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VINAY PANDIT
In the supply chain management the inbound logistics system is frequently referred
to as material’s management and the outbound system is usually called physical distribution.
The integration of the inbound and outbound system is extremely important to the efficient
and effective management of the logistics supply chain.
Materials management involves the planning and control of the flow of materials that
are a part of the inbound logistics system. It includes the following activities: Procurement
(or purchasing), Warehousing Production planning (or scheduling), Inbound transportation
Receiving materials. Quality control, Inventory planning and control all Salvage and Scrap
disposal.
PROCUREMENT OR PURCHASING
Logistics spans both inbound and outbound relationships and flow of materials.
Effective Procurement of goods and services enables an organization to achieve competitive
advantage. The procurement process links members in the supply chain and assures the
quality of suppliers in that chain. The quality of materials and services which are inputs to
the production process affects the quality of finished goods which in turn affects customer
satisfaction and revenue for the firm and its profitability. Since cost of inputs is a major cost
in many manufacturing firms, Procurement function acts as a determinant of revenues, costs
and supply chain relationships. Purchasing is the act of buying goods and services for the
firm in the narrow sense, while Procurement consists of all those activities necessary to
acquire goods and services consistent with user requirements. Procurement has a strategic
importance in the value chain because it includes activities such as qualifying suppliers
procuring various types of inputs, and monitoring supplier performance. As such,
procurement serves as a vital link between members of the supply chain.
Purchasing is important to a firm because of two reasons: (i) cost efficiency and (ii)
Operational effectiveness. Purchase managers have a major responsibility of safeguarding
the financial interests of their firms by economizing on the cost of purchased goods and
services thereby creating a competitive advantage for their firms. Efficient purchasing
optimizes inventory holding and avoids production stoppages (due to shortages of materials)
thereby maintaining operational effectiveness of the firm.
The activities involved in the procurement process are briefly discussed in the
following section.
a. Identify (or reevaluate) need: The procurement activity is usually initiated in response
to a new or an existing need of user. In some instances existing needs may have to he
reevaluated because of change in them.
b. Decides and evaluate user requirement: The requirement to satisfy the identified need
must be defined in measurable terms. For example the technical specification must be
established so that the procurement professional can communicate the same to potential
suppliers.
c. Decide whether to make or buy: The firm should first decide whether to make or buy
the product or service to satisfy the user's needs. Even to make a product the firm may
have to purchase some inputs from outside suppliers (for example. raw materials or
components).
d. Identify the type of purchase: Three types of purchases are: (a) straight buy or routine
purchase, (b) modified rebuy which requires a change to an existing supplier or input, (c)
new buy which results from a new user need.
e. Conduct a market analysis: Market analysis will help the buyer to determine the
number of suppliers available in the rt1arketand to decide the method of buying viz
negotiation Competitive bidding and so on.
f. Identify all possible suppliers: All possible suppliers that might be able to satisfy the
user's needs must be identified. Possible new suppliers maybe included in the list of
potential suppliers.
g. Prescreen all possible sources: Prescreen reduces the number of possible suppliers to
those that can satisfy the user's demands. (Demands for a product or service are those
Characteristics that are critical to the user) whereas desires arc those that arc not so
critical and are negotiable.
h. Evaluate the remaining supplier base: From the pool of suppliers that can meet the
user's demands, choose the supplier or suppliers that can best meet the user's negotiable
requirements or desires.
i. Choose a supplier: The actual choice of the best supplier is based upon criteria to be
discussed subsequently such as quality reliability total required price and so on.
j. Receive delivery of the product or service: This activity occurs with the first attempt
by the supplier or suppliers to satisfy the user's needs upon completion of supply. The
performance data regarding the supplier or suppliers is generated to be used for
evaluation of the supplier or suppliers.
OBJECTIVES/GOALS OF PURCHASING:
a. Provide an uninterrupted flow of materials, components, Suppliers and services for the
Smooth operation of the firm.
b. Minimize inventory investment and inventory costs.
c. Maintain adequate quality standards in the purchased items.
d. Develop or find competent suppliers.
e. Purchase the required items at the lowest price.
f. Improve the organizations competency in the market.
g. Coordinate with the department and make harmonious relationship.
h. Accomplish the purchasing objectives at the lowest possible administrative costs.
Traditionally, purchasing has been separated from the firm's final customers or end
users. However, customer satisfaction is directly affected by the receipt of high quality,
reliable goods and services on a timely basis at a reasonable cost. The following figure
illustrates the effect of supplier performance on total customer cost.
The quality of goods and services a firm provides its ultimate customers cannot he
better than what it receives from 1mits suppliers. Any delay in supply of inputs to the firm
from its suppliers or any quality problem in the inputs will affect the operations of the firm
unless the firm carries higher inventory. An increased inventory will increase the cost of
production and hence that of the product produced by the firm. Hence, it is important that
the purchasing professionals understand the needs of their firm's customers so that they can
make the "right" decisions to meet the firm's needs.
Purchasing has a strategic role to perform activities related to sourcing in a way that
supports the overall objectives of the firm. Purchasing can support the firm to achieve
strategic success through its key role as one of the firm's boundary-spanning functions.
These functions are as below:
a. Access to external markets: Purchasing can establish and maintain contacts with the
supply market and can gain vital information about new technologies, potential new
materials or services, new sources of supply and changes in market conditions. This
competitive intelligence gathered by purchasing can be communicated to the top
management of the firm so that the firm's strategy can be reshaped to take advantage of
the market opportunities.
c. Relationship with other functions: Almost every department within the firm relies on
the purchasing function for some information or support. Purchasing role ranges from a
support role to a strategic function. Purchasing will be taking part important decisions of
the organization as long as it provides value to other functional areas. Being well
informed permits purchasing function to better anticipate and support the needs of other
functional areas. Purchasing and logistics need to work closely in coordinating inbound
logistics and associated material flows.
A four step approach can be used and adapted to a firm's particular needs of
managing the procurement process. These steps which can be used to maximize
effectiveness of the procurement .process can be as follows:
a. Determine the type of purchase: Identifying the type of purchase is the most complex
activity in the entire procurement process. For example, a straight rebuy situation will
mean that all the procurement activities were completed previously when the purchase
was either a new buy or modified rebuy.
b. Determine the necessary level of investment: Two major types of investment required
in the procurement process arc (i) time and (ii) information which arc expended by the
individuals involved in purchasing. When the purchase is a new buy more time must be
spent on it and both internal and external information may be required. More
information is needed for more complex and important purchases. The levels of
investment necessary in the procurement process can be determined by determining the
type of purchase. The investment needed in terms of time and information must be
adequate to meet the user's requirements.
d. Evaluate the effectiveness of the procurement processes: This step involves finding
answer to the following two questions: (a) were the user's needs satisfied? And (b) Was
the investment necessary? If the procurement was not effective, the cause could be
traced to inadequate investment or not performing the proper activities or mistakes made
in performing some of the activities. The manager must determine why the procurement
process is not effective and take appropriate corrective actions to ensure that future
purchases will be effective.
SUPPLIER RELATIONSHIP
Vendor Selection Criteria – The following figure illustrates the vendor selection criteria
These factors considered in vendor selection are briefly discussed in the following section.
1. Quality: It is the most important factor in vendor selection. Quality often refers to the
Specification that a user desires in an item such as technical specifications, chemical or
physical properties or design. The actual quality of a vendor's product is compared with
the specifications desired by the user, other additional factors related to quality are: (a)
life of the product, (b) Ease of repair and maintenance, (c) ease of use and (d)
dependability.
3. Capability: This is concerned with the potential vendor's production facilities and
capacity, technical capability, management and organizational capabilities and operating
controls. These factors indicate the vendor's ability to supply materials of needed quality
and quantity in a timely manner. The vendor must demonstrate this capability
consistently over an extended time period.
4. Financial consideration: This includes the price charged by the vendor and the vendor's
financial position. (i.e., financial stability). Financially unstable vendors pose possible
disruption in the long-run continued supply of materials.
5. Desirable qualities: These factors may be desirable but not essential. One such factor
that affects vendor selection decision is vendor’s attitude. Also, the impression or image
that the vendor project has a similar effect on vendor selection. Training aids, packaging
and availability of repair service are the other desirable qualities that affect vendor
selection decision. The geographical location where the vendor is located affects the
transportation cost. Other factors include (a) Ability to fill rush orders (b) Meet deli very
dates (c) Provide shorter delivery lead-times and (d) Utilize greater vendor-buyer co-
operation and so on.
The relative importance of the vendor selection factors will depend upon the material
the buyer is purchasing. For example: When a buyer purchases a computer technical
capability and training aids may be more important than price, delivery and warranties.
Procurement Price or Cost: Of all the factors that will be considered in the vendor
selection decision, price or cost is one significant factor that is widely discussed by
purchasing professionals.
Sources of Price: Four basic procedures used 10 determine potential vendor's price
are: (a) Commodity markets, (b) price lists. (c) Price quotations and (d) negotiations.
For the buyer, the total procurement price is more than just the basic price. The
following figure illustrates the components of total procurement price.
Basic input cost: In the primary price of the product or materials as paid by the
buying firm. This price is sought by buyers by bidding, negotiating or in requests for quotes.
Direct transaction costs are the costs of detecting. Transmitting the need for and
processing the material flow in the process of acquiring the goods. It includes the process of
detecting inventory need, requisition, placing the order, receiving order acknowledgement,
and handling shipping documents etc.
Supplier relationship costs are the costs of creating and maintaining a relationship
with a supplier. These include travel: supplier education, traffic engineering research and
product development in both firms.
Transportation Costs: Two key cost aspects of the inbound transportation flow are:
(i) the actual transportation cost and (ii) the sales/FOB terms. Four transport options are:
supplier - selected for - hire carrier or private carrier and buyer selected for - hire carrier or
private carrier. The sales terms define the ownership of the firm during transportation as
well is invoice payment requirements.
Operations/logistics costs include four key areas: (a) Receiving and make-ready
costs. (b) Lot - size costs. (c) Production costs and (d) Logistics costs. These four key areas
are briefly discussed in the following paragraphs. Receiving and make-ready costs are the
costs of those flow activities that occur between the inbound transportation delivery of a
good and it availability for me in production processes, the costs considered arc cost of
unpacking, inspection, Counting, Sorting, grading, removing and disposing packaging
materials and moving the good to the point of use. Lot-size costs directly affect space
requirements, handling flow, unit price and the related cash flows (i.e. cost of inventories).
Production costs arc affected by quality of raw material nature of production processes etc.
Logistics costs arc cost factors which are affected by product size, weight, volume and
shape and their resulting impact upon transportation, handling, storage and damage costs.
Warehousing: This function is concerned with the physical storing of raw materials and
other parts and components until they are used. Storage of raw-material and storage of
finished goods differ in terms of the type of facility each requires, the value of items stored
and the perish ability of the product. Raw materials such as coal, sand, Iron ore, or limestone
normally are stored in open-air warehouses and the warehousing cost will be lower than that
of finished goods and components. Value of raw materials is usually lesser than that of
finished goods. Also basic raw materials are less susceptible to damage and loss as
compared to finished goods.
Production Planning and Control: This function involves coordinating product supply
with product demand. The following figure illustrates production planning and control.
Receiving: This process involves the actual physical receipt of the bought-out material from
the transport carrier. The receiving stores person compares the materials indicated on the
buyer's purchase order and the supplier's packing slip with the material the buyer has actual
received. The materials received are examined for any physical damage.
Quality Control: This function attempts t0 ensure that the items a firm receives arc those
the firm ordered. However the quality control function is directly concerned with defining
the product's quality in terms of dimensions, design specification, physical and chemical
properties reliability, ease of maintenance, ease of use etc.
Salvage and Scrap Disposal: It is the last activity in the materials management function
involving disposing of wastage, scrap and obsolete materials. The scrap and salvage
materials which can be recycled are sold, thereby earning some income to the firm, whereas
certain scrap materials which cannot be sold must be disposed of in a safe and prescribed
manner. (Example: hazardous, toxic, corrosive materials).
PRODUCTION SCHEDULING
d. Integrated logistics and operations should eliminate the need for long production
runs by reducing the production run times and lead times resulting in lower inventory
levels and reduced stock-outs.
e. Both integrated logistics and operations must establish strategies to decrease supplier
lead times for parts and suppliers.
PACKAGING
INTRODUCTION
The material flow concept instructs us that industry that industry can be regarded as
a series of pipelines (flows) of materials. Starting with the retrieval of the basic raw
materials from the mines, forests, fields and sea, converters and manufacturers produce a
variety of materials and products, distributed to a variety of customers; through a variety of
channels. The concept also embraces the possibility for reverse flows (disposal, recycling,
recalls, etc.).
While the material flow concept has been around and accepted for some time, its
translation into managerial concepts of material management, physical distribution and
logistics has a shorter history. Flows require movement; movement is achieved, in large
part, through material handling and material handling requires efficient packaging and
unitizing methods for best performance.
IMPORTANCE
TYPES OF PACKAGING
Packaging can generally be categorized into two types: consumer packaging, which
has a marketing emphasis and industrial packaging which has a more of logistics emphasis.
• Consumer Packaging
• Industrial Packaging
Industrial packaging is performed at various stages. The first stage is packaging for
the product itself. For example, soft drinks are packaged in cans. The next stage involves
packaging these products into larger cartons for enabling quantity handling. The carton is
referred to as the Master Carton. The next stage of packaging involves unitization. In this
case, the master cartons are consolidated into a single, larger unit to facilitate handling,
transportation, protection and storage. The next stage of packaging is containerization. Here
the unit loads are placed in rigid containers for protection and handling – facilitation. This
enables efficiency in transportation. An important aspect of packaging is the ability of reuse
and the disposal facilitation and environmental effects of packaging material. For example,
the environmental impact of using plastics and wood as packaging materials.
FUNCTIONS OF PACKAGING
• Protection
This involves protection from damage, pilferage, contamination, physical effects and
environmental conditions. It is generally not economical to provide absolute protection to
the product from all possibility of damage and environmental conditions. Hence, packaging
design and material utilized is a balancing of economic considerations and adequate
protection. The higher the value of the product, the more protection it deserves; and so on,
the more expensive the packaging. During the logistical process, a packaged product can be
damaged in transportation, handling and storage. The physical effects that cause damage are
impact, vibration, piercing and crushing. The environmental conditions that can affect a
packaged product are temperature, humidity and contamination. Packaging provides
protection against physical effects. Protection from environmental conditions can only be
achieved by maintaining the product in the right environment during the logistics process.
• Utility
master cartons, unit loads and containers, promotes handling, transportation, and storage
efficiencies by speeding up handling, enabling higher quantities to be transported, more
quantity storage in the same space and faster retrieval from storage. Packaging facilitates
securing and stacking during transportation, storage and handling.
• Communication
Packaging enables product identification and tracking and displays product care
information. This is facilitated by labels on the packages. Product identification improves
logistical efficiency. Packaging also provides the facility of displaying handling instructions
to ensure proper care of the product during handling, transportation and storage. In case the
product is hazardous, requiring special handling, this functionality becomes critical.
PACKAGING MATERIALS
Many different exterior packaging materials are available to the logistics manager.
At one time the use of harder materials such as wood or metal containers was widespread.
But these added considerable shipping weight, which increased transport costs since
transportation companies’ bill customers for total weight, including packaging.
In recent years, companies have tended to use softer packaging materials. Corrugated
materials have become more popular, particularly with respect to package exterior.
Cushioning materials are used to cushion the product inside the box. Cushioning materials
protect the box from shock, vibration and surface damage during handling. Cushioning
materials include shrink-wrap, air bubble cushioning, cellulose wadding, corrugated paper
and plastics. Plastic materials utilized are expanded polystyrene, polyurethane, foam-in-
place and polyethylene.
overall packaging a company uses. Another way is to recycle the packaging materials in
such a way that there is no harm to the environment.
VALUE ADDITION
Value addition can be categorized into two parts: value addition in marketing and
value addition in logistics.
The customer is spared the additional work and the producer charges extra for adding
value. Adding value holds the promise of additional income, but it is certainly more labor–
intensive and requires more management, more investment in equipment, and an awareness
of legal and regulatory issues pertaining to processing. Value–added products do not have
the same economies of scale as mass–produced goods, and their success hinges heavily on
the producer's retail strategy, especially advertising and promotion.
Value Addition in Logistics: In the age of networking, the traditional ideas about value
chain and the activities comprised thereof have undergone a change. The activities such as
procurement, manufacturing (operations), marketing etc., were traditionally considered as
primary activities and were deemed to be of crucial significance for the business operations.
So, corporate preferred to perform these activities themselves.
Logistical process adds value across procurement with the inventory flow providing
the right material, at the right time and at the right place for manufacturing. Further,
manufacturing adds value to the raw materials and components procured to convert these,
through work-in-process into the right products required by the customer. The logistical
process also adds value to the product during the physical distribution.
The concepts of value system entails the process of conversion of resources i.e.
inputs to the outputs i.e. products or offerings resulting out of value addition.