Supply Chain Management & Introduction to SAP (21ME641)

Module – 2
MODULE 2 - INTRODUCTION
Warehouse Management Stores management-stores systems and procedures-incoming materials control
stores accounting and stock verification obsolete, surplus and scrap-value analysis-material handling
transportation and traffic management -operational efficiency-productivity-cost effectiveness-
performance measurement.
Supply Chain Network Distribution Network Design – Role - Factors Influencing, Options, Value
Addition –Distribution Strategies - Models for Facility Location and Capacity allocation. Distribution
Center Location Models.

INTRODUCTION
Warehouses or stores play a vital role in the operations of a company. It is in direct touch with the user
department in its day-to-day activities. The most important purpose served by the stores is to provide
uninterrupted service to a construction site. Further, stores are often equated directly with money as
money is locked up in the stores.
Nature and Importance of Warehouse
• We often define warehousing as the storage of goods.
• Broadly interpreted, this definition includes a wide spectrum of facilities and locations that
provide warehousing, including the storage of iron ore in open fields
• The storage of finished goods in the production facility; and the storage of raw materials,
industrial goods, and finished goods while they are in transport.
• In a macro-economic sense, warehousing performs a very necessary function.
• It creates time utility for raw materials, industrial goods, and finished products.
• The proximity of market-oriented warehousing to the customer allows a firm to serve the
customer with shorter lead times.
• More important, warehousing increases the utility of goods by broadening their time availability
to prospective customers. In other words, by using warehouses Companies can make goods
available when and where customer demand
• This ware housing function continues to help companies and industries to use customer service
asa dynamic, value-adding tool

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Some Activities of Warehouse

Product & Supply Mixing

Cross Docking.

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• Pallet loads can be moved directly across the warehouse floor from receiving to shipping (left)
• . Boxes, however, first must pass through a sortation system (right)
OBJECTIVES AND FUNCTIONS OF STORES
The simplest (and very outdated) definition of the warehouses or stores is that it is the place where one
keeps (or offloads) material for some time before its use.
According to a more functional definition of stores, it is a place where following activities are carefully
undertaken: Receipt of goods, timely procurement of materials, accounting the transactions, minimizing
obsolescence, surplus & scrap by proper identification and using correct preservation methods, ensuring
good housekeeping by accurately and timely updation, issue of receipts, ensuring issues and other
documentation and handling other issues pertaining to storage and cleanliness.
In some cases, the procurement and optimization of inventory is also added to the functions of stores.
For example, the store’s manager may be given the additional powers to procure urgently required
items. In other words, the functions of stores can be classified as follows:
a. Receipt: Receiving and accounting of raw-materials, bought out parts, spares, tools, equipment
and other items.
b. Storage: Provision of right and adequate storage and preservations to ensure that the stocks do
not suffer from damage, pilferage or deterioration.
c. Retrieval: Facilitating easy location and retrieval of materials keeping optimum space
utilisation.
d. Issue: Fulfilling the demand of consumer departments by proper issue of items on the receipt of
authorised purchase requisitions.
e. Records: To maintain proper records and update receipt and issue of materials.
f. Housekeeping: Keeping the stores clean and in good order so that the handling, preservation,
stocking, receipt and issue can be done satisfactorily.
g. Control: Keeping a vigil on the discrepancies, abnormal consumptions, accumulation of stocks
etc., and enforcing control measures.
h. Surplus Management: Minimisation of scrap, surplus and obsolescence through proper
inventory control, and effective disposal of surplus and obsolete items.
i. Verification: Verifying the bin card balances with the physical quantities in the bins and
initiating the purchasing cycle at appropriate time so as to avoid the out of stock situations.

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j. Coordination and cooperation: To coordinate and cooperate with the interfacing departments
such as purchasing, manufacturing, production planning and control, inspection, etc.
STORES SYSTEMS AND PROCEDURES
Broadly, the systems in stores can be studied under three areas namely, receipt, issue anddocumentation.
It may be seen that at every stage a great deal of information is required for checking, controlling and
feedback purposes. Well-designed stores systems and procedures ensure timely information for decision
making, particularly because stores is the starting point of all activities for control. Let us briefly
consider the systems and procedures in each area.

1. MANAGEMENT OF RECEIPTS

The inputs into stores or receipts can emanate from internal as well as external sources. The procedures
start even before the material reaches the stores when a Purchase Order (PO) is placed on the vendor. In
certain organizations, the stores and purchase activities are bifurcated, but care should be taken to ensure
close coordination.
The details should be maintained in a chronological order to enable the ease of understanding. The scope
of work involves following functions:

 Requirement determination,
 Raising purchase requisition,
 Chasing purchase orders to expedite supplies,
 Scheduling arrival of materials,
 Receiving the materials physically and planning for storage,
 Quantity & quality inspection,
 Checking input documents like invoice, lorry receipt, delivery challans and other challans,
invoices etc.,
 Taking stock of material received and also of rejected material,
 Endorsing the suppliers bills and quantities and forwarding for payment to accounts, Provisional
 goods inwards in case of later inspection,
 Final goods inwards in case of final acceptance of goods
 Informing indenting departments of arrival of goods,
 Sending paperwork to purchase accounts for payment,

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 Updating insurance paperwork for latest goods arrival, and
 In case of demurrages, arrange for insurance company visit.

All this demands a clearly laid out procedure which all concerned are informed about. In addition to
these functions, other functions are as follows:
 Regularize miscellaneous items like samples & cash purchases by raising receipt notes,
 Complete record keeping formalities for returnable items and items received from feeder shops
for later internal or external consumption,
 Keeping record of scrap received, and
 Keeping record of other bulk material supply items which may not be physically received or
stored in the warehouse, like fuel oil etc.

2. ISSUE CONTROL

We now come to the stage namely, issues. Issues can be further divided into issues to consuming
departments, and issues to outside suppliers for processing or conversion. In both cases, there are certain
common system requirements.
 The first aspect is the control of issues. Issues are based on scheduling of project.
 The second aspect is delegation of authority.
Here, in this unit, we are concerned only with the first aspect. The scope of this issue control involves
the issue of the right material, in the right quantity, to the right personnel, at the right time and place on
receiving the right authorization, maintaining the records for the same.
Based on consumption schedules/production programs, listing for each material, quantity to be issued
for each project for that material is made and circulated to all concerned. This automatically controls
consumption as the work order issued details on the quantity of material to be issued by the stores and
the stores personnel are not authorized to issue beyond these quantities. Thus, for routine work,
operations get streamlined and free of bureaucracy.
The store also keeps check on inventory and raises alarms or raises purchase orders (as the case may be)
from time to time. Care should be exercised that work is not held up for the want of materials. One time
issues like bathtubs, furniture, almirahs etc. are to be accounted for separately. Proper weighing and
counting equipment should be used for issuing bulk materials. Thus, these instruments need to be

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calibrated frequently. Provision should be made for emergency issue and procedures should be clearly
defined for all concerned to regularize this.

3. STORES DOCUMENTATION
All the documents received or generated in house should be properly categorized and a numbering
system should be developed for proper storage and quick retrieval. Besides the receipt and issue
documents, some other methods of documentation necessary are given below:
 Bincard or kardex,
 Stores transfer voucher (from one stores to another),
 List of slow moving/fast moving/obsolete items,
 Scrap disposal,
 Rejection notes,
 Acceptance notes,
 Delivery notes,
 Travel requisitions,
 Tour and expense reports,
 Impress details,
 Indents,
 Codification methodology, and
 Material requirement planning.

STOCK VALUATION AND VERIFICATION

There is a distinct difference between the two terms "valuation" and "verification".
Valuation is the monetary equivalent of the stock or material in hand whereas verification is the
determination or quantification of the material in stock and checking its deviation from the figures
shown in the books.
Valuation becomes necessary to assess the assets of the company for sale, determining insurance cover
to be taken, during acquisition and mergers, get an idea about the difference between book and actual
depreciation etc. Since the procurement price or sale price of a material does not remain constant, it is
necessary to evaluate the stocks regularly or during specific occasions. For example, if the price of an

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item in inventory which is required for producing something has gone up during its storage period,
selling it by basing its selling price on the past purchase price can mean lesser margins. Similarly, if the
price has gone down during the stocking period, selling it at a higher price can mean being out priced by
competition.

Since valuation methods can increase or decrease assets, companies occasionally resort to manipulating
the valuation methods to present rosy or drastic pictures as the case may be.
For instance, the gross profit is the difference between net sales and costs of production. Since materials
cost is a part of production, the valuation basis can determine whether the company is going to have
profits or losses. Frequent unauthorized changes are illegal.
Under the companies act, a change in the method of valuation has to be approved by the Board of
Directors of the company and must be reported along with the effect of changes in the profitability due
to the changes in method of valuation duly certified by the auditors.
METHODS OF VALUATION
The methods of valuation are many. In actual practice, there may be more than one method being
followed; one for taxation purpose and the other for control purpose. The details of some of the
important methods are given in subsequent paragraphs.
1. FIFO (First in First out) Method
 FIFO method assumes that materials purchased are issued in strict chronological sequence, i.e. the
material which comes in first is issued first.
 This method ensures that the materials are issued at the actual cost and the valuation is done at the
latest price paid. So long as the cost of the material does not fluctuate much, the assessment works
fine.
 The disadvantages are that in very highly fluctuating costs periods, every batch will have different
costs and the comparison between batches becomes meaningless.
 Moreover, in an inflationary scenario, the time lag from the period the material is inward to that
when it is issued results in the material being issued at a lesser price than its current price which
wrongly indicate the higher profits.

2. LIFO (Last in First out) Method

 This method assumes that the materials coming in last are the first to be issued.

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 The advantage of this method is that the costs are reckoned closest to the latest price and thus,
reflecting the latest market positions (if receipts are recent).
 But the stocks are still evaluated at the old prices for valuation purpose.
 In times of falling prices, the LIFO system (due to lag) charges a cost to production or cost at the
time of issue, a value which is lower than the actual market price, unlike FIFO system which could
have charged a price which might be lesser/more/same depending on the price at the time of the first
purchases.
 Thus, while FIFO is a conservative approach and suffers from time lag, LIFO is directed at the latest
market conditions so that the pricing conditions are up-to-date as much as possible.

Other Variations of FIFO and LIFO Methods

The variations of these methods such as HIFO (highest in first out), NIFO (next in first out) are
modifications of the FIFO and LIFO methods but are not commonly used due to the extra monitoring
work involved. Simple Average Price Method In this method, the issues are valued on the basis of a
simple average price of the inward items. The prices of purchases prior to any issues are summed and
the average is obtained by dividing by the number of purchase prices used.

3. PERIODIC AVERAGE PRICE METHOD

 The lacunae of the simple average method is attempted to be overcome in this method by
considering prices for a defined large enough period to make the variations in price more uniform.
 The prices considered for valuation can be the past six months, quarter or year. The problem with
this method is the extreme amount of calculations involved by referring to past records.
 It also suffers from the same drawbacks as that of the simple average price, but can be easily used
for batch type productions by suitably adjusting the periods and remove the high fluctuations in
prices.
4. WEIGHTED AVERAGE PRICE METHOD
 The variation in prices due to different quantities in the simple and periodic price methods is
overcomelargely in this method.
 The issues to the user department are split into equal batches from each shipment at stock. Here, the
rate is arrived by dividing the total cost by the total items.
 This new rate is applied for consumers. As new items are procured, the new average is computed for
further issues.

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 In actual usage, the weighted average is derived for a given period instead of doing every time for
every issue or procurement as this tends to be too time consuming.
 The weighted average method is quite popular as it is not tiresome and gives a fairly accurate
tracking of the market conditions. The values reflected in this method do not "jerk" the balance
sheets as the weighted averages prevent it.
5. STANDARD COST METHOD

In this method, a forecasted unit price for a specific period of one year or more is used to evaluate the
issues. Some of the factors taken into consideration for calculating the standard cost are as follows:
 Market conditions,
 Depreciating nature of the item,
 Usage rate,
 Storage conditions,
 Handling facilities,
 Obsolescence, and
 Losses in storage.
The actual cost of procurement is thus different from the standard cost, but this figure helps in providing
guidelines to purchase unit for correct buying prices and negotiating goals. In addition, this top-down
approach tries to mould the procurement and inventory department to bring in line their thinking to the
management goals. The success of computing the standard cost is thus, very important in terms of
predicting actual values. The procurement department thus, has a guideline. The smaller the gap
between the standard value and actual costs, the better the management has control over finances. If
variation exists between the standard and actual costs, the variance can be taken care of in the actual
market selling or project pricing costs. Efficient use of the materials is truly reflected as accounting is
now separated from fluctuations in rates, thus saving the manpower accounting hours.

6. REPLACEMENT PRICE
 This method is very suitable for a relatively high inflationary economy. In this method while
purchases are valued at the price paid for, the issues are valued at the price required to replace them
at the current prevalent prices.
 This ensures that the final product is priced at market prevalent rates.
 The problem with this method is that the replacement value is not available at all times.

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 Thus, a very strong system to keep updated prices has to be evolved which in turn costs money. The
issue material follows market price but since the in stock material is evaluated at the actual prices, in
an inflationary economy, the stock in hand is always under evaluated.
 Conversely, when the prices are falling the stocks in hand are always over evaluated leading to
frequent write-offs.
 The rate of depreciation or appreciation of all materials in stock is also not the same. Thus, balancing
stocks can be problematic.

STOCK VERIFICATION

As mentioned earlier, the stock verification is the determination or quantification of the material in stock
and checking its deviation from the figures shown in the books. The store’s manager holds the
responsibility for all happenings in the store. He must periodically verify all stocks to reconcile the
books with the physical presence of the material. The problems mount as the number of items or the
number of transactions increase. Stock verification also checks for pilferage and shows the qualitative
upkeep of the stores. The causes for discrepancy in stock can be due to the following reasons:

 The scales or weighing machines etc. have not been properly calibrated or are not of good
quality or being maintained improperly,
 Issues without indents or proper paperwork,
 Delays in updating paperwork,
 Untrained individuals handling paperwork,
 Pilferage,
 Obsolescence,
 Deterioration and damage due to natural causes like corrosion, insect damage, rodent damage or
seepage of rainwater etc., and
 Deterioration and damage due to unnatural causes like theft, sabotage etc.

The process of verification is the physical counting, weighing or measuring the stock of materials that is
in stock and making a record of these figures. The persons who normally supervise these operations are
responsible people from:
 Accounts department,

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 Internal audit department of large companies,
 Sometimes, auditors from the bankers or loan givers, and
 in case of mergers, the representatives of the other company.

The verification process is normally started only after a clear cut guidelines for the process is written
down and approved by the concerned authorities. To prevent overwork or stoppage of normal work for
inconvenient time periods, the verification process must be carried out over a long period switching
from one area to another. Sometimes, this is not possible and all verification has to be done at one go.
The stores personnel should be actively involved in the verification process to make it stop seem like a
witch hunt. If the discrepancy between actual figures and the book values are substantial enough ahdnot
properly explicable, it is necessary to start an immediate investigation as the organizations will gainif the
stores personnel are motivated by proper development of an atmosphere of good values and quick
justice.

WASTE MANAGEMENT - DISPOSAL OF SURPLUS, OBSOLETE AND SCRAP

Before going into the details of waste management, some of the important terms, i.e. surplus, obsolete
and scrap etc. need to be defined.
Surplus:
These are materials which have no immediate use or at least in the foreseable future. They have
accumulated due to faulty planning, forecasting and purchasing. Sometimes, they may have accumulated
since they are standardly bought in quantities only and not in loose form where they would be more
expensive. In short, surplus stocks are the items which are in excess of their requirement.
Obsolete Stocks:
They are those items which are not damaged and have economic worth but are not suitable for the
company's specific operations. For example, the spare parts of machines that have been phased out.
Changes in product design, technological advancements, rationalisation, food and drugs whose
effectiveness has lapsed over time, wrong codification etc. are some of the reasons why obsolescence
occurs. As the name implies, they are non-moving items of the inventory.
The difference in obsolete and surplus lies in the potential for usage. Surplus items are only in excess of
what is required, obsolete items cannot be used at all.
Salvageable Items:

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These are items which cannot be used for the original purpose but out of which certain parts may be
removed and used either with or without rework. For example, the motor of a spoiltair-conditioner may
be used for other air-conditioners. While removing, these motors should again be regularised as spares
for inventory purpose.
Reclaimable Items:
These are items which have worn out by use but their life can be extended by some specialised
processes. An example is worn out tyres which can be retreated. Before reclaiming items, their extended
life should be properly determined as sometimes reclaiming is expensive and the extended life is not
commensurate to the cost incurred.
Scrap:
This is another term which is used to describe material not useful to the organization (sometimes, used
also for obsolete and surplus items when these are not useful to the organization). Scrap can be defined
as the residue from a construction or manufacturing process which cannot be used economicallywithin
the organization. Typical scrap materials in the construction industry are empty tins, drums, and packing
material etc.
REASONS FOR OBSOLESCENCE
Following are some of the reasons of obsolescence:
 Development of better and more efficient or cost economic technology,
 Advent of new Automation technologies and design changes,
 Standardization of items within the organization,
 Cannibalization of equipment to obtain spares for the other,
 Incorrect purchase practices like buying in bulk, and
 Faulty store keeping or inefficient material handling.

CONTROL OF OBSOLESCENCE:

1. FSN ANALYSIS
Industries in the modern world are facing extreme pressure as the trends and likings of consumers change
even before they are able to predict it. Inventory and warehouse managers need to respond proactively as
the trends change in fact they are needed to be a step ahead of the consumer.

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Although it is a bitter truth, it’s true that the industry with good demand forecasting and inventory
management techniques can any day overtake a company with better quality products but having flawed
demand forecasting abilities.
Inventory management’s goal is to increase profits and performance of the entire supply chain and order
fulfillment process by articulately forecasting demand, reducing inventory carrying cost, managing quality,
and increasing the value of the inventory. Moreover, they should ensure that the products inside are the ones
that would generate profits.
Online or offline retailers will never invest money in holding an inventory that doesn’t bring in revenues
frequently. For making a profit in any business the retailers need moving inventory that gets sold quickly
and frequently. And therefore, you need to analyze the movements and functioning of products through the
supply chain and order fulfillment process.
Also known as the FSN analysis, FSN meaning Fast-moving, the slow-moving and non-moving in
inventory management. FSN is one of the inventory management techniques and it is about segregating
products based on their consumption rate, quantity, and the rate at which the inventory is used.
Fast-moving inventory, as the name suggests, comprises the stock that moves quickly and needs to be
replenished very often. Generally, the stock that lies in this category has an inventory turnover ratio of
more than 3 and constitutes around 10-15% of the total inventory.
Slow-moving inventory is the inventory that crawls slowly through the supply chain and has an
inventory turnover ratio between 1-3. It is generally 30-35% of the total stock.
The inventory that rarely moves with the inventory turnover ratio below 1 and makes 60-65% of the
total stock is called the Non-moving inventory.
2. X-Y-Z ANALYSIS
 The XYZ analysis is a way to classify inventory items according to variability of their demand.
 X – Very little variation: X items are characterized by steady turnover over time. Future demand can
be reliably forecast.
 Y – Some variation: Although demand for Y items is not steady, variability in demand can be
predicted to an extent. This is usually because demand fluctuations are caused by known factors,
such as seasonality, product lifecycles, competitor action or economic factors. It's more difficult to
forecast demand accurately.
 Z – The most variation: Demand for Z items can fluctuate strongly or occur sporadically. There is no
trend or predictable causal factors, making reliable demand forecasting impossible.

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Care should be taken that the critical or insurance items are not be included in this list.
 FSN method can also be combined with the XYZ analysis to identify obsolete items.
o X - Items account for 70% of value but about 10% of stock items,
o Y - Items account for 20% of value but about 20% of stock items, and
o Z - Items account for 10% of value but about 70% of stock items.
 Here, items coming in Y and Z category need attention whereas X category items are very
critical as they constitute a large value. Other than very necessary or insurance items, the excess
items should be used or disposed quickly.
One way of controlling can be to introduce buyback clause or having centralized purchase which can
better plan to keep a low spares level as it can divert these to other sites.
CONTROL OF SCRAP
It may seem odd that scrap requires control. But the following aspects need to be addressed effectively:
 Proper storage and dumping places of scrap need to be identified. It is usual in India to see that
all construction sites or warehouses are littered nearby with scrap.
 Assess the performance of staff by assessing the cleanliness of the place.
 Fix tolerance limits itself on the production of scrap. Explaining the efficient use can control the
use of cloth.
 Scrap should be segregated and sold as this fetches better value. They can be separated as drums
of cement, gunny bags, tin of paints etc.
 Reclamation should be used wherever possible by seeing the economics.
RESPONSIBILITY FOR DISPOSAL

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 If the procurement department is located nearby or in the same premises, they should be given
the responsibility of disposal.
 Otherwise, the store’s manager is the best person for the job. Since the procurement or purchase
manager has brought the material, it is likely that he keeps track of the market value of the scrap.
 The salesmen who interact with him can provide him the feedback for this purpose.
 It is needless to add here that the purchase, stores and accounting department have to function as
a team.

DISPOSAL METHODS
Depending on the nature of scrap, various methods can be prescribed. Before disposal action can be
initiated, the "paperwork" for the same has to be initiated as the stock levels as well as its value change
after this. Scrap disposal can be done in the form given below:
(a) By inviting offers from time to time,
(b) By auction, and
(c) By annual contract.
Scrap should be segregated and kept compactly and separately. Some scrap like glass wool is dangerous
and should be collected and covered. To save even the scrap collection costs, the rate contracts or annual
contracts can include even the collection of scrap from the sites. However, care should be exercised
when the collection is going on that no good material leaves the site. In this way, the scarce manpower
and its associated costs can be utilized for other constructive work.
Sometimes, the scrap (like bad earth) is not collected by anyone. In such cases, the disposal is the
responsibility of the organization and the legal and valid dumping place should be determined before the
material is dumped there.
MATERIAL HANDLING TRANSPORTATION AND TRAFFIC MANAGEMENT
The System Logistics handling and transportation systems rapidly and efficiently connect all the areas
used for the receipt of goods, production, order picking and material shipment within the
company, optimizing storage and transport within the warehouse.
The range of pallet handling and transport systems includes:
1. AGV (Automated Laser Guided Vehicles)

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2. SVL (System vehicle loops)
3. Shuttle cars
4. Pallet conveyors
1. AGV (Automated Laser Guided Vehicles)
Automated guided vehicles (AGVs) are, put simply, driverless vehicles used to move material. They can
look very much like traditional forklifts, though they may lack a cockpit. Depending on the application,
they can also take less traditional shapes. Low-profile AGVs may look like industrial Roombas and
move material by jacking up shelving from below.
AGVs are equipped with traffic control and collision avoidance. Traffic control may be run by a
warehouse control system, which will know where each autonomous vehicle is in relation to the others
and signal each vehicle its turn to move as well as its path. Collision avoidance is often a combination of
sonar and a physical-contact sensor installed in the bumper.

The sonar works much like a bat’s – high-frequency sounds are emitted, the echoes are interpreted, and
the autonomous vehicle is capable of stopping before it impacts anything that may come into its path. As
a failsafe, should the autonomous vehicle bump into anything unexpected, the sensor in its bumper will
stop the machine immediately.
Advantages of AGV
1. Reduced Labor Costs
2. Increased Safety
3. Increased Accuracy and Productivity
4. Modularity
5. Elimination of Human Error

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6. Increased Inventory Accuracy
Disadvantages of AGV
1. Potentially High Initial Investment

2. Maintenance Costs

3. Not Suitable for Non-repetitive Tasks

4. Decreased Flexibility of Operations

2. SVL - SYSTEM VEHICLE LOOPS

SVL steering shuttles are designed to handle and sort large volumes of materials within the warehouse.
Reducing the transfer times of loading units, they are particularly suited to automated order picking
systems and are capable of managing "just-in-time" shipments.
Functioning as a pallet sorting system, SVLs are usually positioned between a vertical automated
warehouse (HBWH) and the picking bays, or between the order picking bays and shipment bays.
SVL steering shuttles travel on a monorail circuit, which allows higher speeds on curves, maximising
transport capacity.
SVL systems offer numerous advantages, including speed and responsiveness, maximum pallet
throughput, simplicity and redundancy, no systemic impact, maximized AS/RS Performance.

3. SHUTTLE CARS

Shuttle cars are pallet transport systems used to connect different areas of an automated storage system.

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Rectilinear shuttles can be used to fast-feed pallets into and out of an automated warehouse or they may
also be used to feed multiple order picking stations. Rectilinear shuttles can also be used for transport
routes where there is crossing forklift truck traffic (rail sunk into floor).

4. PALLET TRANSPORT SYSTEM

The function of pallet transport systems is to provide a continuous flow of materials, and is a compatible
interface with any type of material handling equipment and manual operations.
Pallet transport systems can easily and efficiently handle exceptional workloads and any fluctuations in
material flow within the warehouse.

The main benefits of the pallet transport systems are:

 High throughput rates
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 The possibility of handling loads with different weights and dimensions
 No line pressure
 Simple, quiet, reliable operation
 Easy maintenance
OPERATIONAL EFFICIENCY
Operational efficiency is the ability of an organization to reduce waste in time, effort and materials as
much as possible, while still producing a high-quality service or product. Financially, operational
efficiency can be defined as the ratio between the input required to keep the organization going and the
output it provides. Input refers to what is put into a business to operate properly, such as costs,
employees and time while output refers to what is put out or gained, such as rapid development times,
quality, revenue, customer acquisition and customer retention.
FACTORS OF OPERATIONAL EFFICIENCY
Operational efficiency is gained through a company by cost-effectively streamlining its base operations
while eliminating redundant processes and waste. Generally, this is done by focusing on resource
utilization, production, inventory management and distribution.
 Resource utilization is focused around minimizing waste in production and operations areas.
 Production focuses on making the production environment as organized as possible. This includes
ensuring that employees and equipment are working as efficiently as they can to increase
production.
 Distribution focuses on ensuring efficient handling of the end product, including routing and
delivery.
 Inventory management includes producing and managing enough inventories to meet the demand,
but with as little excess inventory as possible.
HOW TO INCREASE OPERATIONAL EFFICIENCY

Different strategies may be used to accomplish the goals of operational efficiency and can differ from
company to company. When asked to improve operational efficiency, a company will usually change
inputs and outputs, such as giving less input for the same output, providing more output for the same
input, changing the number of inputs or increasing both input and output.
Organizations should also focus on:
 Monitoring performance by setting up dashboards or internal meetings.
 Identifying and minimizing waste, such as ridding bottlenecks.

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 Creating benchmarks, which can give your organization an idea of where they stand versus the
competition.
MEASURING OPERATIONAL EFFICIENCY

Measuring operational efficiency involves keeping track of a company’s inputs and outputs as
performance indicators. Typically, these performance indicators relate to efficiency, quality or value.
Examples of this include automation accuracy, quality indexes and customer satisfaction. These
indicators should be collected and gathered into operational and efficiency reports that show how
effectively a company is running and how it handles volume. Any reports should also show metrics such
as average turnaround time, which can be used to identify any performance bottlenecks.
PRODUCTIVITTY AND ITS MEASUREMENTS
Productivity is a measure of economic performance that compares the amount of goods and services
produced (output) with the amount of inputs used to produce those goods and services.Productivity can
be calculated by measuring the number of units produced relative to employee labor hours or by
measuring a company's net sales relative to employee labor hours.
Types of Productivity Measures
Within an organization, there are four main types of productivity. Each has an impact on a different part
of the supply chain when you’re delivering customers a product or service.
1. Capital Productivity: Capital productivity tells you the ratio of products or services to physical
capital. Physical capital could be equipment, real estate, or anything else you need to produce
your offerings. You improve physical capital through capital deepening, which usually leads to a
higher output of goods or services.
2. Material Productivity: Another ratio is material productivity. This looks at the ratio of products
or services to materials (also called natural resources). Material productivity is more useful in
some industries than others. For instance, it has little value in an area like software development
where few natural resources are necessary, but it plays a major role in the production of goods.
3. Labor Productivity: A type of productivity measure that most employers are interested in
knowing is labor productivity. It tells you if you are efficiently transforming labor into a product
or service.
4. Total Factor Productivity: Lastly, we have total factor productivity (TFP). This covers
everything that capital, material, and labor productivity don’t take into account. This can include
changes in knowledge and skills, use of organizational structures, returns to scale, and

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management tactics. These factors can have a great impact on productivity in some service
industries.
Five steps to supply chain productivity
1. Decide to be responsible for supply chain productivity, not just supply chain management. Make
the earning power of your assets a prime focus of your job. Look around the company, and see
who's involved in this process. The odds are that your company does not have an explicit
profitability management process, and asset productivity is simply (and incorrectly) assumed to
be maximized if everyone makes budget.
2. Analyze your supply chain productivity. Create a model that (1) identifies the inventory
supporting each product, each order, and each customer (if you are a retailer, the inventory
supporting each SKU [stock-keeping unit] in each store); (2) identify the revenues and net profit
generated by each of these assets; and (3) combine these measures to create a database of ROIC
for each product, order, and customer. You can complete this process on a PC at "70 percent
accuracy" in a few months.
3. Take the lead in coordinating with your counterparts in Sales and Marketing to systematically
improve ROIC. Here are a few key leverage points: (1) account selection; (2) relationship
selection (e.g., arm's length vs. customer operating partnership); (3) sales process selection (e.g.,
direct vs. telesales); (4) service differentiation (different order cycles for different customers and
products); and (5) product life cycle management (knowing where and when to stop holding
inventory on a short life-cycle product).
4. Differentiate your company from your competitors using supply chain capabilities. This will
have a big impact on supply chain productivity and company profitability.
Today, most companies are reducing their supplier bases by 50 percent or more. The suppliers
that remain see huge, immediate increases in market share. The key element that determines
which supplier gets this increase, and which supplier loses it all, is the supplier's ability to
operate and create change within the customer. Winning suppliers know how to increase their
customers' internal profitability. This is the fastest and surest way to increase market share today,
and it is first and foremost a supply chain productivity issue.
5. Manage change both internally and externally. Maximizing supply chain productivity requires
not only good information, but most importantly, great change management. Within your
company, this means developing a detailed, holistic picture of ROIC, and engaging your

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counterparts to join you in a coordinated program of ROIC improvement. Within your
customers, it means much the same thing: developing an understanding of customer profitability
and ROIC, and engaging key customer managers
COST EFFECTIVENESS
The cost-effectiveness analysis involved an economic evaluation of the performance of the supply chain
system, with the cost calculated by using the activity-based costing method, by examining a supply
chain according to its main components or functions including the cost of procurement, central storage,
distribution and management, and administrative function. Effectiveness of supply chain investment was
measured as an indicator of supply chain performance, which includes availability, coverage,
affordability, and building capacity indicators.

FIVE WAYS TO CUT COSTS WITHIN THE SUPPLY CHAIN

1. Understand customer service level requirements

Truly understanding customer needs is the first step in identifying improvement opportunities. As you

consider measures based on your insights, keep in mind the right balance between service level and

costs. A supply chain rapid assessment covering qualitative and quantitative aspects can help here, as

can a segmentation exercise that enables you to adapt your supply chains as outlined below.

2. Enhance your supply chain planning and synchronize

A cost-efficient supply chain is stable and optimized – from production to end-to-end flow. That means

starting with planning. Prepare to transform by analyzing whether to centralize planning and/or automate

or even outsource certain planning activities for better planning consistency, capability and quality.

Another important aspect is improving S&OP/IBP effectiveness and efficiency. Get this right, and you

can align supply chain requirements – and costs – to future demand and manage strategic priorities.

Integration of end-to-end supply chain visibility enables supply chain professionals to proactively

manage issues and exceptions, feeding both executional and IBP processes. Implementation of Digital

Twins allows enhanced what-if simulation of your business, unveiling critical elements and scenarios

which result in improved bottom lines. Segmentation and synchronization of rhythm, frequency and

volume, including planning parameter optimization (production, procurement, distribution), empower

your teams to run smooth, cost-efficient supply chains. It also supports a better control environment.

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3. Review your supply chain footprint and network strategy

As your business model and environment shifts, it’s likely that inefficiency will creep in, whether in

terms of space, ways of working, touchpoints or routing. With a renewed understanding of better

differentiated service level requirements, you can right-size the network end-to-end, i.e. across

manufacturing, distribution and global trade. Diving deeper into your network strategy, consider how to

design and implement a logistics operating model (in-house, 3PL, 4PL, shared, etc.) and manufacturing

operating model (contract manufacturing vs. in-house, fixed vs. variable labor) that works for your

business. This also presents an opportunity to drive implementation of smart factory elements as part of

your operational excellence efforts. Look at standard ways of working, digital coaches and daily

management systems to find the right fit. Finally, review your global trade and identify where you can

reduce customs duties, leverage available free trade agreements and improve your total landed costs.

4. Adapt elements of your supply chain operating model

When your business model changes, it’s important to make sure operations keep pace. You should

ensure that you actively translate relevant elements into the operational setup. Revise your shoring

strategy and analyze insourcing vs. outsourcing to ensure your on-, near- and off-shore value drivers are

delivering the best cost-efficiency. Review your supply chain operating model setup and look for

savings potential in areas like organizational design, sizing and location, roles and responsibilities,

processes and governance model. Given the significant shifts we’ve seen recently in the world of work,

you may also find significant potential for savings in your workplace and real estate costs.

5. Consider digital drivers

The supply chain has been undergoing digital transformation for some time, with leading adopters

investing in digital transformation initiatives in the areas of automation, robotics, advanced and

predictive analytics with machine learning, block chain, IOT, 3D printing and self-driving supply chain

systems. After the initial outlay, technology is a key source of additional efficiencies and cost reduction.

The right tools offer near real-time visibility and provide data that drive more cost-efficient solutions

and controls across the supply chain. Deployment of digital tech (e.g., AI in forecasting, demand

sensing, segmentation, supply planning, etc.) also improves planning outcomes, while end-to-end SC

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technology (including ERP systems and enabling digital tools) has come a long way in optimizing

processes, costs and controls. EY has supported clients using digital enablers such as our Supply Chain

Intelligence Platform, EY Catalyst, EY Wave space and open ideation platforms

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