Chapter 16

Market Logistics
&
Supply Chain Management

Deepak Pandey
Mittal School of Business
Lovely Professional University
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2
 Learning Objectives
• Principles of materials management, logistics and supply chain
management
• Logistics interface with other functions

• Inventory management principles and systems

• Warehousing management fundamentals

• Transportation management practices

• How IT enables the logistics function

• Discuss the performance measurement of the logistics

function
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 Materials Management
• Materials forms the largest single cost item in most manufacturing
companies – needs to be carefully managed
• Materials management function includes planning and control,
purchasing and stores and inventory control
• Materials management is the precursor to logistics and supply chain
management

Logistics……

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 Logistics Defined

• Logistics means having the right thing, at the right place, at the
right time
• The procurement, maintenance, distribution and replacement of
personnel and materials – Webster’s Dictionary
• The science of planning, organizing and managing activities that
provide goods or services – Logistics World, 1997

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 Logistics
• Functions: planning, procurement, transportation, supply and
maintenance
• Processes: requirements determination, acquisition, distribution and
conservation
• Business: science of planning, design and support of business
operations of procurement, purchasing, inventory, warehousing,
distribution, transportation, customer support, financial and human
resources

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 Scope of Logistics
• Choice of markets

• Procurement

• Plant location and layout

• Inventory management

• Location and management of warehouses

• Choices of carriers, mode of transport

• Packaging decisions

• Relevant to all enterprises: manufacturing, Government, Institutions,

service organisations
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 Components of LOG Management
Logistics Activities
Input Output
Customer service
Demand forecasting
Distribution • Marketing
• Natural Communications Orientation
Resources Inventory control
(competitive
(land, facilities Materials handling
Order processing
Advantage)
Equipment) • Time and
• HR Parts and service support
• Finance Plants and warehouse selection Place utility
Procurement • Efficient move
• Information
Packaging to customer
Return goods handling
Salvage and scrap disposal
Traffic and transportation
Warehouse and storage

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 Links and Flows

General material flow/ service flow

Information flow

Information flow

Customer’s Supplier’s
Customer Lead Firm Supplier
customer supplier

General cash flow

Outbound / Downstream logistics Inbound / Upstream logistics

Source: ICFAI
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 Logistics and Marketing
• Interface on:
– Product design and pricing
– Customer service policies
– Sales forecasts and order processing
– Inventory policies and location of warehouses
– Channels of distribution and despatch planning
– Transportation to reach products to customers
• Production wants larger production runs to minimise time spent on
set up changes on the machines. Marketing wants smaller runs of a
variety of products.

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 Order Processing
• Primary contact between the firm and its customer.
• Getting the order, preparing the invoice, picking and packing the
goods and despatch
• Quality, speed and accuracy of the order processing function
determines the ‘value’ of the logistics function

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 Order Processing Support Records

• Customer master – all information about the customers

• Item master – all information about the goods by SKU
• Price master – details of the prices for the items to be
despatched to customers
• General data base – customer quotations, customer sales history
and open sales orders

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 Benefits
• Some of the benefits of a good order processing system are:
– Order cycle times get reduced
– Order execution accuracy is 100%
– Timely invoicing and accounting
– Order review and follow up costs get eliminated
– Improved customer service

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 Materials Handling
• Function of managing inventory along with storage and transfer
of information. Includes:
– Receiving, storing and despatch of goods
– Order picking and packing
– Sorting of goods
– Re-packing in case of damages
– Arranging transport and loading of the goods on the carrier
vehicle

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 Source: Michael Porter
The Value Chain
S Company Infrastructure
U
P Organisation, people, methods
margin
P
Systems & technology
P
O
R Procurement
T

Inbound Outbound Marketing Service

Operations
logistics logistics & sales

margin

Primary activities
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 Logistics Strategy
• Corporate strategy defines the business the company wants to be
in
• The marketing strategy decides the products and markets to be
focused on
• The distribution strategy decides how the company will ‘reach’ its
customers/markets
• The distribution strategy includes the physical distribution and
channel management

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 Logistics Strategy Based On…
• Markets – focus on meeting customer requirements even across
business units
• Process – operation of an efficient and integrated logistics function
• Channels – participate in the customer service delivery process

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 Logistics Plan Outline
• Internal analysis (current position)
– Organisation
– Human resources
– Transportation
– Relations with internal customers
– Quality of product
– Quality of Service

• External / situation analysis

– Competitor logistics performance
– Trends
– External environment / economy
– Public, private and contract warehouse
– Public, private and contract carriage

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Principles of Logistics Excellence

Strategic Operational

Link logistics to corporate Focus on financial

strategy performance
Organise comprehensively Target optimum service levels
Use the power of information Manage the details
Emphasise human resources Leveraging logistics volumes
Form strategic alliances Measure and react to
performance

Alling & Tyndall19

 Logistics Focus Areas

Customer service related Operations related

Packaging Plant and warehouse site
Order processing location
Spare parts and service support Procurement
After sales Customer service Inventory control
support Materials handling
Demand forecasting Salvage and scrap disposal
Distribution communications Traffic and transportation
Return goods handling Warehousing and storage

Logistics may be confined to the company whereas SCM extends beyond

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 Logistics for Rural
• A business challenge as ‘access’ is still limited
• Some of the salient points on rural distribution:
– Vast potential for business but collection and delivery points are
too many
– Producers of agricultural produce and the users of consumer
products are dispersed
– Transport is unviable – no return loads
– Agri produce is seasonal, bulky, perishable and not of standard
sizes
– Intermediaries in various forms are a major element of cost

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 Supply Chain Management
• Business context:
– Globalization of the market place
– Advances in technology
– Increasingly demanding, informed customer base
– Purchase decisions on dimensions of quality, price and time
• Innovative supply chain:
– To meet customer driven challenges
– To reduce costs
– Improve service levels
– Enhance speed to market

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 Logistics and SCM

• Logistics is more concerned with activities within the company

– procurement, production scheduling, despatch planning,
inventory, warehousing and transportation.
• Supply chain management extends the process of planning
procurement, production and despatches beyond the company
boundaries to its suppliers and customers.

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 Supply Chain Integration

• Optimising the supply chain requires supplier and customer

involvement to integrate processes, policies, systems, database
and strategies between diverse trading partners

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 Supply Chain Integration
Customer Analysis
Order Fulfillment
Purchasing/Supplier
Partnering

Integrated Inventory Management and

control
Storage & Supply Chain
Transportation Management

Demand & Lead

Manufacturing/ Time Management
Re-manufacturing/
Assembly
Materials
Management Lean thinking…
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 Lean Thinking in the SC
• Based on the principle to produce more and do more with minimum
resources
– To produce just what is needed at the time it is needed
– Meant to create value and reduce waste for the end customer
• Components of lean supply chain: developing lean systems in the
suppliers and the procurement process, warehousing and
transportation practices

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 Benefits of a Lean SC

• Speed of response to customer needs

• Reduced inventories and costs
• Higher customer satisfaction

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 SC Agility – Factors
• Collaboration between supply chain partners
• Regular and accurate flow of information within the supply chain
• Use of technologies to improve agility
• Continuous monitoring of the environment and the supply chain
response
• Enhanced competence of all users of the system

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 6 Sigma in Supply Chain
• 6 Sigma means quality level of 3.4 defects per million. Operational
issues to be tackled for SC become 6 Sigma compliant:
– Late delivery of materials from suppliers
– Large waiting time for work-in-process
– Warehouse running out of stocks frequently
– Poor forecasting accuracy affects planning
– Improper deliveries to customers
– Delayed relay of orders to logistics providers

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 Benefits of a 6 Sigma Supply
Chain
• Total inventory reduction – carrying costs come down
• Reduced inventory obsolescence
• 3P storage can be minimized
• Saves administrative costs like: order management, purchasing,
labour, process cycle time
• Reduced cost of poor quality
• Overall improvement in SC efficiency

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 Service Level Improvements
• On time, in full deliveries
• Orders correctly dispatched – no errors
• Deliveries are damage and defect free
• High customer service levels in order fill rate and order cycle time
• Lower levels of stock-outs
• The SC proves very effective

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 Information Technology in Supply
Chain
• Software to provide:
– Solutions in supply chain optmization
– Materials management systems
– Material requirement planning solutions
– Warehouse management solutions
– Transportation management solutions

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Leading Vendors for SCM
Solutions
• SAP
• Oracle
• JDA software
• Manhattan Associates
• Epicor
• IBM
• Descartes Systems
• Infor
• Highjump software
• GT Nexus

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 IT Systems for SCM
• Supplier relationship management – processes for flow of materials
between the suppliers and the firm
• Customer relationship management – to optimize revenue and
profitability by superior customer service
• Electronic data interchange – exchange of business information
through standard interfaces between suppliers and the firm

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 IT Systems for SCM
• Bar codes – popular and cost effective way of tracking items along
the supply chain. Improved further with QR Codes
• Radio frequency identification(RFID) – tracking of items, people
and equipment in real time without need for ‘line-of-sight’
• Data warehousing – collection of data from multiple sources and
converting into information for storage and use as required

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 Q R Codes
• Machine readable code using black and white squares which store
URLs or any other information
• Can be read by a camera in a smartphone
• Compared to bar codes, QR codes can store more data and can be
read faster
• Uses: item identification, product tracking, time tracking,
documentation management

Inventory… 36
 Why Carry Inventory?
• Support production requirements
• Support operational requirements
• Maximize customer service – ensure availability when needed –
protect against uncertainty
• Hedge against marketplace uncertainty
• Take advantage of order quantity discounts

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 Functions of Inventory
• Inventory serves as a buffer between:
– Supply and demand
– Customer demand and finished goods
– Material requirements for an operation and the output from the
previous operation
– Parts and materials to begin an operation and the suppliers of
these materials

The shock absorber of business !

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 Factors Which Drive Inventory
• Target service level parameters
• Lot sizing practices
• Safety stock and safety time conventions
• Volume discounts and purchase arrangements
• Seasonal build up needs

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 Categories of Inventory
• Anticipation – built in anticipation of future demand – peak season,
strike, promotion
• Fluctuation (safety) – to cover random, unpredictable fluctuations in
supply and demand and lead time – to prevent disruption in
operations, deliveries etc
• Lot-size – to take advantage of quantity discounts, reduce shipping,
set up and clerical costs – also called cycle stock

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 Categories of Inventory
• Transportation – pipeline or movement inventories – to cover the
time needed to move from one point to another – factory to
distribution point for example
• Hedge – for materials where prices are volatile

• Maintenance, repair and operating supplies (MRO) – to support M

and O – spare parts, lubricants, consumables etc

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 Types of Inventory
• Obvious….
– Raw materials
– Work-in-process
– Finished goods – of primary concern to marketing
– Maintenance, repair and operating (MRO) supplies
– In-transit, pipeline

Performance measures…

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 Performance Measures

• Inventory turns = Annual cost of goods sold /average

inventory in value
• Days of sales = inventory on hand / average daily sales

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 Types of Inventory Systems
• Pure Inventory – when and how much to order. RM procurement.
Simple manufacturing operations
• Production Inventory – finite production rates. Demand
fluctuation. Products compete for manufacturing capacity
• Production – distribution Inventory – compete for production
capacity. Geographic placement of inventory for best service of
demand

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 Types of Classification
• ABC category – most common for all
• HML - high, medium, low - similar
• FSND – fast moving, slow moving, non-moving, dead – spare parts
/ FG
• SDE – scarce, difficult, easy to obtain – procurement / Spares
• GOLF – govt, ordinary, local, foreign source – procurement /
Spares
• VED – vital, essential, desirable – spare parts / FG
• SOS – seasonal, off-seasonal - commodity

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 ABC Inventory Analysis
• Based on Pareto’s law:
– A – 20% items worth 80% of value
– B – 30% items worth 15% of value
– C – about 50% items account for 5% of the usage
• Classify items based on the above criteria
• Apply degree of control in proportion to the importance of the group

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 Inventory Related Costs
• Unit costs – basic value of the item carried
• Ordering costs – generating and sending a material release,
transport, any other acquisition costs
• Carrying costs – capital, storage, obsolescence
• Stock-out costs
• Quality costs – non-conforming goods
• Other costs – duties, tooling, exchange rate differences etc

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 Approaches for Controlling
Inventory
• Continuous review:
– Safety stocks and forecasting methods
– Excess and obsolete inventory
• Part simplification and re-design
• On-site supplier managed inventory
• Use of supply chain inventory management systems, Materials
Requirement Planning, Distribution Requirement Planning etc
• Automated inventory tracking systems
• Supplier – buyer cycle-time reduction

Warehouse management…
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 Stores Management Objectives

• Providing efficient service to users

• Reduce cost of carrying goods
• Providing correct, updated stock figures
• Controlling inventory
• Preventing damage to or obsolescence of materials
• Achieve all of the above with good housekeeping

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 Functions
Warehouses

Material Customer Information Storage

handling service transfer function

Receive goods Temporary Permanent

Identify goods
Sort goods
Despatch to storage
Hold inventory
Recall, select goods
Marshal the shipment
Despatch the shipment
Prepare records and
advices

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 Purpose of Warehousing
• To provide desired level of customer service at the lowest
possible total cost
• It is that part of the firm’s logistics system that stores products (RM,
Packing Materials, WIP, FG) at and between point of origin and
point of consumption and provides info to management on the
status, condition and disposition of items being stored
• Distribution warehousing relates mainly to FG

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 Reasons for Warehousing
Service related Cost related
Maintain source of supply Achieve production economies
Support customer service Achieve transportation
policies economies
Meet changing market Take advantage of Quantity
conditions Purchase discounts and forward
Overcome time and space buys
differentials Least Logistics cost for a
Support JIT programs of desired level of customer
suppliers and customers service
Provide customers with the right
mix of products at all times
Temporary storage of materials
to be disposed or re-cycled

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 Warehouses
• Support manufacturing
• Mix products from multiple facilities for shipment to a single
customer
• Break-bulk
• Aggregate
• Used more as a ‘flow-thru’ point than as a ‘hoarding’ point

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 Distribution Warehousing
• The objective is to set up a network of warehouses closest to the
customer locations to service markets better and minimise cost
• Could be C&FA s, depots or distribution centers
• Macro location strategies:
– Market positioned
– Production positioned
– Intermediately positioned

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 Distribution Center
• Warehouse designed to speed the flow of goods and avoid
unnecessary costs
• Speeds bulk-breaking to avoid inventory carrying costs
• Helps to centralise control and co-ordination of logistics activities
• Products can also be cross-docked (one vehicle to another)

Market positioned..

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 Market Positioned
• Warehouses located nearest to the final customer
• Factors influencing are:
– Order cycle time
– Transportation costs
– Sensitivity of the product
– Order size
– Levels of customer service offered

Production positioned….

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 In between…

Production Positioned
• Warehouses located close to the production facilities or supply
sources
• Not the same level of customer service as the earlier one
• Serve as points of aggregation / collection for products made in
a number of plants
• Factors influencing are:
– Perishability of raw materials
– Number of products in the product mix
– Assortments ordered by customers
– Transport consolidation rates ex; FTL

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 Intermediate Positioned
• Mid point locations between the final customer and the producer
• High customer service levels possible even if products made in
number of units

• Other macro approaches look at cost minimisation or cost and

demand elements to maximise profitability

Transportation management….

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 Transportation
• Very important in the Logistics function:
– Movement across space or distance adds value to products
– Transportation provides time and place utility
• Role of transportation includes:
– Provides opportunity for growth under competitive
conditions
– Deeper penetration into markets
– Wider distribution means greater demand
– Can influence product prices favourably

Principles….

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 Transportation Principles
• Continuous flow
• Optimise unit of cargo - stackability
• Maximum vehicle unit – capacity utilization
• Adaptation of vehicle unit to volume and nature of traffic
• Standardisation
• Compatibility of unit load equipment
• Minimum of dead weight to total weight
• Maximum utilization of capital, equipment and personnel

Process….

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 The Transport Planning Criteria
• Environmental analysis: shipper, carrier, government regulations,
public influence
• Deciding objectives
• Selecting mode
• Select transport type within the mode
• Define functions of transport
• Evaluation and control – customer perception / satisfaction, best
practice benchmarking

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 Cost Factors
• Can be product related or market related.
• Product related: density, stowability, ease or difficulty of handling
and liability
• Market related: competition, location of markets, Government
regulations, traffic in and out of the market, seasonality of
movements and impact on customer service
• Five prominent modes: (including intermodal)
– Road, rail, air, water and pipeline.
– Sixth one is use of Ropeways

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 Customer Service Factors
• Consistency, dependability
• Transit time
• Coverage – door-to-door for example
• Flexibility in handling a range of products
• Loss and damage performance
• Additional services provided

Reverse logistics…

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 Comparison of modes……

Reverse Logistics
• Movement of goods from the market or customer back to the
company
• The need:
– Increased awareness of the environment
– Stringent legislation
– For some it is part of the business
– Profitability of dealing with scrap, surplus
• Surplus, obsolescence can result due to:
– Over optimistic sales forecasts, change in product specs, errors
in estimating material usage, losses in processing or overbuying
based on incentives

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 Advantages of Rail

• Economy – more so for goods over long distances

• Efficiency of energy
• Reliability – not affected by weather conditions

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 Disadvantages

• Uneconomical for small shipments and short distances

• Not suitable for remote stations
• Costly terminal handling facilities
• Inflexible time schedules

Road transport…..

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 Road Freight Advantages
• Through movement – direct from consignor to consignee, no
transshipment
• Flexibility – routes and loading routines can be easily altered,
operate day and night
• Less capital costs – for own fleet + immunity from industrial action
• Fast turn-around – if articulated units like tractors and trailers are
used
• Minimum delays

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 Disadvantages
• Susceptibility to weather and road conditions – in spite of the best
protection
• Unsuitability for heavy loads – rail transport more economical for
bulk loads
• Unsuitability for long distances – again the rail telescopic rates are
more favourable

Air transport….

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 Air Transport Advantages
• Faster mode
• Reduction in cost particularly inventory
• Broad service range
• Increasing capabilities
• Disadvantages:
– High cost
– Weather affects flight conditions
– Limitations on heavy consignments

Water transport…..
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 Water Transport
• Advantages:
– Mass movement of bulk
– Lowest freight cost
– Preferred for long haul of low value commodities
• Disadvantages:
– Not for quick transit
– Suitable for certain types on commodities only

Pipeline….

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 Pipeline Movement
• Advantages:
– Reliable, continuous, all weather transport
– Low energy consumption – hence low cost
– Low maintenance and operating costs
– Underground, no space problem
– Can traverse difficult terrain
– Minimal transit losses
– Operation round the clock, safe
– Economies of scale – double the throughput for only 30% additional cost

• Disadvantage is in the investment cost

Ropeways….
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 Ropeways
• Advantages:
– In hilly or inaccessible areas
– Long and circuitous routes with streams / deep valleys
– For commodities capable of movement in ropeway buckets
– Short haulages of less than 50 kms
– Areas where other carriers are uneconomical
• Disadvantages:
– Heavy investments
– Limitations on size and quantity of haul

How to decide on the right carrier?

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 Carrier Selection
Traffic Related Shipper related Service related

Length of haul Size of firm Speed (transit time)

Consignment weight Investment priorities Reliability
Dimensions Marketing strategy Cost
Value Network of production Customer relationship
Urgency and distribution Geographical coverage
Regularity of shipment Availability of rail Accessibility
Fragility sidings Availability of special
Toxicity Stockholding policy vehicles / equipment
Perishability Management Monitoring of goods
Type of packing structure Unitisation
Special handling System of carrier Ancillary services – bulk
required evaluation breaking, storage

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 Chart of Relative Merits
Parameter Weight Rail Road Air Water Pipe Rope
age line way
Speed 30 5 6 8 4 3 3
Versatility 10 6 8 5 6 3 2
Reliability 20 6 8 5 5 7 4
Availability 10 7 8 5 6 3 2
Continuity of 10 6 7 5 5 8 3
service
Distribution cost 20 4 5 6 6 7 8
Total score 10 5.4 6.7 5.1 5.1 5.1 4.0
Overall ranking 10 2 1 4 5 5 6

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Key Learnings

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 Key Learnings
• Support to customer service has evolved from materials
management to logistics and to supply chain management
• Production and marketing are the two internal customers of
Logistics
• Logistics also has a direct impact on the financials of a company
• Three important functions of logistics are inventory management,
warehousing and transportation

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 Key Learnings
• Inventory directly supports customer service but also adds to the
cost and has to be managed carefully
• Warehousing provides the place utility and works as a balance
between production and meeting customer needs
• Transportation supports the place and time utility and uses
different modes to reach the products to the consumer
• Modern day supply chains integrate the operations of a firm, its
suppliers and customers

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 Key Learnings
• Order processing relates to the primary contact between the
company and its customers
• A good order processing system creates the benefits of reduction
in lead times, higher order accuracy and improved customer
service
• Materials handling is the function of managing inventory along
with storage and transfer of information

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 Key Learnings
• Logistics strategy is based on: markets, processes and channels
in use.
• Some of the IT systems in use for effective management of the
supply chain are:
– Electronic data interchange (EDI)
– Supplier and customer relationship management systems
– Bar codes and QR Codes
– Radio frequency identification (RFID)
– Data warehousing

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