Logistics and Supply Chain Management - 2014

1 | P a g e
Logistics and Supply Chain

Management

2 | P a g e

Logistics and Supply Chain
Management
BBA, Specialization, Marketing
CAMAD COLLEGE
Assistance Professor
Bijaya K. Shah

3 | P a g e

MKT 113.3 - Logistic and Supply Chain Management
Course Contents:
1. Introduction 6 hours

Concept of marketing logistics, Competitive advantage: concept and
gaining competitive advantage through logistics. Mission of logistics
management, Supply chain and competitive performance
2. Logistics Environment 8 hours

Changing logistics environment, Customer service, concept,
components, an importance of customer services; Customer
retention, service-driven logistic system; Systems; Setting customer
service priorities and service standards
3. Logistics Cost 8 hours

Total cost analysis. Principles of logistics costing, the bottom line
approach, Shareholder value, customer profitability analysis, and
direct product profitability, cost drivers and activity based costing.
4. Logistics Performance 10 hours

Benchmarking the supply chain: concept, benchmarking the logistics
process, supply chain process mapping, supplier and distributor
benchmarking, setting the benchmarking priorities, and logistic
performance indicators

4 | P a g e

5. Strategic Issues in Logistics 11 hours

Time based competition. Lead time. Logistics pipeline management.
Logistics values engineering. Lead time gap. Just in time logistics:
the Japanese philosophy, implications for logistics Quick response
logistics: concept, vendee managed inventory, logistics information
system. Production strategies for quick response
6. Supply Chain Management 5 hours

Concept, Logistics vision and problems with conventional
organizations, Logistics organization: vertical and horizontal
organizations
Text Books:
1. Martin Christopher: Logistics and Supply Chain Management,
Pitman Publishing/ Pearson Education
Reference Book:
2. G. Raghuram and N. Rangaraj: Logistics and Supply Chain
Management: Case and Concepts, Macmillan India Ltd.

INTRODUCTION
5 | P a g e

CHAPTER: I
Concept of Marketing Logistics
Logistics is the science of planning, organizing and managing
activities that provide goods or services. Often used to
describe supply chain management both in a manufacturing or
a military capacity, logistics also has significant relevance in a
marketing capacity. In order to manage the flow of materials,
the science of logistics in the case of marketing, helps the flow
of information from the business to the consumer in building
stronger relationships.
The term logistics comes from the Greek logos meaning
speech, reason, ratio, rationality, language, phrase, and more
specifically from the Greek word logistiki (meaning accounting
and financial organization.)
The word logistics has its origin in the French verb loger to
lodge or to quarter. Its original use was to describe the science
of movement, supplying & maintenance of military forces in
the field. Later on it was used to describe the management of
materials flow through an organization, from raw materials
through to finished goods. From Wikipedia (Logistics).

INTRODUCTION
6 | P a g e

INTRODUCTION
7 | P a g e

Market logistics involves planning, implementing, and
controlling the physical flows of materials and final goods
from points of origin to points of use to meet customer
requirements at a profit.

It is the task of managing value-added flows from suppliers to
ultimate users and it involves coordinating the activities of
suppliers, purchasing agents, manufacturers, marketers,
channel members, and customers.

Kotler identified four major decisions in market logistics

1. Order processes - How should orders be handled?
2. Warehousing - Where stocks should be located?
3. Inventory - How much stocks should be held?
4. Transportation - How should goods be transported?
Marketing logistics involve planning, delivering, and
controlling the flow of physical goods, marketing materials and
information from the producer to a market as necessary to meet
customer demands while still making a satisfactory profit.
Maintaining an organizations competitive edge means
understanding and implementing an effective marketing
logistics strategy regarding product, price, place and
promotion. These four functions of marketing logistics help the
organization to reach the target customers and deliver the
products or services sold by the organization to these
customers.

INTRODUCTION
8 | P a g e

Product Delivery
One function of logistics marketing is finding out who your
customer is and how to get the product or service to the
customer. Each customer can have individualized needs so the
logistical services provided may vary from customer to
customer. Regardless of these differences, the customers
expects 100 percent conformance and assured reliability at all
times with every transaction. The goals of this aspect of
marketing logistics include filling the order, on-time delivery,
precise invoicing and zero damage.
Price
An organization bases pricing decisions on both internal and
external factors. Marketing logistics must recognize price
drivers. The profile of the customer, the product and the type of
order are factors that drive the price. These changes are not
typically controlled by marketing logistics. However,
marketing logistics must react to these factors and understand
how the factors affect customers decisions. Discounts for
quantities and the related logistical cost structure can impact
the price the customer will ultimately pay for the product or
service. Additional factors driving price include the shipping
costs based on the size, weight and distance the organization
will ship the item. Further, the size of the manufacturing run,
labor costs and the types, quantities and quality of the materials
used in the manufacturing process can affect price.

INTRODUCTION
9 | P a g e

Promotion
Promotion is another important aspect of an organizations
marketing logistics process. When bringing a product to
market, the organization must coordinate the logistics of the
various marketing materials. For example, the art department
might design the artwork for the product's box and an outside
supplier might manufacture the boxes with the artwork.
Marketing logistics can help to ensure that all of these entities
work together and produce the marketing materials needed to
sell the product.
Place
The function of place in marketing logistics allows the
organization to simplify the transactions between a logistics
provider and the customer. The organization must execute
logistics in such a way that the customer is not aware of the
complexities involved in the logistics process. For the
customer, the output is always more important than the
process. The organization should, therefore, never expose the
backroom processes involved with logistics delivery to the
customer. Also the location of the factory, warehouse and
customer can greatly impact the marketing logistics process by
increasing or reducing costs. For example, locating a factory in
Mexico might reduce the labor costs associated with a product.
However, at the same time locating the factory in Mexico
might increase the shipping costs and negate any cost savings.

INTRODUCTION
10 | P a g e

The ultimate purpose of logistics

Logistics is to deliver

The right product
To the right place at the right time
In the right quantity
At the right quality
At the right price
For the right customer

Importance of logistics

Competitive advantage by giving customers better
service at lower prices
Cost savings to the company and its customers
Product variety requires improved logistics
Information technology has created opportunities for
distribution efficiency

INTRODUCTION
11 | P a g e

Logistics and Marketing

Recently logistics and marketing have been treated in
companies as separate areas. The reasons of that fact were the
following, Pilarczyk, Mruk, Sojkin, Szulce (1999):

traditional treatment and mechanical division of
marketing and logistics function, but meaning of
logistics in gaining and maintaining of competitive
edge was small (logistics was treated and organized as a
transportation and warehousing department),
showing off a role of logistic costs from the point of
view of a growth of company effectiveness and success
(cost approach was against marketing market
orientation, which caused separation of marketing and
logistics),
underestimation in practice of goods physical route
management and its information conditions in aspect of
integrated marketing management (not long ago
marketing management was restricted to products
strategy, price and promotion; rarely a marketing
department was responsible for all aspects of integrated
management in the sphere of distribution and delivery
with conscious logistics including).

INTRODUCTION
12 | P a g e

Fundamental occurrences and reasons bringing about a need of
integration process between logistics and marketing and
supporting this process could be, Pilarczyk, Mruk, Sojkin,
Szulce (1999):
A growth of market differentiation (differentiation of
customers needs and preferences, individualization of
market segments, products diversification, etc.),
growing competition in scope of a level and quality of
services and customer service (a growth of demands in
scope of additional benefits and usefulness connected with
purchasing and sales of goods),
INTRODUCTION
13 | P a g e

a shorter product life-cycle,
tendencies related to concentration in trade, creating
and developing of new distribution channels,
integration of economic processes and decisive
processes (using of synergy in micro macro scale),
A growth of new technology in the sphere of goods and
information flow, promotion, sales, etc.,
A growth of entrepreneurship and innovativeness in
market and economic activities, integration and
globalization of markets.

Marketing and logistics are similar because they both attend in
an adjusting process of structure and dimension of supply to
customers needs and wants. They are also complementary
marketing stimulates demand, logistics satisfies it by
distribution processes, Blaik (2001).

Competitive Advantage:
Concept and Gaining competitive advantage through
logistics
When a firm sustains profits that exceed the average for its
industry, the firm is said to possess a competitive advantage
over its rivals. The goal of much of business strategy is to
achieve a sustainable competitive advantage.

INTRODUCTION
14 | P a g e

Michael Porter identified two basic types of competitive
advantage:
cost advantage
differentiation advantage

A competitive advantage exists when the firm is able to deliver
the same benefits as competitors but at a lower cost (cost
advantage), or deliver benefits that exceed those of competing
products (differentiation advantage). Thus, a competitive
advantage enables the firm to create superior value for its
customers and superior profits for itself.
Cost and differentiation advantages are known as positional
advantages since they describe the firm's position in the
industry as a leader in either cost or differentiation.
INTRODUCTION
15 | P a g e

A resource-based view emphasizes that a firm utilizes its
resources and capabilities to create a competitive advantage
that ultimately results in superior value creation. The following
diagram combines the resource-based and positioning views to
illustrate the concept of competitive advantage:
Resources and Capabilities
According to the resource-based view, in order to develop a
competitive advantage the firm must have resources and
capabilities that are superior to those of its competitors.
Without this superiority, the competitors simply could replicate
what the firm was doing and any advantage quickly would
disappear.
Resources are the firm-specific assets useful for creating a cost
or differentiation advantage and that few competitors can
acquire easily.
The following are some examples of such resources:
Patents and trademarks
Proprietary know-how
Installed customer base
Reputation of the firm
Brand equity
Capabilities refer to the firm's ability to utilize its resources
effectively. An example of a capability is the ability to bring a
product to market faster than competitors. Such capabilities are
embedded in the routines of the organization and are not easily
INTRODUCTION
16 | P a g e

documented as procedures and thus are difficult for
competitors to replicate.
The firm's resources and capabilities together form its
distinctive competencies. These competencies enable
innovation, efficiency, quality, and customer responsiveness,
all of which can be leveraged to create a cost advantage or a
differentiation advantage.
Cost Advantage and Differentiation Advantage
Competitive advantage is created by using resources and
capabilities to achieve either a lower cost structure or a
differentiated product. A firm positions itself in its industry
through its choice of low cost or differentiation. This decision
is a central component of the firm's competitive strategy.
Another important decision is how broad or narrow a market
segment to target. Porter formed a matrix using cost advantage,
differentiation advantage, and a broad or narrow focus to
identify a set of generic strategies that the firm can pursue to
create and sustain a competitive advantage.
INTRODUCTION
17 | P a g e

Value Creation
The firm creates value by performing a series of activities that
Porter identified as the value chain. In addition to the firm's
own value-creating activities, the firm operates in a value
system of vertical activities including those of upstream
suppliers and downstream channel members.
To achieve a competitive advantage, the firm must perform one
or more value creating activities in a way that creates more
overall value than do competitors. Superior value is created
through lower costs or superior benefits to the consumer
(differentiation).

INTRODUCTION
18 | P a g e

Seeking the high Ground
For a long time it has understood that customers don't buy
products, they buy "benefits". Put another way, the product is
purchased not for itself but for the promise of what it will
"deliver". Unless the product or service we offer can be
distinguished in some way from its competitors there is a
strong likelihood that the marketplace will view it as a
"commodity" and so the sale will tend to go to the cheapest
supplier. Therefore it is important to look for additional
functionalities of a product that will bring sustainable
competitive advantage.
What are the means by which such value differentiation and
sustainable competitive advantage may be gained? Essentially
the development of a strategy based upon added values will
normally require a more segmented approach to the market.
When a company scrutinizes markets closely it frequently finds
that there are distinct "value segments". In other words,
different groups of customers within the total market attach
different importance to different benefits. The importance of
such benefit segmentation lies in the fact that often there are
substantial opportunities for creating differentiated appeals for
specific segments.
The one way of getting the competitive edge and sustainable
competitive advantage is through technology breakthroughs.
The other way of getting sustainable competitive advantage is
by focusing upon service as a means of gaining a competitive
edge. The service can be seen in many forms including
INTRODUCTION
19 | P a g e

delivery service, after-sales services, financial packages,
technical support etc.
Depending on the value they bring to their customers and their
cost efficiency, the companies are grouped in one of four
quadrants of logistic and competitive advantage matrix:

The supply chain becoming the value chain
The idea of the value chain is based on the process view of
organizations, the idea of seeing a manufacturing (or service)
organization as a system, made up of subsystems each with
inputs, transformation processes and outputs. Inputs,
transformation processes, and outputs involve the acquisition
and consumption of resources - money, labor, materials,
equipment, buildings, land, administration and management.
INTRODUCTION
20 | P a g e

How value chain activities are carried out determines costs and
affects profits.
Most organizations engage in hundreds, even thousands, of
activities in the process of converting inputs to outputs. These
activities can be classified generally as either primary or
support activities that all businesses must undertake in some
form.

According to Porter (1985), the primary activities are:
1. Inbound Logistics - involve relationships with
suppliers and include all the activities required to
receive, store, and disseminate inputs.
2. Operations - are all the activities required to transform
inputs into outputs (products and services).
INTRODUCTION
21 | P a g e

3. Outbound Logistics - include all the activities required
to collect, store, and distribute the output.
4. Marketing and Sales - activities inform buyers about
products and services induce buyers to purchase them,
and facilitate their purchase.
5. Service - includes all the activities required to keep the
product or service working effectively for the buyer
after it is sold and delivered.
Secondary activities are:
1. Procurement - is the acquisition of inputs, or
resources, for the firm.
2. Human Resource management - consists of all
activities involved in recruiting, hiring, training,
developing, compensating and (if necessary) dismissing
or laying off personnel.
3. Technological Development - pertains to the
equipment, hardware, software, procedures and
technical knowledge brought to bear in the firm's
transformation of inputs into outputs.
4. Infrastructure - serves the company's needs and ties
its various parts together, it consists of functions or
departments such as accounting, legal, finance,
planning, public affairs, government relations, quality
assurance and general management.

INTRODUCTION
22 | P a g e

Mission of Logistics Management
The mission is to plan and coordinate all those activities
necessary to achieve desired levels of delivered service and
quality at lowest possible cost. Logistics must therefore be seen
as the link between the marketplace and the operating activity
of the business. The scope of the logistics spans the
organization, from the management of raw materials through to
the delivery of the final product.
Logistics enables the connection of the supply base and the
marketplace through the coordination and management of
various activities. With logistics its possible to meet the
demands and expectations of the end customers, whether they
are buying an end product or raw materials. Logistics runs
through the entire organization, from the management of raw
materials to the delivery of the final product, therefore its
essential the logistics is managed effectively.
Logistics management is when the flow of material and
information fulfill the needs of the customers. In the past the
areas of manufacturing and marketing were seen as separate
entities within the company but today, it is impossible for these
departments to act independently. Marketing focuses on the
customer, working to understand who they are and in meeting
their requirements while manufacturing focuses on operation
efficiency, optimizing cost, minimization of setup/ change over
and standardizing products.
INTRODUCTION
23 | P a g e

Figure: Logistic Network
Procurement also plays a vital role and is part of the integrated
logistics process. The planning creates the framework to ensure
costs are managed and the needs of the marketplace are met.
This is then translated into manufacturing. Therefore the
mission of logistics management is to be involved in
marketing, distribution, production and procurement.

INTRODUCTION
24 | P a g e

Supply Chain and Competitive Performance

Logistics management is term used to describe the planning,
implementation, and movement of goods, services and related
information from the point of origin to the point of
consumption. Increasingly, in the modern business
environment logistics management involves supply chain
management (SCM), for the purpose of this paper we shall
attempt to demonstrate the concept of supply chain and
competitive performance and how it relates to logistics.
According to Schonsleben P., (2007), a Supply Chain
encompasses all activities in fulfilling customer demands and
requests. These activities are associated with the flow and
transformation of goods from the raw materials stage, through
to the end user, as well as the associated information and funds
flows. There are four stages in a supply chain: the supply
network, the internal supply chain (which are manufacturing
plants), distribution systems, and the end users. Moving up and
down the stages are the four flows: material flow, service flow,
information flow and funds flow. A supply chain consists of all
parties involved, directly or indirectly, in fulfilling a customer
request. The supply chain not only includes the manufacturer
and suppliers, but also transporters, warehouses, retailers, and
customers themselves. Within each organization, such as
manufacturer, the supply chain includes all functions involved
in receiving and filling a customer request. These functions
include, but are not limited to, new product development,
INTRODUCTION
25 | P a g e

marketing, operations, distribution, finance, and customer
service (Chopra and Meindl:2004). Bearden et al (2004) noted
that business buyers are increasingly involved in supply chain
management or the integration of business processes from end
user through original suppliers that provides products, services
and information that add value for customers. Schonsleben P.,
(2007) describes Supply Chain Management as the
coordination of strategic and long-term cooperation among co-
makers in the total supply chain for the development and
production of products, both in production and procurement
and in product and process innovation. The chief criteria when
choosing co-makers is their potential contribution towards
realization of short lead times (time to market).
The demand for short product innovation times (time to
market) has come to the fore especially in buyers markets.
Cross-company product and process development with co-
makers can be advantageous to logistic management. When
product development becomes more and more costly,
entrepreneurial risk may in this way be more widely
distributed. Reducing the time for product innovation and
production demands more intensive business collaboration with
co-makers and this can be done at all levels of the supply
structure. This type of cooperation gives co-makers insight into
the participating companies. Entrepreneurial cooperation thus
becomes intensive. One absolute prerequisite is the long-term
formation of trust which gives competitive advantage to the co-
makers.

INTRODUCTION
26 | P a g e

According to Kotler and Keller (2009), supply chain
management yields several insights. Firstly, the company can
estimate whether more money is made upstream or
downstream, in case it might want to integrate backward or
forward. Secondly, the company is more aware of disturbances
anywhere in the supply chain that might cause costs, prices, or
supplies to change suddenly. Thirdly, companies can go online
with their business partners to carry on faster and more
accurate communications, transactions, and payments to reduce
costs, speed up information, and increase accuracy using SCM
software
We shall now look at the concept of competitive advantage,
Schonsleben P., (2007) defines competitive advantage as an
edge, i.e., a process, and patent, management philosophy, or
system that enables the company to have a larger market share
or profit than it would have without that advantage. Product
differentiation is a strategy of making a product different, the
best or unique from the competition with regard to at least one
feature or goal of a target area. In todays environment the
ideas of collaborative planning, forecasting, and replenishment
of co-makers is a source of major competitive advantage
through well organized logistics management. Effective supply
chain collaboration is increasingly seen as a major competitive
advantage viewing the business process as something that
extends beyond the enterprise, and understanding the impact of
decisions on key customers and suppliers will become a critical
success factor. The ability to effectively collaborate with
several other stakeholders outside your organization will
INTRODUCTION
27 | P a g e

become increasingly important. Successful players will operate
comfortably in virtual and perhaps even transient cross-
functional teams, providing domain expertise to some and
leadership skills to others. The ability to rapidly process
information, filtering out the noise, while gleaning the relevant
pieces is the key to understanding that disconnected pieces of
information are indeed part of a larger event. This knowledge
can then be used to proactively plan several potential decision
scenarios and to execute one or more of them in a pre-emptive
mode.
In conclusion it can be said that logistics management is of
great importance to any enterprise in order to achieve
competitive advantage in an attempt to reduce production costs
and enhance relationships with co-makers such as suppliers and
distributors. In a nut-shell the lesson is obvious, a well-run
supply chain can give a huge competitive advantage and help
achieve success; a badly run one leads to dissatisfied customers
and commercial failure.

LOGISTIC ENVIRONMENT
28 | P a g e

CHAPTER: II
Changing Logistics Environment
Some of the challenges of logistic and supply chain management are:
1. The new rules of competition

Comparing to those early days where organization used to be
isolated and independent. Companies have begun to think more
responsive to faster changing market becoming more consistent
and reliable. Setting goal and achieving those goals has become
more importance.
Before firm used to focus on strong brands backed up by large
advertising budgets and aggressive selling. Nowadays they
began to think it differently focusing on their capabilities and
competencies.
A major contributing factor influencing the changed competitive
environment has been the trend towards commoditization in
many markets. A commodity market is characterized by
perceived product equality in the eye of customers resulting in a
high preparedness to substitute one market of product to other.

In todays marketplace the order-winning criteria are more likely
to be service based than product based.

29 | P a g e

2. Globalization of industry
In the global business materials and components are sourced
worldwide and products may be manufactured offshore and sold in
many different countries perhaps with local customization.
The global industries seeks to achieve competitive advantages by
identifying world markets and then to develop a manufacturing and
logistics strategy to support its marketing strategy. For a global
companies like Philips, caterpillar management of the logistic
process has become an issue of central concern.
Time compression has become a critical management issue. Product
life cycles are shorter than ever, customers and distributors require
just -in -time deliveries and end users are even more willing to
accept a substitute product it their choice is not instantly available.
3. Downward pressure on price
So to prepare for the inevitable, consider these 5 response
tactics for coping with downward price pressure.
Acknowledge the Issue. Agencies can no longer be divas
and run screaming from this issue. This is not an if topic;
its a when topic. Prepare yourself by tightening up your
timesheets and getting control of your own stats. By having
a good feel for the margins on each piece of business and
the client-driven factors, which might have increased costs
or times, youll be ready to confront the hungry bean
counters.
30 | P a g e

Designate a Champion. Make productivity analysis a
senior players job. Insist that this person do battle in the
world of numbers, ratios and productivity. Be sure your
champion can talk easily and authoritatively about process,
cost factors and client business results. Arm them with
every data set you can.
Take an Output POV. Focus on how the agency product
drives the client business. Forget about time and materials.
Clients want agencies with skin in the game. Build a pyramid
of deliverables that takes into account both the tangibles of the
clients business and the intangible value-adds the agency
brings to the game. Accept the idea that not every asset has the
same value or weight. Rank your projects according to their
difficulty or complexity and price them accordingly. Be sure to
extract a premium for projects that require unusual experience,
insight or strategic thinking.
Examine Your Process. How can you become leaner and
meaner? Start by creating a process map that a kindergartener
can follow. Look for ways to pull people and time out of your
supply chain. If necessary, re-engineer your process. Then
show your clients what youve done. Set internal benchmarks
to keep agency people focused and honest.
Think Like a CFO. Focus on the return clients get from
agency services. Price your services so that strategic planning,
account service and project management get bought out and
represent fixed and predictable costs. Sell creative and
production services on a by-project variable cost basis.
Separate the regular and routine projects from the significant,
difficult or unusual projects and price them accordingly. And
while CFOs are eager to hammer all suppliers all the time, they
understand that making magic and making toasters are two
31 | P a g e

different things. Meet them half way and youll be surprised
how much you can hold the line.

4. Customers taking control
Managing the 4Rs As we move rapidly into the era of supply
chain competition a number of principles emerge to guide the
supply chain manager. These can be conveniently summarized
as the 4Rs of responsiveness, reliability, resilience and
relationships.
Responsiveness
In todays just-in-time world the ability to respond to
customers requirements in ever-shorter time-frames has
become critical. Not only do customers want shorter lead
times, they are also looking for flexibility and increasingly
customized solutions. In other words, the supplier has to be
able to meet the precise needs of customers in less time than
ever before. The key word in this changed environment is
agility. Agility implies the ability to move quickly and to meet
customer demand sooner. In a fast-changing marketplace
agility is actually more important than long-term planning in its
traditional form. Because future demand patterns are uncertain,
by definition this makes planning more difficult and, in a sense,
hazardous.
In the future, organizations must be much more demand-driven
than forecast driven. The means of making this transition will
be through the achievement of agility, not just within the
company but across the supply chain. Responsiveness also
implies that the organization is close to the customer, hearing
32 | P a g e

the voice of the market and quick to interpret the demand
signals it receives.
Reliability
One of the main reasons why any company carries safety stock
is because of uncertainty. It may be uncertainty about future
demand or uncertainty about a suppliers ability to meet a
delivery promise, or about the quality of materials or
components. Significant improvements in reliability can only
be achieved through re-engineering the processes that impact
performance. Manufacturing managers long ago discovered
that the best way to improve product quality was not by quality
control through inspection but rather to focus on process
control. The same is true for logistics reliability.
One of the keys to improving supply chain reliability is through
reducing process variability. In recent years there has been a
considerable increase in the use of so-called six sigma
methodologies. Thus, for example, if there is variability in
order processing lead times then the causes of that variability
can be identified and where necessary the process can be
changed and brought under control through the use of six
sigma tools and procedures.
Resilience
Todays marketplace is characterized by higher levels of
turbulence and volatility. The wider business, economic and
political environments are increasingly subjected to unexpected
shocks and discontinuities. As a result, supply chains are
33 | P a g e

vulnerable to disruption and, in consequence, the risk to
business continuity is increased.
Whereas in the past the prime objective in supply chain design
was probably cost minimization or possibly service
optimization, the emphasis today has to be upon resilience.
Resilience refers to the ability of the supply chain to cope with
unexpected disturbances. There is evidence that the tendencies
of many companies to seek out low-cost solutions because of
pressure on margins may have led to leaner, but more
vulnerable, supply chains.
Resilient supply chains may not be the lowest-cost supply
chains but they are more capable of coping with the uncertain
business environment. Resilient supply chains have a number
of characteristics, of which the most important is a business-
wide recognition of where the supply chain is at its most
vulnerable. Managing the critical nodes and links of a supply
chain, to be discussed further in Chapter 10, becomes a key
priority. Sometimes these critical paths may be where there is
dependence on a single supplier, or a supplier with long
replenishment lead times, or a bottleneck in a process.
Other characteristics of resilient supply chains are their
recognition of the importance of strategic inventory and the
selective use of spare capacity to cope with surge effects.
Relationships
The trend towards customers seeking to reduce their supplier
base has already been commented upon. In many industries the
practice of partnership sourcing is widespread. It is usually
34 | P a g e

suggested that the benefits of such practices include improved
quality, innovation sharing, reduced costs and integrated
scheduling of production and deliveries. Underlying all of this
is the idea that buyer/supplier relationships should be based
upon partnership. Increasingly companies are discovering the
advantages that can be gained by seeking mutually beneficial,
long-term relationships with suppliers. From the suppliers
point of view, such partnerships can prove formidable barriers
to entry for competitors. The more that processes are linked
between the supplier and the customer the more the mutual
dependencies increase and hence the more difficult it is for
competitors to break in.
Supply chain management by definition is about the
management of relationships across complex networks of
companies that, whilst legally independent, are in reality
interdependent. Successful supply chains will be those that are
governed by a constant search for win-win solutions based
upon mutuality and trust. This is not a model of relationships
that has typically prevailed in the past. It is one that will have
to prevail in the future as supply chain competition becomes
the norm.
These four themes of responsiveness, reliability, resilience and
relationships provide the basis for successful logistics and
supply chain management.
Customer service
Customer service is the service provided to customers before,
during and after purchasing and using goods and services.
Good customer service provides an experience that meets
35 | P a g e

customer expectations. It produces satisfied customers. Bad
customer service can generate complaints. It can result in lost
sales, because consumers might take their business to a
competitor.

Components of Customer Services
Three major components of customer services are:
Pre-transaction
Transaction
Post -transaction
Pre Transaction Service
The pre-transaction element of good customer service will
continually ensure that the firm and its premises, employees
and procedures are set up to provide excellent customer
service. The firm's systems have to be flexible enough to
adequately respond to customer and market needs.
Pre-transaction marketing aims to persuade consumers to visit
the firm's retail stores through highlighting store facilities,
product features/benefits and promotional offers. It also
involves highlighting the firm's ethos, values, vision and
policies. For example price match policies, free return process
and ethical values such as fair trade and sustainability.
Once in the store, how can the store welcome and support the
potential customer. The retail store environment should make
36 | P a g e

customers feel comfortable so that they want to stay in the
store. Research shows that the longer a customer stays in the
store, the more money they spend i.e. the length of time in a
store directly correlates to the amount of money spent.
Retailers go to great lengths to ensure that their stores are set at
a comfortable temperature, lighting and even smell (scent
marketing). The store should be easy to navigate with prices
and information displayed clearly and accurately.
Retailers provide toilets and cafes to ensure that hunger and
sanitary needs do not make the customer leave. There are often
facilities to entertain children so that their parents can relax and
shop with minimal disturbance. For example restaurants will
provide crayons and coloring pads at the table and their
gardens often have slides, swings and climbing frames, whilst
some retailers, gyms and cinemas offer a Crche. Many
shopping centres and eateries now have free wireless internet
access (wifi) in the hope that internet access will encourage
people to stay longer and therefore spend more.
Retail employees should make customers feel welcome and
facilitate the buying process through excellent customer service
skills, product knowledge and store facilities knowledge.
Employees should answer customer questions confidently and
skillfully demonstrate products if required. Interactions with
store employees are often what makes a sale on the day or
prevents people visiting a store in the future.
Transaction Service
It should be easy for the customer to buy products and services
they have selected to ensure that the sale does not fail at this
37 | P a g e

critical stage. Otherwise the efforts involved in persuading the
customer to visit the store (internet site/telephone sales) will
become a waste of time. Customer service during the purchase
process needs good product availability, efficient queuing
systems, a choice of payment methods and accurate
technology/software systems so that the prices and offers at the
point of sale match those displayed around the store, on
marketing material and websites.
Post Transaction Service
Good customer service continues after the purchase
transaction, consumers expect a quality after sales service for
product failures, complaints and questions/queries. Post
transaction service will determine whether consumers buy from
a firm in the future. Customers will feel reassured about the
firm through efficient complaint resolution, product/service
warranties and quick product replacement and repairs. For
online/remote purchases customer deliveries need to process
accurately, made on time, invoiced correctly and goods have to
arrive undamaged.

38 | P a g e

Importance of Customer Services
Quality customer service is about exceeding the expectations of
your customers.
Superior customer service can help your business to grow by
increasing:
the number of customers attracted by favorable word-
of-mouth advertising
the dollars spent by each customer per transaction
The frequency and number of times your customers
shop with you.

Other benefits of high-quality service include:
improved customer satisfaction
stronger customer loyalty
consistency of work-flow practices
reduced marketing costs
competitive advantage
improved market position
Staff pride and satisfaction.

Customer service is sometimes the only way a business can
differentiate itself from its competitors. It isn't just about the
way you greet and serve your customers. It involves many
aspects of business operations, including:
products and services information
39 | P a g e

counter and face-to-face service
telephone service
taking customer orders
follow-up documentation
billing and managing payments
visiting the customer
making repairs
handling complaints
Managing the service culture.

Customer Retention
Customer retention is on the minds of small and medium-sized
businesses across the world. With rising customer acquisition
costs, businesses need to innovate and assume a proactive role
in retaining clients.
An assessment of the product or service quality provided by a
business that measures how loyal its customers are. Customer
retention statistics are typically expressed as a percentage of
long term clients, and they are important to a business since
satisfied retained customers tend to spend more, cost less and
make valuable references to new potential customers.

According to the Harvard Business School, increasing
customer retention rates by 5 percent increases profits by 25
percent to 95 percent
40 | P a g e

The easiest way to grow your customers is not to lose them
The average business loses around 20 percent of its customers
annually simply by failing to attend to customer relationships.
In some industries this leakage is as high as 80 percent. The
cost, in either case, is staggering, but few businesses truly
understand the implications.
Imagine two businesses, one that retains 90 percent of its
customers, the other retaining 80 percent. If both add new
customers at the rate of 20 percent per year, the first will have a
10 percent net growth in customers per year, while the other
will have none. Over seven years, the first firm will virtually
double, while the second will have no real growth. Everything
else being equal, that 10-percent advantage in customer
retention will result in a doubling of customers every seven
years without doing anything else.
The consequences of customer retention also compound over
time, and in sometimes unexpected ways. Even a tiny change
in customer retention can cascade through a business system
and multiply over time. The resulting effect on long-term profit
and growth shouldnt be underestimated.
Marketing Wizdom can introduce you to a number of simple
customer retention strategies that will cost you little or nothing
to implement. Behind each technique listed here there is an in-
depth step-by-step process that will increase your customer
retention significantly once implemented, and will have a
massive impact on your business.

41 | P a g e

1. Reducing Attrition
Virtually every business loses some customers, but few ever
measure or recognize how many of their customers become
inactive. Most businesses, ironically, invest an enormous
amount of time, effort and expense building that initial
customer relationship. Then they let that relationship go
unattended, in some cases even losing interest as soon as the
sale has been made, or even worse, they abandon the customer
as soon as an easily remedied problem occurs, only to have to
spend another small fortune to replace that customer. The
easiest way to grow your business is not to lose your
customers. Once you stop the leakage, its often possible to
double or triple your growth rate because youre no longer
forced to make up lost ground just to stand still.
2. Sell and then sell again
So many people do an excellent job of making the initial sale,
and then drop the ball and get complacent, ignoring the
customer, while they chase more business. Your selling has
actually only just begun when someone makes that initial
purchase decision because virtually everyone is susceptible to
buyers remorse. To lock in that sale, and all of the referrals
and repeat business that will flow from it, you need to strike
while the iron is hot to allay your customers fears and
demonstrate by your actions that you really care. You should
thank them and remind them again why theyve made the right
decision to deal with you and put a system in place to sell to
them again, and again, constantly proving that they made the
right decision.
42 | P a g e

3. Bring back the lost sheep
Theres little point in dedicating massive resources to
generating new customers when 25-60% of your dormant
customers will be receptive to your attempts to regenerate their
business if you approach them the right way, with the right
offer. Reactivating customers who already know you and your
product is one of the easiest, quickest ways to increase your
revenues. Re-contacting and reminding them of your existence,
finding out why theyre no longer buying, overcoming their
objections and demonstrating that you still value and respect
them will usually result in a tremendous bounty of sales and
drastically increased revenues in a matter of days and will
lead to some of your best and most loyal customers.
4. Frequent Communications Calendar
Avoid losing your customers by building relationships and
keeping in touch using a rolling calendar of communications.
This is a programmed sequence of letters, events, phone calls,
thank you, special offers, follow-ups, magic moments, and
cards or notes with a personal touch etc. that occur constantly
and automatically at defined points in the pre-sales, sales and
post-sales process. People not only respond to this positively,
they really appreciate it because they feel valued and
important. It acknowledges them, keeps them informed, offsets
post-purchase doubts, reinforces the reason theyre doing
business with you and makes them feel part of your business so
that they want to come back again and again.

43 | P a g e

5. Extraordinary Customer Service
The never-ending pursuit of excellence to keep customers so
satisfied that they tell others how well they were treated when
doing business with you. Moving the product or service you
deliver into the realm of the extraordinary by delivering higher
than expected levels of service to each and every customer.
Key facets include: dedication to customer satisfaction by
every employee; providing immediate response; no buck
passing; going above and beyond the call of duty; consistent
on-time delivery; delivering what you promise before AND
after the sale; a zero-defects and error-free-delivery process
and recruiting outstanding people to deliver your customer
service. Extraordinary service builds fortunes in repeat
customers, whereas poor service will drive your customers to
your competition.
6. Courtesy system
Powerful systems that improves the interpersonal skills of your
team and changes the spirit of your organization. It involves
speaking to colleagues politely and pleasantly, without sarcasm
or parody, and treating them at least as well as you would want
them to treat your customers. This will help your team to feel
worthwhile and important, which makes for pleasant social
contacts at work. It also motivates them to provide
extraordinary service, encourages them to be consistently
pleasant in all of their dealings and to relate to customers in a
warm, human and natural manner. This results in better,
warmer, stronger, more trusting relationships and longer term
bonds with your customers.
44 | P a g e

7. Product or service integrity
Long-term success and customer retention belongs to those
who do not take ethical shortcuts. There must always be total
consistency between what you say and do and what your
customer's experience. The design, build quality, reliability and
serviceability of your product or service must be of the
standard your customers want, need and expect. Service
integrity is also demonstrated by the way you handle the small
things, as well as the large. Customers will be attracted to you
if you are open and honest with them, care for them, take a
genuine interest in them, dont let them down and practice
what you preach and they will avoid you if you dont.
8. Measure lifetime value
Theres a vast difference between the one-off profit you might
make on an average sale, which ignores the bigger picture, and
the total aggregate profit your average customer represents
over the lifetime of their business relationship with you. Once
you recognize how much combined profit a customer
represents to your business when they purchase from you again
and again, over the months, years or decades, youll realize the
critical importance of taking good care of your customers. And
because youll understand just how much time, effort and
expense you can afford to invest in retaining that customer,
youll be in control of your marketing expenditure.
9. A complaint is a gift
96 percent of dissatisfaction customers dont complain. They
just walk away, and youll never know why. Thats because
45 | P a g e

they often dont know how to complain, or cant be bothered,
or are too frightened, or dont believe itll make any difference.
Whilst they may not tell you whats wrong, they will certainly
tell plenty of others. A system for unearthing complaints can
therefore be the lifeblood of your business, because customers
who complain are giving you a gift, theyre still talking to you,
theyre giving you another opportunity to return them to a state
of satisfaction and delight them and the manner in which you
respond gives you another chance to show what youre made of
and create even greater customer loyalty.
Other customer retention strategies include:
1. Blogs
2. CRM Systems
3. Loyalty Programs
4. Magic Moments
5. Overcome Buyers Remorse
6. Personal Touches
7. Premiums and Gifts
8. Questionnaires and Surveys
9. Regular Reviews
10. Social Media
11. Welcome Book

46 | P a g e

Service-Driven Logistic System
S Smiling to everyone
E Excellence in everything you do
R Reaching out to every customer with hospitality
V- Viewing every customer as special
I Inviting your customer to return
C Creating a warm environment
E Eye contract that show we care
The role of logistic can be seen as the development of system and the
supporting co-ordination processes to ensure that customer service
goals are meet. This is idea of the service driven logistics system - a
system that is designed to meet defined service goals. So often we
find that organization design and manage system which has
internally focused objectives rather than external goals.
Service-Driven Logistic system consists of three components
as:
1. Identify customer service needs.
Identifying the key components of customer service as
seen by customer themselves.
Establish the relative importance of those service
components to customers.
Identify cluster of customer according to similarity of
service preferences.
47 | P a g e

2. Define customer service objectives.

3. Design the logistic system.

Setting Customer Service Priorities
If your company provides customer service, you need to
establish priorities for customer service representatives.
Customer service representatives have many duties and
responsibilities to fulfill whenever they are speaking with
customers. The order in which the duties are prioritized will
determine if your customers are satisfied or disgruntled. If a
customer service representative is working on commission
1. Identify customer service needs

2. Define customer service objectives

3. Design the logistic system

48 | P a g e

based on cross-selling additional products and services, she
may have a tendency to skip right to that function without
handling the customer's initial inquiry.
Determine all of the duties and responsibilities that a
customer service representative is likely to encounter. A
customer service representative should greet customers in a
friendly, courteous manner by providing his name and
company name, solving the customers' problems, cross-selling
other products and services, and updating and verifying the
customers' personal information such as addresses and phone
numbers.
Prioritize the job duties. A greeting should always be the first
thing that occurs when there is interaction with a customer. The
next duty of a representative should be to find out why the
customer is calling. Before anything is done on a customer's
account, the representative should verify personal information
such as Social Security number, date of birth and the
customer's address. Once the preliminaries are out of the way,
the representative should attempt to resolve the customer's
inquiry.
Define what goals need to be accomplished within the
customer service department. Customer service
representatives should have a goal of servicing customers
efficiently and effectively, which leads to more satisfied
customers. When customers are satisfied they have a tendency
to stay with the same company. Customer retention, acquiring
49 | P a g e

new customers and increasing market share become top
priorities for companies that want to remain competitive. These
goals are accomplished automatically when the customer
service department performs its job duties in an excellent
manner.
Cross-sell other products and services to the customer After
resolving the issue to the customer's satisfaction, the
representative should ask the customer if there is anything else
she can do for her. At this point the customer service
representative should mention the latest available products and
services that may help the customer meet her future needs.
Service standards
A service standard is a public commitment to a measurable
level of performance that clients can expect under normal
circumstances.
Service standards are integral to good client service and to
effectively managing performance. They help clarify
expectations for clients and employees, drive service
improvement, and contribute to results-based management.
Service standards reinforce government accountability by
making performance transparent, and increase the confidence
of Canadians in government by demonstrating the
government's commitment to service excellence.

50 | P a g e

Service standards serve two key purposes:
To provide staff with performance targets ("Phone must
be answered within three rings"); and
To inform clients what to expect ("Waiting time is less
than 10 minutes").
A service standard should be linked to an operational
performance target or the frequency to which the organization
expects to meet the service standard. The target takes into
account the risks associated with process delays and
uncertainties arising from factors such as workload
fluctuations, staff movements, and seasonal variations.

Characteristics of a Good Service Standard
Relevant to the client: Service standards are consistent
with client priorities and address aspects of the service
they value most within available resource allocations.
Based on consultation: Service standards are
developed in consultation with clients, managers, staff,
and other partners in service delivery to ensure that they
are meaningful and match the organization's mandate.
Measurable: Service standards are quantifiable and
linked to monitoring activities.
Consistent across government: Service standards
should be consistent throughout federal organizations
providing similar services. Having similar service
standards across government for similar services helps
both clients and government. Clients will find it easier
51 | P a g e

to deal with different organizations, and the
organizations themselves will find it easier to share best
practices and adopt common approaches.
Ambitious but realistic: Service standards are
realistic, based on analysis and consistent with
objectives, yet sufficiently challenging to service
providers.
Endorsed by management: Service standards are
understood and endorsed by senior management.
Communicated: Service standards are clearly
communicated to clients, employees, and other
stakeholders to help manage expectations.
Transparent: Service standards are monitored and
reported to senior management, and performance
results are published to ensure transparency and client
trust.
Continuously updated: Service standards are regularly
reviewed and updated as appropriate.

52 | P a g e

CHAPTER: III

Total cost analysis
In logistics, the idea that all logistical decisions that provide
equal service levels should favor the option that minimizes the
total of all logistical costs and not be used on cost reductions in
one area alone, such as lower transportation charges.
In cost-volume-profit (breakeven) analysis, the total cost
curve is composed of total fixed and variable costs per
unit multiplied by the number of units provided.
Breakeven quantity occurs where the total cost curve and
total sales revenue curve intersect. See: break-even chart,
break-even point.
In inventory theory, the total cost curve for an inventory
item is the sum of the costs of acquiring and carrying the
item.
In supply chain management, the total cost of ownership
of the supply delivery system is the sum of all the costs
associated with every activity of the supply stream. The
main insight that TCO offers to the supply chain manager
is the understanding that the acquisition cost is often a
very small portion of the total cost of ownership.

53 | P a g e

Principles of Logistics Costing
A logistics costing system should mirror the material flow and
identify the costs that result from providing customer service,
and also it should be capable of enabling separate cost and
revenue analysis to be made by customer type and by market
segment or distribution channel (no to deal with averages).
A mission cost approach can be implemented, in which a
customer service goal is set within a specific product/market
context, then cost associated with this mission are taken from a
number of functional areas within the firm.
Barretts mission costing method:
1) Identify activity centres associated with a distribution
mission,
2) Identify and isolate the incremental costs (no sunk costs)
incurred as a result of undertaking that mission.
This approach becomes particularly powerful when combined
with a customer revenue analysis, because even the customers
with low sales off-take may still be profitable in incremental
costs terms if not on an average cost analysis.

54 | P a g e

The Bottom Line Approach
The 3 financial dimensions for decision making are the bottom
line (immediate pay-back only), strong positive cash flow, and
the productivity of capital (return on Investment ROI)
ROI = Profit/Capital employed
ROI = (Profit/Sales) (Sales/Capital employed)
Margin X capital turnover
Retailers can have good ROI with low margins but high
capital productivity (limited inventory, high sales per square
foot, leasing instead of owning)
Logistics management can improve the following elements
that determine ROI:
1) Sales revenue: Service can improve sales and be a powerful
source of differentiation.
2) Costs: Higher cost when outsourcing, inventory holding,
obsolescence, and deterioration.
3) Asset deployment and utilization: Better cash and
receivables with shorter order cycle time, better order
completion rate and invoice accuracy. Lower
inventories, minimizing the premature purchase of
materials (by using MRP and DRP Distribution
requirements planning). By converting fixed assets into
continuing expenses with the use of third-party
suppliers (for transport and warehousing)
55 | P a g e

Adopt a bottom-line approach. Here are five keys steps to
fostering a successful transition to results-based sales and
marketing.
Develop a systematic approach to demand creation - To
achieve measurable results, you must have a systematic
approach to generating demand. Start by doing the math. If you
need to close 100 customers, how many proposals will have to
be generated? If your close ratio is 50 percent, 200 is the
answer. How many qualified leads will you have to generate to
get 200 proposals? If you're efficient, perhaps 1,000, to get
1,000 qualified leads, how many prospects must flow into your
lead qualification systems? At this entry stage of the sales
funnel, you have to make assumptions as to how many leads
each marketing vehicle will generate. You'll need some
multiple of the 1,000 qualified leads because many leads will
turn out to be merely tire kickers. Finally, make assumptions as
to the response rates you'll get from every marketing vehicle
you use, from advertising to direct and e-mail marketing to
events and public relations. Ultimately, measuring how each
element of the marketing mix performs will let you increase
your efficiency and meet your sales goals.
Focus on high-return opportunities - The operative word
here is "focus." Many business people have a tendency to
"spread out" in times of crisis and look outside core markets
for business. It's only natural to think the more potential
customers you have the more potential business you could get.
However, what often results from this flurry of activity is just
that: a flurry of activity. Instead, you need to be more
productive and precise with the limited dollars you have. You
should concentrate your efforts and resources where you have
56 | P a g e

the highest probability of winning business. Then, further
concentrate on getting wins that represent high-return
opportunities. Know what types of customers represent
potential growth and which represent a distraction. Understand
who is buying today -and who has the potential to buy more
tomorrow.
Get closer to your customers - In the game of darts, the
closer you are to the target, the more likely you are to score.
The same principle applies in business. The closer you are to
your customers, the more likely you are to score sales.
Understand why they buy your product or service, how they
use it, what frustrates them and what pleases them. Understand
these subtleties and nuances better than your competition - and
respond to them better than your competition - and you'll be
more effective at winning business and building relationships.
Test high-return techniques For your organization, a
high-return marketing technique may mean using electronic
mail or e-newsletters. The Web represents a high-return
opportunity because of the very low variable costs associated
with it. If you're selling a high-cost product that requires
approval from multiple decision-makers, you might be better
off spending more marketing dollars per contact. Whatever
your technique, you should be disciplined about having
measurement systems in place to determine what's working and
what's not. Use both qualitative and quantitative indicators to
measure your effectiveness.
Integrate all your efforts - This tip is perhaps where you can
get the most bangs for your buck. All of your marketing
programs should be inherently linked to your sales efforts.
57 | P a g e

Whether you use a direct sales force, resellers, e-commerce, or
a combination of all three, your marketing efforts should be
focused on moving the sales process along. Integration also
means making sure your marketing efforts are consistent and
reinforcing your core brand proposition and key messages.
Public relations, employee communications, advertising and
on- and off-line marketing all should communicate with one
voice. Long term, this unified effort will strengthen your brand
and ultimately increase your revenues and profitability.
Shareholder value
Shareholder value is the value enjoyed by a shareholder by
possessing shares of a company. It is the value delivered by the
company to the shareholder.

Definition: Shareholder value is the value enjoyed by a
shareholder by possessing shares of a company. It is the value
delivered by the company to the shareholder.

Description: Increasing the shareholder value is of prime
importance for the management of a company. So the
management must have the interests of shareholders in mind
while making decisions. The higher the shareholder value, the
better it is for the company and management.

For this to happen, management must exercise efficient
decision making so as to earn/increase profits, thereby
increasing shareholder value. On the other hand, faulty
decision making using unfair tactics might damage shareholder
value.
58 | P a g e

Customer Profitability Analysis
A customer profitability analysis is an evaluation process that
focuses on assigning costs and revenues to segments of the
customer base, instead of assigning revenues and costs to the
actual products, or the units or departments that compose the
corporate structure of the producer. Approaching profitability
from this angle can sometimes provide valuable insights into
how each step of the process of designing, manufacturing, and
ultimately selling a good or service incurs cost and generates
revenue. Many businesses use a customer profitability analysis
as a means of streamlining processes so they provide the
highest degree of efficiency and return, while generating the
lowest degree of cost.
In actual practice, this type of analysis looks at each segment of
the process of creating and selling products to customers. The
idea is to look closely at the costs that are associated with each
of those segments, and compare those costs with the gains that
result from the processes and procedures connected with the
operation of that segment. Breaking down the task into
segments makes it much easier to identify what is actually
working to increase profitability with a major client or a group
of clients within the customer base, as well as what elements
may be inhibiting the potential for earning more revenue from
those same clients.
Along with aiding in making sure that every aspect of the
business operation is functioning in a way that allows for the
generation of maximum profits, a customer profitability
analysis can also help identify factors that could have a
negative impact on the future of the company. For example,
59 | P a g e

most customer profitability analysis templates allow for
determining what percentage a given customer or group of
customers actually make up of the overall client base, usually
in terms of revenue generated.
If the analysis makes it clear that the company is depending on
two or three large customers to generate half or more of the its
business volume, then steps are usually taken to diversify and
expand the client base, often by attracting more small to mid-
sized customers. As a result, the business is less likely to be
crippled in the event that one of those major clients decides to
withdraw, since the increased bank of smaller customers who
are less likely to wander now accounts for a larger share of the
monthly revenue.
A proper customer profitability analysis will also look closely
at how much of the companys resources are dedicated to
producing goods and services for specific clients. The idea is to
determine if the maximum benefit is being earned from the
current use of those resources, or if there is some way to
allocate a portion of those resources to other functions while
still satisfying the customer. Reallocating resources also makes
it possible to engage in responsible cost allocation, which in
turn strengthens the business over the long term.

60 | P a g e

Direct Product Profitability
Direct product profitability (DDP) is defined as a way of
measuring a products handling costs from the time it reaches
the warehouse until a customer buys it in the retail store.

According to the American Marketing Association - (retailing
definition) DDP is the profit on sale of a product after
deducting the cost of the goods and only the expenses directly
related to that particular product or product line.
Improve sales and gross margin by changing:
product assortment
article presentation in the store
consumer prices
Reduce costs by changing:
process (logistics, store handling)
product characteristics (package size, item size)
The Seven Step DPP process
The DPP model is capable of calculating net profitability of
individual items of fast moving consumer goods. Working with
the DPP model is a seven-step process:
1. DPP model fine tuning: the classical DPP model is
adapted to specific product characteristics of your
industry
61 | P a g e

2. Input of process characteristics: process
characteristics of the logistics chain are entered as
activity drivers in the DPP model (examples: delivery
frequency, productivity ratios)
3. Input of general ledger resource costs: resource costs
of the central depot, transportation and the store
(examples: transportation cost per km, costs per
working hour)
4. Calculation of activity costs: activity costs
are calculated in the DPP model
5. Input of product characteristics: all characteristics of
individual products are entered as cost drivers
6. Calculation of direct product costs: activity costs are
allocated to products
7. Calculation and presentation of direct product
profitability ratios
Cost Drivers and Activity Based Costing
Ideally, a cost driver is an activity that is the root cause of why
a cost occurs.
In the past century, the root cause of indirect manufacturing
costs has changed from a single cost driver (such as direct
labor hours) to several cost drivers. Due to sophisticated
manufacturing and increased demands from customers, direct
labor is no longer the main cost driver of indirect
manufacturing overhead.
In addition to direct labor, today's drivers of indirect
manufacturing costs include the number of machine setups
required, the number of engineering change orders, the
62 | P a g e

demands from customers for special inspections, handling and
storage, the number of components in the units produced, and
the number of production machine hours.
Manufacturers that want to know the true costs of their
products need to know what is driving their indirect
manufacturing costs. For these companies it is not sufficient to
merely spread overhead costs to products by using a single
factor such as direct labor hours or production machine hours.
Activity-based costing (ABC) is a better, more accurate way
of allocating overhead.
Recall the steps to product costing:
1. Identify the cost object;
2. Identify the direct costs associated with the cost object;
3. Identify overhead costs;
4. Select the cost allocation base for assigning overhead
costs to the cost object;
5. Develop the overhead rate per unit for allocating
overhead to the cost object.
Activity-based costing refines steps #3 and #4 by dividing
large heterogeneous cost pools into multiple smaller,
homogeneous cost pools. ABC then attempts to select, as the
cost allocation base for each overhead cost pool, a cost driver
that best captures the cause and effect relationship between
the cost object and the incurrence of overhead costs. Often, the
best cost driver is a nonfinancial variable.
63 | P a g e

ABC can become quite elaborate. For example, it is often
beneficial to employ a two-stage allocation process whereby
overhead costs are allocated to intermediate cost pools in the
first stage, and then allocated from these intermediate cost
pools to products in the second stage. Why is this intermediate
step useful? Because it allows the introduction of multiple cost
drivers for a single overhead cost item. This two-stage
allocation process is illustrated in the example of the apparel
factory below.
ABC focuses on activities. A key assumption in activity-based
costing is that overhead costs are caused by a variety of
activities, and that different products utilize these activities in a
non-homogeneous fashion. Usually, costing the activity is an
intermediate step in the allocation of overhead costs to
products, in order to obtain more accurate product cost
information. Sometimes, however, the activity itself is the cost
object of interest. For example, managers at Levi Strauss & Co.
might want to know how much the company spends to acquire
denim fabric, as input in a sourcing decision. The activity of
acquiring fabric incurs costs associated with negotiating prices
with suppliers, issuing purchase orders, receiving fabric,
inspecting fabric, and processing payments and returns.

LOGISTIC PERFORMANCE
64 | P a g e

CHAPTER: IV

Benchmarking the supply chain:
"Benchmarking is the process of measuring an organization's
internal processes then identifying, understanding, and
adapting outstanding practices from other organizations
considered to be best-in-class.
It an Ongoing process of measuring products, services,
practices & processes against the best that can be identified in
order to:
Learn about & improve best practice.
Achieve realistic targets.
Integrate improvements into your
strategy.
Use best practice as inspiration for
innovation.
Be externally focused.
Be purposeful about improvement.
Measure improvement.
Most business processes are common throughout industries.
For example; NASA has the same basic Human Resources
requirements for hiring and developing employees as does
American Express. British Telecom has the same Customer
Satisfaction Survey process as Brooklyn Union Gas. These
processes, albeit from different industries, are all common and
65 | P a g e

can be benchmarked very effectively. It's called "getting out of
the box".
One of the biggest mistakes organizations make when first
benchmarking is that they limit their benchmarking activity to
their own industry. Benchmarking within your industry is
essential. However, you already have a pretty good idea how
your industry performs so it's imperative that you reach outside
and above your own industry into other industries that perform
a similar process but may have to perform this process
extremely well in order to succeed. Here are a couple examples
of how one industry can leapfrog their competitor by learning
and adapting a similar process from a totally different industry:
Benchmarking the logistics process
1. Planning:
Prior to engaging in benchmarking, it is imperative that
corporate stakeholders identify the activities that need to be
benchmarked.
For instance, the processes that merit such consideration would
generally be core activities that have the potential to give the
business in question a competitive edge.
Such processes would generally command a high cost, volume
or value. For the optimal results of benchmarking to be reaped,
the inputs and outputs need to be redefined; the activities
chosen should be measurable and thereby easily comparable,
and thus the benchmarking metrics needs to be arrived at.
66 | P a g e

Prior to engaging in the benchmarking process, the total
process flow needs to be given due consideration. For instance,
improving one core competency at the detriment to another
proves to be of little use.
Therefore, many choose to document such processes in detail
(a process flow chart is deemed to be ideal for this purpose), so
that omissions and errors are minimized; thus enabling the
company to obtain a clearer idea of its strategic goals, its
primary business processes, customer expectations and critical
success factors.
An honest appraisal of the company's strengths, weaknesses
and problem areas would prove to be of immense use when
fine-tuning such a process.
The next step in the planning process would be for the
company to choose an appropriate benchmark against which
their performance can be measured.
The benchmark can be a single entity or a collective group of
companies, which operate at optimal efficiency.
As stated before, if such a company operates in a similar
environment or if it adopts a comparable strategic approach to
reach their goals, its relevance would, indeed, be greater.
Measures and practices used in such companies should be
identified, so that business process alternatives can be
examined.
67 | P a g e

Also, it is always prudent for a company to ascertain its
objectives, prior to commencement of the benchmarking
process.
The methodology adopted and the way in which output is
documented should be given due consideration too. On such
instances, a capable team should be found in order to carry out
the benchmarking process, with a leader or leaders being duly
appointed, so as to ensure the smooth, timely implementation
of the project.
2. Collection of Information:
Information can be broadly classified under the sub texts of
primary data and secondary data.
To clarify further, here, primary data refers to collection of data
directly from the benchmarked company/companies itself,
while secondary data refers to information garnered from the
press, publications or websites.
Exploratory research, market research, quantitative research,
informal conversations, interviews and questionnaires, are still,
some of the most popular methods of collecting information.
When engaging in primary research, the company that is due to
undertake the benchmarking process needs to redefine its data
collection methodology.
Drafting a questionnaire or a standardized interview format,
carrying out primary research via the telephone, e-mail or in
face-to-face interviews, making on-site observations, and
68 | P a g e

documenting such data in a systematic manner is vital, if the
benchmarking process is to be a success.

3. Analysis of Data:
Once sufficient data is collected, the proper analysis of such
information is of foremost importance.
Data analysis, data presentation (preferably in graphical
format, for easy reference), results projection, classifying the
performance gaps in processes, and identifying the root cause
that leads to the creation of such gaps (commonly referred to as
enablers), need to be then carried out.

69 | P a g e

4. Implementation:
This is the stage in the benchmarking process where it becomes
mandatory to walk the talk. This generally means that far-
reaching changes need to be made, so that the performance gap
between the ideal and the actual is narrowed and eliminated
wherever possible.
A formal action plan that promotes change should ideally be
formulated keeping the organization's culture in mind, so that
the resistance that usually accompanies change is minimized.
Ensuring that the management and staff are fully committed to
the process and that sufficient resources are in place to meet
facilitate the necessary improvements would be critical in
making the benchmarking process, a success.
5. Monitoring:
As with most projects, in order to reap the maximum benefits
of the benchmarking process, a systematic evaluation
should be carried out on a regular basis.
Assimilating the required information, evaluating the progress
made, re-iterating the impact of the changes and making
any necessary adjustments, are all part of the monitoring
process.

70 | P a g e

Supply Chain Process Mapping
Producing a flow chart the first step and highlighting value
adding time and non-value adding time (Christopher, M.
1998 pp 110)

Value Adding Time:
Time that results in increased value for
the customer
Non Value Adding Time:
Elimination of this time or activity
would not reduce the perceived value of
the ultimate consumer.

71 | P a g e

Todays procurement, production and operations professionals
are faced with the challenges of managing risk across
increasingly global and complex supply chains.

Understanding how the business operates, the interfaces
between departments, identifying non value adding activities
and identifying the inherent conflict in processes offers great
opportunity for continuous improvement. High level and
detailed processing mapping and value identification skills are
available.

Understanding your full supply chain

Managing Supply Chain risk

Global events far from your own business, can impact your
supply chain; companies with visibility of the extended supply
chain are aware of these risks and can build contingencies and
react to disruptions in an informed way. By identifying,
qualifying and monitoring suppliers across your supply chain
youll have visibility of:
The supply chain from Tier 1 and beyond
Areas of supply chain convergence highlighting
potential single points of failure

Product level information

When the programme is activated, as a buyer you will be able
to get visibility of your supply chain by product code. This will
support you in understanding any previously unknown risks in
72 | P a g e

the supply chain. Youll be able to use a range of search and
filter tools to manage this data.

Supply Chain visibility and insight

Supply Chain Mapping can help you by providing:

Clarity of who is in your supply chain beyond the first
tier
Information to support mitigation of supply chain risk
Awareness of how global events (e.g. natural disasters)
might disrupt your supply chain
Awareness of the interdependencies in your supply
chain through search, report and visual display
interfaces

The Supply Chain programme is designed to collect
information on sub-suppliers, link relationships and therefore
expand visibility of the wider supply chain.

As part of the Supply Chain Programme suppliers will be asked
basic questions that relate to their company profile and contact
details. Theyll then confirm relationships between the
products they sell and the products they buy creating links that
map the supply chain.

73 | P a g e

Supplier and Distributor Benchmarking
Involve inbound and outbound elements for the value system.
Their cost will add to the ultimate cost!
Establish and Encourage:
Commitment to continuous improvement.
Acceptance of innovation and change.
Use of regular and formal and benchmarking.
Employee concern for the ultimate consumer.
Leadership involvement

Setting the Benchmarking Priorities
Priority Setting: involves balancing both long and
short term goals in order to attain both.

Benchmarking: is a systematic comparison of
organizational performance or processes to create new
standards or improve processes.

Evaluation: is the systematic determination of merit
, worth or significance

74 | P a g e

75 | P a g e

Logistic Performance Indicators
This comprehensive recommendation defines 6 indicators (EDI
Precision / Delivery Accuracy / Vendor Managed Inventory /
Material Handling & Identification / Production Disruptions /
Supplier Communication & Cooperation) as well as their
ratings.
5 of these indicators are used by at least 2 companies who
participated in the work group:
EDI(Electronic Data Interchange) precision: PSA,
Renault
Delivery Accuracy: PSA, Nissan, Renault
Material Handling & Identification: Bosch, SNOP,
Nissan, Renault
Production disruptions: Nissan, Renault
Supplier Communication & Cooperation: Bosch,
Nissan
The use of standard indicators of logistics performance will
reduce cost and save time:
For the Suppliers, by harmonizing requirements in
logistics performance within the industry
For the Customer, by facilitating the development or
the enhancement of Supplier appraisal systems based
on standard indicators.
The defined LKPI (logistic key performance indicator) are
complementary to the Global Materials Management/Logistics
76 | P a g e

Evaluation Recommendation (Global MMOG/LE) which was
developed jointly between AIAG and Odette:

- Global MMOG/LE supports (auto) evaluation of a plants
logistics capability
- LKPI measure the effectiveness of the logistics processes
between parties
LKPI highlights issues regardless of measurability that have
high impact on the organisational success.
Articulate the strategic objectives to personnel.
Understand measurable outcomes of success.
Communicate importance of key processes.
Highlight and focus attention on key
performance indicators.
Better faster Cheaper!

77 | P a g e

Differences between Innovation and Benchmarking

78 | P a g e

CHAPTER: V

Strategic Issues in Logistics

STRATEGIC ISSUES IN LOGISTICS
79 | P a g e

Time Based Competition
The term time-based competition came into use with its
appearance in a 1988 Harvard Business Review article entitled
"Time-The Next Source of Competitive Advantage" by George
Stalk, Jr. It was further defined in a series of articles and books
written by consultants from the Boston Consulting Group.
Time-based competition is a broad-based competitive strategy
which emphasizes time as the major factor for achieving and
maintaining a sustainable competitive advantage. It seeks to
compress the time required to propose, develop, manufacture,
market and deliver its products.
In order to do this, the firm must change its current processes
and alter the decision structures used to design, produce and
deliver to the customer.
Time-based competition appears in two different forms: fast to
market and fast to produce. Firms that compete with to-market
speed emphasize reductions in design lead-time. In other
words, the firm has the ability to minimize the time it takes to
develop new products or make rapid design changes. Products
fifty percent over budget but introduced on time have been
found to generate higher profit levels than products brought to
market within budget but six months late. Also, this form
allows firms to gain a market edge by being able to
consistently introduce more new products or large numbers of
product improvements/variations faster than its competitors,
thereby dominating the market. Sun Microsystems achieved
leadership in engineering workstations by reducing (by fifty
percent compared to competitors) the time required to design
80 | P a g e

and introduces new systems. Additionally, these firms are now
moving further along the learning curve than the competition.
Both factors ultimately increase barriers to entry by
competitors.

George Stalk, Jr. relates that a firm becomes a time-based
competitor by accomplishing four tasks: (1) understanding the
rules of response, (2) making value-delivery systems two to
three times as flexible and responsible as its competitors, (3)
pricing how customers value these capabilities, and (4)
implementing a strategy for surprising its competitors with
time-based advantages.
81 | P a g e

Time-based competition is a reality for many firms. Generally,
these time-based competitors began by correcting their
manufacturing techniques (often through JIT), then fixing sales
and distribution, and finally adjusting their approach to
innovation. Their strategy is based on the results of flexible
manufacturing, rapid response, expanding variety, and
increasing innovation. It is a Meta strategy which improves
performance through changes in the processes and structures
used to design, manufacture and deliver products to the
customer, thereby impacting overall firm performance (e.g.,
return on investment, return on assets). Motorola, Northern
82 | P a g e

Telecom, and Toyota are but a few of the companies that have
found ways to increase the overall value of their delivery
systems through the compression of time.

Lead Time
Lead Time is the time between the initiation of a process and
its completion. In Supply Chain Management there are 2 types
of lead times:
Manufacturing Lead Time
Information Lead Time
We will focus in this post on the manufacturing lead time.
Manufacturing lead time is simply the time required to buy or
make an item. In Oracle e-Business Suite, the lead times are
defined at organization level (not at master level).
Make items lead times
As shown above, there are 4 different types of lead times
required to make an item or an item lot.

Preprocessing Lead Time: The time required to create
a work order (discrete job) from the time you learn of
the requirement. It is also known as "planning time" or
simply "paperwork".
83 | P a g e

Processing Lead Time: The time required to
make/manufacture the item.
Fixed lead time: The fixed lead time is a portion of
processing lead time which is not dependent of order
quantity
Variable lead time: Portion of processing lead time
which is dependent of order quantity
The total lead time is equal to the fixed lead time plus the
variable lead time multiplied by the order quantity. The
planning process uses the total lead time to calculate order start
dates from order due dates.
Buy items lead times
Understanding buy items lead times is simpler.

Preprocessing Lead Time: The time required to create
a Purchase Order from the time you learn of the
requirement. As for Make items, the buy item
preprocessing lead time is also known as "planning
time" or simply "paperwork".
Processing Lead Time: The time required to buy an
item.
Post processing lead time: The time required to
receive a buy or transfer item from the receiving dock
to inventory (it includes quarantine, inspection time,
etc.)
84 | P a g e

Cumulative lead times
Please find below an illustration showing the different
cumulative lead times you may find in manufacturing
processes.

85 | P a g e

Logistics Pipeline Management
The key to successful control of logistics lead times in pipeline
management. Pipeline management is the process whereby
manufacturing and procurement lead times are linked to the
need of the marketplace. At the same time, pipeline
management seeks to meet the competitive challenge of
increasing the speed of response to those market needs.
For the supply chain to be effective in a multichannel
operation, it is necessary for management to meet four goals:
1) Increased efficiency
2) improved customer service
3) increased sales
4) improved relationships
Each of these goals includes definitive and specific objectives
required within an operation. Fortunately, there are proven best
practices to help you achieve those objectives.
1) Increased efficiency

To increase efficiency, a company must develop cost-
effective transportation rates while reducing overhead, total
inventory, and overall cost-per-order processing. You can
improve your warehouse operations, including processes,
layout, and flow, by working closely with your
transportation provider. Establish a two-way relationship
86 | P a g e

with your carrier to frequently share best practices, issues,
and opportunities.
To improve logistical efficiencies, consider having the
vendor perform value-added services such as packaging,
marking, and quality inspections. This improves the chance
of errors being caught at the source; source-based services
speed product flow through the warehouse.
2. Improved customer service
In direct marketing enterprises, fulfillment operations are in
partnership with marketing and merchandising. This
partnership is like a three-legged stool without all three legs
the stool cannot stand. Fulfillment operations inbound and
outbound transportation is keys to delivering marketings
promise to the customer to get the shipment delivered on time
and in good condition.
In direct marketing, customer service must be balanced with
costs. First is the cost to acquire a customer, which stands at
roughly $10-$25, depending on the efficiency of the
prospecting. This figure includes catalog and other marketing
costs, as well as the cost of non-responses. In many businesses,
u to 70% of all first-time buyers does not purchase a second
time. Most direct businesses need a customer to purchase two
or three times to break even.
The second cost element to consider is the high cost of being
on backorder. Hundreds of customer studies show that in most
87 | P a g e

direct businesses it costs $7-$12 to process one backordered
unit of merchandise.
The third type of cost element is the erosion of gross demand
by customer returns and customer and company cancellations.
Figure 2 shows typical return rates by category. The higher the
fashion nature of the product, the higher the return rate tends to
be. Sized or tailored fashion products have higher returns.
3. Increased sales

How can inbound and outbound logistics and transportation
help a retailers sales? Several opportunities exist for
improving service, and those in turn can be used to marketings
advantage. Look at inbound and outbound freight as separate
operations with separate requirements. Bundle the volumes
wherever possible with your carriers, but recognize the
differences between the channels.
With direct promotions and advertised retail product,
maintaining on-time and in-stock position is a must. Without
an available, reliable source of merchandise, you could end up
losing sales and customers. Because its difficult to project
sales, you need to get product quickly and safely into the
logistics pipeline. Product damage from inbound transportation
can seriously reduce product availability, and of course without
product you can sell, profits decline.
The logistics of delivering to the customer can hurt sales if the
customers expectations are not metfor example, if a gift is
88 | P a g e

delivered late or arrives damaged. If the customer doesnt want
the product that arrives, returns increase the cost of operation.
4. Building relationships

True two-way collaboration between retailer and carrier is key
to the success of logistics execution. Measures of success are
total cost, time in transit, and responsiveness of the carrier
representative.
The single-carrier vs. multicarrier philosophy is one of the
primary issues you need to address with regard to carrier
relations. Using one carrier allows a higher aggregate volume
of shipments, which can result in lower negotiated rates. The
downside is total dependence on the carrier and possible
problems if there is a carrier service interruption.
A good relationship with your carrier representative is vital.
Inevitably there will be issues that must be addressed. Trust
and a positive attitude can influence how those issues are
resolved.
Use a structured approach to comparing carriers. When
soliciting bids; give carriers as much information about your
business requirements as possible. Throughout the bidding
process, and later when working with carrier partners, follow
these guidelines:
Stay involved with the process.
Verify results and reports.
Audit bills.
89 | P a g e

Consider the total costs of transportation in your
analysis and reviews.
Keep options open and treat carrier contracts and
relationships as dynamic and evolving not like a
fixed three-year arrangement.
Material flow

Information flow

90 | P a g e

Lead Time Gap
The fundamental problem that faces many companies not just
those in fashion industries is that the time it takes to source
materials, convert them into products and move them into the
marketplace is invariably longer than the time the customer is
prepared to wait. This difference between what might be called
the logistics pipeline and the customers order cycle time is
termed the lead-time gap. Conventionally, this gap was filled
with a forecast-based inventory there was no other way of
attempting to ensure that there would be product available as
and when customers demanded it.
The problem was that often it would be the wrong inventory:
for example, sizes, colors or styles that were not those actually
demanded.
Highlights the problems of the lead-time gap which in the
fashion industry was traditionally measured in months rather
than weeks

91 | P a g e

Logistics Value Engineering (VE)

It is a systematic method to improve the "value" of goods and
services by using an examination of function. Value, as
defined, is the ratio of function to cost. Value can therefore be
increased by either improving the function or reducing the cost.
It is a primary tenet of value engineering that basic functions
be preserved and not be reduced as a consequence of pursuing
value improvements. Value engineering or Value analysis is a
methodology by which we try to find substitutes for a product
or an operation. In most cases this practice identifies and
removes unnecessary expenditures, thereby increasing the
value for the manufacturer and/or their customers.

Value engineering began at General Electric Co. during World
War II. Because of the war; there were shortages of skilled
labor, raw materials, and component parts. Lawrence Miles and
Harry Erlicher at G.E. looked for acceptable substitutes. They
noticed that these substitutions often reduced costs, improved
the product, or both. What started out as an accident of
necessity was turned into a systematic process.

They called their technique value analysis. Value
engineering process calls for a deep study of product and the
purpose for which it is used, such as, the raw materials, used,
the processes of transformation, the equipment needed and
many others. Questions what is being done /used is the most
economical or appropriate.

92 | P a g e

VE - Approaches and Aim

Nowadays principles of value engineering start at the product
concept and design and is carried down the value chain

The aim of value engineering is to effect economies by
investigating every opportunity & discovering new materials,
methods to achieve high quality performance. The aim of
Value Engineering is listed as:
1. Product Simplification
2. Better and less costly material
3. Improved product design
4. High efficiency in the processes
5. Economy in all activities

Providing Value to the Customers

1. Promote employee involvement in value work
2. Act on customer voice
3. Enhance product reliability
4. Ensure efficient procurement practices for better value
5. Streamline business processes for quicker response.
6. Provide comparative value mapping

93 | P a g e

The main benefits of the application of VE are:
Cost Reduction
Overall cost consciousness
A culture of effecting savings across
organisations
Streaming of administration and creation of
transparency in all dealings even with outsider.
Development of reliable suppliers

Just-In-Time (JIT)

JIT can be defined as an integrated set of activities designed to
achieve high-volume production using minimal inventories
(raw materials, work in process, and finished goods).

JIT also involves the elimination of waste in production effort.

JIT also involves the timing of production resources (i.e., parts
arrive at the next

Advantages of JIT
Increases Productivity
Reduces Operating costs
Improves performance the throughput
Improves quality
Improves deliveries
Increase Flexibility and innovativeness

94 | P a g e

Seven Wastes to be eliminated according to JIT are
(TIMWOOD):

Transportation
Inventory
Motion / Effort
Waiting
Overproduction
Over Processing
Defects

Transport: Movement of materials is a waste.
Minimize the amount of movement by arranging
processes in close proximity to each other. Design
facility layout that reduce or eliminate material
handling and shipping.

Inventory: Too little inventory can lose sales; too
much inventory can hide problems. Aim for "Just in
Time" (JIT) manufacturing to expose problems to be
eliminated and reduce cost.

Motion / Effort: Remove unnecessary motion of the
operations and improve the ergonomics of the
workplace. Improve productivity and quality by
eliminating unnecessary human motions, make
necessary motions more efficient, mechanize, and then
automate.

Waiting: Minimize waiting time and maximize "value
adding" time. Aim for a smooth flow.
95 | P a g e

Overproduction: Always aim to make exactly what the
customer orders, just in time, to the correct quality
standard.

Over Processing: Use machines which are of an
appropriate capacity and capable of achieving the
required quality standard.

Defects: Reducing the number of defects directly reduces the
amount of waste. Aim for zero defects.

The Japanese Philosophy
Key Processes to eliminate waste

Kanban for material flow
High Quality Production
small and Uniform workload
Suppliers as partners
Flexible workforce and training
Total Productive maintenance

At the core of JIT manufacturing at Toyota is Kanban, an
amazingly simple system of planning and controlling
production.
Kanban, in Japanese, means card or marquee. Kanban is the
means of signaling to the upstream workstation that the
downstream workstation is ready for the upstream workstation
to produce another batch of parts.

96 | P a g e

There are two types of Kanban cards:
a conveyance card (C-Kanban)
a production card (P-Kanban)

Signals come in many forms other than cards, including:
an empty crate
an empty designated location on the floor

How Kanban Operates

When a worker at downstream Work Center #2 needs a
container of parts, she does the following:
She takes the C-Kanban from the container she
just emptied
She finds a full container of the needed part in
storage
She places the C-Kanban in the full container
and removes the P-Kanban from the full
container and places it on a post at Work Center
#1
She takes the full container of parts with its C-
Kanban back to Work Center #2

97 | P a g e

Differences between JIT and Traditional Purchasing

JIT Purchase Traditional Purchasing

Smaller lot sizes

Relatively large lot sizes

More frequent deliveries

Less deliveries at higher
quantities

No rejection from the supplier

2% rejection from supplier

Long-term contracts

Lowest price is main objective

Buyer decides delivery
schedule
Time consuming
98 | P a g e

Innovation encouraged

Formal communication

Minimal paper work

formal paperwork

Less formal communication

Implications for logistics Quick response logistics:
Concept
The basic idea behind quick response (QR) is that in order to reap the
advantages of time-based competition it is necessary to develop
system that is responsive and fast.
Quick Response (QR):
Originated in Fashion industry (80s)
Consumer drives channel ship quickly on demand,
like ECR (Efficient Consumer Response)
Involves keeping manufacturing flexible as to what
and how much to make.
More common when consumers dont know what
they need until they try it. Often needed for
perishables (fashionables) that require consumer
reactions vs. ECR for commodities (toothpaste).

99 | P a g e

Vendor Managed Inventory
Vendor Managed Inventory or VMI is a process where the
vendor creates orders for their customers based on demand
information that they receive from the customer.
The vendor and customer are bound by an agreement which
determines inventory levels, fill rates and costs.
This arrangement can improve supply chain performance but
reducing inventories and eliminating stock-out situations.

One of the benefits of VMI is that the vendor is responsible for
supplying the customer when the items are needed. This
removes the need for the customer to have significant safety
stock. Lower inventories for the customer can lead to
significant cost savings.
The purpose of JIT chain is to reduce inventory at all places in
the supply chain. Inventory is considered a waste because
inventory is created by using materials, machines and efforts of
persons. All of these resources which have already been used
100 | P a g e

up and that portion of it which is not consumed and send up the
value chain cause a drag on the system. However inventories
are inevitable because uncertainties exist at every stage,
making it necessary to provide a buffer so that demands do not
go unfilled. The challenge is to keep it to the minimum. To
make this happen, the calculation involving the following are
necessary.
Forecasts of the market demand
Capacities of the equipments
Worker absenteeism
Suppliers lead times
Quality of the produced components
Each of these will have many factors which affect them. JIT
depends upon accurate assessment of them and based on the
decisions taken activities are initiated. These should result is
holding materials as small as the number of components or the
products as feasible to maintain flow of material without
disruption. Many companies make their suppliers hold their
inventories and request then to make timely suppliers. This
may be done at a cost.
101 | P a g e

Logistics Information System
Converting data to information, portraying it in a manner
useful for decision making, and interfacing the information
with decision-assisting methods are considered to be at the
heart of an information system. Logistics information systems
are a subset of the firms total information system, and it is
directed to the particular problems of logistics decision
making. There are three distinct elements that make up this
system: the input, the database and its associated
manipulations, and the output. The inputs are data items
needed for planning and operating logistics system obtained
from sources like customers, company records, and published
102 | P a g e

data and company personnel. Management of the database
involves selection of the data to be stored and retrieved, choice
of the methods of analysis and choice of the basic data-
processing procedures. The outputs of a logistics information
system include:
Summary reports of cost or performance statistics,
Status reports of inventories or order progress,
Exception reports that compare desired performance
with actual performance, and
Reports that initiate action. Output can also be in the
form of documents such as transportation bills of lading
and freight bills.
It is the management of the flow of information, including
customer orders, billing, inventory levels, and customer data.

103 | P a g e

Function of logistic Information System

Planning Function
Stock management
By product/customer
By location
Demand forecasting
Strategy planning

Customer
service
communication
function
Customer order
status
Inventory
availability
by
product
by
stock
location
Outbound
shipment status
Co - ordination
Function
Production
scheduling
Material
requirement
planning
Sales/marketing
planning
Database
External data
Customer orders
inbound shipments
Internal data
Production
Inventory
Control function
Customer service level
vendor performance
carrier performance
System performance
104 | P a g e

Production Strategies for Quick Response
Quick Response (QR) can be defined as:
A state of responsiveness and flexibility in which an
organization seeks to provide a highly diverse range of
products and services to a customer/consumer in the exact
quantity, variety and quality, and at the right time, place and
price as dictated by real-time customer/consumer demand. QR
provides the ability to make demandinformation driven
decisions at the last possible moment in time ensuring that
diversity of offering is maximized and lead-times, expenditure,
cost and inventory minimized. QR places an emphasis upon
flexibility and product velocity in order to meet the changing
requirements of a highly competitive, volatile and dynamic
marketplace. QR encompasses an operations strategy,
structure, culture and set of operational procedures aimed at
integrating enterprises in a mutual network through rapid
information transfer and profitable exchange of activity.
(Lowson, King and Hunter, 1999)
QR has a number of strategic implications for the organization.
Research has shown that mere implementation of technology or
particular procedures without the strategic underpinning lead to
sub-optimal performance (Lowson, 2002).
Quick Response Manufacturing (QRM) is a companywide
strategy to cut lead times in all phases of manufacturing and
office operations. It can bring your products to the market more
quickly and help you compete in a rapidly changing
manufacturing arena. It will increase profitability by reducing
cost, enhance delivery performance and improve quality.
105 | P a g e

QRM's overarching focus on time as the guiding management
strategy is ideally suited for companies offering high-mix, low-
volume and custom-engineered products. In fact, many
companies making highly customized products and/or a high
variability in their product mix have used QRM as an addition
to existing Lean, Six Sigma, and other improvement efforts.

106 | P a g e

The Alignment of Organizational Activity to Demand
This is a fundamental principle of QR. All activities within an
enterprise should be paced to demand and customer behavior.
Products and services are produced and delivered in the variety
and volume that match demand. The activity within a company
moves to the beat of this drum. Swings in demand are closely
monitored: too little or too much leads to waste and
inefficiency. Whether it is marketing, purchasing, new product
development or operations, all endeavors follow the market
tempo, and the realization that this alignment may necessitate a
change in corporate culture. Consequently, it is important that
senior management recognizes and understands these demand
patterns. Resources need to be deployed that can undertake this
vital externally focused role.
Linkages between Demand and Supply
Given the importance of the alignment activity mentioned
above, a strategic understanding of the drivers of demand and
its synchronized connection with supply is imperative for QR.
In the past much attention has, quite rightly, been placed upon
improvements in supply. However, demand is the target no
matter how sophisticated the supply weaponry, it is ineffectual
if the target is not understood. Only when the value and
benefits sought by the customer/consumer are appreciated in all
their complexity, can a strategy to supply them be developed.
This involves detailed assessment of supply and demand
processes and sub-processes by customer or consumer
grouping. Together with the supply of a tangible product, there
are myriad other dimensions peculiar to the
customer/consumer. These include varying information
107 | P a g e

content, time- frames, physical arrangement for logistics,
service support, marketing campaigns, and information
systems.
Demand Relationships
QR recognizes that both customers/consumers and products are
dynamic and place unique demands on the organization.
Identical products, jeans for example, will have unique product
flows depending upon customer/consumer buying behavior and
QR needs (whether a department store, specialty store,
supermarket, wholesaler, independent corner store, or
whatever). Similarly, product attributes will vary by product,
for example, volume and flow characteristics, demand patterns,
seasonality, promotional strategy, cyclical needs, information
content, credit terms and customer incentives and repeat
purchase patterns. These attributes can be aligned with the QR
product categories of basic, seasonal, fashion or short
season and ultra -short season. These different
customer/consumer and product behaviors will customize and
tailor QR channels in line with the requirements. Once this
assessment is done, it is possible to apply specific QR
components or systems that can be tied into the unique supply
pipeline.

SUPPLY CHAIN MANAGEMENT
108 | P a g e

CHAPTER: V

Supply Chain Management

109 | P a g e

Concept
Supply chain management is a set of approaches utilized to
efficiently integrate suppliers, manufacturers, warehouses, and
stores, so that merchandise is produced and distributed at the
right quantities, to the right locations, and at the right time, in
order to minimize system wide costs while satisfying service
level requirements.

Supply chain is an integrated process where raw materials are
transformed into final products, then delivered to customers.
Beamon (1999)
A system whose constituent parts include material suppliers,
production facilities, distribution services and customer linked
together by feed forward flow of materials and feedback flow
of information.
Berry (1995)
An integrating process based on flawless delivery of basic and
customized services. Kalakata (2000)
Supply chain is a process of strategically managing the
movement and storage of materials, parts and finished
inventory from suppliers through the firm and on to the
customers.
Johnson (1995)
110 | P a g e

Supply chain is a network of facilities and distribution options
that performs the functions of procurement of materials,
transformation of these materials into intermediate and finished
products and distributions of products to customers.
- Ganeshan and Harrision

111 | P a g e

Examples:

Asian Paints operates in 22 countries and has 27 paint
manufacturing facilities with combined total capacity of
around 370 million liters per annum servicing
consumers in over 65 countries.

HP sells approximately 400,000 computers through the
4000 wal Mart stores worldwide in one day during the
Xmas season.

Wal Mart moves approximately 2.3 billion general
cartons a year to its stores.

Overview of Strategic Planning for Logistics and
Supply Chain Management

Logistics and supply chain management are changing quickly,
and are characterized by:

Many innovations and improvements
Movement towards being considered as players in
strategic, competitive advantage
Prime candidates for application of tried and proven
approaches to strategic planning
Historical Perspective on Strategy:
Has become an appropriately meaningful and integrated
activity in most globally competitive firms.

112 | P a g e

Evolutionary development phases:

In the 50s and 60s, was referred to as investment
planning.
In the 70s, began to focus on internal growth
opportunities.
In the 80s, a combination of outside investment and
internal growth opportunities was used.
In the 80s, a combination of outside investment and
internal growth opportunities was used.
In the 90s, refocused on gaining strategic advantage in
the marketplace and for defending against competitors.
In the early 2000s, strategic focus clearly moved toward
the development of effective, inter firm relationships
that would create maximum value for the firms
products and/or services.

How does SCM WORK?

The elements of SCM are (Location, Production, Inventory
and Transportations.

Location
It is important to know where production facilities,
stocking points and sourcing points are located. These
determine the paths along which goods will flow.

Production
An organization must decide what products to create at
which plants which suppliers will service those plants,
113 | P a g e

which plants will supply specific distribution centers
and sometimes, how goods will get to the final
customers. These decisions have a big impact or
revenue, costs and customer service.

Inventory
Each link in the supply chain has to keep a certain
inventory or raw materials, parts, subassemblies and
those goods on hand as a buffer against uncertainties
and unpredictability. Shutting down an assembly plant
because an expected part shipment didnt arrive is
expensive. But inventory costs money too, so it is
importance to manage deployment strategies, determine
efficient order qualities and recorder points, and set
safety stock levels.

Transportation
Choosing the best way of transport goods often
involves trading off the shipping cost against the
indirect cost of inventory. For example, shipping by air
is generally fast and reliable.

Managing the CHAIN

Once you have determined all the elements in the supply chain,
how do you manage the chain? There are three main parts in
the process.

There are 3 paths in the chain
Product Flow
Information Flow
Financial Flow
114 | P a g e

Product flow: includes the movement of goods from a
supplier to a customer as well as customer returns.

Information flow: involves transmitting orders and
updating the status of delivery.

Financial flow: consists of credit terms, payments and
payments schedules, plus consignment and title
ownership.

Supply chain software, especially large integrated packages,
combine many different technologies to give a single view of
115 | P a g e

supply chain data that can be shared with others. (Planning and
execution applications).Such applications make possible the
JIT delivery of goods and services. New SCM option involves
web based options with the capability to offer real time data.

Types of Supply Chain Decision

116 | P a g e

THE 7 PRINCIPLES OF SCM

1. Group customer by needs
Effective SCM groups customers by distinct service needs
and tailors services to these particular segments.

2. Customize the logistics network
Need to focus on the service requirement and profit
potential

3. Listen to signals of market demand & plan accordingly
Need to monitor the entire SC to detect early warning
signals of changing customer demands and needs.

4. Differentiate the product closer to the customer
Allows supply chains to respond quickly and cost
effectively to changes in customer needs.

5. Strategically manage the sources of supply
Work closely with suppliers to reduce the cost
Win Win situation for all involved.

6. Develop a supply chain wide technology strategy
Employ IT to support multiple levels of decision making.
It should also afford a clear view and ability to measure
the flow of products, services and information.

7. Adopt channel spanning performance measures
Excellent supply chain performance measurement systems
do more than just monitor internal functions. They apply
performance criteria to every link in the supply chain
criteria that embrace both service and financial metrics
117 | P a g e

Supply Chain Processes

TYPES OF SUPPLY CHAIN

1) Upstream supply chain (inbound logistics):-
activities of a manufacturing company with its suppliers

2) Downstream supply chain (outbound logistics):-
activities involved in delivering the products to the final
customers.

3) Internal supply chain: - in house processes for
transformation the inputs from the suppliers into the
outputs.

118 | P a g e

What enables successful Supply Chain Management
1. Pressure from market changes such as NAFTA and EEU
2. Industry EDI standardization (codes, templates,
software...)
3. Heavy IT and EDI investment
4. Excellent cost accounting
5. Internal management incentives for system gains
6. Culture of cross-functional integration
7. Effective channel management fostering: trust,
relationships, design, and judicious use of power
Key Supply Chain Management Issues
Chain Global
Optimization
Managing Risk
and Uncertainty
Distribution Network
Configuration
Supply Y
Inventory Control Supply Y
Production sourcing Supply Y
Supply contracts Both Y Y
Distribution Strategies Supply Y Y
Strategies partnering Development Y
Outsourcing and off
sourcing
Development Y
Customer value Both Y Y
Smart pricing Supply Y
119 | P a g e

Logistics Vision
The purpose of the logistics vision statement is to give a clear
indication of the basis on which the business intends to build a
position of advantages through closer customer relationship.
Such statements are never easy to construct. There is always
the danger that they they will descend into vague 'motherhood'
statement that give everyone a warm feeling but provide no
guidelines for action.

Ideally the logistics vision should be built around the simple
issue of' how do we intend to use logistics and supply chain
management to create value for our customers?' To operational
120 | P a g e

this idea will necessitate a detailed understanding of how
customer value is (or could be) created and delivered in the
markets in which the business completes.
Value chain analysis will be a fundamental element in this
investigation, as will the definition of the core competencies
and capabilities of the organization. Asking the questions 'what
activities do we excel in?' and 'what is that differentiates us
from the competitors?' is the starting point for creating logistics
statement.
The four elements of logistics -derived customer value are
'Better, Faster, Cheaper, Closer and the criterion for the
good logistics vision statement is that it should provide the
roadmap for how these four goals are to be achieved.

121 | P a g e

Problems with Conventional Organizations
By now, the functional model has become the conceptual core
of nearly all organizational structures, public and private. It is
so ingrained in the daily activities of most companies that it is
rarely questioned. But it is obsolete.
Even when functions are seen as shared services, which would
place them relatively low on the org chart in many companies,
they are typically the most permanent parts of the enterprise.
Business units come and go with the product life cycle, but
finance, HR, marketing, legal and R&D last forever. Even in
matrix organizations, the functions maintain quite a bit of
power, managing career tracks and a huge portion of
discretionary investments.
The value of functions is undeniable; no company could do
without them. But the business and organizational models that
govern functions need updating. The most important business
practices and collaborations no longer fall neatly into
groupings designed many decades ago.
Perhaps the most obvious symptom of distress from the
functional model is the widespread problem of incoherence.
Most functional teams are good at many things, but great at
nothing. They often struggle to meet the needs of all their
constituents, juggling an endless (and sometimes conflicting)
list of demands from line units; they never manage to build the
type of advantage or differentiation that is required for long-
122 | P a g e

term success. The underlying problem is not a lack of desire to
focus, a lack of functional ability, or an inadequate budget. The
functional organization simply no longer serves companies as
effectively as it once did.
Logistics organization: vertical and horizontal
organizations
Origin of Organization
Companies are built from the inside out. No matter what their
roots are, from manufacturing to sales to R&D to whatever,
they build internally in an attempt to satisfy an external
customer market. The company wants to sell its product or
service, yet designs itself by its own needs rather than the
needs of the customers it is trying to satisfy. To compound it,
they build their corporate structure in very traditional and very
function-focused ways. Companies do not build "backwards",
from their customers inward to how they should satisfy these
customers. Instead they build internally and then reach outward
toward customers.
Horizontal Vs Vertical Organization
Logistics is a process that crosses many functional
responsibilities. Logistics is not the purview of one department
amid a mass of other company departments aligned in a
vertical organization structure. As a process, logistics is a
horizontal activity that involves many departments. It is a flat
structure in a vertical organization.
123 | P a g e

Company structures are the first challenge to an effective
logistics process. A multi-function activity is trying to succeed
in a series of vertical tower of responsibilities. Each tower can
be a fiefdom and has its own set of responsibilities and its own
goals and objectives. And many of the responsibilities and
goals are internal; they are not focused on bettering the total
product and service for the company's customers.

Example of Hotel:

124 | P a g e

BIBLIOGRAPHY
125 | P a g e

Sunil Chopra and Peter Meindl: Supply chain Management: Strategy,
Planning and Operation,3/e, Pearson Education, New Delhi 2007.

Donald J.Bowersox and David J.Closs, Logistical Management: The
Integrated Supply Chain Process, TMH, 2006.
Martin Christopher, Logistics and Supply Chain Management,
Pitman, London.
B.S.Sahay, Supply Chain Management for Global Competitiveness,
Macmillan, New Delhi.2003.
Philip B.Schary, Tage Skjott-Larsen: Managing the Global Supply
Chain, Viva, Mumbai, 2006.
Monczka: Purchasing and Supply Chain Management Thomson,
2006.
Ballou, Business Logistics/Supply chain Management5/e Pearson
Education.
David Simchi-Levi, Philip Kaminsky,Edith Simchi-Levi, Designing
and Managing The Supply Chain 2
nd
ed. Tata McGraw Hill
Publishing Company Ltd.,2006
Christopher, M., (1995), Logistics the Strategic Issues, Chapman
Hall, London.
BIBLIOGRAPHY
126 | P a g e

Christopher, M., (1998), Logistics and Supply Chain Management.
Strategies for Reducing Cost and Improving Service, Financial
Times Pitman Publishing, London.
Kaplan, R.S. & Norton, P., (1992), The Balanced Score Card -
Measures That Drive Performance, Harvard Business Review No
92105, January February.
Walleck A.S., et al, (1991), Benchmarking World Class
Performance, The McKinsey Quarterly, No. 1.
Bearden O.W., Ingram N.T. & Laforge W.R., (2004), MARKETING:
Principles and Perspectives 4th Ed., McGraw-Hill Irwin, New York:
United States of America.
Chopra S. & Meindl P., (2004), Supply Chain Management 2nd Ed.,
Pearson Prentice Hall, Upper Saddle River: United States of
America.
Kotler P. & Keller L.K., (2009), Marketing Management 13th Ed.,
Pearson Prentice Hall, Upper Saddle River: United States of
America.
Lysons K. & Farrington B., (2006), Purchasing and Supply Chain
Management 7th Ed., Prentice Hall, Essex: England.
Schonsleben P., (2007), Integral Logistics Management: Operations
and Supply Chain Management in Comprehensive Value Added
Networks 3rd Ed., Auerbach Publications, Boca Raton: United States
of America.
BIBLIOGRAPHY
127 | P a g e

Logistics and Supply Chain Management - 2014

Transféré par

Informations du document

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Logistics and Supply Chain Management - 2014

Transféré par

Droits d'auteur :

Formats disponibles

1 | P a g e

Logistics and Supply Chain

Vous aimerez peut-être aussi