to reading days for any customer segment

» Reading days: Number of days until departure

The strategy of revenue management has been successfully applied in many streams that we often tend
to use but it is never noticed. For example, the finest real life application of revenue management can be
seen in the airline, railway, hotel and resort, cruise ship, healthcare, printing and publishing.

Conditions for RM to Work:

1. The value of the product varies in different market segments

 Airline seats: Leisure vs. Business travel
 Films: Movie theater goers, DVD buyers, Cheap movie theater goers, TV watchers.

In the concept of revenue management, we need to take care of two fundamental issues. The first
one is how to distinguish between two segments and design their pricing to make one segment pay more
than the other. Secondly, how to control the demand so that the lower price segment does not use the
complete asset that is available.

To gain completely from revenue management, the manufacturer needs to minimize the volume
of capacity devoted to lower price segment even if enough demand is available from the lower price
segment to utilize the complete volume. Here, the general trade-off is in between placing an order from a
lower price or waiting for a high price to arrive later on.

2. The product is highly perishable or product waste occurs

 Fashion and seasonal apparel
 High tech products
Any asset that loses its value in due course of time is considered as a perishable item, for example, all
fruits, vegetables and pharmaceuticals. We can also include computers, cell phones, fashion apparels,
etc.; whatever loses its value after the launch of new model is considered as perishable.

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We use below approache for perishable assets in the revenue management.

 Fluctuate cost over time to maximize expected revenue: The first approach is highly
recommended for goods like fashion apparels that have a precise date across which they lose a
lot of their value; for example, apparel designed for particular season doesn’t have much value
in the end of the season. The manufacturer should try using effective pricing strategy and predict
the effect of rate on customer demand to increase total profit. Here the general trade-off is to
demand high price initially and allow the remaining products to be sold later at lower price. The
alternate method may be charging lower price initially, selling more products early in the season
and then leaving fewer products to be sold at a discount.
3. Demand has seasonal and other peaks:
 Products ordered at Amazon.com, peaking in December
 Supply Chain textbook orders peaking in August and January.
One of the major applications of revenue management can be seen in the seasonal demand. Here
we see a demand shift from the peak to the off-peak duration; hence a better balance can be maintained
between supply and demand. It also generates higher overall profit.
The commonly used effective and efficient revenue management approach to cope with seasonal
demand is to demand higher price during peak time duration and a lower price during off-peak time
duration. This approach leads to transferring demand from peak to off-peak period.
Companies offer discounts and other value-added services to motivate and allure customers to
move their demand to off-peak period. The best suited example is Amazon.com. Amazon has a peak
period in December, as it brings short-term volume that is expensive and reduces the profit margin. It
tempts customers through various discounts and free shipping for orders that are placed in the month of
November.

This approach of reducing and increasing the price according to the demand of customers in the
peak season generates a higher profit for various companies just like it does for Amazon.com.

4. The product is sold both in bulk and on the spot market

 Owner of warehouse who can decide whether to lease the entire warehouse through long-term
contracts or save a portion of the warehouse for use in the spot market
 Truck capacities for a transportation company

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Pricing and Revenue Optimization Process:

Introducing a pricing and revenue optimization (PRO) system involves four basic steps:

Step 1: Segmenting the Market: Using historical transaction data, a company develops statistically
relevant micro-market segmentation based on customer buying behaviours.

Step 2: Calculating Customer Demand: Powerful pricing software predicts how a customer or micro-
segment will respond to products and prices based on the current state of the market and other conditions.

Step 3: Optimising Pricing: Based on the predicted customer response, the PRO systems determine
which prices to offer to which customers for each product through each channel in order to maximize a
particular profit objective, market share or other strategic goals. It recommends the optimum prices- not
the lowest prices-to achieve these goals.

Step 4: Recalibrating Prices: Based on the actual results of optimization actions, the system continually
recalibrates forecasting and optimization models.

One such system becomes part of a company’s operations, ongoing price targeting helps to
maximize its revenues. As introducing a PRO system does not require changes to the company’s asset
base, the cost of implementation is minimized and the majority of savings become profit.

It is important to understand that pricing and revenue optimization is not about competing on
price it is about extracting the maximum value from a company’s products and capacity.

Conclusion: We can now conclude that revenue management is nothing but application of differential
pricing on the basis of customer segments, time of use, and product or capacity availability to increase
supply chain profit. It comprises marketing, finance, and operation functions to maximize the net profit
earned.

 LACK OF CO-ORDINATION AND BULLWHIP EFFECT:

Co-ordination in supply chain:
Co-ordination is critical in all business processes, but in particular it is a major component of the logistics
process. SCM is concerned with the management of material, information and financial flows in a
network consisting of suppliers, manufacturers, distributors and customers. Co-ordination and integration
of these flows within and across companies are critical in effective supply chain management.

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Meaning of Co-ordination:
Co-ordination is the primary mechanism by which supply chain management is achieved. Co-ordination
means that all process owners in the chain have full understanding of their roles and functions are linked
through an operational plan. The plan is what creates the co-ordination.
(Or)
The state of co-ordination in a supply chain can be understood as an act of properly combining (relating,
harmonizing, adjusting, aligning) a number of objects (actions, objectives, decisions, information,
knowledge, funds) for the achievement of the chain goal.
Co-ordination in supply chain can be improved by using:
a. Cross-functional teams,
b. Partnerships with customers and suppliers,
c. Better information systems,
d. A flatter organizational structure.

Lack of Co-ordination:

Lack of co-ordination in a supply chain results in poor supply chain response and increased cost within
the supply chain. Therefore, it is necessary for supply chain managers to understand the various obstacles
that lead to the lack of co-ordination and also to identify appropriate managerial levers that can help
overcome the obstacles and achieve co-ordination.

Reasons for Lack of Co-ordination:

1. Conflicting Objectives: A major reason for lack of co-ordination among the different stages of
the supply chain that these stages have conflicting objectives.
2. Information delay and distortion: Another reason is that information flowing between stages is
delayed and distorted.
Because of different ownership, each stage tries to maximize its own profits, which
results in actions that often diminish the total supply chain profits.

For example, a large automobile manufacturer may have thousands of suppliers may have other
suppliers intern. Information is distorted as it moves across the supply chain because complete
information may not be shared between stages. Because, supply chains today produce a large variety of
products, the information distortion will be all the more exaggerated. The challenge supply chain facing
today is to achieve co-ordination among the supply chain participants (suppliers, dealers, etc.) in spite of
multiple ownership and increased product variety.

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Bullwhip Effect:
Bullwhip effect or Whip Lash Effect refers to increase in fluctuations in orders as they move up the
supply chain from retailers to wholesalers and to the manufacturers and to their suppliers.
The bullwhip effect distorts demand information within the supply chain, with different stages having a
very different estimate of what demand look like. The bullwhip effect results in a loss of supply chain co-
ordination.
For example, variability in the estimates of demand at various stages in the supply chain due to bull whip
effect has an impact on various measures of performance in a supply chain. These measures of
performance are:
a. Manufacturing cost
b. Inventory cost
c. Replenishment lead time
d. Transportation cost
e. Labor cost for shipping and receiving
f. Level of product availability and
g. Relationship across the supply chain

The bullwhip effect moves a supply chain away from efficiency by increasing cost and decreasing
responsiveness. It reduces the profitability of a supply chain by making it more expensive to provide a
given level of product availability.

Causes of Bullwhip Effect:

Distortion from one end of the supply chain to the other end can lead to tremendous inefficiencies in the
supply chain such as excessive inventory, dissatisfied customers, lost revenues and ineffective production
schedules. Extensive research has been performed to find the reasons for the Bullwhip Effect and its
remedies. Lee, e al. postulated that there are four major reasons for the Bullwhip Effect. They are:
1. Demand Forecast Updating
2. Batch Ordering
3. Price Fluctuations and
4. Rationing and Shortage Gaming

These causes are briefly discussed in the following paragraphs:

1. Demand Forecasting: All firms use standard forecasting techniques for production scheduling, capacity
planning, inventory control and materials requirement planning. Firms use order history as a proxy for
demand from the firm’s immediate customers and forecast demand data is generated on the basis of these

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past sales data. The forecasting techniques chosen and the way the demand signal is processed are
significant contributors to the Bullwhip effect.
The remedies to this cause of Bullwhip effect are:
a. Access to market demand information (use of point-of-sales data).
b. Information sharing across supply chain links. Electronic Data Interchange (EDI) can be used to
share such information.
c. Vendor managed inventory (VMI) or continuous Replenishment (CR) can be used to avoid
unnecessary fluctuations.
d. Lead time reduction and JIT supply.
2. Batch Ordering: Some firms accumulate demand before issuing an order because of expensive order
placing procedures. This is to take advantage of economies of scale which simplifies production set up
and reduces such set up costs. Transportation costs cause similar ordering build-ups in order to have full
truck load (FTL) transportation to reduce transportation cost per unit of weight of the product transported.
As a result, firms order less frequently, quite often on a regular cyclical basis (i.e., weekly,
biweekly or monthly). The batch ordering pattern becomes more erratic as we move further upstream.
Even smooth demand patterns at the retailer level can be translated via batch ordering into highly erratic
order patterns at the supplier level.
The remedies for this problem are:
a. Devise strategies that reduce batch sizes and promote more frequent ordering.
b. New ways of achieving economies of sales in transportation/distribution (third-party logistics).
3. Price Fluctuation: Firms often end up buying needed supplies well in advance of demand because of
special trade deals and consumer promotions such as price and quantity discounts and rebates. Such
promotions can be extremely costly to the supply chain. When the price is low, a customer buys in larger
quantities than needed. As soon as the price returns to normal, customer delay their purchases until they
have exhausted the accumulated inventories. They wait for another trade promotion before their inventory
stocks are depleted. The resulting buying patterns are more erratic than the realized market demand
pattern.
The remedies for this problem are:
a. Reduce frequency and magnitude of special trade deals and consumer promotions.
b. Using Continuous Replenishment Program (CRP) with rationalized wholesale pricing policies.
4. Rationing and Shortage Gaming: When product demand exceeds supply, manufacturers often ration
their products to customer by allocating the quantity delivered in promotion to the ordered quantity.
Customers, aware of this practice, purposely exaggerate their orders in periods of short supply and cancel
or reduce exaggerated orders in periods of amply supply. This customer practice is referred to as gaming

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of orders which gives little reliable information to suppliers on the product’s real demand. Such as
ordering pattern is highly erratic.
The remedies for this problem are:
a. Better production allocation/rationing rules or policies in short supply period (for example
allocation based on past sales).
b. Penalties for order cancellations.
 IMPACT OF LACK OF CO-ORDINATION ON SUPPLY CHAIN PERFORMANCE:

When each stage in a supply chain optimizes its individual (local) objective, without taking into
consideration the impact of its action on the entire supply chain, lack of co-ordination exists in the supply
chain. If proper co-ordination exists among the various stages in the supply chain, total supply chain
profits can be higher than what could be achieved when each stage optimizes its own objectives.

When each stage tries to optimize its local objective its actions may affect adversely the
performance of the entire supply chain. Lack of co-ordination can also occur if information distortion
occurs within the supply chain. Bullwhip Effect observed in a supply chain is an example. The impact of
the increase in variability on various measures in a supply chain is discussed in the following paragraphs.

1. Manufacturing Cost: The Bullwhip effect increases manufacturing cost in the supply chain. The
manufacturing firm and its suppliers must satisfy a stream of orders which is much different than
customer demand. The manufacturing firm can respond to the increased variability by either building
excess capacity or holding excess inventory which increases the manufacturing cost per unit produced.
2. Inventory Cost: The Bullwhip effect increases inventory cost in the supply chain. The manufacturing
firms has to carry a higher level of inventory to handle the variability in demand than would be required if
Bullwhip effect does not exist. As a result, inventory cost in the supply chain increases. Also the
warehousing cost increases.
3. Replenishment Lead Time: The replenishment time in the supply chain is increased by Bullwhip effect.
The increased variability resulting from the Bullwhip effect makes scheduling of production at the
manufacturing firm and suppliers plants much more difficult compared to a situation with level demand.
When the available capacity and inventory cannot supply the incoming orders, the replenishment lead
time in the supply chain from the manufacturing firm and its supplier will be higher.
4. Transportation Cost: The Bullwhip effect increases transportation cost in the supply chain. The
transportation requirements overtime at the manufacturing firm and it suppliers are correlated with the
orders being filled. As a result of Bullwhip effect, the transportation requirements fluctuate significantly
overtime. This increases transportation cost because of the need to maintain surplus transportation
capacity to cover higher demand periods.

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5. Labor Cost for Shipping and Receiving: The labor cost associated with shipping and receiving in the
supply chain is increased by the Bullwhip effect. Labor requirements for shipping at the manufacturing
firm and its suppliers fluctuate with orders. A similar fluctuation occurs for the labor requirements for
receiving at distributors and retailers. The various stages of the supply chain have the option of carrying
excess labor capacity or varying labor capacity in response to the fluctuation in order. Either option
increases the labor cost.
6. Level of Product Availability: The level of product availability is affected by the Bullwhip effect. This
results in more stock outs in the supply chain. The large fluctuations in orders makes difficult for the
manufacturing firm to supply all distributor and retailer orders in time. This increases the likelihood that
that retailers will run out of stock, result in lost sales in supply sales.
7. Relationship across the Supply Chain: The Bullwhip effect has an negative effect on performance at
every stage and thus effects the relationships between different stages of the supply chain. Each stage in
the supply chain has a tendency to blame the other stages because each stage feels it is doing the best it
can. The Bullwhip effect does leads to a loss of trust between different stages of supply chain and makes
any potential co-ordination efforts more difficulty.
8. Profitability: The Bullwhip effect has negative influence on profitability. Its affects the performance at
each stage of the supply chain. The magnitude of this effect increases due to the lack of or-ordination
between the chain members.

 CUSTOMER RELATIONSHIP MANAGEMENT (CRM):

CRM processes are extremely helpful in identifying and targeting the best customers of the business firm
and generating quality sales leads, as well as in the planning and implementation of marketing campaigns
with definite goals and objectives. The processes involved in CRM can help the firm maintain a
customized relationship with the customers for creating high-level customer satisfaction and offering the
finest customer service. CRM also endows the employees of the organization with the information they
need to know about their customers’ wants and needs and to build a long-term sustained relationship
between the firm and its customers.

Definition:
According to Gartner, “CRM is a business strategic designed to optimize profitability, revenue,
and customer satisfaction.
According to Parvatiyar and Sheth, “CRM is a competitive strategy and process of acquiring,
reacting and partnering with selective customers to create superior value for the company and the
customer”.

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CRM Macro Process:

CRM is the process that focuses on downstream interactions between the enterprise and its customers.
The CRM macro process consists of processes that take place between an enterprise and its customers
downstream in the supply chain. It includes processes such as marketing, sales, order management and
call centre management. At an industrial distributor like W.W. Grainger, CRM processes would include
the preparation of catalogues and other marketing materials, management of the website and management
of the call centre taking orders and providing services.
The goal of the CRM macro process is to generate customer demand and facilitate transmission
and tracking of orders. Weakness in this process results in demand being lost and a poor customer
experience because orders are not processes and executed effectively.

The Key Processes under CRM are as follows:

1. Marketing: Marketing processes involve decisions regarding which customers to target, how to target
customers, and what products to offer, how to price products, and how to manage the actual campaigns
targeting customers.
Successful software vendors in the marketing area within CRM provide analytics that improve
the marketing decisions on pricing, product profitability, and customer profitability, among other
functions.
2. Sell: The sell process focuses on marketing an actual sale to a customer. The sell process includes
providing the sales force the information they need to make a sale and then executing the actual sale.
Executing the sale may require the sales person (or the customer) to build and configure orders by
choosing among a variety of options and features. The sell process also requires such functionality as the
ability to quote due dates and access information related to a customer order.
Successful software providers have targeted sales force automation (SFA), configuration and
personalization to improve the sell process.
3. Order Management: The process of managing customer orders as they flow through an enterprise is
important for the customer to track their order and for the enterprise to plan and execute order fulfillment.
This process ties together demand from the customers with supply from the enterprise.
Order management software has been a part of an ERP system. Recently, new order management
systems have emerged with additional functionality that enables visibility of orders across the often
numerous order management systems that exist within a company.
4. Call/Service Centre: A call/service centre is often the primary point of contract between a company and
its customer. A call/service centre helps customers place orders, suggests products, solves problems, and
provides information on order status.

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Successful software provides information on order status. Successful software providers have
helped improve call/service centre operations by facilitating and reducing work done by customers’
service representatives, often by allowing customers to do the work themselves.
CRM processes are crucial to the supply chain as they cover a vast amount of interaction between
an enterprise and its customers. The customer must be the starting point when trying to increase the
supply chain surplus because all demand, and therefore revenue, ultimately arises from them. Thus, the
CRM macro process is the starting point when improving supply chain performance. It is also important
to note that CRM processes (and also CRM software) must be integrated with internal operations to
optimize performance.
Role of technology in CRM:
CRM applications are a convergence of functional components, advanced technologies and channels.
Applications of IT enabled CRM are stored for efficient retrieval. The IT tools ca be used effectively to
facilitate customer relationship practices of an organization. These tools need to be integrated in a format
so that they may deliver the intended results. The application of IT enabled CRM are as follows:
 Sales Force Automation (SFA)
 Marketing Automation Solutions
 Customer Service and Support Applications
 Customer Integration Management (CIM)
 Customer Relationship Portal
 Order Management Software

CRM versus SCM:

Customer Relationship Management (CRM) helps companies maximize the volume of every customer
interaction and drive superior corporate performance. And the value of CRM grows considerably when it
is tightly integrated with supply chain functionality. A “Customer is King” approach is replacing the
factory-based push supply chains of the 20th century. Today, a small but growing number of companies
are successfully challenging this traditional “Push” paradigm. They link the front end of their business-
customer management and demand-with the back end-supply chain management.

As forward-thinking companies learn to operate customer-centered business, this is the essence of

Customer Relationship Management (CRM). Businesses successfully link CRM with Supply Chain
Management (CRM) achieve remarkable results. Indeed, they are twice as profitable as their competitors
that do not link CRM to SCM. They are also two to five times more likely to achieve superior
performance in sales, market share and customer service.

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The following strategies help businesses move toward that goal:

1. Accelerate investments in initiatives that accommodate immediate, consistently delivered access

to product information, inventory availability and order tracking.
2. Integrate customer information-including purchase histories, preferences and transactional data-
access all channels.
3. Build a uniform customer data repository for integrated marketing campaign planning, execution
and extensiveness analysis.
4. Extend multi-channel customers want to make purchases, arrange delivery and obtain customer
service where, when and how they choose.

Organizations to manage and co-ordinate customer interactions across multiple channels, departments,
line of business and geographies, CRM helps maximize the value of every customer interaction and drives
superior corporate performance.

SCM Applications CRM Applications

Design Collaboration Market Analysis

Sourcing Decisions Sell Process
Negotiations Order Management
Buy Process Call/Service Centre Management
Customer Orientation Supply Process Orientation

 INTERNAL SUPPLY CHAIN MANAGEMENT:

Internal supply chain management focuses on operations internal to the firm. It includes all processes
involved in planning for a customer order and fulfilling the same. The various processes included in
internal supply chain management are:
1. Strategic Planning: The goal of this process is to plan resource availability in the supply chain network.
The decision made include where to locate plants and warehouses, what type of facilities to build and
what markets to serve from each facility. Although a few people make these decisions infrequently, the
impact on supply chain performance can be quite large and is felt potentially for years. Successful
software providers with this functionality are including the capacity of analyzing strategic plans under
uncertain future environments.

Rajesh Pasala, Asst. Professor, ALIET Page 30

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2. Demand Planning: This set of processes involves forecasting future customer demand. In addition to
forecasts, demand planning also includes decisions to manage demand, such as promotions planning.
Successful software providers in this area allow the firm to come up with a demand plan accounting for
marketing and promotional efforts.
3. Supply Planning: The input to the supply planning process includes the demand forecasts produced by
demand planning and the resources provided by strategic planning. The supply planning process produces
an optimal plan to meet the demand. Supply planning software provides factory planning and inventory
planning capabilities.
4. Fulfillment: Once a plan is in place to supply the demand, it must be implemented. The fulfillment
process links each customer order to a specific supply source and means of transportation. Transportation
and warehousing applications (software) fall into the fulfillment segment.
5. Field Service: After the product is delivered to the customers, it is necessary to provide after sales or
field service to them. Service processes involve setting inventory level for spare parts and scheduling
service calls.
Since the internal supply chain management (ISCM) macro process aims to fulfill the demand
generated by the customer relationship management (CPM) processes, there should be a strong
integration between these two processes. When forecasting demand, interaction with CRM is essential
because CRM applications have the data and insight on customer behavior. Likewise, ISCM processes
should also have strong integration with the supplier-relationship management (SCM) macro process.
This is important because, supply palling, fulfillment and field service are all dependent on suppliers (and
hence SCM processes).

Rajesh Pasala, Asst. Professor, ALIET Page 31