Subject: LOGISTICS AND RETAIL INFORMATION Credits: 4

SYLLABUS

Concepts Objectives and Elements of Logistics Concept of logistics; Importance of logistics; Objectives of
logistics; Components of Logistics

Logistics Subsystem Marketing Logistics; Essence of Logistics In Marketing; Marketing Trends; Relevance of
Logistics In Export Management; Importance of Logistics as a Strategic Resource; Trade-Off Analysis; Forms
of Logistics Management.

Integrated Logistics Work of Logistic; Integrated Logistics; Barriers to Internal Integration

Supply Chain Relationships Part I Introduction; Channel Structure; the Economics of Distribution;
Specialization; Assortment; Concentration; Customization

Supply Chain Relationship Part II Supply Chain Competitiveness; Risk, Power, and Leadership; Elements of
Success; Logistical Service Alliances; Factors Stimulating Service Based Alliances; Core Specialization; Power
Clarity; Cooperation Emphasis; Regional Alliances Create Transcontinental Moves; Integrated Logistics
Service Provider.

Transportation Transport Functionality and Principles; Product Movement; Product Storage; Relationship
between the Shipper, the Consignee, and the Public

Multi-Modal Transport Concept of Multimode Transport; Features of Multimodal Transport System;

Advantages of Multimodal Transport; Suppliers of Transportation Services; Typical Carrier Ancillary Services

Warehousing Introduction; Definitions as per Bombay Warehouse Act, 1959; Evolution of Concept of
Warehousing; Importance / Benefits of Warehousing; Warehouse Operating Principles; Developing the
Warehouse Resource

Information Systems Creating Strategic Advantage through Information Systems; Information Flows; the
Physical Flow of Merchandise – Logistics; Distribution Center; Collaboration between Retailers and Venders in
Supply Chan Management; Radio Frequency Identification (RFID).

Suggested Readings:

1. Logistics & Supply Chain Management by Martin Christopher, Publisher: Pearson Publication
2. Business Logistics Management by Ronald H. Ballou, Publisher: ABC Publication
3. Logistics and Supply Chain Management by G Raghuram and N Rangaraj, Publisher: Macmillan
Publication.
4. Retailing Management by Michael Levy, Barton A Weitz and Ajay Pandit, Publisher: McGraw Hill
Company
CONCEPTS OBJECTIVES AND ELEMENTS OF
LOGISTICS

Structure
1.1 The Concept and Definitions Of Logistics
1.2 Concept of Logistics
1.3 Importance of Logistics
1.4 Objectives of Logistics
1.5 Components of Logistics
1.6 Questions

1.1 The Concept And Definitions Of Logistics

Logistics is new unique, it never stops! Logistics is happening around the globe 24
hours a day seven days a week during fifty-two weeks a year. Few areas of business
involve the complexity or span the geography typical of logistics. Logistics is concerned
with getting products and services where they are needed whenever they are desired.

Most consumers take a high level of logistical competency for granted. When they go to
store, they expect products to be available and fresh.
It is rather difficult to visualize any marketing or manufacturing without logistical
support.

Modern logistics is also a paradox. Logistics has been performed since the beginning of
civilization: it’s hardly new. However implementing best practice of logistics has become
one of the most exciting and challenging operational areas of business and public sector
management

According to Council of logistics management:

“Logistics is the process of planning, implementing and controlling the efficient,
effective flow and storage of goods, services and related information from point of origin
to point of consumption for the purpose of conforming the customer requirement”.

Logistical management includes the design and administration of systems to controls the
flow of material, work- in – process, and finished inventory to support business unit
strategy.

Logistics is the designing and managing of a system in order to control the flow of
material throughout a corporation. This is a very important part of an international
company because of geographical barriers. Logistics of an international company

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includes movement of raw materials, coordinating flows into and out of different
countries, choices of transportation, cost of the transportation, packaging the product for
shipment, storing the product, and managing the entire process.

1.2 Concept Of Logistics

The concept of logistics is fairly new in the business world. The theoretical development
was not used until 1966. Since then, many business practices have evolved and logistics
currently costs between 10 and 25 percent of the total cost of an international purchase.
There are two main phases that are important in the movement of materials: material
management and physical distribution.

• Materials management is the timely movement of raw materials, parts, and

supplies.
• The physical distribution is the movement of the firm's finished products to the
customers.

Both phases involve every stage of the process including storage. The ultimate goal of
logistics is:

"To coordinate all efforts of the company to maintain a cost effective flow of goods."

Word, ’Logistics’ is derived from French word ‘loger’, which means art of war pertaining
to movement and supply of armies.

o A military concept

o Fighting a war requires:

a. Setting of an objective
b. Meticulous planning to achieve the objective
c. Troops properly deployed
d. Supply line consisting weaponry, food, medical assistance, etc. maintained

o Plan should be such that there is minimum loss to men & material

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 Like fighting a war in the battlefield, the marketing managers also need a suitable
logistics plan that is capable of satisfying the company objective of meeting
profitably the demand of targeted customers.

Inbound logistics + Material Management + Physical Distribution =Logistics

Inbound logistics covers the movement of materials received from suppliers

Material management describes the movements of material & components
within a firm
Physical distribution refers to movement of goods outward from the end of the
assembly line to the costumer.
Supply- chain management is somewhat larger than logistics and it links
logistics more directly within the user’s total communication network & with the
firm engineering staff. It includes manufacturer and suppliers but also
transporters, warehouses, retailers and customers themselves.

1.3 Importance Of Logistics

Logistics has gained importance due to 8 trends

• Transportation cost rose rapidly due to the rise in fuel prices

• Production efficiency was reaching a peak

• Fundamental change in inventory philosophy

• Product line proliferated

• Computer-technology

• Increased use or computers

• Increased public concern of products Growth of several new, large retail chains or
mass merchandise with large demands & very sophisticated logistics services, by
pass traditional channel & distribution.

• Reduction in economic regulation

• Growing power of retailers

• Globalization

The interrelation of different logistics element and their costs should be based on total
cost rather than individual costs.

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1.4 Objectives Of Logistics
In terms of logistical system design and administration, each firm must simultaneously
achieve at least six different operational objectives. These operational objectives, which
are the primary determinants of logistical performance, include rapid response, minimum
variance, minimum inventory, movement consolidation, quality, and life-cycle support.
Each objective is briefly discussed.

Rapid Response

Rapid response is concerned with a firm's ability to satisfy customer service requirements
in a timely manner. Information technology has increased the capability to postpone
logistical operations to the latest possible time and then accomplish rapid delivery of
required inventory. The result is elimination of excessive inventories traditionally stocked
in anticipation of customer requirements. Rapid response capability shifts operational
emphasis from an anticipatory posture based on forecasting and inventory stocking to
responding to customer requirements on a shipment-to-shipment basis. Because inventory
is typically not moved in a time- based system until customer requirements are known
and performance is committed, little tolerance exists for operational deficiencies

Minimum Variance

Variance is any unexpected event that disrupts system performance. Variance may
result from any aspect of logistical operations. Delays in expected time of customer
order receipt, an unexpected disruption in manufacturing, goods arriving damaged at a
customer's location, or delivery to an incorrect location -all result in a time disruption in
operations that must be resolved. Potential reduction of variance' relates to both internal
and external operations. Operating areas of a logistical system are subject to potential
variance. The traditional solution to accommodating variance was to establish safety
stock inventory or use high- cost premium transportation. Such practices, given their
expense and associated risk, have been replaced by using information technology to
achieve positive logistics Control. To the extent that variances are minimized, logistical
productivity improves as a result of economical operations. Thus, a basic objective of
overall logistical performance is to minimize variance.

Minimum Inventory

The objective of minimum variance involves asses commitment and relative turn
velocity. Total commitment is the financial value of inventory deployed throughout the
logistical system. Turn velocity involves the rate of inventory usage over time. High turn
rates, coupled with inventory availability, means that assets devoted to inventory are
being effectively utilized. The objective is to reduce inventory deployment to the lowest
level consistent with customer service goals to achieve the lowest overall total logistics
cost. Concepts like zero inventories have become increasingly as managers seek to
reduce inventory deployment. The reality of reengineering a system is that operational
defects do not become apparent until inventories are reduced to their lowest possible

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level. While the goal of eliminating all inventory is attractive, it is important to remember
that inventory can and does facilitate some important benefits in a logistical system.
Inventories can provide improved return on investment when they result in economies of
scale in manufacturing or procurement. The objective is to reduce and manage inventory
to the lowest possible level while simultaneously achieving desired operating objectives.

To achieve the objective of minimum inventory, the logistical system design must control
commitment and turn velocity for the entire firm, not merely for each business location.

Movement Consolidation
One of the most significant logistical costs is transportation. Transportation cost is
directly related to. the type of product, size of shipment, and distance. Many Logistical
systems that feature premium service depend on high-speed, small-shipment
transportation. Premium transportation is typically high-cost. To reduce transportation
cost.. it is desirable to achieve movement consolidation. As a general rule, the larger the
overall shipment and the longer the distance it is transported, the lower the
transportation cost per unit. This requires innovative programs to group small shipments
for consolidated movement. Such programs must be facilitated by working
arrangements that transcend the overall supply chain.

Quality Improvement

A fifth logistical objective is to seek continuous quality improvement. Total quality

management (TQM) has become a major commitment throughout all facets of industry.
Overall commitment to TQM is one of the major forces contributing to the logistical
renaissance. If a product becomes defective or if service promises are not kept, little, if
any, value is added by the logistics. Logistical costs, once expended, cannot be reversed.
In fact, when quality fails, the logistical performance typically needs to be reversed and
then repeated. Logistics itself must perform to demanding quality standards. The
management challenge of achieving zero defect logistical performance is magnified by
the fact that logistical operations typically must be performed across a vast geographical
area at all times of the day and night. The quality challenge is magnified by the fact that
most logistical work is performed out of a supervisor's vision. Reworking a customer's
order as a result of incorrect shipment or in-transit damage is far more costly than
performing it right the first time. Logistics is a prime part of developing and maintaining
continuous TQM improvement.

Life-Cycle Support
The final logistical design objective is life-cycle support. Few items are sold without
some guarantee that the product will perform as advertised over a specified period. In
some situations. the normal value -added inventory flow toward customers must be
reversed. Product recall is a critical competency resulting from increasingly rigid quality
standards, product expiration dating and responsibility for hazardous consequences.
Return logistics requirements also result from the increasing number of laws prohibiting
disposal and encouraging recycling of beverage containers and packaging materials. The
most significant aspect of reverse logistical operations is the need for maximum control

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when a potential health liability exists (i.e.. a contaminated product). In this sense, a
recall program is similar to a strategy of maximum customer service that must be
executed regardless of cost. Johnson & Johnson's classical response to the Tylenol crisis
is an example of turning adversity into advantage. The operational requirements of
reverse logistics range from lowest total cost, such as returning bottles for recycling, to
maximum performance solutions for critical recalls. The important point is that sound
logistical strategy cannot be formulated without careful review of reverse logistical
requirements.

Some products, such as copying equipment, derive their primary profit from selling
supplies and providing aftermarket service. The importance of service support logistics
varies directly with the product and buyer. For firms marketing consumer durables or
industrial equipment the commitment to life-cycle support constitutes a versatile and
demanding operational requirement as well as one of the largest costs of logistical
operations. The life-cycle support capabilities of a logistical system must be carefully
designed. As noted earlier, reverse logistical competency, as a result of worldwide
attention to environmental concerns, requires the capacity to recycle ingredients and
packaging materials. Life-cycle support, in modern terms, means cradle-to-cradle
logistical support.

1.5 Components Of Logistics

For the components see the figure given below

Inputs into logistics

Natural resources
Human Resources
Financial Resources
Information Resources

Logistics Management

• Raw Material
• In-Process Inventory
• Finished Goods

These are the systems through which products goes from suppliers to customers.

Logistics activities

• Customers Service
• Demand forecasting
• Distribution communication
• Inventory Control
• Material Handling
• Order Processing

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 • Part & Service Support
• Plant and Warehouse side selection
• Procurement
• Packaging
• Return goods handling
• Salvage & scrap disposal
• Traffic & transportation
• Warehousing & Storage

Outputs of Logistics

• Marketing Orientation
• Time & Place Utility
• Efficient Movement to Customer
• Proprietary asset

Fig 1.1 Components Of Logistics

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1.6 Questions

1. What do you understand by term LOGISTICS? Explain it with the evolution

concept.
2. With the help of suitable figure discuss the components of logistical systems.
3. Define the term LOGISTICS, with suitable example .And the importance of
logistics in today’s business life.
4. With the help of suitable example clearly explain the objectives of Logistics.

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LOGISTICS SUBSYSTEM
Structure

2.1 Marketing Logistics

2.2 Essence of Logistics in Marketing
2.3 Marketing Trends
2.4 Relevance of Logistics in Export Management
2.5 Importance of Logistics as a Strategic Resource
2.6 Trade-Off Analysis
2.7 Forms of Logistics Management.
2.8 Questions

2.1 Marketing Logistics

In 1991 the Council of Logistics Management (CLM) a prestigious, professional

organization, defined logistics as “the process of planning, implementing & controlling
the efficient, effective flow the point of origin to the point of consumption for the purpose
of conforming to customer requirements”.

Logistics means the art of managing the flow of raw materials and finished goods
from the source to the user.

To get goods from where they arise to the right place in the right form, at the right time,
at the right cost.

“Logistics or physical distribution or distribution logistics is an integral part of

Marketing Process”.

2.2 Essence Of Logistics In Marketing:

Marketing Process is successfully completed when Products are produced and priced to
satisfy the identified needs of the segment of buyers Arrangements are made to supply
these goods through selected distribution channels An awareness is created among the
buyers about the availability of the goods through information facilitation & Goods are
physically supplied to the buyers at the place & time selected by them. Besides satisfying
the customers need, the marketing process must be profitable to the seller.

So in the Marketing sense, utility is not merely the usefulness of a product to satisfy the
customer needs but also moving the product from a manufacturing facility to the user.

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 Thus, Logistics is a link between the manufacturing & selling process that leads to
the creation of place and time utility.

While the production element in the marketing – mix (product, price, place &
promotion) leads to creation of ‘form’ utility by taking decisions as product line
variety, design, colour brand, service, etc. the distribution element comprising
distribution channel fixation & physical movement, creates ‘time’ & ‘place’ utility by
ensuring that the produced goods reach the place & time chosen by the buyer.

Logistics is the designing and managing of a system in order to control the flow of
material throughout a corporation. This is a very important part of an international
company because of geographical barriers. Logistics of an international company
includes movement of raw materials, coordinating flows into and out of different
countries, choices of transportation, cost of the transportation, packaging the product
for shipment, storing the product, and managing the entire process.

2.3 Marketing Trends

Past Expectations Today’s Expectations

1 Products Standardized Products Customized Products
2 Forms Predefined Often Configured
3 Time Now as available When wanted
4 Quality Acceptable Exceed Expectations
5 Price Low Competitive
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Value Added Services Minimal Complex

2.4 Relevance Of Logistics In Export Management

International trade is becoming a more important part of the GNP in the industrially
advanced countries. Many firms in these countries have production centers world wide
for markets all over the world. Lack of local resources, small size of home market and
many other reasons has resulted in functional centers being maintained in various
countries.

Issues associated with international transportation of finished goods are essentially the
same as those that apply to transportation in domestic trade. But, under international
operations, goods can be out of exporter's control for longer period of time, more
documentation is required, packaging may be more costly and shipping insurance is more
costly.

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The transportation alternatives include ocean shipping and containerization as well as
airfreight. The basic activities involved in the flow of goods, like transportation,
warehousing and holding of inventories, should be integrated in a systems approach. The
systems approach would recognize the trade-offs, such that sometimes more expensive
airfreight may be opted for, instead of less expensive ocean shipping, because of savings
in warehouse and inventory costs.

In the field of exports, it should be noted that transport systems in developing countries
are generally not as efficient as in the industrially advanced countries. Transportation is
often considered to be the most important single determinant of plant location.

Firms in international trade also try to reduce amount of unnecessary product packaging,
since packing material can account for almost 40 per cent of the weight of the products
shipped. A company can reduce inland transportation charges by locating its distribution
facilities adjacent to container ports or airports. The burden of documentation can be
eased through computerization.

Export management involves marketing in overseas market. Hence the discussions on the
interface of logistics with marketing holds good for the relevance of logistics in export
management. Yet, in addition, export management has certain unique features, as
discussed above, to be understood in the context of relevance of logistics to export
management.

2.5 Importance Of Logistics As A Strategic Resource

Logistical Management includes the design and administration of systems to control the
flow of material, work-in-progress and finished inventory to support business unit
strategy.

Discussion of the concept of logistics, its place in the value-chain process leading to
profitability, its contribution as one of the primary functions and its interface with other
functions of the firm bring outs its importance as a strategic resource. However, to be of a
real strategic influence, a good amount of competency has to be achieved and a well-
defined logistical mission and objectives has to be committed to, by every one in the
firm, especially the top management.

1. Logistical competency: Logistics involves detailed and complex work. Logistical

management starts with how logistical competency fits into a firm's overall strategic
positioning. It is fundamentally important to view logistics as to how it can be exploited
as a core competency. For logistical competency to develop, it is important to develop an
integrated framework that defines and relates key concepts. This integration should be in
such a way that competitively superior logistical performance contributes to overall
enterprise strategy.

Logistical competency is a relative assessment of a firm's capability to provide

competitively superior customer service at the lowest possible total cost.

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This typically means that logistical performance is dedicated to supporting any or all
marketing and manufacturing requirements in a manner that exploits delivery capability.
In short, the strategy is to provide superior service at a total cost below industry average.

Alternative logistical capabilities, emphasizing flexibility, time-based performance,

operational control, postponement capabilities, and most of all a commitment to perfect
service performance typically characterize the service platform of superior logistic
achievers.

So friends we can say that all enterprises must perform logistics to achieve their basic
business goals. One of several competencies required to create customer value is
logistics. When logistics becomes a cornerstone of basic business strategy, it must be
managed as a core competency.

2. The Logistical Mission: Logistics exists to satisfy customer requirements by

facilitating relevant manufacturing and marketing operations. The challenge is to balance
service expectations and cost expenditures in a manner that achieves business objectives.
Basic logistical service is measured in terms of
• Availability
• Operational performance, and
• Service reliability

1. Availability means having inventory to consistently meet customer material or product

requirements.

2. Operational performance deals with the elapsed time from order receipt to delivery.
Operational performance involves delivery speed and consistency. A firm's operational
performance can be viewed in terms of how flexible it is in accommodating unusual and
unexpected customer requests.

3. .Service reliability involves the quality attributes of logistics. For logistics performance
to continuously meet customer expectations, it is essential that management be
committed to continuous improvement.

Do you know in 1956, in an effort to explain conditions under which high- cost air
transport could be justified; Lewis, Culliton and Steele conceptualized the total cost of
logistics?

Total cost was positioned to include all expenditures necessary to perform logistical
requirements. The authors illustrated an electronic parts distribution strategy wherein the
high variable cost of direct factory to customer air transport was more than offset by
reductions in inventory and field warehouse costs. They concluded that the least total cost
logistical way to provide desired customer service was to centralize inventory in one
warehouse and make deliveries using air transportation.

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The concept of total cost, although basic, had not previously been applied to logistical
analysis. Managers typically focused on minimizing functional cost, such as
transportation, with the expectation that such effort would achieve the lowest combined
cost. The total-cost concept opened the door to examining how functional costs
interrelate.

The appropriate level of logistics cost expenditure must be related to desired service
performance. The simultaneous attainment of high availability, operational performance,
and reliability is expensive. A significant managerial challenge stems from the fact that
logistical cost and increased performance have a no proportional relationship.

The typical logistical system in an enterprise seeks to develop and implement an overall
logistical competency that satisfies key customer expectations at a realistic total-cost
expenditure.

Overall, logistical management is concerned with operations and coordination.

Operations deal with strategic movement and storage. To complete the total operations
mission. Attention must be directed to integrating physical distribution, manufacturing
support, and procurement into a single logistical process. These three areas, functioning
as an integrated and coordinated process, can best provide operational management of
materials; semi finished components, and finished products moving between locations,
supply sources, and customers of an enterprise.

The mission of the logistical system is measured in terms of total cost and
performance. Performance measurement is concerned with the availability of
inventory, operational capability, and quality of effort. Logistical costs are directly
related to desired level of performance. As a general rule, the greater the desired
performance, the higher the total logistics cost. The key to effective logistical
performance is to develop a balanced effort of service performance and total-cost
expenditure.

The strategic integration of logistics is fundamental to an enterprise's success. While a

firm may not select to differentiate competitively on the basis of logistical
competency, it must perform logistical responsibilities as part of the fundamental
process of creating customer value. The relative importance that a firm places on
logistical competency will determine the degree of emphasis on achieving internal and
external integration.

Flexibility is key to logistical competency. Logistical flexibility results from integration

and from implementing time-based control techniques.
There are four logistics concepts:

• The Systems Concept

• The Total Cost Concept
• The After-Tax Concept
• The Trade-Off Concept

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The systems concept is based on all functions of a organization working together in order
to maximize benefits. This concept sometimes requires certain components of the
organization to operate suboptimal in order to achieve maximum goals of the system.

The total cost concept is based on the systems concept, however goal achievement is
measured in terms of cost.

A variation of the total cost concept is the after- tax concept. This goal of this concept is
after-tax profit. This concept is becoming very popular because of the many different
national tax policies.

The trade-off concept links the system together in a way that is very efficient, but can
have trade-offs that might be inefficient. The advantages of such high efficiency must be
weighed against the risk involved.

Logistics is a system having number of components, which can be combined in different

proportions to achieve a set objective.

Long-term objective is profitability; short-term objective is to survive competition by

recovering marginal costs.

Logistics sub-systems:-

• Physical Supply or Management of flow of raw materials, spare Parts,

consumable stores and machinery & tools from suppliers.

• Physical Distribution or management of finished goods from the factory to the

buyers.

• Logistical Controls for managing the logistics system, it helps an efficient co-
ordination of physical supply & distribution sub-systems.

Objective of an ideal logistic system is to ensure flow of supply to the buyer:-

• In Correct Quantity
• At Desired Location
• At Required Time
• At Useable Condition
• At the Lowest Total Cost

Thus the objectives encompass efforts to coordinate physical distribution and material
management in order to save money or improve service.

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Elements of logistics system:-
Transportation
Warehousing
Inventory Management
Packing & Utilization &
Information & Communication

When economists originally discussed supply-and-demand relationships, facility location

and transportation cost differentials were assumed either nonexistent or equal among
competitors.

Given a facility network and information capability, transportation is the operational area
of logistics that geographically positions inventory. Because of its fundamental
importance and visible cost, transportation has received considerable managerial attention
over the years. Almost all enterprises, big and small, have managers responsible for
transportation. Finding and managing the desired transportation mix is a primary
responsibility of logistics.

Network of three of the functional areas of logistics - information, transportation, and

inventory - can be engineered into a variety of different operational arrangements. Each
arrangement will have the potential to achieve a level of customer service at an associated
total cost; In essence, these three functions combine to create a system solution for
integrated logistics. The final functions of logistics - warehousing, material handling, and
packaging - also represent an integral part of an operating solution. However, these
functions do not have the independent status of the three previously discussed.
Warehousing, material handling and packaging are an integral part of other logistics
areas. For example, merchandise typically needs to be warehoused at selected times
during the logistics process. Transportation vehicles require material handling for
efficient loading and unloading. Finally, the individual products are most efficiently
handled when packaged together into shipping cartons or other types of containers.

Logistics is viewed as the competency that links an enterprise with its customers and
suppliers. Information from and about customers flows through the enterprise in the form
of sales activity, forecasts, and orders. The whole process is viewed in terms of two
interrelated efforts, inventory flow and information flow.

Information flow is a key element of logistics operations. Paper-based information flow,

increases both operating cost and decreases customer satisfaction. Electronic information
movement and management provide the opportunity to reduce logistics expense through
increased coordination and to enhance service by offering better information to
customers.

Information flow was often overlooked because it was not viewed as being important to
customers. The Council of Logistics Management recognized this change in 1988 when it
incorporated "material, in-process, finished goods and information" into its definition of

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logistics.

Transportation is a key activity in the logistics value chain as it moves product through
the various stages of production and ultimately to the consumer. The primary functions
include product movement, product storage and integration of international production
and distribution operations. The major transportation principles involve economies of
scale and economies of distance.

While effective distribution systems should not be designed to hold inventory for an
excessive length of time, there are occasions when inventory storage is justified.

While the traditional warehousing role has been to maintain a supply of goods to protect
against uncertainty, contemporary warehousing offers many other value-added services.
These services can be described in terms of economic and service benefits. Economic
benefits include consolidation, break bulk and cross-dock, processing/postponement, and
stockpiling. Service benefits include spot stocking, assortment, mixing, product support,
and market presence

The handling of products is a key to warehouse productivity. Handling activities include

receiving, in storage handling, and shipping. Packaging has a significant impact on the
cost and productivity of the logistical system. An integrated logistics approach to
packaging operations can yield dramatic savings.

A marketing mix is a compilation of activities designed to attract customers while

simultaneously achieving business objectives. The so-called four P's -products/service,
promotion, price, and place - constitute a generic marketing mix. The key to formulating
an effective mix strategy is to integrate resources committed to these activities into an
effort that maximizes customer impact. Logistics ensures that customer requirements
involved in timing and location of inventory and other related services are satisfactorily
performed. Thus, the output of logistical performance is customer service. Logistical
competence is a tangible way to attract customers who place a premium on time and
place-related performance.

Thus the discussion on the objectives, logistics interface with marketing and the system
elements brings out the depth of the scope of logistics in the efficient functioning of any
business entity. The key to excellent logistics is to achieve integration of both internal
and external operations. Such integration requires clear identification concerning the role
that logistical competency is expected to play in overall enterprise strategy.

Key Factors
Involved in efficient and effective and effective logistics system are

Shippers (users of logistics)

Suppliers (of logistics services)
Carrier (rail, road, sea, water, pipeline)
Warehouse Providers

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 Freight forwarders
Terminal operators (port, stevedores, etc
Government (regulator of logistics)

2.6 Trade-Off Analysis

Trade-off analysis is a family of methods by which respondents' utilities for various

product features (usually including price) are measured. In some cases, the utilities are
measured indirectly. In this case, respondents are asked to consider alternatives and state
a likelihood of purchase or preference for each alternative. As the respondent continues to
make choices, a pattern begins to emerge which, through complex multiple regression
(and other) techniques, can be broken down and analyzed as to the individual features
that contribute most to the purchase likelihood or preference. The importance or
influence contributed by the component parts. i.e., product features, are measured in
relative units called "utils" or "utility weights."

In other cases, respondents are asked to tell the interviewer directly how important
various product features are to them. For example, they might be asked to rate on a scale
of 1 to 100 various product features, where 1 means not at all important to their purchase
decision and 100 means extremely important to their purchase decision.

Trade-off analyses produce several types of information. First, they tell us what features
(and levels of features) are most valued by customers. Second, they allow us to model
how likely people will be to purchase various configurations of products, the share of
revenue these products will most likely receive and what role price plays in the
assessment of acceptability.

There are four main types of trade-off:

Conjoint
Discrete Choice
Self-explicated
Hybrid

One additional model, the MACROModel , will be discussed which does not fall into
any of the above four categories.

We will discuss each of these trade-off types after reviewing a few basic concepts.

Experimental Design
A critical issue in most trade-off methods is the selection of product attributes to be
combined together to create each product configuration to be tested.

If every possible combination of attributes were included in the study, the study would be
said to be using a complete or full factorial design. This is desirable but very

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seldom practical. For example, if we had 6 attributes with 3 levels each, the total number
of possible combinations would be 36 or 729. This is much too large to ask one
respondent to rate (and 6 attributes with 3 levels each is untypical modest).

When a fractional factorial design is used, only a fraction of the total possible number of
product combinations needs to be tested. For the above example, a fractional factorial
design could be generated (usually with the help of a computer) that would require
perhaps as few as 14 product configurations to be rated. It must be kept in mind,
however, that whenever a fractional factorial design is used, some information will be
lost. It is the job of the researcher creating the experimental design to ensure that the
information being sacrificed (usually higher order interaction effects) does not
compromise the project's ability to answer the research objectives.

Bridging
Occasionally, even with the most efficient fractional factorial design, we still end up with
more products than can be practically accommodated. One possible solution to that
problem is bridging3. Bridging allows the attributes to be divided into two or more sets
(with some attributes common to all sets). Each set of attributes is treated like its own
trade-off study. A fractional factorial design is created for each set of attributes.
Respondents are asked to rate or rank two smaller sets of products rather than one large
set. The utilities are calculated for each trade-off exercise independently and bridged
together to create one final set of utilities.

Cognitive and Non-cognitive Behavior

Critical to the selection of an appropriate trade-off technique is the issue of which type of
behavior, cognitive or non-cognitive, best represents the behavior being measured.
Cognitive behavior is behavior that is based on rational, conscious decision-making. Such
factors as price, functionality or durability are typically cognitive. Non-cognitive
behavior is behavior that is based on less tangible or even less conscious factors such as
status, aspiration, insecurity, perceived taste, etc. One might argue that the selection of a
life insurance policy, a computer or a water heater are all cognitive decisions and that the
selection of a beer, a skin cream or a pair of pants are all non-cognitive. One might also
argue that all decisions made by humans are non-cognitive.

However, trade-off techniques that employ direct questions (self-explicated and hybrid)
all assume that the behavior being modeled is cognitive, because at least some of the
product features are being rated in a way that requires both awareness and honesty from
the respondent. That is, the respondent must be aware of the degree to which a product
feature affects his or her purchase decision and also be willing to admit to that degree of
affect.

Additionally, any data collection methods that rely on verbal or written descriptions of
product features all assume that the behavior being modeled is cognitive ,because the
process of understanding a verbal or written description is itself a cognitive behavior.

23
Non-cognitive trade-off models should be based on an indirect trade-off technique
(conjoint or discrete choice) and data collection that relies on experience rather than
language to communicate the product choices. For example, if you are modeling the pant
selection process, show respondents a variety of pants that they can see and touch. A
consumer may respond to the phrase "light blue pants" very differently than he or she
would to a particular pair of light blue pants.

The Four Main Types of Trade-Off

I. Conjoint
Conjoint analysis is the original trade-off approach and uses linear models. There is
metric conjoint, where respondents monadically rate various product configurations, and
non-metric conjoint, where respondents rank a set of product configurations. There are
also full-profile conjoint, partial-profile conjoint and pair wise conjoint. Full-profile
conjoint uses all product features in every product configuration. Partial profile conjoint
uses a smaller subset of available product features in the product configurations. Pair
wise conjoint requires the respondent to rate their preference for one product over another
in a paired comparison. We will only discuss conjoint methods in general in this paper.

Conjoint models are simply regression models which are constructed for each individual
respondent. Typically, each respondent rates or ranks 20 to 30 product configurations.
Each product configuration contains different levels of the product attributes being tested.
If the product levels are varied appropriately (the role of experimental design), a
regression model can be estimated for each individual, using the product ratings as cases.
The coefficients from the model are the utilities.

A conjoint approach should be used if a limited number of attributes needs to be tested

and utilities need to be estimated for individual respondents, e.g., conjoint-based
segmentation.

II. Discrete Choice

Discrete choice differs from conjoint in that respondents are shown a set of products from
which they pick the one they most want to buy or none if they are not interested in any of
the choices shown (rather than rate or rank choices). Respondents are shown several sets
of choices sequentially. For each choice set, they are asked to pick one or none. This is in
contrast to most forms of conjoint where respondents are not allowed to choose none of
the product options (MACRO incorporates no-buy choices into its conjoint models). The
discrete choice procedure has the advantage of being more like the actual purchase
decision process than do any of the data collection methods used in most conjoint studies.

Also, in conjoint methods, the mathematical models constructed to simulate market

behavior are based on linear regression models. In discrete choice, the basis is the
multinomial logic model , which is non-linear. Another analytical difference is that, in

24
conjoint procedures, the utility weights are estimated for each respondent individually.
These weights can often provide the basis for a very powerful customer segmentation.
Most commercially available forms of discrete choice do not allow this option, although
this may be rapidly changing.

Further, because discrete choice models are generally estimated at the aggregate level,
there exists the possibility that respondents will have strong but opposite preferences to
one another. These preferences will effectively cancel each other out when the model is
constructed at the aggregate level, yielding the incorrect conclusion that respondents had
no strong preference. This is sometimes referred to as the heterogeneity problem.

There are two basic forms of discrete choice: classic and exploding data . Classic discrete
choice involves showing a respondent a series of sets of products (as described above). In
exploding data discrete choice, respondents are asked to rank order a set of products
based on purchase interest (similar to non-metric conjoint). This rank-ordered data set
can be transformed into a format suitable for logit model estimation. Exploding data
discrete choice has the advantage of more efficient data collection over classic discrete
choice. The exploding data approach creates many times more data points (or cases) than
the classic approach with the same interview length.

Discrete choice should be used if the primary objective of the study is to estimate market
share or price sensitivity, a limited number of attributes need to be tested and the sample
population is known to be homogeneous with respect to all product attributes.

III. Self-Explicated
Conjoint and discrete choice both determines respondents utilities indirectly.
Self-explicated determines respondents' utilities directly. With self-explicated scales,
respondents are asked directly how important all levels of all attributes are to their
purchase interest. Despite its conceptual simplicity, self-explicated models have been
shown to be comparable to conjoint models.

Self-explicated conjoint analysis requires respondents to reveal their utilities directly.

Accordingly, standard questionnaire methods can be used to collect the information. The
technique involves the following steps:
• Respondent are informed about all the attributes and their levels, and the respondents
are then asked to identify attribute levels that are totally unacceptable to them
• From among the acceptable levels of the attributes, respondents are asked to indicate
which are the most preferred and least preferred levels of each attribute
• Using the respondents' most important attribute as an anchor, elicit importance ratings
for the other attributes (on a 0 - 100 scale)
• For each attribute, rate the desirability of the different acceptable levels with the
attribute

25
• Utilities for acceptable attribute levels are obtained by multiplying the importance rating
and the desirability ratings

The utilities are then entered into a choice simulator program, and choice information
similar to other conjoint programs can be obtained.

Self-explicated approaches are useful when there are a large number of attributes and the
decision process being modeled is cognitive.

IV. Hybrid
Hybrid models are models that use a combination of the above techniques. The most
.
famous hybrid model is ACA, Adaptive Conjoint Analysis

Adaptive Conjoint Analysis

In this procedure, a computer program prompts the interviewer with questions. The
procedure is as follows:

Respondents are first walked through a battery of feature-importance ratings and

rankings; second, through a series of pair wise trade-offs of different product
configurations. The product configurations shown to any one respondent may not include
all of the attributes being tested.

The configurations to be paired are based on the answers to the importance questions and
rankings asked in the beginning of the interview. Items that are considered of little
importance show up in the comparisons less often. Items that are considered of greater
importance show up in the comparisons more often.

For each pair of products being tested, the respondent is to indicate which product they
prefer and the degree to which they prefer it.
The software continues prompting with pair wise comparisons of product configurations
until enough data has been collected to estimate conjoint utilities for each level of each
feature. Since the procedure is adaptive, only a fraction of the total number of possible
product combinations is tested.

ACA is an approach that is appropriate for building preference models of cognitive

behavior with large numbers of attributes. It may not be as useful when price sensitivity,
non-cognitive purchase decisions or interaction terms are to be modeled.

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Cake Method and Logit-Cake Method
Other hybrid models include the Cake Method and the Logit-Cake Method . Both of
these models have been developed by MACRO Consulting and were designed to
overcome weaknesses in other models.

Cake Method
The Cake Method is a unique, proprietary approach to conjoint analysis which offers
several advantages over other conjoint methods:

A large number of product features (50 or more) can be included in the model
First order interactions can be estimated at both the disaggregate and aggregate levels
There is complete control over the experimental design, in a full-profile format Since
product combinations are specified, via traditional experimental design, before the
interview takes place, physical exhibits can be easily incorporated into the interview

The approach involves a specific data collection procedure as well as a unique analytic
protocol. The basic outline of the approach is to:

• Collect self-explicated scales on most of the product attributes tested

• Conduct a full-profile conjoint exercise with a limited number of product attributes,
some of which are common to the self-explication exercise
• Estimate conjoint utilities for each respondent
• Bridge self-explicated scales to utility weights

The Cake Methodshould be used when there are a large number of attributes, utilities
need to be estimated for individuals, interaction terms need to be measured and the
purchase decision is at least partially cognitive.

Logit-Cake Method
The Logit-Cake Method is a unique, proprietary approach to choice-based trade-off
analysis which offers several advantages over other conjoint methods:
• A large number of product features (50 or more) can be included in the model
• The heterogeneity problem long associated with aggregate logit models is avoided
• The traditional advantages of logit models over conjoint models are maintained
• First order interactions can be estimated

27
• There is complete control over the experimental design, in a full-profile format
• Since product combinations are specified, via traditional experimental design, before the
interview takes place, physical exhibits can be easily incorporated into the interview
The approach involves a specific data collection procedure as well as a unique analytic
protocol. The basic outline of the approach is to:
• Collect self-explicated scales on all product attributes tested
• Conduct a full-profile choice-based exercise with a subset of product attributes
• Segment the sample based on self-explicated scales
• Estimate logit models for each respondent cluster
• Bridge self-explicated scales to logit-based utility weights

The Logit-Cake Method should be used when there are a large number of attributes,
market share and price need to be estimated, interaction terms need to be measured and
the purchase decision is at least partially cognitive.

MACROModel
One other model will be discussed in this paper. It does not fall into any of the four main
types of trade-off models. In fact, it is not strictly speaking a trade-off model because it
does not estimate utilities for any product attributes. The MACROModel was
developed by MACRO Consulting to address a specific research methods need that
frequently occurs in new product development and packaging.

The MACROModel is a unique approach to new product screening which offers

several advantages over other methods:
• A large number of concepts or packages (50 or more) can be screened at one time
• Price sensitivity can be calculated for every new product concept screened
• Price/volume can be individually optimized for every product concept tested
• New product concepts can be screened and/or completely rank ordered on consumer
appeal, market share, unit volume, gross dollar volume or gross profits

The approach involves a specific data collection procedure as well as a unique analytic
protocol. The basic outline of the approach is to:

• Sort a stack of new product concepts cards (all new product concepts, each at three price
points) into two piles: would definitely buy and would not buy. Note: Stack would
contain several existing products as reference.
• Have them rank order the would buy pile on a continuum from most want to buy to least
want to buy.
• Note: If the number of items to be sorted is too large for one sorting exercise, the task
can be broken down into several smaller exercises, with two or three items common

28
across sorting tasks. After the data are collected for all respondents for the various sorting
exercises, a bridging technique can be used to incorporate the data from the separate
exercises into one rank ordering of all of the items used in the study.
• Once the data are combined into one rank order data set for each respondent, the
MACROModel (a first choice share of preference model) can be constructed.

The MACROModel should be used when the product is too complex to decompose into
attributes, e.g., packaging graphics, when a large number of highly different products are
to be included, e.g., new product screening, when price sensitivity needs to be measured
and when products will be screened based on their revenue potential.

Conclusion
There are a variety of approaches to trade-off analysis, each with its advantages and
disadvantages. Which trade off procedure is best is dependent on the issues and
constraints of each marketing problem. The marketing problem should be discussed with
a researcher who is knowledgeable in all appropriate methodologies before a research
approach is selected.

Thus trade-off are necessary . The aspects of trade-off analysis are

o Within One logistics Elements :- Trade-off that occurs within a single element
Between logistics Element:- Trade-off that are possible by considering the impact of one
on the other Interface between company functions:- These trade-off are brought about
through impact on production.

Between the Company & other organizations:- These trade-off benefit all concerned
organizations.

2.7 Forms of Logistics Management.

1. Centralized logistics management

Centralized logistics management provides that managers that also head other divisions
of the company head the logistics operations. This type of management helps
avoid internal problems by having a central manager that ultimately decides how logistics
and operations are coordinated.

2. Decentralized logistics management

Decentralized logistics management is based on the fact that a company needs to have a
division that helps control the local-adaptation needs. Dealing with different cultures
requires input from the local branch. The managers that deal with the cultural differences
on a daily basis normally know what works and what don’t.

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3. Outsourcing

Outsourcing is the final option for logistics management. When this happens,
transportation firms concentrate on logistics, and the company can concentrate on it's
production. There are many cost savings using this type of program, however that lack of
control can negatively effect many companies.

International logistics requires many different options and requirements to be met in

order for a company to operate internationally. It's like a big puzzle that must be put
together, in order for all the goals to be met. As described above, there are many options
to consider, and sometimes what appears to be an option really isn't. It is not difficult to
hit a road block, and you must start over with a new plan. Once the logistics plan is in
place, you must constantly look for improvements in order to maximize profits and goals.

2.8 Questions For Self-Analyzation:

Q1 What is the relation between Marketing and Logistics. Quote a Suitable example to
prove the relationship.

Q2.What are the subsystems of Logistics Management? Expain the importance of about
each system with respect to the importance in business.

Q3 What do you understand by Trade-Off Analysis. Explain the various techniques used
to do the same. Also explain the importance of trade-off analysis.

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 INTEGRATED LOGISTICS

Structure
3.1 Work of Logistic
3.2 Integrated Logistics
3.3 Barriers to Internal Integration
3.4 Questions

3.1 Work Of Logistic

Some qualifications are in order regarding the formal organization of human resources
devoted to logistics. Managers are acutely interested in organizational structure because
it directly reflects responsibility, title, compensation, and power . Many managers have
the perception that grouping responsibility for all logistical activity into a single
organizational unit will automatically stimulate effective integration. This perception is
wrong because it emphasizes structure over managerial practice. Formal organization
structure alone is not sufficient to guarantee integrated logistical performance. Some of
the most highly integrated logistical operations exist without organizational
accountability to a single executive. Other enterprises that have highly formalized
logistics reporting arrangements also achieve superior results. Generalization regarding
how logistics organizations should ideally be structured is premature at this point of
subject development. Logistical organization structures vary significantly depending on
specific mission, type of business, and available human resources. The goal in creating
logistical sensitivity is to stimulate all managers within an enterprise to think and act in
terms of integrated capabilities and economies.

Logistical competency is achieved by coordinating

(1) Network design

(2) Information
(3) Transportation
(4) Inventory
(5) Warehousing
(6) Material handling
(7) Packaging.

Work related to these functional areas is combined to create the capabilities needed to
achieve logistical requirements. Attention is directed to an introductory discussion of
each facet of logistical work and how they interact in a typical business.

31
Two qualifications are important when discussing logistical work from the vantage point
of a single enterprise. First, all firms require the support and cooperation of many other
businesses to complete their overall logistical process. Such cooperation unites the firms
in terms of common goals, policies, and programs. From the perspective of the total
supply chain, efficiency is improved by eliminating duplication and waste. However,
cross-organizational coordination requires joint planning and relationship management.

Second, there are service firms that perform logistical work on behalf of their customers
such as transportation carriers or warehouse firms. Such specialists are supplemental to
or may be substitutes for a customer's employees performing the involved work. When
outside specialists are used in a logistical system, they must be willing to accept
reasonable managerial direction and control from their customers. Therefore, while the
performance of a specific task may be outsourced to specialists, the contracting firm's
management remains responsible for successful performance of the required work.

1. Network Design
Classical economics neglected the importance of facility location and overall net-work
design. When economists originally discussed supply-and-demand relationships, facility
location and transportation cost differentials were assumed to be either nonexistent or
equal among competitors. However, the number, size, and geographical relationship of
facilities used to perform logistical operations directly affect customer service
capabilities and cost. Network design is a primary responsibility of logistical
management since a firm's facility structure is used to provide products and materials to
customers.

Typical logistics facilities are manufacturing plants, warehouses, cross-dock operations,

and retail stores. Determining how many of each type of facility are needed, their
geographic locations, and the work to be performed 'at each is a significant part of
network design. In specific situations, facility operation may be outsourced to service
specialists. Regardless of who does the actual work, all facilities must be managed as an
integral part of a firm's logistical network.

The network design requirement is to determine the number and location of all types of
facilities required to perform logistics work. It is also necessary to determine what
inventory and how much to stock at each facility and where to assign customer orders
for shipment. The network of facilities forms a structure from which logistical
operations are performed. Thus the network incorporates information and transportation
capabilities. Specific work tasks related to processing customer orders, maintaining
inventory, and material handling are all performed within the network design
framework.

The design of a network must consider geographical variations. The fact that a great deal
of difference exists between geographical markets is easy to illustrate. The fifty largest
United States metropolitan markets in terms of population account for over 55 percent of

32
all product sales.' Therefore an enterprise, marketing on a national scale, must establish
logistical capabilities to service these prime markets. A similar geographic disparity
exists in typical material and component part source locations. When a firm is involved
in global logistics, issues related to network design become increasingly more complex.
The sidebar discussion of Laura Ashley' s network design highlights such complexity.

2. Information
The importance of information to logistical performance has historically not been
highlighted. This neglect resulted from the lack of suitable technology to generate desired
information. Management also lacked full appreciation and in-depth understanding of
how fast and accurate communication could improve logistical performance. Both of
these historical deficiencies have been eliminated. Current technology is capable of
handling the most demanding information requirements. If desired, information can be
obtained on a real-time basis. Managers are learning how to use such information
technology to devise new and unique logistical solutions.

Location Redesign
Laura Ashley, based in the United Kingdom, produces women's and children's
fashions, curtain and upholstery fabric, wallpaper, linens, and decorating accessories in
trademark floral patterns. While it had always maintained excellence in product design
and development, Laura Ashley suffered sinking profits because of its complex, costly,
and inefficient logistics system. Laura Ashley found that too many carriers and too
many systems were resulting in an overall loss of managerial control. To regain
control, Laura Ashley had to reorganize its logistical operations. Implementation of
Laura Ashley's new logistics structure began with the transfer of all in-house logistics
operations to Business Logistics, a division of Federal Express. Business Logistics'
task was to restructure, improve, and manage every aspect of the flow of goods and
information within the Laura Ashley supply chain.

Prior to reorganization, Laura Ashley had five major warehouses, eight principal
carriers, and ten unconnected management systems. The result was extremely long lead
times for customers, huge inventories, and too many stock outs. A customer looking
for a fast selling item from a warehouse in Germany would be told that the item was
out of stock and that new supplies would not arrive for several months. At the same
time, the item could be overstocked in a warehouse in Wales. On average, 16 percent
of all product lines were out of stock at the retail stores.

Laura Ashley realized that it needed to reanalyze the location of its current facilities. The
recommendation was to close all warehouses except one in the United Kingdom, which
would be converted from serving local customers only to serving global customers. The
single location, at Newtown, allows close proximity to the manufacturing sites in the
United Kingdom. The Newtown facility is a world "processing centre," acting as cost
would be offset by increased efficiency. In the past, the problem of unpredictable

33
demand resulted in higher inventory to cover up uncertainty and maintain customer
service.
Laura Ashley knew that it would have more predictable flow with a single service
location as opposed to a number of small locations. Random demand could now be
pooled over the entire market area, allowing spikes in one area to level out low demand
in another. Transportation costs were offset by turn rate in inventory .In fact, Laura
Ashley discovered that the single hub system actually decreased transportation costs by
reducing the amount of cross shipping. By shipping direct to the retail store from the
United Kingdom warehouse, the lead time from order to shipment was about the same
but the product was shipped only once instead of being shipped and handled at many
different locations.

Laura Ashley has taken its reorganization beyond just cost reduction. The firm now
sees the opportunity to increase service and flexibility, and it plans to resupply shops
anywhere in the world within twenty-four to forty-eight hours. Advanced systems and
communications will be used to monitor and control world inventory. Federal Express's
global carrier networks will ensure that goods arrive at their destination in time. Laura
Ashley also plans to launch a mail-order business that will feature forty-eight hour
delivery to the end consumer's door anywhere in the world. Its current $10 million
mail-order business has been growing strong, but until now the company had to limit
growth because it could not keep up with expanding orders. The new superior location
network will make this growth possible and profitable.

However, the technology is only as good as the quality of information. Deficiencies in

the quality of information can create countless operational problems. Typical
deficiencies fall into two broad categories. First of all, information received may be
incorrect with respect to trends and events. Because a great deal of logistics takes place
in anticipation of future requirements, an inaccurate appraisal or forecast can cause
inventory shortage or over commitment. Overly optimistic forecasts may result in
improper inventory positioning. Second, information related to order processing may be
inaccurate with respect to a specific customer's requirements. The processing of an
incorrect order creates all the cost of logistics but typically does not result in a sale.
Indeed, logistics costs are often increased by the expense of inventory return and, if the
sales opportunity still exists, the cost of once again trying to provide the desired service.
Each error in the composition of information requirements creates potential disturbance
for the total supply chain.

The benefit of fast information flow is directly related to the balance of work procedures.
It makes little sense for a firm to accumulate orders at a local sales office for a week, mail
them to a regional office, process the orders on a batch basis, assign them to a distribution
warehouse, and then ship them via air to achieve fast delivery. Electronic data
interchange (EDI) from the customer's office with slower surface transportation may have
achieved even faster overall delivery at a lower total cost. The key objective is to balance
components of the logistical system.

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Forecasting and order management are two areas of logistical work that depend on
information. The logistics forecast is an effort to estimate future requirements.

The forecast is used to guide the positioning of inventory to satisfy anticipated customer
requirements. Logistics managers' track record in forecasting is not impressive.
Therefore, one of the main reasons managers use information to achieve positive control
of logistical operations is their desire to replace forecasting inaccuracy with faster
response to customer requirements. Control concepts such as just-in-time (JIT), quick
response (QR), and continuous replenishment (CR) represent approaches to positive
logistical control made possible by the application of recently developed information
technology.2 One of the main jobs of logistics managers is to plan and implement their
firm's strategy regarding the desired combination of forecasting and operational control.

3. Transportation
Given a facility network and information capability, transportation is the operational
area of logistics that geographically positions inventory. Because of its fundamental
importance and visible cost, transportation has received considerable f managerial
attention over the years: Almost all enterprises, big and small, have managers
responsible for transportation.

Transportation requirements can be accomplished in three basic ways. First of all, a

private fleet of equipment may be operated. Second, contracts may be arranged with
transport specialists. Third, an enterprise may engage the services of a wide
variety of carriers that provide different transportation services on an individual
shipment basis. These three forms of transport are typically referred to as private,
contract, and common carriage. From the logistical system viewpoint, three factors are
fundamental to transportation performance: cost, speed, and consistency.

The cost of transport is the payment for movement between two geographical locations
and expenses related to administration and maintaining in-transit inven tory. Logistical
systems should be designed to utilize transportation that minimizes total system cost.
This means that the least expensive transportation does not always result in the lowest
total cost of movement.
:
Speed of transportation is the time required to. complete a specific movement. Speed and
cost of transportation are related in two ways. First, transport firms, capable of providing
faster service, typically charge higher rates. Second, the faster the transportation service,
the shorter the time interval during which inventory is in transit and unavailable. Thus, a
critical aspect of selecting the most desirable method of transportation is to balance speed
and cost of service.

Consistency of transportation refers to variations in time required to perform a specific

movement over a number of shipments. Consistency is a reflection of the dependability
of transportation. For years, transportation managers have considered consistency the
most important characteristic of quality transportation. If a given movement takes two

35
days one time and six days the next, the unexpected variance can create serious logistical
operational problems. If transportation lacks consistency, inventory safety stocks will be
required to protect against unpredictable service breakdowns. Transportation consistency
affects both the seller's and the buyer's overall inventory commitment and related risk.
With the advent of new information technology to control and report shipment status,
logistics managers have begun to seek faster service while maintaining consistency. The
value of time is important and will be discussed repeatedly. It is also important to
understand that the quality of transportation performance is critical to time-sensitive
operations. Speed and consistency combine to create the quality aspect of transportation. .

In the design of a logistical system, a delicate balance must be maintained between

transportation cost and quality of service. In some circumstances low cost, slow
transportation will be satisfactory. In other situations, faster service may be essential to
achieve operating goals. Finding and managing the desired transportation mix is a
primary responsibility of logistics.

There are three aspects of transportation that managers should keep in mind concerning
the logistical network. First, facility selection establishes a network structure that creates
the framework of transportation requirements and simultaneously limits alternatives.
Second, the total cost of transportation involves more than the freight bill. Third, the
entire effort to integrate transport capability into a logistical system may be defeated if
delivery service is sporadic and inconsistent.

4. Inventory
The inventory requirements of a firm depend on the network structure and the desired
level of customer service. Theoretically, a firm could stock every item sold in a facility
dedicated to service each customer. Few business operations could afford such a
luxurious inventory commitment because the risk and total cost would be prohibitive.
The objective is to achieve the desired customer service with the minimum inventory
commitment, consistent with lowest total cost. Excessive inventories may compensate for
deficiencies in basic design of a logistics network and to some degree inferior
management. However, excessive inventory used as a crutch will ultimately result higher
than necessary total logistics cost.

Logistical strategies are designed to maintain the lowest possible financial assets in
inventory. The basic goal of inventory management is to achieve maximum turnover
while satisfying customer commitments.

Inventory strategies need to be focused on meeting requirements of such core customers.

The key to effective segmented logistics rests in the inventory priorities designed to
support core customers.

Most enterprises experience a substantial variance in volume and profitability across

product lines. If no restrictions are applied, a firm may find that less than 20 percent of all
products marketed account for more than 80 percent of total profit. While the so-called

36
80/20 rule or Pareto principle is common, management can avoid excessive cost by
implementing inventory strategies that consider fine-line product classification. A
realistic assessment of which low-profit or low-volume products should be carried is the
key to avoiding excessive cost. For obvious reasons, an enterprise wants to offer high
availability and consistent delivery on more profitable products. High-level support of
less profitable items, however, may be necessary to provide full-line service to core
customers. The trap to avoid is high service performance on less profitable items
purchased by fringe or noncore customers. Therefore, product line profitability must be
considered when developing a selective inventory policy. Many enterprises find it
desirable to hold slow moving or low-profit items at a central distribution warehouse. The
actual delivery performance can be matched to customer importance when orders are
received. Core customers may be serviced by fast, reliable air service, while other orders
to fringe customers are delivered by less expensive ground transportation.

Selection of the product assortment to be stocked at a specific facility has a direct impact
on transportation performance. Most transportation rates are based on the volume and
size of specific shipments. Thus, it may be sound strategy to stock sufficient products at a
warehouse to be able to arrange consolidated shipments to a customer or geographic area.
The corresponding savings in transportation may more than offset the increased cost of
holding the inventory.

Commitments to deliver products rapidly to fulfill customer requirements are important

drivers of logistics. Such time-based arrangements seek to reduce overall inventories by
developing the capability to respond rapidly to exact requirements of manufacturing or
retail customers. If products and materials can be delivered quickly, it may not be
necessary to maintain inventories at manufacturing plants. Likewise, if retail stores can
be replenished rapidly, less safety stock must be maintained forward in the supply chain.
The alternative to stockpiling and holding safety stock is to receive the exact quantity of
inventory at the time required. While such time-based programs reduce customer
inventory to absolute minimums, the savings must be balanced against other costs
incurred in the time-sensitive logistical process. For example, time-based programs tend
to reduce shipment sizes, which increase the number, frequency, and cost of shipments.
This, in turn, can result in higher transportation costs. For a logistical arrangement to be
effective and efficient it must achieve trade-offs that result in the desired customer
service at the lowest total cost.

Finally, inventory strategies cannot be created in a competitive vacuum. A firm is

typically more desirable to do business with if it can promise and perform rapid and
consistent delivery. Therefore, it may be necessary to position inventory in a specific
warehouse to provide logistical service even if such commitment increases total cost.
Sound inventory policies are essential to gain a customer service advantage or to
neutralize a strength that a competitor currently enjoys. Material and component
inventories exist in a logistical system for different reasons than finished product
inventory. Each type of inventory and the level of commitment must be viewed from a
total cost perspective.

37
Warehousing, Material Handling, And Packaging

Four of the functional areas of logistics-network design, information, transportation, and

inventory-can be engineered into a variety of different operational arrangements. Each
arrangement will have the potential to achieve a level of customer service at an associated
total cost. In essence, these four functions combine to create a system solution for
integrated logistics. The final function of logistics warehousing, material handling, and
packaging-also represent an integral part of an operating solution. However, these
functions do not have the independent status of the four previously discussed.
Warehousing, material handling, and packaging are an integral part of other logistics
areas. For example, merchandise typically needs to be warehoused at selected times
during the logistics process. Transportation vehicles require material handling for
efficient loading and unloading. Finally, the individual products are most efficiently
handled when packaged together into shipping cartons or other types of containers.
When warehouses are required in a logistical system, a firm can choose between
obtaining the services of a specialist or operating its own facility. The decision is broader
than simply selecting a facility to store inventory, since many activities essential to the
overall logistical process are typically performed while products are warehoused.
Examples of such activities are sorting, sequencing, order selection, transportation
consolidation, and, in some cases, product modification and assembly.

Within the warehouse, material handling is an important activity. Products must be

received, moved, sorted, and assembled to meet customer order requirements. The direct
labor and capital invested in material-handling equipment are a major part of total
logistics cost. When performed in an inferior manner, material handling can result in
substantial product damage. It stands to reason that the fewer times a product is handled,
the less potential exists for product damage, and the overall efficiency of the warehouse
is increased. A variety of mechanized and automated devices exist to assist in material
handling. In essence, each warehouse and its material-handling capability represent a
mini system within the overall logistical process.

To facilitate handling efficiency, products in the form of cans, bottles, or boxes are
typically combined into larger units. The initial unit, the master carton, provides two
important features. First of all, it serves to protect the product during the logistical
process. Second, the master carton facilitates ease of handling by creating one large
package rather than a multitude of small, individual products. For efficient handling and
transport, master cartons are typically consolidated into larger units. The most common
units for master carton consolidation are pallets, slip sheets, and. various types of
containers.

When effectively integrated into an enterprise's logistical operations, warehousing,

material handling, and packaging facilitate the speed and overall ease of product flow
throughout the logistical system. In fact, several firms have engineered devices to move,

38
broad product assortments from manufacturing plants directly to retail stores without
intermediate handling.

3.2 Integrated Logistics

The conceptualization of integrated logistics is illustrated in the shaded area of Figure

below. Logistics is viewed as the competency that links an enterprise with its customers
and suppliers. Information from and about customers flows through the enterprise in the
form of sales activity, forecasts, and orders. The information is refined into specific
manufacturing and purchasing plans. As products and materials are procured, a value-
added inventory flow is initiated that ultimately results in ownership transfer of finished
products to customers. Thus, the process is viewed in tern1s of two interrelated efforts,
inventory flow and information flow. Prior to discussing each flow in greater detail, two
observations are in order.

Figure 3.1

First, viewing internal operations (the shaded area of Figure 1) in isolation is useful to
elaborate the fundamental importance of integrating all functions and work involved in
logistics. While such integration is prerequisite to success, it is not sufficient to guarantee
that a firm will achieve its performance goals. To be fully effective in today's competitive
environment, firms, must expand their integrated behavior to incorporate customers and
suppliers.

Second, the basic process illustrated in Figure 1 is not restricted to for-profit business, nor
is it unique to manufacturing firms. The need to integrate requirements and operations
occurs in all businesses as well as within public sector organizations. For example,
retailing or wholesaling firms typically link physical distribution and purchasing, since

39
traditional manufacturing is not required. Nevertheless, retailers and wholesalers must
complete the logistics value-added process. The same is true of all public sector
organizations that manufacture products or provide other services.

Inventory Flow
The operational management of logistics is concerned with movement and storage of
materials and finished products. Logistical operations start with the initial ship-ment of a
material or component part from a supplier and are finalized when a manufactured or
processed product is delivered to a customer.

From the initial purchase of a material or component, the logistical process adds value by
moving inventory when and where needed. Providing all goes well, a material gains
value at each step of its transformation into finished inventory. In other words, an
individual part has greater value after it is incorporated into a machine. Likewise, the
machine has greater value once it is delivered to a buyer.

To support manufacturing, work-in-process inventory must be moved to support final

assembly. The cost of each component and its movement becomes part of the value-
added process. The final or meaningful value that is added occurs only with final
ownership transfer of products to customers when and where specified.

For a large manufacturer, logistical operations may consist of thousands of movements,

which ultimately culminate in the delivery of products to an industrial user, retailer,
wholesaler, dealer, or other customer. For a large retailer, logistical operations may
commence with the procurement of products for resale and may terminate with consumer
pickup or delivery. For a hospital, logistics starts with procurement and ends with full
support of patient surgery and recovery. The significant point is that regardless of the size
and type of enterprise, logistics is essential and requires continuous management
attention. For better understanding it is useful to divide logistical operations into three
areas: physical distribution, manufacturing support, and procurement. These components
are illustrated in the centre of Figure 3.1 as the combined logistics operational units of an
enterprise.

Physical Distribution
The area of physical distribution concerns movement of a finished product to customers.
In physical distribution, the customer is the final destination of a marketing channel. The
availability of the product is a vital part of each channel participant's marketing effort.
Even a manufacturer's agent, which typically does not own inventory, must depend on
inventory availability to perform expected marketing responsibilities. Unless a proper
assortment of products is efficiently delivered when and where needed, a great deal of the
overall marketing effort can be jeopardized. It is through the physical distribution process
that the time and space of customer service become an integral part of marketing. Thus

40
physical distribution links a marketing channel with its customers. To support the wide
variety of marketing systems that exist in a highly commercialized nation, many different
physical distribution systems are utilized. All physical distribution systems have one
common feature: they link manufacturers, wholesalers, and retailers into marketing
channels that provide product availability as an integral aspect of the overall marketing
process.

Manufacturing Support
The area of manufacturing support concentrates on managing work-in-process inventory
as it flows between stages of manufacturing. The primary logistical responsibility in
manufacturing is to participate in formulating a master production schedule and to
arrange for timely availability of materials, component parts, and work-in-process
inventory. Thus, the overall concern of manufacturing support is not how production
occurs but rather what, when. and where products will be manufactured. Manufacturing
support has one significant difference when compared with physical
distribution. Physical distribution attempts to service the desires of customers and
therefore must accommodate the uncertainty of consumer and industrial demand.
Manufacturing support involves movement requirements that are under the control of the
manufacturing enterprise. The uncertainties introduced by random customer ordering and
erratic demand accommodated by physical distribution are not present in most
manufacturing operations. From the viewpoint of overall planning, the separation of
manufacturing support from outbound (physical distribution) and inbound (procurement)
activities provides opportunities for specialization and improved efficiency.

Procurement
Procurement is concerned with purchasing and arranging inbound movement of
materials, parts, and/or finished inventory from suppliers to manufacturing or assembly
plants, warehouses, or retail stores. Depending on the situation, the acquisition process is
commonly identified by different names. In manufacturing, the process of acquisition is
typically called purchasing. In government circles, acquisition has traditionally been
referred to as procurement. In retailing and wholesaling, buying is the most widely used
term. In many circles, the process is referred to as inbound logistics. Although differences
do exist concerning acquisition situations, the term procurement is used here to include
all types of purchasing. The term material is used to identify inventory moving inbound
to an enterprise, regardless of its degree of readiness for resale. The term product is used
to identify inventory that is available for consumer purchase. In other words, materials
are involved in the process of adding value through manufacturing, whereas products are
ready for consumption. The fundamental distinction is that products result from the value
added to material during manufacturing" sorting, or assembly.

Procurement is concerned with availability of the desired material assortments where and
when needed. Whereas physical distribution is concerned with outbound product
shipments, purchasing is concerned with inbound materials, sorting, or assembly. Under
most marketing situations involving consumer products, such as a grocery manufacturer

41
that ships to a retail food chain, the manufacturer's physical distribution is the same
process as a retailer's procurement operations. Although similar or even identical
transportation requirements may be involved, the degree of managerial control and risk
related to performance failure varies substantially between physical distribution and
procurement.

Within a typical enterprise, the three areas of logistics overlap. Viewing each as an
integral part of the overall value-adding process creates an opportunity to capitalize on
the unique attributes of each while facilitating the overall process. The prime concern of
an integrated logistical process is to coordinate overall value added inventory movement.
The three areas combine to provide integrated management of materials, semi finished
components, and products moving between locations, supply sources, and customers of
the enterprise. In this sense, logistics is concerned with strategic management of total
movement and storage. Table 1 provides a more exacting definition of the day-to-day
work involved in each sub process of logistics.

Information Flow
Information flow identifies specific locations within a logistical system that have
requirements. Information also integrates the three operating areas. The primary objective
of developing and specifying requirements is to plan and execute integrated logistical
operations. Within individual logistics areas, different movement requirements exist with
respect to size of order, availability of inventory, and urgency of movement. The primary
objective of information sharing is to reconcile these differentials. In the discussion that
follows it is important to stress that information requirements parallel the actual work
performed in physical distribution, manufacturing support, and procurement. Whereas
these areas contain the actual logistics work, information facilitates coordination of
planning and control of day-to-day operations. Without accurate information the effort
involved in the logistical system can be wasted.

Logistical information involves two major types of flows: coordination flows and
operational flows. The overall relationship between the two logistical information flows
is illustrated in Figure3.2.

The objective at this point is to provide an introductory overview of the information

requirements necessary to drive an integrated logistics system.

Planning and Coordination Flows

Coordination is the backbone of overall information system architecture among value
chain participants. Coordination results in plans specifying strategic objectives, capacity
constraints, and logistical requirements inventory deployment manufacturing
requirements procurement requirements, and forecasting.

42
 Figure3. 2

The primary drivers of the overall value chain are the strategic objectives that result from
marketing and financial goals. Strategic objectives detail the nature and location of
customers, which are matched to the required products and services to be performed. The
financial aspect of strategic plans detail resources required to support inventory,
receivables, facilities, equipment, and capacity.

Capacity constraints coordinate internal and external manufacturing requirements. For

non-manufacturing participants in the value chain, this form of capacity planning is not
required. Given strategic objectives, capacities constraints identify limitations, barriers,
or bottlenecks within basic manufacturing capabilities and determine appropriate
outsource requirements.

To illustrate, whereas Kellogg owns the brand and distributes Cracklin Oat Bran, a third
party on a contract basis performs all manufacturing. The result of capacity constraints
is a plan that places strategic objectives in a time-phased schedule that details facility
utilization, financial resources, and human requirements.

Logistics requirements specify the work that distribution facilities, equipment, and labor
must perform to implement the capacity plan. Using inputs from forecasting,
promotional scheduling, customer orders, and inventory status, logistics requirements
specify value chain performance.

43
Inventory deployments are the interfaces between planning/coordination and operations
that detail the timing and composition of where inventory will be positioned. A major
concern of deployment to balance timing and consolidation to create efficiency as
inventory flows through the value chain. Inventory is unique in that it is an integral part
of the planning/coordination and operational flows involved in logistics. From an
information perspective, deployment specifies the what, where, and when of the overall
logistics processes. From an operational viewpoint, inventory management is performed
as a day-to-day event. Because of this duality, inventory deployment and management
are illustrated in Figure3.2 between the planningandcoordination and operational
information flows.

In production situations, manufacturing plans are derived from logistical requirements

and typically result in inventory deployment. The primary deliverable is a statement of
time-phased inventory requirements that drives master production scheduling (MPS)
and manufacturing requirements planning (MRP). The deliverable from manufacturing
requirements is a day-to-day production schedule that can be used to specify material
and component requirements.

Procurement requirements schedule material and components for inbound shipment to

support manufacturing requirements. In retailing and wholesaling situations, procurement
involves maintaining product supplies. In manufacturing situations, purchasing must
facilitate inbound materials and component parts from suppliers. Regardless of the
situation, purchasing coordinates decisions concerning supplier qualifications, degree of
desired speculation, third-party arrangements, and feasibility of long-term contracting.

Forecasting utilizes historical data, current activity levels, and planning assumptions to
predict future activity levels. Logistical forecasting is generally concerned with relatively
short-term predictions (i.e., less than ninety days). The forecasts predict periodic (usually
monthly or weekly) sales levels for each product, forming the basis of logistics
requirement and operating plans.

The overall purpose of information planning/coordination flow is to integrate specific

activities within a firm and to facilitate overall integrated performance. Unless a high
level of coordination is achieved, the potential exists for operating inefficiencies and
excessive inventory. Planning/coordination is illustrated in the health care business by the
sidebar discussing how hospitals use information to improve efficiency and customer
service.

Operational Requirements
The second aspect of information requirements is concerned with directing operations to
receive, process, and ship inventory as required supporting customer and purchasing
orders. Operational information requirements deal with order management, order
processing distribution operations inventory management, transportation and shipping,
and procurement.

44
Order management refers to the transmission of requirement information between value
chain members involved in finished product distribution. The primary activity of order
management is accurate entry and qualification of customer orders. This transfer of
requirements between value chain participants is typically achieved by phone, mail,
facsimile (fax), or electronic data interchange. The impact of information technology on
order management is extensive. The availability of low-cost information transfer has
revolutionized the order management process.

Order processing allocates inventory and assigns responsibility to satisfy customer

requirements. The traditional approach has been to assign available inventory or planned
manufacturing to customers according to predetermined priorities. In technology-rich
order processing systems, two-way communication linkage be maintained with customers
to generate a negotiated order that satisfies customers within the constraints of planned
logistical operations.

Distribution operations involve information flows required to facilitate and coordinate

performance within logistics facilities. The primary purpose of a logistical facility is to
provide material or product assortments to satisfy order requirements. Emphasis is placed
on scheduled availability of the desired assortment with minimal duplication and
redundant work effort. The key to distribution operations is to store and handle specific
inventory as little as possible while still meeting customer order requirements.

Inventory management is concerned with using information to implement the logistics

plan as specified. Using a combination of human resources and information technology,
inventory is deployed and then managed to satisfy planned requirements. The work of
inventory management is to make sure that the overall logistical system has appropriate
resources to perform as planned.

Transportation and shipping information directs the movement of inventory. To achieve

efficiency, it is important to consolidate orders so 'to fully utilize transportation capacity.
It is also necessary to ensure that the required transportation equipment is available when
needed. Finally, because ownership transfer often results from transportation, supporting
documentation is required.

Procurement is concerned with the information necessary to complete purchase order

preparation, modification, and release while ensuring overall supplier compliance. In
many ways information related to procurement is similar to that involved in order
processing. Both forms of information exchange serve to facilitate operations that link a
firm with its customers and suppliers. The primary difference between procurement and
order processing is the type of operation that results from requirements transfer.

The overall purpose of operational information is to provide the detailed data required for
integrated performance of physical distribution, manufacturing support, and procurement
operations. Whereas planning/coordination flows provide information

45
Concerning planned activities, operational requirements are needed to direct the day-to-
day logistics work. Within the context of information and inventory flows, the managers
within an enterprise must achieve some specific objectives to fully exploit logistical
competency. The operating objectives of integrated logistics are discussed in previous
chapter.

3.3 Barriers To Internal Integration

Organizations do not implement internal logistics integration in a vacuum. It is important

to recognize obstacles, or barriers, that often serve to inhibit internal process integration.
Integration barriers originate in traditional practices related to organization structure;
measurement systems, inventory ownership, information technology, and knowledge
transfer capability. Each potential barrier is discussed below

Organization structure

The traditional organization structure for conducting business prevents any cross-
functional process from being implemented. Most traditional organizations are structured
to divide authority and responsibility according to functional work. In essence, both
structure and budget closely follow the work to be performed. The traditional practice is
to assemble all persons related to performing specific work into a functional department
such as inventory control, warehousing operations, or transportation. Each of these
organizations becomes concerned with achieving its own functional excellence. Since the
goal of integration is cooperation among functional areas, the formal organizational
structure can hinder success. Popular terms to describe traditional functions are the
sandbox or silo mentality. In part, this managerial preoccupation with function is caused
by the fact that most managers are rewarded for achieving functional excellence. The
general belief that prevailed was that functions, excellently executed, would combine to
create overall superior performance. Successful integration of a process such as logistics
requires managers to look beyond their organizational structure and facilitate cross-
functional coordination. This mayor may not be best accomplished by creating a new
organization structure. However, regardless of whether the organization structure is
realigned, significant modification of how an organization deals with cross-functional
matters is essential for successful process integration.

Measurement Systems

Traditional measurement systems have also made cross-functional coordination difficult.

Most measurement systems mirror organization structure. To successfully facilitate
integration of logistics functions, a new scorecard must be developed. Managers must be
encouraged to view their specific functions as part of a process rather than as stand-alone
activities. Managers may, at times, have to assume increased costs within their functional

46
area for the sake of lower costs throughout the process. Unless a measurement system is
created that does not penalize managers, logistical integration will be more theory than
practice.

Inventory Ownership
It is a fact that inventory can help a specific function achieve its mission. The traditional
approach to inventory ownership is to maintain adequate supply to gain comfort and
protect against demand and operational uncertainty. The availability of inventory, for
example, can support long manufacturer runs resulting in maximum economy of scale.
Forward commitment of inventory to local markets can also serve to facilitate sales.
While such practices create benefits, they have a related cost. The critical issue is the
cost-benefit relationship and the risks related to incorrectly located or obsolete inventory.

Information Technology

Information technology is the key resource to achieve integration. However, similar to

performance measurement, information system applications tend to be designed along
organization lines. Many databases are limited to specific functions and are not easily
accessed on a cross-functional basis. The need to share information has resulted in the
development of data warehouses that exist for the sole purpose of sharing information
between systems. Until schemes are developed to transfer information, the existing
applications can serve as a barrier to process integration because critical data cannot be
readily shared.

Knowledge Transfer Capability

Knowledge is power in most business situations. An additional barrier to integration is
limitation in the ability to share experience. Failure to transfer information or knowledge
containment tends to foster the functional orientation by developing a workforce
composed of specialists. The failure to transfer knowledge can also create a barrier to
continued integration when an experienced employee retires or for some other reason
leaves the firm. In many cases, replacement personnel are not available to "learn" from
the experienced worker. The more serious situation is a failure of many firms to develop
procedures and systems for transferring cross functional knowledge. Process work often
involves many employees and is not limited to any specific functional area. Transfer of
this type of knowledge and experience is difficult to standardize

47
3.4 Questions For Self-Analyzation

Q1 Describe the concept of value-added inventory flow. How are the costs of logistics
related to the value-added flow?
Q2 Illustrate a common trade-off that occurs between basic work areas of logistics.

Q3 Illustrate from your experience an example where failure to perform on an integrated

basis has resulted in service failure.

Q4 Discuss and elaborate on the following statement: "The selection of a superior

location network can create substantial competitive advantage."

Q5 How does the "quest for quality" affect logistical operations? Do concepts such as

"total quality" have relevancy when applied to logistics?

Q6 Describe the fundamental similarities and differences between procurement,

manufacturing support, and physical distribution performance cycles as they relate
to logistical control.

48
49
SUPPLY CHAIN RELATIONSHIPS Part I

4.1 Introduction
4.2 Channel Structure
4.3 The Economics Of Distribution
4.4 Specialization
4.5 Assortment
4.6 Concentration
4.7 Customization

4.1 Introduction

Almost from the start, Henry Ford envisioned a totally self-sufficient industrial empire. In
River Rouge, just southwest of Detroit, Ford developed a huge manufacturing complex
that included an inland port and an intricate network of rail and road transportation.
Ford's objective was control. To achieve this goal, he set out to develop the world's first
complex vertically integrated firm.)

To ensure a reliable supply of materials Ford invested in coal mines, iron-ore deposits,
timberlands, glass factories, and even land to grow soybeans used to manufacture paint.
Ford's commitment to self-sufficiency extended to buying f.5 million acres in Brazil to
develop a rubber plantation he called Fordlandia.

Ford's desire for control went beyond material and components. To transport materials to
River Rouge and finished product to dealers he invested in railroads, trucks, and both
Great Lakes and ocean vessels. The idea was to control all aspects of inventory moving
from a network of over forty manufacturing, service, and assembly plants throughout the
United States, Canada, Australia, New Zealand, the United Kingdom, and South Africa to
dealers throughout the globe.

This was clearly one of the most ambitious vertical integration schemes, and Ford
founded he needed help. At the peak of Ford's vertical extension the firm faced
economic, regulatory and labor union barriers that eventually required products and
services to be provided by a network of independent suppliers? The key to effective
marketing was finally found by developing a strong network of independent dealers. As
time passed, Ford discovered that specialized firms could perform most essential work as
well as or better than his own bureaucracy. In fact, these specialists often outperformed
Ford's own units with respect to quality and cost. Entrepreneurial firms soon became
Contributors to Ford's network. Over time, the Ford strategy shifted from ownership-
based control/to one of orchestrating channel relationships. The financial resources at
Ford were shifted to developing and maintaining core manufacturing competencies. Ford
found out that in the final analysis, no firm can be self-sufficient.

50
This chapter treats the complex topic of how firms develop and manage logistical supply
chain relationships. In the aggregate, over 5 million firms are engaged in the process of
manufacturing and distributing products in the United States. Over 2 million of these
firms provide essential services required to position materials and products when and
where required.

The first section of this chapter deals with overall channel structure in highly developed
industrial economies. The sophisticated structure includes elements much broader than
logistical operations. In this initial section the overall scope of channels is examined
because it is important that logistics professionals fully understand broad-based channel
dynamics. The channel should be viewed as the logistical playing field. The next section
presents the economics of distribution that underlie and influence specific channel
arrangements. The key to developing successful relationships is to understand
specialization and assortment. The following section discusses the nature of logistical
relationships. Attention is directed to supply chain competitiveness; the relationship of
risk, power, and leadership; and the characteristics of successful supply chain
management. The final section discusses logistical service alliances. The objective of the
chapter is to develop an understanding of the importance of supply chain relationships.
An appendix is provided to offer extended discussion of the full range of structure
alternatives available in overall channel design.

4.2 Channel Structure

Among the least understood areas of business is the complex grouping of institutions
referred to as the distribution or marketing channel. The channel is the arena within
which a free market system performs ownership exchange of products and services. It is
the battlefield of business where a firm's ultimate success or failure is determined. The
diversity and complexity of channel arrangements make it difficult to describe and
generalize the challenges managers confront when developing a comprehensive channel
strategy. Business managers need to understand channel economics and relationship
management in order to plan and implement satisfactory business arrangements. In actual
practice considerable planning and negotiation precede establishment of a channel
structure. Once a strategy is implemented, it is common for managers to constantly
change or modify one or more facets of their channel arrangement. Thus, channel
arrangements are dynamic as firms constantly seek to improve their relative position. A
superior channel structure can lead to competitive advantage.

A working definition is a useful way to understand the broad scope of channel

considerations. The American Marketing Association defines a distribution channel
as the structure of intracompany organizational units and extra company agents
and dealers, wholesale and retail, through which a commodity, product, or service is
marketed.' In a technical sense, a channel is a group of businesses that take ownership
title to products or facilitate exchange during the marketing process from original owner
to final buyer.

51
Figure below illustrates an overall generic channel structure required to complete the
marketing process. One advantage of graphing channel arrangements in a flow diagram
format is the ability to show, in a logical sequence, the variety and positioning of
institutions that participate in ownership transfer. Of particular interest in Figure 1 below
is the range of institutions that products may pass through and the alternative paths they
can physically follow as they flow from original owner to final buyer. For example, retail
stores may purchase from all levels of supply ranging from farmers to wholesalers.
Despite the attractive simplicity of descriptive flowchart structures such as Figure 1
below, they provide only minimal assistance to managers concerned with developing and
implementing a channel strategy.

Figure 4.1 Generic channels of distribution

Figure 4.2 illustrates the range of channel participants involved in food distribution in the
United States.

Figure 4.3 provides a mapping of alternative arrangements and the resultant channel
structure that J. R. Simplot utilizes to distribute a broad product assortment to different
market segments. These figures clearly illustrate distribution complexity in terms of the
channel relationships that must be negotiated, implemented, and managed. A way to give
meaning to channel descriptions is to focus on the relationship required to make
channels function. Thus, channels are properly viewed as systems of relationships among
business that participate in the process of buying and selling products and services.

52
Figure –4.2 Food channel participants in the United States. (Adapted from Thomas R.
Pierson, Food Industry Institute, Michigan State University, unpublished. Reproduced
with permission.)

53
54
Relationship management is a relatively new label applied to an old and fundamental area
of business. Since the beginning of commercial activity, managers have been concerned
with developing and positioning customer and supplier relationships. The new thrust
behind the popularity of relationship management is based on the belief that successful
business arrangements are most likely to result when participating firms cooperate in
planning and executing performance. The emphasis on cooperation represents a shift
from managing relationships on the basis of power-driven adversarial approaches. The
underlying paradigm is that all parties to the arrangement will be better off if emphasis is
focused on joint problem solving to improve overall efficiency and effectiveness. The
basic premise of relationship management is that cooperation between all participants in a
channel system ultimately will result in synergism leading to the highest level of joint
achievement. This shift in priority toward building relationships is extremely important
for logistics
As noted, the widespread advent of logistical based alliances is one of the main forces
behind the logistical renaissance. Later in this chapter, attention will focus on the
development of supply chain management and the role that logistics alliances can play in
such relationships.

As a basis to understanding channel relationships it is important to stress that not all

channel members have an equal stake in the success of each arrangement. To visualize
this variance in commitment, it is useful to group channel participants as primary or
specialized. A primary channel participant is a business that is willing to participate in the
inventory ownership responsibility or assume other significant aspects of financial risk. A
specialized channel participant is a business that participates in channel relationships by
performing essential services for primary participants for a fee. To illustrate, a retailer is a
primary channel member that typically has a majority of business assets committed to
inventory and accepts the associated risk. In contrast, a trucking firm's involvement in a
channel may be limited to moving products between two geographical locations for a
specified fee. Because the carrier's involvement and associated risk are limited to performing the
specific transportation service, the carrier is referred to as a specialist.

Table 4.1 provides a range of businesses that are typically considered primary and
specialized channel participants. While gauging relative risk between primary and
specialized channel members is important, the fundamental focus when developing
channel relationships is to determine how the capabilities of all potential participants
can be orchestrated into a relational network capable of satisfying end customer
expectations.

55
4.3 The Economics Of Distribution

The foundation for developing a successful channel arrangement rests in fully

understanding the underlying economics of distribution. The economics aspects of
channel relationship extend beyond issues of logistical operations.

Several distinct functions must be completed to achieve effective distribution. As general

rule, specialists can be perform these functions in a manner superior to firms that have
other core competencies. For example, a package distribution specialist like United
Parcel Service can perform transportation in manner typically superior to a privately
operated delivery service. In a channel situation, the combined capabilities of primary
and specialized participants should achieve a basic requirement called assortment.

Assortment consists of sorting and configuring a variety of products and commodities to

satisfy the exact buyer requirements. The primary objective of a distribution channel is to
create value by generating acceptable form, possession, time, and place. Assortment is
the channel process that results in the above attributes. In order to design an effective
channel, it is essential that the requirements related to each attribute be specified.
Attention in this section is focused on those attributes that are basically achieved through
logistical operations. Logistical operations are the primary source of achieving time and
place in a channel arrangement. Through the provision of value-added services, logistics
can also make significant contributions to facilitating the correct form and conditions that
most satisfy possession. Thus, logistical operations are a prime contributor to overall
channel success.

56
 This section examines the above concepts in depth. Initially the functional
requirements of overall distribution are examined. Next, the concept of specialization
is reviewed. This sets the framework for description and illustration of the assortment
process.

Traditional Functions
A functional approach to what a channel does provides a logical explanation of the
overall distribution process. Figure 4 illustrates the most commonly agreed upon list of
traditional functions. A function, from a channel perspective, represents work considered
to be universal to marketing and logistics of all products and services. In the typical
channel arrangement, different channel members may alternatively perform a specific
function. However, it must be performed for the channel to be successful. It also may be
performed or duplicated numerous times. For example, storage may be performed by a
manufacturer, wholesaler, Retailer, and even the final buyer. On the other hand, market
financing might be performed by only one institution for the overall distribution channel.
The lesson learned from Henry Ford stressed that no firm can be totally self-sufficient.
Successful distribution involves precise cooperation among many participants and
requires aggregate performance of essential functional work.

Fig 4.4 Marketing Functions

57
Early scholars grouped functional requirements for effective distribution under three
headings: exchange, physical distribution, and facilitating. The exchange functions
involved broad activities related to buying and selling. As such, exchange concerns
activities required to transfer ownership. The physical distribution function is the origin
of what is referred to in this book as logistics. The essential activity consists of getting
the right products to the right place at the right time. In contemporary logistics the scope
of operational concern is significantly broader than transportation and storage,
transcending broad supply chain arrangements. Logistics is viewed as encompassing all
work related to inventory positioning, which can also involve aspects of satisfying form
and possession requirements.

The traditional facilitating functions include standardization, market financing, risk

bearing, and market information and research activities.

Two basic concepts-specialization and assortment-provide valuable insight into how the
work related to achieving these universal functional requirements gets done. These
concepts are discussed next.

4.4 Specialization

Specialization is a fundamental driver of distribution efficiency. In actual practice some

types of businesses can introduce economies to the logistical process because they are
capable of performing essential functions better than others. While functions, as defined
above, are essential to the distribution process, it is not necessary for any channel
participants to be held responsible for performance of any specific activity. In fact, the
economic justification for specialized channel participants is their ability to superiorly
perform a specific function. Thus, while a given business may be expendable in a specific
distribution network, the basic functions must be performed. For example, a privately
owned transportation carrier can be sold and replaced by a public contract carrier, but the
function of delivery must still occur.

Specialization is fundamental to efficient business. When one considers the sheer

magnitude of logistical requirements that must be satisfied in a highly developed
economy, the reasons for underlying specialization become obvious. Figure 5 provide
statistical profile of exchange requirement in United States economy.

The logic specialization is based on economies of scale and scope. The general notion has
long standing in business literature. When a firm specializes in form of a specific
function, it develops the scale and scope to achieve operational economies. These
economic benefits, coupled with associated expertise, represent the core competency of
specialized business.

The logistics service provider market includes many different types of specialized firms.
The most notable in terms of the sheer number of firms are for-hire transportation and
warehouse service companies. Additional special service providers include material

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handlers, custom brokers, pallet providers, and packaging designers. In recent years, the
growth of a new specialized industry consisting of facilitators has mushroomed.
Facilitators are firms that specialize in providing customized packaging, insertion of
marketing incentives, coupon redemption for merchandise, and other essential value-
added services. The economic justification for facilitators is their expertise in providing
desired services more efficiently than their primary channel counterparts.

The justification for outsourcing all or part of the logistical requirements to business
specialists is found in economies of scale and expertise. Specialization is the underlying
construct of product assortment. Assortment is most efficiently achieved through
specialization.

4.5 Assortment

Channel arrangements typically involve cooperative performance by a number of

independent businesses that orchestrate their activities to deliver products and material
assortments to the right location at the desired time. As noted earlier, to satisfy
assortment requirements, channel participants must perform a number of essential
functions. From an efficiency viewpoint, the essential functions should ideally be
performed with minimum duplication. The management of supply chain relationships
involves working out logistical solutions that introduce simplification and standardization
to reduce duplication and associated waste. The goal is to achieve as much synergism as
possible during product assortment. To fully appreciate the importance of developing
logistical relationships, it is essential to understand how assortment is accomplished in a
channel-arrangement.

59
60
 Assortment has received considerable attention in business literature. It is the process
of creating and positioning a mix of products desired by a customer. At strategically
positioned locations in a distribution channel, products must be concentrated, sorted,
and dispersed to the next location in the supply chain. Assortment accomplishes this
task. The assortment process has three basic steps: concentration, customization, and
dispersion.

4.6 Concentration

Concentration refers to the collection of large quantities of a single product or several

different products so that they can ultimately be sold as a group. A manufacturer's
consolidation warehouse is a prime example. Large shipments of products produced at
various factories are transferred to the consolidation warehouse. When a customer order
is received, each item or product demanded is collected into a unique assortment. The use
of a consolidated channel structure reduces overall transactions since the customer can
place a single order to the consolidation warehouse rather than placing separate orders to
each manufacturing facility for the specific items produced there.

An alternative arrangement is to use the services of an industrial distributor or

wholesaler. The use of such specialists allows manufacturers and retailers to achieve the
benefits of concentration without directly performing the associated work. The basic
principle of concentration is referred to as minimum total transaction. The principle
illustrates that introducing specialists can reduce the total transactions required to
complete assortment. In essence, this highlights the power of specialization. Figure 6
shows how inclusion of a wholesaler or distributor in a channel structure significantly
reduces the total number of transactions required to provide product assortments.

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 Figure 6 Principle of minimum total transaction

4.7 Customization

The process of sorting and grouping products into unique combinations is referred to as
customization. Customization results in products and quantities that uniquely satisfy a
specific customer's requirements. Manufacturers may offer customers mixed or
combination truckloads of products. Such mixed shipments allow customers to maintain
minimum inventory for that supplier while realizing the benefits of lower transportation
cost as a result of volume shipment.

The capability of a firm to achieve effective customization is at the heart of developing a

supply chain arrangement. For a firm to sell all products and deliver in a single shipment
with one invoice, it is usually necessary to make substantial changes in conventional
business practice. The Procter & Gamble Company sidebar illustrates the massive change
required to effectively position the firm to logistically perform customization
requirements.

The customization trend in contemporary business is far broader than simply

sorting products into standard combinations. Customization often involves special

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packaging to create unique products for sale through exclusive channel arrangements. For
example, warehouse stores, such as SAM'S, have thrived on the presentation of unique
product packs. This trend is even more pronounced with the advent of special bulk-size
combinations in almost all retail formats. Customization also involves the value-added
assembly of unique promotional displays. Such displays may contain seasonal
promotions such as holiday wrapping or packaging, new-product promotions, trial
samples, point-of-sale displays, Of a host of other creative marketing tactics. The overall
process of customization is a critical part of the value-added channel process.

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SUPPLY CHAIN RELATIONSHIP-II

5.1 Supply Chain Competitiveness

5.2 Risk, Power, And Leadership
5.3 Elements Of Success
5.4 Logistical Service Alliances
5.5 Factors Stimulating Service Based Alliances
5.6 Core Specialization
5.7 Power Clarity
5.8 Cooperation Emphasis
5.9 Regional Alliances Create Transcontinental Moves
5.10 Integrated Logistics Service Provider
5.11 Questions To Self Analyzation

5.1 Supply Chain Competitiveness

The motive behind the formation of supply chain arrangements is to increase channel
competitiveness. The basic idea is derived from two paradigms.
First, the fundamental belief is that cooperative behavior will reduce risk and greatly
improve the efficiency of the overall logistical process. To achieve a high degree of
cooperation, it is necessary for key supply chain participants to share information. Such
information sharing should not be limited to transaction data. Equally or more important
is a willingness to share strategic information so that firms can jointly plan the best ways
and means to satisfy requirements. This cooperative paradigm is based on the belief that
information collaboration is essential to allow participating firms to do the right things
faster and more efficiently.

The second paradigm is elimination of waste and duplicate effort. At the root of
this paradigm is the fundamental belief that substantial amounts of inventory deployed in
a traditional channel constitute a risky commitment. Sharing information and joint
planning can eliminate or reduce risk associated with much of this inventory speculation.
In fact, if information is shared and used properly, much of the inventory positioned
between the end of a production line and the customer checkout can be eliminated from
the channel. One industry study concluded that the average dry grocery product requires
104 days to reach the supermarket checkout counter from the time it comes off the
supplier's line. II The same study reported a total of 66 weeks for the apparel supply
chain to move raw material through the production process to the retailer. The average
inventory of sutures in the health care industry ranges from 12 to 18 months' supply. The
central notion behind supply chain rationalization is not that inventory is bad and should
be totally eliminated. Rather, inventory deployment should result from economic and
service necessities and not from tradition and anticipatory practices. The key to improved
performance is to do the right things more often and do them faster. As one observer

64
stated, "The goal of the enlightened firm is to do more and more with less and less until it
does everything with nothing."

The strategic implications for logistics contained in these basic paradigms are developed
in depth in Chapter 16. The main idea is to think in terms of logistical system
reengineering in the context of manufacturers, wholesalers, retailers, and service
specialists working together.

In the mass merchandise industries, retailers like Wal-Mart, Krnart, JC Penney, Target,
and Walgreens have formed supply chain arrangements aimed at improved
competitiveness. Using a combination of internal resources and cooperation with their
suppliers, these firms have positioned their logistical competency as a core business
strategy.14 Their record in terms of retail growth and profitability speaks for itself.

Several manufacturers have arranged supply chains in such diverse industries as

chemicals, textiles, building supplies, and household tools, Firms like Dupont, Levi
Strauss and Company, Owens-Coming Fiberglas, and Black & Decker have pioneered
revolutionary new ways to improve the value processes of their specific supply chains.

At the wholesale level, drug suppliers such as McKesson, Bergen Brunswig, FoxMeyer,
and Colonial Hospital Supply have moved from near extinction to become dominant
suppliers in their industry. IS Food wholesalers and cooperatives such as Sysco, Spartan
Stores, Fleming, and Supervalu have revolutionized traditional logistics practices. Similar
developments can be observed in the paper and supplies industry by firms such as
Zellerbach, Unisource [formerly Paper Corporation of America (PCA)], and Resource
Net International (formerly International Paper). Likewise, Ace in the hardware business
and W. W. Grainger in. industrial supplies have revolutionized conventional logistics
practice in their respective fields.

These examples of revolutionary change are not limited to specific firms, their trading
partners, and service suppliers. In the case of the food industry two major trade
associations, the Grocery Manufacturers of America (OMA) and the Food Marketing
Institute (FMI), as well as other interested groups have joined forces to provide a
leadership structure for conventional food companies to compete with alternative formats
such as warehouse club stores, convenience stores, and mass merchandisers. The
initiative, known as efficient consumer response (ECR), is a blueprint for building an
industry wide solution to counteract competitive deterioration. 16 The Coca-Cola
Retailing Research Council sponsored a study designed to facilitate improved logistics
replenishment in the food industry. The research, completed by Mercer Management
Consulting, was entitled New Ways to Take Costs out of the Retail Food Pipeline. 17

All of these diverse examples have common grounds with respect to fundamental
features. First, the new practices of logistics are technology-driven. Effective time based
logistics management is a proven strategy to increase competitiveness. Second, logistical
solutions that result in lasting distinctiveness combine the experience and talents of key
supply chain participants from trading partners to service providers. At the heart of

65
several of the examples highlighted is a solid commitment to create a supply chain
culture. The mechanism by which the supply chain is effectively integrated and
competitive superiority achieved' can best be accomplished through voluntary
arrangements.

5.2 Risks, Power, and Leadership

Acknowledged dependency is a prime force in the development of supply chain

solidarity. To the degree that managers acknowledge their joint dependency, the potential
exists to develop cooperative relationships. This dependency is what motivates their
willingness to negotiate functional transfer, share key information, and participate in joint
operational planning. Three concepts-risk, power, and leadership-are essential to
understanding how supply chain arrangements work.

Risk Enterprises that participate in supply chain arrangements each acknowledge a

specific performance role. They also share a joint belief that they will be better off in the
long run as a result of the collaboration. Each enterprise specializes in an area or function
that coincides with its unique core competency. By cooperating, each specialized
function becomes integrated in the supply chain.

As a general rule, a channel member whose competency is highly specialized assumes

less risk with respect to overall performance. Since its function is unique, it is possible
that other supply chains will also require its services, thus minimizing the risk associated
with anyone arrangement. A retailer or a wholesaler incurs risk as a result of stocking
products for a specific manufacturer. The traditional practice is to hedge risk by offering
customers an assortment of many different manufacturers' products, thereby reducing
reliance on any supplier.

In contrast, a processor or manufacturer with a limited product line may be totally captive
to the capabilities of a limited number of supply chain arrangements. In essence, the
manufacturer may be "betting the business" that the arrangement will be successful. For
manufacturers, channel selection is risky business. The disproportionate risk among
channel members is of central importance in determining how logistical relationships
develop and are managed. Some channel members have a deeper dependence on channel
success than others. Therefore, members with the most at stake can be expected to
assume more active roles and shoulder greater responsibility for facilitating channel
cooperation.

Power In a practical sense, the prerogative and even the obligation to spearhead
cooperation rest with the supply chain participant that enjoys the greatest relative power.
Over the last decade significant power has shifted from manufacturers to retailers because
of consumer patronage.

While not universal to all aspects of business, the general shift of power to retailers has
resulted from four somewhat unique events. First, the general trend has been toward

66
ownership consolidation within specific retail areas, meaning that fewer firms having
more extensive coverage of consumer trading areas dominate channels. Second,
retailers have access to vital information concerning what is happening in the
marketplace. The combination of point-of-sale data and near real-time communication
capability means that consumer trends can be identified and accommodated as soon as
they begin to materialize. Walgreens maintains in-store computers and continuous
satellite transmission to keep merchandise buyers posted on developing market trends. A
third factor that has favored retailers is the increasing difficulty and high cost that
manufacturers confront in developing new brand franchises. The fact of the matter is that
many premium private-label items have greater category penetration than so-called
national brands. For example, the Gap and The Limited almost exclusively distribute
their private branded merchandise. Finally, the whole process of logistical replenishment
has shifted from a push to a pull posture. The exact timing and sophisticated orchestration
of a high-velocity market-paced logistics system are ideally determined from the point of
consumer purchase. When consumers purchase products, the final or ultimate potential
value achieved by the supply chain has become a reality.

While the above noted forces are a modern reality, not all contemporary factors favor a
shift of power forward in the supply chain. One major countervailing force has been the
rapid deterioration of traditional channel structures. In the not so distant past, marketing
channels were clearly defined by product line. As noted earlier , because of today's
scrambled merchandising environments, products are often cross-channel distributed to
accommodate specific markets. New retail formats in almost all consumer-based
industries have begun to blur traditional channel arrangements. The result is that
manufacturers are finding new channel options to distribute their products.

As a substitute for full reliance on traditional brand franchises, manufacturers have

been reengineering their operations to become the dominant supplier or trade franchise
for selected consumer products or categories. The movement toward achieving a trade
franchise positions manufacturers to offer greater value to their prospective channel
partners. In addition to offering superior brands at competitive prices, a dominant trade
franchise involves several key operational attributes that increase a firm's attractiveness
as a supply chain participant.

To create a dominant trade franchise involves the following attributes:

Willingness to develop cooperative arrangements, Manufacturing and logistical

flexibility to accommodate supply chain partner requirements rationalization of
supply base to ensure ability to accommodate frequent schedule changes without
becoming an impediment to flexibility, tailored marketing and merchandise programs
availability of information linkages to accommodate cross-organizational operations,
and short, responsive, flexible, and reliable order cycles to facilitate rapid
replenishment of customer requirements. Of course it goes without saying that the
ideal supplier will perform at or below average industry logistics cost.

67
 Because both manufacturers and distributors have repositioned traditional op-erations,
the potential exists to create improved working relationships. A.s a general rule,
powerful firms tend to link together in the development of supply chain arrangements.
For the arrangement to be successful the dominant parties to the cooperative
arrangement need to be receptive to change.

Leadership Just as individual organizations need leaders, so do supply chains. At

present, no definitive generalization can be made concerning which firm should ideally
assume leadership responsibility. In many situations, specific firms are thrust into a
leadership position purely as a result of their size, economic power, customer
patronage, or comprehensive trade franchise. In some successful arrangements there is
a members. In other situations leadership appears to gravitate to the firm that initiates
the clear presence of superior power on the part of one participating enterprise that is
acknowledged in the form of mutual dependency and respect on the part of all supply
chain relationship.

Substantial research confirms the fact that success of a supply chain arrangement is
directly correlated to the presence of constructive leadership capable of stimulating
cooperative behavior between participating firms. The essence of channel leadership is to
ensure that the appropriate firm performs functions essential to logistical integration.
Maintaining a total supply chain perspective is particularly important to logistical
relationships. The leadership role involves creating function spin-off and absorption
agreements between businesses participating in the arrangement.

Table5.1 provides a summary of statements that specific firms used to communicate their
supply chain vision to potential participants. One critical role of leadership is to create a
mutually acceptable set of expectations concerning the potential benefits that will result
from involvement in the relationship. What appears to be evolving is a style of channel
leadership that encourages informal communication and a high degree of commitment to
experimentation

68
A medical products manufacturer. Maximize customer satisfaction and profitability
through world-class supply chain arrangements. These promote operational excellel1ce
and utilize information technology, allowing management of the channel relationship and
the physical flow of products worldwide.
An appliance manufacturer. Commitment to the mutual sharing of information and
technology to reduce total supply chain cycle time with associated costs tailored to meet
the unique requirements of specific customers.
Computer manufacturer: A Flawless, fast and simple delivery of value perceived by our
customer such that the firm becomes the benchmark toward which other strive Major
food retailer: A willingness to share information to achieve short, reliable delivery and
ensured product availability. The firm is committed to developing long term relationship
with suppliers that are willing to jointly plan merchandising and logistical operation
.
Mass merchant. It is essential that all waste and duplication be eliminated between
operations of preferred suppliers and those of the firm's logistics and merchandising
groups. Information will be fully shared and operations modified as necessary to enable
improved competitiveness. The firm is committed to sharing benefits with high-
performance preferred vendors.

. Table 5.1 Supply Chain Leadership Vision

5.3 Elements of Success

A question still remains concerning what factors will result in successful supply chain
relationships. It is also important to identify obstacles that must be overcome to achieve
success. The sidebar summarizes the findings of comprehensive research completed by
Rosabeth Moss Kanter. Her study involved more than 500 interviews with managers in
37 firms from 11 different areas of the world that participated in collaborative
arrangements. Tables 3 and 4 summarize success factors and common obstacles directly
related to supply chain relationships. The summary factors are drawn from research
completed by Andersen Consulting. These findings indicate the attributes of retailers and
wholesalers that have enjoyed successful supply chain arrangements.

69
Retailers Manufacturers
High Level of cooperation Information sharing
Similarity of Goals & objectives Recognition of Mutual benefits
Clear communications Controlled implementation
Senior Management support Joint task force
Control of inventory Commitment/Source dedication
Benefit realization
Source: Anderson consulting

Table 5.2 Factors Increasing Likelihood of Supply chain Relationship Success

Retailers Manufacturers
Low- volume stock keeping units (SKU’s) Lack of communication
Resistance of manufacturers to change Trust level
Information system Non-compatible system
Non-Compatible data formats Understanding Technical Issues
Resistance of customers to change
Readiness of retailers
Table5.3 Common obstacles confronted when creating supply chain relationship

Prospects for the continued development of strategic arrangements appear bright. The
president of the Grocery Manufacturers of America recently predicted that such
arrangements' 'will explode over the next five years and become the prevailing way of
doing business. However, a note of caution should be interjected concerning the ideal
duration of a successful arrangement. Ample evidence suggests that managers must plan
for the ultimate dismantling or renovation of a supply chain arrangement. While some
arrangements may encounter a natural death as a result of losing momentum, others may
persevere to the point that they no longer embody leading-edge practice.

This section has provided an overview of how the primary participants in a supply chain
relationship link together. As noted earlier, a common logistics practice is for individual
firms in a supply chain to create alliances with specific service suppliers. The next
section discusses logistics service alliances, which are an important part of supply chain
management

70
5.4 Logistical Service Alliances

Webster defines the noun alliance as "being allied; a bond or connection. An association
to further the common interests of the members.’ All of the above descriptions fit the
wide range of new logistics service relationships being developed throughout the globe.
As shippers and service firms explore and experiment with building alliances, they are
typically "managing in uncharted areas." This section highlights factors that stimulate
logistics service alliances. It concludes with a broad review of the range of typical
alliances involving service providers. The rapid growth of the integrated logistics service
industry is also examined. Beyond a doubt, this industry has mushroomed over the past
five years in direct response to perceived market potential. Finally, the generally
recognized "do's and don'ts" of alliancing are reviewed.

5.5 Factors Stimulating Service Based Alliances

The appeal of logistical service alliances is fueled by several macro trends in overall
business philosophy. Such service alliances are a direct reflection of senior management's
desire to concentrate basic business resources on core competency. The idea of
outsourcing support activities to specialists results from the desire to "right size"
organizations and to focus activities on "what they know how to do best." Logistics
activities are prime candidates for outsourcing. Four attributes of logistical operations are
essential to build strong working relationships: mutual dependency, core specialization,
power clarity, and emphasis on cooperation. Each is discussed.

Mutual Dependency
A relationship that is built around the performance of logistical service must
acknowledge a great deal of dependency. The performance of a service either happens as
planned or does not: there are no gray areas. Therefore, service providers involved in an
alliance must acknowledge dependency. Information technology increasingly makes real-
time performance measurement of logistical operations affordable. Several carriers such
as Schneider National, Roadway, Federal Express, and United Parcel Service offer
positive tracking of shipments to ensure that all customers remain fully informed of
expected and actual delivery performance. As such, mutual dependency exists on both
sides of the relationship.

5.6 Core Specialization

A second characteristic of logistical service alliances is the high degree' of core

specialization involved in day-to-day operational performance. The simple fact of the

71
matter is that most logistical services benefit from economy of scale and are highly
vulnerable to diseconomy of scale. Therefore, an enterprise whose core competency
involves performing an essential service has intrinsic appeal for firms that require the
service. The logistical specialist is better positioned to perform essential service day in
and day out than a firm with primary competency in making or selling products.
Therefore, the appeal of the logistics specialist is a logical extension of the basic
doctrines of scale and scope economies

5.7 Power Clarity

A third characteristic of a logistical relationship is how it plays out in the typical

power/conflict dynamics of an inter organizational arrangement. As noted earlier, the real
power in supply chain arrangements typically belongs to manufacturers or distributors.
The demand for logistics is derived from market acceptance of basic manufacturing,
wholesaling, and retail business strategies. In other words, nothing moves on a
continuous basis unless it sells on a continuous basis. Suppliers of logistical services
inherently acknowledge that primary firms are dominant in determining the managerial
direction of an overall supply chain arrangement. Whereas significant power struggles
may occur between dominant institutions in a channel, few if any of these confrontations
and the associated conflict directly impact service providers. This clarity of power
focuses the attention of suppliers on providing their designated services.

5.8 Cooperation Emphasis

Finally, since specialized role performance and legitimate power to orchestrate the
channel process are not in question, the service provider is ideally positioned to
cooperate. In fact, zero defect execution of specified tasks and "being easy to do business
with" are the primary appealing attributes of preferred service specialists. Thus, the
marketing strategy of a highly successful service provider builds on a platform of
cooperation. The slogan' 'Whatever it takes, wherever it is" captures the typical service
provider's dual commitment to excellence and cooperation.

Increasing Service Provider Efficiency

Just as primary firms have undertaken initiatives to improve their supply chain posture,
service firms themselves also use alliances to improve their competitiveness. The
formation of alliances between service suppliers to increase their operating capabilities
and efficiencies is widespread.

Highly visible alliances have focused on bringing together the inherent advantages of
firms that specialize in the performance of specific services. A few transportation firms
have vertically integrated by virtue of ownership, such as Union Pacific's purchase of
Overnight Transportation Company. However, such multimodal acquisitions remain rare.
The more common solution for creating strong intermodal fusion has been the strategic
alliance.

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Several large truckload carriers have created alliances for intermodal, trailer-on-flatcar,
and double-stack container service. In essence, motor carriers perform the pickup and
delivery and limited line-haul freight to facilitate subsequent rail movement. The
railroads, in turn, provide long-haul freight movement. Regularly scheduled intermodal
train service provides the economies of rail. The motor carrier pickup and delivery
service provides the inherent benefits of truck flexibility. A leader in the development of
these coordinated services is J. B. Hunt Transport Services, Inc., which has established
alliances with Burlington Northern, the Southern Pacific, and Santa Fe Railway
companies. It would appear that the possibilities for creative alliances are limited only by
the participants' imagination. In the case of the J. B. Hunt/Santa Fe alliance, Ralston
Purina and United Parcel Service (UPS) are important participants. Ralston is a frequent
trailer-on-flatcar shipper, and UPS is the largest purchaser of such services to support its
extensive package distribution business. The four companies working together are able to
trade off and accommodate each other's requirements. For example, if Ralston Purina
needs extra capacity at late notice, UPS may be able to make some of its leased capacity
available. Thus, payoffs from an alliance can benefit a wide range of participating firms.

While transportation firms have traditionally joined forces through regulated working
agreements, the strategic alliances of the 1990s break with tradition. Many regional less-
than-truckload (LTL) carriers are forming horizontal alliances with other LTL carriers so
that they can effectively compete with large nationwide carriers such as Roadway,
Consolidated Freightways, and Yellow Transport. What the regional carriers are doing is
sharing customers through an alliance that allows them to offer one-stop nationwide
shopping, as discussed in the sidebar. Some regional L TL firms have gone as far as
linking up with national truckload haulers to provide line-haul service. For example,
Southeastern Frcight and Viking Freight have such arrangements with J. B. Hunt and
Schneider National.

5.9 Regional Alliances Create Transcontinental Moves

Shippers, requiring shorter lead times and better service, have created a new level of
competition between regional and national carriers. Regional carriers nave responded to
this new competition by forming strategic alliances to bridge regional service areas
enabling transcontinental movements.

Southeastern Freight Lines of Columbia, South Carolina, was one of the pioneers in

forming regional carrier alliances. Its alliance is with Central Freight Lines (of Waco,

Texas) and Viking Freight System (of San Jose, California).

73
Under the arrangement, Southeastern picks up freight in its region and transports it to a
consolidation center in Atlanta. Depending on the customer's location, the freight is
picked up by Viking for delivery to Los Angeles or by a carrier hired by Central for
delivery to Dallas. Central hires national long-haul carriers such as J. B. Hunt or
Schneider National to transport material from Atlanta to Dallas. Once in Dallas, though,
Central handles delivery to the final customer.

When the freight arrives at either Central's dock in Dallas or Viking's dock in Los
Angeles, the consolidated load is broken down into smaller regional and local deliveries.
These regional and local deliveries are handled by Central and Viking as required. This
alliance has allowed regional carriers operating in an integrated fashion to deliver product
one to two days faster than transcontinental carriers. The delivery is faster because
transcontinental carriers. often hold freight to consolidate loads and may handle product
more often by reconsolidating at major hub locations.

Excellent service is also achieved under this alliance. Southeastern takes responsibility
and risk by retaining full ownership of material in transit until final delivery.
Furthermore, Southeastern tracks all shipments through its information system. Another
benefit is that customers receive only one bill of lading regardless of how many carriers
actually handle the freight. Southeastern then handles payment to each carrier.

Regional warehouse firms have created similar alliances for integrated marketing and
service. Associated Warehouses, Inc., is an example. Similar working alliances exist
among pool distributors, freight forwarders, and facilitation companies.

Many service providers have extended their basic competitiveness by adding new and
unique value-added services. Many service suppliers have become experts in performing
tasks that are generally perceived as inconvenient or a burden for their customers to
perform. The result is creativity and expertise that benefit their customers. The range of
documented value-added services includes such activities as assembly,
Assortation, sequencing, basic and promotional packaging, repacking, pricing, and
labeling. For an extensive period, Schneider National provided basic data processing
support for 3-M transportation. The range of such services clearly is limited only by the
customer's need and the resources of the service supplier.

As a result of this massive change, a new format of logistical services, called the
integrated service provider, has emerged to accommodate the growing requirements of its
customer base. Because this aspect of the service industry has experienced such explosive
growth, it is discussed next.

5.10 Integrated Logistics Service Provider

In less than a five-year period, over 100 new firms were established with the expressed
objective of providing integrated logistical services to shipper customers.24 The vision of
these firms was to offer a service sufficiently comprehensive to provide all or a

74
significant part of a shipper's total logistical requirements. To date, no standard
terminology exists to describe this explosive industry. Some names that have been used
are third-party logistics, contract logistics, and logistical utilities. The title used here is
integrated logistics service providers, because almost all industry participants provide a
service that is broader than a single function. In other words, the industry participants
offer potential customers the ability to purchase two or more aspects of their overall
logistical requirements from one supplier. These services were traditionally sold by
separate provider. One example is warehousing and transportation, where the integrated
service provider receives customer orders, picks and packs the merchandise, and then
completes delivery. The typical approach is for the integrated firm to perform the
specified services under single ownership. However, many have created alliances to
extend their ability to market single-source logistics service.

The integrated logistics service market has been estimated to range in size from $6 billion
to $9 billion per year with a projected potential to reach $60 billion by the year 2000.25
Few argue that the provision of integrated services represents a significant business
opportunity. Participants in the industry are generally recognized as having originated
from five basic businesses: carrier-based, warehouse based, forwarder/broker-based,
information-based, and customer-based.

The carrier- and warehouse-based firms are essentially integrating into each other's basic
business via acquisition. The provision of transportation and storage in combination with
a broad range of basic and value-added services offers shippers the potential single-
source purchase of an integrated service package. Most firms offer information
management services to facilitate physical performance. The vast majority of integrated
service firms have their origin in what are commonly called asset businesses. In the eyes
of some of their competitors this prior investment in assets introduces a potential
marketing bias. The concern is that the logistics service firm will force business toward
its parent company. While undoubtedly some such practice occurs, most of these firms go
out of their way to guarantee the best solution to meet a shipper's requirement. To
illustrate, Roadway Logistics provides single-source transportation management for
Libbey-Owens-Ford. To perform the service, it facilitates the purchase of selected
transportation services from a variety of competitors.

The forwarder/broker-based, information-based, and customer-based firms each offer a

unique justification for their service orientation. The forwarder/broker firms stress their
ability to link operational assets across providers of whatever service is required to satisfy
their customer logistics requirements. As would be expected, the information-based
services stress the use of technology to orchestrate operating arrangements.

The customer-based integrated service firms are an extension of a firm's basic business
capabilities. Their original strategy was to sell experience and capacity in a specific
industry. Over time, all integrated service companies can be expected to offer whatever
service shippers are willing to purchase. These service-driven solutions are typically
operationalized in the form of comprehensive alliances.

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Summary
Supply chain relationships are among the most complex and least understood areas of
logistics operations. In this chapter, the distribution channel was positioned as the
battlefield of business. It is within the channel that the ultimate success or failure of a
business is determined. The success or failure is clearly related to competition. It is also
related to a firm's ability to establish effective supply chain relationships.

Relationship management is a relatively new name applied to old and important areas of
business. It involves development and management of supply chain arrangements. A
typical supply chain relationship involves primary trading partners and service providers.
The difference between these' 'participants" is the nature of the activities performed and
the risk they are willing to assume.

Some fundamental economies of distribution determine channel arrangements. Several

indispensable functions must be completed to achieve satisfactory performance. The
capabilities of some firms to perform selected activities better than others result from
specialization. Some firms make provision of selected services their core competency.
The overall supply chain must complete the assortment of merchandise that results in the
right products being at the right place at the right time.

Henry Ford found out that no firm can be self-sufficient in performing all aspects of
assortment. The development and maintenance of effective relationships require
significant change in traditional managerial practice. Executives must learn how to
manage by persuasion and cooperation as opposed to coercion. To develop effective
supply chain arrangements, executives must learn the ins and outs of managing across
boundaries. A growing body of knowledge is being accumulated to assist managers in
developing successful cooperative arrangements.

The establishment and maintenance of logistical service alliances were referred to as

"managing in uncharted areas." Many macro trends in business are causing managers to
explore these new options for purchasing key services. In practice, logistical service
alliances tend to focus on achieving supply chain competitiveness or making service
providers more efficient. While the "art of alliancing" is a growing body of knowledge,
the experience gained by early pioneers offers useful guidelines.

The appendix to this chapter offers a detailed discussion of the full range of channel
relations. This appendix should provide useful background to determine where supply
chain arrangements and alliances fit into the overall range of channel alternatives. It also
serves as background for readers who have not previously studied the supply channel
area.

Whereas the dimensions of domestic logistics are broad-based, global horizons introduce
significantly more complex and demanding requirements.

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5.11 Questions For Self Analyzation

1 Discuss the impact of power on supply chain management.

2 What factors appear to be important determinants of supply chain success?

3 How do supply chain arrangements increase competition?

4 Describe some of the ways in which service providers have increased efficiency by
improving their supply chain posture.

5 Describe and provide examples of value-added services.

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TRANSPORTATION

6.1 Transport Functionality And Principles

6.2 Product Movement
6.3 Product Storage
6.4 Relationship Between The Shipper, The Consignee, And The Public
6.5 Questions For Self- Analyzation

A wider range of transportation alternatives exists today for product or raw material
movement than ever before. For example, a firm may consider for-hire transportation,
private transportation, or a variety of contractual arrangements with different transport
specialists. Service options include changes in billing, information availability, product
liability, and pickup and delivery practices. Carriers and shippers now have the flexibility
to negotiate responsibility for all transportation-related activities.
.

6.1 Transport Functionality And Principles

Transportation is one .of the most visible elements of logistics operations. As consumers,
we are accustomed to seeing trucks and trains moving product or parked at a distribution
facility. While this experience provides a good visual understanding of transportation
elements, it does not allow the necessary depth of knowledge to understand
transportation's role in logistics operations. This section establishes that foundation by
reviewing functionality provided by transportation and the underlying principles of
transport operation.

Transport Functionality
Transportation functionality provides two major functions
1. Product movement
2. Product storage.

6.2 Product Movement

Whether the product is in the form of materials, components, assemblies, work-in-

process, or finished goods, transportation is necessary to move it to the next stage of the
manufacturing process or physically closer to the ultimate customer. A primary
transportation function is product movement up and down the value chain. Transportation
utilizes temporal, financial, and environmental resources, it is important that items be
moved only when it truly enhances product value.

The major objective of transportation is to move product from an origin location to a

prescribed destination while minimizing temporal, financial, and environmental resource
costs. Loss and damage expenses must also be minimized. At the same time, the
movement must take place in a manner that meets customer demands regarding delivery
performance and shipment information availability

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6.3 Product Storage

A less common transportation function is temporary storage. Vehicles make rather

expensive storage facilities. However, if the in-transit product requires storage but will be
moved again shortly (e.g., in a few days), the cost of unloading and reloading the product
in a warehouse may exceed the per A second method to achieve temporary product
storage is diversion. This occurs when an original shipment destination is changed while
the delivery is in transit. Traditionally, the telephone was used to direct diversion
strategies. Today, satellite communication between enterprise headquarters and vehicles
more efficiently handles the information.

In summary, although product storage in transportation vehicles can be costly, it may be

justified from a total-cost or performance perspective when loading or unloading costs,
capacity constraints, or the ability to extend lead times are considered.

Principles

There are two fundamental principles guiding transportation management and operations.
They are economy of scale and economy of distance.

Economy of scale

It refers to the characteristic that transportation cost per unit of weight decreases when the
size of the shipment increases. For example, truckload (TL) shipments (i.e., shipments
that utilize the entire vehicle's capacity) cost less per pound than less-than-truckload (L
TL) shipments (i.e., shipments that utilize a portion of vehicle capacity). It is also
generally true that larger capacity transportation vehicles such as rail or water are less
expensive per unit of weight than smaller capacity vehicles such as motor or air.
Transportation economies of scale exist because fixed expenses associated with moving a
load can be spread over the load's weight. As such, a heavier load allows costs to be
"spread out," thereby decreasing costs per unit of weight. The fixed expenses include
administrative costs of taking the transportation order, time to position the vehicle for
loading or unloading, invoicing, and equipment cost. These costs are considered fixed
because they do not vary with shipment volume.

Economy of distance

It refers to the characteristic that transportation cost per unit of distance decreases as
distance increases. For example, a shipment of 800 miles will cost less than two
shipments (of the same combined weight) of 400 miles. Transportation economy of
distance is also referred to as the tapering principle since rates or charges taper with
distance. The rationale for distance economies is similar to that for economies of scale.
Specifically, the relatively fixed expense incurred to load and unload the vehicle must be

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spread over the variable expense per unit of distance. Longer distances allow the fixed
expense to be spread over more miles, resulting in lower overall per mile charges

These principles are important considerations when evaluating alternative transportation

strategies or operating practices. The objective is to maximize the size of the load and the
distance that it is shipped while still meeting customer service expectations

Participants in transportation Decisions

Transport transaction are often influenced by five parties: the shipper(the original
party),the consignee (destination party or receiver), the carrier, the government, and the
public.

6.4 Relationship Between The Shipper, The Consignee, And The

Public

Above Figure illustrates the relationship between these parties. They may be related by
ownership in some situations, such as when company-owned vehicles are used to
transport goods between two company locations. In many cases, however, the parties are
independently owned and operated. In order to understand the complexity of the
transportation environment, it is necessary to review the role and perspective of each
party.

Shippers and Consignees

The shipper and consignee have the common objective of moving goods from origin to
destination within a prescribed time at the lowest cost. Services include specified pickup
and delivery times, predictable transit time, zero loss and damage, as well as accurate and
timely exchange of information and invoicing

Carriers
The carrier, as the intermediary, takes a somewhat different perspective. Carriers desire
to maximize their revenue associated with the transaction while minimizing the costs
necessary to complete the transaction. The perspective suggests that a carrier wants to
charge the highest rate that the shipper (or consignee) will accept and minimize the labor,
fuel, and vehicle costs required to move the goods. To achieve this objective, the carrier
desires flexibility in pickup and delivery times to allow individual loads to be
consolidated into economic moves

Government
The government maintains a high interest level in the transaction because of
transportation's impact on the economy. Government desires a stable and efficient
transportation environment to sustain economic growth. Transportation enables the

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efficient movement of products to markets throughout the country and thus promotes
product availability at a reasonable cost. The situation in the Soviet Union prior to its
breakup demonstrates the impact of an inadequate transportation system. Although not
the only reason, the transportation system was a contributing factor in the Soviet
economy's inability to supply food to the market even though adequate production
existed.

A stable and efficient commercial economy requires that carriers offer competitive
services while operating profitably. Many governments are more involved with carrier
activities and practices than with other commercial enterprises. Involvement may take the
form of regulation, promotion, or ownership. Governments regulate carriers by restricting
the markets they can service or by setting the prices they can charge. Governments
promote carriers by supporting research and development or by providing rights-of-way
such as roadways or air traffic control systems. In countries like the United Kingdom or
Germany, some carriers are owned by the government, which maintains absolute control
over markets, services, and rates. Such control allows government to have a major
influence on the economic success of regions, industries, or firms.

The Public
The final participant, the public, is concerned with transportation accessibility, expense,
and effectiveness, as well as environmental and safety standards. The public ultimately
determines the need for transportation by demanding goods from around the world at
reasonable prices. While minimizing transportation cost is important to consumers, trade-
offs associated with environmental and safety standards also require consideration. The
effects of air pollution and oil spills remain a significant transportation issue even though
there have been tremendous strides in pollution reduction and consumer safety during the
past two decades. The cost of reducing the risk of environmental or vehicle accidents is
passed on to consumers, who must collectively judge how much safety is necessary.

The transportation relationship is complex because of the interaction between the parties.
This leads to frequent conflicts between parties with micro interest shippers, consignees,
and carriers-as well as parties with a macro interest-government and the public. These
conflicts have led to duplication, regulation, and restrictions of transportation services

Transport Infrastructure
Transportation infrastructure consists of the rights-of-way, vehicles, and carrier
organizations that offer transportation services on a for-hire or internal basis. The nature
of the infrastructure also determines a variety of economic and legal characteristics for
each mode or multimodal system. A mode identifies the basic transportation method or
form.

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Modal Characteristics

The five basic transportation modes are rail, highway, water, pipeline, and air. 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. Rail Network
Historically, railroads have handled the largest number of ton-miles continental. As a
result of the early establishment of a comprehensive rail network connecting almost all
cities and towns, railroads dominated intercity freight tonnage until after World War II.
This early superiority resulted from the capability to transport large shipments
economically and to offer frequent service, which gave railroads a somewhat
monopolistic position. However, with the advent of serious motor carrier competition
following World War II, the railroads' share of revenues and ton-miles started to decline.

The capability to efficiently transport large tonnage over long distances is the main
reason railroads continue to handle significant intercity tonnage and revenue. Railroad
operations incur high fixed costs because of expensive equipment, right of-way (railroads
must maintain their own track), switching yards, and terminals. However, rail
Experiences relatively low variable operating costs. The replacement of steam by diesel
power reduced the railroads' variable cost per ton-mile, and electrification offers potential
for more reductions. New labor agreements have reduced workforce requirements, further
decreasing variable costs.

2. Motor Carriers
Highway transportation has expanded rapidly since the end of World War II. To a
significant degree the rapid growth of the motor carrier industry results from door-to-door
operating flexibility and speed of intercity movement.

Motor carriers have flexibility because they are able to operate on all types of roadways.
In comparison to railroads, motor carriers have relatively small fixed investments in
terminal facilities and operate on publicly maintained highways. Although the cost of
license fees, user fees, and tolls is considerable, these expenses are directly related to the
number of over-the-road units and miles operated. The variable cost per mile for motor
carriers is high because a separate power unit and driver are required for each trailer or
combination of tandem trailers. Labor requirements are also high because of driver safety
restrictions and the need for substantial dock labor. In comparison to railroads, motor
carriers are best suited to handle small shipments moving short distances.
The characteristics of motor carriers favor manufacturing and distributive trades, short
distances, and high-value products. Motor carriers have made significant inroads into rail
traffic for medium and light manufacturing. Because of delivery flexibility, they have
captured almost all freight moving from wholesalers or warehouses to retail stores. The
prospect for maintaining stable market share in highway transport remains bright.

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The primary difficulties relate to increasing cost to replace equipment, maintenance,
driver wages, and platform and dock wages. Although accelerating labour rates influence
all modes of transport, motor carriers are more labour-intensive, which causes higher
wages to be a major concern. To counteract this trend, carriers have placed considerable
attention on improved line-haul scheduling that bypasses terminals, computerized billing
systems, mechanized terminals, tandem operations that pull two or three trailers by a
single power unit, and utilization of coordinated intermodal systems. These
enhancements reduce labour intensity and, thus cost.

Specialty carriers include package haulers 'such as Federal Express and United Parcel
Service. These firms focus on specific requirements of a market or product. Despite the
aforementioned problems, it is quite apparent that highway transportation will continue to
function as the backbone of logistical operations for the foreseeable future.

3. Water Transport
Water is the oldest mode of transportation. The original sailing vessels were replaced
by steamboats in the early 1800s and by diesel power in the 1920s. A distinction is
generally made between deep-water and navigable inland water transport.

The main advantage of water transportation is the capacity to move extremely large
shipments. Water transport employs two types of vessels. Deep-water vessels, which
are generally designed for ocean and Great Lakes use, are restricted to deep-water
ports for access. In contrast, diesel-towed barges, which generally operate on rivers
and canals, have considerably more flexibility.

Water transport ranks between rail and motor carrier in respect to fixed cost. Although
water carriers must develop and operate their own terminals, the rightof-way is
developed and maintained by the government and results in moderate fixed costs
compared to rail and highway. The main disadvantages of water transport are the
limited range of operation and speed. Unless the origin and destination of the
movement are adjacent to a waterway, supplemental haul by rail or truck is required.
The capability of water to carry large tonnage at low variable cost places this mode of
transport in demand when low freight rates are desired and speed of transit is a
secondary consideration.

Typical inland water freight includes mining and basic bulk commodities such as
chemicals, cement, and selected agricultural products. In addition to the restrictions of
navigable waterways, terminal facilities for bulk and dry cargo storage and load-unload
devices limit the flexibility of water transport. Labor restrictions on loading and
unloading at docks create operational problems and tend to reduce the potential range
of available traffic. Finally, a highly competitive situation has developed between
railroads and inland water carriers in areas where parallel routes exist.

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4. Pipelines
It operates on a twenty-four-hour basis, seven days per week, and are limited only by
commodity changeover and maintenance. Unlike other modes, there is no empty
"container" or "vehicle" that must be returned. Pipelines have the highest fixed cost and
lowest variable cost among transport modes. High fixed costs result from the right-of-
way, construction and requirements for control stations, and pumping capacity. Since
pipelines are not labor-intensive, the variable operating cost is extremely low once the
pipeline has been constructed. An obvious disadvantage is that pipelines are not flexible
and are limited with respect to commodities that can be transported: only products in the
form of gas, liquid, or slurry can be handled.

5. Air Transport
The newest but least utilized mode of transport is air freight. Its significant advantage lies
in the speed with which a shipment can be transported. A coast-to-coast shipment via air
requires only a few hours contrasted to days with other modes of transportation. One
prohibitive aspect of air transport is the high cost. However, this can be traded off for
high speed, which allows other elements of logistical design, such as warehousing or
inventory, to be reduced or eliminated.

Air transport still remains more of a potential opportunity than a reality. Although the
mileage is almost unlimited, airfreight accounts for significantly less than I
percent of all intercity ton-miles. Air transport capability is limited by lift capacity (i.e.,
load size constraints) and aircraft availability. Traditionally, most intercity airfreight
utilized scheduled passenger flights. While this practice was economical, it resulted in a
reduction of both capacity and flexibility. The high cost of jet aircraft, coupled with the
erratic nature of freight demand, has limited the assignment of dedicated planes to all-
freight operations.

However, premium air carriers such as Federal Express and United Parcel Service
Overnight provide dedicated global freight operation. While this premium service was
originally targeted at documents. it has expanded to include larger parcels. For example,
both United Parcel and Federal Express have extended their air freight service to include
overnight delivery from a centralized distribution center located at their air hub. This is
an ideal service for firms with a large number of high-value products and time-sensitive
service requirements.

The fixed cost of air transport is low compared to rail, water, and pipeline. In fact, air
transport ranks second only to highway with respect to low fixed cost. Airways and
airports are generally developed and maintained with public funds. Likewise, terminals
are normally maintained by local communities. The fixed costs of airfreight are
associated with aircraft purchase and the requirement for specialized handling systems
and cargo containers. On the other hand, air freight variable cost is extremely high as a
result of fuel, maintenance, and the labor intensity of both in-flight and ground crews.

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Modal Comparison and Dominant Traffic Composition

Before we start with legal classification ,we must know that because of the
following factors one is considering these options:

1. Volume and regularity of business.

2. Cash flow position of firm.
3. Availability of funds for investment.
4. Historical background of the firm.

Common Carriers

The basic foundation of the public transportation system is the common carrier. Common
carriers have the responsibility to offer service at nondiscriminatory prices to the public.

85
The operating authority received by a common carrier may include the right to transport
all commodities, or it may limit transport to specialized commodities such as steel,
household goods, or computers. In addition, the operating authority specifies the
geographical area the carrier may service and indicates if such service is to be on a
scheduled or unscheduled basis.

A common carrier is required to publish the rates it charges for transport service, supply
adequate facilities, provide service to all points prescribed in its certificate of authority
(unless withdrawal is authorized by the appropriate regulatory agency), deliver the goods
within a reasonable time, charge reasonable rates, and refrain from discrimination against
customers. In many cases, these rates are published in computerized format to facilitate
reference and maintenance. In addition to base rates, most carriers offer discounts for key
customers.

A historical problem for common carriers has been that the number of customers
(and thus the volume of freight) is difficult to forecast. Increased legal flexibility for
common carriers has encouraged the formation of strategic alliances and formal
long-term relationships in an attempt to remedy the uncertainty of freight volume
by providing financial and planning stability for both common carriers and
shippers.

Contract Carriers

Contract carriers provide transport services for select customers. Although contract
carriers must receive authorization, requirements are normally less restricted than
common carrier operating authority. The basis for the contract is an agreement between a
carrier and a shipper for a specified transportation service at a previously agreed cost. For
example, the agreement may be a contract to move a single load or a number of loads
over time. The business agreement becomes the basis for the contract carrier to receive a
permit to transport the specified commodities.

A special legal class of contract transportation is the owner-operator or inde-pendent

trucker. The owner-operator typically owns a tractor and may own a trailer. Using this
equipment, an owner-operator provides line-haul service on a regular or trip-by-trip basis
for other legal forms of transportation such as contract carriers. Recent rulings authorize
owner-operators to make business arrangements with common, contract, exempt, and
private carriers. Prior to the 1980s owner-operators were limited to providing service to
common and contract carriers only.

Private Carriers

A private carrier consists of a firm providing its own transportation. Private carriers are
not for hire and are not subject to economic regulation. although they must comply with
regulations concerning hazardous goods movement, employee safety, vehicle
safety, and other social regulations established by government agencies such as the
Department of Transportation.

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The firm must own or lease the transport equipment and provide managerial direction
regarding transportation operations. The primary distinction between private and for-hire
carriage is that the transportation activity must be incidental to the primary business of
the firm to qualify as private carriage. For example, Frito Lay owns the trucks that deliver
its snack products to retail stores. Frito Lay’s primary business is snack food, not
transportation. Prior to deregulation, the private carrier was required to own the products
it transported; that is no longer the case: Now, a private carrier such as Frito Lay can
transport goods for another company to reduce" empty miles."

As result, many firms have reduced their private carrier operations in order to refocus
managerial skills and resources on the core operations of their basic business.
Competitive conditions in many industries have encouraged firms to seek the talents and
leverage of for-hire carriers that specialize in transportation planning and operations.

Common Carriers

Common carrier is a hire-for carrier. Operates for general public: to serve, to deliver, at
reasonable charges without discrimination.

1.The common carrier must transport all commodities offered to them.

2.Liable for damages.
3.The Govt. may intervene to safeguard public interest.
4.Discrimination is when a carrier charges different rate or provides different service
level for essentially similar movements of similar goods.
5.Permissible forms of discrimination are large volume movements over low movements
and cost differential of volume over weight shipments.

Contract Carriers

1.Contract carrier is a hire-for carrier that do not serve general public but rather serves
one or limited number of shippers with whom it is under specific contract.
2.The contract contains terms pertaining to the carrier’s rates, liability, type of service
and equipment.
3.They provide a specialized type of service to the shipper; it can tailor its service to meet
specific shipper’s needs by utilizing special equipment and arranging special pickups and
deliveries.
4.A contract carriers rate are lower than common carrier.
5.The contract carrier is available only to shipper with whom the carrier has signed the
contract.

Private carrier

1.A private carrier is essentially a firm’s own transportation

2.The basic reason for a firm to enter into private transportation is cost and service.

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3.Other advantages likes increase control and flexibility result in lower inventory levels,
greater customer satisfaction and greater efficiency at loading and unloading docks.
4.Disadvantages are capital requirement and problems in labour and management.
Exempt carrier

1.The exempt carrier is a for-hire exempt from economic regulation regarding rates
and services.
2.The laws of the marketplace determine the rates and services.
3. An exempt carrier gains this status by the commodity it hauls or by the nature of its
operations.
4.Basically used for bulk movement like coal, ore, grains, etc.

Now in a simple format we can compare both of them

Before ending the chapter after studying and discussing important issues you can
easily predict the carrier selection determinant.

They are as follows:

1.Transportation cost-This include Rates, minimum weight, loading and unloading

charges.

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 2.Transit time- is the total time that elapses from the time the consigner makes the
goods available for dispatch until carrier delivers same to the consignee.

3.Reliabilty- Refers the consistency of the transit time a carrioer provides.

4. Capability-Refers to the carrier’s ability to provide the equipment and facilities that
is required for the movement of particular commodity.

5.Accessibilty-Refers to carrier’s physical access or geographical limits.

6. Security- Concern the arrival of good in the same condition.

6.5 Questions For Self- Analyzation

Q 1) Describe the five modes of transportation, identifying the most significant

characteristics of each. What is the basic concept behind intermodal movement?

Q 2) Why have the railroad miles declined during a period of national growth?

Q 3) Railroads have the largest percentage of intercity freight ton-miles, but motor
carriers have the largest revenue. How do you justify this relationship?

Q 4) Why is motor carrier freight transportation the most preferred method of product
shipment?

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90
 MULTI-MODAL TRANSPORT

7.1 Concept of Multimode Transport

7.2 Features of Multimodal Transport System:
7.3 Advantages of Multimodal Transport
7.4 Suppliers of Transportation Services
7.5 Typical Carrier Ancillary Services
7.6 Questions For Self- Analyzation

7.1 Concept Of Multimode Transport

Multimode Transport means transport of cargo from premises of shipper to those of

consignee by more than one mode, under single contract evidence by a single transaction
and through freight rate of liability. Thus this is the transport of merchandise using two or
more means of transportation from the location designated by the exporter to the location
of the importer, where the carrier is responsible for taking custody of the merchandise.

7.2 Features Of Multimodal Transport System:

Goods mainly in International Trade pass through the hands of more than one carrier and
more than one mode of transport. Under conventional system of segmented transport, the
consignee enters into separate contracts with each other. The liability of each carrier is
limited to the carrier in limited to the carriage performed by him. The consignor or his
agent has to attend to all arrangements required for trans-shipment of goods from one
mode to another, including warehousing.

7.3 Advantages of Multimodal Transport

¾ Minimizes time loss at trans-shipment points.

¾ Provides faster transit of goods.
¾ Reduces burden of documentation and formalities.
¾ Save cost
¾ Establishes only one agency to deal with.

Different types of operator:

1. Sea/Air:

Economy of Sea Transport and speed of Air transport.

Mainly for east or European route.

91
Mainly used for high value goods like electronic, computer and high seasonal gads like
fashion wear.

2. Air/Road(Truck):

Though road transport in incidental to air transport i.e. pick up delivery.

Also used across national boundaries to connect with main bases of Airport.

3. Rail/Road/Inland Waterways-Sea-Rail/Road/Inland Waterways:

Inland mode of transport such as road rail waterways to reach seaport in country of origin
or from the seaport of Country of destination to inland destination.

4. Mini bridge

Two international intermodal options are Mainland Bridge (mini bridge) and micro
bridge. Mini bridge is a variant of Land Bridge in which freight movements originates or
terminates at a point within the United States.

5. Macro bridge

Terminates at an inland point rather than a port, otherwise same as mini bridge.

6. Land bridge

Fit rate embrace two maritime tariff and surface transport rate.

7. Micro bridge

Micro bridge refers to door- 2- door service available along the west coast of United
States rather than traditional port- 2- port.
Here friends tell me the difference between port -2- port service and door-2 door service
Door-2 –door service places the responsibility of shipment movement and/or delivery on
transportation carrier.

7.4 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 needs of customers. The following sections
review the services that are offered by different carrier types. The description also
includes examples of carriers that are representative of each category

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Single-Mode Operators
The most basic carrier type is a single-mode operator that offers 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. Airlines are an
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 require more
management effort and, thus, increase cost.

Specialized Carrier

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. Railroads do not offer small-shipment service. As a result of the minimum
charge and the lack of low-cost rail alternatives, an opportunity existed for companies
offering specialized service to enter the small-shipment or package-service market.
Package services represent an important part of transportation infrastructure, and the
influence of carriers in this segment is increasing because of their size and intermodal
capabilities. However, the variety of services offered do not fall neatly into the traditional
modal classification scheme since packages travel by rail, motor, and air. Package-service
classification provides both regular and premium transportation, further blurring modal
distinction.

Basic Package Services

Numerous carriers offer package delivery services within commercial zones of
metropolitan areas. As noted earlier, this type of service is classified as exempt common
carriage. Other carriers offer package delivery service on an intrastate and interstate
basis. E.g. Indian Postal services, U.P.S. The original service offered by UPS was
contract delivery of local shipments for department stores. Over the past two decades,
UPS has made substantial inroads into more diverse intercity package movements. In
fact, UPS has expanded its scope of overall operating authority by shipping packages that
conform to specified size and weight restrictions nationwide and globally for consumers
and business enterprises. By specializing in small packages, UPS has been able to
provide cost-effective overnight service between most cities within 300 miles

Value-added services

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Electronic tracking. Monitors shipments from pickup to delivery Advanced label imaging
system (ALlS). Bar code package tracking labels for customer inquiry . Delivery
confirmation service. Automatic proof of delivery via bar coding Customs clearance
service. Expedited service for UPS International Air systems for on-line delivery
information.

Consignee billing. Management and direct payment of inbound customer transportation

charges. Inventory express. Logistical support (inventory control, distribution, and
reporting) for time sensitive products requiring fast, reliable distribution. On-call air
pickup. Same-day pickup for all UPS air services via customer phone call . UPS
properties. Facility development for site leasing close to UPS operations.

Quality of service depends on various factors, some of them are following:

Speed.
Door
Door Capability.
Reliability.
Security.
Safety.
Flexibility.
Availability.

Ranking of Carrier selection determinants

Rank Determinants

1. Transit time reliability or consistency.

2. Door-to-Door transportation rate or cost.
3. Total door-to door transit time.
4. Willingness of carrier to negotiate rate charges.
5. Financial stability of the carrier.
6. Equipment availability
7. Frequency of service.
8. Pickup and delivery service.
9. Freight loss and damage.
10. Shipment expedite.
11. Quality of operating personnel.

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12. Shipment tracing
13. Willingness of carrier to negotiate service changes.
14. Scheduling flexibility.
15. Line haul services.
16. Claim Processing.
17. Quality of carrier salesmanship.
18. Special equipment.

Now dear students tell me what are the Logistics Channels in International
Distribution.

Yes you people are correct they are

Landward movement to the Port or Airport.

Air Transport.
Ocean Shipping.
Surface transport in other Country.

We have covered different types of transportation, advantages and disadvantages of

each, multimodal transport, ranking determinant etc.
Now when we are talking about ranking determinant we must know that ranking is
also done on the basis of certain factors which determines the rate and pricing of
transport modes. So we are today going to cover the same, and I hope that I would
get maximum contribution from all you while discussing each factor.

Transport 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 industries.

Firstly we will discuss the factors that influence transport economics. Then secondly the
cost structures that influence the cost structure. Finally the rate structures that form the
foundation for actual customer charges.

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Economic Factors
Transport economics is influenced by seven factors. While not direct components of
transport rate tables, each factor is considered when developing rates. The specific factors
are

Distance
Distance is a major influence on transportation cost since it directly contributes to
variable cost, such as labor, fuel, and maintenance. 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 that longer movements tend to have a higher percentage of intercity rather than urban
miles. Intercity miles are less expensive since more distance is covered with the same
fuel and labor expense as a result of higher speeds and also because frequent intermediate
stops typical of urban miles add additional loading and unloading costs.

Volume
The second factor is load volume. Like many other logistics activities, transportation
scale economies exist for most movements. Transport cost per unit of weight decreases as
load volume increases. This occurs because the fixed costs of pickup and delivery as well
as administrative costs can be spread over additional volume.

Density
Since vehicle labor and fuel expenses are not dramatically influenced by weight, higher
density products allow relatively fixed transport costs to be spread across additional
weight. As a result, these products are assessed lower transport costs per unit of weight.
In general, logistics managers attempt to increase product density so that more can be
loaded in a trailer to better utilize capacity. Increased packaging density allows more
units of product to be loaded into the fixed cube of the vehicle. At a certain point, no
additional benefits can be achieved through increased density because the vehicle is fully
loaded.

For example, from a capacity perspective, liquids such as beer or soda "weigh out" a
highway trailer when it is about half full. As such, the weight limitation is reached before
the volume restriction is met. Nevertheless, efforts to increase product density will
generally result in decreased transportation cost.

Storability
The storability factor refers to product dimensions and how they affect vehicle (railcar,
trailer, or container) space utilization. Odd sizes and shapes, as well as excessive weight
or length, do not stow well and typically waste space. Although density and storability

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are similar, it is possible to have products with the same density that stow very
differently. Items with standard rectangular shapes are much easier to stow than odd-
shaped items.
For example, while steel blocks and rods have the same density, rods are more difficult to
stow because of their length and shape. Storability is also influenced by the shipment
size; sometimes large numbers of items can be "nested" that might otherwise be difficult
to stow in small quantities. For example, it is possible to accomplish significant nesting
for a truckload of trashcans, while a single can is difficult to stow.

Handling
Special handling equipment may be required for loading or unloading trucks, railcars, 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.

Liability
Liability includes six product characteristics that primarily affect risk of damage and the
resulting incidence of claims. Specific product considerations are:
• Susceptibility to damage
• Property damage to freight
• Perish ability
• Susceptibility to theft
• Susceptibility to spontaneous combustion or explosion
• Value per pound.

Carriers must either have insurance to protect against possible claims or accept
responsibility for any damage. Shippers can reduce their risk, and ultimately the
transportation cost, by improved protective packaging or by reducing susceptibility to
loss or damage

Market Factors
Finally, market factors, such as lane volume and balance, influence transportation cost. A
transport lane refers to movements between origin and destination points. 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 against
the original "front-haul" move. 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. Demand directionality and
seasonality result in transport rates that change with direction and season. Logistics
system design must take this factor into account and add back-haul movement where
possible.

Cost Structures

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The second dimension of transport economics and pricing concerns the criteria used to
allocate cost components. Cost allocation is primarily the carrier's concern, but since cost
structure influences negotiating ability, the shipper's perspective is important as well.
Transportation costs are classified into a combination of categories

1.Variable Costs
Variable costs are those costs that change in a predictable, direct manner in relation to
some level of activity during a time period. Variable costs can be avoided only by not
operating the vehicle. Aside from exceptional circumstances, transport rates must at least
cover variable costs. The variable category includes direct carrier costs associated with
movement of each load. These expenses are generally measured as a cost per mile or per
unit of weight. Typical cost components in this category include labor, fuel, and
maintenance.

2. Fixed Costs
Fixed costs are those costs that do not change in the short run and must be covered even
if the company is closed down (e.g., during a holiday or a strike). The fixed category
includes carrier costs not directly influenced by shipment volume. For transportation
firms, fixed components include terminals, rights-of-way, information systems, and
vehicles. In the short term, expenses associated with fixed assets must be covered by
contributions above variable cost on a per shipment basis. In the long term, the fixed cost
burden can be reduced somewhat by the sale of fixed assets; however, it is often very
difficult to sell rights-of-way or technologies.

3. Joint Costs
Joint costs are expenses unavoidably created by the decision to provide a particular
service. For example, when a carrier elects to haul 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 joint cost must be covered by the original shipper from A to B, or a back-
haul shipper must be found. Joint costs have significant impact on transportation charges
because carrier quotations must include implied joint costs based on considerations
regarding an appropriate backhaul shipper and/or back-haul charges against the original
shipper.

4. Common Costs
This category includes carrier costs that are incurred on behalf of all shippers or a
segment of shippers. Common costs, such as terminal or management expenses, are
characterized as overhead. These are often allocated to a shipper according to a level of
activity like the number of shipments handled (e.g., delivery appointments). However,
allocating overhead in this manner may incorrectly assign costs. For! example, a shipper

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may be charged for delivery appointments when it doesn't actually use the service (such
as when the shipper's deliveries are unloaded on an "as available" basis).

PRICING STATEGIES

1. Cost-of-Service Strategy

The cost-of-service strategy is a "buildup" approach where the carrier establishes a rate
based on the cost of providing the service plus a profit margin. For example, if the cost of
providing a transportation service is Rs200 and the profit markup is 10 percent, the
carrier would charge the shipper Rs220. The cost-of-service approach, which represents
the base or minimum transportation charge, is a pricing approach for low-value goods or
in highly competitive situations.

2. Value-of-Service Strategy

Value-of-service is an alternative strategy that charges a rate based on perceived shipper

value rather than the cost of actually providing the service. For example, a shipper
perceives transporting 1,000 kgs of electronic equipment as more critical or valuable than
1,000 kgs of coal since the equipment is worth substantially more than the coal. As such,
a shipper is probably willing to pay more to transport it. Carriers tend to utilize value-of
service pricing for high-value goods or when limited competition exists.

Value-of-service pricing is illustrated in the premium overnight carrier market. When

Federal Express first introduced overnight delivery, there were few competitors that
could provide the service, so it was perceived by shippers as a high-value alternative.
They were willing to pay $22.50 to obtain the value of an overnight shipment. Once
competitors such as UPS and the United States Postal Service entered the market, rates
dropped to current discounted levels of $5 to $10 per package. This rate decrease is more
in line with the actual cost for the service.

3. Combination Strategy

The combination strategy establishes the transport price at some intermediate level
between the cost-of-service minimum and the value-of-service maximum. In standard
practice, most transportation firms use such a middle value. Logistics managers must
understand the range of prices and the alternative strategies so that they can negotiate
appropriately.

RATING

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1. Class Rates

In transportation terminology, the price in Rupees and paisa per hundredweight to move a
specific product between two locations is referred to as the rate. The rate is listed on
pricing sheets or computer files known as tariffs. The term class rate evolved from the
fact that all products transported by common carriers are classified for pricing purposes.
All products legally transported in interstate commerce can be shipped via class rates
.
2. Commodity Rates

When a large quantity of a product moves between two locations on regular basis ,it is
common practice for carriers to publish a commodity rate. Commodity rates are special
or specific rates published without regard to classification. The terms and conditions of a
commodity rate are usually indicated in a contract between the carrier and the shipper.

E.g. Exception Rates Exception rates, or exceptions to the classification, are special rates
published to provide shippers lower rates than the prevailing class rate. The original
purpose of the exception rate was to provide a special rate for a specific area, origin-
destination, or commodity when either competitive or high volume movements justified
it. A limited service rate is utilized when a shipper agrees to perform services typically
performed by the carrier, such as trailer loading, in exchange for a discount. A common
example is a shipper load and count rate, where the shipper takes responsibility for
loading and counting the cases.

Not only does this remove the responsibility for loading the shipment from the carrier,
but it also implies that the carrier is not responsible for guaranteeing the number of cases
transported. Another example of limited service is a released value rate, which limits
carrier liability in case of loss or damage. Normally, the carrier is responsible for full
product value if loss or damage occurs in transit. The quoted rate must include adequate
insurance to cover the risk. Often it is more effective for manufacturers of high-value
product to absorb the risk in return for lower transportation rates. Limited service is used
when shippers have confidence in the carrier's capability, and cost can be reduced by
eliminating duplication of effort or responsibility.

3. Special Rates and Services

A number of special rates and services provided by for-hire carriers are available for
logistical operations. Several important ex-amples are discussed:

1. Freight-All-Kinds Rates As indicated earlier,freight-all-kinds (FAK) rates are

important to logistics operations. Under FAK rates, a mixture of different products is
transported under a generic rating. Rather than determine the classification and applicable
rate of each product, an average rate is applied for the total shipment. In essence, F AK
rates are line-haul rates since they replace class, exception, or commodity rates. Their
purpose is to simplify the paperwork associated with the movement of mixed

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commodities and thus lower the costs. As such, they are of particular importance in
physical distribution.

2. Local, Joint, Proportional, and Combination Rates Numerous special rates exist
that may offer transportation savings on specific freight movements. When a commodity
moves under the tariff of a single carrier, it is referred to as a local rate or single-line rate.
If more than one carrier is involved in the freight movement, a joint rate may be
applicable even though multiple carriers are involved in the actual transportation process.
Because some motor and rail carriers operate in restricted territory, it may be necessary to
utilize the services of more then one to complete a shipment. Utilization of a joint rate
can offer substantial savings over the use of two or more local rates.

3. Proportional rates offer special price incentives to utilize a published tariff that
applies to only part of the desired route. Proportional provisions of a tariff are most often
applicable to origin or destination points outside the normal geographical area of a single-
line tariff. If a joint rate does not exist and proportional provisions do, the strategy of
moving a shipment under proportional rates provides a discount on the single-line part of
the movement, thereby resulting in a lower overall freight charge.

4. Combination rates are similar to proportional rates in that two or more rates may be
combined when no published single-line or joint rate exists between two locations. The
rates may be any combination of class, exception, and commodity rates. The utilization of
combination rates often involves several technicalities that are beyond the scope of this
discussion. Their use substantially reduces the cost of an individual shipment. In most
cases that involve regular freight movements, the need to utilize combination rates is
eliminated with publication of a through rate. A through rate is a rate that applies from
origin to destination for a shipment.

5. Transit Services Transit services permit a shipment to be stopped at an intermediate

point between its initial origin and final destination for unloading, storage, and/or
processing. The shipment is then reloaded for delivery to the final destination. Typical
examples of transit services are milling for grain products and processing for sugar beets.
When transit privileges exist, the shipment is charged a through rate from origin to
destination plus a transit privilege charge. Transit services are typically performed by
railroads. From the viewpoint of the shipper, the use of this specialized service is
restricted to specific geographical areas once the product enters into transit service.
Therefore, a degree of flexibility is lost when the product is placed in transit because the
final destination can be altered only at significant added expense or, at the least, with loss
of the through rate and assessment of the transit charge. Finally, the utilization of transit
privileges increases the paperwork of shippers in terms of both meeting railroad record
requirements and ultimately settling the freight bills. The added cost of administration
must be carefully weighed in evaluating the true benefits gained. During the last decade
railroads have generally discouraged use of transit services.

6. Diversion and Reconsignment For a variety of reasons, a shipper or consignee may

desire to change routing, destination, or even consignee once a shipment is in transit. This

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flexibility can be extremely important, particularly with regard to the transportation of
food and other perishable products where markets quickly change. It is a normal practice
among certain types of marketing intermediaries to purchase commodities with the full
intention of selling them while they are in transit. Diversion consists of changing the
destination of a shipment prior to its arrival at the original destination. Reconsignment is
a change in consignee prior to delivery. Railroads and motor carriers for a specified
charge provide both services.

7. Split Delivery A split delivery is desired when portions of a shipment need to be

delivered to different facilities. Under specified tariff conditions, pickup and delivery can
be extended to points beyond the initial destination. The payment is typically structured
to reflect a rate as if the shipment were going to the farthest destination. In addition, there
is a charge for each delivery stop-off.

8. Demurrage and Detention Demurrage and detention are charges assessed for
retaining freight cars or truck trailers beyond specified loading or unloading time. The
term demurrage is used by railroads for holding a railcar beyond forty-eight hours before
unloading the shipment. Motor carriers use the term detention to cover similar delays. In
the case of motor carriers, the permitted time is specified in the tariff and is normally
limited to a few hours.

9. Accessorial Services In addition to basic transportation, motor and rail carriers offer a
wide variety of special or ancillary services that can aid in planning logistical operations.
Table below provides a list.

Carriers may also offer environmental services and special equipment. Environmental
services refer to special control of freight while in transit, such as refrigeration,
ventilation, and heating. For example, in the summer, Hershey's typically transports its
chocolate and confectionery products in refrigerated trailers to protect them from high
temperature levels. Special equipment charges refer to the use of equipment that the
carrier has purchased for the shipper's economy and convenience. For example,
specialized sanitation equipment is necessary to clean and prepare trailers for food
storage and transit when the trailer has been previously utilized for nonfood products or
commodities.

7.5 Typical Carrier Ancillary Services

¾ COD. Collect payment on delivery.

¾ Change COD. Change COD recipient.
¾ Inside delivery. Deliver product inside the building.
¾ Marking or tagging. Mark or tag product as it is transported.
¾ Notify before delivery. Make appointment prior to delivery.
¾ Reconsignment or delivery. Redirect shipment to a new destination while in
transit. .
¾ Redeliver. Attempt second delivery.
¾ Residential delivery. Deliver at a residence without a truck dock.

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 ¾ Sorting and segregating. Sort commodity prior to delivery.
¾ Storage. Store commodity prior to delivery.

7.6 Questions For Self- Analyzation

1. Compare and contrast variable, fixed, and joint cost.

2. How do carrier chares special rates and services?

3. Why are Freight of all kinds (FAK) rates important to an enterprise engaged in
delivery of a broad product line to customer?

4. Provide an example of how diversion and reconsignment can be used to

increase logistical efficiency and effectiveness.

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WAREHOUSING

8.1 Introduction
8.2 Definitions As Per Bombay Warehouse Act, 1959
8.3 Evolution Of Concept Of Warehousing
8.4 Importance /Benefits Of Warehousing
8.5 Warehouse Operating Principles
8.6 Developing The Warehouse Resource
8.7 Questions For Self-Analyzation

8.1 Introduction

A warehouse is typically viewed as a place to store inventory. However, in many logistical

system designs, the role of the warehouse is more properly viewed as a switching facility as
contrasted to a storage facility. This chapter offers a unified treatment of strategic warehousing
throughout the logistical system. The discussion is relevant for all types of warehouses as well
as distribution centers, consolidation terminals, and break bulk and cross-dock facilities.
Productivity is the ratio of physical output to physical input. To increase productivity, it is
necessary either to obtain greater output with the same input or to maintain existing output with
a reduction of input factors.

When business is extremely good and the economy approaches full employment, output per
worker-hour falls as marginal productive workers are employed. Warehousing operations get
more than their fair share of such new employees because few, if any, skills are required to
perform many of the manual tasks. When business activity plummets, union labor contract
provisions often prohibit a rapid reduction in payrolls. While not all distribution facilities are
unionized, logistics activities have traditionally been a union strength. Although separate
productivity figures for warehouse workers are not available, it may be assumed that
warehouse labor productivity has lagged most other areas in the private sector.

Let’s concentrate on the basic concept and then the definitions propagated by Bombay
Warehouse act, 1959.

• Warehousing is the function of storing goods to bridge the time gap between their production
and demand and thus leads to time and place utility.

• As a part of marketing strategy, warehousing offers better customer service that competitors
who rely on price competition.

• The creation and strategic location of warehouse are justified of the marginal cost of
warehousing is less than marginal revenue

8.2 Definitions As Per Bombay Warehouse Act, 1959

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 Warehouse means any building structure or other protected enclosure which is used or may be used
for the purpose of storing goods on behalf of the depositors but doesn’t include cloakroom attached
to Hotels, railway station the premises of other public carrier alike.

Depositor means a person who deposits goods with a warehouseman for storing in his
warehouse and includes any person who lawfully holds the receipt issued by the
warehouseman in respect of the goods and derives title too by endorsement or transfer from the
depositor or his lawful transferee.

8.3 Evolution Of Concept Of Warehousing

Manufactures were able to recognize the fact that the customer needs need to fulfill as soon as
he is asking for the product in order to retain him. This perspective of storage created a
tendency to consider warehouses' 'a necessary evil" that added costs to the distribution process
and that resulted in creation of operating expenses with little appreciation of the broader
logistical spectrum in which warehousing played a vital role. Warehousing capability used to
group products into assortments desired by customers was given little emphasis. Internal
control and maximum inventory turnover received little managerial attention.
Literature of the early era correctly described the situation. Firms seeking to operate effectively
between points of procurement, manufacturing, and consumption gave little attention to
internal warehouse operations. The establishment of warehouses was essential for survival, but
little emphasis was placed on improving storage and handling effectiveness. Engineering
efforts were centred on manufacturing problems.
Operation of early warehouses illustrated the lack of concern with material handling
principles. The typical warehouse received merchandise by railcar or truck. The items were
moved manually to a storage area within the warehouse and hand-piled in stacks on the
floor. When different products were stored in the same warehouse, merchandise was
continually lost. Stock rotation was handled poorly. When customer orders were received,
products were handpicked for placement on wagons. The wagons or carts were then pushed
to the shipping area where the merchandise was reassembled and hand-loaded onto delivery
trucks.

Because labor was relatively inexpensive, human resources were used freely. Little
consideration was given to efficiency in space utilization, work methods, or material handling.
Despite their shortcomings, these early warehouses provided the necessary bridge between
production and marketing.

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Following World War II, managerial attention shifted toward increasing warehouse efficiency.
Management began to question the need for so many warehouses. In the distributive industries
such as wholesaling and retailing, it was not unusual for every sales territory to have a
dedicated warehouse and inventory. As forecasting and production scheduling techniques
improved, the need for extensive inventory buildup was reduced. Production became more
coordinated as time delays during the manufacturing process decreased. Seasonal production
still required warehousing, but the overall need for storage to support manufacturing was
reduced.

However, changing requirements of the retail environment more than offset any reductions in
warehousing gained through manufacturing improvements. The retail store, faced with the
necessity of stocking an increasing variety of products, was unable to order in sufficient
quantity from a single supplier to enjoy the benefits of consolidated shipment. The cost of
transporting small shipments made direct ordering prohibitive. This resulted in a need to utilize
warehouses to provide timely and economical inventory assortments to retailers. At the
wholesale level of the channel of distribution, the warehouse became a support unit for
retailing. Progressive wholesalers and integrated retailers developed state-of-the-art warehouse
systems capable of providing necessary retail support.

Improvements in wholesale warehousing efficiency related to retailing soon were adopted in

manufacturing. For manufacturers producing products at multiple locations, efficient
warehousing offered a method of reducing material and parts storage and handling costs while
optimizing production. Warehousing became an integral part of JIT and stockless production
strategies. While the basic notion of JIT is to reduce work-in-process inventory, the concept of
manufacturing must be supported by highly dependable delivery. Such logistical support, in a
nation as geographically vast as the United States, may be possible only through the use of
strategically located warehouses. A basic stock of parts can be staged at a central warehouse,
thereby reducing the need to maintain inventory at each assembly plant. Using consolidated
shipments, products are purchased and transported to the supply warehouse and then
distributed to manufacturing plants as needed. When fully integrated, the warehouse is a vital
extension of manufacturing.

On the outbound side of manufacturing, warehouses created the possibility of direct customer
shipment of mixed products. The capability to provide factory direct mixed product shipments
appealed to marketers because it enhanced service capability. For the customer, direct mixed
shipments have two specific advantages. First, logistical cost is reduced because full product
assortment can be delivered while also taking advantage of the benefits of consolidated
transportation. Second, inventory of slow-moving products can be reduced because they can be
received in small quantities as part of consolidated shipments. As the level of competition in
the marketplace increases, manufacturers capable of rapidly providing direct mixed shipments
gain a competitive advantage.

During the 1960s and 1970s emphasis in warehousing focused on the application of new
technology. Technology based improvements affected almost every area of warehouse
operations and created new and better techniques and procedures to perform storage and

106
handling activities. In the 1980s, central focus was on improved configuration of warehouse
systems and handling technologies.

During the 1990s, the primary focus of warehousing is flexibility and effective use of
information technology. Flexibility is necessary to respond to expanding customer demands in
terms of product and shipment profiles. Advanced information technology offers some of this
flexibility by allowing warehouse operators to quickly react to changes and measure
performance under a wide range of conditions.

8.4 Importance /Benefits Of Warehousing

Benefits realized from strategic warehousing are classified on the basis of economics and
service. From a conceptual perspective, no warehouse should be included in a logistical system
unless it is fully justified on a cost-benefit basis. While there is some overlap, the major
warehouse benefits are reviewed individually.

Economic Benefits
Economic benefits of warehousing result when overall logistical costs are directly reduced by
utilizing one or more facilities. It is not difficult to quantify the return on investment of an
economic benefit because it is reflected in a direct cost-to-cost trade-off. For example, if
adding a warehouse to a logistical system will reduce overall transportation cost by an amount
greater than the fixed and variable cost of the warehouse, then total cost will be reduced.

Whenever total-cost reductions are attainable, the warehouse is economically justified. Four
basic economic benefits are consolidation, break bulk and cross dock,
processing/postponement, and stockpiling. Each is discussed and illustrated.

1. Consolidation

Shipment consolidation is an economic benefit of warehousing. With this arrangement, the

consolidating warehouse receives and consolidates materials from a number of manufacturing
plants destined to a specific customer on a single transportation shipment. The benefits are the
realization of the lowest possible transportation rate and reduced congestion at a customer's
receiving dock. The warehouse allows both the inbound movement from the manufacturer to
the warehouse and the outbound movement from the warehouse to the customer to' be
consolidated into larger shipments.

In order to provide effective consolidation, each manufacturing plant must use the warehouse
as a forward stock location or as a sorting and assembly facility.

The primary benefit of consolidation is that it combines the logistical flow of several small
shipments to a specific market area. Consolidation warehousing may be used by a single firm,
or a number of firms may join together and use a for-hire consolidation service. Through the
use of such a program, each individual manufacturer or shipper can enjoy lower total
distribution cost than could be realized on a direct shipment basis individually.

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2. Break Bulk and Cross Dock

Break bulk and cross-dock warehouse operations are similar to consolidation except that no
storage is performed. A break bulk operation receives combined customer orders from
manufacturers and ships them to individual customers. Figure 13-1a illustrates the break bulk
flow. The break bulk warehouse or terminal sorts or splits individual orders and arranges. for
local delivery. Because the long-distance transportation movement is a large shipment, transport
costs are lower and there is less difficulty in tracking.

A cross-dock facility is similar except that it involves multiple manufacturers. Retail chains
make extensive use of cross-dock operations to replenish fast-moving store inventories. E.g.

Full trailerloads of product arrive from multiple manufacturers. As the product is received,
customer either sorts it if it is labeled or allocated to customers. If it has not been labeled,
Product is then literally moved "across the dock" to be loaded into the trailer destined for the
appropriate customer. The trailer is released for transport to the retail store once it has been
filled with mixed product from multiple manufacturers. The economic benefits of cross
docking include full trailer movements from manufacturers to the warehouse and from the
warehouse to retailers, reduced handling cost at the cross-dock facility since product is not
stored, and more effective use of dock facilities because all vehicles are fully loaded, thus
maximizing loading dock utilization.

3 .Processing/Postponement

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Warehouses can also be used to postpone, or delay, production by performing processing and
light manufacturing activities. A warehouse with packaging or labeling capability allows
postponement of final production until actual demand is known. For example, vegetables can
be processed and canned in "Brights" at the manufacturer. Brights are cans with no preattached
labels. The use of Brights for a private label product means that the item does not have to be
committed to a specific customer or package configuration at the manufacturer's plant. Once a
specific customer order is received, the warehouse can complete final processing by adding the
label and finalizing the packaging.

Processing and postponement provide two economic benefits. First, risk is minimized because
final packaging is not completed until an order for a specific labeland package has been
received. Second, the required level of total inventory can be reduced by using the basic
product (brights) for a variety of labeling and packaging configurations. The combination of
lower risk and inventory level often reduces total system cost even if the cost of packaging at the
warehouse is more expensive than it would be at the manufacturer's facility.

4.Stockpiling

The direct economic benefit of this warehousing service is secondary to the fact that seasonal
storage is essential to select businesses. For example, lawn furniture and toys are produced
year-round and primarily sold during a very short marketing period. In contrast, agricultural
products are harvested at specific times with subsequent consumption occurring throughout the
year. Both situations require warehouse stockpiling to support marketing efforts. Stockpiling
provides an inventory buffer, which allows production efficiencies within the con-straints
imposed by material sources and the customer.

Service Benefits

Service benefits gained through warehouses in a logistical system mayor may not reduce costs.
When a warehouse is primarily justified on the basis of service, the supporting rationale is an
improvement in the time and place capability of the overall logistical system.. For example,
placing a warehouse in a logistical system to service a specific market segment may increase
cost but might also increase market share, revenue, and gross margin. At a conceptual level, a
service-justified warehouse would be added if the net effect was profit-justified. At an
operational level, the problem is how to measure the direct revenue impact.

Five basic service benefits are achieved through warehousing: spot stock, assortment,
mixing, product support, and market presence. Each is discussed and illustrated.

1. Spot Stock

Stock spotting is most often used in physical distribution. In particular, manufacturers with
limited or highly seasonal product lines are partial to this service. Rather than placing
inventories in warehouse facilities on a year-round basis or shipping directly from

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manufacturing plants, delivery time can be substantially reduced by advanced inventory
commitment to strategic markets. Under this concept, a selected amount of a firm's product line
is placed or "spot stocked" in a warehouse to fill customer orders during a critical marketing
period. Utilizing warehouse facilities for stock spotting allows inventories to be placed in a
variety of markets adjacent to key customers just prior to a maximum period of seasonal sales.

Suppliers of agricultural products to farmers often use spot stocking to position their products
closer to a service- sensitive market during the growing season. Following the sales season, the
remaining inventory is withdrawn to a central warehouse.

2 .Assortment

An assortment warehouse-which may be utilized by a manufacturer, wholesaler, or retailer-

stocks product combinations in anticipation of customer orders. The assortments may represent
multiple products from different manufacturers or special assortments as specified by
customers. In the first case, for example, an athletic wholesaler would stock products from a
number of clothing suppliers so that customers can be offered assortments. In the second case,
the wholesaler would create a specific team uniform including shirt, pants, and shoes.

The differential between stock spotting and complete line assortment is the degree and duration
of warehouse utilization. A firm following a stock spotting strategy would typically warehouse
a narrow product assortment and place stocks in a large number of small warehouses dedicated
to specific markets for a limited time period. The distribution assortment warehouse usually
has a broad product line, is limited to a few strategic locations, and is functional year-round.

Assortment warehouses improve service by reducing the number of suppliers that a customer
must deal with. The combined assortments also allow larger shipment quantities, which in turn
reduce transportation cost.

3 .Mixing

Warehouse mixing is similar to the break bulk process except that several different
manufacturer shipments may be involved. When plants are geographically separated, overall
transportation charges and warehouse requirements can be reduced by in-transit mixing. In a
typical mixing situation, carloads or truckloads of products are shipped from manufacturing
plants to warehouses. Each large shipment enjoys the lowest possible transportation rate. Upon
arrival at the mixing warehouse, factory shipments are unloaded and the desired combination
of each product for each customer or market is selected.

The economies of in-transit mixing have been traditionally supported by special transportation
tariffs that are variations of in-transit privileges. Under the mixing warehouse concept, inbound
products may also be combined with products regularly stored in the warehouse. Warehouses
that provide in-transit mixing have the net effect of reducing overall product storage in a
logistical system. Mixing is classified as a service benefit because inventory is sorted to precise
customer specifications.

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4. Production Support

The economics of manufacturing may justify relatively long production runs of specific
components. Production support warehousing provides a steady supply of components and
materials to assembly plants. Safety stocks on items purchased from outside vendors may be
justified because of long lead times or significant variations in usage. In these, as well as a
variety of other situations, the most economical total-cost solution may be the operation of a
production support warehouse to supply or "feed" processed materials, components, and
subassemblies into the assembly plant in an economic and timely manner.

5.Market Presence

While a market presence benefit may not be as obvious as other service benefits, it is often
cited by marketing managers as a major advantage of local warehouses. The market presence
factor is based on the perception or belief that local warehouses (and presumably local
inventory) can be more responsive to customer needs and offer quicker delivery than more
distant warehouses. As a result, it is also thought that a local warehouse will enhance market
share and potentially increase profitability. While the market presence factor is a frequently
discussed strategy, little solid research exists to confirm its actual benefit impact..

8.5 Warehouse Operating Principles

The previous discussion has provided the justification for using warehouses as
intermediaries between manufacturers and customers. Once it has been determined to use a
warehouse, the next step is designing it. The following discussion reviews basic warehouse
design principles.

Whether the warehouse is a small manual operation or a large automated facility, the
following three principles are relevant: design criteria, handling technology, and storage
plan. Each is discussed and illustrated.

1. Design Criteria
Warehouse design criteria address physical facility characteristics and product movement.
Three factors to be considered in the design process are the number of stories in the facility,
height utilization, and product flow.
The ideal warehouse design is limited to a single story so that product does not have to be
moved up and down. The use of elevators to move product from one floor to the next
requires time and energy. The elevator is also often a bottleneck in product flow since many
material handlers are usually competing for a limited number of elevators. While it is not

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 always possible, particularly in central business districts where land is restricted or
expensive, warehouses should be limited to a single story.
Regardless of facility size, the design should maximize the usage of the available cubic
space by allowing for the greatest use of height on each floor. Most warehouses have 20- to 30-
foot ceilings, although modem automated and high-rise facilities can effectively use ceiling
heights up to 100 feet. Through the use of racking or other hardware, it should be possible to
store products up to the building's ceiling. Maximum effective warehouse height is limited by
the safe lifting capabilities of material-handling equipment, such as forklifts, and fire safety
regulations imposed by overhead sprinkler systems.

Warehouse design should also allow for straight product flow through the facility whether
items are stored or not. In general, this means that product should be received at one end of the
building, stored in the middle, and then shipped from the other end. Figure 13-2 illustrates this
flow principle. Straight-line product flow minimizes congestion and confusion. Handling
Technology The second principle focuses on the effectiveness and efficiency of material-
handling technology. The elements of this principle concern movement continuity and
movement scale economies

2. Handling Technology

The second principle focuses on the effectiveness and efficiency of material-handling

technology. The elements of this principle concern movement continuity and movement scale
economies
Movement continuity means that it is better for a material handler or piece of handling
equipment to make a longer move than to have a number of handlers make numerous,
individual, short segments of the same move. Exchanging the product between handlers or
moving it from one piece of equipment to another wastes time and increases the potential for
damage. Thus, as a general rule, fewer longer movements in the warehouse are preferred.

Movement scale economies imply that all warehouse activities should handle or move the
largest quantities possible. Instead of moving individual cases, warehouse activities should be
designed to move groups of cases such as pallets or containers. This grouping or batching
might mean that multiple products or orders must be moved or selected at the same time. While
this might increase the complexity of an individual's activities since multiple products or orders
must be considered, the principle reduces the number of activities and the resulting cost.
3. Storage Plan
According to the third principle, a warehouse design should consider product characteristics,
particularly those pertaining to volume, weight and storage.
Product volume is the major concern when defining a warehouse storage plan. I High-volume
sales or throughput product should be stored in a location that minimizes the distance it is
moved, such as near primary aisles and in low storage racks. Such a location minimizes travel
distance and the need for extended lifting. Conversely, low-volume product can be assigned
locations that are distant from primary aisles or higher up in storage racks.

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Similarly, the plan should include a specific strategy for products dependent on weight and
storage characteristics. Relatively heavy items should be assigned to locations low to the
ground to minimize the effort and risk of heavy lifting. Bulky or low-density products require
extensive storage volume, so open floor space or high-level racks can be used for them. On the
other hand, smaller items may require storage shelves or drawers. The integrated storage plan
must consider and address

8.6 Developing The Warehouse Resource

This section discusses strategies and considerations for acquiring and developing warehouse
space. First, alternative warehouse strategies are identified and compared. These include (1)
private, (2) public, and (3) contract warehouses. Second, the major considerations for each type
are presented and illustrated. Finally, a sample integrated warehousing strategy is described.

Warehousing Alternatives

This chapter focuses on the options of private, public, and contract warehousing. A private
warehouse facility is owned and managed by the same enterprise that owns the merchandise
handled and stored at the facility. A public warehouse, in contrast, is operated as an
independent business offering a range of services-such as storage, handling, and transportation-
on the basis of a fixed or variable fee. Public warehouse operators generally offer relatively
standardized services to all clients. Contract warehousing, which is evolving from the public
warehouse segment, provides benefits of both the private and public alternatives. Contract
warehousing is "a long term, mutually beneficial arrangement which provides unique and
specially tailored warehousing and logistics services exclusively to one client, where the
vendor and client share the risks associated with the operation. .Important dimensions that
differentiate contract warehousing operators from public warehouse operators are the extended
time frame of the service relationship, tailored services, exclusivity, and shared risk. The
benefits of private, public, and contract warehouse options are reviewed next.

1. Private Warehouses

A private warehouse is operated by the firm owning the product. The actual facility, however,
maybe owned or leased. The decision as to which strategy best fits an individual firm is
essentially financial. Often it is not possible to find a warehouse for lease that fits the exact
requirements of a firm. For example, a warehouse requires substantial material-handling
activities. Existing or leased facilities may not be adequately designed. As a general rule, an
efficient warehouse should be planned around a material-handling system in order to
encourage maximum efficiency of product flow.

Real estate developers are increasingly willing to build distribution warehouses to a firm's
specifications on a leased basis. Such custom construction is available in many markets on
lease arrangements as short as five years.

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 Benefits of private warehousing

The major benefits of private warehousing include control, flexibility, cost, and other
intangible benefits. Private warehouses provide more control since the enterprise has
absolute decision-making authority over all activities and priorities in the facility. This
control facilitates the ability to integrate warehouse operations with the rest of the firm's
internal logistics process.

Private warehousing is usually considered less costly than public warehousing because private
facility costs do not have a profit markup. As a result, both the fixed and variable cost
components should be less. This perceived benefit, however, may be misleading since public
warehouses often are more efficient or may operate at lower wage scales. It is important to
develop an accurate assessment of total warehouse-related costs prior to making a decision
regarding warehouse strategy.

Finally, private warehousing has some intangible benefits, particularly with respect to market
presence. A private warehouse with a firm's name on it may produce customer perceptions of
responsiveness and stability. This perception sometimes provides a firm with a marketing
advantage over other enterprises.

2. Public Warehouses

Public warehouses are used extensively in logistical systems. Almost any combination of
services can be arranged with the operator either for a short term or over a long duration. A
classification of public warehouses has been developed. On the basis of the range of
specialized operations performed, they are classified as
(1) General merchandise
(2) Refrigerated,
(3) Special commodity,
(4) Bonded, and
(5) Household goods and furniture.

Each warehouse type differs in its material handling and storage technology because of the
product and environmental characteristics
.
General merchandise warehouses are designed to handle general package commodities such
as paper, small appliances, and household supplies. Refrigerated warehouses (either frozen
or chilled) handle and maintain food, medical items, and chemical products with special
temperature requirements. Commodity warehouses are designed to handle bulk material or
items with special handling considerations, such as tires or clothing.

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3. Contact Warehouse

Contract warehouse combine the best of both private and public warehouse. the long-term
relationship and shared risk will result in lower cost than typical public warehouse arrangement
although minimum fixed assets are required for facilities. At the same time, contract warehouse
operations can provide benefits of expertise, flexibility, and economies of scale by sharing
management, labor, equipment, and information resources across a number of clients.

Contract warehouse operators are also expanding the scope of their services to include other
logistics activities such as transportation, inventory control, order processing, customer
services, and return processing. There are contract warehouses capable of assuming total
logistics responsibility for enterprises that desire only to manufacture and market.

Warehousing Strategy

As would be expected, many firms utilize a combination of private, public, and contract
facilities. A private or contract facility may be used to cover basic year round requirements,
while public facilities are used to handle peak seasons. In other situations, central warehouses
may be private, while market area or field warehouses are public facilities. A contract facility
could be used in either case. Each use of warehouse combinations is discussed and illustrated.

Full warehouse utilization throughout a year is a remote possibility. As a planning rule, a

warehouse designed for full-capacity utilization will in fact be fully utilized between 75 and 85
percent of the time. Thus from 15 to 25 percent of the time, the space needed to meet peak
requirements is not utilized. In such situations, it may be more efficient to build private
facilities to cover the 75 percent requirement and use public facilities to accommodate peak
demand.

The second form of combined public warehousing may result from market requirements. A
firm may find that private warehousing is justified at specific locations on the basis of
distribution volume. In other markets, public facilities may be the least-cost option. In
logistical system design the objective is to determine whatever combination of warehouse
strategies most economically meets customer service objectives.

An integrated warehouse strategy focuses on two questions. The first concerns how many
warehouses should be employed. The second question concerns which warehouse types should
be used to meet market requirements. For many firms, the answer is a combination that can be
differentiated by customer and product. Specifically, some customer groups may be best served
from a private warehouse, while public warehouse may be appropriate for others.

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Above Figure illustrates other qualitative factors that should be considered and their
likely influence.

Across the top, the figure presents a strategy continuum ranging from private to contract to
public. Qualitative considerations, listed on the vertical dimension, are
presence synergies,
industry synergies,
operating flexibility,
location flexibility, and
scale economies.

Each consideration and its rationale are discussed.

Presence synergies

It refer to the marketing benefits of having inventory located nearby in a building that is clearly
affiliated with the enterprise (e.g., the building has the firm's name on the door). It is widely
thought that customers are more comfortable when suppliers maintain inventory in nearby
locations. Products and customers that benefit from local presence should be served from
private or contract facilities.

Industry synergies

It refer to the operating benefits of collocating with other firms serving the same industry. For
example, firms in the grocery business often receive substantial benefits when they share
public warehouse facilities with other suppliers serving the same industry. Reduced
transportation cost is the major benefit since joint use of the same public warehouse allows
frequent delivery of consolidated loads from multiple suppliers. Public and contract
warehousing increases the potential for industry synergy.

Operating flexibility

It refers to the ability to adjust internal policies and procedures to meet product and customer
needs. Since private warehouses operate under the complete control of the enterprise, they are
usually perceived to demonstrate more operating flexibility. On the other hand, a public
warehouse often employs policies and procedures that are consistent across its clients to

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minimize operating confusion. While conventional wisdom would suggest that private
warehouses can offer more operating flexibility, there are many public and contract warehouse
operations that have demonstrated substantial flexibility and responsiveness.

Location flexibility

It refers to the ability to quickly adjust warehouse location and number in accordance with
seasonal or permanent demand changes. For example, in-season demand for agricultural
chemicals requires that warehouses be located near markets that allow customer pickup.
Outside the growing season, however, these local warehouses are unnecessary. Thus, the
desirable strategy is to be able to open and close local facilities seasonally. Public and contract
warehouses offer the location flexibility to accomplish such requirements.

Scale economies

It refers to the ability to reduce material handling and storage co through application of
advanced technologies. High-volume warehouses generally have a greater opportunity to
achieve these benefits because they can spread technology’s fixed cost over larger volumes. In
addition, capital investment in mechanized or automated equipment and information
technology can reduce direct variable cost. Public and contract warehouses are generally
perceived to offer better scale economies since they are able to design operations and facilities
to met higher volumes of multiple clients.

In recent years, the traditional role of public warehouses as supplemental storage facilities has
changed dramatically. The nature of modem business places considerable emphasis on
inventory turnover and the ability to satisfy customer order: rapidly. To achieve these two
requirements, flexibility must be maintained within the logistical structure. Many public
warehouses have formed partnerships that allow a firm to purchase total order processing and
local delivery systems in a number of cities across the United States. In addition to basic
warehousing, these associations provide specialized services such as inventory control and
billing.

8.7 Questions For Self-Analyzation:

Q1 Provide a definition and an example of strategic storage from a logical system you are
familiar.

Q2 Discuss and illustrate the economic justification for establishing a warehousing.

What is logic for considering a warehouse a “necessary evil”?

Q3 What is the concept of market presence and how does it relate to the functionality of
warehousing?

Q4 Explain and comment of the statement:” A warehouse should merely consist of a set of
walls enclosing an efficient handling system.

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INFORMATION SYSTEMS

9.1 Creating Strategic Advantage Through Information Systems

9.2 Information Flows
9.3 The Physical Flow of Merchandise –Logistics
9.4 Distribution Center
9.5 Collaboration between Retailers and Vendors in supply chain management
9.6 Radio Frequency Identification(RFID)
9.7 Questions For Self-Analyzation

9.1 Creating Strategic Advantage through Supply Management and

Information Systems

Retailers connect customers with vendors who provide the merchandise. It is the retailers'
responsibility to gauge customers' wants and needs and work with the other members of
the supply chain-distributors, vendors, and transportation companies-to make sure the
merchandise that customers want is available when they want it. In a retailing context,
supply chain management is the delivery of economic value to customers through the
management of the flow of physical goods and associated information from vendors to
customers. Thus, supply chain management is a set of business activities that manages
the movement of products to retail distribution centers and stores and the exchange of
information between retailers and vendors.
Retailers are increasingly taking a leadership role in managing their respective supply
chains. When retailers were predominantly small, family-owned businesses, larger
manufacturers and distributors dictated when, where, and how merchandise was
delivered. But with the consolidation and emergence of larger, national retail chains,
retailers now play an active role in coordinating supply chain management activities. The
size of these national retailers typically makes them more powerful than their vendors
and thus better able to control their supply chains. In addition, retailers are more
knowledgeable about their customers. They are in the unique position to collect purchase
information customer by customer, transaction by transaction. As we will discuss later in
the chapter, this information is being shared with suppliers to plan production,
promotions, deliveries, assortments, and inventory levels.

Improved Product Availability

Efficient supply chain management provides two benefits to customers: (1) Reduced
stock outs, and (2) Tailored assortments. These benefits translate into greater sales, lower
costs, higher inventory turnover, and lower markdowns for retailers.
Reduced Stock outs

A stock out occurs when an SKU (Stock Keeping Unit) that a customer wants is not
available. What would happen if Joe went to the Target store and the store had stocked

118
out of Michael Graves toaster ovens because the distribution center did not ship enough
to the store? The store would give Joe a rain check so he could come back and still pay
the sale price when the store received a new shipment, but Joe would, have made a
wasted trip to the store. As a result of the stock out, Joe might decide to buy another
model, or he might go to a nearby Wal-Mart to buy a toaster oven. While at Wal-Mart, he
could purchase other items in addition to the toaster oven. He also might be reluctant to
shop at Target in the future and tell all of his friends about the negative experience he
had. This bad experience could have been avoided if Target had done a better job of
managing its supply chain.

Tailored Assortments

Another benefit provided by information systems that support supply chain management
is making sure that the right merchandise is available at the right store. National retail
chains have long adjusted assortments in their stores on the basis of climate-stocking
more wool sweaters in northern stores and cotton sweaters in southern stores during the
winter. Now retailers use sophisticated statistical methods to analyze sales transaction
data and adjust store assortments for a wide range of merchandise on the basis of the
customer demand characteristics of the store's local market. For example, Meijer, a
regional super center chain, analyzed its sales data and discovered that its private label
water softening tablets sold well in some stores, but the national brands sold better in
other stores. So it adjusted its private label stock to be higher in one set of stores.

Higher Return on Investment

From the retailer's perspective, an efficient supply chain and information system can
improve its return on investment because it increases sales, net profit margins, and assets
(inventory turnover). Net sales increase because customers are offered more attractive
assortments that are in stock. Consider Joe Jackson's toaster oven purchase. Target, with
its excellent information systems, could accurately estimate how many Michael Graves
toaster ovens each store would sell during the special promotion. Using its supply
management system, , it made sure sufficient stock was available at Joe's store so all of
the customers wanting to buy one could.
Net profit margin is improved by increasing the gross margin and lowering expenses. An
information system that coordinates among the buying staff and vendors allows retailers
to take advantage of special buying opportunities and obtain the merchandise at a lower
cost, thus improving their gross margin. Retailers also can lower their operating expenses
by coordinating deliveries, thus reducing transportation expenses. With more efficient
distribution centers, merchandise can be received, prepared for sale, and shipped to stores
with minimum handling, further reducing expenses.
By efficiently managing their supply chain, retailers can carry less backup inventory to
stay in stock. Thus, inventory levels are lower, and with a lower inventory investment,
the total assets are also lower, so the asset and inventory turnovers are both higher.
Retailing view 9.1 describes how 7-Eleven is transforming its business operations
through information technology.

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Strategic Advantage

Of course, all retailers would strive to increase sales and reduce costs by using high-
performance information systems and efficient supply chain management. But not all
retailers can develop a competitive advantage from their information and supply chain
systems. However, if they do develop an advantage, the advantage is sustainable; that is,
it is difficult for competitors to duplicate. For example, a critical factor in Wal-Mart's
success is its information and supply chain management systems. Even though
competitors recognize this advantage, they have difficulty achieving the same level of
performance as Wal-Mart's systems for two reasons. First, Wal-Mart has made a
substantial investment in developing its systems and has the scale economies to justify
this investment. Second, its systems are not simply some software any firm can buy from
a supplier. Through experience and learning, small changes are always being made to
improve the performance of these systems. In addition, the effective use of these systems
requires the coordinated effort of employees and functional areas throughout the
company. .
To illustrate the complexity of the tasks performed by these systems and the need for
coordinated efforts, consider the various factors that can cause stock outs, as shown
below:

Store forecasting (ineffective algorithms, long forecasting cycles) 33%

Store stocking (inadequate/incorrect shelf space, sl1ell stocking frequency, congested

backroom) 22%

Store ordering (late/no orders". inappropriate replenishment intervals) 18%

Management errors (last-minute price / promotion decisions, inaccurate/ obsolete product

information) 13%

Warehousing (poor ordering policies, data accuracy) 11%

Manufacturer availability (packaging/raw materials, capacity issues) 3%

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 RETAILING VIEW 9.1

7 -Eleven Serves a Big Gulp of Technology

By investing over $100 million information technology, 7 -Eleven, the Dallas- based
convenience store chain, is redefining the convenience store concept. This ambitious
makeover is powered by technology systems that, analysts say, rival those of Wal-Mart.
The majority of 7-Eleven's technology investments focus on enhancing its proprietary re-
tail information System. 7-Eleven's three objectives for these investment are to ( 1)
automate and simplify store operations, (2) use technology to improve customer service
and the customer experience, and (3) deliver quality information across the different
areas of the business to enable fact based decision making.
7 -Eleven is emerging as a leader in efficient supply chain management, matching
customer demand. With supply an weeding out sow-moving items in favor of fast-
moving SKUs. Information technology is enabling 7 -Eleven to transform its business.
Now store managers can reorder fresh foods in the morning and replenish their shelves
that night. Using the company's sophisticated systems, store managers know what’s
selling, item-by-item and hour-by-hour. They can monitor customers' buying patterns,
react to changing weather forecasts, and capitalize on neighborhood happenings. For
example, a store manager who finds out on Thursday about the local high school's "big
game" can have enough soda and hot dogs to satisfy customers by kick-off Friday night.
7 -Eleven's Retail Information System collects data from POS terminals and transmits it
in real time to a data warehouse (a data Warehouse is a collection of databases and
mechanisms to access the data designed to support decision making in organizations).
The data are analyzed to better understand customer preferences, pricing, and new prod-
uct launches. The system not only improves in-stock performance, it also allows
entrepreneurial-minded store managers to tailor their assortments in an effort to
maximize sales. "It’s about giving those in the stores the ability to make decisions rather
than having decisions made for them by someone off in an ivory tower," says Keith
Morrow, 7Eleven's ClO. "They're the ones listening to and interacting with the customer.
Our goal is to provide the information they need at the time they need it to make
decisions store by store and item by item."
Sources: Susan Reda, "Slurpee Power: 7-Eleven Serves Convenience with a Big Gulp of
Technology," Stores, May 2005, pp 23-27; Christopher Koch, "Who's Minding the
Store?" CIO, May 15,2005, pp. 1-6

9.2 Information Flows

When Joe Jackson bought his toaster oven at Target, he initiated the following
information flows illustrated in Figure 9.1 (the numbers in parentheses refer to the path in
the Figure):

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 The Target cashier scans the Universal Product Code (UPC) tag on the toaster oven
box (1), and a sales receipt is generated for Joe. The UPC tag is a black-and-white bar
code containing a 13-digit code that indicates the manufacturer of the item, a description
of the item, and information about special packaging, such as cents-off promotions. The
codes for all products are issued by GSI US (www.gslus.org), formerly the Uniform Code
Council.
The information about the transaction is captured at the point-of-sale (POS) terminal and
sent to Target's computer system, where it can be accessed by the planner for the toaster
oven product category (2). The planner uses this information to monitor and analyze sales
and decide to reorder more toaster ovens or reduce their prices if sales are below
expectations.

The sales transaction data also are sent to the distribution center (6). When the store
inventory drops to a specified level, more toaster ovens are shipped to the store, and the
shipment information is sent to the Target computer system (5) so the planner knows the
inventory level that remains in the distribution center.
When the inventory drops to a specified level in the distribution center (4), the planner
negotiates terms and shipping dates and places an order with the manufacturer of the
toaster ovens. The planner then informs the distribution centers about the new order and
when they can expect delivery (5).

When the manufacturer ships the toaster ovens to the Target distribution centers, it sends
an advanced shipping notice to the distribution centers (7). An advanced shipping notice
(ASN) is a document that tells the distribution center what specifically is being shipped
and when it will be delivered. The distribution center then makes appointments for trucks
to make the delivery at a specific time, date, and loading dock.
When the shipment is received at the distribution center, the planner is notified (5) and
then authorizes payment to the vendor.
In some situations that will be discussed later in the chapter, the sales transaction data are
sent directly from the store to the vendor (3), and the vendor decides when to ship more
merchandise to the distribution centers and stores. In other situations, especially when
merchandise is reordered frequently, the ordering process is done automatically,
bypassing the planners.
Customer

(1)
(2)
Sales Information Stores
Buyer/planner
(4) (6)

(5)

(3) (7) Distribution

Vendor Center

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 Fig 9.1 Information Flows
Electronic Data Interchange

In the past, the information flows described above were accomplished by sending
handwritten or typed documents through the mail or by fax. Now most communications,
between vendors and retailers occur via electronic data interchange. Electronic data
interchange (EDI) is the computer-to-computer exchange of business documents in a
structured format, which means that the data transmissions use a standard format to
communicate the data. For example, specific symbols are used to delineate the purchase
order number, the vendor's name, the address the merchandise is being shipped to, and so
forth.

Standards In the retail industry, two data transmission standards are used: (1) the Uniform
Communication Standard (UCS), used primarily by the grocery sector, and (2) the
Voluntary Inter industry Commerce Standard (VICS), used by the general merchandise
retailing sector. Using these standards, retailers and vendors can exchange information
about purchase order changes, order status, transportation routings, advance shipping
notices, on-hand inventory status, and vendor promotions, as well as information that
enable vendors to put price tags on merchandise. The development and use of these
standards is critical to the use of ED I because they enable all retailers to use the same
format when transmitting data to their vendors.

Transmission Systems In larger retail firms, communications among employees within a

company, such as the communications between store managers, planners, and distribution
center employees, are done through an intranet. An intranet is a local area network (LAN)
that employs Internet technology in an organization to facilitate communication and
access to information internally.
To communicate with people outside the organization, such as vendors and
transportation companies, large retailers like Wal-Mart initially developed their own
propriety transmission systems. But now EDI transmissions between retailers and
vendors occur over the Internet through extranets. An extranet is a collaborative network
that uses Internet technology to link businesses with their suppliers, customers, or other
businesses. Extranets are typically private and secure and can be accessed only by
authorized parties.
An extranet is generally an extension of a company's intranet, modified to allow access
to specified external users. The shift from a propriety transmission network to Internet-
based networks enables small retailers and vendors to take advantage of EDI
economically. For example, Target Corporation has shifted its propriety EDI network to
an extranet system called Partners Online, and Wal-Mart's extranet is called Retail Link.
These companies make certain time-sensitive procedures, confidential information, and
general supplier information, such as shipping requirements and prerequisites for packing
cartons, available to vendors via the extranet.

Security Because the Internet is a publicly accessible network, its use to communicate
internally and externally with vendors and customers raises security issues. Some
potential implications of security failures are the loss of business data essential to

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conducting business, disputes with vendors and customers, loss of public confidence and
its effect on brand image, bad publicity, and the loss of revenue from customers using an
electronic channel.
Security has become a bigger challenge in recent years as a result of EDI using
extranets and the operation of Internet retail channels. Now vendors and customers all
need some form of access to the retailer's information system. In addition, the control of
retail information is slipping away from centralized information systems to systems
housed in the functional areas of the business, such as buying and distribution.
To help control this changing information environment, retailers have incorporated
security policies. A security policy is the set of rules that apply to activities involving
computer and communications resources that belong to an organization. However, in
addition to instituting these policies, retailers train employees and add the necessary
software and hardware to enforce the rules. The objectives of the security policy are:

¾ Authentication. The system assures or verifies that the person or computer at the
other end of the session really is who or what it claims to be.
¾ Authorization. The system assures that the person or computer at the other end of
the session has permission to carry out the request.
¾ Integrity. The system assures that the arriving information is the same as that
sent, which means that the data have been protected from unauthorized changes
or tampering (data integrity).

Benefits of EDI The use of EDI provides three main benefits to retailers and their
vendors. First, EDI reduces cycle time, or the time between the decision to place, an
order and the receipt of merchandise. Information just flows "quicker using EDI, which
means that inventory turnover is higher. Second, EDI improves the overall quality of
communications through better record keeping; fewer errors in inputting order, order
receipt, and ASNs; and less human error in the interpretation of data. Third, the data
transmitted by EDI are in a computer-readable format that can be easily analyzed and
used for a variety of tasks ranging from evaluating vendor delivery performance to
automating reorder processes.
Due to these benefits, many retailers are asking their vendors to interface with them
using EDI. However, small-to medium-sized vendors and retailers face significant
barriers, specifically, cost and the lack of information technology (IT) expertise, to
become EDI enabled. For example, in late 2003, Greg Kieler, co-president of Work tools
International, an 8$S million specialty paintbrush company, got a letter from Lowe's
requesting that his firm adopt a new EDI system that would let Lowe's track inventory
more easily. Work tools' deadline: April 2005. This notification presented a challenge
because Work tools doesn't have an IT department, and none of its 40 'employees has real
computer expertise. But Kieler didn't have a choice; Lowe's is his largest customer.
Kieler hired consultants that had worked with Lowe's. They upgraded Worktools'
software, charging a $1,000 set-up fee and $125 a month in ongoing support. Worktools
also paid $600 a year to have its products listed in UCCnet, a registry run by the Uniform
Code Council. When Lowe's went live with the system, Kieler was ready. "Now we
hopefully have an inside track on making Lowe's happy," he says.

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Pull and Push Supply Chains

Information flows 'Such as that described above illustrate a pull supply chain-a supply
chain in which orders for merchandise are "generated at the store level on the basis of
sales data captured by POS terminals. Basically, in this type of supply chain, the demand
for an item pulls it though the supply chain. An alternative and less sophisticate approach
is a push supply chain, in which merchandise is allocated to stores on the basis of
forecasted demand. Once a forecast is developed, specified quantities of merchandise are
shipped (pushed) to distribution centers and stores at predetermined time intervals.
Because inventory at the store is based on consumer demand, in a pull supply chain,
there is less likelihood of being overstocked or out of stock. Also, a pull approach
increases inventory turnover and is more responsive to changes in customer demand. A
pull approach becomes even more efficient than a push approach when demand is
uncertain and difficult to forecast.
Although generally more desirable, a pull approach is not the most effective in all
situations. First, a pull approach requires a more costly and sophisticated information
system to support it. Second, for some merchandise, retailers do not have the flexibl1ity
to adjust-inventory levels on the basis of demand. For example, commitments must be
made months in advance for fashion and private label apparel. Since these commitments
cannot be easi1y changed, the merchandise has to be pre allocated to the stores at the
time the orders are formulated. Third, push supply chains are efficient for merchandise
that has steady, predictable demand; such as milk and eggs, basic men's underwear, and
bath towels. Because both pull and push supply chains have their advantages, most
retailers use a combination of these approaches.

9.3 The Physical Flow Of Merchandise-Logistics

Figure 9.2 illustrates the physical flow of merchandise within the supply chain:
1. Merchandise flows from vendor to distribution center
2. Merchandise goes from distribution center to stores
3. Alternatively, merchandise can go from vendor directly to stores.

Logistics is the aspect of supply chain management that refers to the planning,
implementation, and control of the efficient flow and storage of goods, services, and
related information from the point of origin to the point of consumption to meet
customers' requirements. In addition to managing the inbound and outbound
transportation, logistics involves the activities undertaken in the retailer's distribution
center. For example, sometimes merchandise is temporarily stored at the distribution
center; other times it is immediately prepared for shipment to individual stores. This
preparation may include breaking received shipping cartons into smaller quantities that
can be more readily utilized by the individual stores (breaking bulk), as well as affixing
price tags or stickers, UPC codes, and the store's label.

125
 Customer

Stores

(2)
(3)
Vendor Distribution
Center

(1)

Figure 9.2 Merchandise Flow

Distribution Centers versus Direct Store Delivery

As indicated in Fig 9.2, retailers can have merchandise shipped directly to their stores-
direct store delivery (path 3} --- or to their distribution centers (paths 1 and 2). The
appropriate decision depends on the characteristics of the merchandise and the nature of
demand. To determine which distribution system distribution centers or direct store
delivery-is better, retailers consider the total cost associated with each alternative and the
customer service criterion of having the right merchandise at the store when the customer
wants to buy it.
There are several advantages to using a distribution
center:
¾ More accurate sales forecasts are possible when retailers combine forecasts for
many stores serviced by one distribution center rather than doing a forecast for
each store. Consider a set of 50 Target stores, serviced by a single distribution
center, that each carry Michael Graves toasters. Each store normally stocks 5 units
for a total of 250 units in the system. By carrying the item at each store, the
retailer must develop 50 individual forecasts, each with the possibility of errors
that could result in either too much or too little merchandise. Alternatively, by
delivering most of the inventory to a distribution center and feeding the stores
additional toasters as they need them, the effects of forecast errors for the
individual stores are minimized, and less backup inventory is needed to prevent
stockouts.
¾ Distribution centers enable the retailer to carry less merchandise in the individual
stores, which results in lower inventory investments systemwide. If the stores get
frequent deliveries from the distribution center, they need to carry relatively less
extra merchandise as backup stock.
¾ It's easier to avoid running out of stock or having too much stock in any
particular store since merchandise is ordered from the distribution center as
needed.

126
 ¾ Retail store space is typically much more expensive than space at a distribution
center, and distribution centers are better equipped than stores to prepare
merchandise for sale. As a result, many retailers find it cost effective to store
merchandise and get it ready for sale at a distribution center rather than in
individual stores.

But distribution centers aren't appropriate for all retailers. If a retailer has only a few
outlets, the expense of a distribution center is probably unwarranted. Also, if many
outlets are concentrated in metropolitan areas, merchandise can be consolidated and
delivered by the vendor directly to all the stores in one area economically. Finally, direct
store delivery gets merchandise to the stores faster and thus is used for perishable goods
(meat and produce), items that help create the retailer's image of being the first to sell the
latest product (e.g., video games), or fads. For example, by developing a supply chain
that bypasses the distribution center, ProFlowers reduced the delivery time from flower
cutting to store delivery from 12 to 3 days.
Thus, the types of retail stores that are most efficiently supplied through distribution
centers are those:

¾ Selling nonperishable merchandise.

¾ Offering merchandise that has highly uncertain demand, such as fashionable
apparel, because more accurate sales forecasts are possible when demand from
many stores is aggregated at distribution centers.
¾ Selling merchandise that needs to be replenished frequently, like grocery items,
because a direct store delivery system requires stores to spend too much time
receiving and processing deliveries from many vendors.
¾ That carry a relatively large number of items that are shipped to stores in less than
full-case quantities, such as drug stores.
¾ With a large number of outlets that aren't geographically concentrated within a
metropolitan area but are within 150 to 200 miles of a distribution center.

Some vendors provide direct store delivery for retailers to ensure that their products
are on the store's
Shelves, properly displayed, and fresh. For example, employees delivering Frito-Lay
snacks directly to supermarkets replace products that have been on the shelf too long and
are stale, replenish products that have been sold, and arrange products so they are neatly
displayed.

9.4 The Distribution Center

The distribution center performs the following activities: coordinating inbound
transportation; receiving, checking, storing, and crossdocking; getting merchandise
"floor-ready"; and coordinating outbound transportation.. To illustrate these activities
being undertaken in a distribution center, consider a shipment of Sony MP3 players
arriving at a Sears distribution center.

127
Activities Managed by Distribution Centers

Management of Inbound Transportation Traditionally, buyers focused their efforts when

working with vendors on developing merchandise assortments, negotiating prices, and
arranging joint promotions. Now, buyers and planers are much more involved in
coordinating the physical flow of merchandise to the stores. The Sears MP3 buyer has
arranged for a truckload ofMP3 player to be delivered to its Warren, Ohio, distribution
center on Monday between 1:00 and 3:00 p.m. The buyer also specifies how the
merchandise should be placed on pallets for easy unloading.
The truck must arrive within the specified time because the distribution center has all of
its 100 receiving docks allocated throughout the day, and much of the merchandise on
this particular truck is going to be shipped to stores that evening. Unfortunately, the truck
was delayed in a snow storm. The dispatcher-the person who coordinates deliveries to
the distribution center-reassigns the Sony truck to a Wednesday morning delivery slot
and charges the firm several hundred dollars for missing its delivery time. Although
many manufacturers pay transportation expenses, some retailers negotiate with their ven-
dors to absorb this expense. These retailers believe they can lower their net merchandise
cost and better control merchandise flow if they negotiate directly with trucking
companies and consolidate shipments from many vendors.

Receiving and Checking Receiving is the process of recording the receipt of

merchandise as it arrives at a distribution center. Checking is the process of going
through the goods upon receipt to make sure they arrived undamaged and that the
merchandise ordered was the merchandise received.
In the past, checking merchandise was a very labor-intensive and time-consuming
process. Today, however, many distribution systems using EDI are designed to minimize,
if not eliminate, these processes. The advance shipping notice tells the distribution center
what should be in each carton. A UPC label on the shipping carton that identifies the
carton's contents and the number of each type of Sony MP3 player is scanned and
automatically counted as it is being received and checked.

Storing and Cross-docking After the merchandise is received and checked, it is either
stored or crossdocked. When merchandise is stored, the cartons are transported by a
conveyor system and forklift trucks to racks that go from the distribution center's floor to
its ceiling. Then, when the merchandise is needed in the stores, a forklift driver goes to
the rack, picks up the carton, and places it on a conveyor system that routes the carton to
the loading dock of a truck going to the store.
Merchandise cartons that are crossdocked are prepackaged by the vendor for a specific
store. The UPC labels on the carton indicate the store to which it is to be sent. The vendor
also may affix price tags to each item in the carton. Since the merchandise is ready for
sale, it is placed on a conveyor system that routes it from the unloading dock at which it
was received to the loading dock for the truck going to the specific store. The cartons are
routed on the conveyor system automatically by sensors that read the UPC label on the
cartons. Crossdocked merchandise is only in the distribution center for a few hours before
it is shipped to the stores.

128
 Merchandise size and the sales rate typically determine whether cartons are
crossdocked or stored. For instance, due to their small size, MP3 players are shipped in
cartons with 48 players, but a Sears store can only display and hold 12 players at a time.
So the Sony MP3 player shipment needs to be stored in a "break pack" area where the
carton of 48 players IS opened and 12 players are removed, put in another carton with
other items being sent to the store, and sent to the specific Sears store. However, the
Sears MP3 buyer might negotiate with Sony to have MP3 players shipped to Sears
distribution centers in cartons of 12 units so they could be crossdocked, thus avoiding the
additional cost of breaking the carton and repacking them.

Getting Merchandise Floor Ready For some merchandise, additional tasks are
undertaken in the distribution center to make the merchandise floor ready. Floor-ready
merchandise is merchandise that is ready to be placed on the selling floor. Getting
merchandise floor ready entails ticketing, marking, and, iIi the case of some apparel,
placing garments on hangers.
Ticketing and marking refers to affixing price and identification labels to the
merchandise. It is more efficient for a retailer to perform these activities at a distribution
center than in its stores. In a distribution center, an area can be set aside and a process
implemented to efficiently add labels and put apparel on hangers. Conversely, getting
merchandise floor ready in stores can block aisles and divert salespeople's attention from
their customers. An even better approach from the retailer's perspective is to get vendors
to ship floor-ready merchandise, thus totally eliminating the expensive, time-consuming
ticketing and marking process.

Preparing to Ship Merchandise to a Store At the beginning of the day, the computer
system in the distribution center generates a list of items to be shipped to each store on
~at day. For each ~tem, a pick ticket and shipping label is generated. The pick ticket is a
document or display on a screen in a forklift truck indicating how much of each item to
get from specific storage areas. The forklift driver goes to the storage area, picks up the
number of carton indicated on the pick ticket, places UPC shipping labels on the cartons
indicating the stores to which the Items are to be shipped, and puts the cartons on the
conveyor system, where they are automatically routed to the loading dock for the truck
going to the stores
Pick tickets and labels are also generated for the break pack area the number of items for
a store are selected by employees from the open cartons and put into a new carton. Then
shipping labels indicating the store destinations are attached to the cartons, and the
cartons are placed on the conveyor system and routed to the appropriate loading dock.
So the conveyor system feeds cartons from three sources to the loading dock for a
truck going to a specific store: (1) crossdocked cartons directly from the vendor's
delivery trucks, (2) cartons stored in the distribution center, and (3) cartons from the
break pack area. These cartons are then loaded onto the trucks by employees.

Management of Outbound Transportation The management of outbound

transportation from distribution center to stores has become increasingly complex.
Most distribution centers run 50--100 outbound truck routes in one day. To handle this
complex transportation problem, the centers use sophisticated routing and scheduling

129
computer systems that consider the locations of the stores, road conditions, and
transportation operating constraints to develop the most efficient routes possible. As a
result, stores are provided with an accurate estimated time of arrival, and vehicle
utilization is maximized. Retailing View 9.2 describes these activities in Wal-Mart's
distribution centers.

Reverse Logistics

Reverse logistics is the flow of returned merchandise back through the channel, from the
customer back to the stores, distribution centers, and vendors. Reverse logistics can be an
important issue. For instance, returns of apparel bought from catalogs range from 12 to
35 percent of sales, depending on the product's characteristics. Tailored, fashion-forward
apparel has a higher return rate that does traditional casual. apparel.
Reverse logistics systems are challenging. The returned items may be damaged or lack
the original shipping carton and thus require special handling. Transportation costs can
be high because items are shipped back in small quantities.
To recover the cost of returned merchandise, Sears and other retailers sell returned
merchandise through online auctions. Sears has sold thousands of items at auction on
eBay and recovered an average of two to three times more than it would have using other
liquidation channels. A third-party distribution facilitator, Genco Distribution Systems,
collects the merchandise to be auctioned from Sears, inspects it, and, following criteria
set by Sears, lists the items on eBay without identifying the Sears brand name. After the
auction, Genco packs and ships the merchandise to the consumer.

Logistics for Fulfi11ing Catalog and Internet Orders

Fulfilling Internet and catalog orders from customers is very different than distributing
merchandise to stores. The typical retail distribution center is designed to ship a large
number of cartons in truck loads to a relatively small number of stores. These distribution
centers typically s typically have automated material-handling equipment and warehouse-
management software. In contrast, when fulfilling orders from individual consumers,
retailers ship small packages with one or two items to a large number of different places.
Thus, a completely different distribution center design is required for supplying Internet
and catalog channels compared with that for a store channel.
Catalog retailers use distribution centers designed to pick and pack orders for
individual consumers. Traditional store-based retailers, as they evolve into multichannel
retailers, have had to either redesign their distribution centers or outsource the fulfillment.
Some multichannel retailers, like Staples, use different distribution centers to service
stores and Internet and catalog customers. Sharper Image, which started as a catalog
merchant and now operates almost 100 stores in the United States, uses one distribution
center to service all three retail formats. Borders is partnering with Amazon.com to assist
it with its online fulfillment needs.

130
Outsourcing Logistics

To streamline their operations and make more productive use of their assets and
personnel, retailers consider outsourcing logistical functions if those functions can be
performed better or less expensively by third-party logistics companies. Third-party
logistics companies are firms that facilitate the movement of merchandise from
manufacturer to retailer but are independently owned. Specifically, they provide
transportation, warehousing, consolidation of orders, and documentation.

Transportation Retailers are careful in choosing their shippers. They demand reliable;
customized services because, to a large extent, the retailer's cycle time and its variations
are determined by the transportation company. Also, many retailers are finding that it is
worth the added cost of airfreight to get merchandise into stores quicker.
One cost advantage of independent transportation companies is they are better able to
fill trucks on the return trip (backhaul) than the retailer. By arranging a productive round-
trip, they can offer their services at a lower cost than most retailers can achieve
themselves.
Some retailers mix modes of transportation to reduce overall costs and time delays. For
example, many Japanese shippers send Europe-bound cargo by ship to the U.S. West
Coast. From there, the cargo is flown to its final destination in Europe. By combining the
two modes of transport, sea and air, the entire trip takes about two weeks, as opposed to
four or five weeks with an all-water route, and the cost is about half that of an all-air
route.

131
 RETAILING VIEW 9.2
Wal-Mart's Muscle: It’s Distribution Centers
The untold story behind Wal-Mart's success is a squat, gray building on the outskirts of
Bentonville, Arkansas. Wal-Mart Distribution Center (DC) No. 6094 is dedicated to
replenishing the general merchandise of 120 stores, primarily across Arkansas, Missouri,
and Oklahoma. At 1.2 million square feet, DC No. 6094 stores more than $55 million in
merchandise of 50,000 items. The receiving, processing, and shipping operations that
occur there are repeated at 173 other facilities the world over.
Whereas founder Sam Walton used to transport merchandise from the DCs to the stores
in his own station wagon, DC No. 6094 dispatches and receives 200-250 trucks dally.
Lower-volume stores receive four or five truckloads of merchandise in a week, while
busy stores may receive that many in a single day. Wal-Mart's DCs ship more than 2.5
billion cartons annually. Wal-Mart also maintains four DCs for imports.
Half of the merchandise that DC No. 6094 processes is crossdocked and ships out less
than 24 hours after it arrives. The other half, called "pull stock," is stored at the DC.
Eighty-five percent of the pull stock is processed through the facility's approximately 20
miles worth of conveyors. Automated, conveyor-mounted shoes push cartons off the lane
and down one of the facility's 100 chutes to a waiting truck at a rate of 200 cartons per
minute.
The remaining is percent of pull stock consists of "non-conveyable": merchandise that is
too bulky to be carried on the conveyors, such as Christmas trees or home gyms. These
are transported to the waiting trucks by forklift. A voice-based guidance system directs
the forklift drivers trucking bay. The drivers can typically operate their battery-powered
forklifts six to eight hours between charges.
Less than 10 percent of the pull stock is break pack merchandise. For efficiency and
ergonomic reasons, merchandise at the break pack area is segregated by product category.
The fastest-moving merchandise is stored at waist level so workers don't have to stretch
or bend any more than is necessary. Wal-Mart's famed thriftiness can be seen on every
break pack carton the DC ships: On each cardboard carton is printed a reminder for the
"This box cost Wal-Mart 75$ to make." Store associates are encouraged to return the
boxes to the be reused in the break pack area.
Source: Dan Scheraga, "Distribution Centers: Waf-Mart's Muscle," Stores, June 2005,
pp. 34-36.

Warehousing To meet the increasingly stringent demands retailers are placing on their
vendors to meet specific delivery times for floor-ready merchandise, many vendors must
store merchandise close to their retail customers. Rather than owning these warehouses
themselves, vendors typically use public warehouses that are owned and operated by a
third party. By using public warehouses, vendors can provide their retailers with the level
of service demanded without having to invest in warehousing facilities.

Freight Forwarders Freight forwarders are companies that purchase transport services.
They then consolidate small shipments from a number of shippers into large shipments

132
that move at a lower freight rate. These companies offer shippers lower rates than the
shippers could obtain directly from transportation companies because small shipments
generally cost more per pound to transport than do large shipmentsJ5
One of the most daunting tasks for a retailer involved in importing merchandise to the
United States is government bureaucracy. International freight forwarders not only
purchase transportation services but also prepare and expedite all documentation, such as
government-required export declarations and consular and shipping documents.

Integrated Third-Party Logistics Services Traditional definitions distinguishing among

transportation, warehousing, and freight forwarding have become blurred in recent years.
Some of the best transportation firms, for example, now provide public warehousing and
freight forwarding. The same diversification strategy is being used by other types of
third-party logistics providers. Retailers are finding this one-stop shopping quite useful.

-------------------------------------------------------------------------------------------- ------------
9.5 Collaboration Between Retailers And Vendors In Supply Chain
Management

As we discussed previously, retailers' and vendors' objectives for supply chain

management are to make sure that merchandise is available in the stores when customers
want it (minimize stockouts) and to accomplish this task with the minimum investment in
inventory and costs. Supply chain efficiency dramatically improves when vendors and
retailers share information and work together. By collaborating, vendors can plan their
purchases of raw materials and production process to match the retailer's merchandise
needs. Thus vendors can make sure that the merchandise is available 'just in time," when
the retailer needs it, without having to stock excessive inventory in the vendor's
warehouse or the retailer's distribution centers or stores.
When retailers and vendors do not coordinate their supply chain management
activities, excess inventory builds up in the system even if the retail sales rate for the
merchandise is relatively constant. This buildup of inventory in an uncoordinated channel
is called the bullwhip effect. The effect was first discovered by Procter & Gamble, which
saw that its orders from retailers for Pampers disposable diapers were shaped like a
bullwhip even though retail sales were relatively constant (see Fig -9.3). Since it is more
cost effective for Procter & Gamble to manufacture disposable diapers at a continuous
rate, the company or its retailers had to maintain an inventory of a lot of diapers to meet
the "irregular" demand it saw.

Research has found that the bullwhip effect in an uncoordinated supply chain is
caused by the following factors:
¾ Delays in transmitting orders and receiving merchandise. Even when retailers
can forecast sales
accurately, there are delays in getting orders to the vendor and receiving those
orders from the vendor. In an uncoordinated supply chain, retailers might not
know how fast they can get the merchandise, and thus, they overorder to prevent
stockouts. When the retailers overorder, the vendors think demand is higher than
it really is, and they overproduce.

133
 ¾ Overreacting to shortages. When retailers find it difficult to get the merchandise
they want, they begin to play the shortage game. They order more than they need
to prevent stockouts, hoping they will receive a larger partial shipment. These
overorders again lead the vendor to think demand is higher than it really is.
¾ Ordering in batches. Rather than generating a number of small orders, retailers
wait and place larger orders to reduce order processing and transportation costs
and take advantage of quantity discounts. This ordering pattern leads the vendor
to think that sales are more irregular than they really are.
These factors cause the bullwhip effect even when sales are fairly constant. However,
for many retailers, sales are not constant; they go up dramatically when retailers put
merchandise on sale and during special gift-giving times of the year. These irregularities
in sales heighten the bullwhip effect and the buildup of inventory in the supply chain.
Vendors and retailers have found that by working together they can reduce the level of
inventory in the supply chain and the number of stockouts in the stores. Four approaches
for coordinating supply chain activities, in order of the level of collaboration, are (l) using
EDI; (2) exchanging information; (3) using vendor-managed inventory; and (4)
employing collaborative planning, forecasting, and replenishment (CPFR). Retailing
View 9.3 describes the historical forces motivating retailers and vendors to collaborate on
supply chain management.

Quantity

Orders Placed

40

30

20

10

0 Time

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 RETAILING VIEW 9.3

Quick Response and Efficient Consumer Response (ECR)

Retailer-vendor collaboration in supply chain management grew out of activities
undertaken by apparel manufacturers and retailers, called quick response (QR), and
consumer package goods (CPG) manufacturers and supermarket retailers, called efficient
consumer response (ECR). In the mid-I 980s, Milliken, a U.S. textile manufacturer facing
severe price competition from imports, developed a strategy to compete on its speed to
market rather than price. At the time, it took 66 weeks for the apparel industry to go from
yarn at the manufacturer to clothing on a retail store fixture. But since no one in the
supply chain knew what would be selling in a month, much less a year, the cost of that
lengthy supply cycle was devastating. The apparel industry as a whole lost billions of
dollars each year through price reductions on items customers didn't want and because
they did not have enough of what they did want.
To address this supply chain inefficiency, Milliken joined with The Warren Featherbone
Company, a children's apparel maker, and Mercantile Stores, a large retail chain, to
compete through what they called quick response. Quick response was modeled after the
just-In-time OJT) initiatives undertaken. by manufacturers and adapted to retailing.
Mercantile developed a sales forecast for a season. Milliken manufactured the fabric to
meet the forecast but kept most of the fabric as "grey goods" that could be dyed different
colors when orders for the specific colors came in. Featherbone cut and sewed a small
initial assortment of garments and shipped them to Mercantile. Mercantile monitored the
initial sales of colors and sizes then transmitted this information to Featherbone and
Milliken so the remaining fabric could be dyed, cut, .and sewed in the colors and sizes
that consumers were buying.
Wal-Mart and other discount store chains were the motivating force for collaboration
between CPG manufacturers and supermarket retailers. Through the Food Marketing
Institute, supermarkets, facing price competition from discount stores, commissioned
Kurt Salmon Associates (KSA) to find out. how they could compete more effectively.
KSA found that the supermarkets had a significant cost disadvantage due to their
inefficient supply chains. When CPG manufacturers held special trade promotions
(discounted the wholesale price), supermarket chains would buy a six month supply of
the products, leaving them with $30 billion of excess inventory in their distribution
centers. In 1993, the KSA report recommended a multipronged approach called ECR that
involved collaboration between manufacturers and retailers to achieve efficient
replenishment and promotions.
Since these initiatives were launched, the grocery industry has made greater strides in
improving supply chain efficiencies than the apparel industry because the manufacturing
process for apparel is more complex and the number
of SKUs is significantly greater. .
Sources; Goran Svensson, "Efficient Consumer Response-Its Origin and Evolution in the
History of Marketing," Management Decision 40 (2002), pp. 508-20; Barbara Kahn and
Leigh McAlister, Grocery Revolution: The New Focus on the Consumer (Reading, MA:
Longman. Addison-Wesley, 1997).

135
Sharing Information

One of the major factors causing excessive inventory in the supply chain is the inability
of vendors to know what the actual level of retail store sales are. If vendors knew that
sales were increasing, they could produce more merchandise and prevent shortages and
stockouts. With information that sales are decreasing, vendors could cut back on
production and prevent excessive inventory buildup.
Wal-Mart's Retail Link is a data warehouse and decision support system that provides
vendors with a two-year sales history and inventory levels for each of their products in
each of Wal-Mart's 5,000 stores worldwide. The data warehouse available from Retail
Link is so rich in information that many vendors hire analysts and buy third-party
software to uncover patterns that can help them improve sales forecasts and the
assortments to allocate to specific stores. Wal-Mart solicits input from vendors on how to
improve the system. It sponsors Retail Link User Groups that meet regularly around the
country, in which participating vendors can share tips and strategies for increasing the
effectiveness of the system. Wal - Mart also has a Retail Link steering committee
comprised of members of the vendor community that meets quarterly and is able to share
suggestions on how to improve the functionality of the system.3o
Sharing sales data with vendors is an important first step in improving supply chain
efficiency. With these sales data, vendors can improve their sales forecasts, improve
production efficiency, and reduce the need for excessive backup inventory. But additional
levels of collaboration are needed to use this information effectively. The sales data
reflect historical data, not what the retailer's plans are for the future. For example, the
retailer might decide to delete a vendor's SKU from its assortment-a decision that clearly
affects future sales.

9.6 Radio Frequency Identification (RFID)

Radio frequency identification (RFID) is a technology that allows an object or person

to be identified at a distance using radio waves. The devices or tags are inserted into
oceangoing containers, on shipping cartons, or even behind merchandise labels and
transmit data about the object in which they are embedded. The RFID technology has
advantages over bar codes, including the ability to hold more data and update data stored
on the device. For instance, it can keep track of where an item is in the supply chain and
even where it is stored in a distribution center. The data on the device can be acquired
without a visual line of sight and in harsh environments in which bar code labels won't
work.
The promise of RFID is the dream of every supply chain manager because it enables
the accurate, real-time tracking of every single product, from manufacturers to checkout
in stores. It eliminates the manual point-and-read operations needed to get data from UPC
bar coding. Thus, RFID can significantly decrease warehouse, distribution, and inventory
costs, increase margins, and provide better in-stock positions.
Several of the most prominent retailers are already taking advantage of this new
technology. Wal-Mart has demanded its top 100 suppliers put RFID tags on all pallets,
cases, cartons, and high-margin items. To meet these demands, vendors have been forced
to make significant investments to acquire the necessary technology and equipment.

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Benefits of RFID

Some of the benefits of RFID include

Reduced warehouse and distribution labor costs Warehouse and distribution costs
typically represent 2-4 percent of operating expenses for retailers. Replacing point-
and-read, labor-intensive operations with sensors that track pallets, cases, cartons, and
individual products anywhere in the facility can significantly reduce labor costs by as
much as 30 percent.

Reduced point-of-sale labor costs Using RFID at the product level can help retailers
reduce the labor costs needed for checking shelf inventory. In addition, RFID-enabled
products will improve self-scan checkouts and increase the use of self-scans, thus
shortening checkout times and reducing employee fraud.
Inventory savings RFID reduces inventory errors, ensuring that the inventory recorded
is actually available. By tracking pieces more exactly, companies have more accurate
information about what was sold and what inventory is actually needed.

Reduced theft With RFID, products can be tracked through the supply chain to pinpoint
where a product is at all times, which helps reduce theft in transportation, at the
distribution centers, or in the stores. RFID has already been successfully deployed in
stores, particularly on costly items prone to theft, such as Gillette Mach 3 razor blades.

Reduced out-of-stock conditions Since RFID facilitates accurate product tracking,

forecasts are more accurate, which decreases stockouts. Using RFID, store managers
can be automatically notified when specific SKUs are not on the shelves and need to be
stocked.

Impediments to the Adoption of RFID

A major obstacle to the widespread adoption of RFID is the high costs, which make the
present return on investment low. The cost of RFID tags is 25 to 30 cents per tag, down
from 40 cents in 2002. Even though the cost is dropping, it still only makes economic
sense to put tags on pallets, cartons, expensive merchandise, or high theft items.
However, with demand increasing and tag production costs declining, the tags are
expected to reach 5 cents per tag.
Another reason RFID has not been adopted by more retailers is that it generates more
data than can be efficiently processed, and therefore, retailers find it difficult to justify the
implementation costs. Most retailers are not capable of transmitting, storing, and
processing the data that would be available about the location of pallets, cases, cartons,
totes, and individual products in the supply chain.

Pantaloon Retail adopts RFID

Rapidly changing production and supply chain dynamics are driving the Indian Retail
industry to automate their processes and data. It is a challenge for retailers to constantly
improve their customers' experience and to attract new shoppers and maintain old
customers. At the same time, narrowing margins mean that retailers need to cut costs to
stay profitable. Wireless technology has been introduced by retailers to improve worker

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productivity on the retail floor.
With RFID solution, inventory can be updated automatically without the requirement
of scanning the product or any human involvement. The fully automated system allows
inventory status to be determined and shipping & receiving documents to be generated
automatically. The system can also trigger automatic orders for products that reach re-
order quality level.

Need for RFID

Pantaloon began to focus more on IT to bring in more transparency in its customer

relationships and to streamline its supply chain. Whenever it procured merchandise, the
entire process had to undergo two to three steps before it reached outlets. At each step,
human intervention was required and barcode readers were installed at merchandising
locations. Traceability and visibility of goods in the supply chain, lack of a unique
identity at each item level, and human intervention leading to errors were some of the
issues faced by the company. Further, these challenges led to a lack of coordination with
the back-end at the stores hampering the company's production planning and inventory
management.
Pantaloon's experiment with RFID

Initially, Pantaloon piloted the RFID project at one its warehouses in Tarapur using 1,000
RFID tags. Pantaloon went in for RFID for its simplicity of tagging, efficacy of use,
product buffering, ability to keep track of over-produced items, and ability to monitor
product-line lead time at the warehouse and fast-moving product-lines. The company
selected a few lines of apparel, primarily shirts and trousers, for its RFID pilot. The RFID
application developed by Wipro InfoTech was tailored to the overall solution in line with
Pantaloon's business processes and IT landscape (from the factory outward to the
warehouse inward and from the warehouse outward) in order to capture real-time data.
The application is integrated with Oracle database 109 and middleware along with an
implementation of the RFID hardware. It integrates with the existing IT infrastructure,
the in-house developed Retail Enterprise Manager. The main objective was to smoothen
the entire product lifecycle, introduce item-level tagging for identification, and track the
entire RFID road map with Pantaloon. The piloting was also to do an RFID feasibility
study for additional uses.
At the factory outlet, RFID tags were attached to the merchandise and the data written
to them. When the RFID-tagged merchandise comes through the inward gate, all related
information such as purchase and delivery orders will be fed in the inward terminals in
real-time. After correlating the requirements of specific outlets with the merchandise in
the warehouse; the items allocated for different outlets will be transported. The tags are
removed once the RFID-tagged goods pass through the outward terminal. The pilot was
implemented at a cost of Rs. 30 lakh, which included the hardware cost (a writer, 2 tag
readers and 1,000 tags) and the cost of system integration.

Benefits

Apart from improving the efficiency and accuracy of data records, there has been

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tremendous savings on the time saved, about 80 percent in inward warehouse processing
and 12 percent in outward. Real-time visibility of items during all stages of the supply
chain improved to 98 percent.
Pantaloon now has plans to extend the application to production routing and
scheduling, product recall and returns, and real-time data for category managers for
effective forecasting. It is expected that the RFI D application will further il11prove the
shopping experience, store layout and inventory savings. RFID tech-
nology will also improve collaboration across the supply chain right up to the point of
sale.

Sources:www.networkmagazineindia.com,March2007; www.expresscomputeronline.com.
August 29,2005; www.domainb.com. April 29. 2005; www.wipro.in; www.interconnect.in

9.7 Questions For Self-Analyzation:

Q1 Why is global logistics much more complicated than domestic logistics?

Q2 Evaluate the options retailers have for dealing with returned merchandise.

Q3 Explain how an efficient supply chain system can increase a retailer's level of
product availability and decrease its inventory investment

Q4 In the past, manufacturers dominated the relationship between vendors and retailers.
Today, retailers have more leverage, and both parties are investing in and seeing the
benefits of a more trusting relationship with two-way communication. How has the
emergence of mega formats, mergers and acquisitions, and technology enabled this
shift to greater cooperation between retailers and manufacturers?

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