TRL2604 Study Notes

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Unit 1 – Basic Concepts & Goal of Logistics

Logistics & the Supply Chain SU 1 pg. 2; par. 1.2 & TB Ch. 1 pg.4,7
Supply chain management [SCM] definitions:
 "Firms collaborating to leverage strategic positioning & improve operating efficiency" Bowersox, Closs, Copper (2013:4)

 "Encompasses planning & management of all activities involved in sourcing & procurement, conversion, all
logistics management activities, coordination & collaboration with channel partners (i.e. suppliers /
intermediaries/third party service providers/customers). Essentially integrates supply & demand
management within & across companies" CSCMP: Council of Supply Chain Management Professionals (2010)

Supply Chain: "Alignment of firms bringing products/services to the market”. Supply chain therefore consists of the
key business processes (from original supplier to end-user) that provide products/services/information which add
value for customers & stakeholders (Stock & Lambert 2001:54).

Supply chain concept envisions new business arrangements offering potential to improve competitiveness & highly
effective business relationships that serve to improve efficiency by eliminating duplicate & non-productive work.

Logistics: Process of planning, implementing & controlling procedures for efficient & effective transportation and
storage of goods (services & related information) from point of origin to point of consumption for the purpose of
conforming to customer requirements. Definition includes in-, outbound, in- & external movements CSCMP (2010).
The work required to move & position inventory throughout a supply chain.

Logistics is the process that creates value by timing and positioning inventory and it is the combination of a firm’s
- order management & information - inventory - transportation
- warehousing - materials handling - packaging

In firm’s SCM, logistics is the work required to move & geographically position inventory throughout supply chain.
Thus logistics is a subset of and occurs within the broader framework of a supply chain.

Integrated Logistics: serves to link & synchronize overall supply chain as continuous process essential for effective
supply chain connectivity. Integrating activities to achieve particular level of customer service at lowest total cost.

Logistics SU 1 pg. 2; par. 1.3 & TB Ch. 1 pg.28-29


Is about satisfying customer expectations/adds value by ensuring required quantity of a particular product (raw
materials/ semi-finished/finished products) is available at place and time required at the lowest total cost. It involves
a number of processes/activities that cut across various functional departments and even other participants in the
supply chain.

Goal: "to support procurement, manufacturing & customer accommodation operational requirements" Bowersox (2013:29)
with two important elements: service & cost.

Renaissance: Because logistics is both old & new, term characterizes the rapid change taking place in best practice.

Logistical Competency SU 1 pg. 6; par. 1.4 & TB Ch. 1 pg.29-30


Logistical competency refers to a business’s level of performance with regard to logistics & customer requirements
at a realistic total cost expenditure. Superior logistical performance can be essential for business success, resulting in
a competitive advantage.

To gain competitive advantage, customer value needs to be created. Creation of customer value depends largely on
effective logistics/logistical competency - a relative assessment of the capability of a business to provide superior
customer service at the lowest total cost. Effective logistics requires the integration of various basic work and
functional areas, as well as logistical temporal/spatial integration.

When Malfunction (something going wrong) occurs, competency can be measured in terms of recovery time
Logistical Mission SU 1 pg. 6-7; par. 1.5 & TB Ch. 1 pg.30-33
Attributes of basic logistics service describes level of service a firm provides to all established customers. Give
particular attention to the following customer requirements in which logistical service is measured:

 Availability: probability of having inventory to consistently meet customer material/product requirements.


 Operational performance: time required to deliver customer's order; involves speed, consistency, flexibility
 Service reliability: requires quality (accurate measurement of availability & operational performance)

Logistical quality: product of careful planning, employee training, operational dedication, comprehensive
measurement & continuous improvement

Main point of total cost concept is that minimisation of costs within each individual business function or logistics
activity can result in a higher total cost (all expenditures necessary to perform logistical req.) than could otherwise
be achieved if functions/activities were integrated. Lowest total cost approach requires integration of various
functions & activities, and certain trade-offs.

Logistics value proposition: matching operating competency & commitment to key customer expectations &
requirements; a unique commitment of a firm to an individual/selected customer groups.

Logistical Trade-Offs SU 1 pg. 7-9; par. 1.6


The Nature of Trade-Offs: SU 1 pg. 7; par 1.6.1
Trade-off: simply a balance between two/more logistics functions to achieve total lowest cost. Occurs when
increased cost in one area is more than matched by cost reduction in other areas, resulting in lower total cost.

Trade-Off Levels: SU 1 pg. 8; par 1.6.2


1) INTER-ORGANISATIONAL TRADE-OFFS: mainly occur when using intermediaries (selecting wholesalers & retailers) in
marketing channel. For example may cost more to make use of various wholesalers, but sales may increase,
thus resulting in a better overall position.

Involve selecting least total cost supply chains - chains mostly comprising different institutions (intermediaries
i.e. wholesalers/retailers/third-party logistics providers). N.B. to use the correct intermediaries.

If none were used, there would be:


 close contact with the marketplace
 proper control over key areas such as customer (end-user) service policy

Use of intermediaries has distinct advantages:


 Intermediaries in the channel specialise in particular activities which may result in economies of
specialisation through the division of labour, for example, specialised sales staff.
 Intermediary may achieve economies of scale by means of high volume at high throughput levels.
 Results in reduction in contact costs, which are the costs of the contacts that need to be made
between buyers and sellers in order to distribute a product.

2) INTER-FUNCTIONAL (INTERDEPARTMENTAL) TRADE-OFFS between different management functions/departments. May


be necessary for some/all individual functional departments to operate sub-optimally in order for whole
logistics system to minimise total logistics costs.
Example: marketing manager may have to prepare to accept lower level of service/narrower product range;
production manager may have to schedule shorter runs/forfeit economies of scale; transport manager may
have to make more frequent deliveries if this will contribute to efficiency of the total logistics system.

3) INTERACTIVITY TRADE-OFFS: among various logistics activities constitute contributing factor to the achievement of
lowest total cost. The most obvious trade-offs at this level are the following:
 Warehouse cost/transport cost trade-offs Example: SG page 8
 Transport (mode) cost/inventory cost trade-offs Example: SG page 9
4) INTRA-ACTIVITY TRADE-OFFS: within particular logistics activity. Following are the most common:

 Trade-offs within a warehouse: Materials handling done manually/mechanically/automated. High


capital costs of automated warehouses traded off against human resources cost of manual handling.

 Inventory trade-offs: Advantage of ordering large quantities traded off against costs of carrying stock

 Trade-offs regarding transport: cost of owning & operating own fleet vs. freight tariffs charged by
professional carriers.

Self-Evaluation Questions SU 1 pg. 10; par 1.8 - References


1)
Unit 2 – Basic Logistics Activities
Basic work which must be performed to fulfil logistics requirements: network design, information, transport, [SU2]
inventories, warehousing, materials handling and packaging [SU3]

Network Design SU 2 pg. 13; par. 2.2 & TB Ch. 1 pg. 37-38
Logistics management: concerned with flow of inventory & info.
Inventory flow requires network of facilities which allows:
- Stock to be kept - customer orders to be picked up - and dispatched

Facilities/depots hold stock to match anticipated demand with planned supply, balance flows, enable consolidation
of customer orders.
Facility aspects required to achieve high quality service at lowest total cost:
 Type/Nature of facility  Size of facility

 Number of depots/warehouses  Location of facility

Nature & Role of Facilities in Logistics Network: SU 2 pg.13; par 2.2.2


Network of facilities forms structure that enables logistical operations to be performed
Location of supplier & customer is fundamental. Trade-off of a number of relationships existing between facilities
Number, size, geographical location directly affect level of customer service & logistics costs.

Typical logistic facilities: manufacturing plant, warehouse, depot, retail store


But mainly warehouses and depots for inventory & info flow.

Number of Facilities: SU 2 pg. 13; par 2.2.3


Cost Relationships & Trade-offs in deciding number of warehouses:

1) COST OF LOST SALES OWING TO POOR SERVICE: (e.g. non-availability.)


 Number (#) of Facilities =  Level of Services =  Lost Sales

More facilities brings product closer to market, increasing availability,


creating shorter lead times between ordering & delivery.

If cost of lost sales is insignificant, fewer depots would be more optimal. Cost of lost
sales

2) INVENTORY COST:
 # of Facilities =  Inventory Cost because of safety stock kept to ensure availability tying up more capital.

3) WAREHOUSING COST:
 # of Facilities =  Warehousing cost because more space bought/rented.
Costs tend to increase at decreasing rate as number of facilities increase especially if rented. Due to discounts
offered when negotiating on space for different areas (public & contract warehouses i.e. not owned by firm)

4) TRANSPORT COST:
 facilities = shorter distances = cost but too many warehouses =  cost as more deliveries are required
 # of Facilities = Initially  Transport cost until optimum # is reached then  cost.
Due to combination inbound & outbound transport costs and lower tariffs negotiated on truck loads

Outbound: (e.g. factory to warehouse or warehouse to individual customer).


Lower tariffs on full truck-loads. Higher rates as smaller quantities delivered to several destinations
Fewer facilities = truck-load shipments at lower truck-load tariffs.
No facilities = no truck loads as consignment delivered to each customer individually at higher tariffs

Minimum Charges: (e.g. delivery cost stays the same irrespective of delivering 100kg or 1kg)
5) OTHER FACTORS
Customers' Purchasing Patterns: regular basis small orders = more facilities closer to market
Competition: if rivals offer rapid delivery, may force firm to match service level by  # of facilities
Computers/Technology: improved warehouse layout & design, inventory control, shipping & receiving,
dissemination of info =  # of facilities

Size of Warehouses: SU 2 pg. 16; par 2.2.4


 Number of Facilities =  avg. warehouse size = Inverse relationship
Reason: market served by each facility decreases as number of warehouses increases
Unit of measurement: area (square metres); cubic space (vertical storage)

Interrelationship between other logistical activities & facility size. Main factors Influencing Size:
 Customer Needs / service levels:  level of service =  size =  levels of inventory = greater availability
 Market Size: large market =  storage space required
 Product Range:  number of different product types =  size to maintain minimum stock levels
 Large Physical Size of Product
Also fluctuation &
 Less sophisticated Handling Systems
unpredictable demand
 High Throughput Rate (vol. of products handled during specific period)
Requires More Space
 Long Production Lead Time (time taken to manufacture product)
 Aisle Requirements
 Office/Admin Space Required
 Level of Demand: High demand = high turnover of stock =  space required
 Demand Patterns:  space if direct deliveries (bypassing regional warehouse) are possible

Location of Facilities: SU 2 pg. 17; par 2.2.5


Alfred Weber (1929) model: facility location based on cost minimisation. Optimal site = minimal transport costs.
Three strategies for identifying warehouse location:

Close to Market/Final Cust. Close to point of production Intermediate location


•Maximise customer service •collection point/consolodation •In between proudcer & final
• transport costs due to truck- facilities customer
loads/vol. del. to warehouses • customer service •maintain  customer level &
•Favoured by order cycle time, •Favoured by perishable raw still  transport cost.
competitiveness, order size materials, variety of products,
(cash flow), local transport truck-load transport tariffs

Specific factors influencing location at a particular point:


 Availability, quality & diversity of transport carriers
 Quality, quantity & cost of available human resources
 Cost & quality of industrial land
 Expansion potential
 Tax structure (property tax/concessions/municipal levies)
 Building regulations
 Construction costs
 Availability & cost of utility services

Information SU 2 pg. 19; par. 2.3 & TB Ch. 1 pg. 33-34


Importance of accurate, speedy & reliable info in forecasting / order management which influences inventory levels
Proper communication & speed (e.g. online / e-mail orders) can overcome despatch/transport delays to enable
goods to be delivered on time.

Incorrect demand forecast & customer requirements info can seriously affect customer service & logistics costs.
Transportation SU 2 pg. 19; par. 2.4 & TB Ch. 1 pg. 35-36
Operational area that geographically moves & positions inventory

Types of Transport Supply / Options for fulfilling transport requirements:

 Private Fleet
 Contracted (dedicated transporters)
 Common Carriage (wide varieties of carriers, as needed, per shipment basis)

Basic Modes of Transport: SU 2 pg. 20-24; par 2.4.2


1) ROAD TRANSPORT: For transporting high-value, manufactured goods over relatively short distances

•Cost: high variable vs. low fixed as no capital invested in road infrastructure thus
•Fairly easy entry = large market of relatively small enterprises makes transoprt
Road •Readily available & highly competitive = willing to negotiate rates & services
Characteristics •Indispensable, complete service; complementary (convey goods between other
modes)
•No terminals, with door-to-door service = relatively short delivery times

•Accessibility - virtually any location


•Less time to consolidate consignment due to unit (vehicle) size =
•Relatively short lead time
•Smaller carrying capacity/consignments = frequent despatches
Advantages •Reduces inventory carrying costs but still maintain service level
•Less friction, handling, shunting & better suspension = safer = less protective
packaging
•Low staff req. as personnel can do multiple tasks

•Higher Freight Rates


Disadvantages (can be traded-off against stock, warehousing, packaging & cust. service
•Reliability & Consistency hampered by wather & traffic

2) RAIL TRANSPORT: New developments in integrated services incl. piggybacking & containerisation
Innovative services incl. unit trains, express trains & specialised equipment to remain competitive

•High investment in terminals, tracks & equipment


•Construction & maintenance for own permanent way
Rail •Market: limited number of large carriers
Characteristics •Transport large consignments economically (e.g. mining, agricultural, forestry)
•Convey low-value, high-density products in large volumes over lang distances

Advantages •Freely available in metropolitan areas & smaller communities

•Track-bound: not as accessible & flexible


Disadvantages •Between terminals only (road transport needed to & from terminals)
•Delivery & handling only at terminals
3) AIR TRANSPORT:

•Cost: high variable vs. low fixed as no capital in way (air)


Characteristics •Carries do not have to invest in airports

•Speed = short delivery time over long distances (see also disadvantages)
Advantages •Transport urgent / highly perishable products

•Speed maimed by door-to-door delivery time (surface freight handling & movement)
•High Cost = only commodities with high value (weight ratio) can absorb costs i.e.
Disadvantages transport cost constitutes smaller portion of sales price than inventory carrying cost
•Restricted Accessibility (road transport needed to & from terminals)

4) WATER TRANSPORT: RSA no inland waterways only sea transport (international & coastal)

•Cost: High variable vs. low fixed as rew. no capital invested in infrastructure
Water •Majority consignments: Low value, High density that are
Characteristics •Readily handled by mechanical loading equipment
•Transport large quantities over long distances

•Domestic: Lower freight rates than land transport


Advantages •Facilities more suitable for handling certain bulk commodities
•New Developments: lash vessels & Ro-Ro (roll on-roll off) improved handling

•Slower & Less frequent scheduled services available means


•No rush orders & careful planning ahead of production & shipping schedules
•Goods in transit = funds tied up in inventories
Disadvantages •Serves only major points (pinpoint area coverage)
•Delays by adverse weather conditions
•Extra Handling & Expenses (transport to & from water by land carriers)

5) PIPELINES:

•Limited to crude oil & refined petroleum products


Pipeline •Others products (coal) processed into liquid form (water suspension) first
then separated again at desitnation
Characteristics
•Considerable infrastructure investment = High Fixed cost

•Low cost for petroleum products


•Most reliable & safest mode for suitable products
•Timely delivery due to:
Advantages - product flow monitored & controlled by computer
- minimal risk of loss / damage
- minimal effect of climatic conditions
- not labour intensive / dependent

•Accessibility: only suitable products


Disadvantages •Slow speed but virtually no interruptions reduces total delivery time
Intermodal Transport: SU 2 pg. 24-25; par 2.4.3
Define: Using two or more carriers from different modes in the through movement of a shipment.
Packaged in such a way to handle shipment as a whole = facilitating intermodal transport.
Ease of interchanging equipment between transport modes = eliminating repeated handling, delays & cost.

Two types of intermodal transport


1) PIGGYBACKING: Various combinations possible, most commonly

Rail-road a.k.a. "trailer on flat car" (TOFC): transporting truck trailers on railroad flat cars over longer
distances than truck would. Cost less than only using road.
Combines convenience & flexibility of road with long-haul economies of rail.
Benefit: door-to-door service over long distance at reasonable cost.

Obstacles: unwillingness of carriers to participate


Optimal if company can utilise most efficient modal services to meet shipper needs = lower cost to shipper

2) CONTAINERISATION: Large box wherein commodities are placed for shipment.


After initial loading, not re-handled in transit. Container is handled – not commodities.
Specialised packing method for easier transport = saves on handling cost.

Main advantages of containerisation:


 Allows door-to-door, multimodal long distance transport
 No intermediate handling at transfer points = reduces cost, labour, damage & theft (therefore
insurance premiums), required modal transfer time
 Needs less protective packaging
 Shorter & reliable delivery times = less stock to be carried
 Simplified freight documentation & administration

Intermediaries in Transport System: SU 2 pg. 25; par 2.4.4


Companies themselves not provide transport but act as freight consolidators/agents between shippers & carriers.

1) FREIGHT FORWARDERS: Usually not carriers themselves but use services provided by professional carriers
Collect small consignments  consolidate  arrange long-haul transport  distribute at destination.
Accepting responsibility for transportation of cargo from receipt to delivery points.
Income = shippers higher tariff for LTL less-than-truck-load minus carriers lower vol. tariff for TL truck-load
Shippers benefit from reduced delivery time for LTL shipments

2) FREIGHT BROKERS: simultaneously act as sales agents for carriers & traffic managers for shipper.
Arrange/book suitable carriers for shipper. Paid commission by carriers.

Selection of Suitable Transport: SU 2 pg. 26-27; par 2.4.5


Fundamental Factors / Qualities for Selecting Suitable Transport:

 Speed (faster = high rates but shorter time intervals)


 Consistency & Dependability (affect stock)
 Cost (lowest total cost approach: least expensive mode not always the lowest total cost)
 Accessibility
 Safety
 Adaptability of Capacity
 Completeness

See Product- and Market-related factors below:


Product-Related Factors
Short Shelf Life / Density Stowability Value
Perishability •High weight:volume •(cube utilisation) •Influence transit
•Req. rapid & reliable ratio (heavy given •Degree product fills security
transport size) e.g. vehicle space • value:weight ratio
steel, canned food •Depends on size, = high cost modes
•Specific req. e.g. Handling
Temp. control / •Low-density cost shape, fragility, • value,  desire for
special handling more per kilo physical qualities dealer to carry large Characteristics
inventories
•= rapid stock turnover
•=rapid, reliable
transport

Market-Related Factors
Rate of Sale & Sales Seasonality Customer Size & Market Share /
Volume •Growing time = rapid & freq. Location Competitive Status
service
•Fast-moving products req. •Large cust., densely •Monopoly =  service
frequent deliveries (often •Min time delay between located enable large level
large quantities) pick & process
vehicles & large loads •Competitive Market = 
•Failure = lost sales & •Foods/flowers often air
freight = freshness & high •Rural areas = small vol. = service level
goodwill
resale price expensive = alternative
mdes & enterprises

Self-Evaluation Questions SU 2 pg. 27-28; par 2.6 - References


1)
Unit 3 – Basic Logistics Activities
Basic work which must be performed to fulfil logistics requirements: network design, information, transport, [SU2]
inventories, warehousing, materials handling and packaging [SU3]

Inventory SU 3 pg. 29-38; par. 3.1 & TB Ch. 1 pg. 34-35


Generally classified as raw materials, work-in-progress (semi-finished goods) and finished goods.
Considered safety factor/insurance/"just in case" – recently also liability.
Directly linked to facility network & desired level of customer service.
"Just in time" (JIT) = inventory minimised to extent that lowest total logistics cost can be achieved.

Types of Inventory / Stock Class: SU 3 pg.30; par 3.1.1

In-transit •Can be: raw, semi- or finised product


Inventory •Moving from one part to next of logistics system

•Also working stock / base stock


Cycle Stock •Min. inventory required to meet demand under conditions of certainty
•Perfectly predicting demand & performance cycle (replenishment lead time)

Safety / Buffer •Allows for variance & uncertainty


stock in demand / performance cycle (lead time)

Speculative Stock •Held because of expected changes in supply/demand for product

Purpose/Functions of Inventory: SU 3 pg.30-31; par 3.1.2


1. Customer service: ensuring availability & preventing cost of lost sales
2. Proportionate flow in production process: non-availability/lopsided supply = interruptions =  cost
3. Buffer against supply & demand uncertainty & variability: physical distribution & materials provision
4. Save production cost by holding stock: trade-off long/continuous production run vs. cost of holding stock
5. Better utilisation of human resources & equipment: stabilised materials flow = plan capacity utilisation
6. Reduce purchasing costs: less frequent orders = bulk discounts &  cost (handling, admin & delivery)
7. Negotiate quantity discounts
8. Reduce transport cost: truck loads =  rates than less-than-truck-load
9. Assist with seasonal fluctuations: manufactured year-round; kept in stock until season arrives

Consequences of holding no/too little stock:

1. Frequent & small reorders = no quantity discount =  Procurement & purchase cost
2. Unsatisfied customer demand = cost of lost sales & lost customers

Inventory Carrying Cost: SU 3 pg.31; par 3.1.3


Increase in relation to inventory level & period held. Examples are:
 Invested capital (money tied up that could have been spent elsewhere / invested gaining interest)
 Admin & record-keeping costs
 Warehousing costs (purchasing & renting storage space)
 Handling costs
 Insurance
 Depreciation & obsolescence (risk of product in holding no longer sellable)
 Damage / pilferage
Optimum Inventory Levels: SU 3 pg.32-37; par 3.1.4
1) IN-TRANSIT STOCK: Level depends on transport time & quantity of products sold in given period
Long to move =  level in-transit stock

Formula: I = total In-transit stock


Average In-
Transit Stock
I = ST S = avg. Sales rate per period
T = avg. Transit Time

S = avg. weekly demand = 200 units


Example: I = 200 x 2 = 400 T = avg. delivery leed time = two weeks

2) CYCLE STOCK: Commonly order more than meet immediate requirements; trade-off large qty. vs. carrying cost =
simple Economic Order Quantity (EOQ)  balance order cost vs. holding cost to find optimum lot size "how much"

A = Fixed cost of an order


Formula:
EOQ = (2AS/i)½ or √(2AS/i) S = annual Sales in units
i = annual Inventory holding cost per unit

Example: A = Fixed cost = R40.00 per order


= (2 x 40 x 6 000 ÷ 12)½ = S = sales vol. of 6 000 bags
EOQ = 200 bags (40 000)½ or √(40 000) i = annual Inventory holding cost = R12.00

When to Order - Two considerations (depends on accuracy of estimating & forecasting):


 Lead time (between placing order & receiving goods)
 Expected sales during lead time

Formula: P = reorder Point (in units)

Reordering
Time
P = SS + DL SS = Safety Stock (units)
D = avg. Daily sales (units)
L = Lead time (days)

3) SAFETY STOCK: More varied demand / lead time =  safety stock;


Measure variability: standard deviation (historical data & probability) & mean absolute deviation

Normal Distribution: symmetric bell-shaped demand curve with


mean (average) = median (middle) = mode (most frequently observed)
σ = standard deviation

Stock-out Concerns: higher than avg. demand =


Focus on curve area to the right of the mean

"To offer service level of 99.9%, keep 3σ of safety stock"


Formula: E.G. p36 σ = Standard Deviation
n = number of observations
Standard Xi = value of observation 'i'
Deviations μ = avg. of all observations

Selective Inventory Deployment: SU 3 pg.37; par 3.1.5 & TB Ch. 1 pg. 34-35
Product line profitability essential in developing selective invetory policy (& avoid 80/20 rule or Pareto principle).
Aim to offer high availability & consistent delivery of most profitable products.
Avoid high service performance on less profitable items purchased by non-core customers.

Inventory Strategies (to achieve desired core customer service goal with minimum inventory/cost commiment):
 Stock sufficient product range/assortment to assist in consolidated shipments
 Larger shipment =  the effective transportation rate per unit shipped (trade-off transport vs. holding cost)
 Rapid delivery to meet customer inventory requirements = competitive edge ( safety stock & out of stock)
 Consistent & reliable deliveries to customers
 Corret positioning of invetory in warehouse
 Apply selective deployment to gain customer advantage / neutralize competitor

Sound inventory management policy based on:


- Core customer segmentation - Product requirements/profitability - Transort integration
- Time-based requirements/performance - Competitive performance.

Warehousing, Materials Handling & Packaging SU 3 pg. 38-41; par. 3.1 & TB Ch. 1 pg. 36-37
Part of other logistic areas (i.e. order processing, inventory & transportation) = effective & efficient product flow

Warehousing: SU 3 pg.38-40; par 3.2.1 & TB Ch. 1 pg. 36-37


To receive & temporarily store large inventory quantities and dispatch specific customer orders (ideally same day)
Reverse logistics: Receipt, processing & disposal of returns, overstocked & damaged inventory
Value-adding activities: sorting, sequencing, order selection, transportation consolidation, product modification

1) TYPES OF WAREHOUSING: Single-warehouse at point-of-origin: companies accept postal/telephone orders (direct


marketing) and delivers directly to final customer. More than one = three options for warehousing:

•Independently owned / leased


Private •Operations carried out by own staff

•Facilities & servicies for profit


•Storing goods suitable to their facility type:
- General Merchandise: any product (manufacturers', ditributors', retailers' use)
- Refrigerated / Cold Storage: perishable/pharmaceutical/film (temp. controlled)
Public - Domestic goods: personal property
- Special-commodity: equipped for specific product (agricultural)
- Bulk-storage: liquid tanks & dry goods in open, protected space (can incl. mixing
services to form new chemical compounds)

•Dedicated to specific shipper's logistics system (space, software, labour etc.)


Contract •Resources provided & customised by contract firm to fit client
2) WAREHOUSE OPERATIONS - Two main functions: movement & storage

•unload •Transfer to
3 incoming: receiving •check
MOVE- Handling Receiving •manual,
Internal area Shipping •loading
MENT Handling
Activities: •equip. •Selection: •dispatch
•or auto. group order

Normal Storage Extended / Special Storage


•for day-to-day activities •Longer periods to
•regular customer orders •Match supply & demand:
•duration depends on - seasonality
system's nature based on - erratic demand
replenishment cycles - production process partly performed in storage
(bananas)
- speculative / promotional purposes
- special discount negotiations (large / early)

Materials Handling & Packaging: SU 3 pg.40-41; par 3.2.1


Significant element of total logistics cost
Unitisation: most suitable & economically viable unit sizes in which to pack product (pallet, container, carton, crate)
Master carton: smaller products typically combined into larger unit to protect in-transit & facilitate handling

E.g. bottles into six-pack1  packed into case of 242  ultimately palletised3  tranship number of palletised packs4
1. Based on consumer behaviour / consumption patterns
2. Based on conveniently manageable number of bottles for typical demand level
3. Based on often standardised view – realistic weight:volume ratios for manoeuvring in warehouse
4. Based on available vehicle type, legislation on size & load weight, despatch & delivery facilities

Container: form of bulk unit load with standard sizes = fit to form modular loads & safe stacking. Advantages:
 Reduce pilferage & damage, thus insurance costs
 Simpler documentation
 Savings on transport costs
 Better utilisation of space
 Easier handling

Self-Evaluation Questions SU 3 pg. 41-42; par 3.4 - References


1)
Unit 3 – Basic Logistics Activities
Basic work which must be performed to fulfil logistics requirements: network design, information, transport, [SU2]
inventories, warehousing, materials handling and packaging [SU3]

Inventory SU 3 pg. 29-38; par. 3.1 & TB Ch. 1 pg. 34-35


Generally classified as raw materials, work-in-progress (semi-finished goods) and finished goods.
Considered safety factor/insurance/"just in case" – recently also liability.
Directly linked to facility network & desired level of customer service.
"Just in time" (JIT) = inventory minimised to extent that lowest total logistics cost can be achieved.

Types of Inventory / Stock Class: SU 3 pg.30; par 3.1.1

In-transit •Can be: raw, semi- or finised product


Inventory •Moving from one part to next of logistics system

•Also working stock / base stock


Cycle Stock •Min. inventory required to meet demand under conditions of certainty
•Perfectly predicting demand & performance cycle (replenishment lead time)

Safety / Buffer •Allows for variance & uncertainty


stock in demand / performance cycle (lead time)

Speculative Stock •Held because of expected changes in supply/demand for product

Purpose/Functions of Inventory: SU 3 pg.30-31; par 3.1.2


1. Customer service: ensuring availability & preventing cost of lost sales
2. Proportionate flow in production process: non-availability/lopsided supply = interruptions =  cost
3. Buffer against supply & demand uncertainty & variability: physical distribution & materials provision
4. Save production cost by holding stock: trade-off long/continuous production run vs. cost of holding stock
5. Better utilisation of human resources & equipment: stabilised materials flow = plan capacity utilisation
6. Reduce purchasing costs: less frequent orders = bulk discounts &  cost (handling, admin & delivery)
7. Negotiate quantity discounts
8. Reduce transport cost: truck loads =  rates than less-than-truck-load
9. Assist with seasonal fluctuations: manufactured year-round; kept in stock until season arrives

Consequences of holding no/too little stock:

1. Frequent & small reorders = no quantity discount =  Procurement & purchase cost
2. Unsatisfied customer demand = cost of lost sales & lost customers

Inventory Carrying Cost: SU 3 pg.31; par 3.1.3


Increase in relation to inventory level & period held. Examples are:
 Invested capital (money tied up that could have been spent elsewhere / invested gaining interest)
 Admin & record-keeping costs
 Warehousing costs (purchasing & renting storage space)
 Handling costs
 Insurance
 Depreciation & obsolescence (risk of product in holding no longer sellable)
 Damage / pilferage
Optimum Inventory Levels: SU 3 pg.32-37; par 3.1.4
1) IN-TRANSIT STOCK: Level depends on transport time & quantity of products sold in given period
Long to move =  level in-transit stock

Formula: I = total In-transit stock


Average In-
Transit Stock
I = ST S = avg. Sales rate per period
T = avg. Transit Time

S = avg. weekly demand = 200 units


Example: I = 200 x 2 = 400 T = avg. delivery leed time = two weeks

2) CYCLE STOCK: Commonly order more than meet immediate requirements; trade-off large qty. vs. carrying cost =
simple Economic Order Quantity (EOQ)  balance order cost vs. holding cost to find optimum lot size "how much"

A = Fixed cost of an order


Formula:
EOQ = (2AS/i)½ or √(2AS/i) S = annual Sales in units
i = annual Inventory holding cost per unit

Example: A = Fixed cost = R40.00 per order


= (2 x 40 x 6 000 ÷ 12)½ = S = sales vol. of 6 000 bags
EOQ = 200 bags (40 000)½ or √(40 000) i = annual Inventory holding cost = R12.00

When to Order - Two considerations (depends on accuracy of estimating & forecasting):


 Lead time (between placing order & receiving goods)
 Expected sales during lead time

Formula: P = reorder Point (in units)

Reordering
Time
P = SS + DL SS = Safety Stock (units)
D = avg. Daily sales (units)
L = Lead time (days)

3) SAFETY STOCK: More varied demand / lead time =  safety stock;


Measure variability: standard deviation (historical data & probability) & mean absolute deviation

Normal Distribution: symmetric bell-shaped demand curve with


mean (average) = median (middle) = mode (most frequently observed)
σ = standard deviation

Stock-out Concerns: higher than avg. demand =


Focus on curve area to the right of the mean

"To offer service level of 99.9%, keep 3σ of safety stock"


Formula: E.G. p36 σ = Standard Deviation
n = number of observations
Standard Xi = value of observation 'i'
Deviations μ = avg. of all observations

Selective Inventory Deployment: SU 3 pg.37; par 3.1.5 & TB Ch. 1 pg. 34-35
Product line profitability essential in developing selective invetory policy (& avoid 80/20 rule or Pareto principle).
Aim to offer high availability & consistent delivery of most profitable products.
Avoid high service performance on less profitable items purchased by non-core customers.

Inventory Strategies (to achieve desired core customer service goal with minimum inventory/cost commiment):
 Stock sufficient product range/assortment to assist in consolidated shipments
 Larger shipment =  the effective transportation rate per unit shipped (trade-off transport vs. holding cost)
 Rapid delivery to meet customer inventory requirements = competitive edge ( safety stock & out of stock)
 Consistent & reliable deliveries to customers
 Corret positioning of invetory in warehouse
 Apply selective deployment to gain customer advantage / neutralize competitor

Sound inventory management policy based on:


- Core customer segmentation - Product requirements/profitability - Transort integration
- Time-based requirements/performance - Competitive performance.

Warehousing, Materials Handling & Packaging SU 3 pg. 38-41; par. 3.1 & TB Ch. 1 pg. 36-37
Part of other logistic areas (i.e. order processing, inventory & transportation) = effective & efficient product flow

Warehousing: SU 3 pg.38-40; par 3.2.1 & TB Ch. 1 pg. 36-37


To receive & temporarily store large inventory quantities and dispatch specific customer orders (ideally same day)
Reverse logistics: Receipt, processing & disposal of returns, overstocked & damaged inventory
Value-adding activities: sorting, sequencing, order selection, transportation consolidation, product modification

1) TYPES OF WAREHOUSING: Single-warehouse at point-of-origin: companies accept postal/telephone orders (direct


marketing) and delivers directly to final customer. More than one = three options for warehousing:

•Independently owned / leased


Private •Operations carried out by own staff

•Facilities & servicies for profit


•Storing goods suitable to their facility type:
- General Merchandise: any product (manufacturers', ditributors', retailers' use)
- Refrigerated / Cold Storage: perishable/pharmaceutical/film (temp. controlled)
Public - Domestic goods: personal property
- Special-commodity: equipped for specific product (agricultural)
- Bulk-storage: liquid tanks & dry goods in open, protected space (can incl. mixing
services to form new chemical compounds)

•Dedicated to specific shipper's logistics system (space, software, labour etc.)


Contract •Resources provided & customised by contract firm to fit client
2) WAREHOUSE OPERATIONS - Two main functions: movement & storage

•unload •Transfer to
3 incoming: receiving •check
MOVE- Handling Receiving •manual,
Internal area Shipping •loading
MENT Handling
Activities: •equip. •Selection: •dispatch
•or auto. group order

Normal Storage Extended / Special Storage


•for day-to-day activities •Longer periods to
•regular customer orders •Match supply & demand:
•duration depends on - seasonality
system's nature based on - erratic demand
replenishment cycles - production process partly performed in storage
(bananas)
- speculative / promotional purposes
- special discount negotiations (large / early)

Materials Handling & Packaging: SU 3 pg.40-41; par 3.2.1


Significant element of total logistics cost
Unitisation: most suitable & economically viable unit sizes in which to pack product (pallet, container, carton, crate)
Master carton: smaller products typically combined into larger unit to protect in-transit & facilitate handling

E.g. bottles into six-pack1  packed into case of 242  ultimately palletised3  tranship number of palletised packs4
1. Based on consumer behaviour / consumption patterns
2. Based on conveniently manageable number of bottles for typical demand level
3. Based on often standardised view – realistic weight:volume ratios for manoeuvring in warehouse
4. Based on available vehicle type, legislation on size & load weight, despatch & delivery facilities

Container: form of bulk unit load with standard sizes = fit to form modular loads & safe stacking. Advantages:
 Reduce pilferage & damage, thus insurance costs
 Simpler documentation
 Savings on transport costs
 Better utilisation of space
 Easier handling

Self-Evaluation Questions SU 3 pg. 41-42; par 3.4 - References


1)
Unit 4 – Framework for Integrating Logistics Operations
Integration between customer relationship management, manufacturing production & procurement & flow of
inventory = minimising total logistics costs.

Integrated Logistics SU 4 pg. 45-48; par. 4.1 & TB Ch. 2 pg. 38-40
"Serves to link & synchronise overall supply chain [SC] as continuous process - essential for effective SC connectivity"
Coordinate overall, value-added inventory movement. Strategic management of total movement & storage.

Coordinating the Components of Logistics Operations: SU 4 pg.45-47; par 4.1.1

Transport & Logistic Components


Handling
Customers (External)
Ware-
SU 2 & 3

housing Logistic Activities Inven- SU 4 Internal Operations / Enterprise


& (Req. Trade-offs) tory •Market Distribution [CRM] Inventory &
storage •Manufacturing Support Info Flow
•Procurement
Info & Order
Processing Suppliers (External)

Logistics Activities features in all three overlapping internal operations of Logistics Components.
Logistics excellence requires coordination between internal & external components of supply chain.
Necessary to coordinate inventory (raw, semi & final) at various levels of supply chain & info flow between.

Inventory Flow: SU 4 pg.47-48; par 4.1.2


Flow of finished product to customers. Core of logistics system & position logistics in broader aspect of supply chain.
Value is added to materials at each step of transformation towards finished inventory i.e.
 individual part has greater value as finished product
 as finished product, has greater value when delivered

Customer Relationship Management / Customer Accommodation /


CRM: Market Distribution
•Align manufactures, wholesalers, retailers into SC arrangements to provide customer with product availability
•Customer's ship-to location = final supply chain [SC] destination
•Dealing & maintaining customer relationships, timing & geographic inventory placement = integral to marketing
•Invetory flow rely on sales forecasts for final product: Servicing customers = accomodate uncertainty of demand
•Activities: order receipt & processing, deploying inventories, storage & handling, outbound transport
•Coordinate marketing planning (pricing, promotional, customer service, reverse logistics, life cylce support)
•Primary Objective: provide strategically desired customer service delivery levels at lowest total cost =  revenue

Manufacturing Manufacturing Support / Manufacturing Production


•Managing & positioning work-in-progress inventory (adding value)
•Formulate & implement master production schedules & timely stock availability
•Not how, but what, when, where products will be manufactured
•Integrated inventory flow saves money by reducing inventory (semi-finished products)
•Activities: planning, schedules, storage, handling, sorting, kilting, sequencing, timing
Procurement Purchasing / Buying / Supply Management / Acquisition
•Arrange inbound movement of material from suppliers to manufacturing / assembly plants, warehouse, retailers
•Primary Objective: support manufacturing & resale by timely purchases at lowest cost
•Integrated inventory flow saves money by reducing inventory (materials)
•Activities: resource planning, supply sourcing, negotiate, order placement, inbound transport, receiving & inspect,
storage & handling, quality assurance, hedging, speculation, research

Information Flow: SU 4 pg.48; par 4.1.3


Identifies specific locations within logistical system that have requirements.
Info flow management: to reconcile differentials to improve overall supply chain performance
Flows from & to customer as a result of sales, forecast, and orders.
Directed to manufacturing & purchasing who WIP-goods & materials depends on customer accommodation needs.
Without info, planning & operating logistics system is impossible = excessive / non-available inventories

Info in logistics planning & coordination: integrates specific company activities to facilitate overall performance.
Provides info concerning planned activities, operational requirements & day-to-day logistic work

Operational info: provide detailed data required for integrated performance of CRM, manufacturing & procurement

Operational Objectives SU 4 pg. 48-49; par. 4.2 & TB Ch. 1, 2, 12 pg. 5-6, 40-42 , 288-291
Key to achieving: Coordinate CRM, manufacturing & procurement by managing inventory & info flow
Focusses on both logistics cost & service quality. Six objectives determine logistical performance:

1. Responsiveness 2. Variance reduction 3. Inventory reduction


•satisfy cust. req. in timely manner •Failure to perform expected facet as •Control asset commitment
•Info-tech. facilitatesdelivery, anticipated (fin. value of deployed inventory) &
 inventory e.g. delays, disruption, damaged turn velocity (replenishment rate of
•Shift from forecasting to rapid order- •Safe-guards: inventory safety stock; inventory over time)
to-shipment premium transportation =  cost • turn rate & inventory availability =
•Use info-tech. to maintain control = assets efficiently & effectively
 variance & operational utilized = committed assets
disruptions minimized

4. Movement / Shipment 5. Quality 6. Life Cycle Support


Consolidation •Total quality management (TQM) • Product return: quality standards,
•Transport cost: directly related to •Product quality fails = Replacement expiration dating, hazardous
product type, size & distance = Logistical cost  rapidly consequences
•General rule: larger shipment & •Attempt zero-defect order-to- • Reverse logistics: laws
longer distance =  transport cost delivery (obstacles: vast geography, encouraging recycling, recalls -
per unit all times of day, supervision) maintain maximum control
•Innovation & multifirm coordination •After-sales support
to achieve effective consolidation •Cradle-to-cradle support

Value: TB pg. 5-6 & table 1.1


Economic Value Market Value Relevancy Value
High quality at lowest total cost Assortment at right time & place Customization (value above basic)
Economy-of-scale efficiency Economy-of-scope effectiveness Segmental diversity
Product/service creation Product/service presentation Product/service positioning
Procurement/Manufacturing
Market/Distribution Strategy Supply Chain Strategy
Strategy
Barriers to Internal Integration SU 4 pg. 49-50; par. 4.3 & TB Ch. 14 pg. 347-349
Barriers (& ways of overcoming them) to internal process integration stem from:

1. Organisation as a whole: Structure can stifle cross-functional processes


Look beyond functional boundaries / significant traditional management behavioural modification

2. Measurement & reward systems: typically mirror organization structure


New measures e.g. balanced scorecards / view functions as contributing to process, not stand-alone

3. Inventory leveraging: stockpiling (for max manufacturing economy of scale) & forwards commitment create
benefits but achieved at a cost.
Best cost/benefit balance of such leveraging & risk associated with potential inventory obsolescence.

4. Infocratic structure: info flows along long-standing functional organization lines of command & control
(traditional functional information flows act as invisible force)
Enterprise Resource Planning (ERP) has therefore have great management appeal

5. Knowledge hoarding: unwillingness to share & lack of understanding


Transfer of knowledge & experience is vital

Self-Evaluation Questions SU 4 pg. 50; par 4.4 - References


1)
Unit 5 – Logistics Performance Cycles
Logistics Performance Cycles as Basis for Integration SU 5 pg. 51-52; par. 5.1 & TB Ch. 2 pg. 47-50
Logistics performance cycles links suppliers, firm's facilities & customers using transportation & communication

PERFORMANCE CYCLE STRUCTURE = framework for integration implementation.


Node-link relationship: facilities (within & outside) = nodes; movement & communication in-between = links
2.7 in TB pg. 49-50
See also Fig 2.6 &

Ware-
Supplier Plant Customer
(Node)
Link (Node) Link house Link (Node)
(Node)

Committed inventory assets: stocked and flows through nodes necessitating handling / in-transit- / storage:
- Base stock: held at node = ± ½ of avg. shipment size received
- safety stock: protect against demand / operational lead time variance
Series of performance cycles = supply chain = basis for achieving integration. Contribute to minimising total cost.
Primary unit for logistical synchronisation within (CRM, manufacturing, procurement) & between firms (external/SC).

Input = demand (e.g. order with specific req. for product / material)
High-volume supply chain = complex & wider variety of performance cycles vs. chain with -volume throughputs

Output = level of performance expected from combined logistical operations

Key concerns of SC management:


SC effectiveness: when operational requirements are satisfied
SC efficiency: measure of resource expenditure necessary to achieve effectiveness
SC relevancy: extent of customized services to meet needs of specific customers
SC sustainability: ability of desired performance to be maintained over time

Depending on operational mission control can be single (manufacture) or multiple firms (procurement & CRM).
National / Multinational scope: numerous individual performance cycles linking participating firms' operations.
No matter the number, cycles must be individually designed & operationally managed

Transaction frequency & intensity varies


e.g. one-time purchase / sale: SC designed, implemented & abolished once transaction completed

Operation/facility in one SC may simultaneously participate in a number of others

3 Points to understanding architecture of integrated supply chain logistical systems:

1. Fundamental unit = Performance Cycles


2. Performance cycle structure (link & nodal arrangement) basically the same for CRM, manufacture / procure
Differences in individual firm's degree of control based on specific type of cycle
3. Identify & evaluate interfaces & control processes to individual cycles no matter complexity of structure

Multifirm operational Coordinates material,


SUPPLY CHAIN  duplication &
integration across SC product & info flow
SYNCHRONIZATION redundancy (demand)
(to jointly benefit) (timing)

Sync. timing of supply to leverage overall Advocates


Overall  of
arrival with destination supply chain reengineering
demand requirement
inventory dwell time
capability internal operations
Dwell Time: ratio of time inventory sits idle vs. time being productively moved to desired location in SC
Performance Cycles within Each Logistical Component SU 5 pg. 52-54; par. 5.2
Characteristics & differences of the 3 Performance Cycles:

Procurement

 Activities maintaining materials, parts, goods flow into manufacturing & distribution facility
 Limited scope of activities
 Larger shipments, require more time & longer than CRM cycles
 Maintaining raw materials inventory less expensive & sensitive than finished goods
 Firm's suppliers less than customers = more direct

Manufacturing Production

 Serves as logistics of production


 Maintain orderly & economic flow of materials & WIP to support production schedules
 Goal: support manufacturing requirements efficiently
 Firms' Internal cycles thus not affected by behavioural uncertainty
 Individual firm exercise control = limited uncertainty

Customer Relationship Management

 Processing & delivering customer orders


 Links customer through timely & economical product availability
 Physical distribution integrates marketing & manufacturing
 Customer Req. = more erratic than other 2 cycles
 Collaborative customer planning &  forecast accuracy =  effectiveness &  uncertainty
 Using forecasting to emphasise flexibility & responsiveness to deal with uncertainty

Managing Operational Uncertainty SU 5 pg. 54-55; par. 5.3 & TB Ch. 2 pg. 50-51
Operational Consistency: conforming to expected/standard order cycle time = effective & efficient logistics ops.
When operations are consistent then attempt to reduce performance cycle duration.
Performance cycles, operating conditions & quality of logistical operations all introduce operational variance Fig2.8 TB

Variance depends on nature of work involved.


Variance factors in the following customer accommodation performance cycle activities:

Order Order
Order Processing Order Selection Customer Delivery
Transmission Transportation

• Regardless of •Time & variance •Speed & delays •Time function of: •Depending on:
tech., variance function of: related to: •Distance, •authorized
will occur due to: •workload, degree •capacity, shipment size, receiving times,
•daily changes of automation & materials transport type & delivery
•Electronic credit approval handling operating appointments,
transfer (EDI) / policies sophistication, HR conditions workforce
internet availability availability,
communications •If stock-out, time traffic, unloading
= highly reliable. spent includes: / equipment
•Telephone / •manufacturing requirements
routine mail = scheduling &
more erratic. inventory
purchase

Goal of performance cycle synchronization:


 Achieve planned time performance (delays = safety stock. Too early = unplanned work/handling & storage)
 Operational consistency = reduce inventory risk & improve turn performance
Self-Evaluation Questions SU 5 pg. 55-56; par 5.5 - References
1)
Unit 6 – Customer Accommodation
Logistics/Marketing Interface SU 6 pg. 57; par. 6.1
Marketing: satisfying customer requirements & meet expectations = profit / motivation behind firm's activities
Logistics Activities: provide superior customer service (inventory availability) at lowest total cost.
Customer service is measured in performance.

Product Inventory
Info &
Packag- Order
ing Proces-
sing

Marketing Place / Logistics


Promo- Customer Materials
tion Mix Service (Time & Place Handling
(4 P's) Levels Utility)

Ware- Network
housing Design
Price Transpor-
tation

Customer-Focused Marketing SU 6 pg. 58; par. 6.2 & TB Ch. 3 pg. 54-59
Identifying the Customer: SU 6 pg.58-59; par 6.2.1 & TB Ch. 3 pg. 54-55
Perspective Customer Type
End user of 1. Consumer: Individual/household 2. Organizational:
product/service that purchase products/service to Purchases by company/institution to
Total Supply
2 types: satisfy personal needs allow end user to perform task/job in
Chain
[ProductConsumer] organization
[ProductCustomerend user]
Supply Chain All firms in supply chain focus on meeting needs & requirements of end users (both consumers &
Management organizational end users)
Specific firm Intermediate Organisations between firm & end (tend to resell to consumers)
within SC Customers user
Logistics Customer = any delivery location e.g. person, organisation or point (facility) within firm

Logistics & the Marketing Concept: SU 6 pg.58; par 6.2.2 & TB Ch. 3 pg. 55-56
Marketing Concept: identify specific customer needs & focus activities on satisfying these needs.
Builds on four fundamental ideas:
1. Customer needs & requirements more N.B than products/services
Develop combination of products/service to meet requirements  in-depth study of customers

2. Different customers have different needs & requirements


Market segmentation: clearly identify segments & select targets based on homogeneous features.
Matching capabilities with segments (use similar logistics requirements as classification)

3. Product/service meaningful only when available& positioned from customer's perspective.


Readily able to obtain desired products (logistics strategy). Four economic utilities add Value:
- Form (utility generated during manufacture) - Time (when desired)
- Possession (inform on availability & enable ownership exchange) - Place (where desired)
4. Profitability (from customer relationships) first then volume sold
Modify basic utilities only if customer(s) values it & is willing to pay (justifiable on basis of profitability)

Transactional vs. Relationship Marketing: SU 6 pg.59; par 6.2.3 & TB Ch. 3 pg. 56-57

•short-term customer interaction


Transactional
•obtaining successful exchanges/transactions
Marketing •customers drive  in revenue & profit
(Traditional) •Accommodate customer's need - focus on successful individual transactions

Relationship •develop & retain long-term preference & loyalty with SC participants
Marketing •gain larger share of purchases from current customers than attracting new

•ultimate in market segmentation & relationship marketing = individual focus


Micromarketing
•recognise that each customer has unique requirements to be met
/ one-to-one
•can  transaction costs, better accommodate customer requirements &
marketing make individual transaction routine

Supply Chain Service Outputs: SU 6 pg.60; par 6.2.4 & TB Ch. 3 pg. 57-59
Specialisation in production of specific goods/services requires mechanism for exchange.
To do so efficiently & effectively, firms must overcome Discrepancy in:

1. Space: location of production & location of consumption seldom the same.


Overcome fundamental transportation challenge to accomplish exchange.

2. Time difference between production & consumption.


Require inventory, warehousing & to match rate of production with market consumption.

3. Quantity & assortment: firms specialize in producing large quantities of limited variety items; customers
want small quantities of numerous items.

Bucklin's 4 generic service outputs to overcome discrepancies & satisfy customer req.:

1. Spatial convenience = shopping time & effort required by customer


In SC, provide customers with more places to access products =  shopping effort,  spatial convenience
Number influences SC structure & logistics cost incurred

2. Lot/batch size = number of units to be purchased in each transaction


Customers' costs  (storage & maintenance) when purchasing large quantities
Supply chain costs  when it allows customer to purchase smaller quantities =  unit prices

3. Waiting/delivery time = amount of time customer waits between ordering & receiving products
 waiting time =  level of SC service;
 waiting time =  customer inconvenience but =  SC costs =  prices to customers

4. Product variety & assortment: different SC offer differing levels of variety & assortment on brand/size etc.

Additional service outputs: information, product customization, after-sales support


Customers differ in req. level of service, importance, willing to pay.
These requirements influence SC configuration (I.e. types of participants, incurred costs)
Customer Service SU 6 pg. 60-61; par. 6.3 & TB Ch. 3 pg. 59-64
Basic Customer Service: SU 6 pg.60-61; par 6.3.1 & TB Ch. 3 pg. 59-62
Customer service: logistics' role in fulfilling marketing concept (achieve target level of customer service at low cost)

Customer service programs: identify & prioritize activities required to meet customer's logistical requirements &
best competitors. Identify clear standards of performance & related measurements.
Focus on operational aspects of logistics  provide 7 customer "rights": right amount of right product at right time
at right place in right condition at right price with right information.

Fundamental Attributes of basic customer service:

1) AVAILABILITY: Capacity to have inventory when customer desires


Traditional Practice: stock inventory in anticipation of orders. Based on forecast demand (incl. differential
stocking policies for specific items as result of popularity, profitability & overall N.B)
Achieve  availability levels while  overall investment
 inventory levels =  availability but IT strategies allow  availability without  inventory
3 Measures of availability combine to establish extent of firms' inventory strategies meeting cust. demand:
• Stock out Frequency = Probability that firm will not have inventory
Indicator of position to provide basic service commitments in availability (not considering products N.B)
Stock out does not have impact until customer desires a product

• Fill Rate: measures magnitude/impact of stock outs over time


When demanded, determine that product is not available & how many units customer wanted
Item fill rate = evaluate performance over time to include multiple customer orders
Can be used to differentiate level of service offered on specific product
Fill rate strategies need to consider customer requirements for products

• Perfect Orders Shipped = most exacting measure


It views having everything that a customer orders as the standard of acceptable performance
Failure to provide entire order = zero in terms of complete shipment

2) OPERATIONAL PERFORMANCE: time required to deliver a customer's order. Measured in terms of:
• Speed: elapsed time from placing order to delivery & being ready for customer use.
Time for total performance cycle completion depends on logistical system design & operations strategy
 Speed (in just-in-time & quick-response strategies) =  customer inventory requirements
Trade-off  Speed =  total cost: customer to determine by perceived benefits

• Consistency: number of times actual cycles meet the time planned for completion/cust. specification
N.B to logistical managers as directly impacts customer's ability to plan & perform own activities
degree of variability/on-time directly translates into required safety stock

• Flexibility: ability to respond to special situations & unusual/unexpected customer requests.


Typical events requiring flexible operations:
- Modification to basic service agreements (e.g. location)
- Support of unique sales promotion programs
- New product intro
- Product recall
- Disruption in supply
- One-time customization of basic service for specific customers/segments
- Product modification/customization performed while in logistics system (e.g. mixing/packaging)

• Malfunction Recovery: anticipate service breakdowns, having contingency plans in place to accomplish
recovery & measure compliance.
3) SERVICE RELIABILITY: involves combined attributes of logistics & concerns firm's ability to perform all order-
related activities & capability to accurately inform customer regarding logistical operations & status.
e.g. damage-free shipments, error-free invoices, correct locations, exact order amount shipped, etc.
Advance notification to customers of problems.

The Perfect Order (Zero Defect): SU 6 pg.61; par 6.3.2 & TB Ch. 3 pg. 62-64
= logistics quality = everything is done right the first time = high customer service level
Expensive commitment = offer to customers willing to respond to exceptional performance by  purchasing loyalty
Zero defect = low tolerance for error
Delivered complete, on time, right location, perfect condition, accurate documents
Total order cycle executed with zero defects
Perfect executed support activities & operations performance
strategic competitive advantage: offer to selected customers by way of gaining & maintain preferred supplier status
Also six-sigma performance (extension of Total Quality Management)

Basic Service = treating all customers equally at specified level to build & maintain overall loyalty. Based on:
- Competitor / industry-acceptable practice
- Derived from firm's overall marketing strategy

Near zero defects: utilize combination of customer alliances, IT, postponement strategies, inventory stocking,
premium transportation & selectivity programs to match logistical resources to core customer requirements

Customer Satisfaction SU 6 pg. 61-63; par. 6.4 & TB Ch. 3 pg. 64-70
Perfect orders = execution of individual transactions & deliveries (transactional marketing)
Customer satisfaction = broader concept; other aspects of overall supplier-customer relationship (e.g. enquiry delays
Beyond operational performance  finer points of personal & interpersonal relationships (e.g. friendly, respectful)
To meet / exceed customers' expectations
TQM + dynamics of competition  continuous improvement = continued  of customers' expectation

10 Expectations Customers have of Supplier: Table 3.2 TB pg. 66

• Reliability: way supplier performs all activities.


Customers judge reliability on all parts that make up basic service.

• Responsiveness: customer’s expectation of ability & willingness to provide timely service.


E.g. measured by time it takes to replenish stock.

• Access: ease of contact & approachability of supplier.


E.g. ease of obtaining info about status of pending order, will be used as measurement of accessibility.

• Communication: keeping customer proactively informed. E.g. advance notice to customer if shortage of raw
material is expected - helps customer explore alternative, but also builds stronger partnership.

• Credibility: expectation that suppliers' communication will be believable & honest; completeness of info.

• Security: riskiness (e.g. change of plans) in doing business & confidentiality of business dealings.

• Courtesy: politeness, friendliness & respect for contact person.


Bad behaviour by one person can undo the best efforts of everybody else.

• Competency: judged in every interaction; Individual failure may affect perception of supplier as a whole.
E.g. truck drivers' measured making delivery, customer service personnel when making phone calls, etc.

• Tangibles: physical appearances of facilities, equipment & personnel.


E.g. old & badly maintained warehouse as indicator of firm’s overall performance to its customers.

• “Knowing the customer:” expectation that supplier will understand customer’s unique requirements & be
willing to adapt to these needs.
Factors that influence customers' expectations:

• Customers' needs & requirements


• Supplier's previous performance (may also influence customers' expectation of other suppliers)
• Word-of-mouth (passed between customer concerning their experiences with specific suppliers)
• Communications coming from supplier itself (e.g. promises by sales reps, printed policies, marketing)

Gaps in Satisfaction & Quality Model Figure 3.1 TB pg. 67 firms must overcome to develop customer satisfaction:

•= between customers' real expectations & suppliers' perceptions of them


gap 1: Knowledge • gap by understanding cust. expectations; how formed & prioritized

•= internal performance standards not accurately reflect cust. expectations


gap 2: Standards •establish standards of performance for organization

•= diff. between standard & actual performance


gap 3: Performance • performance gap =  satisfaction

•= diff. in what firm is capable of doing & capabilities cust. are told about
gap 4: Communication • by making realistic promises to customers & keeping to them

•= customers perceive performance lower / higher than actually achieved


gap 5: Perception •e.g. overall good performance but one "only as good as last order"

gap 6: Satisfaction/Quality •any gaps =  customer perception = dissatisfaction

Limitations of the customer satisfaction emphasis:

• Executives' fundamental yet understandable mistake in interpretation of satisfaction ≠ happiness Fig. 3.2
Customer expectations ≠ needs or requirements
• Satisfied customers ≠ loyal customers (even satisfied, may choose to do business with competitor)
• Firms forget satisfaction lies in expectations & perceptions of individual customers (neglect uniqueness)

Customer Sacrifice: satisfaction exists when they get what they expect, customers frequently settle for performance
lower than what they really want/need.

Customer Success SU 6 pg. 63-64; par. 6.5 & TB Ch. 3 pg. 70-72 [I only used SG]
Helping customers to be successful by meeting their real requirements thereby  suppliers' own success.

Value-added services: unique/tailored specific activities firms undertake jointly to improve efficiency & effectiveness
Customer specific; cannot be generalised.  customers' chances of success
Potential gain on competitive advantage

Four-stage process used to gain competitive advantage:


Provide basic  commitment Move towards Creative
Extension

Creation
Market Access
Cost
Effectiveness

Market

Market

services to customers zero defects & arrangements


constantly & willing to value-added  relationship
cost-effectively cooperate services to building
(e.g. basic info strengthen
sharing) relationships Longe-term &
Total
Low customer High customer commitment
selectivity selectivity

Self-Evaluation Questions SU 6 pg. 64-65; par 6.6 - References


Unit 7 – Customer Service Costs & Efficiency
Deciding level of basic service = trade-off:  cost vs. benefits ( lost sales) of rendering superior service
Customer service cost = all costs of various activities needed to ensure availability of right product at the right place,
at the right time & in the right quantities.
Management problem = accurately identify total costs (hidden/shared) of logistics function = inappropriate decisions

The Service Level/Cost Relationship SU 7 pg. 67-68; par. 7.2


Minimising total logistics cost: trade customer service against cost of customer accommodation.

 Level of Service (measured in availability of inventory) =  cost.


Service level beyond 80% =  cost more than proportionally Fig. 7.1 typical exponential

Slight service  = slight /effect on customer but resulting in vast amount of


safety stock & high logistical cost

Significant cost implications for firm who generally:


- Are unaware of operating service levels / no define service policy
- Determine service levels arbitrarily (2% diff can have costly effect)

Logistic services & strategies absorb cost, otherwise borne by customer


(e.g. freq. deliveries =  in customer's stock)

Customer Service Costs SU 7 pg. 68-69; par. 7.3


Include costs involved in all logistics activities (see SU 2 & 3 and "customer service cost" above)

Total Distribution Cost [TDC]: incurred more costs through provision of availability than just transport & warehouse
e.g. service level affect inventory amt.; distribution (incl. handling/packaging/admin) affect order processing costs;

TC FC CC IC HC PC MC
Material Packa- Manage
TDC Transport Facility Comms Inventory
Handling ging ment
Cost Cost Costs Cost
Cost Cost Cost

The Cost of Lost Sales SU 7 pg. 70-71; par. 7.4


"Penalty for not having right product available at the required time." Penalties/costs resulting from stock outs:

1) Cost of Back-Order: extra costs of processing & expediting order which cannot be met from current stock
2) Cost of Lost Sale: Customer makes particular purchase elsewhere. Measured by profits lost. = opportunity costs /
cost of forgone sales
3) Cost of Lost Customer: Customer permanently seeks alternative supply source

Quantifying cost of non-availability:

 Calculate/estimate above costs from stock-outs


 Determine likelihood/probability (based on previous experience) of these costs occurring in event of a stock-out
 Expected cost = :cost x :probability
Trade-Off between Costs & Benefits of Customer Service SU 7 pg. 71-72; par. 7.5
Fig. = conceptual
optimum level
 Firm's overall service offering ≠  profitability due to particular behaviour of
logistics costs & non-linear reaction of customer demand to logistics services

Optimum Level of Service (L) reached long before max realisable service level Fig. 7.2
Trade-off when considering total logistics costs = opportunity costs of lost sales vs.
cost of offering service.

Management task = a cost-benefit appraisal of alternative logistics strategies

Practical Problems when determining optimum point:


- Generating accurate cost data relating to service policies
- Determining market's response to different levels of service offering

Logistical approach = find cost/benefit balance that satisfies stated objectives instead of devising optimal policies:

1) Cost minimisation: set specific customer service objectives then ask "how to achieve at minimum cost?"
Where market situation = highly competitive customer service or alternative approach

2) Service maximisation: maximising service offering within fixed budget constraints


Where market situation = limited corporate resources

Strategies on how much to spend on customer service, should be integrated in total context of the business.
Above trade-offs mostly apply when deciding on level of basic service. Differs to zero defect & value-added

Customer Service Efficiency SU 7 pg. 72-77; par. 7.6


How to identify the customers for whom it is worth providing zero defect services:

ABC Analysis: SU 7 pg.73-74; par 7.6.1


Certain customers/products are more profitable, justifying higher expenditure on customer service
Measure profitability on a contribution basis – use customer-product contribution matrix to classify customers &
products according to their impact on manufacturer's profit performance:

Interpretation of customer-product Matrix: Customer Product


A: most profitable products (small % of total product line) Classification A B C D
D: least profitable products (± 80% of total product line) I 1 2 6 10
I: most profitable for manufacturer (max 5 – 10 customers) II 3 4 7 12
V: least profitable, buys small quantities (majority of cust.) III 5 8 13 16
Highest profit customer-product combo = IA Priority #1 . Next IV 9 14 15 19
best = IB then IIA etc. Least profitable combo = VD Priority #20 V 11 17 18 20
SG pg. 74
See Table 7.4: Making the customer-product contribution matrix operational for implementation & allocation

Method acknowledges need to provide most profitable customers with service levels that encourage repeat business
Requires knowledge of customer base & their behaviour.

 Profitability of less profitable customers by  cost of servicing them. E.g. time limit on when to place orders =
consolidating orders for shipment to specific geographic area =  Profitability & benefits customer ( variability).

Customer Account Profitability [CAP]: SU 7 pg.74-77; par 7.6.2


CAP = identifying profitable customers using a costing analysis.
Awareness of cost differentials between & within customer types (e.g. delivery arrangements, size, after-sales supp.)

Customer profitability analysis helps organisation evaluate impact of its prices/terms of trade offered to various
individuals/customer groups on their relative profitability to supplier.
Develops a basis for taking decisions on prices & services levels/ mix of service offered to each customer / group.
Principles underlying CAP concept:

 Individual customer order = ultimate profit centre


 Profitability in existing product/market structure = effective managing of costs incurred after manufacturing
 Costs incurred after manufacture relates to individual & events associated with servicing that customer
 How customer-oriented costs vary specifically by customer/ order size/ type & other key activity measures

Cost elements have both fixed & variable components. See figure 7.3: CAP Model Study guide page 75
Profit per transaction influenced by discounts, returned goods & other revenue factors which produce gross margin.
Customer profitability analysis requires cost accounting that attributes all costs forward to revenue source

Components of a CAP analysis are basically gross & net sales revenue for each customer/group & contribution by
individual customer/group at two levels, net sales revenue less total manufacturing costs of goods sold, and the
above contribution level less costs of servicing the customer group.

Attributing costs: there is a primary recognition that costs are:

- Product-related in manufacturing (incl. fixed/indirect overheads or variable/direct value-added);


- Individual customer-related in selling & distribution – based on activities servicing those customers
not a function of sales & not to be attributed according to sales volume.
- And “below-the-line” overheads (incl. admin & finance costs) not included in the CAP analysis.

Attribution of the costs should be based on classification of typically physically identifiable activities:

• Storage = distribution activity. Charge basis could be warehouse space in square/cubic metres based on
customer/group sales throughput & stockholding needs.

• Despatch/delivery activity: basis might be a charge per sales order completed.

• Order processing: charge could be based on sales order.

• Sales processing: charge basis could be on the sales call rate.

• Promotion: charge basis could be on sales “potential” or each customer/group being serviced.

CAP enables measurement of financial performance & therefore acted upon at the source in a way which traditional
accounting & information systems fail to do.

Actions which lead to improvement in performance, but may only be indicated by a CAP analysis:

• enrich the product mix , which increases margins


• increase sales volume per customer, usually increases order size
• reduce delivery frequency, in turn increases order & drop size
• apply “minimum order” policy or charge a premium on small orders
• avoid “balancing” follow-up deliveries because this adds cost
• lengthen order-cycle time
• intensify business done in each delivery area, increases the drop size
• encourage use of intermediaries, where appropriate, particularly for handling small orders
• reduce level of service at drop point = increases speed of turnaround & therefore reduces turnaround time
• seek cost-effective methods of obtaining orders (e.g. telephone method better “order getters” vs. field reps)

Despite both conceptual and practical difficulties, companies which attempt to understand and introduce the
mechanisms of CAP are likely to be amply rewarded at the “bottom line”, even with only limited application of the
principles.

Self-Evaluation Questions SU 7 pg. 77; par 7.8 - References


Unit 8 – Logistics Requirements Planning [LRP]
What is Logistics Requirements Planning SU 8 pg. 78-79; par. 8.1
LRP = scheduling technique ensuring right goods are available at right place & time in right quantities.
Combination of materials requirement planning [MRP] & distribution requirements planning [DRP] applied to
distribution, feeder & manufacturing inventories.

Emphasis on integration of distribution & manufacturing's inventory planning = right supplies available when needed

Can save company money when implemented correctly

Dependent & Independent Demand SU 8 pg. 79; par. 8.2 & TB Ch. 7 pg. 154
Independent demand: item's demand is not related to/dependent on the demand for any other item.
Cannot be calculated - Estimate by means of forecast. E.g. Finished/final goods / maintenance spares.

Dependent demand: items with demand related to other items. E.g. raw/packaging material, subassemblies
No forecast – Calculated based on demand for final product.

(in)dependent demand ensuring supplies are available when needed not allocated after becoming available

The Scope of LRP SU 8 pg. 80-81; par. 8.3


Customers
DRP
(Independent Demand Distribution Centres
 Forecast)
Plant Warehouse

See full Fig. 8.1 pg. 80 Planning /


MPS Factory (Final Assembly)
Comms

Sub-assembly
MRP
(Dependent Demand
 on DRP/final good) Various Parts

Raw Material Suppliers

•Computer-based production & inventory control system


MRPI •minimise inventories while maintaining adequate supply of production materials
•planning availability of all production resources & materials
Material Requirements
Planning •Materials requirements = stock required for production

•Extends MRPI to include all resources & activities involved in planning & control of
MRPII production operations
•E.g. production planning, resource req. planning, master production scheduling, MRP, shop
Materials Resource
Planning floor control, purchasing

•System of determining distribution centre's demand & consolidating info backwards


•input for production & material system (mirror image of MRP, same logic & tools)
DRPI •All org. levels Input  demand forecast  Master Production Schedule [MPS]  MRP
•Objective = effective communication & planning link between manufacuring & distribution
Distribution
Requirements Planning •Planning availability of final product
•Distribution requirements = stock required to serve final customers

DRPII •Planning of key resources in distribution system


•E.g. warehouse space, human resource req. transport capacity, financial flows
Distribution Resource
Planning
Starting Point of DRP = Identify where & when individual stock-keeping units [SKUs] are needed by:

- Analysing actual customer demand for SKUs by service location (demand per geographic region)
- Aggregated, time-phased requirement schedule at echelon (depot, warehouse, factory) are
- Communicated back to production via MPS

Variables Required for Implementing LRP SU 8 pg. 81; par. 8.4


Variables & requirements to drive LRP process (mainly info to implement):

 Final products' independent demand – forecasting techniques (historical sales & statistical/known factors)
 Variability of independent demand – determines safety stock levels for each SKU
 Lead time – period between placing & receiving order determines reorder point
 Order quantity – EOQ depends on volume discounts, inventory carrying cost & ordering costs
 Determined safety stock levels of all SKUs

Procedure for Implementing LRP SU 8 pg. 82; par. 8.5


1. Distribution (Independent demands & DRP)
2. Demand forecasting for as short time unit as possible (e.g. weekly)
3. Calculate how long (days/weeks) current stock will last
4. Deduct safety stock requirements
5. Add stock in transit
6. Calculate date safety stock will be reached (= date new batch should arrive)
7. Calculate date of shipment/receipt of final product (allow for lead time)
8. Plan production via MPS
9. Calculate raw materials delivery
10. Calculate date of shipment/receipt of materials (allow for lead time)

Figure 8.2 Procedure for LRP

Advantages of LRP SU 8 pg. 83; par. 8.6


Correct & effective implementation of inventory planning integration (through LRP) can save millions of rand

Marketing Benefits: SU 8 pg. 83; par 8.6.1


 Proper planning to meet demand =  service levels through timely deliveries =  complaints.
 Enables planning ahead for promotions/new products & effectively launching relevant campaigns.
 Enables beforehand knowledge of product unavailability  avoid aggressive marketing of low stock levels.
  Intrafunctional relations as all departments are working on the basis of the same data & MPS.
Logistics Benefits: SU 8 pg. 83; par 8.6.2
 Fewer urgent deliveries at high rates & improved load planning =  Transport cost to distribution centres
  Inventory levels. (Using up-to-date info, LRP fairly accurately predicts what & when needs).
  Inventory levels =  Warehouse space required.
 Monitoring stocks = Improved obsolescence control by timely warnings.
 Right stock = Fewer overdue orders =  costs of distributing goods from centres to customers.
  Coordination & working relationships between distribution & manufacturing.

Practical Application of LRP


See study unit 8 study guide page 83-87; par. 8.7 & subsequent tables.

Self-Evaluation Questions SU 8 pg. 88; par 8.8 - References


Unit 9 – Supply Chain [SC] Integration
Supply Chain Collaboration: info sharing & joint planning by all participants in a channel = SC competitiveness

Supply Chain Competitiveness SU 9 pg. 91; par. 9.2 & TB Ch. 14 pg. 351-352
SC Relationship & participants' core competencies = superior service & lowest total cost =  competitiveness

Supply chain implies a multi-enterprise coordinated effort focused on  SC efficiency & competitiveness.
Two believes facilitate drive for efficiency & competitiveness:
- Cooperative behaviour =  risk &  efficiency. Requires sharing all strategic info
Collaborative info essential to positioning & coordinating firms to jointly do right things faster & efficiently
- Eliminate waste & duplicate effort;  inventory investment & risk (driven by economic & service necessities)

Firms with  SC competitiveness, exhibit several similarities:


- Collaborative practices are technology driven
- Business solutions achieve competitive superiority
- Initiatives combine experience & talents of key supply chain participants & third-party service providers
- Create & maintain unique supply chain culture (forged on understanding of risk, power &leadership)

Supply Chain Management: encompasses the planning & management of all activities i.e.:
sourcing; procurement; conversion; logistics management.
Coordination & collaboration between partners (suppliers; intermediaries; 3rd parties; customers)
Integrates supply & demand managements within & across companies
Brings products & services to the market.

Risk, Power & Leadership SU 9 pg. 91; par. 9.3 & TB Ch. 14 pg. 355-356
Acknowledged/Perceived mutual dependency is driving force behind firm's:
- Collaborative relationships
- willingness to enter channel arrangements
- negotiate transfer of certain functions / functional integration
- share key strategic info
- participate in joint operational planning

Relationship between risk, power & leadership determines nature of channel arrangement.

1. RISK
Participating firms must:
- acknowledge responsibility for performing specific roles
- believe they will be better off in long run as a result of collaboration
- be positioned to specialize in operational area/function based on unique core competency

Leveraging core competencies is the driving force behind SC integration:


 specialized competency (participate in multiple SC) =  risk to overall performance
e.g. wholesaler - assortment of products =  risk;  reliant on any one supplier VS.
Firms with  stakes &  competency = prime facilitators =  risk
e.g. manufacturer – limited product line =  risk;  reliance on collaboration; captive/committed SC

Disproportionate risk / deep dependency structures relationship & determines collaboration management
General rule: firm bearing most risk assumes active/leadership role &  responsibility for facilitating SC cooperation

2. POWER

SC Participant with  relative power = prerogative/obligation to spearhead collaboration - Typically also have  risk

Recent significant increase in power of retailers – due to four independent developments:


 Trend of retail consolidation = fewer but more dominant retailers with more extensive market coverage
 Proliferation of point-of-sale data, frequent-shopper programs & credit card use = easy access market info
= rapidly identify & accommodate consumer trends
  Difficulty & cost manufacturers confront in developing new brands/"national brands" vs. retailer owned
private-label products with have greater market penetration
 Logistical replenishment's shift toward response-based posture  ideally driven from point of consumer
purchase = final/ultimate value of SC

Scrambled merchandising environs. = cross-channel-distribution to accommodate volatile & changing markets.

Manufacturers
- Have  range of alternatives for distribution due to Internet-based & traditional retailer formats blurring
channel arrangements
- Substitute to full reliance on traditional brand power  Reengineered operations = dominant supplier for
selected consumer/categories
- Category dominance =  value to prospective supply chain partners
o Dominant category position = superior brands at competitive prices
o = Key operational capabilities =  firm's attractiveness as SC participant

Repositioning of traditional operations = potential to leverage collaboration


General rule: powerful firms link together in the development of SC arrangements -
For successful arrangement: dominant parties need to agree on a leadership model.

3. LEADERSHIP

At present SC maturity = no definitive generalization on how firms gain leadership responsibility.


Some factors to leadership position = size, economic power, customer patronage, comprehensive product portfolio

Other arrangements:
- If SC participants acknowledge mutual dependency & respect = clear presence of leadership to enterprise.
- Some situations, leadership gravitates to the firm that initiates relationship

When leaders exercise power in the form of rewards & expertise =  relationship commitment in SC vs.
coercive practise = partners  committed to relationship = more likely to seek alternative arrangements

Supply Chain Relationships SU 9 pg. 92-93; par. 9.4 & TB Ch. 14 pg. 352-354
Effective SC require certain relationships & arrangements between participating firms.
Framework & classification of five basic forms of collaboration of interorganizational SC relationships: Fig. 14.5 TB p. 352

Based on Degree of Acknowledged Dependency & Information Sharing from


 Limited ------- to ------ Extensive 

Contract Outsource Administered Alliance Enterprise


(Product/service (Function/process (Leader/follower (Voluntary Extension
procurement) performance) engagement) integration) (Act as One)

 dominant firm =
 time dimension focus shifts from  long-term
leader = command  joint policies
 negotiate terms buying / selling  voluntary
& control  integrate
& specifications material to  integre resources
 ltd sharing of ops operations
 also 'Adversarial' performing =  efficiency &
& strategic info  continuous
 Failure = specific service / cust. impact
 limited joint  essentially one
sanctions / process  extensive joint
planning entity
termination planning
 continuous
Further Contracting / Outsourcing characteristics:

- share primarily operational info – not necessarily comprehensive SC integration;


- limited joint planning among firms;
- specific periods for rebidding / terminating relationship;
- precisely specified terms of performance & cost;
- cordial relationship based in traditional command-and-control principles;
- Buyer as leader.

Developing Trust = required for real SC collaboration

1. Reliability-based trust: perception that partner is willing & capable to perform as promised.
If perceived as incapable of delivering promise = unreliable = unworthy of trust.
Needed for collaborative SC but not sufficient

2. Character-based trust: perceive as interested in each other's welfare & not act inconsiderately.
Belief of protecting other's interest/acting fairly. Based in firm's culture, leadership & philosophy.

Building Trust requires


Reliability & Consistancy Full & frank Info Sharing Open Communication & Explanation

Criteria for Successful Partnerships


 Individual excellence
Both partners are strong & contribute value.
Positive motives (pursue future opportunities), not negative (mask weaknesses / escape difficult situation).

 Importance
Ties in with major strategic objectives. Partners have long-term goals in which relationship plays a key role.

 Interdependence
Partners need each other. Complementary assets & skills. Independently goals are unattainable.

 Investments
Demonstrate respective stakes in relationship (e.g. equity swaps, cross-ownership, mutual board service).
Devoting financial & other resources = Tangible signs of long-term commitment.

 Information
Communication is reasonably open. Info sharing required to make the relationship work,
(e.g. objectives & goals, technical data, knowledge of conflicts, trouble spots, changing situations).

 Integration
Linkages & shared ways of operating to work smoothly. Build connections between many employees &
organisational levels. Partners become both teachers and learners.

 Institutionalisation
Relationship is given formal status, with clear responsibilities & decision processes.

 Integrity
Behave honourable = justify & enhance mutual trust. Not abuse collected info / undermine each other.

Supply Chain Integrative Framework SU 9 pg. 93-95; par. 9.5 & TB Ch. 14 pg. 3576-359
Defines the nature of collaboration required in alliances & enterprise extension.

Four critical supply chain flows =


best way to create value in SC Fig 9.1
Even if SC not integrated, flows
must take place between firms
 Product/Service Value Flow = products/services' value-added movement from raw material to end customer.
Also accommodate critical reverse flows (recalls, reclamation, recycling).
 Market Accommodation Flow = structure to achieve post-sales service admin.
Info (CRM, customization req. POS data etc.) provides visibility on timing & location of product consumption.
Common understanding of demand & consumption patterns =  synchronization of planning & operations.
 Information Flow = bidirectional exchange of transactional data, inventory status, strategic plans.
Initiates, controls & records products/service value flow (e.g. forecasts, orders, shipping info, invoices).
 Cash Flows typically reverse direction of value added activities except promotion & rebate.
Cash flow velocity & asset utilization are critical to superior SC performance

Supply chain integrative framework to achieve widespread collaboration

Facilitates operations in SC by integrating basic logistics work, functions/departments, capabilities & competencies.
Capability: knowledge & achievement level essential to developing integrated performance (why rather than how).
Links SC & combines to form universal competencies
Competency: result of blending several logistical capabilities into logistically harmonious & manageable actions that
achieve & maintain supply chain collaboration.

High levels of competency & their supporting capability = customer loyalty = competitive advantage
Lack of coordination & integration between SC & participants = waste, delays, redundancy & inefficiency.

1. OPERATIONAL CONTEXT

Operations involve processes that facilitate order fulfilment & replenishment across SC
Leading performance require customer-focus, interorganizational coordination,  functional& process performance

Customer integration: competency that builds intimacy & lasting competitive advantage
Strong commitment to supportive capabilities of segmentation, relevancy, responsiveness, flexibility = SC integration

Internal integration: focuses on joint activities & process within firm that coordinate functions related to
procurement, manufacturing, CRM
Supporting capabilities = cross-functional unification, standardization, simplification, compliance, structural
adaptation.

Supplier integration: capabilities that create operational linkages with material- & service-providing SC partners
E.g. strategic alignment, operational fusion, financial linkage, supplier management
2. PLANNING & CONTROL CONTEXT

Involves joining technology across SC to monitor, control & facilitate overall SC performance.

Technology & Planning integration: design, application & coordination of information to enhance purchasing,
manufacturing, customer order fulfilment & resource planning.
Capabilities: database access for info sharing; transaction systems to initiate & process replenishment / customer
orders; internal communication, connectivity & collaboration.

Management integration: ability to monitor & benchmark functional & process performance (in- & externally).
Capabilities: functional assess. &activity-based methodologies, comprehensive metrics& financial impact assessment

3. BEHAVIOURAL CONTEXT

Relationship management: SC implementation rests on quality of basic business relationship


Firms must specify roles, guidelines, share info, risk & gains, resolve conflict, dissolve unproductive arrangement.

Self-Evaluation Questions SU 9 pg. 95; par 9.5 - References


Unit 10 – Global Supply Chain [SC] Integration
Global Economies SU 10 pg. 96-97; par. 10.2 & TB Ch. 11 pg. 270-271
Opportunities from Globalization =  markets, wider range of manufacturing alternatives, resource advantages,
revenue, volume.
Challenges = more demanding logistics operating environs, security considerations, more complex total cost analyses

Objective Rationale for Globalization Table 11.1 TB pg. 271


• Open up more markets
Increase Revenue • Expand beyond competitors
• Accessibility to markets that limit access without local operations

Achieve Economies of Scale • Take advantage of available production capacity

• Take advantage of lower labour rates / real estate expense


Reduce Direct Cost •  distance / changing transportation mode =  Energy requirements
• Take advantage of differences in production requirements

• Access to advanced tech. not yet available from current locations due
Advance Technology to historical investment
• Obtain access to specialized expertise or language skills

Reduce Firm's Global Tax • Local/regional tax benefits related to property, inventory or income
Liability • Localized production or other value-added services =  in VAT

Reduce Market Access • Source from location involving less transportation uncertainty
Uncertainty • Source from location involving fewer security constraints

• Source products/resources from location with ongoing availability of


Enhance Sustainability
materials & expertise (e.g. energy or trained workers)

Global Supply Chain Integration SU 10 pg. 97-98; par. 10.3 & TB Ch. 11 pg. 271-276
Domestic Logistics: movement & storage activities to support SC integration in relatively stable & consistent environ.

Global Logistics: must support operations in variety of diff. national, political & economic settings. Deals with 
uncertainty associated with geography, distance, demand, diversity & documentation of international commerce.
Increased cost & complexity that stems from:
-  Uncertainty: greater distances, longer lead-times & decreased market knowledge.
-  Variability: unique customer & documentation requirements & shifting political environments.
-  Control: use of international service firms & potential government intervention.
-  Visibility: longer transit & holding times with less ability to track & determine exact shipment locations

Globalisation Strategies: SU 10 pg. 97-98; par 10.3.1


Globalisation of supply chains can be categorised into four strategies:

1) No international strategy

• Organisations are merely involved in domestic operations.


• Few international transactions (global sourcing); no systematic strategy to expand international operations.
• Advantages:  complexities and least possible coordination required across SC & other firm functions.
• Disadvantages: problematic to respond to customers operating globally; growth restricted to local markets.
2) Multi-domestic strategy

• Operations in multiple countries, but main country = one in which corporate headquarters is located.
• Organisations normally have separate, semi- autonomous supply chains in each global district.
• International operations to assist domestic operations, mainly for sourcing raw materials & goods for resale.
• Logistics and supply chain operations within each district are self-regulating.
• Advantage: organisation can concentrate on local markets while reducing overall coordination requests.
• Disadvantages: non-responsive to globally based customers & challenging to develop economies of scale.

3) Global strategy

• Cross-border operations; some local market customization.


• Single HQ that organises global operations; logistics & SC operations takes place in regions around the world.
• Each country concentrates on the market characteristics of the region.
• Little motivation on reducing brand, manufacturing and logistics complexity.
• Transactions between various regions or countries are usually treated as intra-firm transfers.
• Most advance integration is the focus on globally integrated financials.
• Product development, marketing, supply chain and planning are less popular.
• Advantages: ability to focus on numerous local markets, meeting requirements of local customers,
competence to benefit of global brands & products.
• Disadvantage: problematic to respond in a unified manner to global customers.

4) Transnational strategy

• Organisations maintain regional operations around the globe and use a headquarters structure that
increases the efficiency of organisational operations and performance.
• There are still mostly regional operations, but no single headquarters region.
• Several activities may be situated in separate regions to guarantee global perspectives.
• Goal is to administer activities in the region that can best manage those activities.
• Look for limited consolidated customer centres, production control facilities & purchasing centres.
• Advantages: enables a global focus of solution development & delivery, important economies of scales.
• Disadvantages: demands coordination & information integration; minimises firm’s ability to respond to
individual market distinctiveness.

Influence of multi-domestic, global & transnational strategies on logistics decisions:

Sourcing & Resources Influenced by Artificial Constraints:


Choices
•Use Restriction: government imposed limitation that restricts level of import sales/purchases
•Local Content Laws specify % of product's components that must be sourced within the local economy
•Price Surcharge:  charges for foreign-sourced product; government imposed to maintain viability of local suppliers (e.g.
duties/tarifss)
•Above limits management's ability to select what otherwise might be the preferred supplier

Logistics Supporting Global


Operations  Planning Logistics Object = smooth product flow to facilitate efficient capacity utilization
Complexity
•Transportation uncertainty, infrastructure constraints, time & language differences, government restrictions =
•Makes objective difficult in international environments

Global Operations Extend & Practices to a broad range of lacations & operating environments
Domestic Logistics Systems
•Substantial complexity & exception processes
•Local managers must accommodate exceptions while remaining wihin coporate policy & procefural guidelines
Managing the Global Supply Chain SU 10 pg. 99-100; par. 10.4 & TB Ch. 11 pg. 276-280
Table 10.1: Major Differences between Domestic & Global Supply Chains: See below table for more detail taken from TB

Differences Domestic Global

- Cycles = 1 to 10 Days - Cycles = Weeks & Months


Performance Cycles 1
(Transit: 1 to 5 Days) - Less Consistent
- Four Global Changes:
• Intermodal ownership & operations
Transportation 2 - Not Influenced • Privatisation
• Cabotage & Bilateral Agreements
• Infrastructure Constraints
- Fewer Language Problems - Multiple Languages (products & documentation)
Operational - Common National - Distinctive National Accommodations
Considerations 3 Accommodations - Sheer Amount of Documentation TB Table 11.4
- Less Documentation - High Incidence of Countertrade
- Big Challenge
Information Systems
- Systems not that Sophisticated - High Investment Costs
Integration 4
- Requires Global Planning Systems
- Very Important
Alliances 5 - Important but not Essential - Provide Market Access & Expertise
- Required owing to Complexity

1. Elements making global performance cycles longer & less consistent/flexible = distances; more intermediaries;
freight scheduling; slow ocean transit; customs clearance; security issues; restricted availability of containers;
- communication delays: due to time zone & language differences;
- financing delays: caused by requirements for credit & currency translations;
- special packaging: to protect products from in-transit damage (high humidity, temps, weather conditions)

Global logistics operation more complex because: more documentation,  number of SKUs & inventory stocking
locations & less developed service providers, unbalanced trade.

Makes planning & coordination more difficult; determining shipment status & arrival times;  asset commitment

2. Removal of multimodal ownership restrictions: historically limited carriers to operating a single transport mode.
Privatization: Carriers previously government-owned/subsidized =  pricing &  service.
 Cabotage: laws required passengers/goods moving between domestic ports to utilize only domestic carriers.
3. Unique National Accommodation albeit not substantial may significantly increase required SKUs & inventory
- performance feature differences e.g. specific product functionality / process constraints;
- technical characteristics e.g. power supplies, documentation, metrics;
- environmental considerations e.g. chemicals, types & amount of waste generated;
- safety requirements e.g. automatic shutoffs, specialized documentation

Countertrade = seller agrees to products as payment / purchase products from buyer as part of sales agreement
Duty Drawback: duty paid to import goods into foreign country can be drawn back/returned if item is exported.

4. Improved info systems necessary for: extended communication, alternative languages & process flexibility.
Global transaction/ERP system: common & consistent data on global customers/suppliers/inventory/orders etc.
Global planning system: maximize overall manufacturing & delivery asset utilization while meeting service req.

5. Manufacturing, logistics, marketing alliances essential in global markets to  contact with multiple service
providers;  risk
Self-Evaluation Questions SU 10 pg. 100; par 10.6 - References
Unit 11 – International Trade Terms
Author's Note: After working through a couple of the previous exams, it appears that the multiple choice questions [MCQs] are
taken exactly, word-for-word from this section. As such this amounts more to copy & paste than a summary!

Introduction SU 11 pg. 101; par. 11.1


Set of international rules to interpret most commonly used trade terms & reduce confusion/problems.
Set forth by ICC (International Chamber of Commerce).
Incoterm (abbreviation of "international commercial terms") = terms of contract of sale not of carriage/delivery.
They define obligations, risk & costs shared by buyer & seller in transaction relating to delivery of goods.

Organisation of Incoterms 2010


Consolidated into Table below or see study guide (MO001/3/2015) pages 101 to 102

Description of Incoterms 2010 SU 11 pg. 102-103; par. 11.3


EXW – ex works
Buyer bears all costs & risks involved in taking goods from seller’s premises to desired destination.
Min. Seller's obligation: to make the goods available at their premises (works, factory, warehouse).

FCA – free carrier


Seller’s obligation to hand over goods, cleared for export, into charge of carrier named by buyer at the named
place/point. If no precise point indicated by buyer, seller may choose within the place/range stipulated where
carrier must take goods into their charge. When seller’s assistance is required in making the contract with the
carrier, seller may act at buyer’s risk & expense.

CPT – carriage paid to


Seller pays the freight for carriage of goods to named destination. Risk of loss/damage occurring after delivery
has been made to carrier is transferred from seller to buyer. Requires seller to clear the goods for export.

CIP – carriage and insurance paid to


Seller (=CPT plus) but has responsibility of obtaining insurance against buyer’s risk of loss or damage of goods
during carriage. Requires seller to clear goods for export & obtain insurance on minimum coverage.

DAT – delivered at terminal


Seller delivers when goods, once unloaded from the arriving means of transport, are placed at disposal of the
buyer at named terminal at named port/place of destination. “Terminal” = quay, warehouse, container yard or
road, rail or air terminal. Both parties should agree on terminal and, if possible, a point within the terminal, at
which point risks will transfer from seller to buyer. If it is intended that seller is to bear all the costs &
responsibilities from the terminal to another point, DAP or DDP may apply.

DAP – delivered at place


Seller delivers goods when they are placed at disposal of buyer on the arriving means of transport ready for
unloading at the named place of destination. Parties are advised to specify clearly as possible the point within
agreed place of destination, because risks transfer at this point from seller to buyer. If seller is responsible for
clearing the goods, paying duties etc., consideration should be given to using DDP term.

DDP – delivered duty paid


Seller is responsible for delivering goods to named place in country of importation, including all costs & risks in
bringing goods to import destination. Includes duties, taxes & customs formalities.

FAS – free alongside ship


Seller has fulfilled obligation when goods have been placed alongside the vessel at port of shipment. Buyer is
responsible for all costs & risks of loss / damage to goods from that moment. Buyer is required to clear goods
for export.
FOB – free on board
Once goods have passed over the ship’s rail at port of export, buyer is responsible for all costs & risks of loss or
damage to goods from that point. Seller is required to clear the goods for export.

CFR – cost and freight


Seller must pay costs & freight required in bringing goods to the named port of destination. Risk of loss or
damage is transferred from seller to buyer when goods pass over the ship’s rail in port of shipment. Seller is
required to clear the goods for export.

CIF – cost, insurance and freight


Seller (same obligations as CFR), but also required to provide insurance against buyer’s risk of loss or damage
to goods during transit. Seller is required to clear the goods for export.

Notes on Incoterms 2010 SU 11 pg. 104; par. 11.4


ICC outlines four important notes on use of Incoterms in contracts of the sale of goods:

 Clear from contract that parties want Incoterms 2010 rules to apply
E.g. citing specific rule & location with explicit reference to Incoterms 2010.
Prevent misunderstandings = Clarify intended effect of any variants. “Incoterms 2010” vs. “Incoterms”

 Crucial to use appropriate rule


Consider type of goods, mode of transportation additional obligations, customs particular specified location.

 Clearly identify the place or port in question


Failure = Incoterms rule ineffective. Identifying particular place at location =  rule effectiveness.
- Named place: where delivery takes place & risk passes from seller to buyer under rules EXW, FCA, DAT,
DAP, DDP, FAS and FOB.
- Named place: place of destination to which carriage is paid under rules CPT, CIP, CFR and CIF.

 Incoterm rules are not law & do not make a comprehensive contract of sale
Incoterms do not provide for the price or method of payment, do not consider issues of ownership and,
importantly, do not deal with breaches of contract.

Summary SU 11 pg. 105-108; table 11.1


(Code) Incoterm (Name of Term) Geographical Point Brief Description See 11.3 for full
For Any Mode(s) of Transport
Seller must deliver goods by placing them at the disposal of the
buyer at the agreed point, if any, at the named place of delivery, not
EXW Ex Works Place of Delivery loaded on any collecting vehicle.
Carriage to be arranged by buyer.

Seller must deliver goods to carrier/another person nominated by


the buyer at the agreed point, if any, at the named place on the
FCA Free Carrier Place of Delivery agreed date or within the agreed period.
Carriage to be arranged by buyer / seller on buyer’s behalf.

Seller must deliver goods by handing them over to the carrier


CPT Carriage Paid To Place of Destination contracted on the agreed date or within the agreed period.
Carriage to be arranged by the seller.

Seller must deliver goods by handing them over to the carrier


Carriage & contracted on the agreed date or within the agreed period.
CIP Insurance Place of Destination
Carriage to be arranged by the seller.
Paid To
Insurance to be arranged by the seller.
Seller must unload goods from the arriving means of transport and
must then deliver them by placing them at the disposal of the
Delivered at Terminal at Port or buyer at the named terminal at the port or place of destination on
DAT
Terminal Place of Destination the agreed date or within the agreed period.
Carriage to be arranged by the seller.

Seller must deliver goods by placing them at the disposal of the


buyer on the arriving means of transport ready for unloading at the
Delivered at agreed point, if any, at the named place of destination on the
DAP Place of Destination
Place agreed date or within the agreed period.
Carriage to be arranged by the seller.

Seller must deliver goods by placing them at the disposal of the


buyer on the arriving means of transport ready for unloading at the
Delivered Duty agreed point, if any, at the named place of destination on the
DDP Place of Destination
Paid agreed date or within the agreed period.
Carriage to be arranged by the seller (incl. duties & customs).

Sea & Inland Waterway Transport Only


Seller must deliver goods either by placing them alongside ship
Free Alongside nominated by the buyer at loading point, if any, indicated by the
FAS Port of Shipment
Ship buyer at the named port of shipment or by procuring goods so
delivered.

Seller must deliver goods either by placing them on board vessel


nominated by buyer at loading point, if any, indicated by the buyer
FOB Free on Board Port of Shipment at the named port of shipment or by procuring goods so delivered.
Carriage to be arranged by buyer / seller on the buyer’s behalf.

Seller must deliver goods either by placing them on board vessel or


CFR Cost & Freight Port of Destination by procuring goods so delivered.
Carriage to be arranged by the seller.

Seller must deliver goods either by placing them on board vessel or


Cost, Insurance by procuring the goods so delivered.
CIF Port of Destination
& Freight Carriage to be arranged by the seller.
Insurance to be arranged by the seller.

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