FUNDAMENTALS OF LOGISTICS

Mrs. M.AMUTHAMALAR
Assistant Professor

MASTER OF BUSINESS ADMINISTRATION

In

SHIPPING & LOGISTICS MANAGEMENT

REMO INTERNATIONAL COLLEGE, CHENNAI

ALAGAPPA UNIVERSITY KARAIKUDI - 630 003.
(UNDER COLLABORATIVE PROGRAMME)

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 TABLE OF CONTENTS
Chapter TITLE Page
Number Number
1 Logistics Role in the Economy 5
/Organization
2 Logistics and Customer Service 11
3 Procurement and outsourcing 20
4 Inventory Role & Importance of 21
Inventory
5 Inventory Management 37
6 Materials Management 49
7 Transportation 59
8 Warehousing / Distribution 70
9 Packaging and Materials Handling 82
10 Global Logistics 95
11 Logistics Strategy 115
12 Logistics Information Systems 129
13 Organization for Effective Logistics 145
Performance
14 Financial issues in Logistics Performance 157
15 Integrated Logistics 176
16 Role of 3PL & 4 PL 189

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CHAPTER 1: LOGISTICS ROLE IN THE ECONOMY/ORGANIZATION

The scope and influence of logistics has evolved in the late 1940s. In the
1950s, and 60s, military was the only organization which used logistics. The
scope of logistics has been extended beyond the army, as it has been recognized
as one of the important tools for developing competitiveness. Competitive
advantage means the company has the ability to differentiate itself, in the
customer's eyes, and also is operating at a lower cost and greater
profit.Logistics facilitates in getting products and services as and when they are
needed and desired to the customer. It also helps in economic transactions,
serving as a major enabler of growth of trade and commerce in an economy.
Logistics has come to be recognized as a distinct function with the rise
of mass production systems. Production and distribution were earlier viewed as
a sequential chain of extremely specialized activities. The role of logistics is to
ensure availability of all the required materials before every step in this chain.
Obviously inventory of raw materials, semi-finished and finished goods is a
must across this chain to ensure its smooth functioning.
The concept of logistics has its base upon the systems approach. There is a
single chain, with flow of materials starting from the supplier, then to the plant
and finally to the end customer, and also these activities are done sequentially
in order to achieve customer satisfaction at low cost. For this to be successful
there has to be co-ordination in the activities of the department.With reference
to an organization, an organization gets a concrete shape due to its structure. In
the earlier times, the suppliers in distribution activities were spread across the
entire structure, thus resulting in an overlapping of activities and finally in
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 unaccountable authority and responsibility. In today's process driven
organization, where the focus has shifted from functions to process, logistics
has become an essential part of the process.
Definitions of logistics:
The American Council of Logistics Management defines logistics as “the
process of planning, implementing and controlling the efficient, cost effective
flow and storage of raw materials, in-process inventory, finished goods and
related information from point of origin to point of consumption for the
purpose of conforming to customers' requirements”.
Philip Kotler defines logistics as “planning, implementing, and controlling the
physical flows of materials and finished goods from point of origin to point of
use to meet the customer's need at a profit”.Logistics is all pervasive. Some
excellent examples of value adding logistics services are:

Dabbawalas of Mumbai: Reliable, foolproof logistics system of delivering

lunch boxes to over 5,00,000 office goers every day without letting the wrong
lunch box reaching the wrong office and also ensuring the boxes reach on time.

The Indian Postal Services: One of the largest logistics network in the world
today, which delivers letters in the most cost effective manner across six lakh
villages, one hundred and twenty cities and several thousand mofussil towns
covering the length and breadth of the country within twenty-four to forty-eight
hours and serving more than hundred and seventy countries with Indian source
stations/ customers and/or destinations as mentioned earlier.

Objectives of logistics:
Logistics has the following objectives:

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 Reduction of inventory: Inventory is one of the key factors, which can affect
the profit of an enterprise to a great extent. In the traditional system, firms had
to carry lot of inventory for satisfying the customer and to ensure excellent
customer service. But, when funds are blocked in inventory, they cannot be
used for other productive purposes. These costs will drain the enterprise's
profit. Logistics helps in maintaining inventory at the lowest level, and thus
achieving the customer goal. This is done through small, but frequent supplies.
Economy of freight: Freight is a major source of cost in logistics. This can be
reduced by following measures like selecting the proper mode of transport,
consolidation of freight, route planning, long distance shipments etc.
Reliability and consistency in delivery performance: Material required by
the customer must be delivered on time, not ahead of the schedule or behind the
schedule. Proper planning of the transportation modes, with availability of
inventory will ensure this.
Minimum damage to products: Sometimes products may be damaged due to
improper packing, frequent handling of consignment, and other reasons. This
damage adds to the logistics cost. The use of proper logistical packaging,
mechanized material handling equipment, etc will reduce this damage.
Quicker and faster response: A firm must have the capability to extend
service to the customer in the shortest time frame. By utilizing the latest
technologies in processing information and communication will improve the
decision making, and thus enable the enterprise to be flexible enough so that
the firm can fulfill customer requirements, in the shortest possible time frame.

The various functions of logistics are as follows:

1. Order Processing: Processing the orders received from the customers is an

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 activity, which is very important by itself and also consumes a lot of time
and paperwork. It involves steps like checking the order for any deviations
in the agreed or negotiated terms, price, payment and delivery terms,
checking if the materials is available in stock,producing and scheduling the
material for shortages, and also giving acknowledgement to the owner, by
indicating any deviations.

2. Inventory Planning and management: Planning the inventory can help an

organization in maintaining an optimal level of inventory which will also
help in satisfying the customer. Activities like inventory forecasting,
engineering the order quantity, optimization the level of service, proper
deployment of inventory etc. are involved in this.

3. Warehousing: This serves as the place where the finished goods are stored
before they are sold to the customers finally. This is a major cost center and
improper warehouse management will create a host of problems.

4. Transportation: Helps in physical movement of the goods to the customers

place. This is done through various modes like rail, road, air, sea etc.

5. Packaging: A critical element in the physical distribution of the product,

which also influences the efficiency of the logistical system.
Value delivery in the supply chain
The world has become a global village where due to liberalization and
globalization, business organizations are forced to supply products beyond their
national boundaries. Thus in such situations, the role of logistics is to provide
time and place utility of the products to customers.Also businesses are striving
to attain competitiveness. In their struggle to survive, their focus has shifted to
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 supply chain, and to deliver value for money for their customers. Logistics
plays an important role in the process of delivering value and how successful
the supply chain management is greatly depends on logistics planning and
support.Nowadays, the trend is to outsource. Organizations continue to
outsource their operations because it is better to outsource the functional areas
to experts who can do this job at a lower cost. This is one way of adding value.
Logistics delivers value to the customer through three main phases:
a. Inbound logistics: These are the operations, which precede manufacturing.
These include the movement of raw materials, and components for
processing from suppliers.
b. Process logistics: These are the operations, which are directly related to
processing. These include activities like storage and movement of raw
materials, components within the manufacturing premises.
c. Outbound logistics: These are the operations, which follow the production
process. These include activities like warehousing, transportation, and
inventory management of finished goods.
Logistics Solution:
Generally, the in-house logistics departments in manufacturing organizations
take care of all aspects of logistics. But this is not an area of core competency
of manufacturing or trading organizations. Today, a lot of successful business
corporations across the world are outsourcing logistics to the third party
logistics providers, who are having the necessary infrastructure and expertise to
do the job in a better manner. Complete logistics solutions to manufacturers and
traders is provided by the third party logistics providers, and they help in
integrating various logistics operations, thus ensuring speedy and uniform
movement of materials across the supply chain. Logistics is nowadays widely

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 used in virtually every area. The success of a logistics service providing
company depends on how they conceptualize and implement the logistics
solution, and also tune to the requirements of the customer.
Future of Logistics
Nowadays corporations look only for sustainable competitive advantage, not
only for growth, but also to survive. There is so much killing competition that
corporations are compelled to review their business process while they deliver
the products and services to customers, who are looking for more and more
value for the money that they are spending. The focus of competition has
shifted from the product to the supply chain.

Today, logistics management is based on the system concept and cost

approach. Transportation, warehousing, handling of material, inventory
management and order processing are the major logistics activities, which
impact the customer cost and operation. Integrated logistics helps in taking the
cost out of the supply chain and also enhance the customer service level.
When looking at the macro level, a growth of a country's economy depends
on the availability of excellent logistics infrastructure. The speed of the
movement of goods depends to a great extent on the various modes of
transportation like rail, road, air, and sea.

Logistics has a bright future, especially in India, but certain pressing issues
like abolition of octopi levy, rationalization of customs formalities,
improvement in road and rail infrastructure, creation of modern warehouse
facilities etc, have to be taken care of. The geographical position of India also is
well positioned to emerge as an excellent hub for a variety of products.

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CHAPTER 2: LOGISTICS AND CUSTOMER SERVICE

Customers are the focus of any activity. The primary reason behind this
being that ultimately every product, service or idea finally needs to cater to the
customer's requirements.
According to Lalonde Bernard J, “Customer service as a complex of
activities involving all areas of the business which combine to deliver and
invoice the company’s product in a fashion that is perceived as satisfactory by
the customer and which advances the company’s objective”. Customer service,
as a concept has many aspects to it. Logistics management has a major role in
enhancing the customer satisfaction and also retention and thus creating a
lifetime customer value.
In other words, customer service as a combination of activities enables a
business firm to add more value to the buyer. It is a key element of the product
or service, which is offered to the customer. With good customer service, the
existing customers are satisfied and this attracts new customers through word-
of-mouth communication. Customer Service is not just a function or an activity.
It is a philosophy, and attitude. With so much importance given to customer
service, companies are trying to increase the level of customer service and scale
up to the expectations of the customer. Unless the products are in the hands of
the customer at the time and place of requirement, products do not have any
value attached to them. To attain a commendable service level, the firm has to
plan a closely integrated logistics strategy.
In today's market, customers are so much demanding, not only in the quality
aspect but also with regard to the service aspect. Customers form a few

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 perceptions in relation to the various aspects of customer service like reliability,
competency, responsiveness, trustworthiness etc. With the help of these cues,
customers evaluate the firm's services and conclude whether they are satisfied
or not. Physical distribution plays a major role in delivering customer service.
As there is an increase in the competition, and there is advancement in
technology, companies today are faced with the mounting pressure to develop
even more innovative strategies for customer service.Two key factors that have
contributed maximum for the growing importance of customer service as a
competitive weapon are the continuous development of customer expectations
and the gradual shift of customers from branded products to local unbranded
products. A very good example would be the personal computer market, where
the buyer finds it difficult to make a difference between a branded version and
an unbranded one. The rapidity of technological change and a decreased
product life cycle has further developed the importance of customer service.
The following are the elements of customer service:
Order Delivery Cycle Time:
The general tendency for a manufacturer to look into is the physical delivery
of the product when the orders are not delivered on time. So, when orders are
not delivered on time and customer complaints are received, the manufacturer
looks into the physical delivery of the product to the customer and tries to solve
this problem by bringing the product closer to the client. Thus, there is a
tremendous increase in the stock-holding points for the manufacturer. When
the manufacturer examines this closely, he will realize that physical delivery is
not the most time consuming element of the order-delivery cycle time, but there
are a host of other activities like transmission of the order, processing the order,
etc which also affect the delivery. In fact an activity like the order processing

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 itself consists of a series of activities like the registering the order in supplier's
system, allocation of material from work – in – progress, warehousing and
distribution centers, packing the materials, dispatch of material etc.

Reliability of inventory:
When a specific item is out of stock, which is interpreted as a loss of sale and
if these stocks out conditions take place frequently, these will influence the
customer service levels. And would further lead to a loss of credibility for the
company.

Consistency and frequency in delivery:

The firm must ensure the maintenance of a same or similar delivery period
over a period of time to deliver material to the customer. This means the firm
must have the ability to co- ordinate the various logistics arms, and also the
efficiency and effectiveness of the entire chain.Also, the frequency of delivery
is an important part of the customer service. Usually, a customer does not
prefer to stock huge quantities of particular items, and would prefer smaller
quantities in smaller lots. Eventually there is an increase in the transportation
cost, but the inventory cost reduces and there is a net effect in the entire supply
chain. When there are multiple orders from small clients, there is congestion in
the logistics pipeline, and thus this reduces the ability of the company to serve
its larger clients more efficiently. Also the logistics costs for small orders are
more than the large orders and also they would swallow up the profit on the
large orders. To avoid such hassles, and to avoid additional costs, the frequency
of delivery and minimum orders are being used as limitations imposed on
suppliers as an effort to reduce normal tendency of most clients.

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Other factors
Apart from the regular factors there are also others like the transmission of
order collection, frequency of visit of salesman to customers, invoicing and
collection systems, communications level between customers and suppliers
which can be of more importance to certain organizations.
Phases in Customer Service:
a) Pre transaction phase: In this phase, the service level and other related
activities are defined on a policy level in both qualitative and quantitative
measures. It is the creation of a service platform to serve the customer, so
as to build up credibility in the market and create a good image amongst
the existing and prospective customers. In other words, this refers to those
elements, which determine the capability of service before they are
provided.
Pre – transaction elements are usually relate to corporate policies or
programs, written statements of service policy, adequacy of organizational
structure and system flexibility.
The following are the important elements of the pre-transaction phase:
o Customer Service Policy Statement: This gives the service
standards for the company. For example, company X, a leading
automobile spare part manufacturing company, makes a policy
commitment to deliver the spare parts to its customers within 48
hours of placement of the order.
o Accessibility: This refers to the ease with which customers can
contact the firm.
o Building the organization: In order to implement the policy
derivatives on customer service, the firm must formalize the
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 reporting structure, delegate authority and also allocate
responsibility. Also, a proper reward system will motivate
employees who are involved in customer service to interface
efficiently with the customer.
o Structuring the service: The expectations of customers, the
industry standards, and the standard of service the firm would like to
maintain influence the basic structure of any service. For sustaining
the competitive advantage, innovation in service is very much
necessary. Innovation adds to the value of the offerings made to
customers. Another key aspect to service structure is the delivery.
Two important aspects of delivery are place and time.
o Educating the customer: This is important because this can reduce
the customer complaints on deliveries of products, their operations
and maintenance etc., Usually customers are educated through
manuals training, seminars workshops etc.
o System design and flexibility: While designing the system, care
should be taken that all the possible queries, which the customers
can ask, must be answered. The system may be manual or fully
automatic, similar to e- commerce. Also the adaptability of the
service delivery systems to meet a particular customer need is
essential.
b) Transaction phase: During this phase, the customer service is associated
with the routine tasks, which have to be performed in the logistics supply
chain. Those variables directly involved in performance of the logistics
functions, for example, availability of product, order cycle time, reliability
of delivery etc. The following are the various service elements associated
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 with this phase:
o Reliability of order fulfillment: This is a key factor. There needs to be
reliability in fulfilling the order within the agreed time frame and also with
respect to the quantity and quality of the material ordered.
o Order convenience: The ease with which customer can place an order.
There are various barriers to this like the paper work required by the
supplier, compliance to various procedures, complex payment terms,
poor communication network at suppliers end etc.
o Order postponement: Sometimes, the customer may postpone an
entire order or some parts of it. This means customer has to reschedule
his requirements. In some other case, due to availability of a certain
product category in the future, the seller can allow the buyer to place
the order immediately and he would ship the product when it is
available on future dates.
o Consistency of delivery: Delivery consistency of repeat orders is important.
o Product substitute: There may be some situations in which the product
ordered couldn't be shipped due to certain manufacturing or quality
problems. In such cases, the seller can offer a substitute product and
honor his commitment.
c) Post transaction phase: This is a phase where customer satisfaction and
building up of a long-term relationship with the customer are involved. It
involves commitment of resources to offer the desired level of service.
These measure the customer satisfaction on the basis of the expected
results. Generally supportive of the product in use, for example: warranty
of products, parts and repair service, procedures for complaints of
customer and replacements of products. The following:
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 o Information of order status: In B2B transactions and e-commerce, the
customer after payment of part value (sometimes full value) of the
product as an advance, requests feed back on the status of the shipment
on a continuous basis.
o Customer complaints, claims, and returns: The seller's responsibility
will not be over once the product is dispatched to client. Sometimes, the
products damaged during transit, or the product may not be according to
the functional requirements of the customer. For this, there must be a
policy for product return and this is usually done through reverse
logistics system.
o Product installation, commissioning and technical snags: This is part
of the after sales service, as complex products may sometimes develop
technical snags during the warranty period. The after sales department
takes care of all these issues.
o Customer awareness and training: A key aspect of service element in
this phase. For technically complex products, it is necessary for the
seller to train or educate the user regarding its operation.
Customer Retention – An Extension of customer service:
It is the totality of the ‘offer', which delivers value to the customer. An
illustration to highlight this can be a comparison between a product in the
warehouse and a product in the hands of the customer. The value addition here
is the fact that the product is in the hands of the customer.

According to the 80/20 Pareto (The Italian economist, Pareto) rule, 80 per
cent of a company's profits come form 20 per cent of the customers. A further

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 dimension to this would be to say that 80 per cent of the total costs to service
would be generated from 20 per cent of the customers.
Thus identification of the real profitability of customers and then develop
strategies to develop services that will improve the profitability of all customers
is essential.While ‘getting and retaining customers' is the main focus of
marketing, in practical terms, organizations put in more effort in getting the
customers rather than retaining them. Organizations have to make a conscious
effort in understanding how many of the customers they had a year or six
months ago are still with them as customers. The retained customers can be
more profitable than the new customers in the cost perspective. Also the word-
of- mouth communication happens through existing customers.
The principle of ‘Relationship Marketing' is rapidly gaining popularity. A
high level of customer satisfaction must be created so that they don't consider
any alternative suppliers or offers.
There need to be certain pre-determined standards for controlling the service
performance. There are various standards available like order cycle time, order-
size constraints, technical support, order convenience, frequency of delivery,
claims procedure etc.
Conclusion:
The basic purpose of providing services is to deliver value to the customer for
the money he is spending for the product. Customer service means all
customers must be treated equally and also to extend service to build a
fundamental business relationship. Also, a step ahead of offering basic services
is to offer zero defect services. Repetitive operations have to be performed
without errors by using automated systems.Another possibility is to provide
value added service, which are basically unique and add efficiency and

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effectiveness to the basic service capabilities of the firm. These value added
services have evolved due to forced innovation due to differentiated offering,
for growing and surviving in competitive markets.

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CHAPTER 3: PROCUREMENT AND OUTSOURCING

Procurement is usually done in order to meet the needs of the manufacturing

function or other internal functions for which buying is made. It enables access
to external markets, supplier development and relationship management and
also relationship to other functions
It is the buyers and suppliers who are usually engaged in procurement
transactions, which usually begins with the buyer receiving and paying for the
order. When designing the procurement process, it is important to consider
goods that the process will be used to purchase. The two main categories of
purchased goods are direct material and indirect materials. Direct materials are
components like used to make finished goods. Indirect materials are goods used
to support the operations of a firm. Indirect materials are components used to
make finished goods. Indirect materials are goods used to support the
operations of a firm. All procurement processes within a company relate to the
purchase of direct and indirect materials.
The procurement process for direct materials should focus on improving
coordination and visibility with the supplier. The procurement process for
indirect materials should focus on decreasing the transaction cost for each order.
The procurement process in both cases should consolidate orders to take
advantage of economies of scale and quantity discounts.

Making or Sourcing Decisions:

1. Use multifunctional teams: The strategy, which is developed, must be in

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 collaboration with the various functions like engineering, purchase,
manufacturing, engineering etc which will help in identifying the correct
drivers in the total cost.

2. Ensure that there is appropriate co-ordination across regions and

business units: Ensuring that there is enough co-ordination across all the
regions and business units, which will allow a firm to maximize economies
of scale.

3. Evaluating the total cost of ownership: Price reduction need not be the
sole objective of an effective sourcing strategy. Total cost of ownership is
also influenced by other factors, which have to be identified and used for
selecting suppliers. By focusing on the total cost of ownership, also allows
a buyer to identify opportunities for having a better collaboration in terms
of design, planning, and fulfillment.

4. Building long-term relationships with key suppliers: Basically, when

buyer and supplier work together, more opportunities for saving will be
generated that the two parties working independently. A long-term
relationship will encourage the supplier to expand greater effort on the
issues that are key from the point of view of the buyer.
Logistics Outsourcing
Today, business organizations across the world are struggling for
competitiveness, not only for growth but also for survival alone. The factors
responsible for this are liberalized economies of the countries across the world.
Moreover, the customers have become more demanding and look for value
added services from prospective suppliers, as he wants value for the money he
is spending. In such a situation, business organizations across the world have
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started reviewing their business processes and have realized that cost cutting
and differentiation in value delivery are solutions to the current problem
Outsourcing is the transfer of a function previously performed in-house to an
outside provider. Outsourced providers are often referred to as contractors or
"third parties." When "outsourced" work is contracted out, the outsourcing
business or agency still provides oversight. Once it is decided to outsource,
identifying a short list of partners can be a daunting task. Though many options
exist it is essential to sort them. The following can facilitate in sorting them:

1. Identify areas of opportunity:

Gaining the ability to enter new markets without building a costly
distribution infrastructure is one great reason to outsource. Establishing a
team to look at current and future requirements of a business, and assess the
ability to meet those needs. This team should consist of key members of the
logistics organization and such other areas as marketing and customer
service. These other departments can provide insight into growth projections
and shortcomings in existing processes.

2. Assessing the Strengths and Weaknesses

Having an understanding in what the company is good at and not--will
enable to find an appropriate partner. Potential partners also have distinct
strengths and weaknesses. For example, some logistics partners are better at
warehousing than transportation. Others may be great at managing the
import process but less skilled in such functional areas as order
management.

3. Decide what to outsource

Once a team has identified partnering opportunities, it needs to be
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 determined which functions to cede to the partner. Such functions as
warehousing and transportation affect how customers view a company's
ability to execute. The success of an outsourcing project depends, in part, on
the company's comfort level with the partner's ability to execute on the
company's behalf.

4. Identify a Short List of Providers

Several strategies can help in selecting the right partner. Creating and
distributing a request for information that asks potential partners about their
capabilities can be done. A list of providers who have experience in the
industry can be developed. This process will reduce the number of potential
partners quickly. The network infrastructure of the remaining companies
also needs to be examined. It may also be helpful to initiate a logistics
network optimization effort to identify optimal locations for distribution.
The company's geographic needs may require a nationwide network or be
more focused on specific regions. Comparing requirements with the
capabilities of potential providers and assessing their technological
capabilities is essential.
5. Consider the Human Element
Successful outsourcing projects have one element in common: nurturing
relationships between key people on both sides. Ensuring not only a fit
between corporate cultures but also chemistry between individuals. This is
especially important during implementation and ongoing operations.
Outsourcing – A value proposition
Logistics service providers help the business corporation in achieving two
goals, i.e., reducing operating cost and increasing revenue. As the service
provider organizes the required logistics assets, the investment in owning the
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 logistic assets on the part of the customer is reduced, this in turn allows the firm
to invest in more productive activities and get more returns on the remaining
assets, enhancing the return on stockholders' investment. Alliances with service
providers will free the company's manpower for more productive work,
concentrate on their area of core competence, and increase the company's
returns. The firm gains in knowledge because of exposure and acquaintance
with the best available practices and technologies used by the service providers.
These value propositions justify logistics outsourcing.
Benefits of Logistics Outsourcing:
In logistics, considerable quantities of materials are required to be transported
and stored at various locations. Raw materials and components are to be moved
over long distances from vendor supply points to production centers. These
materials have to be stored for some time as raw materials and later as finished
goods. Finished goods need to be transported to the point of consumption. With
so much to be done, the critical reasons why companies outsource logistics
activities are:
a. Better focus on core competencies
b. Cost saving resulting from better management of supply chain
c. Cross pollination of better available practices
d. Wider and better geographical coverage by access to specialist world class
capabilities
e. Improved re-engineering benefits
f. Lesser internal resources
Critical Issues in Logistics Outsourcing:
The following are a few major issues that need to be addressed and examined
before deciding on a 3 PL or 4 PL partner:

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 Switching Cost: By outsourcing logistics services, there is a re-
organization of the existing assets of the company. It includes activities
like:
a) Managing the existing assets, by the service provider
b) Deploying the existing assets on lease to the service provider
c) Divesting of the existing assets and also switching over fully to the
usage of a logistics infrastructure provided by the service provider
 Degree of control: The firm, which is outsourcing must be particular
about the degree of control over the service provider's activities, so that
they get the service desired by the end user. Having a direct control over
the activities of the employees of the service provider is not possible, but
service provider should ensure that the information is available on time in
order to monitor the activities.
 Human and electronic interface: A proper interface between employees
of two organizations is important to resolve the issues, which are raised out
of misunderstanding or miscommunication. The job of co-coordinators of
both organizations is important to formulate the policies and guidelines for
a smooth operation of the outsourcing firm and also the service provider.
 Tuning logistics services to the needs of channel partners: For an
efficient channel management, logistics is a key enabler. Actually, channel
and logistics management have to go hand in hand for an efficient as well
as effective physical distribution system. The major areas of interface
between channel and logistics management is defining the logistics
standards as required by the channel members, designing the logistics
programmes by standards, implementing the programmes, and also
monitoring the programmes.

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  Degree of outsourcing: The various business organizations resort to
logistics outsourcing depends on the following factors like existing
logistics infrastructure of the company, company's product portfolio,
management t policy for third party involvement.
Conclusion:
Logistics service providers basically help the organization achieve two major
goals: reducing the operating cost and also increases the revenue. When the
service provider organizes the required logistics assets, the customer's
investment in owning the logistics assets is reduced and thus the firm can invest
in more productive activities and also get more returns on the remaining assets.
There is a knowledge gaining activity on the firm's part because of the exposure
and acquaintance with the best available practices and techniques utilized by the
service providers.

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CHAPTER 4: INVENTORY ROLE & IMPORTANCE OF INVENTORY

Introduction
Inventory refers to the stock of materials of any kind stored for future use,
mainly in the production process. Semi-finished goods, which are awaiting use
in the next process, or finished goods, which are waiting for sale, are also
included in this broad category. But these are practically idle resources. Thus
inventories are materials / resources of any kind having some economic value,
either awaiting conversion or use in future.
Inventory is a key determinant of profitability. Inventory velocity turns assets
into profits. The faster inventory turns, the greater the profitability. Inventory is
the key issue to supply chain management success. Customers demand that
their orders be shipped complete, accurate and on time. That means having the
right inventory at the right place at the right time. Excess of inventory within
the pipeline increases the overall working capital requirements of the pipeline
and places a large cost burden on the agents of the chain. The levels of
inventory need to be reduced throughout the logistics pipeline, which will lead
to an effective operation.
Today the focus is on retailers and their distribution services. Inventory aims
to reduce costs and simultaneously improve service. Thus the need to reduce
costs as against improving service becomes the key issue and the role played by
successful inventory management is becoming more apparent.
Role of Inventory
Inventory is critical to supply chain management because it directly impacts
both cost and service. Certain amount of inventory is inevitably required

25
 somewhere in the chain to provide adequate service to the end customer, as
demand is mostly uncertain and it takes time to produce and transport product.
Inventory typically generates an incremental cost of20 to 40 cent per year for
the company. Increasing supply chain inventories typically increases customer
service and consequently revenue, but it comes at a higher cost.
Today, inventory investment is viewed as a supply chain cost driver rather
than a material asset. Hence, a lean supply chain operating on material
requirement planning (MRP), distribution requirement planning (DRP), or Just
– in – time (JIT) system are preferred to ensure maximum inventory turns (ratio
of sales to average inventory), reduction of cost on inventory investments, and
enhancement of the bottom line and return on investments.

Importance of Inventory
Management of inventory is a powerful driver of financial performance.
Improper management of inventory leads to slow growth and pressure on
profitability. Thus companies aim at improving the efficiency of inventory
cycle. This helps the firm from locking up of capital, which can be invested
elsewhere, and improve financial performance and create competitive
advantage in delivering goods at lower prices.
Functions of inventory
Inventory management is an area which has strategic importance in logistics
operation and thus impacts the efficiency and effectiveness of the overall supply
chain system. In order to get over the uncertainties in demand and supply,
goods need to be kept in stock. This is because the cycle of production and
consumption never matches. However, higher inventory levels will affect the
bottom line of the company. It is important to strike a balance between the two
extreme goals of lower cost and higher levels of customer service, as it is a high
26
 risk and high impact area.Companies block sizeable funds in inventories, which
would otherwise have been invested in other important and productive areas.
Inventories are held in the categories like Raw material and components, work
in progress, finished goods, maintenance, repairs and operating supplies, in-
transit inventory etc.
Functions of Inventory
1. Striking a balance between supply and demand:
It is very difficult to achieve a match between the production and
consumption cycle. Whenever there is a sudden requirement of product in large
quantities, it is not possible to produce such quantities immediately. Thus,
products are manufactured in advance, and kept in stock during the peak period
to avoid any shortage.

2. Minimize costs at acceptable inventory levels:

When inventories are replaced in extremely small quantities, they result in
low investments but high ordering costs. There has to be a point where, the total
carrying cost of inventory is minimum but the level of inventory is such that it
doesn't affect production.

3. Provide the desired customer service levels:

Customer demands are satisfied through inventory. The location of inventory
determines time in which customer will be served, the company's policies
concerning the economic order quantity, safety stocks, etc will determine the
cost at which customer is getting served.

4. Protecting the operating system:

Inventory ensures that the operating system does not have any disruption. For
example, if a worker in one work center falls sick or if there is a machine
27
 breakdown, the work need not be affected if the inventory is available and
others can continue the work.

5. Advantage of quantity discounts from suppliers:

Inventory helps the firms in getting the advantage of quantity discounts from
suppliers.
The following are the costs for holding Inventory
An inventory manager's job is to balance the conflicting cost and the pressures
of determining the appropriate level of inventory. The reason behind keeping
the inventories low is that firms must pay interest on the investment made on
inventories.
Inventory holding (or carrying) cost is a variable cost on items such as storage
and handling, taxes, insurance, interest on capital and shrinkage cost. The
annual cost to maintain one unit in inventory typically ranges from 20 to 40
percent of its value.
Illustration:
If a firm's holding cost is 30 percent. If the average value of total inventory is
20 percent of sales, the average annual cost to hold inventory is 6 percent
{0.03(0.20)} of total sales.This cost is significant in terns of gross profit
margins, which often are less than 10 percent.
The various costs in inventory are broadly classified as follows:
Interest or Opportunities Cost A company may obtain a loan or forgo an
opportunity to invest in an attractive return. Interest or opportunity cost
whichever is higher is the largest component of holding cost.
Storage and Handling Costs This cost is incurred when a firm rents out space.
Here again there is an opportunity cost, as the firm can utilize the storage space
28
 productively for some other purpose.

Taxes, Insurance and Shrinkage When inventories are high, the insurance on
the assets (i.e. Inventories) also increases. Shrinkage takes place in three forms.
 Pilferage or theft of inventory by customers or employees.
 Obsolescence occurs when inventory cannot be used or sold to the full
value due to change in model, engineering modifications or low
demand.
 Deterioration through physical spoilage or damage results in lost value.

Ordering Cost This refers to the cost involved in the ordering process. The
paperwork faxes, phone calls etc. will add to inventory related costs.
Carrying cost Also called holding cost, carrying cost is the cost associated with
having inventory on hand. It is primarily made up of the costs associated with the
inventory investment and storage cost. For the purpose of the EOQ calculation, if
the cost does not change based upon the quantity of inventory on hand it should
not be included in carrying cost. In the EOQ formula, carrying cost is
represented as the annual cost per average on hand inventory unit. Below are the
primary components of carrying cost.
Out of stock costs Incurred when the order placed by the customer cannot be filled
from the available inventory.
Over stock costs Incurred when the company is having some stock in hand even
after the demand for the product has been terminated.

Reasons for Carrying Inventories

Carrying Inventory can be classified under four heads

 Cycle Inventory
29
  Safety Stock Inventory
 Anticipation Inventory and
 Pipeline Inventory

Cycle Inventory: Raw materials, components, parts are required for

production. This is cycle plays a crucial role in keeping the production cycle
continuous. The work in progress inventory is a major part of production related
inventory. Determining how frequently to order and in what quantity is called
Lot sizing.
Safety Stock: In order to avoid customer service problems and the hidden costs
of unavailable components, companies hold safety stock. This gives a cushion
against uncertainties in demand, lead-time, and supply therefore ensuring that
operations aren't disrupted.
Illustration:
Suppose the average lead-time from a supplier is three weeks but a firm orders
five weeks in advance just to be safe. This policy creates safety stock equal to a
two weeks' supply (5- 3).
Anticipation Inventory: This term refers to the inventory that is used to absorb
uneven rates of demand or supply that businesses face. Manufacturers of air
conditioners, for example, experience 90 percent of their annual demand during
just three months of a year. Hence anticipation inventory helps in evening out
the volatility in demand and supply. A company may stock up on certain items
if its supplier threatened with a strike or have severe capacity limitations.
Pipeline Inventory: Inventory moving from point to point in the materials flow
system is called pipeline inventory. Materials move from suppliers to a plant,
from one operation to the next in the plant, from the plant to a distribution
center or customer, and from distribution center to a retailer. Pipeline inventory
30
 consist of orders that have been placed but not yet received. Therefore stocking
locations, improving materials handling and delays in distribution should be
overcome.
Inventory Levels
There are three basic types of Inventory: Raw Material, Work in Progress, and
Finished Goods.
Raw Material
This includes all the purchased parts and direct materials that go into the end
product. This type of material has value added to it as it flows together as
subassemblies, assemblies and finally into the shippable product.

Work-in-Process
Refers to the inventory waiting in the process for being assembled into final products.

Finished goods
These refer to the inventory, which are ready for delivery to the distribution
centers, retailers, and wholesalers or to the customers directly.

Inventory Efficiency in the Supply Chain

Lowering inventories is one of the quickest ways to substantially decrease
working capital needs. The drive for working capital use efficiency with the
need to more quickly respond to changes in customer demand, with shorter and
shorter order-to-delivery cycle times is challenging to many manufacturers. In
times past, manufacturers would stockpile large quantities of raw materials;
load-up the shop floor with work-in-process; and, pack warehouses with
finished goods. Not only do those old ways increase working capital needs,
they are a big factor in contributing to erratic and longer lead times as well as
31
 increasing overall costs.

The pressures to reduce inventories, and therefore working capital

requirements, are increasing even in times of relatively low interest rates. The
opportunities to use a finite source of capital, not just more efficiently but in
ways that yield high rates of return for employing the essentially idle capital
elsewhere in the business. For example, reducing inventories could provide the
necessary capital to finance such things as: new product development, expanded
marketing and sales, modernization, business process redesign, improved
supply chain management, expansion, acquisitions, debt reduction among
others.
Inventory Control: Improving the Bottom Line
Inventory control requires the tracking of all parts and materials purchased,
products processed, and products stored and ready for shipment. Having a
sophisticated tracking system alone does not improve your bottom line; it is
how you use the information that your system provides.One should know how
critical the function is to business success and the complexities involved in
planning, executing and controlling the supply chain network From a financial
perspective, inventory control is no small matter. Oftentimes, inventory is the
largest asset item on a manufacturer or distributor's balance sheet. As a result,
there is a lot of management emphasis on keeping inventories down so they do
not consume too much cash. The objectives of inventory reduction and
minimization are more easily accomplished with modern inventory
management processes that are working effectively.
Need for inventory control:
1. Increase in the size of manufacturing units: With the increase in the size
of manufacturing units, there is a necessity to have sufficient inventory
32
 control so that increasing inventories do not become non-value added
expenditure. In fact, increasing inventory can erode the profits of the
company and the possibility of inventory control arises.
2. Wide variety and complexity of the requirements: The requirements of
the modern industry have necessitated the need for conscious inventory
management.
3. High idle time cost of machine and men: If men and machines are kept
idle, it is highly uneconomical for the firm. Inventory levels have to be
managed keeping this factor in mind.
4. Liquidity: There is an increased stress on liquidity in today's organizations,
where it becomes a necessity to maintain liquidity at the levels of nearly 10-
20 per cent of the total capital invested in finished goods.
Inventory Control Problems
In actual practice the vast majority of manufacturing and distribution companies
suffer from lower customer service, higher costs and excessive inventories than
are necessary. Inventory control problems are usually the result of using poor
processes, practices and antiquated support systems. The inventory
management process is much more complex than the uninitiated understand. In
fact, in many companies the inventory control department is perceived as little
more than a clerical function. When this is the case, the fact is the function is
probably not very effective.
The likely result of this approach to inventory control is lots of material
shortages, excessive inventories, high costs and poor customer service. For
example, if a customer orders a product that requires a manufacturer to acquire
20 part numbers to assemble a product and then, only 19 of the 20 part numbers
are available, there are nineteen part numbers, which are excess inventory.

33
Certain Performance Indicators for Inventory:
o ABC analysis of the assortment categorized by stock value/volume
o Variance in throughput time of the product group in totality
o The number of damages/claim
o Mean throughput time of the product group / vendor wise/ location wise
o Reliability of the inventory regarding quantity and correct place.

Conclusion
Thus, inventory management decisions involve trade-offs among the
conflicting objectives of low inventory, high resource utilization and good
customer service. For making supply chain leaner, firms are using selective
control techniques like EOQ, ABC, etc. and inventory control models like
MRP, DRP, JIT, AITS. Therefore, inventory should be held only when the
benefits of holding it exceeds the cost of carrying the inventory.

34
CHAPTER 5: INVENTORY MANAGEMENT
Inventory decisions are high – risk and high – impact in nature from the
logistics perspective. Inventory Management is an integrated process, which
aims to operationalize a firm's as well as the value chain's inventory policy. It is
a strategic area in logistics and has an overall impact on the efficiency and
effectiveness of the entire supply chain. It is basically a practice of planning,
directing and controlling inventory so that it contributes to the profitability of
business.Since it is necessary to have an optimum minimum of multiple types
of inventory, inventory management is essential.There are three methods for
inventory management – The first one being a reactive or pull approach, which
uses the customer demand to pull the product through the distribution channel.
Another philosophy is the planning approach, which proactively schedules the
product movement and also its allocation through the channel according to the
demand forecast. The final approach, hybrid logic combines the former versions
and results in an inventory management philosophy, which responds to product
as well as market environments.

Characteristics of Inventory:
 Once an investment has been made in inventory, it cannot be reversed and
that fund cannot be utilized to obtain other assets to improve corporate
performance. Thus investments in inventory are risky.
 There are a lot of chances for the inventory to be pilfered or to become obsolete.
The magnitude of risk varies according to the position of the enterprise in the
distribution channel:

a) Manufacturer: For the manufacturer, there is a longer dimension of risk.

35
 Starting with the raw material, and component parts, the risk includes work
– in – progress, and finally the finished goods. It doesn't end here, as the
inventory needs to be transferred to warehouses in close proximity to the
wholesalers and retailers. Though, the product line may be narrower, the
risk element is deeper and of longer duration.
b) Wholesaler: The wholesaler handles more product lines than the
manufacturer. He purchases in bulk and distributes in smaller lots to the
retailers. Also these small lots are in assortment. Especially, when the
product lines are more in number, there is a grave problem. The problem
escalates for a seasonal product where the wholesaler has to stock much in
advance of the sale.
c) Retailer: The risk for a retailer is wider and not deeper in the sense he
stocks a wide variety of products. The number of Stock Keeping Units
within a Supermarket is enormous. The risk is primarily of marketing in
nature. The enormity of risk faced by the retailers makes them push the
risk towards manufacturers and wholesalers by pressing them to assume
greater inventory responsibility.
The need for inventory and its control
Inventories of materials are necessary by all manufacturing organizations.
Materials and inventories serve some social purpose in industries, which stems
from some economic motives. The motive behind inventory is the following:

 Meeting the production requirements: A manufacturing organization

needs to keep stock of raw materials, components and parts required for
producing finished goods to meet the continuous production requirements.

 Support in operational requirements: Inventories are required for repairs,

36
 maintenance as well as operational support. Inventory for this purpose
include production machinery spare parts, chemicals, lubricating oils,
welding rods etc.

 Customer Service: Customer satisfaction is used as a tool for competitive

advantage. To ensure customer satisfaction, it is necessary for suppliers to
maintain parts in order to extend after sales service to their clients.

 Speculation: Provides ample scope for holding large amount of inventories,

but this inventory is not important for industrial purpose.

 Precaution: Arises out of the inability to predict future demands precisely

and getting the materials in time, without incurring extra costs.
Importance of Inventory Management in the Supply Chain
Managing inventory has become important due to the following factors:

 Availability of resource (such as finance and space) has made the

management to consider lowering the levels of inventory within the supply
chain management systems to maintain margins
 Latest concepts like Just in Time (JIT) applications and lean manufacturing
have reduced the need for inventory as an insurance buffer within the
overall logistics activity
 Many companies have realized that a greater return on investment (ROI) can
be obtained by developing the core business, and investment in working
capital items, like inventory and debtors give lesser returns.
 With the advent of Information technology (IT), inventory management has
become essential which can be used to reduce inventory. Better the
information, lower is the inventory.
37
 Types of Inventory
a) Raw materials and production inventories: Raw materials and other
supplies, parts and components, which enter into the product during the
production process and usually form part of the product.

b) In-process inventories: Semi – finished, work – in – progress and partly

finished products formed at various stages of production

c) MRO Inventories: Maintenance, repairs and operating supplies consumed

during production process and usually not a part of the product itself (eg:
oils and lubricants, machinery and plant spares, tools and fixtures, etc.)

d) Finished goods inventories: Completed products ready for sale.

e) Movement or transit inventories: Arise, as there is time involved while

moving stocks from one place to another.

f) Let-size inventories: Large quantities than necessary are stocked to keep

costs of buying, receiving, inspection and handling low.

g) Fluctuation inventories: Maintained as a cushion against unpredictable

fluctuations in demand.

h) Anticipation inventories: Inventories carried to meet predictable changes in

demand.
Inventory Control
This is a mechanical procedure, which helps in implementing an inventory
policy. Control procedures are devised to implement the desired inventory
38
 management policies. Procedures for inventory control can either be perpetual
or periodic. In a perpetual control process, inventory status is reviewed daily in
order to determine the needs of replenishment. To ensure proper
implementation of this system, there is need to have accurate accountability of
all stock keeping units, apart from proper computer assistance. In a periodic
review, the inventory status of an item is reviewed at regular time intervals,
maybe weekly or monthly.
Types of Selective Inventory Control
Techniques ABC Analysis
Relates to the annual usage cost of a particular item. Generally 10 per cent of
items account for nearly 70 per cent of usage value, another 20-30 percent may
account for 20 per cent of usage value and the balance 60 – 70 per cent
accounts for 10 per cent of the usage value. Items are classified as per their
usage value. ‘A' items costs approximately 60 – 70 per cent of the total
inventory cost while they are less in number. ‘B' items cost 20-30 per cent of
the total inventory cost while ‘C' class items are greater in number and carry
less than 10 per cent of the cost of the entire inventory.

VED Analysis
Related to the Vital, Essential, and Desirable status of inventory items. As the
term implies, certain parts and items are considered to be vital for meeting
operational requirements and this aspect is taken into consideration while
making a forecast. While making a forecast, certain items and parts, which are
considered as vital for meeting operational requirements, are considered. The
modified version of this is the ABC analysis. VED analysis, takes into
consideration both the value and criticality of each item. Continuous review is
necessary for high value and critical items and thus is ordered in low quantities.
39
 Low value, least critical items are reviewed periodically and ordered in large
quantities and have lower safety stock requirements.

SAP analysis
Refers to Scarce, Available and Plenty analysis which allows to build into
provision forecasts. The ordered quantity is governed by the scarcity factor. The
guideline for procurement policy decisions would be the limitations in supply or
the obsolescence of the firm in the near future.

FSN analysis
The Fast, Slow or Normal analysis determines the consumption pattern of
each item. However, a realistic picture for procurement action will not be
available from a consumption pattern where the production run is slowed down
due to various other reasons.

SDE Classification
Classification based on the availability of an item. S items are scarce items,
which needs to be imported and thus take a long time to obtain. D items are
difficult to obtain, and E items are easily obtainable.
Inventory Planning Models:
1. Economic Order Quantity (EOQ): This is the replenishment order
quantity, which minimizes the combined cost of inventory maintenance and
ordering.

Assumptions Of Basic EOQ Model

 Demand is known with certainty
 Demand is relatively constant over time
 No shortages are allowed
40
 Lead time for the receipt of orders is constant
 The order quantity is received all at once

In this model, the inventory holding/carrying cost is taken to be proportional

to the average inventory held during a period. Thus, by reducing the
inventory, its carrying cost can be reduced. On the other side, smaller lot sizes
will increase the number of lot sizes per annum to cover the annual demand
and thus the cost of ordering will be more. Thus the economic lot size must
balance both these opposing costs.
The mathematical formula for economical lot size is:

2DS/HC

Q=

Where:
Q = Order quantity in units
S = Cost of placing an order in rupees
D = Average annual consumption in units
H = Percentage of inventory cost vis a vis
unit cost C = Cost per unit
2. Material Requirement Planning (MRP)
Materials Requirement Planning (MRP) is a scheduling procedure for
production processes that have several levels of production. MRP
determines a schedule for the operations and raw material purchases, given
information describing the production requirements of the several finished
goods of the system, the structure of the production system, the current
41
 inventories for each operation and the lot sizing procedure for each
operation.

3. Distribution Requirement Planning (DRP)

This is a sophisticated planning approach, which consider multiple
distribution stages and the characteristics in each stage. It is a logical
extension of MRP. While MRP is determined by a production schedule,
which is defined and controlled by the enterprise, a DRP is guided by
customer demands, which cannot be controlled by the enterprise. A DRP
allocates inventory from the mother warehouse to the various distribution
centers based on the following:

a) Pattern of demand
b) Provision of safety stock
c) Quantity ordered
d) Re-order point
e) Average performance cycle length
DRP also coordinates the finished goods requirement across the distribution
network.

Major benefits of using DRP

a) Improved customer service level with increased on-time deliveries.
b) Efficient and effective marketing efforts for high stock items.
c) Reduced inventory levels and thus lower carrying costs.
d) Reduced inventory and thus lesser warehouse space requirements.
e) Reduced customer freight costs due to fewer back-orders.
f) Improved budgeting capability where DRP can simulate inventoryand
42
 transportation requirements under multiple planning scenarios.
4. Just – in – Time System (JIT)
Just In Time (JIT) is a manufacturing philosophy, which leads to
Production of necessary units, in the necessary quantities at the necessary
time with the required quality. It is an approach to achieving excellence in the
reduction or total elimination of waste (Non-Value Added Activities). The
JIT-technique is a "Pull System", based on not producing units until they are
needed. The Kanban Card is used as a signal to produce. Overproduction,
Unnecessary Inventory, Defective Products, Transport and Waiting Time are
some examples of waste according to JIT. The benefits of JIT include:
 Better quality products.
 Higher inventory turnover.
 Higher productivity.
 Lower production costs.
4. Vendor Management Inventory (VMI)
In VMI, the supplier takes charge of the inventory management of the
product and also manages the replenishment process based on the customer's
consumption pattern. EDI or other inter – organizational software packages
are used.
Inventory Management Strategy Development Process
This process consist of three steps:

a) Market / Product Classification: Also known as ABC classification, this

groups products and markets with similar characteristics to ease inventory
management. The objective of this classification is to focus and to refine
the inventory management efforts. Classification can be based on a variety

43
 of measures like sales, contribution of profit, inventory value, nature of the
item etc.

b) Segment Strategy: In the second step, the integrated inventory strategy for
each product or market group or segment is defined. Various aspects of the
inventory management process like service objectives, forecasting
methodology, management technique and the review cycle are included in
this strategy.
c) Operationalized policies and parameters: Finally, the focused inventory
management strategy has to be implemented which involves clearly
defining the detailed procedures and parameters. The procedures have to
define the data requirements, software applications, performance
objectives, etc. The parameters give the actual numeric values like the
length of the review period, service objectives, percentage of inventory
carrying cost, order quantities and re-order points.
Improved Inventory Management
Certain additional initiatives need to be taken to improve the effectiveness of
inventory. These are a number of policies and procedures that form guidelines
for inventory – related decisions are incorporated in inventory management.

Performance Measures: Clear and consistent measures of performance are

necessary for the inventory management process. These measures must bring
out the trade – offs between service and inventory level. For example, if the
performance measure of the planner focuses only on inventory level, then the
planner will have a tendency to minimize the inventory levels, which might
have a potential negative impact on the service level. On the contrary, if the
planner's single focus is on service, it will lead the planner to disregard the
44
 inventory level.

Training: Inventory management is complex owing to the number of factors

involved. The interface between the inventory management in the enterprise
and also other entities within the value chain needs to be understood. Thus the
firms need to increase not only the amount, but also the sophistication of
training in order to improve inventory management decision-making. Planners
must understand how certain inventory parameters like service objectives,
review periods, order quantity, safety stock etc, influence inventory operations
and performance etc. Also, planners must understand how their inventory
management decisions will affect other members in the value chain.Integration
of Information: Effectiveness and performance of inventory can be increased
substantially and the uncertainty can be decreased by integrating the
information requirement related to forecasts, orders, marketing plans, status of
inventory, shipment etc across the enterprise and also among the channel
partners. Exchange of information using global networks, forecasts and also a
reliable measure of inventory reduce the uncertainty between the enterprise
systems and thus result in lesser need for buffer inventory.

Application of Expert Systems: These expert systems utilize a computerized

knowledge base to share inventory management expertise among the enterprise.
This expertise can provide a lot of support for the training and awareness and
thus lead to substantial improvements in productivity and performance of
inventory.

Conclusion
Supply Chains being complex, inventory plays a key role in managing

45
them. Inventory managers need to provide for stocks, whenever necessary in
order to utilize the available storage space efficiencies such that stocks do not
exceed the storage space available for them, and at the minimum inventory cost.
There is a need for trade – offs to be achieved amongst the various costs so that
the production and marketing functions of inventory are fulfilled.

46
CHAPTER 6: MATERIALS MANAGEMENT
Materials Management is the process of management which co-ordinates,
supervises and executes the tasks associated with the flow of materials to,
through, and out of an organization in an integrated fashion. There is maximum
utilization, conservation, elimination of wastes, and thus avoidance of
unnecessary delays.
Objectives of materials management
 Economical procurement of materials
 Issuance and timely distribution
 Store accounting
 Record keeping
 Stores control
 Looking at new supply sources
 Development of vendors
 Value engineering
 Coordinating smooth flow of materials
Materials Planning
This is a scientific technique of determining in advance, the requirements of
raw materials, ancillary parts and components, spares, etc. given by the
production programme. The overall management planning and control system
is a broad perspective within which material planning functions, and materials
budgeting are an exercise translated in money terms for its effective
functioning, control as well as execution.The actual planning starts with the
information gathered from the annual sales forecasts, production and general
business forecast. Forecasts provide the means for satisfying locational needs,

47
 and the general business forecasts provide the means to estimate in advance
the trends in prices, wages and costs of other services. While breaking down
broad forecasts into specific plans, the next step is to make the price and
supply available to confirm to the specific plan. The materials consumption
estimation is broken down into specific periods. The quantities are checked
against the inventory control procedure, by taking into account the safety
stock and lead-time requirements.
Purchasing
Refers to the exchange of goods or services for cash. In other words, it
provides the right materials, at the right price, of right quality and quantity
at the right time and, from a right source.
Objectives of purchasing:
 To maintain a continuous supply of materials to support production as
well as the schedule
 Avoidance of duplication of purchases, wastes, obsolescence and delays
 Adopting proper standards of quality on the basis of suitability
 Procurement of materials at the lowest possible cost, at the same time
ensuring that it is consistent with quality and service requirements
 Maintenance of the company's competitive position in the market
The purchasing department has the following functions:
 Selection of suppliers
 Analyzing bids
 Price negotiations
 Issuing purchase orders
 Follow – up actions
 Cost – analysis and study of market conditions

48
  Maintenance of price catalogues, information library, etc.
Inventory Management and Control Systems
Inventory refers to the stock of materials of any kind stored for future
use, mainly in the production process. Inventory is critical to supply chain
management because it directly impacts both cost and service. These are the
prime ingredients for any logistical system. They also have an influence over
the other activity centres of logistics such as customer service, transportation,
warehousing, order processing and material handling. At least a certain
amount of inventory is inevitably required somewhere in the chain to provide
adequate service to the end customer, as demand is mostly uncertain and it
takes time to produce and transport product.It is necessary to have an
optimum minimum of inventories, where the inventories are minimum and
the chances of stock out also minimum. A Company achieves this through
inventory management.
Inventory has various functions like striking a balance between
demand and supply; minimize costs at acceptable inventory levels, providing
the desired customer levels, availing quantity discounts etc.
Inventory control is a scientific method of storekeeping and considerably brings
down the acquisition and retention costs of materials. It is concerned with
maintaining the optimum level of stock and also recording its movement. The
need for inventory control arises due to many factors such as increase in the
manufacturing units, growing complexity of the modern industry, higher idle time
cost of machine and men and a higher degree of stress on liquidity.There are
several inventory control mechanisms such as ABC, VED, SAP, and FSN analysis.
The various inventory models are Economic Order Quantity (EOQ), Materials
Requirement Planning, Just – In – Time, and Distribution Requirement Planning.

49
Stores Management and Operation
The three main storage systems on a broad view are receipts, physical
upkeep and maintenance system. The system must be flexible enough to
change with the change in the environment as well as production demands.
The key activities of stores are as follows:
 Receipt of materials, checking the quantity, co – ordination for
inspection and the preparing the goods receipt note
 Accepting the checked materials, preparing rejection notes and thus
completion of formalities for payment of bills
 Taking stock of the accepted materials and storing them in their respective
locations
 Preparing issue vouchers, making actual issues for disposals and
accounting for the same
 Ensuring proper sharing of information with the purchase departments
through regular reports
 Ensuring the storage place is clean to facilitate handling, movements and
observing all safety and security measures.

Having a key role to play in the success of warehousing operations, the storage
system should be designed in such a way that it accommodates the inflow of
inputs of materials and bought out components from the outside sources, in –
process inventories and the outflow of finished goods to the ultimate
customers. The design, size and location of a storehouse must be an important
part of the management strategy.

Three basic ways of storage are as follows:

50
  Fixed Location: Stock can be found easily without any complex system
of recording, but there is a considerable wastage of space.
 Random Location: Space is better utilized, but there is a need to keep
good and elaborate records for the location of materials.

 Zoned Location: Goods of a particular group are stored together in a given area.
Warehousing
An element of strategic importance in the logistics system. A proper
decision making regarding warehouse is necessary to ensure effectiveness of
marketing. The warehouse acts as an important link in the supply chain of a
manufacturing company. It serves as the interface area for production, market,
customers and suppliers. Functionality of warehousing covers operations like
holding, consolidating break bulk, cross docking, postponement, mixing,
packaging, and information handling. Public, private and contract storage are
the different types of warehousing operations.While making the warehouse
selection, factors like nature of the product, access, availability, infrastructure,
market, regulations and local factors influence.
Warehouse network planning is a complex activity, and whose decision upon
the number is dependent on a number of factors such as product characteristics,
objectives of logistics, and availability of resource. Performance parameter
ratios such as stock turnover, cost to sales, occupancy rate etc enable in
successful management of a warehouse.
Material Handling and Storage Systems
Every operation in materials management involves the raising, lowering or
moving an item, which is termed as materials handling. The management of
materials handling activities brings about a host of specialty disciplines and
responsibilities like mechanical, electrical, hydraulic means and electronic
51
 devices.

Basic Principles of Material Handling

 Best handling is least handling: As handling does not add any value to
the product, it is advisable to keep the handling cost minimum
 Use of standardized equipment: The material handling equipment must
be chosen in such a manner as to afford flexibility and also be capable of
performing multiple standardized operations.
 Minimum use of specialized equipments: Though it is desirable to have
specialized equipment, the cost of acquisition, cost of operation,
maintenance, repair etc needs to be taken into consideration
 Payload: The selection of equipment needs to be made after careful
consideration of the cost of moving. The economics can be measured by
studying the cost of operation involved in handling in each move.
 Standardized methods: When the methods of picking, carrying and
settling down are fixed, the wastage in time, labour and equipment will
be eliminated.
 Capacity of equipment: The capacity needs to be examined carefully, as
any over loading causes undue wear, and also results in excessive
maintenance.
 Loading and unloading: A major portion of Material handling
activity is in the loading and unloading and thus this function needs a lot
of attention.

52
Types of material handling equipments
Pallets: Specially designed platform, which is built to dimension to suit
forklift operations. These are designed out of hardwoods, though in some
cases, steel pallets may also be used. The supplies are loaded onto the pallets,
transported and stored in warehouses.

Forklift trucks: Move loads of master carton horizontally and vertically. The
master cartons are stacked upon the pallet, which forms a platform. There are
many types of forklift trucks, which are available for handling a variety of
products. Though these trucks can be used to load and unload other vehicles
too apart from transporting material, they are not economical for long distance
horizontal movement due to the high ratio of labour per unit of transfer.
Cranes: These are power – driven, self – propelled units fitted with a boom
mounted on a mobile chassis.
Conveyors: These enable straightforward transportation as rehandling before
each and every activity is eliminated. Nowadays these are loaded and
unloaded automatically. The cost increases with the distance to be traveled
and thus it makes them more attractive for high –volume throughputs
overshooting the distances.
Elevators: Contains an endless chain or a belt which runs over two – terminal
pulleys or sprocket – wheels fixed at different levels on a vertical plane.
Tractors: Used as a substitute for forklift trucks, which are uneconomical for
long distance movements.
Towlines: Consist of either in – floor or overhead – mounted drag devices and
are used in combination with four – wheel trailers on a continuous power

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 basis.
Carousels: Operates on a different concept than other equipments. The
desired item to the order selector is delivered by using a number of bins
mounted on an oval track. The logic behind carousel systems is to reduce
walking length/paths and time.
Containerization
Unifies a number of shipments, which then move as individual units. Used to
handle bulk commodities as well as merchandise. Benefits include door-to-door
shipment, reduced freight costs, higher labour productivity, lesser
documentation, reduced warehousing costs, environmental control and better
utilization of capital equipment.
Roll On/Roll Off Ferries (RORO)
A lorry is loaded at the manufacturer's workstation driven on to a ship and
then driven off at the end of the voyage directly to the consignee, using the ship
as the moving bridge.

LASH (Lighters Aboard a Ship)

LASH barges are loaded at Inland River and shallow ports. Then, the barges
are towed to ocean port's fleeting areas to meet the LASH mother vessel. On
arrival, the mother vessel's crane lifts LASH barges onto the ships. The same
crane lifts outbound barges, which are placed in the water, and then towed, to
their final destination. LASH cargo does not require transshipment, as the
movement from origin to destination with a single bill of loading.
Material Storage Systems
The storage system in a warehouse has a key role to play in the total cost and
the efficiency of warehouse operations. The manner in which inventories are
handled rather than how they are stored is very important. An efficient usage of
54
 material handling equipment is possible if the storage system allows easy access
and retrieval of inventory. Selecting a storage system for a specific application
depends upon the following factors:

 Nature of the product: Products, which have a higher risk of

contamination, will have to be isolated from other product groups. For
example hazardous chemicals can cause damage to other products.

 Configuration: While uniform products may be stored in stacks or in an

enclosure, products, which are in odd shapes and sizes, need more space.

 Perishability: Perishable products are stacked in such a manner that

consignments, which come in first, are distributed first.

 Product variety: When a variety of products are stored together, there

needs to be segregation for easy identification for storage and retrieval.
Transportation
With the environment becoming very competitive over the past 10 to 15
years, speed has become an unmistakable competitive advantage for firms.
Transportation helps an organization to achieve this advantage by ensuring that
the right product reaches the right place and at the right time. Achieving this
competitive advantage require effective functioning of transportation activities.
There are various modes or transport like road, rail, air, pipeline etc, the transit
time being an important consideration. After the mode has been chosen, the
logistics manager can choose the type of transport mode, i.e., whether to opt for
common carriers, contract carriers, exempt carriers, private carriers or freight
forwarders. Transportation management not only deals with settling an efficient
transportation activity center but also continuous evaluation and management
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 activity of the transport department.
Conclusion:
Most of the businesses arise out of the idea, which is much, more fundamental
than mere profit making. The ultimate product or service is of great importance.
Materials Management involves much more than cost – reducing techniques
and includes cost control, cost reduction, work simplification and value
analysis.The professional materials manager needs to judge the right
procedures, tools and techniques before approaching the job. Control of
materials function is a primary task. In future, the materials managers have to
be well equipped to face the challenge the modern days have posed to them.

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CHAPTER 7: TRANSPORTATION
Transportation is basically the movement from one location to another as it
makes its way from the beginning of a supply chain to the customer's hands.
Transportation not only ensures movement of people but also goods from one
place to another thus assisting the economy in the growth of trade and commerce.
Being one of the most visible elements in the logistics operations, this function has
gained a lot of importance and interest from the logistics perspective.
Transportation plays an important role in each and every supply chain because
products are usually not produced and consumed in the same location. The third P
in the marketing mix, ‘Place' is of importance here. In fact, transportation costs
occupy a significant part of the total costs in most supply chains.With the growth
in industry and commerce, transportation facilitates in achieving the social and
economic objectives. As times are changing and according to the requirements, the
mode of transportation is changing to keep pace with the growth of science and
technology across the globe. The degree of sophistication of the various
transportation equipment in use varies according to the level of economic condition
and growth of any particular region / country. As the economy has transformed
from subsistence agriculture to commercial agriculture, and also with the spurt of
manufacturing activities, the scope of development of transportation modes has
widened. In the olden days, the various modes of transportation like human beings,
camels, horses, donkeys, carts and ships were being used. Today, these have paved
way to newer modes of transportation to suit the needs of the modern world. In
spite of the emergence of sophisticated modes of transportation, older modes
continue to serve the society, but in a smaller way.

57
Transport, being the main component of logistics, plays an important part in all
management decisions within the organization, from strategic decisions to
everyday operations. Day to day management decisions also relies on transport, as
“Just in Time” methods for both production and distribution have become the
standard. With the growth in e-commerce, resulting in more and more home
delivery of products, transportation costs have become very significant in retailing.
Especially for products sold online, transportation cost is a larger fraction of the
total delivery cost.

The appropriate use of transportation is the key to any supply chain's success.
For eg: Wal-Mart uses a responsive transportation system to lower overall costs.
Wal-Mart uses the technique of aggregation for products leaving for different retail
stores on trucks leaving to a supplier. At distribution centers (DCs), Wal-Mart uses
cross – docking, where product is exchanged between trucks such that each truck
going to a retail store has products from different suppliers.
Basically, transportation serves two main purpose:
 Product movement: The primary function of transportation is the forward
and backward movement of the product in the value chain. It is necessary
that product be moved only when they are necessary and there is an
enhancement in the product value. This is because transportation utilizes the
financial resources for expenditure like driver's labor, operation cost of the
vehicle, and other administrative expenditure. The environmental resources
are utilized both directly and indirectly. An example of direct usage can be
the fuel and oil costs and an indirect usage can be the environmental expense
caused by air, noise pollution in the environment.
 Product Storage: Temporary storage for in – transit goods is expensive. But
in circumstances where the warehouse space is limited, utilizing the
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 transportation vehicles may be a better option. One option is where the
product is loaded on the vehicle and then it takes a round about or indirect
route to its destination. The vehicle can be used as a temporary storage
option where the origin or destination warehouse has limited storage
capacity. Another option is to take a diversion. This is done when there is an
alteration in the shipment destination while the delivery is in transit. While,
telephone was used for diversion strategies originally, today satellite
communication handles this task efficiently.
A transportation strategy to be successful, should recognize the following:

 Customer requirements. The supply chain involves continuous and

efficient movement of product from vendor to manufacturer to customer.
Thus the transportation program must reflect and meet the customer's
needs. The vital aspects are time and service.

 Timely movement of shipments. Customers demand their shipments be

delivered as they require - on the date needed, by the carrier preferred, both
shipped complete and delivered complete and in good order. A
transportation program, which can do this, can provide customer
satisfaction and give a competitive edge.

 Mode selection. Selecting the mode of transport is an important

consideration. The transit time has to be considered while doing so.

 Carrier relationships. Volume catches the attention of the carrier of

forwarder. The carrier attention with volume creates a competitive interest
in a business. Another side to this attention is that the business cannot be
divided among many carriers. The chief reason being that responsive
transportation can create a competitive advantage and this can be done

59
 only with a focused relationship with a carrier.

 Measuring/benchmarking. There is a necessity to know about the

performance of the strategy as well as the carriers. Measuring and
benchmarking can be of assistance to this. Measuring means comparing
performance versus standards. Benchmarking means learning what other
companies do--the best practices. Benchmark needs to be done with a
company in the same industry.
 Flexibility. As change is happening everywhere, the strategy has to be
ready to change. There is a constant change in the customers, products,
business, suppliers and the overall corporate emphasis, which can
dramatically change the company's strategy. It is important to recognize
that change will occur. Just as times are changing, the strategies will also
keep changing. A company must adapt itself to such an environment.
Participants in the Transportation Decisions:
Primarily there are five key parties in transportation decisions. Each of these
parties has a role in the transportation environment.
Shipper: The party, which requires the movement of the product between
the two points in the chain. The shipper's objective is to fulfill the customer
order with responsiveness but at the minimum cost.
Consignee: The destination party or receiver. The consignee also has the
similar objective of receiving the goods at a lowest cost and with maximum
responsiveness.
Carrier: The party, which moves or transports the product with an objective
of maximizing the revenue at the least cost. Carriers have a tendency charge
a higher rate and reduce their costs by trying to consolidate various
individual loads into economical loads and thus would seek flexibility in
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 pick-up and delivery with the client. This motive is in conflict with the
manufacturer's objective of reducing total transportation costs.
Government: The Government has a high interest level in the transactions
because a stable and efficient transportation environment is necessary to
sustain economic growth. To facilitate this, carriers must offer competitive
services while operating profitably.
Public: The ultimate determinant of transportation by desiring goods at
reasonable prices. Their concerns are related with the accessibility,
expenditure, effectiveness as well as the safety and environmental standards.
Factors affecting carrier decisions:
o Vehicle related cost: Cost incurred by the carrier for purchase or lease of
the vehicle to transport goods
o Fixed operating cost: Costs which can be associated with the airport,
terminals and labour which are incurred whether vehicles are in operation or
not.
o Quantity – related costs: Usually variable in nature except in
circumstances where labour for loading and unloading is fixed.

o Trip – related cost: Includes the price of labour and fuel incurred
for each trip independent of the quantity transported.

o Overhead cost: Any cost incurred for planning, scheduling a transportation

network as well as the information technology costs incurred.

o Transportation Cost: Total amount paid to various carriers for transporting

products to customers.
o Inventory Cost: Cost of holding inventory incurred by the shipper's

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 supply chain network.

o Facility cost: Cost of various facilities in the shipper's supply chain network.

o Processing cost: Cost of loading / unloading orders and the other

processing costs associated with transportation.
o Service level cost: Cost of not being able to meet delivery commitments.
This cost to be considered in strategic, planning and operational decisions.
Modes of transportation
o Air

This is the least hazardous in nature when compared to all other modes of
transport. Air transport is expensive, and is very suitable for products having
high value or extreme perishability. The prohibitive aspect of this mode is its
high cost. From the operator's point of view, though the fixed cost is low
compared to other modes like rail, water and pipeline, variable costs are very
high as a result of fuel, maintenance, and the labor for crew. Though the cargo
handled by air is growing at a fast pace, it is still not important when
compared to the cargo handled by other modes of transportation. Air, by
whatever type of airline, is generally considered a premium means of
transportation. The best justification for the high cost can be an emergency
situation, which necessitates the service of air transport. Technological
developments like new cargo-handling equipment at air terminals and the use
of larger containers have been beneficial.

Sea /Water

The oldest mode of transportation. Water transport, due to its nature, is

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 limited to certain areas. It is the slowest modes of all the modes and a lot of
delays also occur at ports and terminals. Water transport is generally suited for
carrying very large loads at low cost. Usually the shipping fleet across the
globe comprises of tankers, dry bulk carriers, container ships and special
vessels. Some of the problems encountered with this mode are rough
weather characterized by storms, ice, high waves etc in – transit. Also there is
a disadvantage of a limited range of operation and speed.

o Railways

Generally capable of transporting large quantities of freight over long

distances very economically. These are the principal carriers of men and
material, and play a major role in the country's trade and commerce activities.
It is the main source of supply of essential commodities, which are transported
across the length and breadth of the country. Road traffic is relieved to a
certain extent and also air pollution caused by trucks can be eliminated. The
railways also charge competitive freight rates.

o Roadways

Most popular mode of transport. With the manifold growth in industrial

and agricultural activities, this mode has achieved a lot of importance. The
various advantages of this mode are flexibility, faster turnaround, lesser risk
of delays or strikes, door-to-door service, reach to remote places and through
movement from consignor to consignee.

o Pipeline

In India, pipelines are used for oil transportation by all public and private
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 sector petroleum refineries. They are also utilized for transporting
manufacturing chemicals, dry bulk materials like cement and flour by
hydraulic suspension, and also sewage and water within cities and
municipalities. This mode is unique in comparison with the other modes in the
sense that they operate throughout the day, with limited time for changeover
and maintenance. The basic advantage here is that they reduce the operational
costs, though the initial investment is high. Also these are eco-friendly. The
disadvantage of this being its lack of flexibility where only limited
commodities in the form of gas, liquid or slurry can be transported.

Transport Economics: The factors which influence transport economics:

1. Distance: This is a major influence on the cost as it is a direct contributor to

variable costs like labour, fuel, and maintenance. The tapering principle,
where the cost curve increases at a decreasing rate as a result of the distance
function is relevant here.

2. Volume: It is viable to consolidate smaller loads into larger loads to take

advantage of the economies of scale.

3. Density: The product density or weight is discussed here, where the product
density can be increased within a truckload for better capacity utilization.

4. Storability: This refers to the product dimensions and how they affect the
vehicle space utilization. It is easier to stow standard shaped items than odd
– shaped items, which occupy more space.

5. Handling: While loading or unloading trucks, railcars, or ships, there is a

necessity for special handling equipment’s like trolleys, forklift trucks,
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conveyors etc. to load or unload trucks, railcars or ships.

65
 6. Liability: These are product characteristics, which basically affect the risk
of damage and the resulting incidence of claims.

7. Market Factors: Factors like lane volume and balance. A transportation

lane refers to the movements between the points of origin and destination.
When a vehicle is sent from the point of origin, it may return empty-handed
or may bring back load. Due to the imbalances in demand in both the
manufacturing and consumption locations, a balanced (volume is equal in
both directions) move is nearly impossible.

It is the responsibility of the logistics managers to understand the influence

these factors have on the transportation cost and minimize such expense.

Documents in Transport Decision Making:

 Bill of Lading: A computerized, basic document, which is, utilized in

purchasing transport services. This serves as a receipt of the commodities
and quantities shipped. It also serves as the basis for damage claims in case
of loss, damage, delay etc. The terms and conditions of the carrier liability
and gives in documentation form the responsibility for all possible causes of
loss or damages

 Freight Bill: This is how the carrier charges for the transportation services
he performs. The information contained in the bill of lading is utilized for
preparation of this.

 Shipping Manifest: This document is used when multiple shipments are

placed on a single vehicle. The document provides a comprehensive list,
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 which informs the entire load content, making it unnecessary to view
individual bills of lading as all details relating to the stops, bills of lading,
weight, case count etc for each shipment are listed in this manifest.
Transportation Management
Factors like globalization and technological improvements in the past years
have changed the logistician's view of transportation. The logistics manager is
expected to be more pro- active in identifying the desirable combination of
carrier services and also the suitable pricing structures in order to meet the
objectives of the firm. Transportation, when managed independently of other
value added logistics operations often represents the weaker elements.
Transportation decisions, which are made in co-operation with, related
functions remove this weakness.The two main fundamental principles in
transportation management and operations are economy of scale and economy
of distance. Economy of scale means the transportation cost per unit of weight
decreases with an increase in the size of shipment. Economy of distance implies
that there is a decrease in the transportation cost per unit with an increase in the
distance. These principles are essential while evaluating alternative
transportation strategies or operating practices.
Thus transportation management is an important activity for the organization which
involves the following process:

a) Analysis and Understanding of environment: There is a necessity to

understand the transport environment, to make sound transport decisions.
The environment consists of the five parties – shipper, consignee, carrier,
government and public.
b) Clarity in objectives: The order of preference in performance of
transportation functions has to be decided. The manufacturer must determine
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 his objectives at a level at which service can be performed and the levels at
which customers expect, the amount of trade – offs that can be expected.
Such setting of objectives can enable the company to choose an efficient
mode of transport.

c) Selecting mode of transportation: A choice between single mode and

intermodal transport has to be made to achieve objectives efficiently.

d) In source or outsource: After selecting the mode, the company must decide
whether to in source the activity or outsource to third parties. According to
the mode selected, the company must perform the functions.

e) Evaluation and Control: The efficiency of the transport system can be

ascertained by measuring the customer satisfaction.
Conclusion

Modern transportation has undergone a sea – change with a change in the point
of view of an operational function to a strategic one. In the new era,
transportation requires a constant search for methods to ensure that the
customers order will arrive at their doorstep when required, in the right
quantities and in undamaged condition. Additionally, transportation has to
continually improve its flexibility and ability to respond to the market place, at
a short notice, while providing better avenues for communication and also cost
reduction. This makes transportation a continuous perennial activity rather than
a one – time exercise.

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CHAPTER 8: WAREHOUSING / DISTRIBUTION
Warehousing is a support function for logistics and plays an important role in
attaining the overall objectives of an organization's supply chain system.
Warehouse is a place where inventory is stored. It is basically an area of
interface for production, market, customers as well as suppliers. The
performance of warehouse is often judged by its productivity and its cost
performance.
In today's highly interconnected and interdependent supply chain networks,
successful warehouse management involves a thorough understanding of how
the basic warehouse management functions impact the supply chain. The
warehouse, being a critical link in the supply chain, serves as the source of
order status information for the customers, provides inventory visibility for the
supply chain partners and for the enterprise as a whole. While focusing on
warehouse objectives of improving profit through reducing cost and enhancing
customer service level, the following have to be taken into consideration:

o Utilizing the storage space to the maximum

o Higher productivity of labour
o Reduced material handling
o Reduced order filling time
o Maximum utilization of assets
o Reduced operating cost

Functions within the warehouse:

 Receiving: Collection of activities involved in proper receipt of all
materials coming into the warehouse, providing the assurance that the
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 quantity as well as quality is as per ordered, and distributing the materials
to storage or to the other organizational functions which require them.
 Pre packing: This is done in the case when products are received in bulk
from a supplier and repacked into single consignments. The entire
merchandise, which is received, may be processed at once, or a portion
may be held in bulk for processing later.
 Storage: Putting away the inventory received to complement order
picking. It can be explained as the physical holding of merchandise while it
awaits demand. Method of storage depends on the size and the quantity of
the items in inventory and the handling characteristics of the product or its
container.

 Order picking: Physical selection of the products from their locations after
receiving the customer orders. In other words, process by which items are
removed from storage in order to cater to a specific demand. A document
named Pick List containingdetails like sales order number, shipment details,
item details, quantity etc facilitates order picking.

 Packaging and / or pricing: This is basically optional which may be done

after the picking process.

 Sortation and / or accumulation: When a warehouse stores multiple

products, this activity is done.

 Packing and shipping: Performance of tasks related to dispatching an

order. This includes the following tasks like checking whether order is
complete or not, packing material in an appropriate shipping container,
preparation of shipping documents, including packing list, address label,
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 and the bill of lading, weighing the shipments to determine shipping
charges, accumulate orders by outbound carrier, loading trucks etc.

 Traffic management: Choosing the best mode of transportation for inflow and
outflow.
Benefits of warehousing:
Economic: Refers to the overall reduction in the logistical costs by utilizing one
of more benefits. The major benefits are as follows:

a) Consolidation: Material from a number of manufacturing plants destined to

a particular customer on a single shipment are consolidated and received by
the consolidating warehouse which results in reduced transportation cost. The
advantage is that it combines the flow of logistics from several small
shipments to a specific market area. Several firms may also join together and
use this consolidation service, which will benefit each shipper individually.

b) Bulk Breaking: Various combined customer orders are received from a

manufacturer and shipped to individual customers. A break bulk warehouse
sorts or splits individual orders and delivers them locally.

c) Cross Docking: This facility is similar to bulk breaking but involves

multiple manufacturers.
Truckloads of products arrive from multiple manufacturers, which are sorted
customer wise. Then they are loaded into the truck destined for the
appropriate customers. This system is widely used by retailers.

d) Postponement: A warehouse with facilities for light manufacturing

activities like packaging and labeling can enable postponement of final
71
production until the exact demand is known. The benefit here is a reduced
level of risk and lower inventory as the final labeling and processing activity
is done only on knowledge of the actual demand and thus the basic product is
used for a variety of labeling and packing configuration.
e) Stock Piling: Stocks piled in the warehouse act as buffer inventory which
help to tide over situations of material constraints and customer demands.
Service:
Service benefits may not reduce costs and the justification for a warehouse
based on service is an increase in the market share, revenue and thus an
increase in margin. The benefits are as follows:

a) Spot Stocking: A selected amount of a firm's product line is placed in a

warehouse to fulfill customer orders during a key period of maximum
seasonal sales. Features include a narrow product assortment and stocks
placed in many small warehouses catering to specific markets over a limited
time horizon.

b) Assortment: Various product combinations are stocked in an assortment

warehouse in anticipation of customer orders. This is similar to spot stocking
except that this has a broader product line, is limited to a few strategic
locations and functions throughout the year.

c) Mixing: Similar to the bulk breaking process with an exception that various
different manufacturer shipments are involved. Truckloads of products are
shipped from manufacturing plants to warehouses and upon arrival at mixing
warehouses these are unloaded and the desired combination of specific
product for a particular customer or market is selected. Inventory is sorted to
suit specific customer requirements.
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 d) Support in production: Production support warehouses provide a constant
supply of components and materials for assembly units. Such a warehouse
supports production by supplying components or sub – assemblies in a regular
and timely manner.
Warehousing Alternatives:
The various warehouse strategies are as follows

1. Private warehouse:
Refers to having the entire facility under the financial and administrative control of
the firm,i.e. the firm owns the product and also operates the warehouse. The actual
facility can be either owned or can be taken on lease, for a short period. The major
benefits of this warehouse are

 Control: The enterprise has complete decision-making authority over all

activities in the facility thus enabling integration of warehousing
operations with other internal processes of the firm.

 Flexibility: Operation policies and procedures can be formulated and

altered to suit individual needs.

 Cost: The basic objective of this warehouse is not profit – making, thus the
cost aspects are less compared to public warehouses.
 Marketing: An intangible benefit is a marketing advantage over other
firms due to the firm's name attached with the warehouse thus enhancing
customer perception.
2. Public Warehouse:

73
 These are similar to private carriers in transportation service. Services are
provided to others by firms that have warehousing space, storage facility, and
material handling equipment for their own use and are used a lot in logistical
systems. These are designed to handle the most general packaged products or
commodities, which would not require specialized storage or handling
arrangement. The products usually stored are food grains, paper rolls, bulk
material (cement, fertilizers), furniture, chemicals etc.
A major advantage of a public warehouse is that they provide financial
flexibility and economies of scale. More operating and management expertise
is provided, as warehousing is the core business for such firms. Variable
costs are lower compared to private facilities. With more customers and
higher volumes, the fixed costs are spread over resulting in economies of
scale. Public warehouses are of great use to firms, which are newly formed,
and have the desire of expanding their distribution network and thus needn't
invest in developing a private warehouse. They can alternatively hire a space
in a public warehouse or channel their funds into other activities, which
generate more revenue. This would improve their performance and thus
increase the return on investment. Location flexibility is also available
through public warehouses. Firms can also close storage facilities in one
market and open at other places without any financial losses.

3. Contract Warehouse:
Combine features of both public and private warehouses. The risk is shared
and there is a long – term relationship that will result in lower costs. Benefits
include economies of scale, flexibility, information, and equipment sharing
among clients.

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Other types of warehouse
 General Merchandise warehouses: Deal in all commodities except
specialized or commodity items. These can either be public or private.
 Refrigerated/Cold Storage warehouses: Used for storing perishable
items, which are kept at low temperatures to preserve quality. These are
expensive and a variation of this type of warehouse is known as the
controlled temperature warehouse, which is lesser expensive and is used
for storing fruits, milk etc.
 Bonded warehouses: A special type of warehouse whereby distributors
can produce, transfer and store products without paying excise taxes and
duties on them. The government licenses these to various parties.
 In – bond warehouses: Bring in imported merchandise, store as well as
display the merchandise in shops, which sell for export or sell
merchandise, which is directly exported.
 Special commodity warehouses: These are specialized and handle a
specific or a bulk commodity.
 Combination warehouses: Warehouses, which combine all the above
facilities.

Nature of warehousing costs:

The warehousing costs can be either
a) Fixed costs: Incurred irrespective of how much or how little throughput is
experienced.

b) Variable costs: Vary with the throughput.

Warehousing costs are associated with the following:

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 Association Costs
Land Rent
Building Rent & Rates
Storage and material handling Maintenance
equipment
Labour Pickers, Packers
Supervision Warehouse Management
Services Electricity, Telephone

Decisions in planning the warehouse:

Warehouse Site Selection:
Cost and service are the key considerations here. The other supplementary factors
are:

1. Nature of product: This influences the number and location of

warehouses. For perishable commodities, proximity to the consumption
centers is essential. It is preferable to have limited number of warehouses,
which have delivery limitation in terms of distances and geographical
reach.

2. Infrastructure: The efficiency of the warehouse operations improves with

the availability of suitable infrastructure like roads, utilities (water,
electricity, communication etc) and labour, the unavailability of which will
increase the transportation cost. For example, for cold storage, availability
of electricity is a major influencing factor.

3. Access: Again, when there the warehouse is located at a place where there
is little accessibility, the transportation costs will escalate.
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 4. Availability: The availability of warehouse space is an issue, especially in
the metros. In the case of non – availability, alternative location at the
outskirts will be the alternative, but which will increase the transportation
costs.

5. Market: To offer better service to customers, warehouses need to locate in

proximity to consumption centers so that frequent deliveries by customers
in small quantities can be organized at a limited time.

6. Regulations and local taxes: Government regulations guide the site

selection for certain hazardous chemicals, explosives etc. In such cases,
there are limited options for site selection. Also the regional sales tax and
octroi charges influence the site selection. With a lack of uniformity in the
sales tax structure across the States, warehouses will be planned to make
maximum utilization of this.

7. Product – Mix Consideration:

The product mix is directly related to the design and operation of a
warehouse. Considerations such as product sales, demand, weight, bulk,
packaging etc needs to be made.

Future Expansion:
Some consideration about the estimated requirements for future operations in
case of expansion must be made. A five – to – ten-year expansion plan must be
considered while establishing the warehouse facilities so that normal operations
are not disturbed during expansion.

Selecting the material handling system:

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 As movement is the primary function within a warehouse, it is necessary to
select the appropriate material handling system.

Warehouse layout:
The warehouse layout needs to fit specific needs. Considerations to be made
while planning the layout and operation are:
- Deciding on the receiving and shipping locations
- Identify minimum paths for movement of equipment and people, for
speedy storage and retrieval
- Classifying items as slow, medium and fast and then allocating
separate area for these
- Placing the material handling systems at their assigned location

Determination of warehouse space and design:

a) A sales forecast or total tonnage expected is used to estimate the final size of
the warehouse required. A number of techniques like linear programming,
simulation etc are used to determine warehouse size.
b) Warehouse designing is a specialty planning activity usually done by an
architect. Specifications like size of warehouse, lay – out, path of material –
handling equipment, are required. The warehouse must be designed for
maximum utilization of available space and material handling equipment.
Factors to be considered while initiating warehouse operations:
 While stocking the warehouse, a complete list of inventory needs to be
obtained. Quantities of individual stock keeping units to be determined
while planning the warehouse.
 Hiring and training of personnel is an important issue. There must be
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 clarity about the role played by personnel hired for specific requirements
and each group of employees needs to be given special training.
 The management must ensure that work procedures are developed and also
understood by personnel.
 Protection against theft of merchandise must be ensured. Adequate security
measures to be undertaken by allowing only authorized personnel to enter
the premises, where computerized inventory control and processing
systems are of use.
 Product deterioration arises from careless storage and non – compatibility
among products stored in the same facility. Careless handling by
warehouse employees is a matter of concern.
 When firms handle a large number of products it is economical to utilize
computers for billing and inventory control. The computer inventory needs
to be compared with the physical stock
 Accident prevention is an important consideration.

Warehouse Management Systems

This is a software solution to control movement and storage of materials within
a warehouse, transportation management, order management, and a complete
accounting system. The following activities are managed through a WMS:

1. Inbound: Functions like addition of a new purchase order, palletisation,

receipt of goods, putting away received goods etc
2. Inventory Management: Transferring inventory, holding and adjusting
inventory, awareness of inventory balances etc
3. Outbound: Tasks such as creating an order of shipment, shipping
multiple orders, allocation of orders, shipping order status etc

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Conclusion
Warehouse being the interface area for production, market, customers and
suppliers performs a number of functions in the supply chain. In many logistical
system designs, the role of warehouse is viewed as a switching facility when
contrasted to a storage facility. While the role of a traditional warehouse was to
maintain a supply of goods to protect any uncertainty, the contemporary
warehousing offers a host of much other value – added services. Effective
warehousing has become the order of the day.

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CHAPTER 9: PACKAGING AND MATERIALS HANDLING
Packaging is a marketing tool related to the performance of marketing function.
The basic objective behind packaging is to prevent damage to the product
during storage, transportation and handling, when it is in movement for
distribution in the market. It forms an important cost element of goods and
represents 5 – 30 per cent of the value of goods, depending on the type of
product. It has a significant impact on the cost and productivity of the logistical
system. The main cost elements are the purchase of packaging materials,
introducing automated or manual packing operations, and further the need for
disposal of material. A systems approach is necessary to manage packaging.
Any central planning logic, which is designed to control total distribution costs,
must keep in mind the costs related to packaging.

There are two main types of packaging: Consumer and logistical/industrial packaging

 Consumer packaging
This packaging is done with a marketing emphasis. The packaging
design focuses on aspects like customer convenience, market appeal, shelf
utilization, product protection etc. The proper package design should have its
base on a complete assessment of the logistical packaging requirements,
which requires a complete evaluation of how all the components in the
logistical system influence packaging.

 Industrial packaging
The concept of containerization or unitization where the individual
products are grouped into carton, bags, bins, or barrels for handling
efficiency. The master cartons are grouped into larger units for handling, the
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 combination that is referred to as containerization or unitization. Logistical
packaging is designed to meet the distribution objectives. Determining the
degree of protection required to cope with anticipated physical and element
environments are an important issue in package designing.
Functions of packaging:
 Damage Protection
The master carton protects products from damage while movement and
storage, in addition to being a restraint to pilferage. The cost of protection
increases according to the degree of value and fragility of the product. The
vulnerability of damage is related to the environment in which it is stored and
transported. The physical environment relates to the logistical system. When
the firm has more control over its physical environment, lesser the packing
precautions are required. An example can be the utilization of privately owned
transportation, which will move the product in a controlled environment. But
if common carriers are used for transportations, more precaution needs to be
exercised as the product may be transported in a variety of vehicles and there
is lesser control. Certain situations in which the product will cause in – transit
damage to the product are vibration, compression, puncture and impact.
Securing the package with a tight strap or to load the carrier in a right pattern
can reduce this. The outside elements also influence the packaging. There are
certain factors like temperature, humidity etch which are beyond the control of
logistical management. It has to be determined in advance how the contents of
the packing will react to each of these factors and design the packing
accordingly.

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 Utility/Convenience
This refers to how packaging can affect the logistical productivity and
efficiency. When products are packed in certain configurations and order
quantities, it increases the logistical output. Packaging thus provides
convenience of handling and storing. Also the concept of unitization is very
significant here. Unitization refers to the process of grouping the master
cartons physically into one restrained load for easier material handling and
transportation.

 Communication
Packaging plays a significant role by assisting all channel members to
identify the contents of the package. An attractive surface decoration can
serve as a display item. Information such as the manufacturer's name,
quantity, code number etc is mentioned on the package. The labels must be
visible from reasonable distances. Handling and damage instructions are
provided on the package. Especially for hazardous products such as
chemicals such instructions can be of great assistance. Tracking is one more
feature of logistical packaging. The consignment moves along multiple
storage locations, transportation systems at various points with other
consignments. For a well – controlled material handling system to track the
product as it is received, sorted or shipped, packaging identifiable through a
bar code is essential.

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Packaging Cost:
The packaging cost depends upon factors like nature of product, physical
dimensions, value, regulations etc. Delivery of the product at minimum overall
packaging cost is essential. These are the costs included in packaging.

 Unit Package Cost: Basic material or container price. This will depend
upon factors like volume, freight charges, and methods of over packing and
development costs. An increase in the volume attracts lesser price.

 Operation Cost: The packaging equipment must have the strength and
ability to withstand the stress of high speed filling equipment, in order to
make the production process cost effective and efficient.

 Warehousing: The packed product is shipped to the user's warehouse for

storage before shipment. Shape of the package and strength of the package
are the factors of key importance here.
 Distribution: Moving the product from the user's warehouse involve several
forms of transport. The costs of these are referred to as transport costs,
which are governed either by the weight of the finished pack or the volume.
They may also depend upon the shipping distance and value of the item
being handled.
Types of packaging material
 Shrink – Wrapping: Form of packing where a pre - stretched plastic sheet
or bag is placed over platform and master cartons. Heating locks the
cartons. Advantages of this packaging are adaptability to various shipment
sizes, low cost, and the ease of identifying contents and damage. A major
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 disadvantage is disposal of waste material.
 Stretch – Wrapping: The unit load is wrapped with a tightly drawn
external plastic material. Then it is rotated on a turntable to place the stack
under tension. Platform is wrapped directly into the unit load.
 Aluminium: The main area of usage is foil. These are used as a
replacement for beverage cans, stackability being the main advantage.
Metal tubes and moulded trays are the other two forms. While metal tubes
are used in pharmaceuticals, crafts, and cosmetics, moulded trays are used
in the food industry.

 High – Density Plastic Boxes: Containers with lids similar to those

purchased for home storage applications. These are rigid and sturdy, thus
ensuring high protection.

 Plastic Strapping: A load is unitized so that many smaller containers can

be handled as a single larger container. The strapping, which is usually
about one to one and a half inch wide, is bound tightly around the
containers.

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 Plastic Foam Dunnage: Used to pack irregular shaped products into
standard shaped boxes. These are light and do not increase the
transportation cost and also provide substantial protection. A major issue
here is the environmental problems related to disposal.
 Film – Based Packaging: This utilizes flexible materials instead of rigid
packaging like corrugated fireboard boxes. Corrugated fireboard cases
represent an important part of the paper and board industry, in terms of
both tonnage and value. Corrugated fiberboards are commonly used for
television, washing machines, refrigerators, cigarettes, personal care
products, etc. among a host of other products. The advantages here include
automatic operation, reduced labor costs of manually boxing products.

 Blanket – Wrapping: A traditional form of packing, which is generally

used in household packing. This packing is most suitable for irregular
shaped products like chairs, tables and other furniture. Generally
household goods carriers use these services.

 Returnable Containers: These are mostly re – usable packages like steel

or plastic and sometimes corrugated fireboard boxes. These are used by
automobile manufacturers to pack inter - plant shipment of body parts.

 Intermediate Bulk Containers: Used for granular and liquid product

shipment quantities smaller than tank cars but larger than bags or drums.
Resin pallets, food ingredients, and adhesives are packed in these
containers.

 Plastic Pallets: The rapid growth in the utilization of plastic in packaging

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 is noticeable. These are lightweight and recyclable.

 Pallet Pools: Third – party supplies maintain and lease high – quality
pallets all through the country. Palletization has contributed immensely to
logistical productivity. Advantages include reduced damage, lesser costs of
disposal, and improved use of pallet resources. The disadvantage is the
costly investment in pallets.

 Refrigerated Pallets: A self – contained refrigerated shipping unit, which

can be placed inside a regular dry van as a Less Than Truck Load
shipment. This integrates the demands of environment and unitization.
Unitization
Products are grouped together in cartons, bags and barrels for handling
efficiency. The containers used to group individual products are called master
cartons. When the master cartons are grouped together, it is called unitization.
The concept of Unitization has its base upon the theory that all shippers must
pack their cargo in such a manner that it is moved and handled entirely by
mechanical equipment, like lifts and cranes, all through the distribution
network. It enables faster loading and unloading by transportation equipment,
results in more efficient distribution center operations and also a reduced level
of pilferage.

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 According to the unit load concept:
 Small, heavy and expensive items are enclosed in containers with double or
triple wall to avoid pilferage and damage.
 The boxes or containers are secured to pallets with shrink-wrap or steel
strapping.
 Large items can be directly secured to pallets, with assurance that they are
completely protected from damage.
Palletisation for Unitization
Pallets enable unifying dry cargo loads. Basically, it is a flat tray upon which
a lot of articles can be placed, and can be handled as one article. For securing
the articles to the pallets, metal strapping, plastic films or more elaborate forms
of devices are used. Benefits of palletisation include reduction in time required
to load or unload the products from the vehicle, and better utilization of
warehouse space. Other benefits include assembly of individual packages
according to a single customer order, easy handling of pallets for road as well
as rail vehicles, and reduction in the rate of damage in transit, and reduced
delivery time. A drawback can be the lack of uniformity in pallets.

Containerization:
Container refers to physical equipment, which is used for unifying a number
of shipments, which then move as individual units. These are used to handle
bulk commodities as well as merchandise and are especially adaptable for inter-
modal transport.

Benefits of containerization
 Reduced door to door shipment
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  Reduced freight costs
 Reduced damage and pilferage, thus eliminating intermediate handling of
packages
 Higher productivity of labor
 Lesser documentation
 Reduced warehousing and inventory costs
 Better utilization of capital equipment through uniformity of cargo
 Environmental control

Drawbacks of containerization
 All cargo need not necessarily suite containerization
 Heavy capital investment in equipment required
 Difficult to thrust liability as there are several carriers and also no
intermediate inspection
 Proper equipment to handle containers may not be available
 System not comfortable with air freight

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 Movement of containers:
While moving the container, the consignor is faced with several choices such
as the follows:

 By Road: This is done by using equipment like direct lifting cranes,

forklift trucks, portal frames and other self-loading devices.

 By Rail: For long distances, road may prove uneconomic and thus the
rail transport can be used to transfer containers.

 By port terminals: The container finally arrives at the port to be shipped

whether road or rail transport is used to transfer containers.

 By ships: To secure benefits of rapid loading and unloading and thus to

ensure efficient utilization of space, containers are built or customized.
Wide hatches give complete access to holds in these ships.

Designing a Package:
Designing the package involves the following steps:
o Briefing the designer: The person who is designing the package needs to
understand what is in the mind of the manufacturer. A complete marketing
analysis may be given to the designer or some specific objectives may be
given. The designer needs to list his views about the problem.
o Gathering information about the package: Meeting the people involved in
the production process, various channel members like sales personnel,
dealers etc. has to be done. Facts about the packaging materials need to be
gathered.
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o Writing the Design Platform: The designer gives a report giving details of
what he has understood and what must be done to achieve the objectives he
has laid down. The product and packaging engineers need to work together.
o Creative Phase: Here, the creative people are involved. They are given a
precise definition of the problem and a set of objectives to work upon. They
are required to find visual solutions to the problems stated within the
boundaries outlined in the platform of design.
o Consulting Suppliers: Then, the appropriate suppliers of materials need to
be called in. The ideas are synchronized with reality. The ideas need to be
practical and also cost effective.
o Initial Presentation: The ideas are presented at a first visual presentation
meeting. The client actually sees the work being done. The designs should
be judged in relation to the design platform.
o Modification: Modifications, if any which need to be done after the first
presentation, must be made.
o Design Testing: To test package, a number of tests have been developed, a
few of which have been listed below:
o Image tests: Use the qualitative and quantitative research to assess
consumer attitudes, preferences and message communicated.
o Usage tests: Examine the functional related attitudes towards packaging and
usually involve in - placement tests.
o Visibility tests: Are designed to evaluate legibility of pack graphics, relative
impact of different pack elements, and the relative impact of different
designs they include the use of

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 o Brainwave analysis: Used for both advertising and package designing.
Method is based on “Alpha” and “Beta” brainwaves.
o Final Design Phase: A final meeting with client is held to finalize the
design. In this stage the various aspects of packaging like labels, contents,
colour schemes, artwork on label etc need to be finalized.
o Production Design: The complete designs are presented to the clients for
approval. The design is approved and also set as per the initial discussions
concerning the marketing strategy. Any variance needs to be resolved by
consulting the experts in the respective fields.
o Finishing the Job: The finalized artwork is turned over to the suppliers for
producing the packs.
Factors effecting choice of packaging materials
 Characteristics of Materials to be Packaged
 Destination
 Kind of Transportation
 Handling, storability and storage considerations
 Conditions of usage and distribution
 Cost
 Availability of the type of package and choice of substitutes

Conclusion
Packaging has a key impact on the cost and productivity of the logistical
system. A central planning logic designed to control the total distribution costs
must incorporate all the relevant costs and trade – offs, also those related to
packaging. The cost of every logistical activity is affected by packaging.
Inventory control is dependant on the accuracy of the manual or automatic
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identification systems that are keyed by product packaging. The order selection
speed, accuracy, and efficiency are affected by the identification of product,
configuration and ease of handling. The capability of unitization and techniques
influence the handling cost. Package size and density influences the
transportation and storage costs too. From the customer perspective, factors like
quality control during distribution, providing consumer education, compliance
with environmental regulations explain the importance of packaging. Given the
complexity in the global supply chain and the costs of locating new facilities,
the concept of packaging postponement to achieve strategic flexibility is
gaining importance. With so much influence of packaging in every logistical
activity, an integrated logistics approach towards packaging operations can
yield substantial savings.

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CHAPTER 10: GLOBAL LOGISTICS

Introduction
Global brands and companies dominate most markets today. The global
company seeks growth of its business by extending markets while at the same
time seeking cost reduction through scale economies in purchasing and
production and also through focused manufacturing or assembly operations.
While the logic of globalization is strong, it also presents a few challenges. One
challenge is that world markets are not homogenous; there is a requirement for
local variation in a lot of product categories. Secondly, unless there is a high
level of co-ordination, complex logistics of managing global supply chains may
result in higher costs. Both these challenges are related. On one hand, offering
local markets the variety which they require while still gaining the advantage of
standardized global production and on the other, how to manage the links in the
global chain from sources of supply through to end user.
As an effective logistics system is important for domestic operations, it is
equally important for global operations too. Global logistics operation must
accommodate not only domestic requirements, but should also deal with
increased uncertainties associated with distance, demand, diversity and
documentation. With this background, there is a necessity for logistics
managers operating globally to develop a wide variety of capabilities and
expertise.
Globalized economies have created a host of business opportunities
beyond the national boundaries of a country. The world has become a global
village owing to the rapid advancement in information and communication
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technologies.
Today, the Internet has made it easier to do business electronically in any part
of the globe, from any point to any point. As businesses continue to globalize,
their attention has increasingly turned to logistics operations. Speed and
efficiency in the movement of goods across national boundaries depends on the
available modes of transportation, their capacity and capability, inter-modal
facility for movement, packaging, and handling, and logistical regulations in
countries where the buyers, sellers, and carriers are located. The domain
knowledge, connectivity with international cargo carriers, and documentation
are the three crucial areas that need to be focused in global logistics.These
emphasize the need for defining global logistics as the design and management
of a system that directs and controls the flows of materials into, through and out
of the firm across national boundaries to achieve its corporate objectives at a
minimum total cost.
The various activities involved in global logistics include demand forecasting,
packaging, labeling, documentation flow, customer service and parts and
service support, which are outbound. Production, scheduling, procurement, and
the handling of returned products form a part of inbound movements.
Logistics Intermediaries: These are logistics service providers who have
expertise in customs clearance and other formalities of international trade. In
import and export business, for the physical movement of cargo, the role of
intermediaries is quite indispensable.

Export Management Companies EMCs are intermediaries that market

another firm's products overseas.

Export Packers They assist the exporter with special packaging requirements
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needed to reach some export markets.

Customhouse Brokers These are usually tied to freight forwarders in exporting

nations. The customhouse broker meets the importer's shipment, and guides it
through customs seeking to use tariff classifications that involve the smallest
charges. Then goods are delivered to the importer's place of business.

Publication Distributors Publication distribution firms are specialized

intermediaries. For example, an airline company has this service that includes
wrapping, destination sorting, addressing, database management, and so on for
magazines. Magazines move overseas by air and then are turned to post offices
for delivery, saving on international package costs.

Goods Surveyors They are frequently referred to in international trade and are
retained by the buyer, seller or both to inspect their quality and retain them.
Parts Banks Several firms, often airlines, offer this service. This helps
manufacturers to store important repair parts throughout the world, where they
can be quickly flown to customers with equipment “down”.Container Leasing
Companies These companies facilitate inter modal movements because they can
relieve individual carriers of the financial burdens and control responsibilities
they would have if they had to own all of their equipment. Companies lease
containers on both a short and long term basis.

Export trading Companies Export trading companies are a distinct

intermediary. They actually buy the manufacturer's goods, take title, and then
sell these goods in the export market. ETCs are customers of manufacturers in
selected markets. By selling to an ETC instead of the importer, the
manufacturer removes himself from some of the financial risks associated with
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 exporting. Risks include political instability, importer creditworthiness, and the
risk of unavailability of foreign exchange.

The Global Supply Chain

To meet logistical challenges, logistics management must evaluate complexity
of global supply chains and must focus on the major differences between
domestic as well as international trade. These are as follows:

1. Differences in operations – Major operational differences are as follows:

 Multiple languages are required for both product and documentation for
international operations. Complexities increase due to language differences
when a product is limited to a specific country once it is been customized
with respect to language. Product proliferation due to language
requirements has been reduced because of multilingual packaging; this is
not an acceptable strategy always. Apart from product language
implications, multilingual documentation is required for every country
through which the shipment passes. There are many countries where
transportation and customs documentation needs to be provided in the local
language, although English is the local language. This results in an
increase in the time and effort for international operations as complex
documents need to be translated before shipment.

 A large amount of documentation is required for international operations.

Though domestic operations can be generally completed using only an
invoice and bill of lading, international operations require a lot of
documentation.

 Global transportation is complex. Certain services which are available and

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 taken for granted in a particular country may not be available in another
country, especially the underdeveloped countries.

2. Differences in Systems Integration - Earlier, there was little commonality

between the international information systems in multinational enterprises. This
was also acceptable as every country's operation was viewed as separate and
had an autonomous legal entity. In today's scenario, there is a requirement for
increased co-ordination through systems integration. There is a requirement for
increased global co-ordination through integration of systems and a few firms
have an integrated global logistics information system.

3. Differences in Alliances - The importance of carriers and specialized service

suppliers is more in the international operations than domestic operations. In the
absence of alliances, enterprises operating internally need to maintain contacts
with retailers, manufacturers, suppliers and service providers all through the
world. It would be time consuming to maintain these relationships. Market
access and expertise is provided by international alliances, which reduces the
inherent risk.
Organizing for global logistics
When companies extend their supply chains internationally they have to
confront the issue of structuring their global logistics organization. Companies
have moved towards the conclusion that global logistics can be achieved
only through a greater integration in

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different ways. This is in contrary to the conventional idea that a decentralized
decision- making responsibility needs to be developed and decentralized at least
upto a strategic business unit level. This had led to many companies develop a
strong local management, mostly with autonomous decision making at the
country level.
A number of general principles that have emerged are as follows:
a) Strategic structuring and an overall control of logistics flows need to be
centralized in order to achieve worldwide optimization of costs.
b) Control and management of customer service needs to be localized
against the requirements of specific markets for gaining competitive
advantage.
c) There is an increased trend towards outsourcing, which increases the need
for global co-ordination.
d) A global Logistics Information System (LIS) is absolutely essential for
ensuring the achievement of local service needs while seeking global cost
optimization.

 Structure and Control: A lot of companies, which are active on an

international basis, find that there is a constraint on their search for global
optimization by strongly infringed local systems and structure. The twin
goals of cost minimization and service maximization can be achieved
only through centralized planning and co- ordination of logistics.
Organizations need to look into locational decisions through total cost
analysis as the trend towards global manufacturing continues. There is a
necessity for improved access to information for costs related to
manufacturing, transportation, handling and inventory holding.
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 Customer Service Management: Considerable advantage can be
achieved by formulating marketing strategies locally, within overall
global guidelines. This is true especially in customer service management
where opportunities for offering tailor- made services to suit individual
customer requirements are huge. Managing customer service involves a
lot of monitoring of service as well as performance and also extends to
the management of the overall order fulfillment process – from order
capture through delivery. With an increasing global and centrally
managed order fulfillment system on the rise, there is a need for strong
local customer service management.
 Out-sourcing: One of the greatest changes in the global business today is
the increasing trend towards outsourcing. The trend nowadays is not only
outsourcing the procurement of materials, but also outsourcing services,
which have been provided in-house traditionally. The main idea behind
this trend is that an organization will increase its focus on its core
competencies and everything else will be outsourced. Control and
management of network of partners and suppliers requires a combination
of both central and local involvement.

 Logistics Information: Managing global logistics involves management

of information flows on a real-time basis. The information system acts as
a mechanism whereby the complex flows of materials; parts, sub-
assemblies and finished goods are co-coordinated for achieving cost-
effective service. An organization aspiring to be a global leader depends
upon visibility, which can be gained through material, inventories and
demand flows throughout the pipeline. Any time lapses in information

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 flows will be directly translated into inventory. There is a need for
information systems, which can estimate demand at every level in the
chain and also provide the driving power for a centrally controlled
logistics system.
Strategic Issues in Global Logistics
1. Internal Issues
 Logistics Planning: Logistics network planning is crucial for companies
with global operations in order to gain competitiveness. Formulating a
logistics network strategy also depends on factors such as unit value of the
product, markets and competition. For example: A firm's strategy to
develop new markets and relocate facilities will trigger the need for
sourcing of raw materials with reference to the delivery time frame,
logistics cost, and reliability. So the formulation of logistics strategies
should consider the location of production facilities, sourcing of materials
and components and product- market characteristics.

 Inventory: Make to order or make to stocks: Making to order for

delivering products directly to customer can result in a major shift in
inventory planning and also reduce inventory levels. Consolidating global
production into a single or focused factory for catering to needs of various
markets can be an approach. Fulfilling the needs of local individual
customers or local markets is done through the strategy of rationalization
of product design. A modular approach to product design, where the
product can be configured to its final shape at the distribution center
catering to local markets can take care of the local markets.

 Product variables: Reach of the logistical system is decided by the unit

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 value of the product. In a globalized marketing environment, firms with
low unit value products resort to the local manufacturing system for
extending good customer service.

 Flexibility: Global players focus on economies of scale for achieving cost

advantage. There is inflexibility in this system as responding to a dynamic
market and demanding customers can be difficult. Similarly the logistics
system associated with the above strategy also becomes inflexible while
responding to changing distribution needs. An example can be the
emphasis on freight consolidation

2. External Issues
 Shorter Lead Time: Global markets emphasize on responsiveness with a
lean supply chain. Thus, customers bank on the shortest lead-time for
inputs going into the product manufacture in order to compress the
performance cycle, extend superior customer service, and simultaneously
reduce overall levels of inventory. But, in the case of inflexibility in
manufacturing system the supplier has to maintain some buffer stock for
maintaining the desired level of customer service, thus sacrificing the
benefits of lean inventory.

 Trade barriers and facilitation: Though the trade barriers have reduced
progressively owing to GATT/WTO, the non-tariff barriers have increased,
particularly in the developed countries.

 Cultural Issues: These can be a problem in global sourcing due to a wide

variety of approaches to conducting business in different regions of the
world.
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Forces Driving Globalization
There are many forces, which drive the firms to enter the international arena.
These play a combined role of being motivators as well as facilitators.
Enterprises are motivated for global expansion of operations for growth and
survival. Development of technologies and capabilities are also facilitated
through global operations.

Economic Growth
A decline in the economic growth of industrialized economies has occurred
simultaneously with an increase in the manufacturing and logistics productivity,
which has resulted in excess capacity. With this scenario, a most direct means
for an enterprise to increase profit and revenue is through global expansion into
other developed and developing nations. This expansion requires an integrated
global manufacturing with marketing capacities as well as logistics support for
the new business location. A pursuit for growth and profit is a major force,
which drives enterprises to serve the global markets.

Supply Chain Perspective

Another force is the total supply chain perspective adopted by manufacturers
and distributors. A historical view sought that expenses incurred by other
channel members were not important while making logistics related decisions.
This trend is slowly changing. Also there was a practice that more control on
logistics activities can be achieved by doing as many activities as possible
internally. Eventually logistics managers found out that they could reduce
capital deployed by outsourcing a host of logistics activities. This has led to
development of alliances with global suppliers who could provide expertise and
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 also quality service at affordable prices.
Regionalization
When firms decided to expand, they wanted to do this by spreading their
wings to nearby geographic regions. To promote regional trade, countries began
to enter into treaties and formalize partnerships. There is always an extra time
required to accommodate political requirements, which add to the logistics costs
without adding value to the ultimate consumer. Though efforts for
regionalization have been designed to facilitate trade, continued government
restrictions cause logistical bottlenecks.
Technology
Technological development has resulted in an increased capability for
exchanging information facilitated by widespread availability of computer as
well as communication networks. For instance, today, the total performance
cycle time has been reduced through the use of enhanced information
technology. Demand for world-class products and services are on the rise as the
world has become more real-time oriented.
Fig 1: Forces driving globalization

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 Economic
Growth

Supply Chain Regionalization

Technology

Strategies to enter global market

Technique Modes of Entry
Indirect Exporting  Export Trading Company
 Export Management
Corporation
 Piggy-Backing
 Agent
Active Exporting
 Distributor
 Marketing Subsidiary
 Co-ordinating Direct Exports
 Foreign Sales Corporation
Production Abroad  Contract Manufacturing,
 Licensing
 Franchising
 Joint Venture
 Subsidiary
Parallel Imports

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1. Indirect Exporting: This means firms are not willing to export directly as they
prefer to concentrate on their domestic markets. Under this, several
alternatives are possible which are as follows:

a) Export Trading Company:

 This is an intermediary, which purchases the goods in the exporting

company and resells them to a customer in a foreign country.

 ETCs are very large firms, with local offices in many countries. They
take title to the goods in the exporting country, making this transaction
a domestic transaction for the exporter, and transfer the title to the
importer in the importing country, thus making the transaction a
domestic transaction as well. For either parties dealing with the trading
company, the product is seemingly handled by a domestic company, its
foreign origin is not concerned for the buyer, and its sale abroad is not
an issue for the seller.

 These trading companies have acquired a lot of information on

potential sellers and buyers and they leverage this knowledge into
sales.

 These companies offer a complete package of international logistics

services such as shipping, insurance and financing international trade.
b) Export Management Corporation:

 An EMC is located in the exporting country and is operating as an

export-oriented manufacturer's representative for the exporter.

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  EMCs have the tendency to restrict their sales efforts to potential
customers in a single country and often specialize in selling a single
line of production in that country. Most of them represent more than a
single manufacturer abroad, usually in complementary lines.

 The exporter is involved slightly more in the foreign sale as the EMC
acts as an agent.

 Thus, the EMC acts as the export department of the seller, handling
every detail of the transaction.
c) Piggy-Backing:
 This choice is for the reluctant exporter.

 A successful exporter involves one of his suppliers or a

company making complementary product in the markets that this
exporter has developed.

 This strategy gives an opportunity for a firm to gain knowledge

about selling abroad.

2. Active Exporting: This option is where the firm desires to exploit the
possibilities of sales abroad and decides to become involved in its exporting
activities. Various alternatives are as follows:
a) Agent:

 An agent is usually a small firm or an individual located in the

importing country, which acts as a manufacturer's representative for the
exporter. Thus the agent does not take title to the goods it sells but
earns a commission on the sales it makes.
 The exporter is known as the principal due to the relationship with agent.
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b) Distributor:

 A distributor is usually a firm located in the importing country – or

sometimes in a neighboring country, which buys goods form the
exporter. A distributor takes title to the goods it sells and earns a profit
on the sales it makes.

 He takes more risk in his relationship with the exporter than an agent
and experiences higher costs. He carries the traditional risks associated
with inventory and also invests a considerable sum of money in the
inventory.
c) Marketing Subsidiary:

 This refers to a foreign office, staffed by employees of the exporting

firm that sells goods in the foreign market.

 It is incorporated in the foreign market, and is the importer on record as

far as the foreign government is concerned, and the export takes place
between two legal entities that are part of the same company, at a
transfer price.
d) Foreign Sales Corporation:

Created in the United States for tax break for exporters. In fact more than a
method of entry, it is a way for United States based corporations to lower its
income tax.
3. Production Abroad:

This is a strategy where a company can start operations abroad. This can
be done through the following alternatives.

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a) Contract Manufacturing:

 Company enters an agreement with a producer in the foreign

market to manufacture its goods.

 Suitable as an entry strategy for markets with significant barriers to

entry such as high tariffs and quotas.
b) Licensing:

 Granting of rights to intellectual property owned by a company to

another company for a fee.

 Company using the intellectual property has the right only to use the
property and for every use has to pay a fee called royalty.

 In the international arena, the licensor is the exporting company and

licensee is the foreign company.

 Use of this strategy is when high tariffs or non-tariff barriers,

prohibitive shipping costs limit access to market or when licensor is
uninterested in actively pursuing the market.
c) Franchising:

 Process by which a firm possessing an array of intellectual property

items grants another company the right to use these intellectual
property items in exchange for royalties.

 Basically, the franchisee and franchisor are in distinguishable in the

eyes of customers.

d) Joint Venture:

 Creation of a new corporation in a foreign country, jointly owned by

the joint venture partners in any combination of ownership
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 percentages.

 This strategy minimizes the impact of a possible nationalization.

e) Subsidiary:

 Investment by a firm in a foreign venture.

 Another option is where the firm can relocate an entire plant to a

foreign location, for utilizing cheap labor and forgoing the higher costs
of a brand new facility.

 Followed by firms who want total control of an investment and are

willing to take the risk of such a venture.

 This strategy is more beneficial to the host country as it creates jobs and
offers substantial incentives to foreign company that are willing to
establish a facility within their borders.

4. Parallel Imports: Goods are sold outside the regular distribution channels of
a company, usually because there is a difference between the price charged
in one country and the price charged in another.
Modes of Transportation in Global Logistics
Transportation plays a vital role in the movement of cargo within or between
countries. Selection of the transportation mode depends upon the following factors
 Location of market
 Cost of transportation
 Speed of cargo transportation
 Reliability of mode

Air: Advantage of this mode is responsiveness as it can quickly respond to

urgent and unpredictable demands for parts or components. There is minimum
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transit damages to the cargo. Also the insurance cost is lesser when compared to
other modes. This mode is confined to high value density items – items having
high selling prices where the transportation cost is an insignificant percentage
of the price of the product. By using air transportation, since the value of cargo
is high, the capital tied up in inventory in transit is released fast.
Sea: Used mostly for cross border cargo movement. The types of ships used are as
follows:

a) Independent lines: Operate and quote rates individually and independently.

They accept cargo from all shippers through freight forwarding agents.

b) Tramp vessels: Do not have any fixed route or schedules and operate on a
charter basis. They are mainly involved in bulk cargo transportation.

c) Conference lines: Association of shipping companies across the world.

They join hands to have common codes/rules for cargo movement, freight
rates, shipping conditions etc.

Road: Preferred when countries are connected by land and other options are
either costly or not feasible. In India, roads are an important mode of cargo
movement.
Barriers to Global Logistics: A host of barriers hinder global logistics. Three
significant barriers are as follows:

Markets and Competition

Restrictions of entry, availability of information, pricing and competition are
the market barriers. Poor availability of information is one more barrier.

Tariffs are the other marketing-related barriers. Tariffs are additional cost
elements, which need to be considered while evaluating foreign sources of
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supply. Also tariffs are political, and are subject to change as and when
government policies change.
While most international firms experience a highly competitive environment,
various rules concerning competitive governance is also proving to be global
logistics barrier. A combination of lack of awareness regarding global rules as
well as the necessity to conform to norms of particular geographic regions is a
competitive barrier.

Financial Barriers
These result from forecasting and institutional infrastructure. Though it is not
simple to forecast in any situation, it is very difficult in global environments.
The challenge in domestic forecasting is prediction of unit or dollar sales on the
basis of customer trends, competitive actions as well as seasonality. In a global
environment, the challenges also include exchange rates, customs actions, and
government policy complexities. Barriers in institutional infrastructure arise out
of the major differences in intermediaries like banks, firms, and legal
counselors or transport carriers. A combined financial and institutional
uncertainty makes it difficult for planning product and financial requirements.

Distribution Channels

Differences in the distribution channels such as standardization of infrastructure

as well as trade agreements are a barrier confronting logistics managers.
Infrastructure standardization means the differences in transportation and
material-handling equipment, warehouse and port facilities and systems of
communication. While there are recent efforts for standardization with respect
to containerization, there are a lot of major differences in global transportation
equipment like vehicle dimensions, capacity, weight and rail gauge.
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 When there is no standardized infrastructure, products are loaded and reloaded
into different vehicles or containers, while crossing national boundaries, which
results in higher costs and time.Trade restriction barriers can also influence
channel decisions, such as rules restricting volume of imports or increase duties
once a specified volume has been reached.
Fig 2: Barriers to global logistics (Source: Bowersox & Closs, 2004)

Marketing/ Financial Distribution

Barriers to International Logistics

Successful
Global Logistics Management International

Potential Benefits of International Trade

Conclusion:
Implementing a global pipeline control is dependant to a large extent upon the
organization's ability to find a correct balance between central control and local
management. Global organizations are expanding and this suggests that there
are certain tasks and functions requiring local management and control.
International competition has become more intense, due to a gradual reduction
in the national barriers. Sophistication of product technology or marketing
communications determines the difference between success and failure in the
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global marketplace.

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CHAPTER 11: LOGISTICS STRATEGY

Chapter Objectives

- Introduction
- Requirements for effective logistics strategy
- Strategic Logistics Planning
- Logistics Strategies
- Implementation of Strategy
- Strategic Issues
- Strategic Fit
- Conclusion
Introduction
In the modern day dynamic business environment, competitive pressures and
customer demands force a large number of firms in shifting their priorities
towards understanding the logistics supply chain process for delivering superior
value to customer. In order to achieve this objective, the historic role of
warehousing, transportation, storage, and handling have started with a more
comprehensive role, which pervades the entire supply chain.
Logistics strategy facilitates gaining a competitive edge to support emerging
technologies. As a service function logistics involves the four basic features:

 Reliability: Influences the degree of trust, which a supplier can have, in a

company's capability for honoring commitments. The supplier has to be
perceived as reliable and for this the supplier needs to exhibit certain
service characteristics. A high degree of reliability in terms of inventory
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 and material delivery is expected from the supplier end. Thus a key
objective of the logistical system needs to be reliability in meeting the
needs of the customer, according to the resource planning.

 Responsiveness: The speed with which customer demands are being

responded. Responsiveness is expected at all levels of the supply chain.
Response to pre-sales enquiry by using latest available information and
communication technologies is an important strategy. Supplying material
as per customer needs, and frequent deliveries in fewer lot sizes are
important. Deliveries can also be made at the various assembly centers,
which are in proximity to the markets. A firm will gain a winning edge in
competitive markets through a responsive strategy.

 Relationship: Firms spend huge amounts in Customer Relationship

Management (CRM) related activities for development of long term
relationships to retain customers, and also reduce the element of risk in
demand management. Partnering with the right supplier and considering
the supplier operations, as an extension of its own operations will enhance
the efficiency and effectiveness of the supply chain.
 Rationalization: This refers to reducing the supplier base and partnering
with select suppliers. The supplier's facility is treated as an extension of the
buyer's facility and there is sharing of information, experience and
resources for mutual advantage.

Requirements for an effective Logistics Strategy

Characteristics of an effective logistics strategic planning and project
management are as follows:

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Dedicated planning resources and programs: Unless proper resources are set
aside for long term planning, it will not be carried out to the level of necessity
to assess ways of changing economic, technological, competitive, demographic
and regulatory environments affecting long-range requirement of logistics. A
dedicated logistics planning team needs to be organized. The logistics planning
team should include analytical and operational backgrounds that are required to
resolve complex issues.
Formal Logistics Planning Methodology: Logistics is filled with
interdependent activities, which impact other areas of the organization.
Planning activity goes through three important phases such as investigation,
vision and implementation. In the investigation phase, a logistics audit is
conducted and the company's current performance and practices are compared
with world-class practices. The vision phase involves application of world-class
practices to the current environment. In the implementation phase, detailed
project plans for completing the recommended initiatives are developed and
monitored.

Strategic Logistics Planning

Business firms have been forced to reengineer or redefine their business process
so that efficiency and effectiveness can be brought into the operations. The
main reason for this has been the increasing globalization of business activities,
intense competition, and uncertain markets. Different firms have different
process of strategy formulation and implementation. The process of strategic
logistics planning has the following steps:
 Analyzing the external and internal environment, which will help to
determine the resource requirements, limitations and any other factors.
 The environmental analysis identifies the company's strengths,
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 weaknesses, opportunities and threats in customer service.
 SWOT enables in formulating the appropriate resources and the logistics
mix or resources required for achievement of organizational goals.
 A structural design is needed to implement the strategy. The primary
concern here is the strategic planning of warehouses; transportation and
information flow in the entire supply chain. A proper interface between
channel structure of the firm and its logistical network can be done with
the help of a structural design. The efficiency of the functional elements in
the movement of information and inventory across the supply chain will
influence the success of the strategy implementation.

 Selection of transportation route, mode and carrier operator is a key aspect

for offering and maintaining a reliable and consistent service level.The role
of material procurement and management also cannot be
ignored.Implementing the strategy is absolutely important and its success
depends on efficiency of the human resources, equipment and the
interfaces involved. A major task at the level of operation are order
registration, processing, picking, replenishment and dispatching.
Thus, the process of strategic logistics planning will improve the overall
responsiveness of the organization.components of Information Decisions in
Supply Chain Strategy:
 Push Versus Pull: While designing the pieces of supply chain, it is
necessary to determine whether these are part of the push or pull phase in the
supply chain. Push systems require an elaborate Master Production Schedule
(MPS) and Master Requirements Planning (MRP). The Master Production
Schedule rolls the Material Requirements Planning (MRP) system. In
contrast, for pull systems, information is
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 required on actual demand for quick transmission throughout the entire
chain so that the real demand is reflected.

 Competitive Strategy: This defines the customer needs to be satisfied

through its products and services. A firm's competitive strategy depends
upon the customer requirements. It targets the customer segments with a
main objective of providing products and services to cater to the customer
needs.

 Product Development Strategy: Mentions clearly the portfolio of new

products, which needs to be developed by a company giving an indication
whether efforts towards these are done internally or externally.

 Marketing and Sales Strategy: Specifically mentions about market

segmentation and details relating to positioning, pricing and promotion of
the product.

 Supply Chain Strategy: A wide term, which includes supplier, operations

and logistics strategy. Includes decisions relating to inventory,
transportation, operating facilities and information flows. The strategy
specifies the activities of supply chain such as operations, distribution and
service.

 Other Strategies: A company also devises additional strategies for finance,

accounting information technology and human resources.

Logistics Strategies
Formulating a logistics strategy can be viewed from the following three angles:
 Customer demands satisfied through strategy implementation
 Targeting customers
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  Resources required for implementing strategies

Formulating a strategy is not an isolated process. Logistics strategy needs to

have congruence with the overall goal and strategy of the business. A synergy
with the other domains of the organization is necessary. An example of this
can be the Management Information Systems of an organization
encompassing all the functional areas of business. The MIS, being an
information sharing system across the supply chain has considerable synergy
with logistics operation.. Considering the importance of formulating a
logistics strategy, the following are the possible approaches:
The following competitive and generic strategies could be pursued for
logistics operations:
1. Cost Leadership: Achieving cost leadership is facilitated by logistics cost
reduction to a major extent. This can be achieved by many ways. Examples of
achieving logistics cost reduction are:
 Reducing transaction costs through IT support
 Warehouse operations based on scale economics
 JIT, cross docking and postponement, which results in reduction of
inventory and related costs.
 Reduced vendor base and co-partnerships with suppliers.

2. Differentiation: This strategy focuses on offering superior service. Examples

of offering logistics services for differentiation:
 On time and consistent delivery
 Logistics solutions to suit individual requirements
 Tracking consignments

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 3. Collaboration: A strategy where the customer works in collaboration with
the suppliers. An example here is Vendor Managed Inventory (VMI). In VMI,
customer places no orders but instead shares information with the vendor. This
information relates to actual usage or sales of their product, their current on
hand inventory and details of additional marketing activity. On the basis of this
information, the supplier takes responsibility for replenishment of the customer
inventory.
4. Diversification: Firms having a lot of operations adopt this strategy. The
basic objective here is the lower cost and better control over operations thus
providing superior customer service.
5. Outsourcing: Outsourcing services to logistics service providers having
expertise in this area in order to bring efficiency and effectiveness into the
logistics operations. An example in outsourcing is Customs Clearance service
providers. As a majority of exporters and importers do not have a proper
expertise in this area of logistics operations, many logistics service providers
offer customs clearance services to their clients. This can reduce the overall
transaction cost.
Implementation of Strategy
Implementation of the strategy is an important activity after the formulation.
The firm needs to evolve a proper framework to successfully implement its
logistics strategy. Important aspects for implementation of strategy are:

 Financial dimensions of control such as net income return on equity, net profits
etc

 Non-financial parameters of control such as quality of service, customer

satisfaction, delivery time etc

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  The organizational culture and employee motivational programmes
initiated by the company facilitate behavioral controls for employees.

 The structure of the organization is of importance. Organizational structure

with a wide span of control give higher motivation to employees to
perform well and strategy implementation can be done successfully in such
organizations.

 Skills of the implementers of the strategy are also an important consideration.

The successful implementation of logistics strategy depends to a great extent on
the information shared with internal and external customers and also logistics
partners. Transparency at both the buyer and seller's end helps to build an
element of trust, thus adding value to the customer delivery chain, which makes
the task of implementation simpler.

Fig 4: Framework for strategy implementation (Source: Sople, 2004)

Strategy

Financial and Non –Financial

Controls

Organizational
Organizational Structure
Culture

Complementary Human skills

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Performance
Strategic Issues that confront today's business organization
With today's business scenario becoming more complex these have an impact on
logistics. The following strategic issues confront the area of logistics today:
 Expansion of customer service: Today's customers are more demanding,
not only in terms of quality but also from service point of view. There is a
need for differentiation with more and more markets becoming ‘commodity'
markets. The creation of differential advantage is through adding value,
especially through customer service. Achieving competitive advantage
through customer service is from a carefully planned strategy for service,
and developing appropriate delivery systems and commitment from people
throughout the organization. Achieving service excellence can be only
through a closely integrated logistics strategy.

 Time Compression: Time is a critical issue in management. Shorter product

life cycles enable customers to accept substitute products, which are
available just in time. In the case of introducing new products, management
implications result from the reduction in the time ‘windows' for making
profits. Amidst all the concern for creating and managing innovation, there
is an issue, which is perhaps given the necessary attention only now. This
issue is the problem of extended logistics lead times. Lead-time is the time
taken to convert order into cash. An important function of logistics is the
provision of availability. The integration of marketing and manufacturing
planning is necessary to achieve the availability requirement. More problems
are created by limited co-ordination of supply decisions with the dynamic
requirements of the market and the limited visibility in purchasing and
manufacturing related to final demand. A radically different approach to
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 manage lead-time is required to overcome these problems and establish
long-term competitive advantage by ensuring timely response to changing
demand.

 Globalization of the industry: The increasing trend towards globalization is

proving a challenge for logistics management. Global companies seek to
achieve competitive advantage by identifying world markets for its products
and then developing manufacturing and logistics strategy to support its
marketing strategy.

 Organizational integration: The classical business organization is based

upon strict functional divisions and hierarchies. Achieving a closely
integrated, customer-focused materials flow while encroached management
with its priorities guards traditional territorial boundaries. Today's
organizations follow a systems approach where functions are components of
the system, which requires an overall guidance to fit together.
Strategic Fit
This means that there is a common goal between the competitive as well as
supply chain strategies. Aims at achieving a consistency between the customer
priorities satisfied by the competitive strategy and the supply chain capabilities
satisfied by the supply chain strategy. Three basic steps in achieving the
strategic fit:
1. Identifying the uncertainties of the customer and supply chain: To have
an understanding about the customer, the company must first understand the
needs of the customer segment. For example a customer who visits a store
nearby may be doing so for convenience and not for the low cost. Similarly,
a customer may visit another store irrespective of its location for its low
cost.
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Various attributes on the basis of which customer demand varies across
segments are as follows:
 Product quantity required in each lot
 Tolerable limit of response time
 Price of the product
 Required service level
 Desired level of innovation
Demand and Implied Uncertainty: Demand uncertainty reflects the
uncertain customer demand for a product Implied demand uncertainty is
related to the portion of demand, which the supply chain is required to handle.
This is in contrast to the demand uncertainty, which reflects uncertain demand
for a product.

2. Understanding the Supply Chain: After understanding the company

uncertainty, the firm needs to meet the demand in the uncertain
environment in the best possible way. A trade off between responsiveness
and efficiency is of significance here. A responsive supply chain has an
ability to provide the following such as responding to a voluminous
demand; meeting high service levels, handling variety and innovative
products. But responsiveness can be achieved only with a cost. An efficient
supply chain operates by making and delivering a product to the customer
at a lower cost.
3. Achieving Strategic Fit: The performance of the supply chain needs to be
consistent with the targeted needs of the customer and uncertainty in the
supply chain. A firm needs to consider all the functional strategies within the
supply chain to achieve a complete strategic fit. A supply chain, which is
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 highly responsive, needs to devote all its functional strategies towards service
levels while an efficient supply chain needs to focus its functional strategies
towards cost.
Other Issues Affecting Strategic Fit:
Multiple products and customer segments: A majority of the companies
manufacture and sell multiple products to multiple customer segments, each
one of these with different characteristics. Each of these products and
segments has an implied demand uncertainty of their own. While creating a
supply chain strategy for each of these, the company needs to balance
efficiency and responsiveness provided the portfolio of products, customer
segments and sources of supply are known.
Product Life Cycle: When products pass through the product life cycle, there
is a change in the characteristics of demand and the needs of the customer
segments being catered to. Towards the beginning of the cycle, demand of the
product is absolutely uncertain and there is unpredictable supply. Availability
of product is a crucial factor in capturing the market, cost being a secondary
factor. High implied uncertainty makes responsiveness a key feature of the
supply chain.
At the later stage of the life cycle, demand becomes more certain and supply
is predictable to a certain extent. Increase in competition lowers the margin.
The supply chain becomes efficient from responsiveness. Thus the supply
chain strategy must keep changing over the product life cycle as demand and
supply characteristics change.
Competitive Changes over Time
Finally, changes in competitor behavior are a point of consideration.
Competitors can influence the competitive strategy. With more product

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 variety, supply chain have been forced to develop an ability to supply high
variety. With a change in the competitive landscape, firms are forced to alter
the competitive strategy. A strategic fit needs to be maintained with a change
in the supply chain strategy.

Fig 5: Achieving Fit Between Competitive and Functional Strategies

Competitive Strategy

Achieving Strategic Fit

Functional Strategies
- Logistics Strategy
- Product Development Strategy
- Marketing and Sales Strategy
- Information Technology Strategy
- Finance Strategy
- Human Resources Strategy

Conclusion
Organizations formulate strategies responding to environmental pressure.
Logistics is an important element in these strategies. The apparent trends today
are from a logistics strategy approach to a strategic logistics approach. Logistics
is being used as a tool to again sustainable strategic advantage more than a tool
for developing competitiveness. The success of the strategy depends to a great
extent on the framework, where key variables are control tools like
organizational culture and structure, and human skills involved in the process.
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Today, managers are encouraged to look beyond the traditional view and seek
out to develop logistics strategies for exploiting a lot of potential to improve
productivity and efficiency to deliver advances in customer service. A large
amount of capacity utilization, reduction of inventory and improvements of
service through tighter co-operation with suppliers is required.

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CHPATER 12: LOGISTICS INFORMATION SYSTEMS

Chapter Objectives:
- Introduction
- Functions of LIS
- Building Blocks of LIS
- Data Warehousing, Mining and DSS
- Information Architecture
- LIS flows
- Applications of LIS
- Principles of LIS
- Conclusion

Introduction
Logistics information systems are the means of capturing, analyzing, and
communicating information related to logistics and supply chain management.
Information was largely paper-based during the past and thus resulted in slow,
unreliable, error-prone transfer of information. Now, with technology
becoming user friendly and also less expensive, logistics managers can
effectively and efficiently manage information electronically.Earlier, logistics
focused on efficient flow of goods through the distribution channel.
Information flow was not given that much of importance. Now, timely and
accurate information is critical owing to the following reasons:
 Total customer service includes information related to order status, product
availability, delivery etc.
 To reduce supply chain inventory, information is very essential as this
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 can minimize demand uncertainty
 There is more flexibility with information as there is clarity as to how,
when and where resources may be utilized to gain strategic advantage

This has triggered the need for an effective Logistics Information System.

Functions of a Logistics Information System are as follows:

o Planning
o Co-ordination
o Customer Service and communication
o Control

Fig 6: Functions of a Logistics Information System (Source: Martin Christopher)

Planning Function

- Management of stock
by product and location

Co – ordination Function Customer Service and

communication function
- Production - Inbound shipment
scheduling Database status
- Sales or marketing - Customer order
planning status

Control Function
- Customer service levels
- Vendor, carrier and system
performance

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 Logistics information systems are the threads, which link the various logistics
activities into an integrated process. The system builds on four levels of
functionality:
Building Blocks of LIS are as follows

a) Transaction System - Initiates and records individual logistics activities.

Activities include order entry, selection, inventory assignment, shipping,
pricing, invoicing and customer enquiry. In this system, the customer order
performance cycle is completed though a series of information system
transactions.

b) Management Control Systems - Focus is on performance measurement and

reporting. Performance measurement provides management feedback
regarding the service level and resource utilization. Customer service,
productivity, financial and quality indicators are the commonly used
performance measures. While, the Logistics Information System (LIS) reports
past performance, it is also essential that exceptions are identified as and when
they are processed.

c) Decision analysis – Focuses on decision applications to assist managers to

identify, evaluate and compare logistics strategic and tactical alternatives,
vehicle routing and scheduling, facility location cost – benefit analysis
etc. Evaluates future tactical.alternatives and thus need to be unstructured
and flexible to consider a wide range of options. To benefit from its
capability, user requires a lot of expertise and training.

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d) Strategic Planning - Focus is on information support to develop and refine
the logistics strategy. Decisions are typically more abstract in nature, are
lesser structured and have a long-term focus. This level requires incorporating
lower-level data collection into a range of business planning as well as
decision-making models, which help in evaluating the probabilities and
payoffs of strategies.

Fig 7: Building blocks of LIS (Source: Bowersox & Closs, 2004)

Strategic Planning

Decision Analysis

Management Control

Transaction
Systems

Logistics Data Warehousing, Data Mining, and Decision Support Systems

Logistics Data Warehousing serves as the foundation for the entire

Information System. The data warehouse contains data structures, which are
anticipated and developed ahead of the requirements for the other execution
as well as planning systems, which makes the design, selection and
implementations of those systems easier, and less time consuming. It
contains information, which describe past activity levels as well as the current
status, which serves as the basis for planning future requirements. This
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 enables access of data. Data access usually becomes a bottleneck as it causes
a lot of system failures, delays and response time problems. Also, profiling
the logistics activity and data mining is not possible until the logistics data
warehouse is designed and developed.
Logistics Data Mining is key to any logistics improvement initiative and is a
methodical and systematic analysis of supply and demand activities. The
process is designed to identify the root cause of materials and information flow
problems, to identify major opportunities for improving processes, and also
enables objective decision-making.
Logistics Decision Support Systems are computer based decision support
tools, which provide solutions to logistics problems. Examples include QAD,
SAP and JD Edwards.
Information Architecture
Logistics system architecture includes both the information - that which
maintains the data warehouse as well as the execution components. Data
warehouse contains past as well as current information. Execution components
include activities such as initiation, monitoring, and measurement of activities
required fulfilling customer as well as replenishment orders. These activities are
as follows:
Planning and Co-ordination: These form the information system backbone
for manufactures as well as merchandisers. Activities include material planning
within the organization as well as between channel members. Components of
planning and co- ordination include:
 Strategic Objectives – These are the primary information drivers in many
organizations, which basically define the financial as well as marketing
goals. These objectives are developed for a time period ranging for many

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 years and usually include quarterly updates. A combined marketing and
financial objective define markets, products as well as the services and
indicate the activity levels for logistics managers during the planned time
frame. A combined marketing and financial plan also serves as a direction
for other enterprise plans.
 Capacity Constraints – These evolve from the strategic objectives.
Capacity constraints identify the material bottlenecks using the defined
activity levels and thus effectively manage resources to satisfy market
demands. The place, time and quantity for production, storage and
movement are determined by capacity constraints. Aggregate production
and throughput limitations like annual or monthly capacity are considered.
Time dimension is introduced into an organization's strategic objectives by
considering factors such as facility, financial and human resource
limitations. These constraints have a great influence on logistics schedules.
The enterprise's aggregate plan is linked by capacity constraints, which
have a great influence on the production for every location. A high level of
integration across all planning and co – ordination components is highly
essential for a good organization.

 Logistics Requirements: These co-ordinate the facility, equipment, labor,

as well as inventory resources, which are necessary for accomplishment of
logistics objectives. Distribution requirement planning (DRP) is used for
implementation of logistics requirements. Future requirements and
forecasts are based on customer orders, sales and marketing conjunction
with historical activity levels. Logistics requirements need to be integrated
with capacity constraints as well as manufacturing requirements in order to
obtain optimal system performance.
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  Manufacturing Requirements: Production resources are scheduled by
manufacturing requirements and attempt to resolve day – to - day capacity
bottlenecks within the material management systems. The Master
Production Schedule (MPS) and Materials Requirements Plan (MRP) are
determined by manufacturing requirements. Weekly or daily production
schedules are defined by the MPS. Once the MPS is given, MRP enables
co-ordination of purchase and arrival of materials to provide support to the
desired manufacturing plan.
 Procurement Requirements: These facilitate the material releases,
shipments and the receipts. Long – term material requirements and release
schedules are demonstrated by procurement requirements, which build on
the capacity constraints, logistics and manufacturing requirements.

 Operations: Include information activities, which are required for receipt,

processing and shipment of customer orders and also to ensure co – ordination
of receipt of purchase orders. Components are as follows:

 Order Management: Serves as the point of entry for customer orders and
inquiries. Enables entry as well as maintenance of customer orders using
various technologies of communication such as mail, phone, fax, EDI etc.
Functions include retrieval of requisite information, editing appropriate
values, and retention of acceptable orders for processing done. Information
relating to inventory availability as well as delivery dates to confirm
customer expectations can be obtained. Order management creates and
maintains customer as well as replenishment orders base that affect the
remaining operations components.

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 Order Processing: Available inventory is assigned to open customer and
replenishment orders. Orders may be allocated on receipt basis or in batch
mode. Real – time allocation is more responsive, and batch allocation
provides more control over situations of low inventory. Generating an
order solution satisfying both customer requirements as well as enterprise
resource constraints is a suitable order processing application.

 Distribution Operations: Direct all activities within the distribution centers

using a combination of batch as well as real – time assignments. In the case
of batch environment, LIS develops list of instructions or tasks for guiding
each material handler (a person who handles material handling equipment
such as fork trucks or pallet jacks) in the warehouse. In a real – time
situation, information – directed technologies operate in interaction with
LIS to prevent time elapse between decision and action. There is more
operational flexibility and reduction in internal performance – cycle time
requirements in case of real – time distribution.

 Transportation and Shipping: Include LIS functions of planning, execution

and management of transport and movement activities. Activities include
scheduling and planning shipment, consolidation, notification, transport
generation and carrier management There are three parties involved in
transportation and shipping LIS – shipper, carrier and consignee. A basic
level of information integration needs to exist for information to be shared.
Increased planning as well as performance measurement capability can be
incorporated with the help of state of the art transportation and shipping
LIS.

 Procurement: Procurement systems have not been considered a part of LIS.

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 But the importance of integrating procurement is inevitable while managing
the entire supply chain. Procurement manages preparation of purchase
orders, modification, as well as their release. A desired procurement LIS
needs to provide planning, direction ofactivities and measurement of
performance and also co – ordinate inbound and outbound activity
movement.

 Inventory deployment and Management: Serves as the primary interface

between planning, co – ordination and operations. It plans requirements and
manages finished inventory from the production till customer shipment. The
primary component here is the forecast module, which predicts product
requirements of customers for every distribution centre and thus supports
enterprise planning. Other components include simple reactive models to
complex planning tools. Customer service objectives established by
management are of significance in inventory deployment and management.
With effective inventory deployment and management, level of inventory
assets required can be significantly reduced. An important function of this is
measurement of inventory performance by continuous monitoring. An
integrated forecast information facilitates inventory deployment and
management and this results in low inventory requirement.
 Logistics Information System Flow
The LIS flow consists of the following elements:
 Modules: Actual routines that process data or information. Examples
include entering orders or assignment of inventory.

 Data Files: Information structures that store task specific data like orders or
inventory records.Management and data entry activities: Represent the
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 interface where LIS need to obtain input from externals environment like
decision-maker or from another firm.
 Reports: Provide information related to logistics activity as well as performance
links.
 Communication links: External and internal interfaces between LIS
components and the external environment.
Modern Technology Applications:
Information technology is a major source of improved productivity as well as
competitiveness. Specific technologies with widespread logistics applications
are as follows:

Electronic Data Interchange: Intercompany computer-to-computer exchange

of business documents in standard formats. It describes both capacity as well as
the practice of communicating information between organizations electronically
instead of using traditional methods like mail, courier or fax. Benefits of EDI
are as follows:

 Improved internal productivity

 Improved external productivity

 Improved channel relationships

 Reduced operating cost

 Ability to compete internationally

With regard to logistics cost, EDI impacts the same by reducing labor and
material cost associated with papers, reduces communication and also clerical
cost.

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 Electronic Data Interchange Standards: Essential elements in Electronic Data
Interchange (EDI) which include communication and information standards.
Communication standards influence the character sets, priority in transmission
and speed. Information standards prescribe types of documents and sequence in
which a document is transmitted

Artificial Intelligence or Expert Systems: This refers to a term, which

describes a group of technologies, which are aimed at enabling computers to
imitate human reasoning. Technologies include expert systems, natural
language translators, neural networks, recognition of speech, 3D-vision etc.
Logistics expert systems increase a firm's return on assets. They primarily
include three components: knowledge base, inference engine and user interface.
The process of developing the knowledge base is by interviewing a series of
“experts” regarding the data as well the logic used to make decisions. The
knowledge base regarding the best technique to use is available with an
experienced forecaster. The inference engine to identify rules relevant for a
specific decision searches the knowledge base. It determines the relevant rules
and their sequence of evaluation. Interaction between the decision maker and
the expert system is facilitated by the user interface, which formats the key
questions to user in the natural language and also interprets the responses. As
additional information or expertise is obtained, a good interface enables user to
refine his knowledge base as additional expertise or information is obtained.

Fig 8: Basic Structure of an expert system

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 User

User
Interface

Advice and Facts and Data

Explanations
Inference
Engine

Knowledge
Base

Communication: Logistics performance through faster and widespread

communication is enhanced by information technology. Earlier, logistics
activities had a glaring communications disadvantage as they involved the
movement in either a transport or a material handling vehicle or were
decentralized. Thus, information and directions were removed in terms of time
as well as location from the actual activity. Radio frequency, satellite
communications and image processing technologies have overcome this
problem to a great extent.Radio frequency technology is within smaller
geographical areas, like distribution centers, which facilitates two-way
communication. These applications related to logistics include two- way
communication between warehouse count verification, selection instructions
and printing of labels.

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Satellite technology enables communication across a wide geographic spread. It
also provides faster and a high-volume channel for movement of information
across the globe.Image processing application depend heavily upon fax as well
optical scanning technology for transmission as well as storage of freight bill
information, as well as other documents of support such as proof of delivery
receipts or bill of lading.Substantial capital investment before obtaining returns
is required for RF technology, satellite communication capability, as well as
image processing. The major benefit for these communication technologies is
an improved customer service.
Bar Coding and Scanning: Collection and exchange of information is very
critical for logistical management as well as control. Earlier, manual collection
and exchange were done which resulted in error and time consumption. Bar
coding involves placing computer readable codes on items, cartons, containers,
as well as railcars. A bar code system includes a bar code symbol, which
represents a series of alphanumeric characters. Universal Product Code (UPC)
is present on almost all consumer products. A standardized bar code reduces
errors in receipt, handling or shipping a product. Two most significant
developments in logistics are multidimensional as well as container codes.
Multi – dimensional codes increase transfer of information as their design
enables them to “stack” one bar codes on top of one another. Container codes
enable manufacturers and distributors to provide container identification from
point of production to point of sale.

Radio Frequency Identification Device (RFID): Radio frequency

identification, or RFID refers to the technology that uses radio waves to
automatically identify people or objects. An RFID system consists of a tag,
which is made up of a microchip with an antenna, and an interrogator or reader
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 with an antenna. The reader sends out electromagnetic waves. The tag antenna
is tuned to receive these waves. A passive RFID tag draws power from field
created by the reader and uses it to power the microchip's circuits. The chip then
modulates the waves that the tag sends back to the reader and the reader
converts the new waves into digital data.RFID is an evolutionary step in global
supply chain integration. It makes it possible to synchronize the physical flow
of goods and the related information flow without the need for human
intervention from the point of origin to consumption.
Principles of Logistics Information
Six principles to be incorporated to ensure that management information needs
are adequately met:

 Accuracy - The degree to which the Logistics Information System reports

should match with the actual physical counts. The logistics information must
accurately reflect both the current status as well as the periodic activity for
measures such as customer orders as well as levels of inventory.
 Availability - Logistics information must be readily available when
required. Enterprises usually have substantial data relating to logistics
activities, but these are often paper- based or very difficult for retrieval from
computer systems. It is necessary that these are available speedily to
improve customer response and decision - making. The decentralization of
logistics operations makes in necessary to access information from anywhere
and update them, which the information system must enable to do.
 Timeliness – Refers to the time lapse between when an activity occurs and
when the activity becomes visible in the information system. It is essential
that timely information be provided for quicker management feedback.
Corrective action can be taken and loss can be minimized with timely
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 management controls. Thus, timely information reduces uncertainty and
identifies problems, reduces inventory requirements and increases decision
accuracy.

 Exception-based Logistics Information System – LIS needs to be

exception-based in order to highlight problems and opportunities. The
information system must identify exception situations, which require
attention of management and decision-making. Managers can then focus on
situations, which require maximum attention and offer opportunity to
improve service or reduce cost. LIS need to be state of the art, highly
exception-oriented and must utilize the system for identifying decisions
requiring management attention.

 Appropriate Format – Logistics reports and screens need to contain the

right information in the proper structure and must follow a logical sequence.

 Flexibility – LIS must be flexible to meet the requirements of both system

users and customers. Tailored data to meet specific customer requirements
must be made available by information systems. Within the organization,
information systems must be capable of upgrading to meet future
requirements of the enterprise without incurring huge costs or time.

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 Fig 9: Principles of LIS (Source: Sople, 2004)

Accurac

Flexibility Availability
Logistics
Information
Systems
Format Timeliness

Exception
Based

Conclusion
A major factor for enhancement of logistics competitiveness is information. In fact,
information is one of the few resources whose cost is declining and capabilities are
on the rise. Improved information technology results in lower processing cost for
orders, reduces the planning and operating uncertainty and also provides assistance
to an enterprise in meeting strategic objectives. Logistics firms, which follow best
practice, find that it is cheaper to manipulate information rather than moving
inventory. Thus, competitive advantage can be achieved by information only when
it provides support in transaction, helps in management control, decision analysis
and also strategic planning capabilities.

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CHAPTER 13: ORGANIZATION FOR EFFECTIVE LOGISTICS
PERFORMANCE
Chapter Objectives

- Introduction
- Significance of logistics in the organization
- Organizational System or Positioning
- Stages of Functional Aggregation in the Organization
- Conclusion

Introduction
Organization structure helps in creating, implementing and evaluating
plans. The organization structure gives concrete shape to the organization.
Basically it is a pattern in which various parts or components are interrelated or
interconnected. It prescribes the relationship among various positions and
activities.
Logistics is generally viewed as a facilitating or support function prior to
the 1950s. The organizational logistics responsibility is dispersed all through
the firm. This resulted in duplication and waste, with fragmentation and aspects
of logistics related activities were performed without any cross-functional co-
ordination. The primary idea behind functional aggregation was done with a
belief that grouping all functions of logistics into a single organization would
increase the integration.
Basically, the organizational chart for a company represents a pyramid,
which gives a clear view of how and where everyone fits and also the reporting
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relationships.
Logistics significance is highlighted by the following concepts:
Structural Compression: The role of the chief logistics executive is changing
and this ignites the motivation for logistical structural compression. An
environment with restricted head count as well as intensive control of assets has
enabled the senior logistics manager to emerge as an important part of the
firm's continuous move towards gaining and maintaining customer loyalty.

Centralization/Decentralization: An enterprise is considered decentralized if

their basis of function is autonomous. Every unit would be responsible for their
own logistical planning as well as its execution. A centralized organization has
the opposite policy. A central headquarters group directs logistical planning and
execution. In today's organization, which is information-intense, the distinction
between centralization and decentralization is becoming hazy. Recent trends
have seen a shift towards centralized organizations. But with the recent
developments in distributed information processing, a centralized logistics
organization is no longer required for efficient data processing. Logistical
responsibility gets pushed down the organization, as a result. Basically, there is
a direct relationship between the desired degree of centralization and the
complete nature of business operations. Customers who desire a host of
products sold by different business units of a conglomerate

146
have encouraged many cross-divisional or various business units. The
availability of information technology is considered a major benefit of
decentralization.To conclude, today's organizations, which are agile
simultaneously, enjoy both centralization and decentralization.

Fig 10: Centralized and Decentralized Structures (Source: Satish Kapoor,

Purva Kansal, 2003)

Authority Authority

Centralization Decentralization

Line and Staff Distinction: Traditionally, line performed or executed day-to-

day operations, while the staff was engaged in planning. Today this distinction
is no longer relevant. Logistics managers in all levels are involving themselves
in both planning and operations. Direct involvement and assumption of
responsibility with regard to the reason and methodology of performing work is
the key to a leading edge practice in logistics. One of the major reasons for the
elimination of line/staff distinction is the impact of logistics information
systems. A desired balance of the nature of work for line and staff needs to be
communicated which results in an organization which reflects the total
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 employee resources dedicated to serve customers through maximum
integration.
In line organizations, logistics activities are centralized into departments and
placed under the responsibility of a single manager. Activities are divided on
the basis of importance to the achievement of the overall organization
objectives. The manager is in the operational role. In a staff organization,
functions are more of planning and measuring nature. There is not much
requirement of reassignment of people. This type of structure can be
implemented in a very short time. A drawback is the resistance from line
personnel who refuse to follow the logistics manager and opts to follow their
own views. An organization to have the best of both the structures needs to opt
for staff and line function organizations. Providing a structure for logistics
reduces the conflict among various activities of physical distribution. But this
leads to an additional functional area within an organization and thus
interfunctional conflict increases.

Fig 11: Combination of Line and Staff Organizational Structure (Source: Satish
Kapoor, Purva Kansal, 2003)

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 Physical Distribution
Manager

Distribution planning Distribution Distribution

and control Engineering Operations

Matrix to Horizontal Structure: Under a functional structure, logistical

activities like transportation and warehousing are grouped into clusters and
authority and responsibility create a direct relationship. The matrix model of
authority and responsibility has been gaining a lot of popularity in service
organizations like consulting and public accounting. The matrix organization's
potential has gained a lot of interest as mangers are struggling with the
challenges of process management. A technical resource group, which can be
deployed geographically in order to satisfy line-unit requirements, is required
by a matrix approach. This approach helps in sharing scarce assets and technical
resources on a flexible basis. It also reduces the duplication of skilled personnel
among business units. A horizontal organization is a modern extension of a
matrix approach. While an organization is restructured, the key issue for the
logistics managers is concerned as to how innovative he can make the new
structure.

Empowerment: The main concept in empowerment is the availability as well

149
as willingness of senior management to freely share the relevant information.
Empowerment ranges from accommodating all requirements of an order on a
single call basis to an on the spot resolution of discrepancies of delivery. An
organization that is empowered allows middle- level management to resolve
problems as well as utilization of pro-active judgement. The response speed
shows the extent to which an organization is empowered. From logistics point
of view, empowerment makes it necessary for frontline managers to be
positioned in order to complete all the aspects of their respective work.
Empowerment, to be effective in an organization, requires fully established
ways as well as means of gaining differential advantage.

Teaming: A self directed work team (SDWT) has originated from the idea that
multiple viewpoints are better than the one which have a long standing in
administrative practice. The SDWT is not structured typically for any specific
assignment or problem solving. From logistics point of view, a special purpose
work group can be formulated in order to facilitate the development of a new
software application or for handling a unique requirement, like selecting a new
location for distribution warehouse. A self-directed team is unique in the wayits
performance is planned and executed. The team members are empowered to
perform whatever it takes so effectively as well as efficiently perform the
designated work.
Strategic and Operational structure: Position of logistics in light of other
enterprise functions. Logistics is considered as a strategic element of the overall
organizational structure or an operational element. By this, its activities are
spread under various other functions i.e., marketing, finance and production. If
it is treated as a strategic element then various activities of logistics need to be
grouped together. In the recent times, logistics has become a strategic
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 department equivalent to marketing, production and finance as it helps in
achieving interdepartmental objectives and also helps increase customer
satisfaction.
Stages of Functional Aggregation in an
Organization Stage I Organization
During the late 1950s and 1960s an initial attempt at grouping logistical
activities had
emerged. Organizations with even minimal degree of formal unification have
emerged only after the senior management has become committed to the belief
that improved logistics is the result. Two or more logistics functions have
emerged, which can be operationally grouped without changing the overall
organizational hierarchy to a great extent. Such an aggregation initially has
occurred both at the staff as well as line levels of the organization. During this
initial development stage, organization units were rarely engaged in the
purchasing and physical distribution integration.

Fig 12: Stage 1 Organization (Source: Bowersox & Closs, 2004)

CEO

Manufacturing Finance Marketing

Sub Functions Sub Functions Sub Functions

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Stage 2 Organization
This stage of organization has begun to evolve with the overall enterprise
gaining operational experience with logistics and cost benefits. The position of
logistics has been elevated to that of a higher organization authority and
responsibility. Positioning logistics at a higher organizational level has
increased the likelihood of strategic impact. Logistics has been managed as a
core competency due to the independent status given to logistics. The stage 2
organizations have been established as it was necessary to reassign functions
and position newly created organization at a higher level within the overall
enterprise structure. Though logistics has been given a lot of importance, the
concept of a fully integrated system has not yet been achieved. An important
factor for this is the lack of cross-functional logistics information systems.
Another feature here is that the integrated physical and material management
has begun to be accepted among the financial, manufacturing, and marketing
counterparts.
Fig 13: Stage 2 Organization (Source: Bowersox & Closs, 2004)

Sub Sub Sub Sub

Functions Functions Functions Functions

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Stage 3 Organization

CEO

Finance Marketing Physical Manufacturing

Distribution

Emerged in the 1980s with the beginning of logistical renaissance. Grouping

many logistical planning and operational functions under a single authority and
responsibility is the feature of this organization.

Every area of logistics – purchasing, manufacture and physical distribution is

given the structure of a separate line operation. Operational responsibilities are
well defined and thus

153
 it is possible to establish manufacturing support as a unit of operation similar to
the purchasing and physical distribution.
Logistical resource planning covers the full potential of management
information to plan and co-ordinate operations. Logistical resource planning
facilitates integration.Overall planning and controllership exist at the highest
level of the organization. This organization serves as a single source for guiding
the efficient application of financial and human resources right from sourcing of
materials to customer delivery.
Fig 14: Stage 3 Organization (Source: Bowersox & Closs, 2004)

CEO

Head Logistics

Logistical Logistical Resource

Support Planning

Sub Functions Sub Functions

Logistical Operations
such as purchasing,

Manufacturing

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Stage 4 Organization: A shift in the focus from function to process
A conventional organization had a vertical design. There were functions with
clearly identified tasks and within these functions there is a formal hierarchy
that employees need to progress. This approach had a shortcoming in the sense
that it is inwardly focused and the primary concentration is on the utilization of
resources more than creating the outputs.

Measuring the outputs of any business can be done only if these can be in
terms of customer satisfaction achieved at a profit. These outputs can be
realized only when there is co-ordination and co-operation horizontally across
the organization. The materials and information flows, which connect the
customers with business and suppliers, have horizontal linkages, which mirror
these. These are basically the core processes of the business.

There are many challenges in managing logistics as a process. Efforts need

to be focused only on those activities, which contribute to customer value.
Systems integration is required to stimulate synergism. A shift from functional
to process orientation, has both positive and negative aspects. Positive aspects
include general adoption of a process orientation builds on the basic principles
of integration. Shifting the emphasis from function to process means it will be
positioned as a chief contributor to all initiatives, which will focus on
development of new products, customer order generation, fulfillment and
delivery. The negative aspect is a lesser understanding of how the process will
be performed and managed.

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Stage 5 Organization Beyond Structure: Virutality and organizational
transparency – Extended enterprise.

An extended enterprise is a boundaryless organization where the internal

functional barriers are eroded favoring a horizontal process management. There
is very little separation between vendors, distributors, customers and the firm. A
virtual organization exists without a formal recognition. Basically it consists of
an informal electronic network replacing the formal hierarchical command and
control in the structure. Key work teams may be linked electronically for
performing critical activities in an integrated fashion. Formal organizational
charts may not relate to the actual workflow.
Fig 15: Extended enterprise and virtual supply chain (Source: A.T.Kearney as
quoted by Martin Christopher, 2004)

Sources Converters Retailers

Product and service

flow

Information flow

Funds Flow

Suppliers Distributors Consumer

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 It is essential for the structure and strategy to be aligned for achieving the
business objective of superior customer service at lowest cost. A three-level
framework can be adopted for achieving this integration for a enabling a
transition to a customer-oriented organization:

Conclusion
The revolution in information is making logistics managers reconsider the
traditional organizational logic. The idea of middle managers serving as
guardians of information has been replaced with a frontline workforce having
access to the entire information. A continuous redesign and re-engineering of
the basic nature of work has made hierarchical organizations modified to
accommodate networking of information and self-directed work teams.

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CHAPTER 14: FINANCIAL ISSUES IN LOGISTICS PERFORMANCE

Chapter Objectives:

- Introduction
- Key Financial Metrics
- Supply Chain Performance Measures
- The Balanced Scorecard Approach
- Financial Gap Analysis
- Conclusion

The need for supply chain performance measures is to align activities and
share joint performance measurement information and to explain ‘line of sight'
within the chain. It is required to allocate benefits and burdens resulting from
financial shifts within the supply chain.

Financial performance has been the primary measure of success in most

supply chains. Financial issues also encourage cooperative behavior across
corporate functions and chain.

It is required to establish dynamic supply chain performance measurements

and measurement-enabling systems to effectively manage supply chain
operations and meet financial and non-financial business objectives.The link
between efficient supply chain operations and financial performance can be
deduced by linking elements of balance sheets as well as income and cash flows
to various supply chain activities.

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 The criticality of feedback and reorientation makes measurement important.
Setting objectives, tolerance limits, developing action plans, allocating
resources, assigning responsibilities, implementing plans, and measuring
performance for feedback and corrective action are all part of a close looped
supply chain management process
Factors, which contribute to a management's need for new types of measures to
manage, supply chain:

 Lesser number of measures capturing the entire supply chain

 Going beyond internal metrics and taking a supply chain perspective

 Determining an interrelationship between corporate and supply chain

performance

 The increasing complexity of supply chain management

 Requirement to align activities and share joint performance measurement

information for implementing strategy which helps in achieving supply
chain objectives

 Encouraging co-operative behavior across corporate functions and across

firms in the chain

The following are the steps to develop good financial measures:

o Point-of-origin to point-of-consumption mapping of the supply chain

o Utilizing the customer-relationship management and supplier relationship
management processes to analyze links
o Develop customer and supplier P&L statements

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 o Re – align supply chain processes and activities to achieve performance
objectives
o Compare shareholder value and market capitalization across firms with
supply chain objectives
o Replicate above steps at each link in the chain

Key Financial Metrics are as follows

Overall financial performance:
o Return on capital (investments and assets).
o Cash flow.
o Economic profit

These are further broken down into the following:

o Revenue growth
o Operating income margin (profitability)
o Capital utilization

1. Revenue growth: Revenue is the value of products and services sold.

Revenue growth measures the year-over-year percentage change in revenue.
Important activities which affect revenue are forecasting, supply chain
responsiveness lead-time and availability of new products.
2. Operating income margin (profitability): Measures the percentage of
operating income generated per unit of revenue. It is the revenue less total
operating expenses, which is the sum of the following three components.

• Cost of goods sold (COGS)

• Selling, General and Administrative Expenses

• Depreciation and Amortization

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 Calculated by taking the difference between percentage of cost of goods
(services) sold and percentage of selling, general and administrative expense.

3. Capital Utilization: Capital utilization can be broken down into the following: -
a) Cash operating cycle
b) Fixed asset utilization

a) Cash Operating Cycle: This is a key component of capital utilization,

which measures the number of days from the time a rupee is invested in
inventory and the time it is converted back into cash with a profit. Cash
operating cycle = Days in Inventory + Days Sales Outstanding – Days
Purchase Outstanding.

The three components are as follows:

 Days in inventory (DII): Inventory includes raw materials, work in
progress and finished goods. This measures the number of days of
operations held in inventory.

 Activities in SCM that affect Days in inventory (DII) are as follows:

 Procurement: - Procurement practices like order frequency,

special buys, supplier discounts etc, have major impact on DII.

 Transportation management: - The mode of transportation affects

inventory through lead tomes, which impacts safety stocks, and
inventory in transit.

 Warehouse management: Warehouse efficiency impacts Days in

Inventory through visibility and design. Poor visibility and design
lead to higher inventory.

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  Forecasting: A higher inventory is attributed to lower forecasting
accuracy.

 Demand planning: - Better demand planning leads to lower

inventory and less capital blockage.

 Network design: More consolidated networks require less

investment in inventory.

 Days sales outstanding (DSO): Accounts receivable money owed to a

company by its customers. This measures the number of days on an
average, which a company takes to collect credit sales from its customers.
 Activities in SCM that affect DSO: -
 Fill rates: - Low fill rates always lead to higher account
receivables and days sales outstanding.

 Shipment integrity: - Poor shipment integrity leads to higher DSO.

 Invoicing accuracy: - Discrepancies and incomprehensible invoices

lead to higher DSO.

 Poor communication: - Poor communication between shipping and

invoice leads to higher DSO.
 Days purchase outstanding (DPO): Accounts payable money, which a
company owes to suppliers and vendors. This measures the number of days
on an average a company takes to pay its debts.

 Activities which affect Days Purchase Outstanding:

 Procurement terms: Procurement managers generally trade-off

purchase price for credit terms to purchase goods and services at the

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lowest total cost.

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  Payment practices: - Paying on the exact date of an invoice
compared to fixed date (paying quickly) impacts DPO. Paying on
fixed days reduces DPO and cash flow.

b) Fixed Asset Utilization: - Measures the amount of revenue generated per unit
of currency invested in net property, plant and equipment. It is computed by
dividing Revenue by Net property, plant and equipment. Net property, plant
and equipment include assets like manufacturing facilities, warehouses and
corporate offices.
o Activities in SCM that affect fixed asset utilization: -
 Transportation management: - For a company managing its own fleet
activities such as load management, routing and scheduling impact the
size of the fleet required which is relative to shipments and in turn fixed
asset utilization.

 Warehouse management: - Impacts fixed asset utilization through

automation, physical layout, and other activities.

 Network design: - Lesser investment in distribution assets is

required by more consolidated networks.

 Selective outsourcing: - Outsourcing of manufacturing,warehousing

and distribution facilities increases fixed asset utilization.
Supply Chain Performance Measures are as follows

1. The Supply Chain Council's SCOR Model

The Supply-Chain Operations Reference-Model (SCOR) has been developed

and endorsed by the Supply Chain Council. This is a process reference model
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 that is used as cross-industry standard diagnostic tool in supply chain
management. This enables users to address, improve and communicate supply
chain management parties within all parties in the chain.
The SCOR model describes the business activities that are associated
with all the phases in satisfying the customer demand. This model has been
very successful in providing a basis for supply chain improvement for global
projects.
This model also provides guidance about the types of metrics which
might be used for obtaining a balanced approach in measuring one's overall
supply chain. The model advocates a set of supply chain performance
measures that are a combination of cycle time, cost, quality and asset metrics.
At the core level of the SCOR model is a four-level pyramid that guides
supply chain members on the road to integrative process improvement.

Level One defines the scope and content for the SCOR model. This level
broadly defines four key supply chain process types (i.e., plan, source, make,
deliver and return). This is the point at which supply chain competitive
objectives are established.
Plan
Processes that balance aggregate demand and supply to develop a course of
action which best meets sourcing, production and delivery requirements.
Under this process the company should assess supply resources, aggregate and
prioritize demand requirements, plan inventory, distribution requirements,
production, material and rough-cut capacity of all products and all channels.
Long-term capacity and resource planning, product phase decisions are taken
in this phase.

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 Source
Processes that procure goods and services to meet planned or actual demand.
Under this process-sourcing infrastructure is managed. Various activities like
vendor certification and feedback, sourcing quality monitoring, vendor
contracts are conducted. Also activities involved with receiving of material
such as receive, inspect, hold and issue material are under taken here.

Make
Processes that transform products to a finished state to meet planned or actual
demand. This process is concerned with production, execution and managing
“make” infrastructure. Specifically under production execution activities like
manufacturing, testing, packaging, holding and releasing of product are
undertaken here.

Deliver
Processes that provide finished goods and services for meeting planned or
actual demand, typically including order management, transportation
management, and distribution management.

Return
This consists of processes associated with returning or receiving returned
products for any reason. These processes extend into post-delivery customer
support.
Level Two defines the 26 core supply chain process categories which have been
established by the Supply Chain Council with supply chain partners can jointly
present their ideal or actual operational structure. At this stage, each SCOR
process can be further described by process type:

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 Planning: This process aligns expected resources to meet expected demand
requirements. The planning process involves balancing aggregated demand
and supply, considering consistent planning horizon, and contributing to the
supply-chain response time.
Execution: This process is triggered by planned or actual demand that changes
the state of material goods. The process involves scheduling or sequencing,
transforming the product and moving product to the next process.
Enable: This process prepares, maintains, or manages information or
relationships on which planning and execution processes rely.

Level Three provides partners with information useful in planning and setting
goals for supply chain process improvement.

Level Four focuses on implementation of supply chain process improvement efforts.

Fig 1: SCOR Model supporting Horizontal Process Integration (Source:

www.supply- chain.org)

Return Plan
Delivery Plan
Production Plan
Sourcing Plan

Plan Source Plan Make Plan Deliver Plan Return

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 The Logistics Scoreboard
This approach to measuring supply chain performance was developed by
Logistics Resources International, a consulting firm specializing in supply
chain. The company recommends the use of an integrated set of performance
measures falling into the following general categories:
o Logistics financial performance measures (e.g., expenses and return on assets)

o Logistics productivity measures (e.g., orders shipped per hour and transport
container utilization)

o Logistics quality measures (e.g., inventory accuracy and shipment damage)

o Logistics cycle time measures (e.g., in-transit time and order entry time)
Activity Based Costing Technique
The Activity-Based Costing (ABC) approach was developed to overcome
some of the shortcomings of traditional accounting methods in linking financial
measures to operational performance.
The method involves breaking down activities into individual tasks or cost
drivers, while estimating the resources (i.e., time and costs) needed for each
one. Costs are then allocated based on these cost drivers rather than on
traditional cost-accounting methods, such as allocating overhead either
equally or based on less-relevant cost drivers. This approach allows one
to better assess the true productivity and costs of a supply chain process.
Activity – based costing techniques tend to fall into one of three major categories:
Diagnostic: - Provides snapshot cost information at widely spaced intervals of
typically three to six months apart. Critically needed information such as
activity costs, output costs, resource consumption, activity consumption etc.

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 Reengineering: - The activity analysis attempts to identify the performance of
any non- value added activities.

Integrated cost management system: Most mature forms of activity based

costing. They differ from the above because they are updated frequently, fully
relational, flexible to changes, have automated feeds from other systems, and
have on-line reporting and query capabilities.
Fig 2: Steps in ABC Costing

Identify Processes

Break processes into activities

Identify resources for each activity

Determine cost drivers for each activity

Economic value-added Analysis (EVA)

This measure has been developed by Stern, Stewart & Co. It attempts to
quantify value created by an enterprise on the basis of operating profits in
excess of capital employed (through debt and equity financing).
Some companies are starting to use measures like EVA within their executive

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evaluations. Similarly, these types of metrics can be used to measure an
enterprise's value-added

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 contributions within a supply chain. Economic-value added metrics are less
useful for measuring detailed supply chain performance and more useful while
assessing higher-level executive contributions. They can be used, however, as
the supply chain metrics within an executive-level performance scorecard, and
can be included in the measures recommended as part of The Logistics
Scoreboard approach.

The Balanced Scorecard Approach

Developed at the Harvard Business School, the balanced scorecard is a
comprehensive, top-down view of organizational performance with a strong
focus on vision and strategy. It is founded upon the idea that financial
measurements being important for corporate performance tend to be
retrospective in nature.
Financial metrics typically tell how an enterprise has performed, but give
little indication as to how it will perform. A true balanced scorecard must
include metrics that provide both historical and future insights. Thus, a
scorecard must be comprised of both leading and lagging indicators. Leading
indicators drive performance, whereas lagging indicators are actually results of
past performance. For example, in a logistics analysis system, ‘customer
complaints' is a lagging indicator, while ‘on-time delivery' is a leading
indicator.
More than just a measurement system, the Balanced Scorecard is a
management system that channels core competencies and emerging
technologies toward strategic goals and business objectives. Four categories or
“perspectives” to align individual, organizational and cross-departmental
initiatives for meeting objectives are utilized.
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To achieve ‘balance' the methodology prescribes the strategic assessment of
four perspectives: financial, customer, internal, and innovation and learning.

 Financial perspective

 Customer perspective

 Internal business perspective

 Innovative and learning perspective

The balanced scorecard approach compels supply chain managers to abandon
the belief that traditional financial and operational measures are sufficient for
strategic supply chain analysis. To develop an effective scorecard, management
defines the organization's vision and goals. Next, while keeping organizational
structure in mind, they must decide which supply chain strategies will lead to
successful goal attainment. These strategies are then translated into specific
tactical performance driving activities. Finally, metrics are established for each
activity. Once a vision, and subsequent strategy have been developed, the
individual metrics – or vital signs –are integrated at relevant places.
The four main key elements in SCM are Supply Chain Operational Efficiency,
Optimization of Supply Chain Cost, Customer Satisfaction and Continuous
Improvement of Supply Chains. On the other hand the four key perspectives
in Balanced Scorecard are Internal Business Perspective, Financial
Perspective, Customer Perspective and Learning and Growth perspective.
Henceforth there is an opportunity to integrate and measure the four key
elements of Supply Chain through the four perspectives of Balanced Scorecard.

1. Supply Chain efficiencies of waste reduction, time compression, flexible

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 response and unit cost reduction directly correspond to the Internal
Business perspective of Supply Chain cost of ownership, Supply Chain
cycle efficiency, Number of choices/Average response time, Percentage of
Supply Chain target costs achieved respectively.
2. The Customer benefit goals of improved product/service quality, improved

timeliness, improved flexibility and improved value translate into customer

benefit measure of number of customer contact points, relative customer
order response time, customer perception of response flexibility and
customer perception of derived value of the Balanced Scorecard.
3. The third dimension of financial goals of higher profit margins, improved

cash flow, revenue growth and high return on assets translate into the
metrics of profit margin by supply chain partner, cash to cash cycle,
customer growth and profitability and return on supply chain assets
respectively which is the Financial Perspective of the Balanced Scorecard.
4. Finally the supply chain improvement efficiencies of product/process

innovation, partnership management, information flow and threats and

substitutes is represented by the metrics of product finalization points,
product category commitment ratio, number of shared data area and local
data set and performance trajectories of competing technologies.
The above approach illustrates how measures and metrics in the areas of
planning, sourcing, make/assembly decisions, delivery, and customer service
level, have been integrated successfully in the balanced scorecard framework.
The approach has many advantages, in terms of emphasizing the inter-functional
and inter- firm nature of supply chains and recognizing the need to ascertain the
extent to which firms effectively work together and the extent to which functions
must be coordinated and integrated. Also, the framework increases the chance

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that a “balanced” management approach is indeed practiced within firms and
among the supply chain partners.

Fig 3: Balanced Scorecard

Financial

Internal
Customer Vision and
Business
Strategy Process

Learning and
Growth

Fig 4: Linking Supply Chain Management Framework to the Balanced

Scorecard (Source: Publication on Balanced Score Card tool as Supply Chain
Measure, Dr N. Chandrasekaran & Varun Kumar Jha)

SCM Goals
 Waste Reduction
 Time Compression Business Process
 Flexible response Perspective
 Unit Cost Reduction

Customer Benefits
 Improved product or 174
service quality Customer Perspective
 Improved timeliness
 Improved flexibility
 Improved value
Financial Gap Analysis:
Though supply chain management has the potential to improve the three drivers of
financial performance namely growth, profitability and capital utilization, financial
gaps still arise.

A number of reasons for financial gaps exist a few of which are as follows:

 Many senior level executives continue to view SCM as a tactical back-

room cost- center activity. Thus it is not being given so much of
importance.

 SCM drives performance throughout the enterprise. Thus, SCM strategic

and tactical decisions cannot be made in a vacuum.
 Lack of appropriate performance measurement
 Proper Information Systems not in place
 Lack of collaboration with supply chain partners.

Process of calculating gaps:

Step 1: - Calculate value of gaps in key financial metrics
SCM drives key financial metrics like revenue growth, percentage cost of goods
sold, and days in inventory (DII). The values of the gaps may be based on
benchmarks from competitors, industry aggregates, historical performance, and
aspirations derived from business intelligence tools. They can be measured
using a variety of value-based financial measures such as free cash flow,
economic profit and stock price.The values of the gaps are an effective means
of communicating to the organization the need or change and the potential value
of improved SCM. Like all financial analysis, great caution should be used
when interpreting the results of the gap analysis.
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Techniques for analyzing gaps:
The following are the techniques for analyzing gaps:
Benchmarks
Target Company's measures are compared to other companies, which may be
from inside or outside the Target Company's industry. Additional benchmarks
could be from industry or other aggregates.

Percentage Gap Analysis

Target Company's performance is measured in percentage terms.

Valuing the gap

Each gap is converted into an annual cash flow measure. This measure by how
much annual cash flow would increase if the gap were completely closed.The
gaps are also converted into a stock price benefit if Target Company is publicly
traded.
The size of the gaps provides a guide to which ones to be attended to first. The
largest gaps and the ones to examine first are revenue growth, operating income
margin and days in inventory

Step 2. Link gaps in financial metrics to SCM business processes and strategies
The next step in this approach is to link gaps in financial metrics to SCM-
related business processes and strategies such as sales mix, pricing strategies
and outsourcing trends.For example, a gap in profitability related to percentage
cost of goods sold can be mapped to an SCM-related process such as
distribution and logistics, which, in turn, is linked to a key activity such as
warehouse management. Warehouse management is related to tasks such

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 as receiving, put-away, pick, pack, and ship, and to key performance indicators
(KPIs) such as labor costs, average time per pick, and pick accuracy. This
mapping provides a better understanding of the cause-and-effect relationships
between SCM business activities and financial performance.
Step 3.: Map SCM Initiatives to Financial Performance Gaps

Linking gaps in financial metrics to SCM business processes and strategies are
used as the foundation for exploring SCM solutions that improve the SCM –
related business processes and strategies underlying the gaps in the key
financial metrics. This provides a logical methodology for identifying specific
areas of opportunity. It also provides a disciplined approach for estimating the
monetary benefits and understanding of the critical success factors and risks of
SCM solutions.
Improvements in SCM business processes and strategies typically cannot
completely close financial performance gap. But this can make a significant
contribution for many companies.

Fig 5: Financial gap analysis

Financial
Performance
Gaps

Revenue Operating Cash Operating Capital Human

Growth Profitability Cycle
Capital
Utilization
Business Strategy Business Process
Gaps Gaps

SCM Initiatives to Close

Gaps

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Conclusion
Organizations need to maximize profitability at each link in order to increase
the overall profitability. It is not enough for management to just identify
metrics, but they have to be developed for their situation. In fact standard
metrics can be developed in spite of different supply chain settings. Most of the
performance measures called supply chain metrics are nothing more than
logistics measures that have an internal focus and do not capture how the firm
drives value or profitability in the supply chain. The goal should not be to
identify specific metrics, but to provide the framework that allows management
to develop the bestmetrics for their situation. By maximizing profitability in
each link, supply chain performance migrates towards management's objectives
and maximizes performance for the whole.

It may be possible to conclude that standard metrics can be developed

irrespective of the different supply chain settings.

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CHAPTER 15: INTEGRATED LOGISTICS
Chapter Objectives:

🞜 Introduction
🞜 Imperatives for successful integrated logistics
🞜 Need for Integration
🞜 Activity Centers
🞜 Barriers to Internal Integration
🞜 Hierarchy of Logistics Integration
🞜 Complete Systems Perspective
🞜 Conclusion

Logistics links an enterprise with its customers and suppliers. Information flows
through the enterprise from and to customers in the form of sales activity,
forecasts and orders. Such information is refined into specific manufacturing
and purchasing plans. A value-added flow of inventory is initiated as products
and materials are procured. This ultimately results in transfer of ownership of
finished products to customers.Supply chain integration focuses on defining key
linkages across functional areas both within and among companies partnering
along a supply chain. Integrated logistics is a process-oriented integrated
approach to procure, produce, and deliver products and services to customers.

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Fig 6: Logistics Management

Outbound Logistics
Inbound logistics

Logistics Information
Management Management

Warehousing &
Inventory
Customer relationship

The following are the imperatives for successful integrated logistics:

 New Culture: Enabling employees to adapt to the new operating realities in

cross-supply chain collaboration are a key component of integrated logistics.
Core capability teams, which consist of professionals, must be focused on
key integrated logistics activities, which synchronize activities across the
entire supply chain. Senior executives entrusted with the task of integration
and synchronization has to articulate the strategy for a new cross supply
chain culture, which will be shared by all partners.
 Agreements on cost-sharing and revenue-sharing: Building a benefit
structure balancing rewards with each partner's understanding of their
contribution is important for maintaining close partnering relationships. A
generally agreed upon framework for equitable revenue and cost sharing
amongst all participants is necessary. Analyzing the supply chain economics
examines the role and costs of each of the different participants of the supply

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 chain. Detailed practices and performance metrics will help in understanding
the participant's competitive advantage.

 Establish Transparency: Establishing of an integrated logistics system is

challenged by participants' unwillingness to forgo any degree of control,
which is a symptom of lack of trust. This lack of trust will hinder acceptance
of integrated logistics while lack of standard communication and business
processes will hinder implementation.

Need for Integration

A significant feature of a responsive organization is the priority the organization

attaches for integration. Not only integration within the organization but also
integration upstream with suppliers and downstream with distributors and
customers is important. There is also a lot of emphasis on linking organizations
through information. Information systems nowadays drive companies to
reconsider their relationships with customers and suppliers. Process integration
is achieved through logistics integration, which means both upstream and
downstream integration. The objective in an extended enterprise is creation of
an ‘end-to- end' process so that innovative products are created and delivered at
higher levels of quality and in lesser time frame to markets. This is achieved
through the following means:

Rationalization of supply base: Companies try to rationalize their supply base

by reducing the number of suppliers. In fact, companies are looking at these
suppliers to provide systems rather than components. Companies are basically
trying to rationalize their supply base. For example: the automotive sector is
trying to integrate tier 1, tier 2 and tier 3 suppliers.
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Centralized inventory: The extended enterprise not only includes upstream
suppliers but also the downstream flow of finished products through dealer
networks. Traditionally, when dealers did not have the product demanded by
customers, they used to swap this with another dealer who had that product
variety in stock. Today, enterprises have centralized inventory and also take
responsibility for its management. The dealers have only demonstration models;
they have on-line access of the enterprise supply system and can give the
customer an immediate confirmation about the availability of the product of
their choice and when it can be delivered. For those products not available from
stock, dealers enter order directly into the production schedule and the product
required is made to order.
Integrated Information Systems: The benefits of a fully transparent information
system are being considered with the use of Electronic Data Interchange (EDI)
together with the growing acceptance of ‘just-in-time' philosophy. Suppliers
can now manage the flow of materials into the plant on the basis of advance
notification of a company's production schedule. With integrated information
systems, there are no manual orders, invoices or delivery notes. A single source
of information provides the basis for a timely physical response, which
automatically triggers payment to the supplier.

Supplier Development Programmes: Supplier development has replaced the

traditional purchasing function. A cross functional team of specialists work
closely with suppliers and seek improvements in supplier processes as well as
in the interfaces with the enterprise's processes.
Supplier involvement: Innovations in industries are supplier originated. By
bringing suppliers closer to the process of new development, it has been found
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 that innovation can be embodied in new products continually and simpler cost
effective designs can be created.

Activity Centers in integrated logistics

Refers to the activities that make up business logistics. These are studied in the
following two categories:

Key Activity centers: These are the activities forming the core of logistics
function and also take place in every logistics channel. These are as follows:

Customer Service Standards: The customer has become more and more
demanding in overall performance terms. The manufacturer needs to create a
competitive advantage on the basis of customer-service. Co-operating with
marketing to determine customer needs and wants determine the customer
response to service and set customer levels.
Transportation: This is one of the most expensive activity centers in logistics. It
is concerned with movement of raw materials to the plant and semi-finished
goods or finished goods to the market. Any problems in the transportation
service can result in the company holding inventory for more days than planned
for. An efficient transportation planning and management is a pre-requisite
function of logistics.
Inventory Management: The operational aspects of logistical management are
concerned with movement and storage of materials and finished goods.
Logistics operations start with the initial shipment of material from a supplier
and finalized when a manufactured or processed product is delivered to a final
customer. As material gains value at every step of its conversion into finished
inventory, work-in-progress inventory needs to be moved to support final
assembly for supporting manufacturing. A meaningful value-addition is done
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only when the final ownership is transferred to customers wherever specified.
For better understanding of the inventory it is divided into the following three
areas:

 Physical Distribution: Concerns with movement of a finished product to

customers. Here, customer is the final destination of a marketing channel.
Availability of a product is a key part in the marketing efforts of every
participant. A major part of the overall marketing effort will be lost unless a
proper assortment of products is delivered efficiently wherever needed.
Time and space of the customer service becomes an integral part of
marketing through the process of physical distribution. The common feature
of all physical distribution systems is that they link manufacturers,
wholesalers, and retailers into marketing channels that provide product
availability as a key aspect of the overall marketing process.

 Manufacturing Support: This area focuses on managing work-in-progress

inventory as it flows between various stages of manufacturing. The overall
concern of manufacturing support is the method by which production occurs.
Manufacturing support is different when compared to physical distribution.
Physical distribution attempts servicing the desires of customers and thus
needs to accommodate uncertainty of consumer and industrial demand.
Manufacturing support involves movement requirements under the control
of the manufacturing organization.

 Procurement: This area focuses on with purchasing and arranging the

inbound movement of materials, parts or finished goods from suppliers to
assembly plants or retail stores. It involves availability of the desired
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 material wherever needed.

All the above three areas of inventory flow in logistics overlap in a typical
enterprise. Looking at each as an integral part of the overall value-adding
process gives an opportunity for capitalizing on the unique attributes of
everything while facilitating the overall process. A major concern area for
integrated logistics is co-ordination of overall value added movement. All
these three areas combine to provide an integrated management of materials,
work-in-progress and finished products moving between various locations.

Information Flow and Order Processing: Completing activities of the order

cycle are very important in customer service. A lot of management attention is
being given to activities involved in processing orders. An effective order
processing system should have an effective order status reporting system also.

Support Activity Centers: These are the activity centers necessary for
achieving synergy in key activity centers. This category includes:

Warehousing: Storing goods that are waiting for sale. This function is necessary
as there is rarely a match between production and consumption. Organizations
choose between warehouses and distribution centers. Distribution centers are
larger, automated warehouses designed to receive goods from various plants
and suppliers.

Material Handling: Efficient material handling methods in warehouses can

improve customer satisfaction by decreasing the damage in handling,
maintaining the quality of storage, facilitating order processing and moving the
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 right goods at the right time to make them available to the right customers.
Costs are also reduced through proper material handling techniques.

Information: Information collection, storage and handling are necessary for

achieving higher customer service. Information enables reducing the gap
between actual and benchmark and also assists in strategy formulation – a key
activity in logistics.

Packaging: Packaging protects the goods and acts as a source of information for
customers. It is also used as a marketing tool to attract customers. The concept
of packaging has paved way to ‘Unitization', where various package are
handled together as one unit. Example: Palletization.

Fig 7: Logistics Integration (Source: Bowersox & Closs, 2004)

Customers Physical Manufacturing Procurement Suppliers

Distribution Support

Barriers to Internal Integration

Implementing internal logistics integration is not possible in a vacuum. There

are certain barriers to integration, which are as follows:

Organization Structure: The traditional organization structure prevents

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implementation of any cross-functional process being implemented. Traditional
structure is to divide authority and responsibility according to functional work.
Organizations are generally concerned with achievement of functional
excellence and this structure can hinder success of the goal of integration –
which is co-operation among functional areas. Also, managers are usually
rewarded for achieving functional excellence. Successful integration of logistics
process requires managers to look beyond their organizational structure and
facilitate cross- functional co-ordination. This may not be possible by creating a
new organization structure. Thus, regardless of whether organizational structure
is realigned or not, organizations dealing with cross-functional matters are
required for successful integration of processes.
Ownership of Inventory: Inventory can facilitate a specific function to achieve
its mission. A traditional approach to ownership of inventory is to maintain
adequate supply for gaining ease against demand and operational uncertainty.
Availability of inventory also results in economy of scale. While such practices
create benefits, they also have a related cost. The critical issue is cost-benefit
relationship.

Measurement systems: Traditional measurement systems make cross-

functional co- ordination difficult. A new scorecard needs to be developed for
facilitating integration of logistics functions. The measurement system must
facilitate logistics managers to view their specific functions as part of a process
and not just stand-alone activities.
Transfer of knowledge: Ability to share experience is an additional barrier.
Failure to transfer information or knowledge tends to nurture functional
orientation by development of specialized employees. Many firms also fail to
develop procedures and systems to transfer cross-functional knowledge. When
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 work is done in a series of processes and involves many employees, transfer of
this type of knowledge and experience is difficult.

Information Technology: IT acts as a key resource to achieve integration. IT

applications need to be designed along organizational lines. Databases are
mostly limited to specific functions are not easily accessed on a cross-functional
basis. Data warehouses have emerged due to the need to share information.
Schemes to transfer information are required to be developed as existing
applications can serve as a barrier to process integration as critical data cannot
be shared readily.
Hierarchy of logistics integration:
 Competencies: For long-term survival, a wide variety of competencies are
required. A firm will excel in a few of these, which are referred to as core
competencies.
 Performance Cycle: A structure integrating all aspects of logistical
operations linking procurement, manufacturing, support and physical
distribution.

 Function: These are traditional areas of logistics specialization, which are

essential for operational excellence. They need to be viewed as integral parts
of the overall logistical competency and not as unique areas of performance.
 Sub functions: Specific jobs within functions, which need to be performed
within functions for satisfying logistical requirements.

Complete Systems Perspective for Logistics

This concept is a cost-service integration, backed by an integrated logistics
network, which is aimed at minimizing the total cost of distribution at a given
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level of customer service. The main components are as follows:

Perspective of total cost: The cost of logistics includes various logistics

activities such as cost of planning and managing range of logistics activities
such as transportation, finished goods distribution, receipt, inspection and
storage of goods etc. All functions necessary for converting inventories and
satisfying customers have a cost. An individual cost control perspective should
be avoided and the overall cost of all logistics elements need to be considered
simultaneously. This is referred to as tackling the cost of logistics as a whole,
while trying to tackle the primary function of logistics system i.e. to perform the
function assigned to the system in a most cost effective manner. In fact, the
total cost perspective is an important component of logistics.

System Perspective: This concept is an extension of the logistics concept and is

a key for managing logistics function. This total system perspective of logistics
is time consuming but results in reduction of inefficient logistics systems as a
whole. The total system of logistics also has a number of sub-systems
such as transportation, warehousing, inventorymanagement etc. A number
of techniques and objectives that are stated beforehand have been designed so
that each of these activities is conducted in an optimal manner. A proper
balance between these activity centers is necessary to reduce the total cost of
logistics.
Trade-offs: This refers to the evaluation of the cost of each system component
with the objective of determining a combination of components providing a
minimum total cost for a specified level of customer service. Trade-off takes
place when management incurs cost in a particular activity center as part of the
strategy to achieve benefits from another activity center.
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 Intra – activity trade-off occurs when trade-offs occur within an individual
activity of the logistics system. An example can be a decision to use one's own
transportation instead of a public transportation.Inter-activity trade-off occurs
between various activities of logistics system. Management prepares itself to
bear the increased cost of one activity center so as to get the profits from
another. For example, using airfreight can increase transportation cost but
would result in a reduced inventory and warehousing cost.
Inter-functional trade-off occurs between the logistics system and other
functional areas of the firm. A trade-off is made between various functions. For
example, the packaging structure for a company was changed from
conventional vacuum packs to a different shape to suit the structure of the
product.Inter-organizational trade-off is a category between manufacturer and
other organizations involved in creating utilities for the manufacturer. The
manufacturer has to be concerned with the members of the distribution channel
and should try maintaining relations with these members.

Managing the supply chain as a network

The firm is at the center of an inter-dependant network that competes as an
integrated supply chain against the other supply chains. Managing such a
competitive structure requires various skills and priorities. A focus on the
network management as well as upon internal processes is necessary to achieve
market leadership. The following are the most significant issues in such an
environment:

 Collective development of strategy: In the traditional view, members of a

supply chain never considered themselves as part of a marketing network
and so never shared their strategic thinking with each other. A higher level
190
 of joint strategy development is required for network competition to be
truly effective. Network members must collectively agree to strategic goals
for the network and the means of attaining them.

 Open communication: The advent of information technology is making the

exchange of information between supply chain partners very easy and this
has been one of the most powerful drivers of change in the marketing
networks.
 Benefits for partners: There is a growing realization between network
partners for co- operation that usually leads to improved performance.
Another issue is how the results of that improved performance can be
shared amongst the various players. All partners must benefit and be better
off due to co-operation.

Conclusion

A key to logistics integration is the transparent flow of information from one

end of the chain to the other. Supply chain partners are able to respond more
rapidly to known demand with lesser inventory and hence lower cost by sharing
information. A responsive supply chain is highly integrated. They integrate
internally across functions and externally integrate with suppliers and
downstream customers. A lot of companies are attempting to become more
agile and responsive due to an encroached functional structure. They have a
fragmented approach to the marketplace and thus manage functions rather than
processes. It is also difficult for firms like these to reflect external integration
when they lack internal integration. Companies that have got over this are now
looking to design close linkages with their supply chain partners.
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CHAPTER 16: ROLE OF 3PL & 4PL

Chapter Objectives:

- Introduction

- First Party Logistics

- Second Party Logistics
- Third Party Logistics: Functions, Advantages, Essential characteristics
- Fourth Party Logistics: Features, Advantages
- Selection of a Service Provider
- Key Trends in Logistics Outsourcing

Logistics involves getting the right goods to right place at the right time at
the right cost in the right condition. To survive in today's highly competitive
markets, companies are focusing on their core competencies to adopt
outsourcing as a strategic solution to improve quality of service and also reduce
cost of key and non-core activities. An accepted trend today is to form a
collaborative relationship with logistics service providers on the basis of the
backbone of information technology, for integrating knowledge based supply
chain.
Business organizations across the world are struggling for competitiveness
for both growth and survival. Customers are demanding more and more value-
added services from prospective suppliers for the amount spent. Business
organizations have started reviewing business processes and realized that cost
cutting and differentiating in value delivery systems is essential. Focusing on
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 core business areas can be done through outsourcing non-core operations to
experts in the field.
Logistics operations are an area of specialized function and a majority of
marketing and manufacturing organizations do not have the requisite expertise
in housed. Thus, there is a requirement for outsourcing operations to experts in
the field. It has become an accepted practice to use strategic partnerships that
are known as ‘third party service providers' in integrated logistics.Most
companies consider using the services of a 3PL in their supply chain operations
when they realize that it is essential in providing efficient and effective
competitive customer service which requires huge investment and is difficult to
develop on their own.

Outsourcing has the following advantages:

1. Focus on core competencies
 Management is freed from repetitive/mundane tasks, reduces
investment and generates cash.
 Organization can concentrate on core competencies.
2. Organizations can adopt “best-in –class” practices.
 Vendors have considerable strength and focus on outsourced
processes. To remain competitive, they are continuously looking to
improvise their services and adopt best practices to make them more
efficient.
 This helps organizations achieve faster, efficient, effective and more
economical business process.
3. Organizations become more competitive
 Can respond more effectively to changing demands.
 Allows companies to gain more scalability.
193
  Outsourced activities allow companies to have greater leverage in
responding to changes and to gain market access, expand.

4. Reduced cost and advanced technologies

 Vendors often implement latest technologies to make their processes
and services. Companies can take advantage of these technologies,
which they might not be always able to do if they were conducting
activity in-house.
 Vendor's economies of scale helps drive down overall cost in the
system, thus enabling companies to realize more productivity and
efficiency.
Fig 8:Difference between various logistics service providers

Managing the
entire
4 PL supply
chain

3 PL
Managing
complex
Supply
2 PL chains

1 PL Traditional
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First Party Logistics

First Party Logistics are companies, which do their own logistics activities.

Second Party Logistics

Second party logistics people provide their own assets such as truck owners,
warehouse operators etc.

Third Party Logistics

Third party Logistics Provider (3PL) performs logistics services on behalf of
another company. 3PLs provide the management skills along with the physical
assets, labor, and systems technology to provide professional logistics services,
relieving companies of the responsibility of performing these services themselves.
3PL's typically can provide transportation, warehousing, pool distribution,
management consulting, logistics optimization, freight forwarding, transportation
management, rate negotiations, cost evaluations, and contract management
services.

3PL is the function by which the owner of goods outsource various elements of
the supply chain to one 3PL company that can perform the management function
of the clients inbound freight, customs, warehousing, order fulfillment,
distribution, and outbound freight to the clients customers. 3PL is a service
provider who gives service for one or more portfolios of services in stand alone or
integrated manner with own or leased or contracted assets or services.

195

A 3PL can also be described as a contract logistics service provider who manage
inventory/material flow between companies and encompasses all processes and
 activities such as transportation, warehousing, documentation.

Common 3 PL functions are as follows:

1. Transportation Management

 3PLs fleet (or alliance partners) offer optimized network to serve their
customers.

 3PLs plan load management, routing, equipment and driver management

by Shipment Management System (SMS).

 SMS can be effectively integrated with Warehouse Management Software

(WMS), to provide integrated logistics solutions concepts such as multi-
stop workload or less than truckload which are often used to serve
customers better.

 Multi-vendor consolidation reduces overall costs. Full truckload

economies can be used to combine freight from different vendor to
common destinations.
2. Warehouse management

 3PLs run and manage warehouses using Warehouse Management Systems,

radio frequency scanning, and bar code labeling

 3PLs manage and track the movement of goods from initial receipt to
outbound shipment. Real time, periodic and accurate information can be
provided to manage inventory and demand better.

 Additional services such as advanced shipment notifications can be generated

to inform the retail partners in the supply chain.

3. Packaging 196

 3PLs often have ability to do final product packaging in their warehouse, thus
eliminating the need to ship product to off site packaging companies. This in
turn means reduced product handling, reduced cycle time and reduced costs.
  3PLs can offer variety of packaging services like custom pallets, display
shippers, inserts and coupons, labeling and printing, repackaging / conversion
and also wrapping and bundling.
Advantages to companies by using 3PL services: -

 Focus on core competencies: Outsourcing enables companies to focus on the

core businesses and strengths. The companies limited resources can be saved
and the company can remain focused on what it can do best.

 Lower Investment: Organizations can outsource and save a large amount

required for building logistics assets, networks and facilities such as
warehouses. As an alternative for these investments, the companies can
outsource these requirements by outsourcing and investing in their core
processes.

 Enhanced technological capabilities and flexibility : Utilization of

technological capabilities has enhanced the efficiency of logistics operations.
But, it may not be feasible always for companies to invest in newer systems
or upgrade their existing systems. However, deploying third party logistics
providers can insure against such technological changes. 3 PL often invest in
such technologies for providing competitive services.

 Best practices: Outsourcing logistics to third party logistics enables

companies to implement best practices and also allows organizations to
achieve best performance.
Essential characteristics of a 3 PL
 Solutions Orientation
 Logistics Know-how
 IT Capability
 Management and organizational Skill
197
 Innovativeness
 Independent and best of breed approach
Fourth Party Logistics
 Information technology plays a key role in logistics and supply chain
management. In fact logistics integration, which is a complex exercise, is
completely dependent on IT support. Third party logistic suppliers provide
logistics solutions to clients on the basis of their domain knowledge they have
acquired over the years. 4 PL companies provide logistics solutions built around
the domain knowledge provided by third party logistics companies. Thus 4 PLs
have emerged out of the vacuum created by 3PLs.
Fourth Party Logistics (4PL) is the integration of all companies involved
along the supply chain. 4PL is the planning, steering and controlling of all
logistic procedures (for example flow of information, material and capital) by
one service provider with long-term strategic objectives. Fourth-party logistics
(4PL) has evolved as a breakthrough supply chain solution comprehensively
integrating the competencies of third party logistics (3PL) providers, leading
edge consulting firms and technology providers.
4 PLs see the process and what is required for the process to succeed. A 4PL
is a supply chain manager & enabler who assemblies and manages resources,
build capabilities and technology with those of complimentary service providers.
They act as the first point for delivering unique and comprehensive supply chain
solutions. 4PL leverages combined capabilities of management consulting and
3PLs. They act as an integrator assembling the resources, capabilities, and
technology of their own organization and other organizations to design, build
and run comprehensive supply chain solutions. 4 PL is an emerging trend and it
is a complex model and offers greater benefits in terms of economies of scale.
Features of a 4 PL:
o Covers the customer's entire supply chain
o Collaboration between two or more logistics service providers on a
resource-sharing basis for extending
198logistics solutions to a common customer.

o Flexible arrangements
The following are the requirements of a 4 PL:
 3PL cost advantage are one time achieved through the contract process
  Performance and competency across the logistics network
 Logistics planning and consulting
 IT support
 Operative and administrative logistics functions
 Customer Relationship Management
 Linking analytical capabilities with strong implementation and operational
capabilities
 Building a high level of customer confidence in outsourcing and its solutions
 Offering transparent and flexible win-win contracts
Advantages to companies using 4PL services: -
 Reduced inventory and cycle time.
 Improved delivery performance.
 Lower supply chain cost.
 Improved order fulfillment, capacity utilization.
 Overall productivity.
4 PL attempts to do the following to create value by:
 Reduction of complexity/eliminate redundancy.
 Economics of scale
 Tailor made solutions
 Improved customer service at reduced cost.
 Access to new technology.

Selection of a Service Provider

Selection of a service provider is a strategic one and has long-term effects upon the
customer service capabilities of an organization.
Major issues to be considered before deciding on a 3PL or 4PL partner:

 Switching cost: Outsourcing logistics

199 services results in reorganizing the

existing assets of a company in tuning with the working methodology of the

service provider. It includes activities such as management of existing assets,
fully or partly to the service provider, deploying existing assets on lease to
 service provider and divesting existing assets and completely switching over to
the usage of a logistics infrastructure by the service provider. A high degree of
risk is involved in each of the activities. Though outsourcing reduces cost
substantially, switching over to other service providers in terms of poor
customer service during the period of transition and stabilizing new system will
cause more loss.

 Degree of control: The firm, which is outsourcing needs to be particular about

the degree of control over activities of the service provider, for getting the
desired service by the end user. It is not possible to have direct control over the
activities of the service provider but the service provider should ensure timely
availability of information to monitor activities.

 Degree of outsourcing: The following factors influence an organization's

logistics outsourcing in part or in total:
- Existing logistics infrastructure of the company
- Policy of management for third party involvement
- Anticipated benefits
- Product portfolio of the company
The areas of responsibility and authority both at the outsourcer's and
service provider's end must be clearly differentiated.
 Channelizing logistics services to suit the needs of channel partners:
Logistics service standards are to be quantified as per requirements of channel
members who service the end users or consumers in turn. Logistics acts as a
key enabler for efficient channel management. Channel and logistics
management must go together for effective and efficient physical distribution
system.
 Interface: Suitable co-ordination through
200 an intelligent interface is necessary
for proper working of two organizations together in partnership. A match of
cultures is essential. Proper interface between employees of both organizations
is very important for formulating policies and guidelines for smooth operations
 of the outsourcing firm and service provider. Mismatch in technologies used at
the two ends may result in problems too. Differences in technologies used in
communication, material handling, storage, inventory management may cause
delays and errors resulting in performance below the expected level.
Key Trends in Logistics Outsourcing
The following are some of the important observations from logistics outsourcing

1. Adoption of Internet, ERP, SCP and SCE technologies continues to accelerate

 Many ERP systems are used for financials, payroll and HR, but not for core
operations.
 Most ERP systems lack logistics service provider-specific functionality
forcing the use of customised solutions.
 Need to increase intelligence and productivity of ERP by adding Internet
communication technology, Supply Chain Planning and Supply Chain
Execution components
 ROI from these technologies is often unclear.

Global visibility has now become a basic requirement

 Customers desiring to decrease transport costs, increase delivery reliability
and cross- docking activity, and shorten cycle times are demanding end-to-
end visibility of goods. For example: Shippers not only want to be able to
track their goods via the Internet but also to receive automatic notification
when a shipment is deviating from its schedule.
 Logistics service providers need to build or buy Inventory Visibility in the
Supply Chain to meet this requirement.
Most carriers and 3PLs in India are unprepared to move from a transaction-
based customer relationship to strategic supply chain partnerships with
customers. 201

 Shippers expect their logistics providers to help them improve supply chain
processes and increase revenues.Customers will succeed via mass
 customisation and Web commerce initiatives. Logistics suppliers need to
respond to such initiatives.
 SCM IT tools will help in facilitating of cross-docking, delayed allocation,
in-transit merge, postponed assembly and other value-added services,
increasing their customers' supply chain agility and velocity.
 Innovators will use IT to move beyond tactical logistics to influence product
and procurement strategies.

Ability of matching market Demand with available Supply

 Leveraging suppliers' distribution systems and collaborating closely with
them to ensure seamless information flow across the supply chain.
 Using tactical initiatives such as sales promotions and pricing changes
to shift demand towards in-stock products and accessories.
 Usage of scientific tools for better demand forecasting.

Outsourcing of non-core activities

 Increasing number of organisations are now outsourcing their non-core
activities to specialist logistics service providers for whom it's their core
business.
 Past cost centres have now become present profit centres and the focus has
turned to innovation and continuous improvement.
Fig 9: A holistic view of 3 PL and 4 PL

Client 3 PL Service Providers

202 Process Management

Client

Client
4 PL 3 PL Providers
Client

IT Service Providers
Conclusion
Third party logistics service providers have the core competency in a particular
area of logistics such as warehousing, transportation, inventory management etc
who provide comprehensive logistics service solutions for the entire supply chain.
A new and emerging trend in outsourcing is the Fourth Party Logistics who
assembles and manages the resources, capabilities and technology of its own
organization with those of complimentary service providers to deliver a
comprehensive supply chain solution. A management's decision to outsource can
be justified by its value proposition or the benefits. By outsourcing, the company
gains on many fronts such as cost reduction, higher return on investments,
utilization of manpower for more productive work and a clearer focus on core
competency area.

203