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Logistics and 


Distribution Management
Sub Code 335

Developed by
Prof. Sandeep Narvekar

On behalf of
Prin. L.N. Welingkar Institute of Management Development & Research
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Advisory Board
Chairman
Prof. Dr. V.S. Prasad
Former Director (NAAC)
Former Vice-Chancellor
(Dr. B.R. Ambedkar Open University)

Board Members
1. Prof. Dr. Uday Salunkhe
 2. Dr. B.P. Sabale
 3. Prof. Dr. Vijay Khole
 4. Prof. Anuradha Deshmukh

Group Director
 Chancellor, D.Y. Patil University, Former Vice-Chancellor
 Former Director

Welingkar Institute of Navi Mumbai
 (Mumbai University) (YCMOU)
Management Ex Vice-Chancellor (YCMOU)

Program Design and Advisory Team

Prof. B.N. Chatterjee Mr. Manish Pitke


Dean – Marketing Faculty – Travel and Tourism
Welingkar Institute of Management, Mumbai Management Consultant

Prof. Kanu Doshi Prof. B.N. Chatterjee


Dean – Finance Dean – Marketing
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai

Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale


Dean – Management Development Programs Faculty – Media and Advertising
Welingkar Institute of Management, Mumbai Founder of EVALUENZ

Prof. B.N. Chatterjee Prof. Vineel Bhurke


Dean – Marketing Faculty – Rural Management
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai

Prof. Venkat lyer Dr. Pravin Kumar Agrawal


Director – Intraspect Development Faculty – Healthcare Management
Manager Medical – Air India Ltd.

Prof. Dr. Pradeep Pendse Mrs. Margaret Vas


Dean – IT/Business Design Faculty – Hospitality
Welingkar Institute of Management, Mumbai Former Manager-Catering Services – Air India Ltd.

Prof. Sandeep Kelkar Mr. Anuj Pandey


Faculty – IT Publisher
Welingkar Institute of Management, Mumbai Management Books Publishing, Mumbai

Prof. Dr. Swapna Pradhan Course Editor


Faculty – Retail Prof. Dr. P.S. Rao
Welingkar Institute of Management, Mumbai Dean – Quality Systems
Welingkar Institute of Management, Mumbai

Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee


Dean – Banking Dean – Marketing
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai

Mr. P.M. Bendre Course Coordinators


Faculty – Operations Prof. Dr. Rajesh Aparnath
Former Quality Chief – Bosch Ltd. Head – PGDM (HB)
Welingkar Institute of Management, Mumbai

Mr. Ajay Prabhu Ms. Kirti Sampat


Faculty – International Business Assistant Manager – PGDM (HB)
Corporate Consultant Welingkar Institute of Management, Mumbai

Mr. A.S. Pillai Mr. Kishor Tamhankar


Faculty – Services Excellence Manager (Diploma Division)
Ex Senior V.P. (Sify) Welingkar Institute of Management, Mumbai

COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.


Printed and Published on behalf of Prin. L.N. Welingkar Institute of Management Development & Research, L.N. Road, Matunga (CR), Mumbai - 400 019.

ALL RIGHTS RESERVED. No part of this work covered by the copyright here on may be reproduced or used in any form or by any means – graphic,
electronic or mechanical, including photocopying, recording, taping, web distribution or information storage and retrieval systems – without the written
permission of the publisher.

NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.

1st Edition (Jan-2008). 2nd Edition (Jan-2014)

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Contents

Chapter No. Chapter Name Page No.

1 Introduction to Logistics 3-26


2 Transportation Infrastructure 27-64
3 Transportation Operations 65-94
4 Operational Integration 95-135
5 Global Strategic Positioning 136-155
6 Network Integration 156-188
7 Logistics Design and Operational Planning 189-223
8 Logistics Outsourcing and Best Practices 224-245
9 Warehousing 246-276
10 Packaging, Material Handling and Storage 277-307
Systems
11 Cold Chain Management 308-335
12 Relationship Development and Management 336-360
13 Operational, Financial and Social Performance 361-385
14 IT in Logistics 386-406
15 Containerization 407-419
16 Reverse Logistics 420-436
17 International Logistics and Intermodal 437-461
Transportation
18 Incoterms 462-469
Logistics Vocabulary 470-475
Self Assessment Questions 476-521

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INTRODUCTION TO LOGISTICS

Chapter 1
INTRODUCTION TO LOGISTICS
Objectives

After going through the chapter, students should be able to understand:

• The concept and definitions of Logistics

• The system life cycle and functions of Logistics

• The customer value chain and supply chain synchronization

Structure

1.1 Introduction and Concept

1.2 Logistics Definition

1.3 Scope of Logistics

1.4 Logistics in the System Life Cycle

1.5 Customer Value Chain

1.6 Logistics Functions

1.7 Supply Chain Synchronization

1.8 Summary

1.9 Self Assessment Questions

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INTRODUCTION TO LOGISTICS

1.1 Introduction and Concept

Logistics is concerned with the organization, movement, and storage of


material and people. It deals with the planning and control of the flow of
materials and related information in organizations. Its main objective is to
get the right materials to the right place at the right time while optimizing
the total operational costs of this process. Logistics are applied to both
public and private sectors.

As a concept, it means the art of managing the flow of raw materials and
finished goods from the source of supply to their users. In other words,
primarily it involves efficient management of goods from the end of
product line to the consumers and in some cases includes the movement of
raw materials from the source of supply to the beginning of the production
line. These activities include transportation, warehousing, inventory
control, order processing and information monitoring. These activities are
considered primary to the effective management of logistics because they
either contribute most to the total cost of logistics or they are essential to
effective completion of the logistics task. However, the firms must carry out
these activities as essential part of providing customer with the goods and
services they desire.

1.2 Logistics Definition

“Logistics is that part of Supply Chain Management (SCM) that plans,


implements, and controls the efficient, effective, forward and reverse flow
and storage of goods, services, and related information between the point
of origin and point of consumption in order to meet customers’
requirements.”

So what does the definition mean?

1. The definition says that it is part of the supply chain management – this
means that supply chain involves a bigger process which engages
different organizations; however, logistics determines how well or how
poor an individual firm can achieve their goals.

2. It is part of SCM that plans, implements, and controls – this means that
logistics must cover all these areas not just one or two.

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INTRODUCTION TO LOGISTICS

3. It also mentions the efficient, effective, forward and reverse flow and
storage – this means “How well does the company do what they are
going to do?”

4. Goods, services, and related information between the point of origin and
point of consumption – this means that information about what you are
delivering is as important as the delivery itself.

5. To meet customers’ requirements – this means logistics strategies


should be focused on customers’ needs and wants

Activity A

❖What is the objective of logistics management?


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1.3 Scope of Logistics

It is of critical importance to the organization how it delivers products and


services to the customer, whether the product is tangible or intangible.

Logistics must deliver products to a customer at the time, method and cost
to satisfy that particular customer's requirements [Fig. 1(a)].
Responsiveness is needed, the quicker the better, the smoother the better.
Flexibility is needed to meet the quickly changing market and customer
demands.

Effective and efficient physical movement of the tangible product will speak
of intangible services associated with the product and the organization
which is delivering it. In case of intangible product, the delivery of
tangibles at the right place and right time will speak about its quality. On
the macro level, infrastructure such as various modes of transport,
transportation, equipment, storage facilities, connectivity and information
processing are contributing to a large extent in the physical movement of
goods produced in manufacturing, mining and agriculture sectors.

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INTRODUCTION TO LOGISTICS

This speed and reliability in distribution of products and services contribute


to a great extent in the growth of a country’s domestic and international
trade.

At micro level, logistics plays a critical role in the value delivery system of
business organization to provide superior customer service, i.e., to achieve
a desired level of delivered services and quality at the lowest possible cost.
In a nutshell, any productivity improvement that could be achieved in any
part of logistic system, at the micro or macro level, would help in cost
reduction and proper deployment of scarce national resources to their
productive purposes. India’s logistic cost as a percentage of the GDP is as
high as 13%-14%.

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Figure 1(a): Basic Logistic Function
Activity B

❖What is the importance of logistics and how does it affect the delivery
system?
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1.4 Logistics in the System Life Cycle

In response to some of today's challenges, logistics and its related support


infrastructure must be considered as a major element of a "system," and
not as a separate and independent entity.

A system, which may constitute an integrated mix of components (e.g.,


equipment, software, people, facilities, data, information, etc.), must have
a functional purpose and be directed to the accomplishment of some
designated mission objective. If a system is to ultimately accomplish its
intended purpose, there must be a logistic support infrastructure in place
and dedicated to the fulfillment of mission objectives.

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INTRODUCTION TO LOGISTICS

To date, these somewhat different approaches to logistics have not been


all-inclusive (in terms of including all of the applicable life cycle activities
necessary), have not been addressed from a total system's perspective,
the different elements have not been very well integrated, and logistics has
basically been considered "after-the-fact" and downstream in the system
life cycle. As a result, many of the systems in use today are not very cost-
effective in terms of their operation and support. Further, there is a lack of
total cost visibility at the times early in the system life cycle when decisions
are made relative to future logistics requirements. For many systems, the
costs associated with the initial design and development, construction, the
initial procurement of capital equipment, production, etc., are relatively
well known. However, the costs associated with the distribution, utilization,
and sustaining maintenance and support of the system throughout its
planned life cycle are somewhat hidden.

Decisions pertaining to the selection of technologies, the selection of


materials, equipment packaging schemes, the design of a manufacturing
process, the design of a maintenance and support infrastructure, etc., have
a great impact on the "downstream" costs and, hence, life cycle cost.

Thus, including life cycle considerations (and the elements of logistics) in


the decision-making process from the beginning is critical. While
improvements can be initiated for cost reduction purposes at any stage,
the greatest impact on life cycle cost (and hence logistics and maintenance
support costs) can be realized during the early phases of system design
and development.

Given that a system/product will likely fail at some point in time during its
operation, some maintenance will then be required in order to restore the
system to normal operational use so that it can continue to accomplish its
mission.

In other words, one needs to address all of the activities in the life cycle for
a given system, to include not only what is presented in Fig. 1(b), but
those activities which support material phase out, recycling, and/or
disposal.

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INTRODUCTION TO LOGISTICS

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Figure 1(b): Logistics in the System Life Cycle

System is shown as a logistic mix including following areas:

Information Flow:

• Order registration
• Order checking and editing
• Order processing
• Coordination

Warehousing:

• Material Storage
• Load Utilizing and Material Handling
• Site Selection and Network Planning
• Order Picking and Filling
• Dispatch Documentation

Inventory Control:

• Material Requirement Planning


• Inventory level decisions for customer service objectives

Packaging:

• For Handling and Damage Prevention

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INTRODUCTION TO LOGISTICS

• For Communication
• For Inter-modal Transportation

Transportation:

• Route Planning
• Mode Selection (Air, Sea, Road, Rail, Pipeline, Ropeway)
• Vehicle Scheduling

1.5 Customer Value Chain

A key component of customer value chain is defining collaborative


relationships with customers and suppliers across all dimensions of those
relationships. To create more visibility and understanding of end-customer
behavior and demand patterns, companies are extending the value chain.
Some companies add value to traditional commodity products by offering
services to their customers over and above the product itself.

Organizations increasingly find that they must rely on effective supply


chains, or networks, to compete in the global market and networked
economy. In recent decades, globalization, outsourcing, and information
technology have enabled many organizations, to successfully operate
collaborative supply networks in which each specialized business partner
focuses on only a few key strategic activities.

Outsourcing is an acceptable trend in businesses. Corporations have


realized that doing everything by themselves does not result in effective
and efficient use of scarce resources available to them. It is better to
outsource functional areas to experts who can do job at the lowest cost
and that too efficiently and effectively.

The logic of this trend is that the company will increasingly focus on those
activities in the value chain in which it has a distinctive advantage and
outsource everything else. As shown in the Fig. 1(c), the value chain
activities of a firm can be categorized into primary activities: Inbound
Logistics, Operations, Outbound Logistics, Marketing and Sales, and
Services. Support activities such as: Firm Infrastructure, Human
Resources, Technology and Procurement.

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INTRODUCTION TO LOGISTICS

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Figure 1(c): Customer Value Delivery Chain

Logistics delivers value to the customer through three logistical phases:


inbound logistics, operations, and outbound logistics.

Inbound logistics: It involves the relationship between the supplier and


the firm which has the activities of supplies of raw materials, the receiving,
delivering and storing as well as keeping the raw materials safe. The
distribution to manufacturing of these raw materials is also concerned.

Operations: In this type of activity, the process and the steps of


transformation of goods and services means to transform inputs into
outputs that is product and services.

Outbound logistics: It includes most of the activities from collection to


distribution. First, it requires the activity of collection, then it needs to
store the warehouse and the final stage is to distribute those products.

Activity C

❖Why are companies extending the value chain?


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INTRODUCTION TO LOGISTICS

1.6 Logistics Functions

Logistics is a process of movement of goods across the supply chain of a


company. This process consists of various functions those which have to be
properly managed to bring effectiveness and efficiency to the supply chain
of the organization. While the role covers a range of functions, each with
its own challenges and skills, they are all interdependent and practitioners
must work together and understand the impact on the whole supply chain
to deliver results.

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Figure 2: Logistics Functions

The major logistical functions are:

Order Processing

While many aspects of information are critical to logistics operations, the


processing of orders is of primary importance. Failure to fully comprehend
this importance resulted from not fully understanding how distortion and
operational failures in order processing impact logistical operations. Order
processing is concerned with the information flow in the logistics system
and includes a number of operations. The beginning of the process consists
of a request from a customer for a particular product via an order form.
These orders are then transmitted and checked for completeness and
accuracy. The availability of the requested product and the customer’s
credit status are verified. Finally, products are retrieved from the stock,
packed, and delivered along with their shipping documents. Throughout
this entire process, the customers have to be kept informed about the
status of their orders Figure 2(a).

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INTRODUCTION TO LOGISTICS

Current information technology is capable of handling the most demanding


customer requirements. When desired, order information can be
exchanged between trading partners.

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Figure 2(a): Order Processing Cycle

Inventory Management

Definition and Functionality: “Inventory management is the process of


efficiently overseeing the constant flow of units into and out of an existing
inventory”. This process usually involves controlling the transfer in of units
in order to prevent the inventory from becoming too high, or dwindling to
levels that could put the operation of the company into jeopardy.
Competent inventory management also seeks to control the costs
associated with the inventory, both from the perspective of the total value
of the goods included and the tax burden generated by the cumulative
value of the inventory.

Balancing the various tasks of inventory management means paying


attention to three key aspects of any inventory. The first aspect has to do
with time. In terms of materials acquired for inclusion in the total
inventory, this means understanding how long it takes for a supplier to
process an order and execute a delivery. Inventory management also
demands that a solid understanding of how long it will take for those
materials to transfer out of the inventory be established. Knowing these

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INTRODUCTION TO LOGISTICS

two important lead times makes it possible to know when to place an order
and how many units must be ordered to keep production running smoothly.

Calculating what is known as buffer stock is also key to effective inventory


management. Essentially, buffer stock is additional units above and beyond
the minimum number required to maintain production levels. For example,
the manager may determine that it would be a good idea to keep one or
two extra units of a given machine part on hand, just in case an
emergency situation arises or one of the units proves to be defective once
installed. Creating this cushion or buffer helps to minimize the chance for
production to be interrupted due to a lack of essential parts in the
operation supply inventory.

Inventory management is not limited to documenting the delivery of raw


materials and the movement of those materials into operational process.
The movement of those materials as they go through the various stages of
the operation is also important. Typically known as a goods or work-in-
progress inventory, tracking materials as they are used to create finished
goods also helps to identify the need to adjust ordering amounts before the
raw materials inventory gets dangerously low or is inflated to an
unfavorable level.

Inventory is made to flow from one warehouse to another, factory to


warehouse, plant to plant or warehouse to customer. To understand the
operating system, one has to analyze these links. A logistical operating
system requires links, nodes and inventory to perform logistical operations.
Nodes are the facilities linked by logistical performance cycles. Inventory is
measured, stored and moved in nodes regularly. But this may also be done
during transportation. We can notice that three types of logistical
performance cycles exist in a logistical operating system. The cycle linking
material source and components plant is procurement cycle.

Finally, inventory management has to do with keeping accurate records of


finished goods that are ready for shipment. This often means posting the
production of newly completed goods to the inventory totals as well as
subtracting the most recent shipments of finished goods to buyers. When
the company has a return policy in place, there is usually a sub-category
contained in the finished goods inventory to account for any returned
goods that are reclassified as refurnished or second grade quality.
Accurately maintaining figures on the finished goods inventory makes it

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INTRODUCTION TO LOGISTICS

possible to quickly convey information to sales personnel as to what is


available and ready for shipment at any given time.

The storage, record keeping, flow of inventory and its efficient


transportation and delivery to customers has proven to be one of the most
focused-upon elements of the modern supply chain. Businesses choose to
maintain inventories for a variety of reasons, including:

1. Improving service level.


2. Reducing overall logistics costs.
3. Making seasonal items available throughout the year.
4. Overcoming inefficiencies managing the logistics system.

The objective of inventory management is to regulate stock levels for


minimizing total operating cost while satisfying customer service
requirements.

Warehousing
Warehousing plays a vital role in providing the desired level of service to
the customer at the lowest possible cost and is an important link between
the producer and the customer. Improving the flow of goods through a
warehouse by minimizing handling and movement can generate significant
and measurable business benefits. The major criteria in choosing a
warehouse are:

Warehousing Location

Area or Size of Warehouse

Number of Warehouses

Warehouse Layout and Design

Ownership of the Warehouse

Strategic warehousing has a great influence in the logistic system and


needs a thorough evaluation before making the decision to have own
warehousing or to outsource, otherwise a firm might incur unnecessary
cost and/or lack the competitive edge in the market.

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INTRODUCTION TO LOGISTICS

Transportation
Freight transportation plays an important role in today’s economy since it
enables production and consumption to take place at locations far away
from each other. Freight transportation accounts for two-thirds of total
logistics costs and has a major impact on the level of customer service.
Therefore, transportation planning plays a key role in logistics system
management.

The main modes of transportation used by logistics system management


are ship, rail, truck, air, and pipeline. All are combined in numerous ways
to obtain door-to-door services. Rail transport is inexpensive especially for
long distance shipment and is more energy efficient than the alternatives.
Trucks are used mainly for moving semi-finished and finished goods by the
truckload or by partial truckload. Air transportation is often used in
combination with road transportation to provide door-to-door service. Air
transportation is theoretically the fastest mode of transportation but in
practice it is slowed down by freight handling at airports.

The major advantages of using a logistics system are:

1. It helps capital reduction.


2. It reduces total cost of transportation.
3. It helps improve service level.

Material Handling and Storage

“Material handling is the movement and storage of material at the lowest


possible cost through the use of proper method and equipment”.

The focus is on the methods, mechanical equipment, systems and related


controls used to achieve these functions. In the modern era of competition,
this has acquired greater importance due to growing need for reducing the
manufacturing cost. The importance of material handling function is
greater in those industries where the ratio of handling cost to the
processing cost is large. Today material handling is rightly considered as
one of the most potentially lucrative areas for reduction of costs. A
properly designed and integrated material handling system provides
tremendous cost saving opportunities and customer services improvement
potential.

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INTRODUCTION TO LOGISTICS

Storage has always been an important aspect of economic development. As


transportation capability developed, it became possible to engage in
specialization. Product storage shifted from households to retailers,
wholesalers, and manufacturers. Warehouses stored inventory in the
logistics pipeline, serving to coordinate product supply and consumer
demand.

Logistical Packaging
Logistical Packaging is the science, art and technology of enclosing or
protecting products for distribution, storage, sale, and use. It also refers to
the process of design, evaluation, and production of packages. Packages
can have features which add convenience in distribution, handling, display,
sale, opening, use, reclosing and reuse. It also aids the control of
inventory.

Information
Information flow identifies specific locations within a logistical system that
have requirements. Information also integrates the three operating areas.
Within individual logistics areas, different movement requirements exist
with respect to size of order, availability of inventory, and urgency. The
primary objective of information flow management is to reconcile these
differentials to improve overall supply chain performance.

Information facilitates coordination of planning and control of day-to-day


operations. Without accurate information, the effort involved in the
logistical system can be misdirected.

1.7 Supply Chain Synchronisation

Synchronizing the supply chain is, in essence, getting all of the partners
operating in a manner that is mutually supportive (flexible, cooperative)
and seamless (smooth, unnoticed by customers).

The synchronization process starts with a clear definition of roles and


responsibilities. That is, making sure that all supply chain partners know
specifically what tasks they are expected to perform (e.g., storing goods,
modifying them, reassembling quantities, price marking), when they are
expected to do them (lead times and deadlines), how they are expected to
perform them (i.e., to what operating specifications), and what results are
expected (sales quotas, customer satisfaction ratings).

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INTRODUCTION TO LOGISTICS

Often, vertical channel conflict (i.e., between layers of the supply chain)
occurs due to ambiguous or conflicting roles and responsibilities. That is,
conflicts such as poor service levels, passive sales efforts, and missed
deadlines.

On a day-to-day basis, many tasks and activities require operating


synchronization: entering orders, conforming schedules, tracking
shipments, communicating status information, invoicing, collecting
payments, processing returns, resolving disputes. Whenever a partner has
a process failure, the entire supply chain may be disrupted and operational
conflict may occur.

Over time, the bulk of the operating synchronization activity is PSI


planning (production, sales, and inventory) which is the information-based
scheduling of product flows throughout the system.

Practical synchronization involves making the supply chain “capable” and


broadcasting demand information in parallel to all of the trading partners,
i.e., the supplier, the factory, the wholesaler, and the retailer, must have
sufficient capacity to process the statistical peak of daily demand each day.
To achieve the highest level of supply chain synchronization benefit, eight
different dimensions of the supply chain need to be addressed.

1. People, Communication, Coordination and Education

Practical synchronization is possible by the support of motivated, interested


a n d e d u c a t e d p e o p l e . Sy n c h r o n i z i n g p e o p l e e n s u r e s p r o c e s s
synchronization.

Educate the people. Explain in simple terms what synchronization is, what
it intends to achieve, how it intends to achieve it and what is their role in
it.

Continue direct communication. Communicate throughout the project to


help develop linkages between employees of participating trading partners.
When faced with unforeseen difficulties, the strength of prior personal
contact makes the difference in motivating individuals to make rapid
changes needed to keep the initiative on track.

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INTRODUCTION TO LOGISTICS

Facilitate communication about data. Ongoing communication is critical to


ensure product ordering and systems information are correctly
synchronized for coordinated delivery scheduling. This ensures the fewest
possible errors once the scheduled supply chain is "switched on.”

2. Process and Delivery Timing

Customers generally evaluate a supplier’s performance on four factors:


product performance (features), price, quality, and delivery within a
reasonable time. Now, customers are increasingly emphasizing two
additional performance criteria: flawless delivery, that is, very short cycle
on-time delivery, and responsiveness to the customers’ changing needs

• Develop the supply chain schedule. This varies for each supply chain.
Mapping and understanding current supply chain flows and timings, and
developing a new optimized supply chain synchronization model are
essential.

• Have realistic expectations. Complexities of multiple companies come


together because capabilities and limitations vary. Schedules also vary
for each participant.

• Map the current process. Map it from start to finish, including volume and
timing for all trading partners. Trends and levels of competency within
the group of players will become apparent during this process. Use
current supply chain timing to compare with proposed timing models to
identify any opportunities at hand.

• Allow for variances. To assume that everything will function perfectly


according to plan is a risk. The new process flow and timing should allow
for variance in timings for the players identified.

• Leave a margin for error. Be conservative when setting initial delivery


lead times to ensure that the schedule is consistently met. Tighten lead
times later if capabilities improve.

• Overlay volume and density information. Develop a schedule for each


partner, and then exceed volume and bulk to define the entire supply
chain flow and create a model from which expected delivery frequency
determinations can be made.

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INTRODUCTION TO LOGISTICS

• Inform the participants. Define requirements to become part of the new


synchronized process specifically for each trading partner.

3. Product/Information Linking
Collect data in parallel with the overall effort, streamlining the process to
minimize additional work. Data collection should be a byproduct of the
supply chain process, not activity unto itself.

4. Information of Movement and Synchronization of Orders


This process is initiated by barcode tracking or RFID (Radio Frequency
Identification) in advanced cases and the purchase order. These two key
data streams can be easily integrated into the supply chain synchronization
processes. Integrate scanning into the handling process and collect
information electronically at the source. This is a large and valuable
assimilation of data, but collected this way, it can be almost transparent to
those carrying out the process.

5. Process Exception Monitoring and Reporting


Develop rules to test items as they move through processes and flag those
exceptions requiring action for monitoring and improvement purposes.

If all of the above dimensions have been synchronized, exceptions should


be manageable. However, flaws in the information used to build the
synchronized system may become obvious and are to be fixed right away,
or the entire process could rapidly deteriorate into chaos.

Flagged exceptions should be immediately reported to the supply chain


partner and fixed either electronically or via equally effective auto-
generated communication system. Report the key metrics to important
personnel at the partner firms and point out significant ongoing issues
which may identify players who are not playing their part of the program
objectives.

6. Physical Movement and Modal Optimization


In the end, clients will remember the final execution, and not the
attempted synchronization if in their case failed to deliver. Physical
movement and modal optimization (objective function) must be
synchronized. Whether provided directly by the synchronizing party or by
another supporting carrier, they must be foolproof.

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INTRODUCTION TO LOGISTICS

The result of the synchronization process should allow accurate


measurement of the Perfect Order Rate* for the supply channel, which if all
is functioning well, should represent significantly improved, if not world
class, results for this metric.

(*A Perfect Order is characterized as deliveries being on time, complete,


damage free, and having accurate documentation.)

The first step in defining the physical movement process is to determine


the required service level or delivery lead time that is acceptable to the
supply channel partners. This is the base level of service required.

Secondly, once this determination is made, and a transportation mode


selected, determine optimal load mix density, based on the total usable
cube of the vehicle and maximum allowable transport weight.

Finally, define the optimal trailer (carrier) as the goal of the load
optimization process. This methodology can be built into load-building
algorithms in the provider's system, based on the total order flow cube,
density and quantities for all products moving to a given destination in the
same service timeframe.

7. Dynamic Process Adjustment and Optimisation


Define rules and methods for ongoing adjustments and optimization of the
processes in response to rapidly changing variables which can impact the
supply chain. Integrate the ability to switch to the varying size and
capacity of containers should volume fluctuations so dictate. Analyze cubic
imbalances and actively solicit new business partners to balance these.

8. Greater Synergies among Partners


Finally, as the supply chain synchronization effort proceeds and grows, so
do the destinations, complexity of service and opportunities for greater
synergies among the players. These should also be actively monitored and
acted upon when appropriate. There is no doubt that the continual addition
of critical mass to such a program will at some point hit justification levels
for implementing advanced handling and automation equipment to speed
and simplify the process. In the end, it is through careful monitoring of
these optimization opportunities which will make the appropriate timing for
such initiatives to be implemented readily apparent.

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INTRODUCTION TO LOGISTICS

1.8 Summary

Robust GDP growth, coupled with a sharp rise in domestic as well as


international trade, has been driving logistics business over the past
decade in India. The purpose in this chapter was to provide a brief
overview of logistics as it is being practiced today, in the commercial
sector; to identify the various logistics and related activities being
accomplished in different phases of a system life cycle; to suggest that
these logistics activities could be integrated and considered as a major
"element" of the system; and to recommend that the logistics and support
infrastructure be addressed as an inherent part of the systems engineering
process, applied in the development of systems from the beginning. In
other words, the subject of logistics must be addressed from a total
system's life cycle perspective from the beginning.

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INTRODUCTION TO LOGISTICS

1.9 Self Assessment Questions

1. What is the scope of logistics?

2. What are the key elements and activities of the business logistics
function?

3. What are the logistic requirements of delivering a product to a


customer?

4. Discuss the importance of logistics at macro and micro levels.

Multiple Choice Questions

5. Physical items that can be perceived by the sense of touch, e.g., cars,
food items, computers, telephones, etc. are known as:

Options
a. Intangible products
b. Tangible products (Ref: Para 1.3.3)
c. Sensible products
d. Delivery products

6. Points mentioned below are examples of:

1. Incapable of being perceived by touch; impalpable


2. Imprecise or unclear to the mind intangible ideas
3. Economics, Accounting and Finance/Accounting and Book-keeping of
property or a business asset saleable though not possessing intrinsic
productive value
4. An asset that cannot be perceived by the senses.

Options:
a. Intangible products (Ref: Para 1.3.3)
b. Tangible products
c. Sensible products
d. Delivery products

7. It constitutes an integrated mix of components, e.g., equipment,


software, people, facilities, data, information, etc.

! !23
INTRODUCTION TO LOGISTICS

Options:
a. Custom
b. Lifecycle
c. System (Ref: Para 1.4.2)
d. Products

8. Selection of technologies, the selection of materials, equipment


packaging schemes, the design of a manufacturing process, the design
of a maintenance and support infrastructure, etc. have a great impact
on:

Options:
a. Delivery schedules
b. Requirements for smooth operation
c. Downstreaming of costs (Ref: 1.4.4)
d. Upgrading of systems

9. Key components of customer value chain are:

i. Collaborative relationships with customers and suppliers


ii. Create more visibility and understanding of end-customer behavior
and demand patterns
iii. By focusing on few strategic activities
iv. Offering services to their customers over and above the product
itself.

Options:
a. (i), (ii), (iii) and (iv)
b. (i), (ii) and (iii)
c. (ii), (iii) and (iv)
d. (i), (ii) and (iv) (Ref: 1.5.1)

10. Activities in the value chain in which they have a distinctive advantage
can be categorized into primary activities such as:

i. Inbound and Outbound Logistics


ii. Operations
iii. Marketing and Sales
iv. Services

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INTRODUCTION TO LOGISTICS

Options:
a. All of the above (Ref: 1.5.4)
b. None of the above
c. (i), (ii) and (iii)
d. (ii), (iii) and (iv)

11.Order processing is concerned with the information flow in the logistics


system and includes a number of operations. Kindly synchronise the
order of delivery of the points mentioned below:

i. Products are retrieved from the stock, packed, and delivered along
with their shipping documents
ii. Availability of the requested product and the customer’s credit status
are verified
iii. Orders are then transmitted and checked for completeness and
accuracy
iv. A request from a customer for a particular product via an order form.

Options:
a. (i), (ii), (iii) and (iv)
b. (i), (iii), (iv) and (ii)
c. (iv), (iii), (ii) and (i) (Ref: 1.6.1)
d. (ii), (iv), (i) and (iii)

12.An important role that inventory plays is to increase the amount of


demand that can be satisfied by:

i. Increasing the quantity of production


ii. Having product ready and available when the customer wants it
iii. Having a minimum amount of stocks to save on costs
iv. Keeping proper records of storage and stocks

Options:
a. (i), (ii) and (iv)
b. (i), (ii) and (iii)
c. (i), (iii) and (iv)
d. (ii), (iii) and (iv) (Ref: 1.6.2.1)


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INTRODUCTION TO LOGISTICS

13.Strategic ______________ has a great influence in the logistic system


and needs a thorough evaluation before making the decision to have
own ______________ or to outsource, otherwise a firm might incur
unnecessary cost and/or lack the competitive edge in the market.

Fill in the blanks with a common word:

Options:
a. Transportation (Ref: 1.6.4.1)
b. Equipment
c. Warehousing
d. Inventory

14.“Material handling is the movement and storage of material at the


lowest possible cost through the use of proper method and equipment”.

Options:
a. True (Ref: 1.6.5.1)
b. False

15.On a day-to-day basis, many tasks and activities require this: entering
orders, conforming schedules, tracking shipments, communicating
status information, invoicing, collecting payments, processing returns
and resolving disputes.

Options:
a. Operating synchronization (Ref: 1.7.4)
b. Operating system
c. Operating tasks
d. Operation handling

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INTRODUCTION TO LOGISTICS

REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter

Summary

PPT

MCQ

Video Lecture - Part 1

Video Lecture - Part 2


! !27
TRANSPORTATION INFRASTRUCTURE

Chapter 2
TRANSPORTATION INFRASTRUCTURE

Objectives

After going through the chapter, students should be able to understand:

• The concept transportation and importance of transport management

• The functionality provided by transportation, underlying principles of


transportation and the participants of transportation

• The various methods/forms of transportation, modes/types of


transportation service and different activities of transport department
administration.

Structure

2.1 Importance of Transport Management

2.2 Transport Functionality, Principles and Participants

2.3 Transportation Infrastructure

2.4 Transportation Service

2.5 Transport Department Administration

2.6 Summary

2.7 Self Assessment Questions

! !28
TRANSPORTATION INFRASTRUCTURE

Introduction
Proponents of increasing investment in transportation infrastructure argue
there is a substantial need to invest in transportation infrastructure and
that infrastructure is central to a modern economy. The quality of transport
infrastructure is a key determinant of performance in the transport sector
and development of transport infrastructure supports economic growth.

Countries spend considerable amounts of money each year to build,


maintain and improve their transport infrastructure in response to the
growing passenger and freight mobility needs and the need to renew aging
infrastructure. Decision-makers need information on spending and the
outputs achieved from infrastructure spending in order to prioritize
investment.

A key aim of this chapter is to provide detailed guidance for the uniform
collection of data on transport infrastructure spending and assets,
ultimately leading to better decision-making.

2.1 Importance of Transport Management

Transportation is one of the most visible elements of logistics operations.


The role of transport in national economy is very crucial. Every business,
firm, regardless of what it produces or distributes, requires the movement
of goods from one point to another and, therefore, is involved in
transportation. Transportation essentially concerns the spatial dimension of
the business firm.

Transportation Management (TM) is a holistic process that brings


together supply chain partners and service providers to drive inefficiencies
out of the transport planning and execution process. The objective of TM is
to improve the operating performance of all parties involved by eliminating
inefficiencies in the transportation component of the supply chain.

TM as the segment of logistics and transport options requires to get your


product from the source (factory, producer, port, terminal etc.) to the place
that you need it (final delivery of your raw product or end-use product).
The management of transportation include operations of all types, including
tracking and managing every aspect of vehicle maintenance, fuel costing,
routing and mapping, warehousing, communications, EDI implementations,
traveler and cargo handling, carrier selection and management accounting.

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TRANSPORTATION INFRASTRUCTURE

Considering the variables involved in our definition of Transportation


Management, one would need to be an expert at:

• Matching up to transport rates with routes and services for the best
combination of price and delivery options.

• Considering all available modes of transportation for product movement


in context of timing, cost and delivery capability.

• Optimizing the use of your infrastructure to seamlessly move product


into and out of production.

TM focuses on enhancing the interaction between three principal parties –


a shipper, a carrier, and a receiver, as well as secondary participants such
as third-party logistics (3PL) service providers. Participants collaborate by
sharing information about demand and supply (e.g., forecasts, event plans,
and expected capacity), ideas and capabilities to improve the performance
of the overall transport planning and execution process, and assets, where
feasible (e.g., trucks).

The process begins with an order/shipment forecast, and includes capacity


planning and scheduling, order generation, load tender, delivery execution,
and carrier payment.

Activity A

❖What are the objectives of transport management?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
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…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………


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TRANSPORTATION INFRASTRUCTURE

2.2 Transport Functionality, Principles and Participants

Transportation is one of the most visible elements of logistics operations.


As consumers, we are accustomed to seeing trucks and trains moving
products or parked at a distribution facility. While this experience provides
a good visual understanding of transportation elements, it does not allow
the necessary depth of knowledge to understand transportation’s role in
logistics operations. This section establishes that foundation by reviewing
functionality provided by transportation and the underlying principles of
transport operation.

Transportation Functionality
The purpose or function of transportation is to serve as a connecting link
between separate units within a firm’s own organization (such as between
plants and warehouses) and between units of the firm and units of other
firms and individuals (such as suppliers and customers). Good
transportation has the effect of holding to a minimum the time and cost
involved in the relationships of the firm. In economic theory terms,
transportation’s function is to create place utility for the goods produced or
distributed by the firm. Transportation enterprises provide two major
services: product movement and product storage.

1. Product Movement
Whether the product is in the form of materials, components, assemblies,
work-in-progress, or finished goods, transportation is necessary to move it
to the next stage of the manufacturing process or physically closer to the
ultimate customer. A primary transportation function is product movement
up and down the value chain. Transportation utilizes temporal, financial,
and environmental resources. It is important that items be moved only
when it truly enhances product value.

The major objective of transportation is to move product from an origin


location to a prescribed destination while minimizing temporal, financial,
and environmental resource costs. Loss and damage expenses must also
be minimized. At the same time, the movement must take place in a
manner that meets customer demands regarding delivery performance and
shipment information availability.

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TRANSPORTATION INFRASTRUCTURE

2. Product Storage
A less common transportation function is temporary storage. Vehicles make
rather expensive storage facilities. However, if the in-transit product
requires storage but will be moved again shortly (e.g., in a few days), the
cost of unloading and reloading the product in a warehouse may exceed
the profitability. A second method to achieve temporary product storage is
diversion. This occurs when an original shipment destination is changed
while the delivery is in transit. Traditionally, the telephone was used to
direct diversion strategies. Today, satellite communication between
enterprise headquarters and vehicles more efficiently handles the
information.

Activity B

What is the primary objective of transportation?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Transportation Principles
There are two fundamental economic principles that impact transport
efficiency: economy of scale and economy of distance.

1. Economy of Scale
It refers to the characteristic that transportation cost per unit of weight
decreases when the size of the shipment increases. For example, truckload
(TL) shipments (i.e., shipments that utilize the entire vehicle’s capacity)
cost less per kg than less-than-truckload (LTL) shipments (i.e., shipments
that utilize a portion of vehicle capacity). It is also generally true that
larger capacity transportation vehicles such as rail or water are less
expensive per unit of weight than smaller capacity vehicles such as road or
air. Transportation economies of scale exist because fixed expenses
associated with moving a load can be spread over the load’s weight. As
such, a heavier load allows costs to be “spread out,” thereby decreasing
costs per unit of weight. The fixed expenses include administrative costs of
taking the transportation order, time to position the vehicle for loading or
unloading, invoicing, and equipment cost. These costs are considered fixed
because they do not vary with shipment volume.

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TRANSPORTATION INFRASTRUCTURE

2. Economy of Distance
It refers to the characteristic that transportation cost per unit of distance
decreases as distance increases. For example, a shipment of 600 miles will
cost less than two shipments (of the same combined weight) of 300 miles.
Transportation economy of distance is also referred to as the tapering
principle since rates or charges taper with distance. The rationale for
distance economies is similar to that for economies of scale. Specifically,
the relatively fixed expense incurred to load and unload the vehicle must
be spread over the variable expense per unit of distance. Longer distances
allow the fixed expense to be spread over more miles, resulting in lower
overall per mile charges.

Activity C
❖ How can you achieve economies of scale and economies of distance?

…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Transportation Participants

The participants in the world of transportation are (Fig. 2.1):

• The shipper (often called the consignor)

• The receiver (or the consignee)

• The carrier

• The government

• The internet and

• The public…

! !33
TRANSPORTATION INFRASTRUCTURE

!
Figure 2.1: Major Relationships among Transportation Participants

Shipper and Consignee


There is a mutual interest in moving goods from origin to destination within
a given time at the lowest cost between the Shipper and Consignee.
Services such as specified pickup and delivery times, predictable transit
times, and zero loss and damage as well as accurate and timely exchange
of information and invoicing are included.

Carriers and Agents


Carriers hope to maximize their revenue for movement of goods while
minimizing associated costs by charging their customers the highest rate
possible while minimizing overhead costs such as labor, fuel and vehicle
costs to complete the cycle of delivery.

Brokers and freight forwarders facilitate carrier and customer


synchronization. To achieve this objective, the carriers coordinate pickup
and delivery times to match or consolidate different shipper freight into
movements so that economy of scale and distance can be achieved.

! !34
TRANSPORTATION INFRASTRUCTURE

Government
The Government always desires a stable and efficient transportation
environment so that there is a positive and direct impact of transportation
on economic success.

Internet
Internet is used to share real-time information with customers and
suppliers. The Internet now provides the vital communication links
between the transactional participants (shipper-carrier-consignee). The
real-time tracking of packages and shipments replaces the old system of
phones and faxes. In the past, truckers would need to call in regularly to
update their location. It is also used for items such as freight matching
(things going to similar locations), and purchases of items such as fuel,
equipment parts and supplies.

Public
Public is concerned with transportation accessibility, expenses, and
standards for security, safety and the environment. The public creates
transportation demands by purchasing goods.

Activity D

❖What role do agents play in transportation of goods?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

2.3 Transportation Infrastructure

Transportation infrastructure refers to the framework that supports our


transport system. It consists of rights-of-way, vehicles, and carriers
operating within five basic modes. A mode identifies basic transportation
method or form:

• Rail
• Road
• Air
• Water (Sea/Inland)
• Pipeline
• Ropeways

! !35
TRANSPORTATION INFRASTRUCTURE

Transport is vital to the well functioning of economic activities and a key to


ensuring social well-being and cohesion of populations. Transport ensures
everyday mobility of people and is crucial to the production and distribution
of goods. Adequate infrastructure is a fundamental precondition for
transport systems. In their endeavor to facilitate transport, however,
decision-makers in governments and international organizations face
difficult challenges. These include the existence of physical barriers or
hindrances, such as insufficient or inadequate transport infrastructures,
bottlenecks and missing links, as well as lack of funds to remove them.
Solving these problems is not an easy task. It requires action on the part
of the governments concerned and actions that are coordinated with other
governments at international level.

A key element in the benefits supplied by transport infrastructure in any


form is connectivity, which in turn provides growth and distributional
effects. Connectivity improves information flow, reduces time in travel, and
reduces overall transaction costs. Within a social context, adequate
infrastructure provides for general prosperity and health. At a general
level, these elements within themselves can serve economic efficiency, less
consumption of resources and a more sustainable society. Modern urban
systems are dependent on transport infrastructure networks to make their
economic and social systems function effectively.

1. Rail Transportation
Rail transport is literally the strategic sector that offers a broad possibility
for the integration of transport in sustainable development. Railway
development has always played an important part among major regional
economic cooperation projects, especially over the past decade, in
particular due to freight transport safety, due to the superiority of rail
transport in terms of pollution, but mostly due to transport costs against
road or sea transport. The railway infrastructure plays the role of a catalyst
for an increased regional integration, but also in supporting trade and
foreign investments. In developing or expanding their projects, major
companies and logistics operators seek a reliable railway infrastructure and
especially a railway network that provides access to sea ports.

Transport infrastructure development has been the main focus of all major
projects of economic cooperation in Europe and Asia. This was mainly due
to freight transport safety, the fact that railway transport is eco-friendly,
but especially due to the fact that, from the point of view of the transport

! !36
TRANSPORTATION INFRASTRUCTURE

costs, compared to land-maritime transport, railway transport is much


more efficient. Transited by major international transport corridors, east to
west and north to south, the Black Sea area stands in the middle of all
routes linking Europe and Asia. Being aware of these advantages, all the
countries plan to make the most of their situation. On another note, the
international financial institutions make massive investments in the
infrastructure projects developed in Europe and Asia.

As companies seek to diversify their supply chains, and with environmental


concerns playing an increasingly important role in business decision-
making, many are seeing rail logistics as an attractive alternative to
traditional solutions. Rail transport is particularly useful for the movement
of large or heavy loads. In many countries, higher weights are permitted
on rail, but not on road.

Key Advantages of Rail Logistics include:

• Especially suited for large quantities of volume and weight

• Economic transportation over long distances

• Railway is the safest form of transport. The chances of accidents and


breakdown of railways are minimum as compared to other modes of
transport. Moreover, the traffic can be protected from the exposure to
sun, rain, snow etc.

• It is a quick and more regular form of transport because it helps in the


transportation of goods with speed and certainty

• Environmentally friendly

Activity E

❖In short, what is the importance of rail infrastructure in the integration of


transport?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

! !37
TRANSPORTATION INFRASTRUCTURE

Effect of Transportation Infrastructure on Economic Growth in


India
The transportation would be a key facilitator to sustainable economic
growth is rarely questioned. In India, in particular, transportation has been
noted to be a critical infrastructure required for economic growth. A well-
oiled transportation infrastructure expands the productive capacity of a
nation, both by increasing the mobilization of available resources, and by
enhancing the productivity of those resources.

The support for this assertion is straightforward and there are many ways
we can justify it.

First, transportation infrastructure can enter in the production process as


direct input and in many cases as an unpaid factor of production. Second,
transportation infrastructure may make other existing inputs more
productive. For instance, a well-designed road allows goods to be
transported to market in less time and hence, reducing the transportation
cost in the production process. Third, transport infrastructure can act as
magnet of regional economic growth by attracting resources from other
regions, which is called agglomeration.

Transport infrastructure accounts now for a major share of energy


consumption in India, especially for petroleum products and the
consequent development in that sector. However, the link between
transport infrastructure growths causing economic growths appears to be
relatively weak in a country like India. Still, since substantial economic
expansion is expected in India over the next two decades, building of
transport infrastructure to cause or facilitate it should at least be modest.
But there are other drivers of the transport sector. The recent high growth
in India is resulting not only from the country’s rapid economic growth in a
feedback mode, but also due to population expansion and changing
economic lifestyles.

The reverse is now becoming increasingly visible; for instance, economic


expansion in India is causing notable growth of roads and railways. While
the former approach is called as demand driven (economic expansion
causing the transport sector to grow), the latter is called as supply driven
(expanding transport facilities help the economy to grow). Such nexus
suggests that economic growth and transport infrastructure may perhaps
be jointly determined to help in the formulation of appropriate policies,

! !38
TRANSPORTATION INFRASTRUCTURE

because economic growth is closely related to transport as higher economic


growth requires added transport infrastructure.

Transport access is complementary to other services such as health and


education. Studies in rural India show the effect of infrastructure
investments on economic growth and poverty. The results from these
studies consistently show the importance of road investments in promoting
economic growth and poverty reduction. In India, public investment in
rural roads was found to have had the largest positive impact on
agricultural growth.

Growth of transport sector post globalization has well exceeded what was
achieved over 40 prior years. Still, the level attained so far is quite low
when compared with international norms. Rather importantly, in India one
has noticed a gradual transition from rail-dominated transport to a road-
dominated one. Besides, the contribution of transport sector to GDP, as
expected, has been rising. It rose from 3.8% in 1980-81 to 4.6% in
1990-91 and then to 5.5% in 2000-01 grossing 6.7% of the annual growth
rate in 2008-09 and estimated to be 8.0% in 2010-2011

Table 2.1: Contribution of the Transport Infrastructure to GDP in India in


%age
Year X1 X2 X3 X4 X5
1980-81 0.28 2.42 0.79 0.31 3.8

1985-86 0.61 2.59 0.66 0.34 4.2

1990-91 0.97 2.71 0.64 0.27 4.6

1995-96 1.48 3.01 0.71 0.28 5.5

2000-01 1.48 3.15 0.69 0.22 5.5

2008-2009 6.7

2010-2011 Estimated 8.0


to be
Source: National Accounts Statistics of India, EPW Research Foundation
Mumbai.

! !39
TRANSPORTATION INFRASTRUCTURE

Note: X1: Rail contribution to GDP; X2: Road contribution to GDP; X3:
Water contribution to GDP; X4: Air contribution to GDP; X5: Total transport
infrastructure contribution to GDP.

Activity F

❖How can transport infrastructure help economic growth in India?


…………………………………………………………………………………………………………………………
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…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Dedicated Freight Corridors


A Dedicated Freight Corridor (DFC) can be described as a network of
railway lines “dedicated” for the movement of freight trains. Such DFCs are
separate from the passenger railway networks to ensure uninterrupted
movement of the freight trains. Railway tracks under DFC are often
provided with a higher voltage overhead power line than that of normal
passenger railway networks, so the freight trains can attain higher speeds.

India has one of the largest transport sectors. The railway network
connecting the four metropolitan cities of Delhi, Mumbai, Chennai and
Kolkata is known as the “Golden Quadrilateral” of The Indian Railways. The
hypothetical diagonals of this Golden Quadrilateral connect Delhi-Chennai
and Mumbai-Howrah. The total route length of the Golden Quadrilateral
and its diagonals add up to 10,122 km and is responsible for generating
more than 55% of the total revenue of the Indian Freight Railways. Though
covering 16% of the routes in India, these corridors are “High Density
Corridors” carrying 52% passengers and 58% freight.

A corridor project that will enable the Railways run faster, longer and
heavier goods trains along dedicated tracks is planned by the Indian
Railways in an ambitious $4 billion (` 25,000 crore) programme inviting
the private sector to build and develop multimodal logistics parks along the
proposed eastern and western dedicated freight corridors. The first phase
of this plan involves the construction of two DFCs, the Western DFC and
the Eastern DFC. The Eastern DFC will start from Ludhiana in Punjab
passing through the States of Haryana, Uttar Pradesh, Bihar and finally
ending in Dankuni, West Bengal. The Western Corridor will start from Dadri
to Mumbai and pass through the States of Delhi, Haryana, Rajasthan,

! !40
TRANSPORTATION INFRASTRUCTURE

Gujarat and Maharashtra. The two corridors are estimated to span a route
length of 3300 kilometers and expected to be completed by 2017. The
basic objective of the logistics projects is to enhance the volume of rail
freight in the overall transport chain of the country with complete solutions
to help companies reduce both the cost and time of transporting goods.

Activity G

❖What is the purpose of DFCs?


…………………………………………………………………………………………………………………………
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…………………………………………………………………………………………………………………………

2. Road Transportation
The network of roadways of a country is as essential as the arterial system
to the human body. The roads in a big way facilitate advancement in the
economy of a country and they simultaneously facilitate communication. In
the matter of surface transport, they are almost equal to the railways
which connect other parts of the country through its large railway network
system. These two transports are not parallel but interdependent.

Road transport is one of the most promising and potent means for rapid
industrialization and agricultural advancement. It plays an important role in
the economy of the country and is particularly suitable for short and
medium distance. It provides the basic infrastructure for bringing the
majority of the people who are living in far-off villages into the mainstream
of life by connecting them with the rest of the country.

While railways occupy the predominant position in the transport network in


the country, the role of road transport has steadily been increasing. With
the spread of green revolution in the country and industrial growth and
opening up of new areas, the road transport has assumed greater
importance as the growing demands for supply of inputs like fertilizers,
seeds etc. as well as the transport of agricultural produce to markets have
to be met largely by road transport.

Full Truckload
Full Truckload (FTL) shipping is the movement of large amounts of
homogenous cargo. Generally, FTL carriers will contract an entire trailer

! !41
TRANSPORTATION INFRASTRUCTURE

load to a single customer. The cargo usually remains on a single vehicle


from the point of origin to the destination.

Less-than-Truckload
Companies providing less-than-truckload (LTL) services can range from
specialized services developed for this particular need and parcel services.
They often combine the loads and shipping requirements of several
different companies on their trucks, which makes it more cost-effective
than running an entire truck for one small load. It allows the carrier to
distribute costs among several different businesses. However, a less-than-
truckload shipment may take longer to be delivered than a full shipment
because it does not follow a direct route from the shipper to the
destination.

Activity H

❖How does road transport help in the development of the country?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Road Infrastructure in India


India has an extensive road network and provides service to millions of
people every day, thus road transport is one of the important ingredients
for the social and economic development of the country. India has the third
largest road network in the world stretching 3.32 million kilometers in
length. According to the World Bank, national highways in India constitute
a length of close to 70,748 km, which is a mere two per cent of the road
network, but carry about 40 per cent of the total road traffic in India.

The significance of transportation is relative to the economy and the


population of a country. India being the world’s second fastest growing
economy and being the second largest populated, transportation plays a
crucial role in its economic development and sustainable growth.

Road transport has emerged as the dominant segment in India’s


transportation sector with a share of 4.5% in India’s GDP in 2005-06. Over
the last six years (2000-01 to 2005-06), the annual average growth in
road transport sector GDP at 9.5% was much higher than the overall GDP
growth of 6.5%. Robust growth in road transport has been attained despite

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TRANSPORTATION INFRASTRUCTURE

significant barriers to inter-State freight and passenger movement


compared to inland waterways, railways and air which do not face rigorous
en-route checks/barriers.

3. Air Transportation
The newest but least utilized mode of transport is air freight. Its significant
advantage lies in the speed with which a shipment can be transported. A
coast-to-coast shipment via air requires only a few hours contrasted to
days with other modes of transportation. One prohibitive aspect of air
transport is the high cost. However, this can be traded off for high speed,
which allows other elements of logistical design, such as warehousing or
inventory, to be reduced or eliminated. The air cargo industry plays a
critical role as it is involved from the procurement cycle to the delivery of
the finished product overseas. Liberal and open sky policies are great
catalysts and can trigger unconstrained growth capability, which is
important for any developing economy.

Increasing Importance of Air Freight


Air cargo offers clients the benefits of secure handling, speed and
geographic and temporal flexibility but, with per kilogram costs that
average six times those of ocean container freight, is relatively expensive.
That high cost is compensated by reduced inventory and warehousing
costs. Air cargo service has become increasingly more integrated and
ground-linked, characterized by door-to-door service from shipper to
customer, as opposed to airport to airport. That advantage has allowed
integrated express handlers to offer time-definite service and to reduce
door-to-door delivery times.

Two major changes have taken place over recent years in many
manufacturing industries and it is due to these changes that air freight is
becoming a popular choice for transporting products internationally. The
reason for this increase is:

• The growing volume of technology-based products. These products are


becoming lighter and smaller while their value is becoming greater
justifying the expense of air freight.

• The second is the rapidly increasing trend in many industries towards


"just-in-time" (JIT) inventories. JIT is most effective where the goods in
question can be moved by air. The benefits of JIT ordering are:

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❖ Substantial reduction in capital requirements

❖ A substantial reduction in stockholding

Primary Reasons for The Growth in Air Cargo

• Deregulation and liberalization of the air cargo industry.

• Global interdependence helped by world trade agreements.

• International production and sales of goods and services.

• New inventory management concepts such as “JIT” and “ZERO” stocks.

• New air-eligible commodities. The vast development of high value and


limited time-consumable commodities

! 


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Air Express Services (Courier)


Air express service has been valued by a significant segment of the express
cargo market to the point that integrated express now accounts for an
estimated 11% of the international air cargo market. In the United States,
air express actually accounts for over 70% of all air cargo shipments,
despite its premium cost, and the average weight of each shipment has
now risen to approach six pounds. FedEx, UPS, and DHL are the largest
integrated air express companies with operations in over 200 countries
each and 952,000 employees, collectively. They own or operate 677, 577,
and 420 aircraft, respectively, placing each among the largest airlines in
the world and they serve over 300 airports internationally.

The express industry has enabled the widespread adoption of just-in-time


practices by many businesses, which results in saving countless dollars in
inventory and logistical costs.

With time-definite international transactions, production flexibility and


speed characterizing much of the new economy, it is nearly certain that air
express cargo will play an increasingly vital role in the global economy. No
other means of transportation is better equipped to meet the economic
realities of the new era where global sourcing and selling, and just-in-time
logistics, require that producers receive and ship smaller quantities more
frequently, quickly and reliably over long distances.

Air express services help to improve the competitiveness of almost all


aspects of companies' operations, including sales, logistics and inventory
management, production and customer support. By expanding the size of
the market that can be served, aviation acts as a spur to innovation,
increases sales and profits, allows more scope to exploit economies of scale
and enhances competition. Business in sectors such as technology,
financial services, pharmaceuticals or business services increasingly require
high speed delivery services to ensure they can respond to customers'
needs.

Types of Goods Shipped by Air and the Industries Dependent upon


Air Cargo

Air transport is critical to the movement of goods in national and global


supply and distribution chains. From the beginning, air transport
specialized in high value-to-weight products, perishable goods, emergency

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deliveries for unanticipated shortages, and products requiring the security


of increased attention. High value-to-weight ratios imply a relatively light
transportation cost burden and high inventory costs if goods are long in
transit. Highly perishable goods incur a significant decrease in product
value with any delay. The absence of critical components of complex supply
or distribution chains means significant assets would lie idle if the
components are not delivered in a timely manner

The Role of Air Cargo in Fostering Economic Development


Air cargo service has been a tremendous enabler for economic
development. This is because air freight and integrated air express are
critical to time-based competition –the frontier challenge for the world’s
most-advanced firms. Air freight has also facilitated specialization and
allowed the well-developed countries – their producers and consumers – to
reap the benefits of ever-closer matches between demand and supply. This
is due not just to the speed of air transport but to the geographic reach it
allows which enlarges effective market areas to the point that increasingly
small product niches reach the threshold of feasible production. At the
same time, air freight allows large pools of, especially Asian, labor to
connect with the product needs of wealthy Western European, North
American, and Northeast Asian markets. Using traditional ocean
transportation, exporters (and their employees and suppliers) in most
developing countries are at a considerable shipping time disadvantage to
these markets compared to domestic producers. Air cargo, combined with
the institutional mechanisms that allow the transfer of production
knowledge, goes a long way towards leveling the temporal playing field for
developing country producers. Air cargo potentially allows developing
country producers 24- to 48-hour access to these markets, compared to
the typical 30 days shipping time using traditional ocean transport.

An Assessment of Indian Air Cargo Industry


The Air Cargo industry in the Indian market has seen unprecedented
growth in the last decade. This significant growth over the last few years is
expected to continue over the next decade. International cargo traffic is
concentrated on the three key international gateway airports — Mumbai,
Delhi, and Chennai. With the development of supporting infrastructure in
the new Greenfield airports, Bangalore and Hyderabad will also experience
higher traffic rates. Although international air cargo traffic is much higher
than the domestic traffic, the latter offers greater potential for Indian

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investors, since regulations prevent foreign airlines from competing in the


domestic air cargo market.

Transshipment throughput at Indian airports is assumed to grow at a much


higher rate than what it is now based on a number of factors.
Transshipment cargo constitutes as high as 60-70% of total volumes
handled by some of leading airports tends to be negligible for Indian
airports. A significant potential lies for the Indian airports to become
transshipment hub. Given its geographic location, India is well placed to
capitalize on this opportunity. While neighboring countries of India,
particularly Bangladesh and Sri Lanka, have sizeable international trade
with Europe and US, they have very limited direct connectivity to US and
Europe. On an average, the air freight traffic growth has been significantly
higher than the gross domestic product (GDP) growth rate and this trend
has been rising over the years. This is the result of increasing use of aerial
mode to transport freight, particularly perishables and time-sensitive
products, relaxation of foreign direct investment (FDI) limits, and open-sky
policies of the government.

Many interesting trends are taking place like the construction of an air
cargo hub in tier-II city of Nagpur in Maharashtra, rise in budget airlines
and cargo carriers with the relaxation in regulations. The cost of air-freight
is expected to drop in the coming years which will open up new economic
opportunities in India’s second tier cities which are now being added to the
air network. There are plans by many airlines to create full-fledged cargo
operations and it is expected that these cargo carriers will also move to
tier-II and tier-III cities. Even logistics companies are planning to acquire
their own aircrafts. All these augur well for aviation logistics and as the
demand for air cargo continue to grow steadily, it will attract many more
new players facilitating faster growth.

Domestic air freight market in India was at 568 metric tons in 2007-08
amounting to a total of ` 20,149 million. The market is likely to grow at a
rate of 12.9% in next 5 years and reach a figure of 1043 metric tons by
2012-13. At current realization level, this will amount to ` 36,986 million
by 2012-13.

Key players in the Domestic sector are Jet Airways (38% market share),
Indian Airlines (27% market share) and Blue Dart (17% market share). Jet
Airways also leads in value share at 38%, followed by Blue Dart at 26%

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and Indian airlines at 22%. Mumbai and Delhi are the busiest ports with
Mumbai – Delhi being the most important sector.

The International air freight market in India was at 1146 metric tons of
which about 55 metric tons gets into interline movement within India. It is
estimated that the growth in the international sector will continue in the
coming years at an estimated growth rate of around 12.8% on a year-to-
year basis over the next five years.

Key players in the International sector are Singapore Airlines (12% market
share), Lufthansa (9% market share), Emirates (7% market share), Air
India (7% market share) and British Airways (7% market share).

Activity I

❖What are the advantages of air transportation?


…………………………………………………………………………………………………………………………
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Glossary of Freight Terms

Air Freight Forwarder: An air freight forwarder provides pickup and


delivery service under its own tariff, consolidates shipments into larger
units, prepares shipping documentation and tenders shipments to the
airlines. Air freight forwarders do not generally operate their own aircraft
and may therefore be called "indirect air carriers." Because the air freight
forwarder tenders the shipment, the airlines consider the forwarder to be
the shipper.

Air way Bill: An airway bill is a shipping document airlines use. Similar to
a bill of lading, the airway bill is a contract between the shipper and airline
that states the terms and conditions of transportation. The airway bill also
contains shipping instructions, product descriptions, and transportation
charges.

Articles of Extraordinary Value: Carriers are not liable for "documents,


coin money, or articles of extraordinary value" unless the items are
specifically rated in published classifications or tariffs. Exceptions may be

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made by special agreement. If an agreement is made, the stipulated value


of the articles must be endorsed on the bill of lading. Articles may include
precious stones, jewels and currency. Many tariffs include restrictions on
goods with values in excess of a specified amount.

Bill of Lading (BOL or B/L): A bill of lading is a binding contract that


serves three main purposes:

1. a receipt for the goods delivered to the transportation provider for


shipment;

2. a definition or description of the goods; and

3. evidence of title to the relative goods, if "negotiable".

Bonded Carrier: A transportation provider by US Customs to carry


Customs-controlled merchandise between Customs points.

Break Bulk: To separate parts of a load into individual shipments for


routing to different destinations.

Break Bulk: Terminal Consolidation and distribution center. A terminal in


the freight system that unloads and consolidates shipments received from
its smaller terminals and from other break bulks. This terminal may have
its own city operation.

Broker: A broker is an independent contractor paid to arrange motor


carrier transportation. A broker may work on the carrier’s or shipper's
behalf.

Cartage Agent: A carrier who performs pickup or delivery.

• Cartage agents use their own paperwork while transporting the


shipment.

• Does not track the shipment while it is in the cartage agent's possession.

• A shipment to a cartage agent for delivery, the shipment is considered to


be "delivered" in freight's tracking tool.

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Claim Cargo: A "Cargo Claim" is a demand made on a transportation


company for payment for goods allegedly lost or damaged while the
shipment was in the transportation provider's possession. Pursuant to the
National Motor Freight Classification (NMFC) Uniform Bill of Lading, all
cargo claims must be filed within 9 months.

Consignee: The person or place where a shipment will be transferred for


the last time (destination); the individual or organization to which the
goods are addressed.

Consignor: The consignor, in a contract of carriage, is the person sending


a shipment to be delivered whether by land, sea or air. Some carriers, such
as national postal entities, use the term "sender" or "shipper" but in the
event of a legal dispute the proper and technical term "consignor" will
generally be used.

Delivery Receipt: Document a consignee or its agent dates and signs at


delivery, stating the condition of the goods at delivery. The driver takes the
signed delivery receipt to the terminal for retention. The customer retains
the remaining copy.

Dispatch: The act of sending a driver on his/her assigned route with


instructions and required shipping papers. Freight maintains contact with
drivers throughout the day by phone, pager, radio, satellite communication
or cellular phone.

Hazardous Material: Hazardous materials are defined by the US


Department of Transportation in accordance with the Federal Hazardous
Material Law. A substance or material may be designated as hazardous if
the transportation of the material in a particular amount and form poses an
unreasonable risk to health and safety or property.

Hazardous Material May Include: an explosive, radioactive material,


etiologic agent, flammable or combustible liquid or solid, poison, oxidizing
or corrosive material, and compressed gas.

Linehaul: Movement of goods between cities or between freight terminals,


particularly between origin terminal and destination terminal (excluding
pickup and delivery service).

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Manifest: A shipping document used by Customs personnel reviewing a


particular transport vehicle's intended trip that summarizes all bills of
lading that have been issued by the carrier or its representative for that
particular shipment. For example, a cargo manifest might be used for
shipments.

Terminal: Freight building and grounds where shipments are prepared for
local delivery or transportation to other terminals.

Shipper's Agent: A Shipper's Agent is not a carrier, freight forwarder, or


broker. Shipper's agents generally arrange for truckload or container load
shipment transportation. Shipper's agents commonly provide services
related to warehousing or loading and unloading.

Shipping Documents: Papers accompanying a shipment as it moves


through the YRC Freight system, including bills of lading (PDF), packing
slips (PDF), Customs paperwork, manifests and shipment bills.

Shortage: The number of units received is less than the quantity shown
on shipping documents. The outstanding units may be delivered later.

Tariff: A Tariff is a document setting forth applicable rules, rates and


charges to move goods. A tariff sets forth a contract for the shipper, the
consignee and the carrier. Since January 1, 1996, motor carriers are not
required to publish tariffs. However, in accordance with federal law, tariffs
must be provided to a shipper on request.

Third-party: A party other than the shipper or consignee that is ultimately


responsible for paying the shipment charges.

UN Number: An internationally accepted 4-digit number used to identify


hazardous material.

4. Water Transportation
Sea transportation is very important as about 80% of all the world's
international trade is carried out through sea. Compared to transportation
by air and land, the transportation of heavy and bulky goods is more
convenient by sea. Although transportation of bulky goods through big
ships can mean several days of journeying time, it is still preferred as the
goods transported will reach in good condition. Sea freight is the most

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economic form of transportation by which goods are moved between


countries in the export process. What is more, the use of containerization
for packing and carrying goods has greatly increased the volumes of cargo
moved by sea, the speed of transit and the safety of the cargo in question.

The following factors should be taken into account when considering the
transit times for goods being carried by sea. These are:

• The frequency of sailing

• The actual sailing time between the port of loading and the port of
discharge

If the sailing is a direct sailing or a transshipment sailing; that is to say will


the vessel sail directly to the port of discharge or will the cargo be placed
on a second vessel and then delivered to a final port of discharge.

Is the sailing an inducement sailing, the vessel will only call the port of
loading or discharge if there is sufficient cargo to load or discharge.

Types of Ships Operating in International Trade

A visit to any harbour around the world will highlight the many different
types of ships that one finds plying international waters. The most common
types of ships operating in international waters are given below:

• Cellular or multipurpose ships that are built to carry containerized cargo


and also break bulk cargoes.

• Conventional break bulk ships that carry only break bulk, non-
containerized cargo.

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• "Cellular or Multi purpose" vessels are largely replacing break bulk


vessels.

• Most cellular vessels are able to accommodate break bulk/non-


containerized cargo on the upper most stack of the vessel.

• Ro-Ro ships that are multipurpose, with the addition of a stern ramp, to
the quayside, by which cargoes are received and dispatched.

• “Reefer vessels" - are vessels dedicated to carrying refrigerated cargoes

• Lo-Lo vessels have their own gantry or crane on board. These vessels
can load and discharge their own cargoes.

Activity J

❖Why water transportation considered the most preferred transportation


for export goods?
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Shipping Industry in India


Shipping is the lifeline of a growing economy like India blessed with an
extensive coastline with more than 14,000 kms of inland waterways.
Approximately, 95% of the country's trade by volume (68% in terms of
value) moves through sea. Clarkson's Research Service reports that India
currently ranks 22nd in terms of growth of world tonnage when compared
to the principal maritime countries of the world. Moreover, shipping is also
an important earner of foreign exchange. According to a study conducted
by the National Council of Applied Economic Research (NCAER), shipping as
a single industry is one of the largest contributors to the foreign exchange
pool of the country. The Indian shipping industry plays a vital role in the
energy and national security of the country. The issue of energy security is
of paramount importance considering the fact that India is greatly
dependent on the import of energy resources such as coal, crude oil and
natural gas.

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The shipping sector has witnessed significant cyclicality in the last decade
with a surge in freight demand in the middle of the decade slowing down
dramatically owing to a global recession towards the end. With the sector
completely open to foreign investment, there have been significant
improvements in shipping capacity available to Indian manufacturers and
traders as well as operational and scale efficiencies. Today, India is firmly
placed within the global liner network connecting Indian importers and
exporters to the remotest parts of the world. The average capacity and
parcel size of a vessel calling Indian ports has trebled since the beginning
of the decade and there have been significant improvements in turnaround
time and similar measures of operational efficiency. There has been
significant investment made in the sector both by Indian shipping
companies and international organizations alike. Challenges, however,
remain both on the physical and operational front as well as on the policy
front. Indian shipping is not able to achieve its full potential restricted by
limited draft availability in most ports, sub-optimal distribution of port
capacity across the coastline, limited road and rail evacuation capabilities
and restrictive legislative infrastructure in terms of tax and other policies.

Sea Freight Terms

Alongside: A phrase referring to the side of a ship. Goods to be delivered


"alongside" are to be placed on the dock or lighter within reach of the
transport ship's tackle so that they can be loaded aboard the ship. Goods
are delivered to the port of embarkation, but without loading fees.

Bonded Warehouse: The Customs Service authorizes bonded warehouses


for storage or manufacture of goods on which payment of duties is
deferred until the goods enter the Customs Territory. The goods are not
subject to duties if reshipped to foreign points.

Commercial Invoice: The commercial invoice is a bill for the goods from
the seller to the buyer. These invoices are often used by governments to
determine the true value of goods for the assessment of Customs duties
and are also used to prepare consular documentation. Governments using
the commercial invoice to control imports often specify its form, content,
number of copies, language to be used, and other characteristics.

Cost and Freight (C&F): Cost and Freight (CFR) to a named overseas
port of import. Under this term, the seller quotes a price for the goods that

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includes the cost of transportation to the named point of debarkation. The


cost of insurance is left to the buyer's account. (Typically used for ocean
shipments only. CPT, or carriage paid to, is a term used for shipment by
modes other than water.) Also, a method of import valuation that includes
insurance and freight charges with the merchandise values.

Cost, Insurance and Freight (CIF): Cost, insurance, and freight (CIF) to
a named overseas port of import. Under this term, the seller quotes a price
for the goods (including insurance), all transportation, and miscellaneous
charges to the point of debarkation for the vessel. (Typically used for ocean
shipments only.)

Demurrage: Excess time taken for loading or unloading a vessel, thus


causing delay of scheduled departure. Demurrage refers only to situations
in which the charter or shipper, rather than the vessel's operator, is at
fault.

Duty: A tax imposed on imports by the Customs authority of a country.


Duties are generally based on the value of the goods (ad valorem duties),
some other factors such as weight or quantity (specific duties), or a
combination of value and other factors (compound duties).

Return to Top

FCL or CY: Full Container Load, also known as CY. CY is the abbreviation of
Container Yard. When the term CY to CY, it means full container load all the
way from origin to destination.

Free Alongside Ship: Free Alongside Ship, FAS, at a named port of


export. Under FAS, the seller quotes a price for the goods that includes
charges for delivery of the goods alongside a vessel at the port of
departure. The seller handles the cost of unloading and wharfage, loading,
ocean transportation, and insurance are left to the buyer. FAS is also a
method of export and import valuation.

Gateway: In the context of travel activities, gateway refers to a major


airport or seaport. Internationally, gateway can also mean the port where
Customs clearance takes place.

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Letter of Credit: A financial document issued by a bank at the request of


the consignee guaranteeing payment to the shipper for cargo if certain
terms and conditions are fulfilled. Normally, it contains a brief description
of the goods, documents required, a shipping date, and an expiration date
after which payment will no longer be made.

Wharfage: A charge assessed by a pier or dock owner for handling


incoming or outgoing cargo.

River Freight: In many countries around the world, from North America to
Asia and from Europe to Africa, river transportation is extremely important
and these countries could not survive without river transportation. To some
extent, river transportation is dealt with in a similar way to sea freight and
pretty much any type of cargo can be transported along some of the larger
rivers in the world. Other rivers may have width and depth problems,
requiring the cargoes to be transported overland instead.

Coastal Shipping and Inland Waterways of India


India's 7,500 kms coastline and over 14,000 kms of navigable waterways
make it an ideal geography to effect transportation by coastal shipping and
inland waterways movement. Coastal shipping and inland waterways are
two modes that are cost-efficient and environment friendly but are
currently rendered unattractive due to a relatively restrictive policy regime
and market dynamics. Coastal shipping requires very simple infrastructure,
unlike the ocean-going vessels, with provision for smooth transfer of cargo
between coastal ships and ocean-going ships. Most major ports are ill-
equipped as far as providing infrastructure to coastal shipping vessels is
concerned. Ocean-going vessels and coastal shipping vessels are treated
on par and ports do not differentiate them in terms of port charges which
are not conducive to the incubation of an industry in its infancy.

5. Pipeline Transportation
Pipeline transport is the transportation of goods through a pipe. Most
commonly, liquids and gases are sent, but pneumatic tubes using
compressed air can also transport solid capsules.

As for gases and liquids, any chemically stable substance can be sent
through a pipeline. Therefore, sewage, slurry, water, or even beer pipelines
exist; but arguably the most valuable are those transporting crude

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petroleum and refined petroleum product including fuels: oil, natural gas
(gas grid), and biofuels.

6. Ropeways
A ropeway is a form of naval lifting device used to transport light stores
and equipment across rivers or ravines. It comprises a jackstay, slung
between two sheers or gyns, one at either end, from which is suspended a
block and tackle, that is free to travel along the rope and hauled back and
forth by inhauls (ropes attached to the pulley from which the block and
tackle are suspended).

Freight Terminals: A freight terminal is an industrial area where cargo is


loaded and unloaded. These terminals are typically located at seaport
ports, rail yards, and airports. Terminals are the central hubs for domestic

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and international transport, where cargo can be consolidated and


transferred to locations around the world.

A cargo airline uses a freight terminal to load and unload the cargo onto
airplanes. This type of airline specializes in sending large packages and
uses airplanes that are larger than familiar passenger planes. Most cargo
plans have large cargo holes at the rear of the aircraft that are used for
loading and unloading packages. A cargo airline is often used by the
military to transport heavy equipment and construction material.

At railroad terminals, special freight cars are loaded onto trains so that
goods can be transported across large areas. Many railroad terminals are
located at seaports, where freight cars are loaded onto trains from ships.
These freight cars hold many bulk materials including stone, steel, and
wood. The automobile industry relies on freight terminals to ship cars and
trucks. These terminals are located near assembly plants so manufacturers
can send newly assembled cars around the world.

Modal Classification: Cost Structure for Each Transportation Mode

Rail
• High fixed costs (land, tracks)
• Low variable costs (operating costs, e.g., labor, fuel)
• Slow, but inexpensive way to transport heavy freight that doesn’t require
special handling, long distances

Road
• Low fixed costs (government builds, maintains highways)
• Medium-high variable costs (operating costs, e.g., labor, fuel)
• Most accessible mode (more highways than railroads, waterways,
pipelines); best for transporting medium to high value products short to
moderate distances

Water
• Moderate fixed costs (ships and freight handling equipment)
• Low variable costs (operating costs, e.g., labor, fuel)
• Very slow, but inexpensive way to transport large, heavy freight over
long distances (e.g., oceans, rivers, inland waterways, lakes)

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Air
• Low fixed costs (aircraft and freight handling equipment)
• Highest variable costs (e.g., labor, fuel, maintenance)
• Very fast; used for transporting high value and/or high perishability
product over short to medium distances

Pipeline
• Highest fixed costs (right-of-way and construction costs of equipment)
• Lowest variable costs (no significant labor or fuel costs)
• Slow, but dependable (e.g., no weather, traffic disruptions); no flexibility
with regard to types of products that can be transported – must be liquid
(e.g., petroleum)

Table 1.a
Operating
Rail Road Water Air Pipe
Characteristics
Speed 3 2 4 1 5

Availability 2 1 4 3 5

Dependability 3 2 4 5 1

Capability 2 3 1 4 5

Flexibility 3 1 4 2 5

Composite 13 9 17 15 21
1 = best, 5 = worst

Activity K

❖Which mode of transport is most effective for inland transportation and


why?
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2.4 Transportation Service

Transportation service can be improved by combining modes. Prior to


deregulation, government policy limited carriers to operating in a single
mode. Such restrictive ownership sought to promote competition between
modes and limit the potential for monopoly practices. Following
deregulation carriers were free to develop integrated modal services in
efforts to more efficiently and effectively meet the needs of customers.

Traditional Carriers: The most basic carrier type is a transportation firm


that provides service utilizing only one of the five basic transport modes.
Focus on a single operational mode permits a carrier to become highly
specialized.

Although single mode operators are able to offer extremely efficient


transport, such specialization creates difficulties for a shipper who desires
intermodal transport solutions because it requires negotiation and business
planning with multiple carriers. Airlines are an example of a single mode
carrier for both freight and passenger service that traditionally limits
service from airport to airport. Since deregulation, most carriers are
developing services that facilitate multimodal integration.

Package Service: Over the past several decades, a serious problem


existed in the availability of small shipment transportation. It was difficult
for common carriers to provide reasonably priced small shipment service
because of overhead cost associated with terminal and line-haul
operations. This overhead forced motor carriers to implement a minimum
charge. The minimum applies to all shipments regardless of shipment size
or distance. As a result of the minimum charge and lack of alternatives, an
opportunity existed for companies offering specialized service to enter the
small shipment or package service market.

Package services represent an important part of logistics, and the influence


of carriers in this segment is increasing because of their size and
intermodal capabilities. The advent of e-commerce and the need for
consumer-direct last-mile delivery have significantly increased demand for
package delivery services. While package services are expanding, the
services required do not fall neatly into the traditional modal classification
scheme. Packages are regularly transported by using the line-haul services

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of rail, motor, and air. Package service provides both regular and premium
services.

2.5 Transport Department Administration

While transport managers administer many different activities, they are


fundamentally responsible for: (1) operations management, (2) freight
consolidation, (3) rate negotiation, (4) freight control, (5) auditing and
claims, and (6) logistical integration.

1. Operations Management: In large-scale organizations, traffic


operations management involves a wide variety of administrative
responsibilities. From an operational perspective, key elements of
transportation management are equipment scheduling, load planning,
routing, and carrier administration.

2. Freight Consolidation: Freight costs are directly related to size of


shipment and length of haul places a premium upon freight
consolidation. From an operational viewpoint, freight consolidation
techniques can be grouped as reactive and proactive. Each type of
consolidation is important to achieve transportation efficiency.

3. Rate Negotiation: For any given shipment, it is the responsibility of


the traffic department to obtain the lowest possible rate consistent with
service requirements. The prevailing price for each transport alternative
– rail, air, motor, pipeline, water, and so on – is found by reference to
tariffs.

4. Freight Control: Other important responsibilities of transportation


management are tracing and expediting. Tracing is a procedure to locate
lost or late shipments. Expediting involves the shipper notifying a carrier
that it needs to have a specific shipment move through the carrier's
system as quickly as possible and with no delays.

5. Auditing and Claim Administration: When transportation service or


charges are not performed as promised, shippers can make claims for
restitution. Claims are typically classified as loss and damage or
overcharge/undercharge. Auditing freight bills is an important function
of the traffic department. The purpose of auditing is to ensure billing
accuracy.

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TRANSPORTATION INFRASTRUCTURE

6. Logistical Integration: For any given operating period, traffic


management is expected to provide the required transportation services
at budgeted cost. It is also traffic management's responsibility to search
for alternative ways to deploy transportation to reduce total logistics
cost.

Activity L

❖What are the main functions of a transport manager?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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TRANSPORTATION INFRASTRUCTURE

2.6 SUMMARY

Major international gateway and corridor infrastructures such as ports,


airports and key rail routes are crucially important to the exports and
imports of all the products and resources of modern-day economies. These
infrastructures will become even more important in the future. Good
transport infrastructure underpins economic growth. Surface transportation
system serves as the backbone of our country’s economy. Transportation
highway systems are increasingly becoming a key issue among numerous
national, State, and local policymakers. Aviation and maritime services will
carry most of the long distance traffic, with ground handling likely to
remain heavily concentrated at the major international gateway airports
and ports. Much of this infrastructure will require improved capacity to
handle volumes two or three times current levels. Improved funding and
financing arrangements will be needed in many countries, given their
current deficit and debt levels and other expected demands on budget
resources. Air freight could triple in 20 years; and port handing of maritime
containers worldwide could quadruple by 2030. Quality infrastructure is a
key pillar of international competitiveness. It is trade-enhancing –
especially for exports – and has positive impacts on economic growth.

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TRANSPORTATION INFRASTRUCTURE

2.7 Self Assessment Questions

1. What modes of transportation are best suited for large, low-value


shipments? Why?

2. Explain how the company can use a network to reduce transportation


costs while replenishing inventories more frequently.

3. Discuss key drivers that may be used to tailor road transportation.

4. What is the importance of transport infrastructure for growth in India?

5. Explain how the company can use such a network to reduce


transportation costs.

6. Explain at least two strategies that a firm can use to overcome the
challenges related with the air transportation infrastructure.

7. What is freight bill?

8. What is a 'Bill of Lading?


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TRANSPORTATION INFRASTRUCTURE

REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter

Summary

PPT

MCQ

Video Lecture - Part 1

Video Lecture - Part 2


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TRANSPORTATION OPERATIONS

CHAPTER 3
TRANSPORTATION OPERATIONS
Objectives

After going through the chapter, students should be able to understand:

• An overview of transportation economics and pricing

• The working of transport administration

• The concept, role and importance of Documentation

Structure

3.1 Transportation Economics and Pricing

3.2 Transport Administration

3.3 Documentation

3.4 Summary

3.5 Self Assessment Questions

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TRANSPORTATION OPERATIONS

Introduction
Fundamentally, the role of transportation and logistics management is
simple: get the right product to the right place at the right time and at the
lowest cost. Competition in terms of transportation and logistics depends
on speed and intelligence – making the best decisions, quickly turning
decisions into action and monitoring the operation every step of the way to
deliver the superior service customers expect. Achieving this objective is
no small feat in today’s complex global environment. Companies are under
intense pressure now more than ever to streamline their operations and
overcome unprecedented economic, environmental and industry challenges
while still satisfying the ongoing expectations of a rapidly evolving
customer base.

Confronted with these and many other challenges, how can organizations
strategically streamline their transportation and logistics processes to
maximize supply chain efficiencies, customer satisfaction and profit
margins?

3.1 Transportation Economics and Pricing

Economics and pricing are concerned with factors and characteristics that
drive cost. To develop effective logistics strategy, it is necessary to
understand such factors and characteristics. Successful negotiation
requires a full understanding of transportation economics. An overview of
transportation economics and pricing builds upon four topics: (1) the
factors that drive transport costs, (2) the cost structures or classifications,
(3) carrier pricing strategy, and (4) transportation rates and ratings.

3.1.1 Factors that Drive Transport Costs (Economic Drivers)

Transportation costs are driven by seven factors. While not direct


components of transport tariffs, each factor influences rates. The factors
are: (1) distance, (2) weight, (3) density, (4) stowability, (5) handling, (6)
liability, and (7) market.

1.Distance: Genetic distance, geographic proximity, and economic


variables are strongly correlated. Distance, Modal Choice and Transport
Cost. Different transportation modes have different cost functions
according to the serviced distance. Distance is a major influence on
transportation cost since it directly contributes to variable expense, such as

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TRANSPORTATION OPERATIONS

labor, fuel, and maintenance. Figure 3.1 illustrates the general relationship
between distance and transportation cost. Different transportation modes
have different cost functions according to the serviced distance. Road, rail
and maritime transport have respectively a C1, C2 and C3 cost functions.
While road has a lower cost function for short distances, its cost function
climbs faster than rail and maritime cost functions. At a distance D1, it
becomes more profitable to use rail transport than road transport while
from a distance D2, maritime transport becomes more advantageous.

Activity A

❖How does distance affect cost among modes of transport?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

!
Figure 3.1: Generalized Relationships between Distance and
Transportation Cost

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TRANSPORTATION OPERATIONS

2. Weight: The second factor is load weight. Transport cost per unit of
weight decreases as load volume increases. Fixed costs of pickup and
delivery as well as administrative costs get spread over additional volumes.
Smaller loads must be consolidated into larger loads.

This relationship, illustrated in Figure 3.2, indicates that transport cost per
unit of weight decreases as load size increases.

Activity B

❖How can you achieve the economy of scale in transportation?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

!
Figure 3.2: Generalized Relationships between Weight and
Transportation Cost

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TRANSPORTATION OPERATIONS

3. Density: A third factor is product density. Transportation cost per unit


declines as product density increases. In terms of weight and space, an
individual vehicle is constrained more by space than by weight. Once the
vehicle is full, it is not possible to increase the amount carried even if the
product is lightweight. As with other logistics activities, scale economies
exist for most transportation movements. Higher density products allow
fixed costs to be spread across additional weight, as a result the products
are assessed at a lower transport cost per unit. Attempts are made to
increase product density so that more can be loaded in a vehicle to utilize
its capacity.

Figure 3.3 illustrates the relationship of declining transportation cost per


unit of weight as product density increases. In general, traffic managers
seek to improve product density so that trailer cubic capacity can be fully
utilized.

Activity C

❖What is the correlation between density and transportation cost?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Figure 3.3: Generalized Relationships between Density and


Transportation Cost/Pound

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TRANSPORTATION OPERATIONS

4. Stowability: Refers to product dimensions and impact of the same on


vehicle utilization. Odd sizes and shapes as well as excessive weights and
lengths do not stow well and typically waste space. Though density and
stowability are similar, products may have same density that stow
differently. Items with regular shapes are easier to stow than odd shaped
items. While the steel blocks and rods have the same density, rods are
more difficult to stow because of their length and shape.

Activity D

❖How can one achieve the optimum stowability while transporting goods?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

5. Handling: Special handling equipments may be required for loading or


unloading trucks, trains, or ships and the unitization/palletization affects
the handling cost.

6. Liability: Product characteristics such as susceptibility to damage,


perishability, susceptibility to theft and susceptibility to explosion affect the
risks and hence claims.

7. Market: Back-haul, i.e., vehicle returning back to the point of origin


with load. Dead head to be avoided because empty returns incur labor,
fuel, and maintenance costs. Thus, design of logistics system must add
back-haul movement wherever possible.

3.1.2 Cost Structure


The second dimension of transport economic and pricing concerns the
criteria used to allocate cost. Transport costs are a monetary measure of
what the transport provider must pay to produce transportation services.
They come as fixed (infrastructure) and variable (operating) costs,
depending on a variety of conditions related to geography, infrastructure,
administrative barriers, energy, and on how passengers and freight are
carried. Three major components, related to transactions, shipments and
the friction of distance, impact on transport costs. Transportation costs are
classified into a number of categories.

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TRANSPORTATION OPERATIONS

(i) Variable Costs: Variable costs or direct costs are expenses that change
in direct proportion to the activity of a business. Costs that change in a
predictable, direct manner in relation to some level of activity are
labeled variable costs. Variable costs include direct carrier costs
associated with movement of each load. For example, fuel, travel time
and crash risk are variable vehicle costs because they increase directly
with vehicle mileage. These expenses are generally measured as a cost
per mile or per unit of weight. Typical variable cost components include
labor, fuel, and maintenance.

(ii) Fixed Costs: It is important to realize that fixed costs are fixed only
within a certain range of activity or over a certain period of time. If
enough time passes, all costs become variable.

Fixed costs are expenses whose total does not change in proportion to the
activity of a business. (Indirect costs may be fixed or variable.) Fixed costs
are associated with fixed inputs. Fixed costs can be further subdivided for
many transport operations into “Standing Costs” (i.e., vehicle operating
costs which do not vary with vehicle usage but are specific or traceable to
particular vehicles) and “Administrative Overheads” (i.e., general fixed
costs that cannot be directly attributed to particular vehicles or services).

Depreciation, insurance, and residential parking are considered fixed,


because vehicle owners pay the same, regardless of how much a vehicle is
used.

iii. Joint Costs: A joint cost occurs when the production of one good
inevitably results in the production of another good in some fixed
proportion. For example, consider a rail line running only from point A to
point B. The movement of a train from A to B will result in a return
movement from B to A. Since the trip from A to B inevitably results in
the costs of the return trip, joint costs arise.

iv. Common Costs: Common costs arise when the facilities used to
produce one transport service are also used to produce other transport
services (e.g., when track or terminals used to produce freight services
are also used for passenger services).

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TRANSPORTATION OPERATIONS

Activity E

❖What are the major differences between: (a) fixed costs and variable
costs and (b) joint costs and common costs?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

3.1.3 Carrier Pricing Strategies

When setting rates to charge shippers, carriers typically follow one or a


combination of two strategies. Although it is possible to employ a single
strategy, the combination approach considers trade-offs between cost of
service incurred by the carrier and value of service to the shipper.

i. Cost-of-Service Strategy: Carrier estimates cost of providing service


then adds on a percent profit margin. Commonly used for pricing
transport of low value goods or in highly competitive situations.

ii. Value-of-Service Pricing: Price is based on value as perceived by the


shipper rather than the carrier. Commonly used when services are sold
in niche markets.

iii. Combination Pricing Strategy: Price is set at a value between cost-


of-service minimum and value-of-service maximum. Most common
pricing strategy.

iv. Net-Rate pricing: Is a simplified pricing format. Established discounts


and accessorial charges are rolled into one all-inclusive price tailored for
individual customer needs. The net-rate pricing approach does away
with the complex and administratively burdensome discount pricing
structure that has become common practice since deregulation.

Activity F

❖Which among the four pricing strategies are most simple to calculate?
Why?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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TRANSPORTATION OPERATIONS

3.1.4 Rates and Rating

The rate is the price to move a product per hundred weight between two
locations (also known as tariffs) or per mile in TL. Rates may include
minimum charges and surcharge (e.g., to cover fuel cost risk).

i. Class Rate: The intent of the class rate system is to simplify the
process for pricing freight with inherently different freight
characteristics. Rather than have a unique price for each and every
commodity, articles with similar freight characteristics are assigned to
common freight ‘classes’. The logic is, the lower the class the lower the
price. The principle factors used in the freight classification process are:

• Cost of service to the carrier


• Value of service to the shipper
• Competition
• Value of article
• Methods of packing and protecting the article
• Risk
• Dimensions and weight

In the simplest terms, low-value freight that is easy to handle, unlikely to


damage and dense will receive lower class ratings than expensive, light,
bulky freight which is highly susceptible to damage. In addition to the class
rating assigned to an article, carrier pricing is driven by shipment weight as
well. The rule is the higher the weight, the lower the cost per pound. This
is merely the simple economic principle of economies of scale.

ii. Classification: This work involves determining appropriate


classifications for various items or commodities by reference to
published classification guides. In addition to simple comparisons,
classification also includes the study of the transportation characteristics
of items or commodities which are new or not usually shipped in
commercial channels. These may be compared with freight items or
commodities which have been classified to determine the appropriate
classification by analogy.

Classification may include the development of narrative and exhibit


material and related information to request new classifications or
classification adjustments; it may also include the preparation of material

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TRANSPORTATION OPERATIONS

concerning classification matters in cases to be presented before


representatives of the carriers, regulatory bodies, and the courts.

Products are also assigned classifications on the basis of the quantity


shipped. Less-than-truckload (LTL) shipments of identical products will
have higher ratings than truckload (TL) shipments.

Activity G

❖How does packaging affect the ratings given while classifying the
products?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

iii. Rate Determination: This work involves the determination of the


appropriate, legally applicable, and most economical rates and routes
for the movement of domestic and foreign freight via any or all modes
of transportation. These determinations are made in accordance with
published classifications, tariffs, and tariff routings. However, factors
such as the following are considered in selecting the appropriate rates
and routes:

Suitability of specific routes (including those not specified in tariffs);


weather, physical, and seasonal characteristics; availability of appropriate
terminal facilities; availability of carriers including carrier operating
authorities and handling equipment required; availability and application of
transit privileges including substitution of tonnage and out-of-line or back
hauls; agreements and propriety of using various modes of transportation
singly or in combination; the selection of junction or interchange points;
the consolidation of shipments; numerous alternative origin and
destination points; the documentation of shipments including governmental
requirements, State, Federal, and foreign; miscellaneous and accessorial
service (sorting, packing, pre-cooling, heating, storage, loading and
unloading, blocking and bracing, cartage, demurrage, diversion, drayage,
dunnage, free time, switching, lighterage and lighterage limits, port
charges, diversion and re-consignment, towage, wharfage, etc.).

Rating may also include the development of narrative and exhibit material
and related information to be used by others request and negotiate new or

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TRANSPORTATION OPERATIONS

revised rates; it may also include the preparation of material concerning


rate matters in cases to be presented before representatives of the
carriers, regulatory bodies, and the courts. The steps in the rating process
are also followed in the pre-audit and post-audit of freight bills since the
purpose is to determine appropriateness of the classification, rates, routes,
and the actions of the carriers.

Activity H

❖Why are minimum and surcharges paid over and above the variable
rates?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

iv. Commodity Rates: The global economy and its production systems are
highly integrated, interdependent and linked through commodity chains.
Value Chain (also known as commodity chain) is a functionally
integrated network of production, trade and service activities that
covers all the stages in a supply chain, from the transformation of raw
materials, through intermediate manufacturing stages, to the delivery of
a finished good to a market.

Value chains enable a sequencing of inputs and outputs between a range of


suppliers and customers, mainly from a producer and buyer-driven
standpoint. They also offer adaptability to changing conditions, namely an
adjustment of production to adapt to changes in price, quantity and even
product specification. This means that value chains are constantly
upgraded to fit technological, costs and market changes.

v. Exception Rates: Some carriers will offer exception ratings when the
characteristics of a commodity varies from the characteristics of the
same commodity in a different region. This allows carriers to offer
discounts to shippers which operate large volumes of shipments, or if
there is increased competition.

A limited service rate is utilized when a shipper agrees to perform selected


services typically performed by the carrier, such as trailer loading, in
exchange for a discount. A common example is a shipper load and count
rate, where the shipper takes responsibility for loading and counting the

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TRANSPORTATION OPERATIONS

cases. Not only does this remove the responsibility for loading the
shipment from the carrier, but it also implies that the carrier, once the
trailer is sealed, is not responsible for guaranteeing case count. Another
example of limited service is a released value rate, which limits carrier
liability in case of loss or damage. Normally, the carrier is responsible for
full product value if loss or damage occurs in transit. The quoted rate must
include adequate insurance to cover the risk. Often it is more effective for
manufacturers of high-value product to self-insure to realize the lowest
possible rate. Limited service is used when shippers have confidence in the
carrier’s capability. Cost can be reduced by eliminating duplication of effort
or responsibility.

Under aggregate tender and limited service rates as well as other


innovative exception rates, the basic economic justification is the reduction
of carrier cost and subsequent sharing of benefits based on shipper/carrier
cooperation.

Activity I

❖When is the function of a value chain between supplier and the


customer?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Freight-all-Kind Rate: Shipping industry term for a carrier's tariff


classification for various kinds of goods that are pooled and shipped
together at one freight rate. Consolidated shipments are generally
classified as FAK.

Joint Rate: Rate which applies for carriage over the lines of two or more
carriers and which is published as single amount (air cargo).

Local Rate: Charge which applies to carriage over the lines of a single
carrier (air cargo).

Proportional Rate: Rate which is used in combination with other rates to


establish a through rate.

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TRANSPORTATION OPERATIONS

Activity J

❖FAK Rate; Local Rate; Joint Rate; Proportional Rate: Mention when each
of them are applicable.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Transit Services: Cargo is not always in transit. During various parts of


the process, it is stacked up in warehouses awaiting successive intermodal
legs of transit, or laid away pending orders from owners as to where they
want it to sent. Transit Services permit a shipment to be stopped at an
intermediate point between initial origin and destination for unloading,
storage, and/or processing. The shipment is then reloaded for delivery to
the destination.

Activity K

❖Describe the process of diversion and reconsignment of a shipment.


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Split Delivery: A method by which a larger quantity is ordered on a


purchase order to secure a lower price, but delivery is divided into smaller
quantities and spread out over several dates to control inventory
investment, save storage space, etc. or when delivery is desired when
portions of a shipment need to be delivered to different destinations.

In addition to basic transportation, truck and rail carriers offer a wide


variety of special or accessorial services. Table 3.3.1 provides a list of
frequently utilized ancillary services.

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TRANSPORTATION OPERATIONS

Table 3.1
COD: Collect payment on delivery
Change COD: Change COD recipient
Inside Delivery: Delivery product inside the building
Marking or tagging: Mark or tag a product as it is transported
Notify before delivery: Make appointment prior to delivery
Reconsignment of delivery: Redirect shipment to a new destination while
in transit
Redeliver: Attempt second delivery
Residential delivery: Deliver at residence without a truck dock
Sorting and segregating: Sort commodity prior to delivery
Storage: Store commodity prior to delivery

Environmental Logistics: LSPs have started to green their operations in


order to help their customers to be better prepared for predictable and
future green demand from both market and government legislations. One
of the strongest reasons to implement green initiatives was increased
firm’s competitiveness.

Services refer to special control of freight while in transit, such as


refrigeration, ventilation, and heating. For example, in the summer,
Hershey typically transports chocolate confectionery products in
refrigerated trailers to protect them from high temperature levels.

Extant works dealing with barriers to green initiatives in LSPs distinguish


between internal and external barriers. Isaksson and Huge-Brodin (2010)
identified financial, technical, information, managerial and organisational
as internal barriers, while external barriers include policy and market
issues. The findings indicate that among internal barriers financial and
information are the most relevant barriers to implement.

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TRANSPORTATION OPERATIONS

Activity L

❖Discuss the barriers associated with environmental services offered by


road carriers.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

3.2 Transport Administration

3.2.1 Operations Management

The operation of transportation determines the efficiency of moving


products. The progress in techniques and management principles improves
the moving load, delivery speed, service quality, operation costs, the usage
of facilities and energy saving. Transportation takes a crucial part in the
manipulation of logistic. Reviewing the current condition, a strong system
needs a clear frame of logistics and a proper transport implements and
techniques to link the producing procedures.

Transportation Management System (TMS) is used to seamlessly manage


every facet of the supply chain. It provides industry-leading supply chain
management and workflow, and a sophisticated planning engine optimizes
shipments while reducing costs. A TMS product serves as the logistics hub
in a collaborative network of shippers, carriers and customers. MS systems
facilitate interactions between an Order Management System (OMS) and
the Warehouse or Distribution Center (DC). (Table 3.2).

The business value of a fully deployed TMS should achieve the following
goals:

• Reduce costs through better route planning, load optimization, carrier


mix and mode selection.

• Improved accountability with visibility into the transportation chain.

• Greater flexibility to make changes in delivery plans.

• Completion of key supply chain execution requirements.

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TRANSPORTATION OPERATIONS

Table 3.2: TMS Functionality


Order consolidation
Route optimization
Carrier rate management
EDI links with carriers
Internet based carrier tracking
Integrated claims management
Identify most economical mode: parcel, less-than-truckload, truckload,
pool distribution, stops in transit
Calculate best route
Carrier selection based on cost and service including performance
Yard management

Activity M

❖What is the importance of implementing Transportation Management


System?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Equipment Scheduling and Yard Management: Companies have made


significant investments in systems and technologies to track transportation
assets, however, few realize that transportation delays often take place not
on the road, but while the assets are still in the yards at distribution
centers (DCs), warehouses, and manufacturing plants. As all goods often
go through multiple yards throughout the life cycle, any inefficiencies or
errors in the yard are amplified as the effects propagate through the supply
chain network.

Some common yard management related challenges include lengthy gate


check-in processes, multiple or redundant moves, time-consuming yard
checks, delays, excessive detention/demurrage charges, unproductive
administrative time due to ineffective communications, and the general
lack of actionable information. Delays can mean production downtime for
manufacturing operations, product spoilage if handling perishable goods,

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TRANSPORTATION OPERATIONS

lost opportunities caused by stock-out for retailers, or credibility issues


with carriers and customers. On the other hand, all of these problems can
be attributed to the fundamental issue of lack of accurate, real-time
information (i.e., visibility) about the yard operations.

Yard management can be described in a framework covering the following


main processes:

• Resource planning – decisions on capacity, labor and equipment


requirements and yard zoning.

• Task scheduling – dock appointment, management for inbound and


outbound shipments, and trailer move optimization based on custom
criteria.

• Yard process execution – check in/out trailers and tractors, and park
trailers at staging areas or move to dock doors for loading/unloading.

• Event monitoring – for security control and generating alert and


notifications.

• Asset tracking and management – records of asset inventory,


movements, and history.

• Performance management – analytics on equipment and facility


utilization, labor productivity, and resource time.

The key yard management metrics commonly considered include such


performance measures as driver, equipment (trailers and yard trucks), and
facility (including parking spaces and dock doors) utilizations, which
contribute to the overall productivity of these resources.

Load Planning
Load planning encapsulates the various ways of loading a consignment,
whether to have pallets, whether single units. There can be a mix of
various units – pallets + single units + barrels etc. Also there might be
different kind of requirements of certain consignment like refrigeration,
liquid holding; all these can be planned to be transported even in a single
vehicle. Load planning has a great impact on the cost of transportation for
the client, for the transporter it has an impact on the transit time. Load

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TRANSPORTATION OPERATIONS

Planning would control the transfer of freight around the country. It would
make sure goods are moved in the most efficient way, taking into account
schedules, costs, and health and safety.

Load Planning would involve road haulage or other businesses maintaining


own fleet of vehicles, such as retail chains.

Load Planning would involve:

• deciding how many vehicles will be needed to deliver each shipment of


goods

• working out how much it will cost to make each delivery

• planning the safest way to load and unload goods

• monitoring each delivery as it makes its journey

• reviewing load plans with clients

• making back-up plans to cover changes in circumstances.

Software packages will help with some of these tasks, for example, to
match the size of loads with the vehicles needed to move them etc.

Routing and Advanced Shipment Notification (ASN)


An advance ship notice or advance shipping notice (ASN) is a notification of
pending deliveries, similar to a packing list. It is usually sent in an
electronic format and is a common EDI (Electronic Data Interchange)
document. The ASN can be used to list the contents of a shipment of goods
as well as additional information relating to the shipment, such as order
information, product description, physical characteristics, and types of
packaging, markings, carrier information, and configuration of goods within
the transportation equipment. The ASN enables the sender to describe the
contents and configuration of a shipment in various levels of detail and
provides an ordered flexibility to convey information. The goal of the ASN
is to provide information to the destination's receiving operations well in
advance of delivery. This tends to impact the logistics stream in three
areas: cost, accuracy, and flexibility.

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TRANSPORTATION OPERATIONS

Movement Administration

Fleet management is the function that oversees, coordinates and facilitates


various transport and transport related activities such as the management
of vehicle fleets used in the transportation of cargo.

Effective fleet management aims at reducing and minimizing overall costs


through maximum, cost-effective utilization of resources such as vehicles,
fuel, spare parts, etc.

The administration and financial management of fleet is very organizational


specific. It largely depends on organisational policies. At a glance, some
vehicles are restricted to specific projects, others are utilized to serve all
projects, some are strictly organizational driver driven and others self-staff
driven and coordinated based on administration policies. The fleet
manager’s function is also very much dependent on organizational policies
and structures.

The location of the vehicle management function within organizations’


structures varies from organization to organization. The management may
be located within administration, transport function or have an independent
fleet manager.

Vehicles are expensive but critical to an organizations' operation. They


facilitate the movement of cargo. Vehicle management is also one of the
aspects of supply management that can be easily abused if not properly
managed. If properly managed, this aspect would ensure:

• availability of vehicles as and when required;


• cost efficiency;
• programme or response continuity;
• staff safety;
• safety on the roads;
• vehicle safety;
• vehicle security; and
• performance management.

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TRANSPORTATION OPERATIONS

Activity N

•What are the administrative duties of fleet manager?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

3.2.2 Freight Consolidation

Freight costs are directly related to size of shipment and the length of haul
places a premium upon freight consolidation. Traffic management is the
business function responsible for achieving freight consolidation. Cargo
consolidation is a service provided by a freight forwarder in which several
smaller shipments are assembled and shipped together to avail of better
freight rates and security of cargo. Also called assembly service, cargo
consolidation, or freight consolidation.

Building complete truckloads is a transportation best practice that nurtures


efficiencies and economies in the best of times and the worst of times.

Converting less-than-truckload (LTL) shipments to full truckloads (TL) helps


companies optimize and reduce transportation costs, rationalize asset
utilization, and provide better service to end customers. Fluctuating
demand, variable capacity, and speed-to-market requirements often
challenge shippers to find economies of scale by consolidating freight.
Pooling similar shipments together can help mediate these volatilities.

Fundamentally, consolidation drives simplicity and consistency. Companies


often leverage this balance to underpin business process improvements
that have far-reaching impact elsewhere in the supply chain. By merging
shipments and delivering more frequent truckload volumes, shippers can
increase turns and reduce inventory. This flexibility drives just-in-time,
continuous flow strategies — from production to sale — allowing businesses
to pull product at each pooling point and more efficiently match supply to
demand.

Why drive alone when you can take mass transportation? The same theory
applies to businesses sourcing transportation. Why have two trucks deliver
half-full when one can carry the entire load?

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TRANSPORTATION OPERATIONS

Consolidating freight is a simple way for shippers to net considerable cost


savings by finding a shared network that meets their transportation
requirements. Collaborative warehousing is the wave of the future as
shippers and consignees look to reduce inventories. The same holds true
for collaborative transportation. Load consolidation saves money in two
direct ways: it improves TL (truckload) utilization, resulting in lower costs
per shipment; and it converts LTL shipments into less expensive TL
shipments.

Beyond economy, working in a consolidation-minded transportation


network allows companies to tap into a greater pool of carriers, which is
critical when capacity ebbs and flows. Temperature-controlled
transportation is expensive and a robust national refrigerated LTL network
does not exist to support broad coverage. Gathering critical mass among a
local group of like companies serves a similar purpose. Finding peer and
third-party partners that can execute consolidation programs demands
willingness to collaborate and explore a common good. Smaller and
sometimes competing companies can work together to be more
competitive within a broader space.

Successful pooling or consolidation requires a higher level of customer,


manufacturer, and carrier communication than single shipments from one
manufacturer to a customer. Joint understanding of order lead times,
required delivery dates, specific customer requirements, and EDI
transactions is a must.

End customers are welcome beneficiaries, too. Holding vendors in


compliance to specific transportation requirements, be it a preference for
TL shipments or specific carriers, helps them meet their own inventory
replenishment needs. Consolidation offers a customer service advantage by
increasing the number and frequency of collective shipments to specific
customers or regions of the country. Buyers are equally engaged in
supporting their vendors' delivery needs. A small consolidation client
reaching out to a customer to see if it could realign delivery schedules and
seize an opportunity to consolidate freight and reduce costs is not
surprising anymore. Retailers know there is value in consolidation. From a
scheduling perspective, TL is more reliable than LTL. As with other logistics
fundamentals, embracing load consolidation as a best practice invites other
opportunities to affect change—sometimes to the point of breaking out
shipments even farther downstream to reap economies of scale.

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TRANSPORTATION OPERATIONS

Whether businesses are scaling supply to demand or balancing growth or


reduction options against available resources in a shared transportation
network, consolidation programs tap the collective whole to optimize the
individual parts. Be it shared pain or shared gain, businesses are finding
greater strength in numbers.

Activity O

❖How does consolidation offer an advantage to the end customer?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Activity P

❖What is consolidation and how does a pooled delivery add value to


consolidation?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Activity Q

❖How can pooling arrangements between competitors achieve logistical


efficiency?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

3.2.3 Negotiation
For any given shipment, it is the responsibility of the logistics department
to obtain the lowest possible rate consistent with service required. A RFQ
(Request for Quote) is a formal document, presented to a group of carriers,
requesting them to bid for the freight business. The advantage of this
approach is that the negotiating manager knows all the participants are
speaking the same language, so to speak. In the document, it is spelt out
about information of the company, its products, the volumes and
expectations. A bid completion date is specified, by which the carriers must
return the completed bid. Upon receipt of the completed bid, the offerings
are analyzed and decisions made.

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TRANSPORTATION OPERATIONS

The key principle of carrier rate negotiation is: volume is king, but
profitability is queen. A shipper with enormous volumes, can negotiate
from a position of strength.

3.2.4 Control: Fleet Management Systems


In recent times, to address problems in fleet management and the ever
expanding need to monitor usage of vehicles, commercial organizations
have designed automated control systems and other approaches to vehicle
management. Simple management systems can be designed in-house for
internal use to provide a good analysis of the vehicles and driver
performance. Recent research found that any break from driving reduces
risk in the hour following the break, but off-duty breaks produced the
largest reduction. This study also showed that when non-driving activities
(both work- and rest-related) were introduced during the driver's shift –
creating a break from the driving task – these breaks significantly reduced
the risk of being involved in a safety critical event during the 1-hour
window after the break. The benefits of breaks from driving ranged from a
30% to 50% reduction in risk with the greatest benefit occurring for off-
duty (non-working) breaks.

Vehicle management systems are also structured in a way that enables the
capturing of information on various aspects of fleet usage, maintenance
and operations. For example:

• distances travelled;
• destinations reached;
• distance travelled by vehicle showing official and private mileage;
• fuel consumption;
• repair and maintenance per vehicle;
• rate of consumption of spare parts; and
• servicing planned and completed.

The reports can be produced on a weekly, monthly or bi-monthly basis,


depending on the needs of the organization. Weekly reports may comprise
a summary weekly re-fuelling by vehicle – which may highlight any
exceptions to targets set per vehicle, whereas monthly reports may
comprise:

• summary re-fuelling by vehicle and average fuel consumption;


• summary mileage per vehicle;

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TRANSPORTATION OPERATIONS

• repairs or maintenance; and


• any accidents.

Activity R

❖How did the regulation on Hours of Service bring about a change in the
working conditions of the truck driver?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

3.2.5 Claim Administration and Auditing

Freight payment, billing and claims management allows shippers to audit


and pay freight bills for their shipments by uncoupling the operational
nature of shipping orders from the commercial process.

A claim is a charge made against a carrier for loss, damage, delay, or


overcharge. A claim is a demand in writing for a specific amount of money
that contains sufficient information to identify the shipment received by the
originating carrier, delivering carrier, or carrier on whose line the alleged
loss, damage, or delay occurred within the time limits specified in the
contract. A claim may be filed by the shipper, consignee, or the owner of
the goods.

In reference to freight bills, the term audit is used to determine the


accuracy of freight bills. Determining the correct transportation charges
due the carrier; auditing involves checking the freight bill for errors, correct
rate, and weight. Freight bills are automatically matched against bill of
lading details and audited based on user-defined percentage and/or
amount tolerances. Freight bills within tolerance are approved and
automatically interfaced to any Accounts Payables system for payment and
cost allocation.

Activity S

❖When does a shipper make a claim against the carrier?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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TRANSPORTATION OPERATIONS

Activity T

❖What is the purpose of auditing freight bills?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

3.3 Documentation

3.3.1 Bill of Lading


Bill of lading is a required document to move a freight shipment. The bill of
lading (BOL) works as a receipt of freight services, a contract between a
freight carrier and shipper and a document of title. The bill of lading is a
legally binding document providing the driver and the carrier all the details
needed to process the freight shipment and invoice it correctly. (Figure 4).

When a customer books a shipment, the bill of lading is automatically


generated based on the shipment details entered during the quoting and
booking process. The bill of lading should be provided to the carrier on
pickup and will be delivered to the consignee on delivery.

What is in a Bill of Lading?

• Shipper's and receiver's/consignee’s names and complete addresses.

• PO or special account numbers used between businesses for order


tracking.

• Special instructions for the carrier to ensure prompt delivery.

• The date of the shipment.

• The number of shipping units.

• Type of packaging, including cartons, pallets, skids and drums.

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TRANSPORTATION OPERATIONS

!
Figure 4: Bill of Lading

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TRANSPORTATION OPERATIONS

• A note if commodity is a Department of Transportation hazardous


material. Special rules and requirements apply when you are shipping
hazardous materials.

• A description of the items being shipped, include the material of


manufacture and common name.

• The freight classification for the items being shipped.

• The exact weight of the shipment. If multiple commodities are being


shipped, then the weight of each commodity is listed separately.

• The declared value of the goods being shipped.

3.3.2 Freight Bill


It is a bill rendered by a carrier to a consignee of freight and containing an
identifying description of the freight. The manifest provides details about
the items in each order, including the weight, volume, and quantity, the
name of the shipper, and the point of origin of the shipment.

The freight bill may be either prepaid or collect. A prepaid bill means that
transport cost is paid by the shipper prior to performance, whereas a
collect shipment shifts payment responsibility to the consignee.

3.3.3 Shipment Manifest


A shipping manifest is the details of shipment. A complete manifest shows
the contents, where the shipment came from and where it is going. A
shipping manifest can also include who signed for the package at drop off.
This can be very helpful if a dispute arises over when and if a package was
actually delivered. In addition to weight, volume, and quantity, it can
specify:

• The length, width, and height of each shipping unit


• Records for individual SKU numbers, including the weight, volume, and
freight class
• Hazardous material information
• Product qualifiers, such as commodity codes

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TRANSPORTATION OPERATIONS

3.4 Summary
Motor transport units may be used in direct support of tactical operations
or in intermodal operations. Truck companies function through various
types and methods of hauling while supporting movement requests created
by the supported units. Efficient use of resources is identified as of
importance to best practice as growing concern mounts over fuel cost and
availability. Freight strategy and industry practices are well focused to meet
currently understood demands of freight system efficiency. However, future
best practice planning will need to include a stronger emphasis on risk
management planning to cope with possible disruptions to reliability of
transport systems in times of shortages and price increase scenarios.

The challenge to organizations and the freight industry is to incorporate the


intent of relevant strategy into efficient operational systems aided by good
management. As transport systems often have source and destinations in
different regions, communication and alignment of strategy between
regions becomes equally important.

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TRANSPORTATION OPERATIONS

3.5 Self Assessment Questions

1. What is meant by Distribution Network?

2. Briefly explain the critical factors that drive Transportation costs.

3. Describe the difference between a rate and a rating. How do they relate
to classification?

4. What is the purpose of freight classification?

5. What is the basic concept of multi-vendor consolidation?

6. Compare reactive and proactive consolidation.

7. What is the role of the freight bill and the bill of lading in a
transportation transaction?

8. Write a short note on shipment manifest.

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TRANSPORTATION OPERATIONS

REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter

Summary

PPT

MCQ

Video Lecture - Part 1

Video Lecture - Part 2


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Chapter 4
OPERATIONAL INTEGRATION
Objectives

After going through the chapter, students should be able to understand:

• The integrated supply chain and its framework.

• The objectives of integration

• The integration enterprise and its functions and obstacles

• The SCOR Model and sales and operational Planning (S&OP)

• The processes and planning considerations of supply chain

Structure

4.1 Integrated Supply Chain Creates Value

4.2 The Integrated Supply Chain Framework

4.3 Objectives of Integration

4.4 Integrated Enterprise

4.5 SCOR (Supply Chain Operations Reference Model)

4.6 Supply Chain Processes

4.7 Sales and Operational Planning (S&OP)

4.8 Supply Chain Planning Considerations

4.9 Summary

4.10 Self Assessment Questions

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Introduction
Business strategy involves leveraging the core competencies of the
organization to achieve a defined high-level goal or objective. It also
includes the analytic and decision-making process surrounding what to
offer (e.g., products and services), when to offer (timing, business cycles,
etc), and where to offer (e.g., markets and segments) as a competitive
plan.

The reason for having value integration is to establish how you work with
your supply chain partners, including suppliers, distributors, customers,
and even your customers’ customers. As the marketplace becomes more
competitive, it is critical to reinforce existing relationships and work
together. And for all these reasons, a well executed value integration
results in value creation for the organization.

4.1 Integrated Supply Chain Creates Value

A truly integrated supply chain does more than reducing costs. It also
creates value for the company, its supply chain partners, and its
shareholders. The foundation of integration is information sharing.
Coordination is the next dimension. Then comes the organizational linkages
that enable sharing of risks, costs, and gains. There has been a drastic
increase in the pressure on organizations to find new ways to create and
deliver value to customers through SCM and marketing initiatives. The goal
of SCM and marketing integration is to create unique competitive
advantages by linking together customer values with a more effective flow
of products. The flow must always be refined and create customer value
proposition in a constantly changing market.

Competitive advantage from SCM emanates primarily from the dual-edged


sword of cost reduction and revenue enhancement (Green et al., 2006).
SCM evolved from a traditional focus on purchasing and logistics to a
broader, more integrated emphasis on value creation. According to
Kampstra et al. (2006), leading firms increasingly view SCM excellence as
more than just a source of cost reduction — rather, they see it as a source
of competitive advantage.

Integration of SCM and marketing decisions should be a prime concern for


firms. Supply chain actions should always be aligned with the business
strategy of the firm and include upstream (i.e., order processing) and

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downstream (i.e., demand management and customer service) activities in


order to facilitate the integration of the supply chain.

Following are the major drivers for SCM and marketing integration:

• Increased needs and requirements of the customers;

• Globalization of world economy;

• Increased competition, leading to higher thrust to lower prices;

• Standardized products and services; and

• Shorter product life cycles.

In today’s business environment, customer retention has become very


difficult in the face of fluctuating market demand. Expectations of
consumers about quality, innovation, prices, 24 × 7 services, etc., also
have increased manifold. It is necessary that organizations think again
about how front-end marketing should work alongside back-end operations
of supply chain and how marketing data should flow from the marketing
department to these departments and back for enhancing customer value
proposition. For products with short product life cycles, such as fashion
apparel, electronic gadgets, personal computers and automobiles, effective
integration of SCM (including production, inventory and logistics) and
marketing is very important. Increased level of competition and shorter
product life cycles make the link between SCM and marketing more critical.

In manufacturing and assembly, relevancy is achieved by integrating


specific components into products to increase functionality desired by a
specific customer. The customer’s take-away in terms of relevancy is a
unique product/service bundle.

The simultaneous achievement of economic value, market value, and


relevancy value requires total integration of the overall business process
and is known as the integrative management value proposition, as
illustrated in Table 4.1

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Table 4.1: Integrative Management Value Proposition


Economic Value Market Value Relevancy Value

• Lowest total cost • Attractive assortment • Customization


• Eonomy-of-scale • Economy-of-scope • Segmental diversity
efficiency effectiveness • Product/Service
• Product/service creation
 • Product/service positioning

presentation Market/
Procurement/
Manufacturing Strategy Distribution Strategy Supply Chain Strategy

Activity A

❖What are the benefits/values delivered to the customer on account of


integrated management?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

4.2 The Integrated Supply Chain Framework

Value results from the synergy among firms constituting a supply chain as
a result of five critical flows: information, product, service, financial, and
knowledge. It is imperative that every company specifically define the
functional responsibility of all departments within each of their
organizations. Integrating activities both within and beyond organizational
boundaries has become and will continue to be a major challenge for
supply chain executives. Integration efforts now extend beyond traditional
product-process design and functional integration to focus on extra-
organizational links with customers and suppliers. The object is to produce
"supply chain-enhanced" products and services. This eliminates any doubt
as to which department has responsibility for addressing any issues that
arise.

Supply chain integration focuses on two key issues – alignment and linkage
– both inside an organization and across organizations.

1. Alignment refers to common vision, goals, purposes and objectives


across organizations, functions and processes in the supply chain.

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Alignment ensures that there is consistency in the direction and


objectives as these plans and decisions are made.

2. Linkage refers to the communication and sharing of information needed


for planning and decision-making, and the interaction of people involved
in planning and decision-making. Linkage ensures that the information
necessary for decision-making is available, and that different functions
and entities in the supply chain are working with the same data as
decisions are made.

Supply chain integration (Figure 4.1) calls for every organization and
individual involved in the process to understand that they can all benefit
from their efforts. The supply chain is a multi-organizational team that
should be working together. Although the buyer has the most to gain, the
supplier’s and the transportation company’s observations can often lead to
improvement in the manner the supply chain functions. An integrated
supply chain should benefit all participants. Logistics is the primary conduit
of product and service flow within a supply chain arrangement.

The integrated supply chain brings together loosely linked groups of


independent businesses that buy and sell inventory to each other to a
managerially coordinated initiative to increase market impact, overall
efficiency, continuous improvement, and competitiveness. For example,
many individual firms simultaneously participate in multiple and
competitive supply chains in multiple arrangements which may confront
loyalty issues related to confidentiality and potential conflict of interest.


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OPERATIONAL INTEGRATION

!
Figure 4.1: Supply Chain Integration
Activity B

❖What do you understand by integration of supply chain?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

4.3 Objectives of Integration

To achieve logistical integration within a supply chain context, six


operational objectives must be simultaneously achieved: (1) rapid
responsiveness, (2) minimum variance, (3) minimum inventory, (4)
movement consolidation, (5) quality improvement, and (6) life cycle
support. The relative importance of each is directly related to a firm’s
logistical strategy.

4.3.1 Rapid Responsiveness


Rapid response is concerned with a firm's ability to satisfy customer service
requirements in a timely manner. Information technology has increased the
capability to postpone logistical operations to the latest possible time and
then accomplish rapid delivery of required inventory. The result is
elimination of excessive inventories traditionally stocked in anticipation of
customer requirements. Rapid response capability shifts operational

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emphasis from an anticipatory posture based on forecasting and inventory


stocking to responding to customer requirements on a shipment-to-
shipment basis. Because inventory is typically not moved in a time-based
system until customer requirements are known and performance is
committed, little tolerance exists for operational deficiencies.

Activity C

❖How can a timely response satisfy a customer’s requirement?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

4.3.2 Minimum Variance


Variance is any unexpected event that disrupts system performance.
Variance may result from any aspect of logistical operations. Delays in
expected time of customer order receipt, an unexpected disruption in
manufacturing, goods arriving damaged at a customer's location, or
delivery to an incorrect location – all result in a time disruption in
operations that must be resolved. Potential reduction of variance' relates to
both internal and external operations. Operating areas of a logistical
system are subject to potential variance. The traditional solution to
accommodating variance was to establish safety stock inventory or use
high-cost premium transportation. Such practices, given their expense and
associated risk, have been replaced by using information technology to
achieve positive logistics control. To the extent that variances are
minimized, logistical productivity improves as a result of economical
operations. Thus, a basic objective of overall logistical performance is to
minimize variance.

Activity D

❖How can a company minimize variance?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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4.3.3 Minimum Inventory


The objective of minimum variance involves asset commitment and relative
turn velocity. Total commitment is the financial value of inventory deployed
throughout the logistical system. Turn velocity involves the rate of
inventory usage over time. High turn rates, coupled with inventory
availability, means that assets devoted to inventory are being effectively
utilized. The objective is to reduce inventory deployment to the lowest level
consistent with customer service goals to achieve the lowest overall total
logistics cost. Concepts like zero inventories have been increasing as
managers seek to reduce inventory deployment. The reality of
reengineering a system is that operational defects do not become apparent
until inventories are reduced to their lowest possible level. While the goal
of eliminating all inventories is attractive, it is important to remember that
inventory can and does facilitate some important benefits in a logistical
system. Inventories can provide improved return on investment when they
result in economies of scale in manufacturing or procurement. The
objective is to reduce and manage inventory to the lowest possible level
while simultaneously achieving desired operating objectives. To achieve the
objective of minimum inventory, the logistical system design must control
commitment and turn velocity for the entire firm, not merely for each
business location.

Activity E

❖What do you understand by asset commitment and turn velocity?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

4.3.4 Movement Consolidation


One of the most significant logistical costs is transportation. Transportation
cost is directly related to the type of product, size of shipment, and
distance. Many logistical systems that feature premium service depend on
high-speed, small-shipment transportation. Premium transportation is
typically high cost. To reduce transportation cost, it is desirable to achieve
movement consolidation. As a general rule, the larger the overall shipment
and the longer the distance it is transported, the lower the transportation
cost per unit. This requires innovative programs to group small shipments

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for consolidated movement. Such programs must be facilitated by working


arrangements that transcend the overall supply chain.

Activity F

❖How can consolidation reduce transportation cost?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

4.3.5. Quality Improvement


A fifth logistical objective is to seek continuous quality improvement. Total
quality management (TQM) has become a major commitment throughout
all facets of industry. Overall commitment to TQM is one of the major
forces contributing to the logistical renaissance. If a product becomes
defective or if service promises are not kept, little, if any, value is added by
the logistics. Logistical costs, once expended, cannot be reversed. In fact,
when quality fails, the logistical performance typically needs to be reversed
and then repeated. Logistics itself must perform to demanding quality
standards. The management challenge of achieving zero defect logistical
performance is magnified by the fact that logistical operations typically
must be performed across a vast geographical area at all times of the day
and night. The quality challenge is magnified by the fact that most
logistical work is performed out of a supervisor's vision. Reworking a
customer's order as a result of incorrect shipment or in-transit damage is
far more costly than performing it right the first time. Logistics is a prime
part of developing and maintaining continuous TQM improvement.

Activity G

❖How can companies adhere to TQM?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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4.3.6 Life Cycle Support


The final logistical design objective is life cycle support. Few items are sold
without some guarantee that the product will perform as advertised over a
specified period. In some situations, the normal value-added inventory flow
toward customers must be reversed. Product recall is a critical competency
resulting from increasingly rigid quality standards, product expiration
dating and responsibility for hazardous consequences. Return logistics
requirements also result from the increasing number of laws prohibiting
disposal and encouraging recycling of beverage containers and packaging
materials.

The most significant aspect of reverse logistical operations is the need for
maximum control when a potential health liability exists (i.e., a
contaminated product). In this sense, a recall program is similar to a
strategy of maximum customer service that must be executed regardless
of cost. The operational requirements of reverse logistics range from lowest
total cost, such as returning bottles for recycling, to maximum
performance solutions for critical recalls. The important point is that sound
logistical strategy cannot be formulated without careful review of reverse
logistical requirements.

Some products, such as copying equipment, derive their primary profit


from selling supplies and providing aftermarket service. The importance of
service support logistics varies directly with the product and buyer. For
firms marketing consumer durables or industrial equipment, the
commitment to life cycle support constitutes a versatile and demanding
operational requirement as well as one of the largest costs of logistical
operations. The life cycle support capabilities of a logistical system must be
carefully designed. As noted earlier, reverse logistical competency, as a
result of worldwide attention to environmental concerns, requires the
capacity to recycle ingredients and packaging materials. Life cycle support,
in modern terms, means cradle-to-cradle logistical support.

Activity H

How did Johnson and Johnson undertake reverse logistics successfully?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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4.4 Integrated Enterprise

The supply chain of a manufacturing enterprise is a worldwide network of


suppliers, factories, warehouses, distribution centers and retailers through
which raw materials are acquired, transformed and delivered to customers.
In order to optimize performance, supply chain functions within the
organization must operate in a coordinated manner. But the dynamics of
the enterprise and the market make this difficult: bank rates change
overnight, political situations change, materials do not arrive on time,
production facilities fail, workers are ill, customers change or cancel orders,
etc. causing deviations from plan. In some cases, these events may be
dealt with locally, i.e., they lie within the scope of a supply chain function.
In other cases, the problem cannot be "locally contained" and modifications
across many functions are required.

4.4.1 Obstacles to Supply Chain Integration


A number of factors can impede external process integration along the
supply chain, causing information distortion, longer cycle times, stock-outs,
and bullwhip effect, resulting in higher overall cost and reduced customer
service capabilities.

Silo Mentality
In many instances, firms have not considered the impact of their actions on
the supply chain and its long-term competitiveness and profitability. Silo
mentality manifests itself in the form of using cheaper suppliers, paying
little attention to the needs of customers, and assigning few resources to
new products and service design. Eventually, these firms will create quality,
cost, delivery timing, and other customer service problems that are
detrimental to the supply chain. Cachon (2005), in his paper, describes silo
mentality as the most significant obstacle to overcome in supply chain
management of most companies.

Internally, the silo effect can also be present among departments. The
transportation manager for instance, may be trying to minimize total
annual transportation costs while inadvertently causing safety stocks to be
higher, shortages to occur, and customer service levels to deteriorate. To
overcome the silo mentality, the firm must strive to align supply chain
goals and the goals and incentives of the firm. Functional decisions must
be made while considering the impact on the entire firm’s profit and those
of the supply chain. Performance reviews of managers must include their

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ability to integrate processes internally and externally and to meet the


overall supply chain goals.

i. Organizational Boundaries: There are two kinds of boundaries in any


organization intra- and inter-organizational boundaries. These
boundaries should be removed for successful supply chain integration.

For successful supply chain integration, intra-and inter-organizational


boundaries should be removed.

Inter-organizational Boundaries: Overcoming the company boundaries


and working closely with suppliers and customers (i.e., functional, business
process, information/ materials flows, and information/communication
technology integration).

Intra-organizational Boundaries: Integration between different


discipline and functions, such as manufacturing, distribution, marketing,
accounting, information, and engineering is essential.

Each of these organizations has an operational responsibility, which is


reflected in its functional goals. The traditional belief was that functional
excellence would automatically equate to superior performance. In
integrated process management, it matters little how much is spent to
perform a specific function as long as process performance goals are
achieved at the lowest total cost expenditure. Successful integration of
processes requires that managers look beyond their functional boundaries
to achieve cross-functional integration. This may or may not require
organizational change. Regardless, successful process integration requires
significant traditional management behavioral modification.

Activity I

❖ How does a silo mentality affect process integration?

…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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ii. Lack of Supply Chain Visibility: In order to make flexible decisions in


daily operations in terms of supply chain visibility, information and
events in the supply chain must be visible and have to be analyzed.
Coordinated performance rating systems enable a company to
implement a supply chain strategy and consistently improve
performance management. Advanced information technologies and
concepts (e.g., track and trace, mobile computing, business intelligence
and analytics) are important for providing information in real time and
processing it to be used as a basis for the decision-making process.

Lack of information visibility along the supply chain is a common supply


chain process integration problem. In a 2002 survey, two-thirds of
manufacturers had not yet successfully synchronized their supply chain
operations with those of their trading partners (Cachon and Fisher, 2000).
Additionally, two-thirds of the respondents said they used different supply
chain management applications than their partners, which prevented
access to valuable external data, resulting in limited information visibility.

In the absence of supply chain visibility, trading partners have to carve out
data from their ERP (enterprise resource planning) or legacy systems and
then send it to one another where it then has to be uploaded to other
systems prior to the data being shared and evaluated, the time lost can
mean lost end customers and higher costs through the supply chain
membership.

iii. Lack of Trust: Successful process integration between partners


requires trust, as with silo mentality and lack of information visibility,
trust is seen as the major stumbling block in supply chain management.
Trust occurs over time between supply chain partners, as each
participant earns trust while it builds its reputations among the other
businesses.

Even though this sounds impossible, relationships employing trust result in


win-win for the participants. Spalding Holding collaborates with Wal-Mart,
resulting in win-win for both companies. Wal-Mart gives Spalding its
forecast and point-of-sale data, which allows Spalding to keep its inventory
levels down and serve Wal-Mart’s needs better. As a result, Wal-Mart stocks
out of Spalding goods less frequently and it now has a better
understanding of Spalding’s capacity and cost (Wisner et al., 2006).

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Unfortunately, company practices and human nature will not change


overnight. Until parties understand that it is in their own best interest to
trust each other and share information, supply chain management success
will be an uphill battle.

Activity J

❖What is the importance of information sharing in process integration?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

iv. Lack of Knowledge: Companies have been moving toward


collaboration and process integration for years, and it is just recently
that technology has caught up with this vision, allowing the process
integration across an extended supply chain. In a survey of 122
executives practicing supply chain management, 43% said lack of core
supply chain management skills and knowledge was the greatest
obstacle within their own organizations, and 54% echoed this opinion
for their trading partners. Getting the network of firms to work together
successfully, though, requires managers to use subtle persuasion and
education to get their own firm and their trading partners to do the right
things.

The cultural, trust, and process knowledge differences in firms are such
that firms successfully managing their supply chain must spend significant
amount of time influencing and increasing the capabilities of themselves
and their partners. Change and information sharing can be threatening to
people; they may fear for their job security, particularly if outsourcing
accompanies integration. Additionally, as firms construct their supply chain
information infrastructure, they may find themselves with multiple ERP
systems, a mainframe manufacturing application, and a desktop analysis
and design software that all need to be integrated both internally and
externally. Thus, firms must realize that the people to be using the system
must be involved earlier on, in terms of purchase decision, the
implementation process, and in training. For all organizations, successful
supply chain management requires a regiment of ongoing training. When
education and training are curtailed, innovation cannot occur, and
innovation fuels supply chain competitiveness (Wisner et al, 2006).

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v. Activities causing the Bullwhip Effect: Logistics practitioners and


academics have long been aware of the "bullwhip" phenomenon in
supply chains. As demand for a product filters back up the chain from
the consumer toward the original source of the component raw
materials, that demand becomes more and more erratic and swings in
larger and large cycles. These swings in demand often create excess
capacity, excess inventories, as well as poor customer service in the
supply chain.

Activity K

❖ What is the main cause of the bullwhip effect?

…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

4.4.2 Collaboration Extends the Enterprise

For the emerging discipline of supply chain management, senior leaders


embraced the challenges and opportunities of end-to-end integration by
adopting the supply chain business model. Within that model, three
important characteristics emerged:

1. The decade witnessed a head-on attempt to close the "Great Divide."


Supply chain integration was positioned and extended to include
customers and suppliers.

2. The concept of supply chain collaboration sparked an unprecedented


level of integration that extended beyond traditional enterprise
boundaries.

3. Supply chain alignment became a global concept extending across


geographically separated customer and suppliers.

Integration across the total supply chain began to achieve the end-to-end
efficiencies that many had anticipated. There were also some unintended,
but positive, consequences. For one thing, increased connectivity allowed
suppliers to become involved in new product innovation. Moreover,

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companies that gained more end-to-end visibility began to tap expertise


that previously had been excluded from activities that affected consumers.
The result was not only greater supply chain efficiency but also major
increases in effectiveness and customer relevancy.

As the decade unfolded, technologies that supported enterprise extension


enabled senior leaders to develop new business models to guide supply
chain integration. The earlier focus on cooperation and coordination was
expanded to include collaboration.

Companies that collaborate for successful supply chain execution have


three characteristics in common. First, they acknowledge their dependency.
Second, they are willing to share strategic information. And third, they
acknowledge and comply with cross-organizational leadership.

In many ways, the conceptual framework of the supply chain business


model developed faster than did its implementation. Many companies tried
to leapfrog the technology challenge by adopting enterprise resource
planning (ERP) systems. Their goal was to achieve integrated financials and
end-to-end operating systems that would be capable of guiding supply
chain globalization. Most got the financials they were after; few achieved
end-to-end operational integration.

Activity L

❖What were the changes brought about by collaboration in supply chain


integration?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

4.5 SCOR (Supply Chain Operations Reference Model)

One way to understand a supply chain is to use a process model. The


Supply Chain Council created the SCOR model which is a framework for
examining a supply chain in detail, defining and categorizing the processes
that make up the supply chain, assigning metrics to the processes, and
reviewing comparable benchmarks. Many companies use the SCOR model
to understand and improve their supply chains.

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These companies include aerospace and defense manufacturers, large


consumer product manufacturers, and third-party logistics providers. The
SCOR model is the only supply chain framework that links performance
measures, best practices, and software requirements to a detailed business
process model.

SCOR models integrate the well-known concepts of business process


reengineering, benchmarking, and process measurement into a cross-
functional framework. SCOR defines supply chain as the integrated process
of plan, source, make, deliver and return spanning suppliers’ supplier to
customers’ customer, aligned with operational strategy, material, work and
information flows.

Plan: Demand and supply planning and management are included in this
first step. Elements include balancing resources with requirements and
determining communication along the entire chain. The plan also includes
determining business rules to improve and measure supply chain efficiency.
These business rules span inventory, transportation, assets, and regulatory
compliance, among others. The plan also aligns the supply chain plan with
the financial plan of the company.

Source: This step describes sourcing infrastructure and material


acquisition. It describes how to manage inventory, the supplier network,
supplier agreements, and supplier performance. It discusses how to handle
supplier payments and when to receive, verify, and transfer product.

Make: Manufacturing and production are the emphasis of this step. Is the
manufacturing process make-to-order, make-to-stock, or engineer-to-
order? The make step includes, production activities, packaging, staging
product, and releasing. It also includes managing the production network,
equipment and facilities, and transportation.

Deliver: Delivery includes order management, warehousing, and


transportation. It also includes receiving orders from customers and
invoicing them once product has been received. This step involves
management of finished inventories, assets, transportation, product life
cycles, and importing and exporting requirements.

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Return: Companies must be prepared to handle the return of containers,


packaging, or defective product. The return involves the management of
business rules, return inventory, assets, and transportation.

Benefits of Using the SCOR Model


The SCOR process can go into many levels of process detail to help a
company analyze its supply chain. It gives companies an idea of how
advanced its supply chain is. The process helps companies understand how
the Five steps repeat over and over again between suppliers, the company,
and customers. Each step is a link in the supply chain that is critical in
getting a product successfully along each level. The SCOR model has
proven to benefit companies that use it to identify supply chain problems.
The model enables full leverage of capital investment, creation of a supply
chain road map, alignment of business functions, and an average of two to
six times return on investment, and regulatory requirements.

SCOR Spans

• All customer interactions, from order entry through paid invoice

• All product (physical material and service) transactions, from your


supplier’s supplier to your customer’s customer, including equipment,
supplies, spare parts, bulk product, software, etc.

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• All market interactions, from the understanding of aggregate demand


to the fulfillment of each order

SCOR does not attempt to describe following business process


or activities:

• Sales and marketing (demand generation)

• Research and technology development

• Product development

• Some elements of post-delivery customer support

• Links can be made to processes not included within the model’s


scope, such as product development

SCOR assumes but does not explicitly address:

• Training

• Quality

• Information Technology (IT)

4.6 Supply Chain Processes

Successful supply chain management requires a change from managing


individual functions to managing a set of integrated processes. In many
leading corporations, management has concluded that they cannot
optimize product flows without first implementing a process approach to
the business. The value of having standard business processes in place is
that managers from organizations across the supply chain can use a
common language and can link up their companies' processes with those of
the other supply chain members.

The eight key supply chain management processes identified by members


of The Global Supply Chain Forum are:

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1. Customer relationship management.


2. Customer service management.
3. Demand management.
4. Order fulfillment.
5. Manufacturing flow management.
6. Supplier relationship management.
7. Product development and commercialization.
8. Returns management.

1. Customer Relationship Management. The CRM process provides the


structure for how relationships with customers are developed and
maintained. Allows companies to prioritize their marketing focus on
different customer groups according to each group’s long-term value to
the company or supply chain.

2. Customer Service Management. The customer service management


process represents the company's face to the customer. Presents a
multi-company, unified response system to the customer whenever
complaints, concerns, questions, or comments are voiced.

3. Demand Management. Demand management is the process that


balances customer requirements with supply chain capabilities. Seeks to
align supply and demand throughout the supply chain by anticipating
customer requirements at each level and create demand-related plans
of action prior to actual customer purchasing behavior.

4. Order Fulfillment. This supply chain process encompasses all activities


necessary to define customer requirements, design a network, and
enable a firm to meet customer requests while minimizing the total
delivered cost. The objective is to develop a seamless system from the
supplier to the firm, and then on to the various customer segments.

5. Manufacturing Flow Management. Manufacturing flow management


includes all activities necessary to obtain, implement, and manage
manufacturing flexibility in the supply chain and to move products
through the production process.

6. Supplier Relationship Management. Closely related to the


manufacturing flow management process and contains several

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characteristics that parallel the customer relationship management


process.

7. Product Development and Commercialization. This supply chain


management process provides the structure for working with customers
and suppliers to develop products and bring them to market. Includes
the group activities that facilitates the joint development and marketing
of new offerings among a group of supply chain partner firms.

8. Returns Management. Enables firms to manage volumes of returned


product efficiently, while minimizing returns-related costs and
maximizing the value of the returned assets to the firms in the supply
chain.

Each of the eight supply chain management processes has both strategic
and operational elements - that is, a strategic element in which the firm
establishes and strategically manages the process and an operational
element in which the firm executes the process. The strategic elements
should be led by a management team comprised of representatives from
multiple functions including marketing and sales, finance, production,
purchasing, logistics, and research and development. This team is
responsible for developing the procedures at the strategic level and seeing
that they are implemented. The strategic team also identifies how the
external partners will be integrated into the supply chain. The operational
component of each process, where the day-to-day activities take place, is
executed by the managers within each functional area.

4.6.1 Supply Chain Visibility


Supply chain visibility (SCV) is the ability of parts, components or products
in transit to be tracked from the manufacturer to their final destination.
The goal of SCV is to improve and strengthen the supply chain by making
data readily available to all stakeholders, including the customer. SCV
technology promotes quick response to change by allowing privileged users
to take action and reshape demand or redirect supply.

4.6.2 Simultaneous Resource Consideration


If planning system visibility highlights resource status and availability, the
second planning system requirement is the need to simultaneously
consider supply chain demand, capacity, material requirements, and
constraints. Supply chain design must consider customer demand for

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product quantity, delivery timing, and location. While some of these


customer requirements may be negotiable, logistics must execute to the
agreed-to requirements and standards.

The constraints to meeting customer requirements are materials,


production, storage, and transportation capacity, which represent the
physical limitations of processes and facilities. Traditional planning methods
have typically considered these capacity constraints in a sequential
manner. For example, an initial plan is made that operates within
production constraints. The initial plan is then adjusted to reflect material
and sourcing constraints. This second plan is then revised to consider
storage and transportation constraints. While the processes and sequences
may be different, sequential decision-making results in suboptimal and
inferior planning and capacity utilization.

Achieving desired supply chain performance requires simultaneous


consideration of relevant requirements and capacity constraints to identify
trade-offs where increased functional costs, such as in manufacturing or
storage, might lead to lower total system cost. A planning system needs to
quantitatively evaluate the trade-offs and identify alternatives to enhance
overall performance.

Activity M

❖What are the constraints faced by companies while meeting customer


requirements and how can they circumvent them?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

4.6.3 Resource Utilisation


Logistics and supply chain management decisions influence many
enterprise resources, including production, distribution facilities and
equipment, transportation equipment, and inventories. These resources
consume a substantial proportion of a typical firm’s fixed and working
assets. Functional management must focus on resource utilization within
its scope of responsibility. For example, production management is focused
on minimizing plant and equipment resources required for manufacturing.
The typical result is long production runs requiring minimum setups and

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changeovers. However, longer production runs invariably result in more


finished inventory, as substantial quantities are manufactured in
anticipation of projected demand. Excess inventory increases working
capital requirements and space requirements. Extended production runs
also require longer-term and more accurate forecasts.

Activity N

❖How can incorrect resource utilization lead to a firm’s increased inventory


and losses thereby?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

4.7 Sales and Operational Planning (S&OP)

Sales and Operations Planning ties together your operational plan with your
strategic business plan, providing a holistic view of demand, supply, and
finance so that you can literally plan to profit. Sales & Operations Planning
provides a holistic framework for balancing demand with supply and
incorporates key financial measures to ensure the operational plan is
aligned with the strategic plan to produce the best possible business
results.

With multiple "what if" scenarios on both demand and supply, the best plan
to meet the customer service and financial goals can be identified,
responded more quickly to the changing landscape of demand, and
ensured the S&OP process remains strong throughout the business.

Designed for manufacturers and distributors, Sales & Operations Planning


works with conventional ERP and supply chain planning systems to deliver
information and process support to create a consensus plan among:

• Senior executives
• Demand planning managers
• Production managers

Finally, supply chain operations develop materials, manufacturing, and


logistics plans that can meet customer demands within the operating
constraints of the firm and its supply chain partners.

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Conflicts in Sales and Operations Planning


In most organizations, supply chain planning—the administration of supply-
facing and demand-facing activities to minimize mismatches and thus
create and capture value—is a cross-functional effort. In most cases, this
means that each functional area, such as sales, marketing, finance, and
operations, tends to specialize in its own portion of the planning activities.
Such specialization is notorious for generating conflicts over differing
expectations, preferences, and priorities with respect to how the matching
of demand and supply should be accomplished. (Figure 4.3).

The reconciliation of these conflicts is generally referred to as coordination.


Coordination in the operations management literatures generally assumes
some agreement in the assessment of the firm’s environment and on the
options available for an organizational response: the challenge centers on
the details of the organizational response. But supply chain planning
requires something more: cross-functional collaboration to assess the state
of the supply chain and the needs of the organization and then to
determine an approach for creating and sustaining value based on that
collaborative assessment. In other words, beyond coordination,
organizations must define the problem, ascertain the options available for
dealing with the problem, and create an agreeable solution with
collaboration across differentiated functions.

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Table. 4.3
Logistics and New Product
Manufacturing: Marketing
Distribution: Development

“We will require


“Sales are highly exc-essive
“I can guarantee
ove-rstated, we will “There’s a new overtime and
that this new
figure out what to promotion we need air freight to
product will fly out
decrease “ to do next week.” accomplish
of the warehouse
what is being
asked of us.”
Customer Supply Demand
Sales: Finance
planning Planning
“I will place
“We will need to “Our high forecast “Working capital
multi-ple orders
rapidly expand our accuracy error is is too high; We
to make sure
manufacturing not my fault — I need to reduce
my customer
capacity to just enter what inventory by
does not get
achieve the plan.” sales tells me.” 20%.”
shorted.”

Activity O

❖Write a brief note on Sales and Operations Planning.


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

While S&OP has significant information technology considerations, it is not


just an information technology application. It is a combination of
information systems, with significant elements of financial, marketing, and
supply chain planning elements, integrated with organizational processes,
responsibility, and accountability to develop consensus and execute
collaborative plans. Thus, an effective S&OP requires a blending of process
and technology with organizational collaboration. Figure 4.4 illustrates the
S&OP process developed from the firm’s internal and partner resource
constraints.

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!
Figure 4.3: S&OP Process


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Activity P

•Why is it important to plan in an S&OP process?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Activity Q

• Why do conflicts arise in spite of firm’s employing the S&OP process?

…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

4.7.1. Supply Chain Planning Applications


Supply chain planning is increasing in frequency and scope. Such
applications are evolving to consider a broader range of activities and
resources within the scope of supply chain planning. There are, however,
some applications common for most supply chain environments. These
include demand planning, production planning, and logistics planning.

1. Demand Planning
Demand planning and forecasting is a business process that involves
predicting future demand for products and services and aligning production
and distribution capabilities accordingly. It involves a number of different
business functions and requires the sharing of timely data, accurate
processing of this data and agreement on joint business plans along the
supply chain.

The process consists of three parts:

i. Demand forecasting: The creation of a projection for unconstrained


demand for a product or service over time.

ii. Demand planning: The development of a forecast that reflects known


constraints and any possible associated impacts that may occur as a
result of external events, capacity (either production or logistics)
or changing priorities.

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iii. Demand management: Influencing demand via the addition (or


cancellation) of activity, the increasing or reduction of price, or the
rationing or allocation of stock.

Increased Investment in Forecasting


Greater competition, more frequent new product launches and shorter
product life cycles have made forecasting increasingly complex.
Organizations themselves have also become more complex in the past
decade, and many now operate in a greater number of locations, business
units and markets. Unprecedented levels of economic uncertainty, which
have affected buying patterns and historical data, have added to this
complexity. Research highlights that the need to improve service levels and
reduce stockholding are the two biggest drivers to investment of resources
in the forecasting and demand planning process.

Key Demand Planning Challenges

According to research, there are three main obstacles facing the industry in
the area of forecast accuracy performance, as follows:

• Poor communication, for example, the late communication of changes in


promotional mechanics

• Insufficient internal collaboration and inadequate processes to manage


business and customer requirements

• A knowledge gap caused by issues such as a lack of a recognized


forecasting tool or process, promotional complexity and data integrity

Collaboration is Key
A lack of collaboration with trading partners is seen as a key frustration for
suppliers in the demand planning process. It indicates that despite efforts
to share information, this is not common practice across the industry, and
is not sufficient on its own.

The Way Forward


Flexibility in responsiveness and the robustness of integrated business
planning are important factors in delivering real-time, demand-led supply
chains, but companies need to take a more systematic approach to
demand planning and forecasting. There is a need to strive for deeper

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collaborative supply chain practices, both within organizations and with


trading partners. As such, developing collaborative supply chain practices
will drive business capability, optimize service levels, reduce wastage and
maximize on-shelf availability.

Activity R

❖What is the importance of forecasting in a demand management?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

2. Production Planning
The goal of production planning is to help you produce your products more
efficiently. Supply and demand plans need to be transformed into feasible
and meaningful production and purchasing plans and schedules. The
production planning process determines when a specific production order
needs to be produced and on which production line. It also takes into
account the availability of resources and components. Purchasing/
production orders are generated in time to decrease supply costs without
endangering the production process.

An effective production planning process supports the management and


synchronization of master production schedules, material and capacity
requirements, tactical maintenance needs, personnel resources as well as
the scheduling/ sequencing of jobs through the factory floor in order to
achieve business objectives (meet customer orders, contain/reduce cost)
within the supply chain constraints. It is one of the most critical processes
for controlling costs and achieving efficiency.

Although there has been a definite trend toward make-to-order (MTO) and
assemble-to-order (ATO) manufacturing, such response-based practices
are not always possible because of production technology, capacity,
resource constraints, or customer requirements. The limitations occur in
the form of facility, equipment, and labor availability.

Production planning identifies the items that should be produced in


anticipation of need to remain within production constraints and yet
minimize inventory.

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Activity S

❖What constraints are likely to be met by the production planning


department while executing a customer order?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

3. Logistics Planning
To ensure that the supply chain is operating as efficient as possible and
generating the highest level of customer satisfaction at the lowest cost,
companies have adopted logistical planning and associated technology.
Logistical planning has three levels of activities that different parts of the
company will focus on: strategic, tactical and operational.

• Strategic: At this level, company management will be looking to high


level strategic decisions concerning the whole organization, such as the
size and location of manufacturing sites, partnerships with suppliers,
products to be manufactured and sales markets.

• Tactical: Tactical decisions focus on adopting measures that will produce


cost benefits such as using industry best practices, developing a
purchasing strategy with favored suppliers, working with logistics
companies to develop cost-effective transportation and developing
warehouse strategies to reduce the cost of storing inventory.

• Operational: Decisions at this level are made each day in businesses


that affect how the products move along the supply chain. Operational
decisions involve making schedule changes to production, purchasing
agreements with suppliers, taking orders from customers and moving
products in the warehouse.

Logistics planning integrates overall movement demand, vehicle


availability, and relevant movement cost into a common decision support
system that seeks to minimize overall freight expense. The analysis
suggests ways that freight can be shifted among carriers or consolidated to
achieve scale economies. It also facilitates information sharing with carriers
and other service providers to enable better asset utilization.

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The increasingly strong focus on improved asset utilization in conjunction


with improved information management and decision analysis capabilities
and techniques has brought comprehensive planning systems to reality.
Effective planning requires a combination of information systems to provide
the data and managers to make decisions.

Activity T

❖ What is the kind of coordination that takes place between the logistics
department and its channel partners while devising a logistical plan?

…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

4.7.2. Advanced Planning and Scheduling (APS) System


Advanced planning and scheduling (APS) refers to a manufacturing
management process by which raw materials and production capacity are
optimally allocated to meet demand. APS is especially well suited to
environments where simpler planning methods cannot adequately address
complex trade-offs between competing priorities. Production scheduling is
intrinsically very difficult due to the (approximately) factorial dependence
of the size of the solution space on the number of items/products to be
manufactured. Temporal considerations include movement timing and
scheduling. (Figure 4.5).

APS uses, Finite Scheduling, a process that assumes a fixed maximum


capacity. It sequences jobs according to actual constraints the company
faces. It creates more realistic forecasts than infinite scheduling methods.
Improves the accuracy of the production process. Performs multiple data
passes to optimize plans and schedules.


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!
Figure 4.5: Advance Planning and Scheduling Overview

APS is a new revolutionary step in enterprise and inter-enterprise planning.


It is revolutionary, due to the technology and because APS utilizes planning
and scheduling techniques that consider a wide range of constraints to
produce an optimized plan:

• Material availability
• Machine and labour capacity
• Customer service level requirements (due dates)
• Inventory safety stock levels
• Cost
• Distribution requirements
• Sequencing for set-up efficiency

APS System Components

Demand Planning and Forecasting


Both statistical and time-series mathematics are used in this solution to
calculate a forecast based on sales history. A demand forecast is
unconstrained because it considers only what customers want and not what
can be produced. Based on the information from the forecast, it is possible
to create more demand through promotions in periods where the demand
is less than maximum production.

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Ideally, demand management works collaboratively and interactively both


internally across the firm’s functional components and externally with
supply chain partners to develop a common and consistent forecast for
each time period, location, and item. The forecast must also incorporate
feedback from customers to integrate the influence of combined demand
generation activities such as advertising and promotion.

Resource Management
The resource management component defines and coordinates supply
chain system resources and constraints. Since APS systems use the
resource and constraint information to evaluate the trade-offs associated
with supply chain decisions, information accuracy and integrity are critical
to provide optimal decisions and enhance planning system credibility.
Obviously, incorrect planning decisions not only sub-optimize supply chain
performance but also severely reduce management credibility in the
planning system itself. In addition to the requirements definition developed
by the demand management module, APS requires four other types of
information: product and customer definitions, resource definitions and
costs, system limitations, and planning objective.

The product and customer definitions provide constants regarding the


firm’s products and customers to support the planning process. The
product definitions provide the product descriptions and physical
characteristics, such as weight and cube, standard costs, and bill of
material. The customer definitions provide the ship-to location and
distribution assignments, along with special service requirements. The
combination of both defines what is being manufactured, what is being
distributed, where it is being delivered, and the performance cycles
involved in distribution.

The resource definitions specify the physical resources used to accomplish


supply chain activities such as manufacturing, storage, and movement
capacities. The resources include manufacturing equipment and process
rates, storage facilities, and transportation equipment and availability. In
addition to defining the existence of specific resources, the database must
include the performance characteristics and costs associated with resource
usage.

System limitations define major supply chain activity constraints. These


include the capacity limitations associated with production, storage, and

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movement. Production capacity defines how much product can be produced


within a specific time period and what are the trade-offs associated with
making various mixes of products. Storage capacity defines the amount of
product that can be stored in a specific facility. Movement capacity defines
the volume of product that can be transported between facilities or to
customers within a given time frame.

The planning function defines criteria for developing a solution. Typical


objective functions include minimizing total cost or any of its
subcomponents, meeting all customer requirements, or minimizing the
number of instances when capacity is exceeded.

This combination of demand management and resource management


information provides the basis for the APS evaluation of alternative supply
chain strategies. The module includes the databases to store the
definitions, resources, constraints, and objectives as well as the processes
to validate and maintain it. Users are finding that one of the major
challenges to effective supply chain planning systems is the ability to
develop and maintain accurate and consistent data.

The resource optimization module is the computational engine or “black


box” of the supply chain planning system. Using the requirements from the
demand management module and the definitions, resources, limitations,
and objectives from the resource management module, resource
optimization uses a combination of mathematical programming and
heuristics to determine how to most effectively meet customer
requirements while optimizing resource utilization. In effect, the resource
optimization module evaluates multiple planning alternatives and
systematically computes the trade-offs to identify the best alternatives
until a near-optimal result is achieved. The resource optimization module
also determines when requirements cannot be met and which resources
are the most constraining on supply chain performance. The resource
optimization module results are supply chain plans projected into future
time periods that minimize overall costs while attempting to operate within
major resource constraints. The plan specifies which products should be
produced when and determines movement and storage requirements
across the supply chain.

The resource allocation module specifies the resource assignments and


communicates them to the ERP system to initiate appropriate transactions.

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The results include requirements for procurement, production, storage, and


transport. The specific requests can be communicated to the ERP system in
the form of transactions or instructions to complete a specific activity. Each
transaction includes detailed instructions regarding type of supply chain
activity, suppliers, customer, products involved, and required timing, along
with a list of relevant products and quantities. The resource allocation
module also provides information regarding when product is available to
promise (ATP) or capable to promise (CTP).

ATP is used to designate that even though actual inventory is not currently
available, it will be available for shipment or promise at a specific date in
the future. CTP is used to designate when requested product can be
promised for future delivery. ATP and CTP can dramatically enhance supply
chain performance and effectiveness by allowing commitments against
future production and capacity. The result is more rapid commitments to
customers, fewer customer surprises, and enhanced resource utilization.

Activity U

•What are the APS Systems components? Write 2-3 lines on each of their
functions.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Supply Chain Planning Benefits


There are three broad benefits that accrue from planning system
utilization. These are responsiveness to changes, comprehensive
perspective, and resource utilization.

First, logistics and supply chain managers have used extended lead times
and schedule freezes to plan for future supply chain activity. For example,
production would be scheduled three to four weeks into the future and
then frozen to minimize uncertainty and allow for effective resource
utilization. Long lead times and freeze periods were necessary since the
planning process was complex and required substantial analyzes. While this
approach reduced uncertainty, it also substantially reduced flexibility and
responsiveness. Today’s customer requires more responsiveness to market
needs, and demand for lower inventory levels rules out long cycle times.
Marketplace and firm changes can be quickly made in the demand

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management and resource management modules, allowing for the


planning process to use the most current and accurate information. The
requirements optimization module then solves the allocation, allowing daily
and single week planning cycles rather than multiple weeks or months.
Supply chain planning thus results in a process that can be much more
responsive to marketplace or firm changes.

Second, effective supply chain management requires planning and


coordination across firm functions and between supply chain partners. The
process must consider the trade-offs associated with shifting activities and
resources across functions and organizations. Such a comprehensive
perspective increases planning process complexity substantially. The
complexity follows from the number of organizations, facilities, products,
and assets that must be considered when coordinating activities and
resources across an entire supply chain. Supply chain planning systems
offer the capability to consider the extended supply chain and make the
appropriate trade-offs to achieve optimal performance.

Third, supply chain planning typically results in substantial performance


improvements. While more comprehensive planning and reduced
uncertainty usually result in improved customer service, another major
planning system benefit is enhanced resource utilization. More effective
and responsive planning allows a more level assignment of resources for
existing sourcing, production, storage, and transportation capacity. The
result is that existing capacity is used more effectively.

Activity V

•How can managers respond to changes in demand for an effective supply


chain management?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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4.8 Supply Chain Planning Considerations

Supply chain planning can take a comprehensive and dynamic perspective


of the entire supply chain and focus on reducing the supply chain asset
requirements as demanded by financial markets. Prior to the actual
implementation, there are many considerations for supply chain planning
system adoption. The major considerations are: (1) integrated versus bolt-
on application, (2) data integrity, and (3) application education.

1. Technically, there are three options for acquiring and implementing


planning applications. The first is development using internal firm
resources. Options two and three are to use a supply chain planning
application that is integrated with the firm’s ERP system or one from a
third-party that bolts on to the firm’s ERP system.

2. Data integrity is a second major consideration for supply chain


planning system implementation. Planning systems rely on absolute
data integrity for effective decision- making. Missing and inaccurate
data can dramatically impact decision reliability and stability. For
example, missing or inaccurate cube can result in a transportation
planning system making a recommendation to overload a transportation
vehicle. Overloading transportation vehicles or storage facilities cause
management and planners to question the integrity of the entire
planning system and process.

3. Education regarding supply chain execution and planning systems has


usually focused on the mechanics to initiate the transactions. So, the
user would be trained in data or parameter entry where the system
would provide quick feedback regarding the acceptability of the entry.
For example, changing the requirements or forecast for one item in a
time period may shift production schedules for related items on the
other side of the world. Understanding planning system dynamics is
critical to successful application. Such understanding requires thorough
knowledge of APS system mechanics and system interactions. Although
such knowledge can be initiated through training, it must be refined and
extended through education and experience.

Planning system education must focus on the characteristics and


relationships between supply chain management activities and processes
both internal and external to the firm. The education process must be

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much broader than existing training approaches. Planning system


experience can be developed by using job shadowing experience and
simulations. The shadowing environment provides actual on-the-job
experience in a real-time environment. The simulated environment
provides a laboratory where inexperienced planners can see or observe the
results of their planning environment at low risk to the firm. The
combination of these two educational experiences provides a solid
foundation for implementing successful supply chain planning applications.

Activity W

❖Why is it necessary for the user to be educated and trained in the


planning systems for implementing successfully the supply chain
applications?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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4.9 Summary

By analyzing the definition of integrated logistic support, it was possible to


identify the necessary conditions for an integrated logistics model. From
these necessary conditions, a model of the management functions and
technical activities was constructed to suggest the purpose and place of all
logistics functions to work in an integrated way towards the goal of the
organization. The chapter suggested that logistics engineering and
business logistics are both required in the organization and that it is of vital
importance that these functions are executed in unison.

The time has come to accept integrated logistic support as the only
definition for total logistics involving both management and technical
activities. In order to be competitive, management needs to closely
integrate all functions of the organization. Logistics in itself has no
purpose. Logistics supporting an organization in an integrated way provides
an impetus to achieving the goal, MAKING MONEY.

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4.10 Self Assessment Questions

1. How can SCM create a competitive advantage to an organization?

2. What is considered as value in an integrated supply chain process?

3. Why is supply chain integration considered a challenge to implement?

4. What do you understand by a “Supply Chain Network”?

5. What are the limitations that need to be overcome for successful


integration?

6. How does lack of visibility affect the supply chain process?

7. Why does trust play such an important part between supply chain
partners?

8. How do reward systems serve as barriers to enterprise integration?

9. What creates power in the context of supply chain collaboration?

10.What is the process that aligns raw material and production to meet
demand?


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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter

Summary

PPT

MCQ

Video Lecture - Part 1

Video Lecture - Part 2


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GLOBAL STRATEGIC POSITIONING

Chapter 5
GLOBAL STRATEGIC POSITIONING
Objectives

After going through the chapter, students should be able to understand:

• The factors for making global supply chain integration effective.

• The identification of risks while securing the supply chain

• The rationale and challenges related to sourcing from low-cost countries.

Structure

5.1 Global Supply Chain Integration

5.2 Supply Chain Security

5.3 Global Sourcing

5.4 Summary

5.5 Self Assessment Questions

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Introduction
In a global and competitive environment, supply chain relationships and
processes must be continuously integrated and aligned with strategy. The
objective should be to improve the efficiency and effectiveness of supply
chains to create value for final consumers. Global Supply Chain
Management (GSCM) focuses on planning and forecasting, purchasing,
product assembly, moving, storing, and keeping track of a product as it
flows around the world from suppliers and producers to distributors to
retailers and on to you and other consumers.

GSCM makes it possible to build and deliver products better, faster, and
cheaper. Supply chain managers have a tremendous impact on the success
of an organization. These managers are engaged in every facet of the
business process – planning, purchasing, production, transportation,
storage and distribution, customer service, and more! In short, these
managers are the "glue" that connects the different parts of the
organization. Their performance helps organizations control expenses,
boost sales, and optimize profits.

5.1 Global Supply Chain Integration

Global integration goes beyond worldwide presence to provide the visibility


and control needed to respond rapidly to global market dynamics and
achieve the highest level of operating efficiency and cost-effectiveness.
(Figure 5.1).

Whereas an effective logistics system is important for domestic supply


chain integration, it is absolutely essential for successful global
manufacturing and marketing. Domestic logistics focuses on performing
value-added services to support supply chain integration in a somewhat
controllable environment.

Global logistics must accommodate operations in a variety of different


national, political, and economic settings while also dealing with increased
uncertainties associated with the distance, demand, diversity, and
documentation of international commerce. Like traditional, supply chain
management, the underlying factors behind the trend are reducing the
costs of procurement and decreasing the risks related to purchasing
activities. The big difference is that global supply chain management
involves a company's worldwide interests and suppliers rather than simply

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a local or national orientation. Because global supply chain management


usually involves a plethora of countries, it also usually comes with a
plethora of new difficulties that need to be dealt with appropriately. One
that companies need to consider is the overall costs. While local labor costs
may be significantly lower, companies must also focus on the costs of
space, tariffs, and other expenses related to doing business overseas.
Additionally, companies need to factor in the exchange rate.

In the past, an enterprise could survive by operating with a unique North


American, European, or Pacific Rim (China, India, Hong Kong, Japan,
Korea, Singapore, and Taiwan) business strategy. While regionalization
remains viable for some firms, those which desire to grow and prosper are
facing the challenges of globalization. Strategic business initiatives must
change as a firm and its supply chain become progressively more global.
The migration from a fragmented, multi-vendor environment to a single
supply chain partner has significantly enhanced global execution and
visibility, resulting in lower operating costs, faster time-to-market and
reduced risk for the client.

!
Figure 5.1: Global Supply Chain Integration

The effects of a company seeking globalization are far reaching. Managing


the “supply chain” becomes a key focus as international operations must
be able to source equivalent supplies anywhere in the world. Motwani et al.
(1998) believe that global supply chain management “allows corporations
to take advantage of diversity in the international environment by
recognizing and exploiting regional differences’’. Business information,
including order details, inventory levels, directives and product changes,
must be communicated to the people who need it, when they need it,
wherever they are. A good example of a global attitude is at Ford Motor

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GLOBAL STRATEGIC POSITIONING

Company. Their “global car” concept consists of a basic engineering design,


accompanied by regional variations to suit local tastes.

5.1.1 Global Economy and Logistics


International trade is becoming a bigger part of the world's economic
activity. Supply chains success is closely linked to the appropriate use of
transportation. Supply chain also use responsive transportation to
centralize inventories and operate with fewer facilities. To understand the
transportation in a supply chain, it is important to consider the perspective
of all parties involved. A carrier makes investment decisions regarding the
transportation equipment (locomotives, trucks, airplanes, etc.) and in some
cases infrastructure (rail) and then makes operating decisions to try to
maximize the return from these assets.

A shipper, in contrast, uses transportation to minimize the total cost


(transportation, inventory, information, sourcing and facility) while
providing an appropriate level of responsiveness to the customer.

Supply chain use a combination of various modes like air, package carriers,
trucks, rails, water, pipelines and Intermodal for the transportation
purpose. Logistics firms operate with considerable specialized knowledge
on the movement of goods, the use of information, and the organization of
supply chains, all of which are particularly complex in the case of
international shipments. The logistics industry also plays a pivotal role in
the contemporary global economy by enabling cross-border coordination of
production and making possible the seamless flow of commodities globally.

In terms of complexity global operations, in contrast to domestic, are


characterized by increased uncertainty and decreased ability to control.
Uncertainty results from greater distances, longer lead times, and
decreased market knowledge.

These unique challenges complicate development of an efficient and


effective global supply chain strategy. Fortunately, there are forces that
both drive and facilitate globalization and necessitate borderless logistics
operations.


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Activity A

❖Why global operations are considered complex in supply chain


integration?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

5.1.2 International Operations: Local Presence


The second stage of international development is characterized by
establishment of operations within a foreign country. Internal operations
include combinations of marketing, sales, production, and logistics.
Establishment of local facilities and operations serves to increase market
awareness and sensitivity. This is often referred to as gaining local
presence. At the outset of a local presence strategy, foreign operations
typically use parent company management and personnel, and practice
home country values, procedures, and operations.

While firms and supply chains are trying to increase product velocity in the
supply chain to lower cost by reducing product storage time and damage,
the transit times and border delays characteristic of global logistics
constrain product velocity. Extended transit times and exposures in-transit
increases the product risk for intentional or unintentional damage as well
as reducing velocity and ultimate flexibility. However, over time, business
units operating within a foreign market area will adopt local business
practices.

Activity B

❖What are the complexities involved for a company which is doing its
business overseas?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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5.1.3 Globalization: The Stateless Enterprise


These are enterprises that effectively make decisions with little regard to
national boundaries. In these, even though historically they have a country
foundation, a high percentage of its sales, ownership and assets are
outside the country of origin, e.g., ABB Switzerland, ICI Britain, Nestle
Switzerland, Phillips Netherlands, etc.

Managers are able to identify and evaluate alternative strategies and have
the authority for implementation. Search for alternative materials, logistics
service providers, manufacturing plants, warehouses, customer alliances,
etc. There is a need to develop and implement flexible systems and
procedures. Product sourcing and marketing decisions can be made across
a wide range of geographical alternatives. Systems and procedures are
designed to meet individual country requirements and are aggregated as
necessary to share knowledge and for financial reporting. It is actually
through the levels of global integration that the global logistics
perspectives vary.

The Stateless Enterprise contrasts sharply to operations guided by either


an export/import or international perspective.

Activity C

❖Write a short note on a ‘Stateless enterprise’.


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

5.1.4 Managing the Global Supply Chain


With increased globalization and offshore sourcing, global supply chain
management is becoming an important issue for many businesses. Like
traditional supply chain management, the underlying factors behind the
trend are reducing the costs of procurement and decreasing the risks
related to purchasing activities. The big difference is that global supply
chain management involves a company's worldwide interests and suppliers
rather than simply a local or national orientation.

Because global supply chain management usually involves a plethora of


countries, it also usually comes with a plethora of new difficulties that need
to be dealt with appropriately. One that companies need to consider is the

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overall costs. While local labor costs may be significantly lower, companies
must also focus on the costs of space, tariffs, and other expenses related
to doing business overseas. Additionally, companies need to factor in the
exchange rate. Obviously, companies must do their research and give
serious consideration to all of these different elements as part of their
global supply management approach. Time is another big issue that should
be addressed when dealing with global supply chain management. The
productivity of the overseas employees and the extended shipping times
can either positively or negatively affect the company's lead time, but
either way these times need to be figured into the overall procurement
plan. Other factors can also come into play here as well. For example, the
weather conditions on one side of the world often vary greatly from those
on the other and can impact production and shipping dramatically. Also,
customs clearance time and other governmental red tape can add further
delays that need to be planned for and figured into the big picture. Besides
contemplating these issues, a business attempting to manage its global
supply chain must also ask itself a number of other serious questions. First,
the company needs to make decisions about its overall outsourcing plan.
For whatever reason, businesses may desire to keep some aspects of
supply chain closer to home. However, these reasons are not quite as
important as other countries advance technologically. For example, some
parts of India have now become centers for high-tech outsourced services
which may once have been done in-house only out of necessity. Not only
are provided to companies by highly qualified, overseas workers, but they
are being done at a fraction of the price they could be done in the United
States or any other Western country. Another issue that must be
incorporated into a global supply chain management strategy is supplier
selection. Comparing vendor bids from within the company's parent-
country can be difficult enough but comparing bids from an array of global
suppliers can be even more complex. How to make these choices is one of
the first decisions companies must make, and it should be a decision firmly
based on research. Too often companies jump on the lowest price instead
of taking the time to factor in all of the other elements, including those
related to money and time which were discussed above. Additionally,
companies must make decisions about the number of suppliers to use.
Fewer supplies may be easier to manage but could also lead to potential
problems if one vendor is unable to deliver as expected or if one vendor
tries to leverage its supply power to obtain price concessions. Finally,
companies who choose to ship their manufacturing overseas may have to
face some additional considerations as well. Questions regarding the

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GLOBAL STRATEGIC POSITIONING

number of plants that are needed, as well as the locations for those plants
can pose difficult logistical problems for companies. However, it often helps
to examine these issues in terms of the global supply chain. For example, if
a business uses a number of vendors around Bangalore, India than it may
make sense to locate the manufacturing plant that would utilize those
supplies in or around Bangalore as well. Not only will this provide lower
employee costs, but overall shipping and tariff expenses should also be
reduced. This would then save the company’s money.

Activity D

❖What are the challenges faced by companies in a global supply chain


management?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Transportation
The procurement and distribution of goods has been significantly influenced
by the globalization and liberalization of markets. With the advent of trade
liberalization and the emergence of economies such as Brazil, Russia, and
India, global supply chains within many industries have and continue to
change drastically. Distribution and supply networks must be reconfigured
and re-optimized as a result of mergers and acquisitions taking place in
this new economic environment.

Transportation plays a central role in global supply chain operations,


moving inbound materials from supply sites to manufacturing facilities,
repositioning inventory among different plants and distribution centers, and
delivering finished products to customers. Benefits that should result from
world-class operations at the points of supply, production, and customer
locations will never be realized without the accompaniment of excellent
transportation planning and execution. Having inventory positioned and
available for delivery is not enough if it cannot be cost effectively delivered
when and where needed.

To remain competitive on a truly global stage, companies are looking for


new partners that can generate savings in operating costs and they are
finding them in Asia, notably. This practice, sometimes called "offshoring"
or "global sourcing" often results in trading savings in operating cost for

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increases in transportation, inventory and handling costs. Companies are


also increasingly focusing on their core competencies, be it the
manufacturing or assembly of goods (e.g., the auto industry) or the design
and marketing of products (e.g., Nike). Those core competencies seldom
include the supply and distribution of goods, and these activities are
therefore increasingly outsourced to third-party organizations that
specialize in logistics, namely 3PLs.

Activity E

❖What do you understand by the terms “offshoring” and “global sourcing”?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Operational Considerations
Operations and Supply Chain services focus on helping customers develop
integrated operations by identifying and quantifying improvements to
enable strategic change necessary to achieve competitive advantage and
value for the organization from suppliers to the customer.

There are a number of unique operational considerations in a global


environment. First, international operations typically require multiple
languages for both product and documentation. A technical product such as
a computer or a calculator must have local features such as keyboard
characters and language on both the product itself and related manuals.
From a logistics perspective, language differences dramatically increase
complexity since a product is limited to a specific country once it is
language customized.

Although English is the general language of commerce, some countries


require that transportation and customs documentation be provided in the
local language. This increases the time and effort for international
operations since complex documents must be translated prior to shipment.
These communication and documentation difficulties can be somewhat
overcome through standardized electronic transactions.
The second operational difference in global commerce is unique national
accommodations such as performance features, power supply
characteristics, and safety requirements. While they may not be

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GLOBAL STRATEGIC POSITIONING

substantial, the small differences between country requirements may


significantly increase required SKUs and subsequent inventory levels.

The third operating difference is the sheer amount of documentation


required for international operations. While domestic operations can
generally be completed using only an invoice and bill of lading,
international operations require substantial documentation regarding order
contents, transportation, financing, and government control.

The fourth operating difference is the high incidence of countertrade and


duty drawback found in some international situations. While most
established firms prefer cash transactions, countertrade is important.
Countertrade, in essence, is when a seller agrees to take or purchase
products from the buyer as part of a sales agreement.

Activity F

❖What are the limitations encountered in international operations?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Systems Integration
Global Supply Chain Integration is, above all, about integrating data feeds
to provide a holistic view of the system performance. The choice of a
centralized or distributed SC infrastructure should not be driven by
technology but rather by real business needs.

Operational integration requires the ability to route orders and manage


inventory requirements electronically throughout the world. Development
of supportive technology integration represents substantial capital
investment.

Alliances
A final difference in international operations is the extended role of third-
party alliances. While alliances with carriers and specialized service
suppliers are important in domestic operations, they are essential in
international commerce. Without alliances, it would be necessary for an
enterprise operating internationally to maintain contacts with retailers,
wholesalers, manufacturers, suppliers, and service providers throughout

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the world. International alliances offer market access and expertise and
reduce the inherent risk in global operations. The number of alternatives
and the complexity of the globalization require increased use of alliances.
Globalization is an evolving frontier that is increasingly demanding supply
chain integration. As the international businesses develops, the demand for
logistical competency increases due to longer supply chains, less certainty,
and more documentation. While the forces of change push toward
borderless operations, supply chain management still confronts market,
financial, and channel barriers. The barriers are exemplified by distance,
demand, diversity, and documentation. The challenge is to position an
enterprise to take advantage of the benefits of global marketing and
manufacturing by developing world-spanning logistical competency.

Activity G

❖What is the importance of system integration especially in international


alliances?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

5.2 Supply Chain Security

While globalization, extended supply chains, and supplier consolidation


offer many benefits in efficiency and effectiveness, they can also make
supply chains more brittle and can increase risks of supply chain
disruption. Historic and recent events have proven the need to identify and
mitigate such risks. The March 2011 Tohoku earthquake and subsequent
tsunami in Japan showed how one event can disrupt many elements of
global supply chains, including supply, distribution, and communications. In
extreme cases, a single event at one location can severely damage an
enterprise or even cause it to leave an industry.

Effective supply chain risk management (SCRM) is essential to a successful


business. It is also a competence and capability many enterprises have yet
to develop. In some areas, both problems and practices are well defined.
In others, problems are defined, but practices are developing. In still other
areas, both the definition of the problems and the practices needed to
address them are developing. In sum, SCRM is an evolving field.

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Approaches for identifying, evaluating, treating, and monitoring supply


chain security will differ across individual enterprises depending on their
industry, the nature of their extended supply chains, and their tolerance for
risk (or risk appetite). Therefore, rather than prescribing a specific
approach to SCRM, there are guidelines and possible approaches an
organization may wish to consider, including examples of tools other
organizations have used. Specific enterprises will adapt the concepts to fit
their unique characteristics and expand the depth and breadth of the
processes to meet the requirements of their organizations.

Enterprises may inadvertently overlook internal risks. These may include


those posed by a rogue employee, as well as those posed by inadequate
policies, strategies, or organizational structures. The external environment
in which an enterprise, and its suppliers, must work will also pose differing
risks. For example, some suppliers will face meteorological risks, while
others, because of their distance, may have greater transportation risks.
Mapping its supply chain can help an enterprise identify the risks it faces
and how best to prioritize and address them. To prioritize and address
risks, firms will need to identify criteria for determining what may pose a
risk to its operations. One potential starting point is the supply chains for
the products most affecting firm’s profitability.

Once a firm understands how to identify risks, it may undertake risk


identification and assessment, which includes risk identification, risk
analysis, and risk evaluation. Risk identification may entail using a list of
common risks including external risks such as natural disasters, accidents,
sabotage, or labor uncertainty; supplier risks such as production problems,
financial issues, or subcontractor problems; distribution risks such as cargo
damage, warehouse inadequacies, or supply pipeline constrictions; and
internal risks such as personnel availability or facility unavailability. Such
process will also involve prioritizing risks by the threat (as measured by
likelihood and consequence) they can pose to a firm’s operations.

Once a firm has identified and prioritized the risks that it faces, it can
devise risk treatment plans. This includes measures to protect the supply
chain from risks, plans to respond to events that these risks may cause,
and plans to continue operations in the face of disruptions and fully
recovering from them. This may also involve determining ways to measure
risks and the effectiveness of plans to limit them or to respond to
disruptions. Enterprises must also undertake continual communication and

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consultation as well as monitoring and review throughout this process.


Monitoring and review entails not only evaluating the effects of risk
treatment but also maintaining the plan and responding to changes in
suppliers, processes, and regulation affecting elements of the supply chain.
It also entails continually identifying opportunities for improvement.

Activity H

❖How essential is it for organizations to secure their supply chains?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

5.3 Global Sourcing

Several factors have made crafting a supply chain and sourcing strategy a
central focus for firms, including rapid changes in demand for products and
services, the globalization of the economy, and the availability of advanced
planning and communication tools for coordinating the activities of supply
chain participants.

Majority of companies today strive to harness the potential of global


sourcing in reducing cost. Hence, it is commonly found that global sourcing
initiatives and programs form an integral part of the strategic sourcing plan
and procurement strategy of many multinational companies.

Common examples of globally sourced products or services include: labor-


intensive manufactured products produced using low-cost Chinese labor,
call centers staffed with low-cost English speaking workers in the
Philippines and India, and IT work performed by low-cost programmers in
India and Eastern Europe. While these examples are examples of low-cost
country sourcing, global sourcing is not limited to low-cost countries.

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5.3.1 Low-cost Country Sourcing (LCCS)


Low-cost country sourcing (LCCS) is procurement strategy in which a
company sources materials from countries with lower labor and production
costs in order to cut operating expenses.

Low-cost country sourcing has grown significantly, especially in the current


economic scenario of intense competition and spiraling raw material costs
in the manufacturing sector. Great value can be realized from a strategic
plan to source products and services from these countries by using global
sourcing services. Countries which offer a low-cost environment and are
considered to be ideal for sourcing opportunities are China, South East Asia
(especially Vietnam and Thailand) India, Brazil and Turkey. Implementing
programs in these economically emerging regions has helped companies
across the world grow their revenues.

Although cost savings remains the top reason for companies to focus on
emerging markets and LCCR, the other reason is the competitive edge,
which these companies can enjoy. They can successfully carve substantial
markets for themselves by offering the products in the local markets as
well.

Activity I

❖How does sourcing from suppliers of low-cost countries help in global


competitiveness?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

5.3.2 Low-cost Country Sourcing (LCCS) – Challenges


In the current economic climate of spiraling costs and intense competition
in almost every market segment, the question facing procurement
executives is not whether to source goods and/or services from low-cost
countries, but what to source, how much of it, and when to start. To start
with, companies should consider what their core competences are, and
consider the risk of, e.g., supply interruptions, cost variations stemming
from currency fluctuations, and issues related to intellectual property.

While the advantages of low-cost sourcing might entice worldwide


companies, only experienced procurement professionals can warn you

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about potential pitfalls and the obstacles that might prevent them from
achieving the desired benefits. Major risks when sourcing in low-cost
countries are unreliability of quality and delivery. The increased
globalization of supply chains and the prevalent use of subcontract
manufacturing and offshore sourcing can potentially lengthen lead times
and hence lead to a loss of competitiveness.

Apart from the hunt for capable suppliers, a number of cultural and political
differences might keep companies away from establishing contacts in the
country they choose. Language remains a major issue and is accompanied
by the problems related to norms, standards and specifications which you
want to convey to the supplier. Labor quality, business license limitations,
project management challenges and technical capabilities in the supply
base also play an important role in determining LCC sourcing success.
Although legislations in most of these countries are evolving rapidly to
protect copyrights and patents, companies will need to be warned about
IPR (International Property Rights) risks when you are choosing vendors in
any of these nations.

Activity J

❖What are the risks involved in low-cost country sourcing?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

5.3.3 Sourcing Guidelines

A manufacturing company should consider opportunities to improve


efficiency at home and not only consider the offshore alternative in
isolation. Furthermore, products should always be designed so that
production costs can be minimized.

It is also important to separate the offshore decision from the outsourcing


question. As Preston (2004) argues, to go offshore does not automatically
mean outsourcing. When planning for a change, managers should separate
the “what” question from the “how” question. For some companies, it could
be better to run the factory by themselves in the foreign country. The
economics of different alternatives must therefore be assessed and core
activities identified.

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To balance the risks in different countries, the authors suggest a portfolio


approach where a large number of criteria are considered; maturity and
stability of the nation’s infrastructure, political characteristics, size of the
domestic market and local demand, currency risk, climate and weather
patterns, language skills, management training, and cultural
characteristics. Furthermore, long-term trends that may affect the criteria
should be considered.

Furthermore, there is a need for further understanding of supply chain cost


trade-offs between cost and flexibility. ‘An understanding of the relative
levels of premium transportation costs required to sustain supply-chain
agility and inventory levels in the face of disruptions is an important
research requirement.’ (Blackhurst et al., 2005).

Building trust in relationships appears to be an important requirement for


successful global sourcing. This is also discussed by Spekman and Davis
(2004), who argue that the key to managing risk effectively in a supply
chain is trust building between supply chain members. For example,
mitigating risk through increased visibility requires that the supply chain
members are willing to share information. Trust is needed for this.

Lee and Wolfe (2003) suggest six risk mitigation strategies:

1. Comprehensive tracking and monitoring

2. Total supply chain network visibility

3. Flexible sourcing strategies (i.e., single sourcing is perhaps not always


good)

4. Balanced inventory management (a buffer can sometimes be good – JIT


not always the solution)

5. Product and process design (e.g., postponement)

6. Demand based management (e.g., Dell sells only what is available)

These models provide a comprehensive list of factors to consider when


companies source their products or services globally and help us
understand the concept of global sourcing.

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Activity K

❖ What are the difficulties faced by companies who source products


globally?

…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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5.4 Summary

Global operations are becoming more of the norm for logistics and supply
chain executives. Decisions regarding global sourcing and marketing
require more complex trade-off analyses than traditionally required for
domestic logistics. Both the quantitative and qualitative factors are more
complex. While transportation, inventory, and warehousing costs are very
substantial for global operations, other cost components, including taxes,
tariffs, duties, documentation, and import restrictions, can also have a
substantial impact on true total cost. However, in addition to the
quantitative considerations, international operations introduce a number of
other variables that are much more difficult to quantify. Many of these
variables relate directly to logistics operations. The major qualitative
considerations include relationship management, infrastructure
consistency, production and transit reliability, and security. With increased
global marketing and manufacturing operations, logistics management
needs to be more involved in developing and implementing global
strategies.

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5.5 Self Assessment Questions

1. What are the primary factors of an effective global supply chain


integration?

2. Discuss the logistics operational considerations for operating in a global


environment.

3. What is the importance of a supply chain in a global economy?

4. How do companies establish a local presence in a foreign country?

5. Discuss the rationale and challenges related to sourcing from low-cost


countries.

6. What is the “portfolio approach” as a guideline for sourcing?

7. How can risks be identified while securing the supply chain?


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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter

Summary

PPT

MCQ

Video Lecture


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Chapter 6
NETWORK INTEGRATION
Objectives

After going through the chapter, students should be able to understand:

• The integration of Supply chain network.

• The various functions and activities required for successful


implementation of supply chain management systems.

• The importance of each functions in network integration.

Structure

6.1 Enterprise Facility Network


6.2 Location Decisions
6.3 Local Facilities
6.4 Warehouse Requirements
6.5 Total Cost Integration
6.6 Transportation Economics
6.7 Inventory Economics
6.8 Total Network Cost
6.9 Cost Minimization
6.10 Threshold Service
6.11 Service Sensitivity Analysis
6.12 Inventory Model of Immediate and Delayed Delivery
6.13 Summary
6.14 Self Assessment Questions

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Introduction
The supply chain is a network of suppliers, factories, warehouses,
distribution centers and retailers through which raw materials are acquired,
transformed and delivered to the customer. Supply chain management is
the strategic, tactical and operational level decision-making that optimises
supply chain performance. The strategic level defines the supply chain
network, i.e., selection of suppliers, transportation routes, manufacturing
facilities, production levels, warehouses, etc. The tactical level plans and
schedules the supply chain to meet actual demand. The operational level
executes plans. Tactical and operational level decision-making functions are
distributed across the supply chain.

In order to optimise performance, supply chain functions must operate in


an integrated manner. But the dynamics of the enterprise and the market
make this difficult; materials do not arrive on time, production facilities fail,
workers are ill, customers change or cancel orders, etc. causing deviations
from plan. In some cases, these events may be dealt with locally, i.e., they
lie within the scope of a function. In other cases, the problem cannot be
"locally contained"; modifications across many functions are required.
Consequently, the supply chain management system must coordinate the
revision of plans/schedules across supply chain functions.

To exploit flexibility, an enterprise needs to achieve a high level of logistical


process integration. Integration is required at two operating levels. First,
the operating areas of logistics must be integrated across a network of
facilities supportive of market distribution, manufacturing, and
procurement requirements. Such network integration is essential if a firm
is using logistical competency to gain competitive advantage. Second,
integration must extend beyond a single firm by supporting relationships
across the supply chain.

6.1 Enterprise Facility Network

The geographic placement of production facilities, stocking points, and


sourcing points is the natural first step in creating a supply chain. The
location of facilities involves a commitment of resources to a long-term
plan. Once the size, number, and location of these are determined, so are
the possible paths by which the product flows through to the final
customer. These decisions are of great significance to a firm since they
represent the basic strategy for accessing customer markets, and will have

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a considerable impact on revenue, cost, and level of service. These


decisions should be determined by an optimization routine that considers
production costs, taxes, duties and duty drawback, tariffs, local content,
distribution costs, production limitations, etc. Although location decisions
are primarily strategic, they also have implications on an operational level.

Alfred Weber generalized location theory from an agrarian to an industrial


society. "Weber's theoretical system consisted of numerous consuming
locations spread over a geographical area and linked together by linear
weight-distance transportation costs. Weber developed a scheme to classify
major materials as either ubiquitous or localized. Ubiquitous materials were
those available at all locations. Localized raw materials consisted of mineral
deposits found only at selected areas. On the basis of his analysis, Weber
developed a material index. This was the ratio of the localized raw material
in the weight of the finished product. Various types of industry were
assigned a locational weight based on the material index. Utilizing these
two measures, Weber generalized that industries would locate facilities at
the point of consumption when the manufacturing process was weight-
gaining and near the point of raw material deposit when the manufacturing
process was weight-losing. Finally, if the manufacturing process were
neither weight-gaining nor weight-losing, firms would select plant locations
at an intermediate point.

6.2 Location Decisions

In a discrete facility location problem, the selection of the sites where new
facilities are to be established is restricted to a finite set of available
candidate locations. It refers to choosing the locations for distribution
centers, warehouses, and production facilities to facilitate logistical
effectiveness and efficiency. The major factors influencing decisions are
markets and resource availability; most facilities are located near one or
the other. Labor and transport services are two other key factors in facility
location. Also, advantages in technology and communications have had
considerable influence on locational decisions in recent years.

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6.3 Local Facilities

Facility location has a long-term impact on the supply chain and must be
part of the firm’s strategy. Companies can locate anywhere in the world
due to increased globalization, technology infrastructure, transportation,
communications, and open markets. Location still matters as clusters in
many industries show that innovation and competition are geographically
concentrated.

Customers fell that unless a supplier maintained inventory within the local
market area it would be difficult, if not impossible, to provide consistent
delivery. This perception, commonly referred to as the local presence
paradigm, resulted in inventories being maintained in a numerous local
markets. Some firms went so far as to have full-line inventory warehouses
located near all major sales markets.

It is always difficult to break tradition which became a part of successful


economic strategy. However, in 70-80 years, economic aspects and the
risks connected with the concept of local presence, have been subjected
radical revision. To it have pushed two large technological changes. First,
thanks to development and expansion of a complex of transport services
reliability and predictability of delivery have much more increased. Delivery
of cargoes within days from the warehouses placed on distance of
800-1000 miles from destination became usual practice. As a rule, the less
than distributive warehouses serve the certain market, the less stocks it is
required for maintenance of a basic level of service.

Secondly, new information technology has reduced time necessary for


revealing and transfer of inquiries of consumers. New technologies have
opened popular economic possibilities for the organization of continuous
control over movement of vehicles and by that have allowed to adjust
reliable and exact information interchange about deliveries.

Thus, and modern ways of transportation, both information technology,


and principles of economic storekeeping simultaneously induce to
reduction, instead of to increase in number of the distributive warehouses
used for service of consumers in this or that geographical area. That fact
that similar structure of logistical capacities contradicts the settled dogmas
about presence in the local market, often disturbs to acceptance of the
most effective logistical decisions. In many cases, conviction of consumers

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that quality of service is guaranteed only by presence in the market, still


pushes to decentralization of stocks.

Activity A

❖What is the importance of transportation in relevance to location of


plants and warehouses?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

6.4 Warehouse Requirements

When it comes to choosing the right warehouse management system


(WMS) for your business, it is important to understand your warehouse
needs and the benefits of having an integrated WMS before starting the
selection process.

Warehouse efficiency is a critical success factor to effectively managing


your supply chain and achieving peak performance. Implementation of the
latest technologies can significantly improve warehouse operations,
employee productivity and customer satisfaction. By installing the right
system and realigning how your warehouse interacts with your employees,
customers, and vendors, you can streamline your warehouse operations
while achieving a high return on investment.

It allows your company to benefit from increased inventory handling


accuracy and reduced carrying costs associated with obsolete and slow-
moving stock. Because of specialized materials handling and inventory
process requirements, warehouses typically specialize in performing either
supply or demand facing services. Warehouses committed to supporting
manufacturing are typically located close to the factories they support; in
contrast, warehouses dedicated to marketing distribution are typically
strategically located throughout the geographical market area serviced.

The availability of new technologies and increased market demands are


driving rapid change in many industries as well as trends such as rising
customer expectations, increased competitive pressure, and dropping
margins. Introducing new or improved automation management

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technology to your warehouse can be a powerful tool for increasing


competitiveness in a challenging market.

Activity B

❖What are the functions of a warehouse in the logistical systems?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

6.4.1 Procurement Drivers


Procurement, also known as purchasing, is the process of acquiring raw
materials, components, products, services, and other resources necessary
either for the production processes themselves or for the support of
production processes. Procurement processes ensure that supplies are
available in the right place, in the right quantity, and at the right time.

Procurement drivers center on using warehouses to help purchase


materials and components at the lowest total cost. Sophisticated
purchasing executives have long realized that the combination of purchase
price, quantity discount, payment terms, and logistical performance is
required to achieve lowest delivered cost. In an effort to develop and
support improved working relationships, most firms have reduced the
number of suppliers they do business with. The logic is to develop a limited
number of relationships with suppliers who can be operationally integrated
into a firm's supply chain. The goals of relationship buying are to eliminate
waste, duplication, and unplanned redundancy. In an effort to improve
overall operating efficiency, life cycle considerations have become
prominent in purchase decisions. This relational dynamic of working with
limited suppliers is based on a cradle-to-grave philosophy. The relationship
is positioned to focus on all aspects of life cycle spanning from new product
development to reclamation and disposal of unused materials and unsold
product inventory.

Such a life cycle focus is the result of distinct buying practices that directly
impact the nature and functionality of supply faced warehousing. Value-
added services related to procurement are increasingly being de-bundled
from the purchase price. Such de-bundling facilitates functional absorption
and spin-off between manufacturers and their suppliers. There is also a

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trend toward more response-based business strategies which is redefining


expectations concerning supplier support and participation in the value-
added process. The result is new structural relationships, such as tier one
suppliers and lead facilitators.

Finally, the seasonality of selected supplies, opportunities to purchase at


reduced prices, and the need to rapidly accommodate manufacturing
spikes continue to make selected warehousing of materials a sound
business decision.

Activity C

❖Describe the role of a Procurement Manager.


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

6.4.2 Manufacturing Drivers


There are two types of warehouses in the manufacturing process:
production-and sales-focused warehouses. Semi-finished products are
stored in production-oriented warehouses. These warehouses are created,
in particular, as a result of insufficient synchronization between successive
production processes. Finished parts or component groups are located in
sales-focused production warehouses. Such warehouses are created as the
result of strategic production decisions concerning whether and to what
extent parts for order-related, finished products should be produced and
temporarily stored before an order is received.

In addition, the different types of warehouses fulfill different functions.


Manufacturing-focused warehouses perform a balancing, sorting and
security function. Sales-focused warehouses fulfill a flexibility, delivery-
time-reducing and substitution function. If you run a manufacturing
business, an on-site central warehouse can make use of existing land and
put your production facility close to your inventory and distribution center,
removing the need to transport goods from one to the other. A single
warehouse can represent major savings, especially if you choose a location
where land or existing warehouse space is inexpensive and one that is
central to your customers for faster and easier shipping.
The primary determinant of the warehousing required to support
manufacturing is the specific production strategy being implemented. The

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extent of demand faced warehousing can be directly linked to the support


requirements of each manufacturing strategy. In a general sense, MTO
(make to order) manufacturing strategies require supply facing
warehousing support but little, if any, demand facing storage. Conversely,
MTP (make to plan) manufacturing strategies, which focus resources to
achieve maximum manufacturing economy of scale, require substantial
demand facing warehouse capacity.

Activity D

❖What are the advantages of having a warehouse at the point of


manufacture?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

6.4.3 Market Distribution Drivers


Market support warehouses create value by providing inventory
assortments to wholesalers and retailers. A warehouse located
geographically close to customers seeks to minimize inbound
transportation cost by maximizing consolidation and length of haul from
manufacturing plants followed by relatively short outbound movement to
final destination customers, faster throughput and more workflow agility in
their warehouses, and they are able to satisfy customer demands while
lowering logistics costs. The geographic size of a market area served from
a support warehouse depends on the desired service speed, size of average
order, and cost per unit of local delivery. A large number of market
distribution warehouses are operated as public or contract facilities by
third-party logistics service providers. Regardless of who operates the
warehouse, the facility exists to provide inventory assortment and
replenishment to customers. A warehouse is justified if it offers a way to
achieve a competitive service or cost advantage.

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6.4.4 Rapid Replenishment


Market distribution warehouses have traditionally provided assortment of
products from varied manufacturers and various suppliers for retailers. A
retail store typically does not have sufficient demand to order inventory in
large quantities directly from wholesalers or manufacturers. A typical retail
replenishment order is placed with a wholesaler who sells a variety of
different manufacturer products.

Market support warehouses are common in the food and mass


merchandise industries. The modern food distribution warehouse usually is
located geographically near the retail stores it services. From this central
warehouse, consolidated product assortments can rapidly replenish retail
inventories because of the close geographical proximity. Large retail stores
may receive multiple truckloads from the warehouse on a daily basis.
Location of the warehouse within the market served is justified as the least
cost way to rapidly replenish an assortment of inventory to either an end
customer or a retailer.

Activity E

❖Why are warehouse sometimes located near the place of markets?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Market-based ATO
Assemble-to-order is a manufacturing strategy where parts and sub-
assemblies are produced-to-stock, while the final assembly of products is
delayed until customer orders have been received. This strategy allows
manufacturers to achieve a high degree of product variety and quick
product delivery while keeping low inventories. Companies also deploy a
strategy known as forward inventory deployment, which ensures that the
SKUs (stock keeping units) that account for the majority of sales revenue
are closest to key market demand points to minimize order turnaround
time which is an important competitive advantage. In other words, if 80+
% of the sales revenue is derived from a small subset of SKUs, then
position these SKUs closest to their demand points so that customers can
be serviced as quickly as possible.
Because of the highly competitive market, performance measures such as
order service level and fill rate have become the most critical performance

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measures of assemble-to-order systems, and therefore, almost all research


efforts in studying assemble-to-order systems have somehow focused on
the effects of system parameters on order fulfillment.

An increasing amount of ATO operations are performed in market-


positioned warehouses as contrasted to centralized manufacturing
locations. Assembly in close proximity to major markets allows the benefits
of postponement while avoiding the high cost and time related to long-
distance direct shipment.

Activity F

❖What do you understand by forward inventory deployment?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

6.5 Total Cost Integration

Economic forces such as transportation and inventory determine a firm's


most appropriate network of warehouse facilities. This discussion identifies
cost trade-offs related to transportation and inventory followed by
integration to identify the least total cost facility network.

6.6 Transportation Economics

Transport economics is a branch of economics founded in 1959 by


American economist John R. Meyer that deals with the allocation of
resources within the transport sector. The key to achieving economical
transportation is summarized in two basic principles.

1. Quantity principle is that individual shipments should be as large as the


carrier can legally transport in vehicle.

2. Tapering principle is that large shipments should be transported


distances as long as possible.

Both these principles serve to spread the fixed cost related to


transportation over as many pounds and as many miles as possible.

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Economies of transportation consolidation may justify establishment of a


single warehouse or may be achieved across a network of warehouses.

Activity G

❖Explain the quantity principle and tapering principle.


…………………………………………………………………………………………………………………………
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…………………………………………………………………………………………………………………………

6.6.1 Warehouse Justification


Though keeping inventory at any stage of the supply chain has well-known
costs, inventory and the warehouses that maintain stocks serve many
necessary purposes. Finished goods inventory ensures that customer
demand is met, regardless of market uncertainty and volatility in today’s
competitive environment. The same can be said for raw materials
warehouses that ensure that inputs are readily available for manufacturing.
Whether warehouses are truly necessary is becoming an issue of debate.
Information technologies and just-in-time delivery systems are reducing
the necessity of maintaining vast amounts of inventory. Fewer warehouses
must be utilized under these considerations, lessening the “evil”, costly
nature of their existence.

Economic benefits of warehousing occur when overall logistics costs are


reduced. For example, if adding a warehouse in a logistical system reduces
overall transportation cost by an amount greater than required investment
and operational cost, then total cost will be reduced. When total cost
reductions are achievable, the warehouse is economically justified. Five
basic economic benefits are: (1) consolidation and break bulk, (2)
assortment, (3) postponement, (4) stockpiling, and (5) reverse logistics.

Warehouse service can provide benefits through enhanced revenue


generation. When a warehouse is primarily justified on service, the
supporting rationale is that sales can be increased, in part, by such
logistical performance. It is typically difficult to quantify service return-on-
investment because it is difficult to measure. For example, establishing a
warehouse to service a specific market may increase cost but should also
increase market sales, revenue, and potentially gross margin. Warehouses
can provide service as a result of spot stocking, full line stocking, product
support, and market presence.

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The basic economic principle justifying establishment of a warehouse is


also transportation consolidation. Manufacturers typically sell products over
a broad geographical market area. The customer often perceives that
warehouses located close to their operations, having market presence, will
be more responsive to their needs. As a result, it is expected that nearby
warehouses will increase sales and gain market share as customers in the
vicinity choose the close, responsive warehouse operator. There is also the
promotional value of having a presence within a market.

Activity H

❖Why would a warehouse be described as a “necessary evil”?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

6.6.2 Allocating Costs in a Collaborative Transportation


Procurement Network
Due to increased pressure to operate more efficiently and satisfy ever
increasing demand from customers for better service, companies are
forced to realize that suppliers, consumers, and even competitors can be
potential collaborative partners. Thus, many companies employ
collaborative practices such as group purchasing and capacity and
information sharing in order to reduce system-wide inefficiencies and cut
operational costs. Especially, recent developments in communications
technology enable companies to consider a range of opportunities that
become possible by collaborating with others.

In a traditional truckload logistics market, the shipper submits its freight


requests to several carriers and negotiates terms with them. These
requests consist of multiple lanes to be serviced. A lane corresponds to a
shipment delivery from the origin to the destination with a full truckload.
On the other hand, a carrier collects the freight requests from several
shippers and offers prices based on its existing lane network and the lanes
it is anticipating to get by the time of service.
The shipper procures the transportation service from the carrier that offers
the lowest price for the shipper’s freight request. A key aspect that affects
the carrier’s operational cost is asset repositioning. Asset repositioning,
equivalently deadheading, is an empty truck movement from a delivery

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location to a pickup location. Carriers often have to reposition their assets


to satisfy the demands of different shippers. Asset repositioning decreases
the capacity utilization of the carrier, which results in an increase in
operational costs.

Total transportation cost (Figure 6.1) will also initially decline as


warehouses are added to the logistical network. In actual operations, a
consolidation location can be a warehouse or a cross-dock facility offering
transportation break bulk. It is not necessary to stock inventory in a
warehouse to achieve the lowest transportation cost. The reduction in
transport cost results from consolidated volume shipments to the break
bulk location, coupled with short haul small shipments to final destination.

!
Figure 6.1: Transportation Cost as a Function of the Number of
Warehouse Locations

If facilities are expanded beyond the maximum consolidation point, total


cost will increase, because the inbound volume capable of being
consolidated to each facility decreases. The increased frequency of smaller
inbound shipments results in a higher cost per hundredweight for
shipments into the facility. In other words, as the frequency of small
inbound shipments increases, total transportation cost increases.

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6.7 Inventory Economics

Inventory refers to the stock of materials of any kind stored for future use,
mainly in the production process. Semi-finished goods, which are awaiting
use in the next process, or finished goods, which are waiting for sale, are
also included in this broad category. But these are practically idle
resources. Thus, inventories are materials/resources of any kind having
some economic value, either awaiting conversion or use in future.

Inventory is a key determinant of profitability. Inventory velocity turns


assets into profits. The faster inventory turns, the greater the profitability.
Inventory is the key issue to supply chain management success.
Customers demand that their orders be shipped complete, accurate and on
time. That means having the right inventory at the right place at the right
time. Excess of inventory within the pipeline increases the overall working
capital requirements of the pipeline and places a large cost burden on the
agents of the chain. The levels of inventory need to be reduced throughout
the logistics pipeline, which will lead to an effective operation.

Role and Importance of Inventory


Inventory is critical to supply chain management because it directly
impacts both cost and service. Certain amount of inventory is inevitably
required somewhere in the chain to provide adequate service to the end
customer, as demand is mostly uncertain and it takes time to produce and
transport product. Inventory typically generates an incremental cost of
20% to 40% per year for the company. Increasing supply chain inventories
typically increases customer service and consequently revenue, but it
comes at a higher cost.

Management of inventory is a powerful driver of financial performance.


Improper management of inventory leads to slow growth and pressure on
profitability. Thus, companies aim at improving the efficiency of inventory
cycle. This helps the firm from locking up of capital, which can be invested
elsewhere, and improve financial performance and create competitive
advantage in delivering goods at lower prices.
Today, inventory investment is viewed as a supply chain cost driver rather
than a material asset. Hence, a lean supply chain operating on material
requirement planning (MRP), distribution requirement planning (DRP), or
Just-in-time (JIT) system are preferred to ensure maximum inventory
turns (ratio of sales to average inventory), reduction of cost on inventory

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investments, and enhancement of the bottom line and return on


investments.

Reasons for Carrying Inventories


Inventory management is an area which has strategic importance in
logistics operation and thus impacts the efficiency and effectiveness of the
overall supply chain system. In order to get over the uncertainties in
demand and supply, goods need to be kept in stock. This is because the
cycle of production and consumption never matches. However, higher
inventory levels will affect the bottom line of the company. It is important
to strike a balance between the two extreme goals of lower cost and higher
levels of customer service, as it is a high risk and high impact area.

Inventory level in a logistical system directly relates to the location


network. The framework for planning inventory deployment is the
performance cycle. Although one element of the performance cycle is
transportation, which provides spatial closure, the key driver of inventory
economics is time. The forward deployment of inventory in a logistical
system potentially improves service response time. Such deployment also
increases overall system inventory, resulting in greater cost and risk.

Inventory consists of:

• Base stock
• Safety stock
• In-transit stock

6.7.1 Base Stock


As it relates to inventory control, base stock is the minimum inventory that
must be maintained in order for a business to operate with maximum
efficiency. Sometimes known as normal stock, the idea is to keep the
inventory as small as possible, thus reducing storage expenses and also
tax liability. At the same time, keeping the base stock within reason
requires creating an ordering schedule that ensures that essential stock,
such as raw materials and replacement parts for operating machinery,
always arrive before those resources are completely exhausted. Doing so
means there is no interruption in production due to a lack of stock, and no
profits lost because something essential was not on hand when required.

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One of the most important concepts in maintaining a proper base stock is


known as usage. In this setting, usage is simply understanding how quickly
a business operation consumes a given stock item. The idea is to maintain
enough on hand to meet that need, but also to reorder that item so that
new units are received just before they are needed.

6.7.2 Safety Stock


It is a stock that is kept on hand as a buffer in the event of an expected
problem with supply or an increase in demand. Companies use supplies of
safety stock to reduce the risk that they will sell out and not have stock
available for customers who want to buy it. Calculating the amount of stock
to keep in the form of reserve inventory is a delicate balance because
companies do not want to keep unused stock on hand, but they also do not
want to run short.

With a well-organized inventory system, companies know approximately


what the demand levels are like under normal circumstances, and they
know about the lead time required to get new supplies in. When stock falls
below a certain level, an order can be sent out to refill it. By the time the
order arrives, the stocks are usually critically low and the new stock bumps
the levels back up to ensure that enough will be available.

Activity I

❖Why are safety stocks or buffer stocks necessary?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

6.7.3 In-transit Inventory


In-transit inventory generally refers to the goods that have not yet made it
from one company to another. This wholesale-to-retail transaction can
sometimes take a significant amount of time to occur, especially when it
involves the shipping of a large quantity of goods overseas from a
manufacturer to either a wholesale supplier or directly to a retailer.

Transit inventory can sometimes create accounting and inventory


conundrums for companies that fail to effectively track items being shipped
from one location to another. Often referred to as "inventory in transit,"
these goods are typically the goods being sold from one company to

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another, many times from a wholesaler to a retailer who will then resell the
items.

Technically, goods in transit belong to the party holding legal ownership.


Ownership depends on the F.O.B. terms. Goods sold F.O.B. destination do
not belong to the purchaser until they arrive at their final destination.
Goods sold F.O.B. shipping point become property of the purchaser once
shipped by the seller. (Figure 6.2).

Therefore, when determining the amount of inventory owned at year end,


goods in transit must be considered in light of the F.O.B. terms. In the case
of F.O.B. shipping point, for instance, a buyer would need to include as
inventory the goods that are being transported but not yet received.

Activity J

❖What is a transit stock?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Another inventory-related problem area pertains to goods on consignment.


Consigned goods describe products that are in the physical custody of one
party, but actually belong to another party. Thus, the party holding physical
possession is not the legal owner. The person with physical possession is

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known as the consignee. The consignee is responsible for taking care of the
goods and trying to sell them to an end customer.

The consignor is the party holding legal ownership/title to the consigned


goods. Consigned goods should be included in the inventory of the
consignor. (Figure 6.3).

!
Figure 6.3

Consignments arise when the owner desires to place inventory in the


hands of a sales agent, but the sales agent does not want to pay for those
goods unless resold to an end customer. For example, auto parts
manufacturers produce many types of parts that are very specialized and
expensive. A retail auto parts store may not be able to afford to stock
every variety. In addition, there is the real risk of ending up with numerous
obsolete units. But, the manufacturer desperately needs these units in the
retail channel. As a result, the parts manufacturer may consign their
inventory to auto parts retailers.

Conceptually, it is fairly simple to understand the accounting for consigned


goods. Practically, there is a significant record keeping challenge. When
examining a company's inventory on hand, special care must be taken to
identify both goods consigned out to others (which are to be included in
inventory) and goods consigned in (which are not to be included in
inventory). When the consignee sells consigned goods to an end-user, the
consignee would keep a portion of the sales price, and remit the balance to
the consignor. All of this activity requires an accounting system capable of

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identifying consigned units, tracking their movement, and knowing when


they are actually sold.

Activity K

❖What could be the issues related to consigned goods?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

6.7.4 Average Inventory Cost Minimisation


A calculation comparing the value or number of a particular good or set of
goods during two or more specified time periods. Average inventory is the
median value of an inventory throughout a certain time period. A basic
calculation for average inventory would be:
BeginningInventory + EndingInventory
!
AverageInventory =
2
In this example, the current inventory, $10,000, is added to a previous
inventory — for example, the inventory on the same day of the previous
year, such as $8,000 — and divided by the two balance points, for an
average of $9,000 (($10,000 + $8,000)/2 = $9,000).

6.8 Total Network Cost

The logistics network decision is usually modeled as a trade-off between


transportation and fixed warehousing costs. When there are few
warehouses in the network, fixed warehousing costs are low, but
transportation costs are high. As you add warehouses to the network, the
fixed costs increase, but the transportation costs are reduced due to two
factors. First, adding warehouses generally decreases the number of miles
traveled because the total distance a unit is shipped, from the supplier to
the warehouse and then to the customer, gets closer to a straight-line. In
addition, the most expensive portion of that journey is often from the
warehouse to the customer as those are usually less-than-truckload
shipments. The average distance of this leg of the journey is reduced when
there are more warehouses in the network.

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6.8.1 ABC Analysis


ABC Analysis allows inventory/purchasing managers to segregate and
manage the overall inventory/suppliers into three major groups. This
allows different inventory/supplier management techniques to be applied to
different segments of the inventory/suppliers in order to increase revenue
and decrease costs. In terms of a Pareto Analysis, it separated the critical
few from the trivial many. (Figure 6.5).

"A" Category items generally represent approximately 15%-20% of an


overall inventory by item, but represent 80% of value of an inventory. By
paying close attention in real-time to the optimization of these items in
inventory, a great positive impact is possible with minimal increase in
inventory management costs.

"B" Category items represent 30%-35% of inventory items by item type,


and about 15% of the value. These items can generally be managed
through period inventory and should be managed with a formal inventory
system.

"C" Category items represent 50% of actual items but only 5% of the
inventory value. Most organizations can afford a relatively relaxed
inventory process surrounding these items (Figure 6.4).


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!
Figure 6.4

6.8.2 Economic Order Quantity Model (EOQ)


Economic order quantity (EOQ) is that size of the order which gives
maximum economy in purchasing any material and ultimately contributes
towards maintaining the materials at the optimum level and at the
minimum cost.

In other words, the economic order quantity (EOQ) is the amount of


inventory to be ordered at one time for purposes of minimizing annual
inventory cost.

The quantity to order at a given time must be determined by


balancing two factors: (1) the cost of possessing or carrying materials

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and (2) the cost of acquiring or ordering materials. Purchasing larger


quantities may decrease the unit cost of acquisition, but this saving may
not be more than offset by the cost of carrying materials in stock for a
longer period of time. (Figure 6.5).

!
Figure 6.5

2*A*Cp
!
Ch
Where, A = Demand for the year

Cp = Cost to place a single order

Ch = Cost to hold one unit inventory for a year

TRC = Total Relevant Cost

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Variables
C = Carrying cost per unit per year

Q = Quantity of each order

F = Fixed cost per order

D = Demand in units per year

Example: John runs a mail-order business for gym equipment. Annual


demand for the equipment is 16,000. The annual holding cost per unit is
$2.50 and the cost to place an order is $50.

Calculate economic order quantity (EOQ).

Calculation:

2*16,000*$50
=800 units perorder
! $2.50

Activity L

❖A company is determining its frequency of orders for Product A. The


annual carrying cost per unit is $10 and the cost per order is $15. The
company expects to sell 600 units of Product A each year. Find the EOQ.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

6.9 Cost Minimisation

Just as a physical replication of a geographical area illustrates elevations,


depressions and contours of land surface, an economic map can highlight
logistical cost differentials. Generally, peak costs for labor and essential
services occur in large metropolitan areas. However, because of demand
concentration, least total logistics cost resulting from transportation and
inventory consolidation benefits is often minimized in metropolitan areas. A
strategy of least total cost seeks a logistical system network with the

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lowest fixed and variable costs. The cost of transport is the payment for
shipment between two geographical locations and the expenses related to
maintaining in-transit inventory. Logistical systems should utilize
transportation that minimizes total system cost. This may mean that the
least expensive method of transportation may not result in the lowest total
cost of logistics.

A system design to achieve least total cost is driven purely by cost-to-cost


trade-offs. The level of customer service that is associated with a least cost
logistical design results from safety stock policies and the locational
proximity of warehouses to customers. The overall level of customer
service associated with any given least total cost system design is referred
to as the threshold service level.

Activity M

❖When the overall intention is to minimise costs; when are high service
costs justified?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

6.10 Threshold Service

A threshold service is the minimum number of people needed for a service


to be worthwhile. In geography, a threshold population is the minimum
number of people necessary before a particular good or service can be
provided in an area. The concept is equivalent to the "range" in central
place theory and retailing, which delineates the market area of a central
place for a particular good or service, and is dependent on the spatial
distribution of population and the willingness of consumers to travel a
given distance to purchase particular goods or services. The theory then
relied on two concepts: threshold and range.

1. Threshold is the minimum market (population or income) needed to


bring about the selling of a particular good or service and the
willingness of consumers to travel a given distance to purchase
particular goods or services

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2. Range is the maximum distance consumers are prepared to travel to


acquire goods – at some point the cost or inconvenience will outweigh
the need for the good.

6.11 Service Sensitivity Analysis

Sensitivity analysis is very useful when attempting to determine the impact


the actual outcome of a particular variable will have if it differs from what
was previously assumed. By creating a given set of scenarios, the analyst
can determine how changes in one variable(s) will impact the target
variable.

The threshold service resulting from the least total cost logistical design
provides a basis for sensitivity analysis. The basic service capabilities of a
network can be increased or decreased by variation in number of
warehouses, change in one or more performance cycles to increase speed
or consistency of operations, and/or change in safety stock policy.

6.11.1 Locational Modification


The location of a warehouse is generally one of the most important and
strategic decision in the optimization of logistic systems. Warehouse
location is a long-term decision and is influenced by many quantitative and
qualitative factors. Among the main criteria taken into account are costs,
labor characteristics, infrastructure, and markets. Sub-criterias are the
hierarchical structure of the problem, like tax incentives and tax structures,
availability of labor force, quality and reliability of modes of transportation,
and proximity to customers (Figure 6.7). The conventional approaches to
warehouse location selection problem tend to be less effective in dealing
with the imprecise or vague nature of the linguistic assessment. Under
many situations, the values of the qualitative criteria are often imprecisely
defined for the decision-makers.

The problem of serving the given set of customers from the chosen
warehouses is considered. The objective is to minimize the sum of fixed
charges for establishing the warehouses and transportation costs
corresponding to the supply of demands.

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!
Figure 6.6

Chopra and Meindl note that an increase in the number of facilities tends to
increase total supply chain inventory costs due to the need to increase
total system-wide safety stock in order to meet customer service level
expectations. Conversely, a reduction in the number of facilities that hold
safety stock permits a reduction in total safety stock cost as a result of the
risk-pooling benefits from aggregating safety stock in fewer locations.

Aggregation of safety stock at fewer location is not necessarily required to


gain risk-pooling benefits. That is, it is possible to increase the number of
supply facilities without a corresponding increase in safety stock cost, even
while maintaining a prescribed cycle service level at each facility. As we
later discuss, these risk-pooling benefits arise from splitting customer
demands among facilities and mixing multiple customer demands within a
facility.

Because safety stock costs represent a non-trivial component of overall


facility-related costs, recent literature has recognized the need to account
for safety stock costs when making facility location decisions.

Logistics managers are often asked to estimate the inventory impact of


adding or deleting warehouses.

This relationship between uncertainty and required inventory is called the


portfolio effect.

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The portfolio effect can be estimated using the square root rule. The
square root rule, originally proposed by “Maister”, suggests that the safety
stock increase as a result of adding a warehouse is equal to the ratio of the
square root of the number of locations in the newly prepared network
divided by the square root of the number of existing location.

For example, assume that a manager wants to estimate the inventory


impact of shifting from a one- to a two-warehouse network. In effect, the
network is being doubled. For reasons discussed earlier, demand variability
will be increased. Using the square root rule, the firm's aggregate safety
stock (SS2) for a two-warehouse system can be estimated as:

NI
SSl = ! ×SSK
• 1

• Nl = 2

• Nk =1

2 × SSK
• SSl =!
1

• SSl =1.41 x SSK

• So you need 1.41 the safety stock for two warehouses vs. one.

Example: Let’s say you want to go from 3 warehouses to 4 and you


currently have a safety stock of 1000. What is your new safety stock level?

4
SSl = ! × 1000
3

SSl = 1155

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Activity N

❖What is the ‘portfolio effect’?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………

Table 6.1: Inventory Impact of Modified Warehouse Network


Network Locations Safety Stock Level

1 97
2 141

3 173

4 200
5 224

Finally, the square root rule requires that demand for each warehouse
approximate a normal distribution. While the appropriateness of these
assumptions must be reviewed, the square root rule is a useful way to
estimate the inventory impact of adding or deleting warehouses to a
logistical network.

6.11.2 Measuring Performance


The primary objectives of warehouses include providing the right product,
at the right place, right time, and damage free at a competitive cost.
Fundamental to achieving and sustaining these objectives is measuring
performance. The most common warehouse performance measures include
handling productivity, space utilization, accuracy, damage, service, cost,
and inventory. Handling productivity is often measured in “units or lines”
picked per hour or total handling cost per “unit”. Space utilization is
evaluated based on the percentage of total space available for storage,
percentage of useable storage space actually used for storage, and storage
cost per unit of product.

Accuracy includes measures of location and record accuracy, the


percentage of items picked correctly, and the percentage of orders picked
correctly. Damage measurements include the percentage of items picked
that are undamaged when received by the customer and the percentage of

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orders picked without damaged merchandise. Service measures include fill


rate which is based on the number of orders that were filled completely.

Cycle time is also a critical measure to determine service and efficiency.


Dock-to-stock cycle time is a critical measure of how long it takes to make
material available following receipt. Order cycle time measures the elapsed
time from order receipt until order shipment. Order cycle time may also
include transportation to measure the total elapsed time until the customer
receives the product. Cost and inventory performance measurements
include total distribution center cost per unit handled, distribution center
cost as a percentage of sales, and inventory turnover.

6.11.3 Impact of Increasing Order Frequency of Safety Stock


In the continuous review setting, to increase order frequency, the order
quantity must be reduced. This will increase ordering costs and reduce
inventory costs. Since safety stock in this setting depends on variability in
lead time demand and increasing frequency of orders has no impact on
lead time, increasing frequency of orders in this setting has no impact on
the chances that stock out will occur in an order cycle. It does however
increase the number of order cycles in a fixed period, e.g., a year and so to
ensure the same fill rate that is needed to carry more safety stock if
frequency is increased.

In the periodic review setting, it also reduces inventory if safety stock is


ignored. It is less clear what impact increasing frequency has on safety
stock. In the periodic review setting, the risk of stocking out in an order
cycle depends on the variability of demand in a period determined by the
sum of the time between orders and the lead time. So, increasing the
frequency of orders reduces the time between orders and so reduces the
variability of this demand. So, increasing the frequency of orders reduces
the chances that stock-out occurs in an order cycle if we hold safety stock
constant. On the other hand, increasing the frequency of orders means we
face this reduced risk more often. The final impact of increasing frequency
will depend on the balance between these two factors.

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6.12 Inventory Model of Immediate and Delayed Delivery

Consider the long run, profit maximizing strategy of a distributor that holds
a good (good 1) in inventory for immediate delivery and that offers a
second good (good 2) for delayed delivery. When the two goods are
substitutes, an out-of-stock situation for good 1 will cause some consumers
(“walkers”) to seek the good elsewhere, other consumers (“waiters”) to
accept a rain check for later delivery of good 1, and others still
(“switchers”) to place an order for good 2. It is shown that a profit
maximizing strategy may entail setting a price for the delayed delivery
item so as to encourage switching behavior. The rationale is that the
distributor can hold a smaller inventory, thereby incurring lower holding
costs, because out-of-stock situations are less costly than they would be
without some consumers being willing to switch.

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6.13 Summary

It is essential to create a map of organizational or supply chain wide


initiatives and compare them with the organization’s goals, performance
measures, and resources. By its nature, ISCM (Integrated SCM)
implementation will lead to a multiplicity of programs springing up across
the supply chain. This, together with the array of other change programs
that might exist among stakeholder groups, provides a recipe for confusion
and potential failure.

The integration map is a mechanism for identifying the array of change


initiatives and programs ongoing within an organization or the existing
supply chain, as well as for revealing conflicting time, resource priorities,
and change goals that have not been addressed. The map proves useful in
helping to decide which projects to launch first and which may need to be
jettisoned. Since concurrent conflicting initiatives often lead to confusion,
action taken to integrate initiatives is essential if the ISCM implementation
is to be successful.

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6.14 Self Assessment Questions

1. How can a supply chain network be established?

2. How are location decisions taken?

3. What justification of logic can be presented to support the placement of


a warehouse in a logistical system?

4. Why do transportation costs decrease as the number of warehouses in a


system increases?

5. In your words, what is the locational impact of inventory?

6. Why is it important to have the right inventory at the right place at the
right time?

7. What is the importance of WMS in warehouse efficiency?

8. Describe the concept of “relationship with suppliers” in a company’s


supply chain.

9. In what way, WMS support manufacturing?

10.What is the support provided by WMS to wholesalers and retailers?

11.What is meant by the level of threshold service?

12.What are the economic benefits of warehousing? 


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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter

Summary

PPT

MCQ

Video Lecture

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LOGISTICS DESIGN AND OPERATIONAL PLANNING

Chapter 7
LOGISTICS DESIGN AND OPERATIONAL
PLANNING
Objectives

After going through the chapter, students should be able to understand:

• The elements of the systems approach

• The definition and purposes of a feasibility study

• The process of data collection and analysis

• The recommendations and implementation of plan

• The methods and techniques used for data analysis

Structure

7.1 Elements of the Systems Approach

7.2 Definition/Purpose of a Feasibility Study

7.3 Data Collection and Analysis

7.4 Recommendations and Implementation

7.5 Decision Analysis Methods and Techniques

7.6 Summary

7.7 Self Assessment Questions

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LOGISTICS DESIGN AND OPERATIONAL PLANNING

Introduction
The international economic and business environment continues to develop
at a rapid rate. Increasing interactions between economies, particularly
between Europe and Asia, has raised many important issues regarding
transport infrastructure, logistics and broader supply chain management.
This chapter introduces a systems approach to supply chain re-engineering
which is aimed at addressing the challenges which the evolving business
environment brings with it. The adoption of approaches such as that
outlined in this chapter helps to ensure that robust supply chains are
designed and implemented in practice. This facilitates an integrated
approach, with involvement of all key stakeholders throughout the design
process. In addition, the potential benefits associated with emerging
electronic commerce technologies provide the potential to simultaneously
improve customer service levels and to reduce supply chain costs. These
factors have sharpened the focus on the need for improvements in all
aspects of supply chain performance.

7.1 Elements of the Systems Approach

Many managers initially thought that simply implementing a Supply Chain


Management (SCM) system would be enough to keep their inventories
stocked with the raw materials needed to keep production flowing
smoothly. However, implementation of these systems and software has
helped most of those managers to realize how unrealistic their initial
expectations were. The system itself can easily become overwhelmed by all
of the variables involved in supplier-buyer relationships, which is why
managers need to take additional steps to ensure that their SCM system
stays on top of the situations.

Any finite system will have a boundary and anything outside that boundary
can be regarded as the environment. An important aspect of the study of
systems involves examining the interaction between systems and their
environments. Indeed, the way in which a system interacts with its
environment will largely determine the usefulness or degree of success of
the system. If the supply chain under consideration is regarded as the
system, then the environment is the business environment in which that
supply chain operates. The business strategy of firms is concerned with the
interaction between supply chain companies and their business
environment (Porter, 1980). Essentially, the strategy formulation process
defines the nature of this interaction.

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LOGISTICS DESIGN AND OPERATIONAL PLANNING

!
Figure 7.1: Supply Chain as a System

The supply chain system could be regarded as shown in Figure 7.1. The
interaction of the system with its environment is represented by the
system inputs and outputs. In practice, supply chain systems can be
broken down into subsystems. This aids understanding of the operation of
the system and facilitates systems analysis. Each of the subsystems should
display the characteristics of a system; each subsystem will have inputs,
outputs and a boundary. When considering a company’s internal supply
chain, the subsystems can be regarded as the company’s business
processes (e.g., designing, buying, making, moving, and selling). These
business processes are multidisciplinary activities that cross traditional
functional department boundaries. When considering a supply chain which
comprises several companies, the subsystems can be regarded as the
individual companies or the business processes which cross company
boundaries. Traditionally, efforts at improving supply chain or
organizational effectiveness have focused on making changes within the
subsystems. This often resulted in optimal subsystems but sub-optimal
total systems.

7.1.1 Systems Process


The systems approach to analyze supply chains and improving their
performance involves the application of logical, structured methods rather
than relying on making limited improvements in particular areas of the
system. The system offers direction on how to address this process in an
organized manner, and to develop a solution logically.

Customer and competitor attitude keeps varying and also the market
demands, costs and service needs. Naturally, questions arise about
warehouses; their numbers and locations; about striking a balance
between inventory and service in each warehouse; material handling and
routing of vehicles etc.

Such questions are normally considered difficult to answer as the data to


assimilate is difficult. This intricacy is due to a large number of factors
influencing logistics total cost and the range of alternate solutions. The

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LOGISTICS DESIGN AND OPERATIONAL PLANNING

extensive nature of the data is due to a large amount of information


required to evaluate logistics substitutes.

A general process applicable to most logistics design and analysis


situations is divided into three phases: (1) problem definition and planning,
(2) data collection and analysis, and (3) recommendations and
implementation. Figure 7.2 shows the generalized process flow.

!
Figure 7.2: Generalized Planning System Illustrating Major Phases of
Work

Activity A

❖Why do processes have to be systematic in a supply chain?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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LOGISTICS DESIGN AND OPERATIONAL PLANNING

7.1.2 Guidelines on Good Practice


Every supply chain is unique. It has unique products, processes, people
and a lot more besides. Hence, there is no universal solution which can be
applied which will automatically result in a supply chain achieving its
optimum competitive potential. The methodology helps to identify the most
suitable solution for a particular supply chain but there are approaches
which appear to exist in the majority of world-class companies
(Schonberger, 1986).

These approaches include employee involvement, total quality


management, JIT, (total) preventive maintenance and a philosophy of
continuous improvement. The key is not to blindly copy the approaches
used by successful companies but to learn from their experiences.
Education and training of project team members plays an important role in
this.

7.1.3 Tools and Techniques


A potential problem when analyzing supply chain organization and
operations is that there are few (if any) established analytical tools which
can be employed. The lack of such tools can result in practitioners failing to
apply a methodical, scientific approach and instead relying purely on
experience, intuition and iteration. However, there are many techniques in
use in other fields which are relevant to supply chain analysis. Such
approaches include financial analysis, strategic planning techniques (e.g.,
SWOT analysis, the Porter model), Pareto analysis, systems analysis
techniques (e.g., input/output analysis, flowcharting), and process
mapping. These techniques can be used to support various stages of the
methodology with many being particularly useful at the analysis stage.

In addition, computer-based tools, which assist in the application of the


techniques, are also available. Many of these tools are useful in managing
the data collected during the supply chain audit. Useful tools include
spreadsheets, databases, visual interactive simulation and project planning
software.

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7.2 Definition/Purpose of a Feasibility Study

A feasibility study is defined as an evaluation or analysis of the potential


impact of a proposed project or program. First stage of logistics system
design and planning provides the foundation for the entire project. A
thorough and well-documented problem definition and plan are essential to
all that follows.

7.2.1 Feasibility Assessment in Logistic Operation


The decision to implement any new project or program must be based on a
thorough analysis of the current logistic operation. In addition, the impact
of implementation of the proposed project/program on the future operation
of the system must be evaluated. Such an analysis would be critical in
making a final decision on whether to progress and how that progression
should occur beginning with a feasibility study with a comprehensive
evaluation of the current logistics situation. Objective being to understand
the environment, process, and performance characteristics of the current
system and to determine modifications, if any, which might be necessary.
The activities include situational analysis, supporting logic development,
and cost/benefit estimation.

Activity B

❖If observed that changes do have to take place in a company’s logistical


process, what steps are necessary to implement the change?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

1. Situational Analysis
The purpose of the situational analysis is to provide senior management
with the best possible understanding of the strengths and weaknesses of
the existing logistics capabilities for both current and future environment.
Situational analysis is the performance of measures and characteristics
that describe the current logistics environment through:

Activity C

❖ Why is situational analysis undertaken?

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…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

a. Internal review: Internal review is necessary to develop a clear


understanding of existing logistics processes with respect to its stated
objectives and its capabilities to meet those objectives. It profiles
historical performance, data availability, strategies, operation and
tactical policies and practices. All major resources such as workforce,
equipment, facilities, relationships and information are examined. The
comprehensive review is undertaken to justify logistics system redesign
or refinement to be implemented if necessary. Assessment is to consider
the process (physical and information flows through the value-added
chain), decisions (logic and criteria currently used for value chain
management), and key measures for each major logistics activity. These
measurements focus on the KPI’s (key performance indicators) and the
firm’s ability to measure them.

Activity D

❖What is the difference between an internal review and an assessment?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

b. Market Assessment and Competitive Evaluation: The objective is to


document and formalize customer perceptions and desires with regard
to the changes in the firm’s logistical capabilities. It is the review of
knowing the trends and service demands required by customers by
interviewing them and through fresh customer surveys. The assessment
focuses on the external relationships with the suppliers, customers
(wholesalers and retailers) and final consumers. The assessment not
only considers trends in requirements and processes but also the
enterprise and the competitor’s capabilities.

c. Technology Assessment: Focuses on the application and capabilities


of the current key logistics technology systems of transportation,
storage, material handling, packaging, information processing, the firm’s
capabilities and the potential for applying new technologies. The
objective of the assessment is to identify advancements that can

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provide effective trade-offs with other logistics resources such as


transportation and inventory.

Activity E

❖Why is technology assessed from time to time?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

2. Supporting Logic Assessment and Development

The logical findings of the internal review, external assessment and


technology study are to be integrated into the system. A supporting logic
development builds on this comprehensive review in three ways:

(i) Potential opportunities for improvement can be determined by using


logistics principles such as tapering principle, principle of inventory
aggregation and total landed cost principle. The resulting benefits or
costs should be clearly identified.

(ii)The deliverables of this evaluation process include classification of


planning and evaluation issues prioritized into primary and secondary
categories across short- and long-range planning horizons.

(iii)The process of developing supporting logic should include clear


statements of potential redesign alternatives such as:

• Definition of current procedures and systems Identification of the most


likely system design alternatives based on leading industry and
competitive practices

• Suggestion of innovative approaches based on new theory and


technologies.

The alternatives along with being practical should also challenge the
existing practices. A recommended procedure requires the manager
responsible for evaluating the logistical strategy and to develop it with
potential benefits by underlining the most attractive strategy alternatives.

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3. Cost-Benefit Ratio
The final feasibility assessment is a preplanning estimate of the potential
benefits versus the cost of performing a logistics analysis and
implementing the recommendation. Benefits should be categorized in
terms of:

a. Service improvements – Increase loyalty of existing customers to


attract business.

b. Cost reduction – Cost reduction benefits may be observed in two


forms:

• First, reduction in financial or managerial resources required to operate


the existing system, for e.g., reduction in capital deployed for inventory
and other distribution related assets.

• Second, cost reductions in the form of out-of-pocket or variable


expenses.

c. Cost prevention – Cost prevention reduces involvement in programs


and operations experiencing cost increases. Any cost prevention
justification is based on an estimate and is vulnerable to some error, for
e.g., many material handling and information technology upgrades are
partially justified and will depend on how convincing the supporting logic
is, how believable estimated benefits are, and whether estimated
benefits offer sufficient return on investment to justify organizational
and operational change.

These potential benefits must be balanced against the out-of-pocket cost


required to complete the process.

Activity F

❖Will cost prevention always benefit the redesigning of the logistics


system? Why?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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7.2.2 Project Planning Initiatives


Logistics system complexity requires that any effort to identify and
evaluate strategic or tactical alternatives must be planned thoroughly to
provide a sound basis for change. Project planning involves five specific
items:

(i) Statement of objectives: The statement of objectives refers to jotting


down the cost and service expectations for the logistics systems
revisions. It is essential that they be stated specifically and in terms of
measurable factors. For example desired delivery of 98% of all orders
within 48 hours after the order is placed, minimal customer shipments
from secondary distribution centers, back orders held for a maximum of
five days, etc.

(ii)Statement of constraints: On the basis of the situational analysis, the


senior management will hesitate to make any modifications or changes
in the current systems as there are large financial investments in
existing production facilities. The statement of constraints defines
specific organizational elements, buildings, systems, procedures, and/or
practices to be retained from the existing logistical system.

(iii)Measurement standards: Such standards direct the project by


identifying the cost structures and performance penalties and by
providing a means to assess success. Management must stipulate
guidelines for each category as a prerequisite to formulation of a plan.
Measurement standards should include definitions of how cost
components such as transportation are calculated and also relevant
customer service measures and method of calculation must also be
included.

(iv)Analysis procedures: Once the project objectives and constraints are


defined, planning must identify alternative solution techniques and
select the best approach. Selection of an analysis technique must
consider the information necessary to evaluate the project issues and
options.

(v)Project work plan: On the basis of feasibility assessment, objectives,


constraints and analysis technique, a project work plan must be
determined and the resources and time required for completion
identified.

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Activity G

❖What are the service levels that the management will always try to
achieve?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Activity H

❖What could be some of the revisions or changes undertaken in the


system while planning a new project?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Activity I

❖What is the importance of measuring standards in system development?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

7.3 Data Collection and Analysis

Once the feasibility assessment and project plan are completed, the next
activity focuses on data collection and analysis. This includes activities to
define assumptions, collect data, and analyze alternatives.

Assumptions and Data Collection


This activity builds on the feasibility assessment and project plan to
develop detailed planning assumptions and identify data collection
requirements. Specific tasks are as follows:

a. Define the analysis approach and techniques: The most common


techniques are analytical approach, simulation and optimization. The
analytical approach uses standard numerical methods, such as those
available through spreadsheets, to evaluate each logistics alternative. A
simulation or replication approach can be likened to a “wind tunnel” for

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testing logistics alternatives. Simulation is used extensively when major


doubts remain. Optimization uses linear or mathematical programming
to evaluate alternatives and selects the best one. Because of its
powerful capabilities, optimization is used extensively for evaluating
logistics network alternatives such as the number and location of the
distribution centers.

Activity J

❖What is the technique used while considering an increase in the number


of warehouses?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

b. Define and review assumptions: Assumptions definition and review


are based on situation analysis, project objectives, and constraints and
measurements standards. For planning purposes, the assumption
defines the key operating characteristics, variables and economies of
current and alternative systems. Assumptions normally fall into three
categories:

i. Business assumptions define the characteristics of the general


environment including relevant market, consumer, and product
trends and competitive actions, within which an alternative logistics
plan must operate. They are generally outside the ability of the firm
to change.

ii. Management assumptions define the physical and economic


characteristics of the current or alternative logistics environment and
are generally within the firm’s ability to change or refine. Typical
assumptions include a definition of alternative distribution facilities,
transport modes, logistics processes and fixed and variable costs.

iii. Analysis assumptions define the constraints and limitations that must
be included to fit the problem to the analysis technique. These
assumptions frequently concern problem size, degree of analysis
detail and solution methodology.

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Activity K

❖What are the three types of assumptions? Elaborate on any one.


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Identify and Assimilate Data


Internal records will provide majority of data required in a logistical study.
The first major data category is sales and customer orders. For
determining logistics volume and activity levels, records of annual sales
forecast and percentage of sales by month as well as seasonal fluctuations
are necessary. Previous customer order invoice samples can define
shipping patterns and shipment size. Specific customer data are also
required to consider the cost and time associated with moving the products
across distance. To reduce analysis, complexity customers and market data
are often combined by location, type, size, order frequency, growth rate,
and special logistical services.

For integrated channel analysis, it is necessary to identify and track the


costs associated with manufacturing and purchasing, the number and
location of plants, product mix, production schedules and seasonality.
For each current and warehouses in the future, the operating costs,
capacities, product mix, storage levels and service capabilities should be
established.

Transportation data requirements include the number and type of modes


utilized, modal selection criteria, rates and transit times, and shipping rules
and policies. For most logistics analysis applications, a select amount of
future market data is useful for evaluating future scenarios.

Although the management may be able to prepare a consolidated sales


forecast, it is difficult to prepare a market-by-market projection of sales.
There can be two solutions to this problem.

1. Estimate future demand levels and hence determine future logistics


requirements. Secondary data published by various government
agencies can also provide a data bank of environmental information.

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2. Studying competitor’s strategies and capabilities can be helpful in


providing information that compares customer service capabilities,
distribution networks and operating capabilities.

Activity L

❖What is the type of customer data relevant for a logistical study?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Collection of Data
Once the data sources have been identified, the company can start
assimilating required data and convert that data to an appropriate format
for analysis. To avoid errors, data collection process should be properly
documented.

Validation of Data
It is important to ensure that a thorough investigation is conducted into
analytical results based on data that is sourced, and such data that might
not accurately reflect the past.

Analysis
The analyst uses the technique and data from the previous activity to
evaluate logistics strategic and tactical alternatives. The process of analysis
includes:

a. Analysis questions: This involves defining specific analysis questions


concerning alternatives and the range of acceptable uncertainty. The
questions build on research objectives and constraints by identifying
specific operating policies and parameters. For example, in the case of
inventory analysis, questions might focus on alternative service and
uncertainty levels.

b. Validating baseline analysis: The second task completes the baseline


analysis of the current logistics environment using the appropriate
method or tools. Results are compared with validation data collected
previously to determine the degree of fit between historical and
analytical findings. The comparison should focus on identifying

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significant differences, determining sources of possible errors and


identifying and correcting them.

c. Complete alternative analysis: An evaluation of systems alternatives


should be accomplished either manually or electronically to determine
the relevant performance characteristics of each alternative.

d. Complete sensitivity analysis: In this phase, uncontrollable factors


like demand, factor cost or competitive actions are varied to assess the
ability of potential alternatives to operate under a variety of conditions.
Sensitivity analysis in conjunction with an assessment of potential
scenario probabilities is then used in a decision tree to select the best
alternative.

7.4 RECOMMENDATIONS and IMPLEMENTATIONS

The next stage is to operationalize planning and design efforts by making


specific recommendations to the management and developing plans to
implement in the system.

Recommendations
Alternative and sensitivity analysis results are reviewed to determine
recommendations to management. There are four steps in this part of the
phase namely:

1. Identify the Best: Alternative Performance characteristics and


conditions for each alternative must be compared to identify two or
three best options. The decision tree analysis should identify the best
alternative, i.e., the one that meets the desired service objectives at the
minimum total cost.

2. Evaluate Costs and Benefits: A Cost Benefit analysis compares the


alternatives for a base period and then projects comparative operations
across a particular planning horizon. Potential benefits such as cost
reduction, service improvement and cost prevention are identified and
quantified. In other words, when evaluating the potential of a particular
logistical strategy, an analysis comparing present cost and service
capabilities with projected conditions must be completed for each
alternative.

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3. Develop a Risk Appraisal: Availability of increasing alternatives


demands tools that can extract value from each alternative. Risk related
to adoption of a selected alternative can be quantified using sensitivity
analysis. For example, assumptions can be varied and the resulting
influence on system performance for each alternative can be
determined. Risks related to, e.g., system changeover may encounter
unanticipated delays. A series of contingency plans could be tested to
prevent delays and determine their negative impacts.

4. Develop Presentation The final step in this procedure is a


presentation to the management and submission of a report that
identifies specific operating and strategic changes, provides qualitative
reasons for suggesting these changes and then quantitatively justifies
the changes in terms of service, expenses, asset utilization or
productivity improvements.

Activity M

❖What is the risk involved in implementing an alternative?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Implementation
The actual plan or design implementation is the final process activity. An
adequate implementation procedure is the only means to obtain a tangible
return from the planning process. This broadly includes four phases:

1. Define Implementation Plan: The implementation plan has to be


defined in terms of the individual events, their sequence and their
dependencies. The planning process may initially develop at a macro
level. But it must ultimately be refined to provide individual assignment
responsibility and accountability. Plan dependencies identify the
interrelationships between events and thus define the completion
sequence.

2. Schedule Implementation: The implementation plan is scheduled


based on the assignments identified in the previous stage. The schedule
must allow adequate time for acquiring facilities and equipment,
negotiating agreements, developing procedures and training.

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3. Define Acceptance Criteria: The criteria for evaluating the success of


the plan are then developed. The Acceptance Criteria should focus on
service improvements, cost reduction, improved asset utilization and
enhanced quality. Although the acceptance criteria may focus on the
area/function which was the main focus for the plan, it should also take
a broad perspective that focuses on total logistics system performance
rather than the performance of an individual function.

4. Implement: The final task is actual implementation of the plan or


design. Implementation must include adequate controls to ensure that
performance occurs on schedule and that acceptance criteria are
carefully monitored.

Activity N

❖What is the criteria for ensuring the success of the implementation plan?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

7.5 Decision Analysis Methods and Techniques

High performance logistics requires regular comprehensive analysis of


supply chain tactics and strategies. Regular freight lane analysis is
necessary to respond to rate changes and balance of freight flows; tactical
inventory analyses, to identify items with excess inventory and to
determine the appropriate inventory target levels; and location analysis,
now often termed supply chain planning, to perform the strategic
evaluation of supply chain alternatives such as sourcing, plant location,
warehouse location, and market service areas, increasingly important to
optimize flows for global supply chains. Dynamic simulation is used to
investigate the dynamics of multiple stage inventories such as among
suppliers, plants, and distribution centers, and tactical transportation
analysis assists in truck routing and scheduling. For each of these types of
decisions, the following sections describe the specific questions, alternative
analytical techniques, and typical data requirements.

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7.5.1 Design Decisions


Designing a supply chain network involves billions of options and numerous
decisions. And, each of these decisions will impact service levels,
profitability and competitive advantage. To ensure an optimal design, it is
critical that key business data from ERP and business insights are included.
By combining real world knowledge with data, it is possible to model
numerous scenarios and optimize designs to expose total delivered cost by
the customer and product to meet company’s strategic requirements.

A business manager’s ultimate responsibility over these critical


infrastructure decisions is an extensive experience in supply chain design
with best of breed optimization technology to ensure that the plan will lead
to the best infrastructure decisions.

Global operations also increase supply chain design alternative complexity


and the importance of an accurate assessment of supply chain trade-offs.
Therefore, the importance of regular supply chain design analysis has
increased very much.

A robust infrastructure plan must take into account all of the business
requirements for years to come. To optimize the plan, total supply chain
cost, customer service and strategic business initiatives are to be
considered. Through this process, the optimal infrastructure plan to
support the business operations including critical decisions related to plant,
warehouse and distribution center locations and utilization will be
determined. Some of the management questions that are raised are:

• What is the capacity that should be available at each of these locations?

• What are the transportation modes and lanes that should be used to
move product through your network?

• Which customers should be served from each facility and by which modes
of transportation?

• When is expansion of capacity needed and where and how it should


occur?

• When merging business or operations across subsidiaries, which facilities


should be used and at what levels, and which ones should be closed?

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• How many warehouses should the firm use?

Activity O

❖What are the constituents of infrastructure planning?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

7.5.2 Development and Design


With increasing globalization and easier access to alternative products in
today's markets, the importance of product design to generating demand is
more significant than ever. In addition, as supply, and therefore
competition, among companies for the limited market demand increases
and as pricing and other marketing elements become less distinguishing
factors, product design likewise plays a different role by providing
attractive features to generate demand. In this context, demand
generation is used to define how attractive a product design is in terms of
creating demand.

In other words, it is the ability of a product's design to generate demand


by satisfying customer expectations. But product design affects not only
demand generation but also manufacturing processes, cost, quality, and
lead time. The product design affects the associated supply chain and its
requirements directly, including manufacturing, transportation, quality,
quantity, production schedule, material selection, production technologies,
production policies, regulations, and laws. Broadly, the success of the
supply chain depends on the product design and the capabilities of the
supply chain, but the reverse is also true: the success of the product
depends on the supply chain that produces it.

The supply chain is designed around a set of trade-offs, such as fixed


versus variable costs, and transportation versus inventory costs. When
developing supply chain design, companies cannot focus solely on the
mathematical optimal. Instead, firms need to evaluate the “Range of
Indifference” — the set of alternative designs that have similar cost and
service performance but different levels of risk. By evaluating this range of
alternatives, companies can understand the concentration of risk in
activities that are more vulnerable to major swings (e.g., energy and

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transportation costs) versus costs that are more likely to change in a slow,
sustained manner (e.g., labor costs). Figure 7.3 illustrates the scope of
a typical supply chain design.

!
Figure 7.3: Scope of Typical Supply Chain Design

Activity P

❖What is the importance of product design in generating demand?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

7.5.3 Location Decisions


Location decisions are a basic determinant of profitability in international
logistics. Decisions on where to manufacture, to assemble, to store, to
transship and to consolidate can make the difference between profit and
loss. Because of international differences in basic factor costs and because
of exchange rate movements, location decisions are very important. Also,
these decisions involve substantial involvement in fixed assets in the form
of facilities and equipment. Location decisions, therefore, can have a

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continuing impact over time on the company’s financial and competitive


position. As movement towards global manufacturing increases,
organizations should consider location decisions through total cost analysis
which includes activity related costs such as manufacturing, transportation
and handling as well as inventory holding costs, tariffs, and taxes.

Firms often must find the location for a new facility. Usually, this decision
follows a process of system analysis and design, wherein a determination is
made of how many facilities the firm should be operating. A growing firm
may decide that it needs a new warehouse to serve a certain region.
Several layers of analyses would be performed, each with a finer focus.
After a region was selected, then a city within the region would be chosen.
Criteria to this point would include markets, availability and wage rates of
labor, tax rates, climate, and transportation. Within that chosen city,
various sites would be examined, taking into account such factors as land-
use controls, street traffic capability, and room for expansion, soil stability,
water- and sewer-line capacity, police and fire protection, and proximity to
rail tracks. Some firms serve contracting or shrinking, markets. They must
decide which production or distribution facilities to choose, and the closure
must be scheduled in a way that reduces adverse impact upon the firm’s
overall operations.

Activity Q

❖Why so much of an importance is given to a location of a warehouse?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Mathematical Programming
Mathematical programming is a theoretical tool of management science
and economics in which management operations are described by
mathematical equations that can be manipulated for a variety of purposes.
If the basic descriptions involved take the form of linear algebraic
equations, the technique is described as linear programming. If more
complex forms are required, the term non-linear programming is applied.
Mathematical programming is used in planning production schedules, in
transportation, in military logistics, and in calculating economic growth, by
inserting assumed values for the variables in the equations and solving for
the unknowns. Computers are widely used in obtaining solutions. The

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model determines on an aggregate flow basis where the warehouses


should be, where the stocking points should be, how big the warehouses
should be and what kinds of transportation options should be implemented.

Simulation Techniques
Supply chain simulation efforts mainly focus on the improvement of the
performance in term of responsiveness, complexity, and inventory control.
A simulation model of a logistics network is developed to investigate the
impact of the variables associated with production schedules, customer
demand, and transportation delays. It often incorporates a geographic map
of the physical relationships among plants, terminals, warehouses, and
customers. It is suggested that all these should be modeled separately and
then integrated with the underlying logistics network.

A second location analysis method is static simulation. To do this, it is


important to first establish and prioritize which variables will present the
key factors in the analysis. These variables could be inventory costs,
transportation costs, required service levels, ordering costs, labor
availability, etc. The model of the new redesigned process has to contribute
to simplification, minimization and automation of steps, and efficiency
optimization through using new information technology.

After creation of the simulation model of the business process, these


options have to be compared and the model that best supports the
organization’s strategic plans related with the distribution process has to be
chosen.

An expanded use of static simulation involves a heuristic computation


procedure to assist in the selection of warehouses. In this capacity, the
static simulator can be programmed to evaluate and quantify various
combinations of warehouses from a potential list of locations provided
during problem specification. When utilized to help identify the best
logistics network, the typical heuristic procedure includes all possible
warehouse locations in the initial simulation. Customer destinations are
assigned to the best warehouse based on the lowest total logistics cost.

Given the design objective, the simulation choses the best from the
maximum number of potential locations. The deletion procedure eliminates
the most costly warehouse from the remaining in-system facilities on a
marginal cost basis. The demand previously serviced by the eliminated

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warehouse is then reassigned to the next-lowest-cost supply point, and the


quantification procedure is repeated.

Activity R

❖What is the importance of the simulation analysis?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

CASE STUDY

Industry Insight: Simulate Before you Restructure


Before launching a supply chain restructuring, Tesco Ltd., Great Britain's
leading food retailer, used a state-of-the-art simulation tool to determine
whether to revamp its frozen foods distribution network. This computer
simulation validated corporate plans to restructure the network and build a
separate facility specifically for frozen foods storage.

Eight of Tesco's British distribution centers carry a mixture of ambient


(general grocery and non-food items), chilled, and frozen products. Two
years ago, Tesco executives began weighing the idea of creating a stand-
alone warehouse strictly for frozen food items, which account for about
10% of the company's grocery store sales. The rationale was that a
separate facility would allow the retailer to expand its range of frozen food
products and gain operational efficiencies. Before they approached the
company's board of directors with the plan, Tesco's distribution executives
decided to simulate the plan's impact on distribution with a computer
model. They selected IBM's software simulation tool, The Supply Chain
Analyzer. Because it can depict different hypothetical situations, the
software gives, companies a way to see the physical, financial, and
informational impact of supply chain restructuring on a distribution
network.

It took, IBM consultants, six weeks to set up and run the computer model
with Tesco's help. Joe Galloway, Tesco's divisional director of supply chain
information technology, reports that much of that time was spent gathering
a year's worth of detail-laden data about its distribution center operations
to input into the model. "We were looking for data on the actual orders that

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went through our supply chain by (product) line and by store," he says.
Once the data were fed into the application, it corroborated the soundness
of the model.

When Tesco executives ran the same data through the computer model to
simulate a restructured supply chain with a dedicated frozen food facility,
the results supported their assumptions. The model indicated that the food
retailer could achieve distribution savings in the range of 2% to 5%,
depending on the actual mix of frozen food products stored in the
dedicated facility. Transportation costs would drop because Tesco could
eliminate trips between distribution centers and make more direct store
deliveries. In addition to consolidating outbound trips, Tesco also
determined that it could realize some savings on the inbound haul because
it would only have to move products from suppliers to a single point rather
than to two or three warehouses.

Inventory carrying costs would decline. If all of the frozen food supplies
were stored in a dedicated facility, the model showed Tesco could actually
reduce its stock holdings or even expand its mix of frozen food products
and increase store sales in this category. Tesco also would eliminate the
need to construct more facilities in the future. Moving frozen foods out of
the distribution centers would free up warehousing space for the expansion
of chilled products. The simulation also indicated that the company might
benefit by trying some alternative approaches.

Finally, the simulation gave Tesco some insights into its current operation
that allowed it to make an immediate, money-saving change. The company
discovered that it could cut back deliveries of certain slow-moving items to
once a week and still maintain adequate stock for its stores. Although
computer simulation helped persuade the board to approve the
restructuring plan, it had another benefit as well. The simulation gave
Tesco's logistics managers a deeper insight into their own supply chain's
operation.

Location Analysis Data Requirements


In a discrete facility location problem, the selection of the sites where new
facilities are to be established is restricted to a finite set of available
candidate locations. The primary location analysis data requirements are
definitions of markets, products, network, customer demand,
transportation rates, and variable and fixed costs.

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Market Definition: The market analysis section of a business plan


illustrate the industry and market knowledge including its current size and
historic growth rate as well as other trends and characteristics (e.g., life
cycle stage, projected growth rate) list the major customer groups within
the industry. The demand for each customer is assigned to one of the
market areas.

Dimensions of market analysis

• Market size (current and future)


• Market Trend
• Market growth rate
• Market profitability
• Industry cost structure
• Distribution channels
• Key success factors
• Key success details

The goal of a market analysis is to determine the attractiveness of a


market, both now and in the future. Organizations evaluate the future
attractiveness of a market by gaining an understanding of evolving
opportunities and threats as they relate to that organization's own
strengths and weaknesses.

Organizations use the finding to guide the investment decisions they make
to advance their success. The findings of a market analysis may motivate
an organization to change various aspects of its investment strategy.
Affected areas may include inventory levels, a workforce expansion/
contraction, facility expansion, purchases of capital equipment, and
promotional activities.

Product Definition: Every product is designed in a particular way —


product analysis enables to understand the important materials,
processing, economic and aesthetic decisions which are required before
any product can be manufactured. An understanding of these decisions can
help in designing and making for ourselves. Individual items, especially
those with similar distribution characteristics, production sites, and channel
arrangements, are grouped or aggregated to simplify the analysis.

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Network Definition: Network definition specifies the prime responsibility


of logistical management since a firm’s facilities and structure is used to
provide products and materials to the customers. Logistics facilities
typically include manufacturing plants, warehouses, cross-dock operations,
and retail stores.

Determining how many of each type of facility are needed, their geographic
locations, and the work to be performed at each is an important part of
network analysis. In certain situations, some of the facility operations may
be outsourced to service specialists. Regardless of who does the actual
work, all facilities must be managed as an integral part of a firm’s logistical
network. Network analysis, not only determines the number and location of
all types of facilities required to perform logistics work, but also determines
what inventory and how much to stock at each facility and where to assign
customer orders for shipment. The network of facilities including
information and transportation forms a structure from which logistical
operations such as processing of customer orders, maintaining inventory
and material handling performed. The analysis must consider geographical
variations. In context of global logistics, issues relating to network design
become increasingly more complex.

Activity S

❖What constitutes a ‘market’ and a ‘network’ in a supply chain?


…………………………………………………………………………………………………………………………
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Transportation Rates: Inbound and outbound transportation rates are a


major data requirement for location analyses. Rates must be provided for
shipments between existing and potential distribution channel members
and markets. In addition, rates must be developed for each shipment size
and for each transportation link between distribution centers and markets.
It is common for supply chain analysis to require in excess of a million
individual rates. Because of the large number, rates are commonly
developed using regressions or are retrieved from diskettes provided by
most carriers.

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Variable and Fixed Costs: The final location analysis data requirements
are the variable and fixed costs associated with operating distribution
facilities. Involves such decisions as:

1. Which products should be inventoried at a warehouse and how the


warehouse fits into overall customer service, inventory, and
transportation strategies of the company.

2. Raises questions about ownership alternatives (public? leased? owned?),


about the degree of material handling mechanization to be employed,
about the size of the facility, and so on.

3. Raises questions about balancing the advantages of nearness to


customers against nearness to plants from a transportation viewpoint,
with due consideration of regional labor and tax differentials and of less
tangible “market presence” considerations.

4. Raises such questions as the proper assignment of customers to


warehouses, the proper use of cross-docking and plant direct supply,
and the proper pattern of inbound supply.

These questions in turn raise still other questions. For instance, in a


situation where there are multiple sources for some products, how much of
each product should be produced by each plant or vendor (different
sources have different landed costs at customers and warehouses)? As
these issues are clearly interdependent, they should be dealt with
simultaneously, if possible. Ignoring some of the interactions or dealing
with issues sequentially instead of simultaneously can yield misleading
conclusions and result in poor managerial decisions.

Variable cost includes expenses related to labor, energy, utilities, and


materials. In general, variable expenses are a function of throughput. Fixed
costs include expenses related to facilities, equipment, and supervisory
management. Within a relevant distribution facility operating range, fixed
costs remain relatively constant. While variable and fixed cost differences
by geography are typically not substantial, there are minor locational
considerations, which should be included to ensure analysis accuracy. The
major differences result from locational peculiarities in wage rates, energy
cost, land values, and taxes.

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Activity T

❖What are the differences between variable and fixed costs? Are
transportation costs fixed or variable?
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7.5.4 Inventory Decisions


Inventory optimization is the science of calculating inventory targets. Its
goal is to help meet desired service goals at the lowest total inventory cost
possible. Inventory analysis decisions focus on determining the inventory
management parameters to meet desired service levels with minimum
investment. To drive high levels of customer service at the lowest cost,
inventory optimization provides time-phased inventory targets across all
items and locations. The targets can be output in unit quantity, reorder
points, periods of supply, or financial inventory investments.

This analysis can be designed to refine inventory parameters on a periodic


or daily basis. Daily refinements make parameters more sensitive to
environmental changes such as demand levels or performance cycle
length.

7.5.5 Transportation Decisions


Transportation analyses focus on routing and scheduling of transportation
equipment to improve vehicle and driver utilization while meeting customer
service requirements. Transportation decisions can be characterized as
strategic or tactical. On the strategic level, long-term decisions are made.
These are related to the supply chain design including modes of integration
and are determined by long-term decisions like location, production
capacity, inventory and transportation. Thus, strategic routing decisions
identify fixed transport routes that may be used for months or years.
On the tactical level, medium-term decisions are made for transport
planning with the very short-term decisions taken day-to-day or weekly
basis.

The objective of transportation analysis is to minimize the combination of


vehicles, hours, and miles required to deliver product.

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Transportation Analysis Techniques


Routing and scheduling analyses are particularly important for firms
completing partial load delivery activities such as package or beverage
distribution. The techniques can be classified as heuristic approaches,
exact approaches, interactive approaches, and combination approaches.

Heuristic approaches are “an aid to learning, discovery, or problem-


solving by experimental and especially trial-and-error methods” or “relating
to exploratory problem-solving techniques that utilize self-educating
techniques (as the evaluation of feedback) to improve performance.”

Exact, or optimal, approaches model consists of an objective function


and a set of constraints expressed in the form of a system of equations or
inequalities using mathematical (linear) programming to identify the best
routes.

Interactive approaches utilize a combination of simulation, cost


calculator, or graphics capability to support an interactive decision process.
The decision-maker identifies the alternatives for evaluation and then
determines and plots the routes and calculates the performance
characteristics in terms of time and cost.

Combinations of the three approaches have proven very effective. The


two criteria important when evaluating alternative solution approaches are
generalizability and accuracy.

Generalizability is the ability to efficiently incorporate extensions for special


situations, such as pickups and deliveries, multiple depots, time windows,
vehicle capacities, and legal driving times, in an actual setting.

Accuracy determines the level and credibility in the possible savings as a


result of decreased vehicle operating expense, better customer service,
and improved fleet productivity.
Transportation Analysis Data Requirements
Transportation analysis requires three types of data: network, demand, and
operating characteristics.

Network analysis represents a network as a set of nodes interconnected


with a set of links. Network outlines all possible routes and is the main

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support of any transportation system. By carrying out traffic modelling and


analysis, the following aspects are key:

• Capturing data efficiently


• Facility to interpret the data
• Ability to disseminate that information into meaningful language

Traffic simulation models are used to evaluate the impacts of changes in


traffic volumes and transportation network characteristics (capacity, signal
timing, etc.) on traffic flow patterns (vehicle speeds, acceleration, and
delay).

Traffic simulation models are the best strategies that affect traffic flow, and
can provide a relatively accurate assessment of impacts. The use of global
positioning satellites (GPS) has also facilitated determination of network
locations and possible routes with directions for locating addresses
mentioned on the packages.

Demand data defines periodic customer pickup and delivery requirements.


For strategic or long-term analysis, data is assimilated in terms of average
periodic pickups or deliveries of each customer. Routes are then created on
the basis of the average demand with allowances made for delays or
changes in schedules during extremely high-demand periods.

Operating characteristics define all information regarding vehicle


operations such as the number of vehicles, vehicle limitations, driver
constraints, and operating costs.

Through the use of tactical or strategic transportation analysis, many firms


involved in day-to-day transportation operations have been able to reduce
transportation costs by 10% to 15%. The analysis will become increasingly
important to make effective routing, scheduling, and take consolidation
decisions.

Activity U

❖What do you understand by “network” and “routes” in transportation?


…………………………………………………………………………………………………………………………
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Freight by Lane Analysis


Freight by lane analysis is based on geographic zones. (Figure 7.4). Freight
Lane Analysis define and view your rates, empty miles, total miles, revenue
miles, and loaded miles, billed miles, and movement miles by lane, over
any time period you choose. The objective when developing Freight Lane
Analysis is to craft a series of loads that combine to generate the necessary
revenue which creates a profit at the completion of each freight lane run.

Freight lanes attempt to coordinate movement between points by moving


combinations of material and finished product between suppliers,
manufacturers, and customers.

When developing a freight lane, it is important to take this imbalance into


consideration. But because a freight lane is imbalanced to some degree, it
does not mean is not worth developing. There are always going to be
freight areas where the inbound freight far exceeds the outbound freight,
meaning there will be more trucks than freight in an area. In a well-
designed freight lane, this imbalance is taken into consideration. It might
be necessary to depart a low freight area empty and head to a location
which has better paying freight, or it might make sense to take that cheap
load to generate cash flow to increase your total revenue on the trip. This
is all decided by doing a Freight Lane Development Analysis.

Triangular freight lanes attempt to coordinate movement between three


points by moving combinations of material and finished product between
manufacturers, distributors and customers.

!
Figure 7.4: Freight Lane Analysis

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7.5.6 Inventory Analysis


In supply chain, ABC analysis is an inventory categorization method which
consists in dividing items into three categories, A, B and C: A being the
most valuable items, C being the least valuable ones.

Inventory optimization is critical in order to keep costs under control within


the supply chain. Yet, in order to get the most from management efforts, it
is efficient to focus on items that costs most to the business.

The ABC approach states that, when reviewing inventory, a company


should rate items from A to C, basing its ratings on the following rules:

• A-items are goods whose annual consumption value is the highest.


The top 70-80% of the annual consumption value of the company
typically accounts for only 10-20% of total inventory items.

• C-items are, on the contrary, items with the lowest consumption


value. The lower 5% of the annual consumption value typically accounts
for 50% of total inventory items.

• B-items are the interclass items, with a medium consumption value.


Those 15-25% of annual consumption value typically accounts for 30%
of total inventory items.

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7.6 Summary

This chapter provides a comprehensive review of the logistics planning


process, decisions, and techniques. It is designed to guide the logistics
manager through the overall process of situation analysis, alternative
identification, data collection, quantitative evaluation, and development of
viable recommendations.

The methodology, which is generic enough for most logistics problem-


solving, includes three phases: problem definition and planning, data
collection and analysis, and recommendations and implementation. The
problem definition and planning phase is concerned with the feasibility
assessment and project planning. Feasibility assessment includes situation
analysis, supporting logic development, and cost-benefit estimation.

Project planning requires statements of objectives and constraints,


measurement standard definition, analysis technique specification, and
project work plan development. The data collection and analysis phase
develops assumptions, collects data, and completes the quantitative and
qualitative analyses. Assumptions development and data collection include
tasks to define the analysis approach, formalize assumptions, identify data
sources, and collect data. The analysis step involves definition of analysis
questions, completion of validation and baseline analyses, and completion
of alternative and sensitivity analyses. The recommendations and
implementation phase develops the final plan. The recommendation
development step includes identification and evaluation of the best
alternatives. The implementation step defines a recommended course of
action, schedules development, defines acceptance criteria, and schedules
final implementation.

Ad hoc tactical analyses such as freight lane balancing and ABC inventory
analysis must be completed regularly to respond to changes in
transportation rates, flows, and product demands. Regular supply chain
planning and location analysis is becoming increasingly critical to respond
to changes in global material availability, market demands, and production
resource availability. More tactical tools such as dynamic simulation and
routing and scheduling algorithms can be used to investigate and evaluate
inventory and transportation alternatives. The importance of such
comprehensive planning and analysis methods and tools is growing due to
the possible alternatives to and complexity of global supply chains.

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7.7 Self Assessment Questions

1. Explain the concept of a system in a supply chain.

2. Why is a feasibility assessment done before a proposed project?

3. What could be the constraints experienced by the management before


undertaking a new project?

4. What is the role of sensitivity analysis in systems design and analysis?

5. Why is it important to develop supporting logic to guide the logistical


planning process?

6. In view of distribution network design, discuss the interrelationship that


exists between number of warehouses and:

a. Delivery lead time


b. Transportation cost
c. Warehouse facility cost

7. What is the key objective in freight lane analysis?

8. What is the main advantage of the typical optimization technique in


comparison to simulation?

9. At what point in the typical analysis does the technique give way to the
managerial review and evaluation process?

10.Compare and contrast strategic and tactical transportation decisions.

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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter

Summary

PPT

MCQ

Video Lecture

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Chapter 8
LOGISTICS OUTSOURCING AND BEST
PRACTICES
Objectives

After going through the chapter, students should be able to understand:

• The overview of industry structure.


• The scope of and rationale for Logistic Outsourcing
• The meaning, definition, advantages, disadvantages and current state of
3PL service providers and collaborative relationship with 3PL service
providers.
• The 4PL Providers and Capabilities of 3PL and 4PL service Providers
• The contribution of 3PL services in firms’ logistics performance

Structure

8.1 Industry Structure


8.2 Rationale for Logistics Services Outsourcing
8.3 What is 3PL? Definitions
8.4 Types of 3PL Providers
8.5 Advantages of 3PL
8.6 Disadvantages of 3PL
8.7 Managing Today's Challenges in Third Party Logistics
8.8 Scope of Logistics Outsourcing
8.9 Collaborative Relationship with 3PL Service Provider
8.10 Current State of 3PL Markets
8.11 4PL (Fourth Party Logistics) Providers
8.12 Capabilities of 3PL and 4PL Service Providers
8.13 Contribution of 3PL Services in Firms’ Logistics Performance
8.14 Summary
8.15 Self Assessment Questions

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Introduction
Logistics outsourcing involves a relationship between a company and an
LSP (logistics service provider), which, compared with basic logistics
services, has more customized offerings, encompasses a broad number of
service activities, is characterized by a long-term orientation, and thus has
a strategic nature. Transport and storage of materials and products may
constitute a considerable part of costs in functioning of a company.
Sometimes, it is only a precise statement of these costs that makes
companies interested in modern logistics solutions.

8.1 Industry Structure


Previously, logistics activities have been given less importance as
compared to other business operations like distribution, warehousing,
management of inventory, transportation, material handling and order
processing which were handled by the firms themselves. However, the
rising importance on supplying good customer service efficiently and
effectively, the need for developing sustainable competitive advantage, and
the re-engineering and strategic value of concentrating on major business
activities resulted in maturity of contract logistics which is almost unusual
from conventional logistics.

The two important factors of outsourcing are flexibility and emerging


technology of third parties. Firms can hire the services of third party
logistics at their ease rather than to implement and develop new
technologies in-house, as it would be costly and time-consuming activity.
Alternatively, resourcefulness of third parties facilitates firms to develop in
technology, location, control and rotating permanent costs into changeable
costs. Third party logistics providers are capable enough to reconstitute the
delivery system to change to technological advances or altering markets.

As end-to-end integration, supported by better visibility tools, becomes


more attainable, the needs of customers of logistics service providers are
diverging. In order of their increasing demands, four customer segments
can be identified:

• In-sourcers – Manage and operate most of their own logistics activities


in-house. Some companies operate in-house either by accident or design.
That is, some of them in-source because they think of these activities as
“back-office” functions without recognizing that there is high leverage
potential through a more strategic, corporate focus.

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• Commodity outsourcers – Focus on the very tactical outsourcing of


non-core activities: transport, warehousing and freight forwarding. They
expect a good level of operational efficiency. They call for more
innovation but are not prepared to pay for it. They have a large number
of providers serving niche needs primarily based on cost of service and
are willing to switch more readily to lower prices.

• High process conformance outsourcers – Operate in a framework


where processes are very clearly defined and conformance is tightly
measured. So they want demonstrably greater depth of people with high
process and target conformance and consistency. They seek a wider
range of services, such as special packaging configuration, shelf stacking
and reverse logistics. They expect their Freight Forwarders to remove
data complexities where multiple carriers are used. Within this segment
are buyers who dictate the operating model and often require use of
systems that they have selected. There are also buyers who demand not
only a high level of operational effectiveness, but also demonstrable
efficiency improvements every year.

• Wider service outsourcers of process, planning and control,


execution and technology – These buyers have concluded that to
realize the full scope of the potential trade-offs (among transport,
storage, inventory and service levels) they need to move to fewer, bigger
contracts allowing for more scale economies. This is combined with
process improvement and better process interfaces in order to reduce
complexity (fewer providers), and focus on process simplification and
standardization. They are looking for evidence of effective end-to-end
integration and more tightly engineered synchronization and
optimization, as well as the “traditional” qualification of industry
specialization.

Activity A

❖How can companies derive a competitive advantage through contract


logistics?
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8.2 Rationale for Logistics services outsourcing

Logistic decisions of the firm are driven and justified by various factors
including, among others, the need to achieve operational flexibility,
customer service, risk mitigation, cost reductions, operational efficiency
and access to resources and markets. It is argued that out of these many
factors, cost reduction and expectation to improve services are the most
frequently cited factors for outsourcing.

To gain a better understanding of the rationales for logistics outsourcing, it


is important to organize driving factors in some major categories. Since
supply chain redesigning goes together with environmental changes and
internal profile of the firm, the major categories that can best represent
this setting are strategic, operational, financial, and environmental factors.
Furthermore, these are the main areas where outsourcing firms anticipate
potential gain from their relationships with 3PLs.

Strategic factors: Outsourcing provides opportunities to focus on core


competencies. Sink and Langley (1997) argue that it is a viable business
strategy since handing over non-core functions to 3PL service providers
enables the management to leverage its resources, spread risks, and
concentrate resources in issues critical to survival and future growth.
Likewise, the role of logistics functions in areas such as sourcing,
manufacturing, and distribution activities is prone to the influence of
strategic decisions such as development of core capabilities and discarding
of business segments or functions (Rao and Young, 1994).

Operational factors: In the assessment of whether or not to outsource,


operational complexity can be considered as one of the core determining
factors. In their assessment of factors influencing outsourcing of logistics
functions in global supply chains, Rao and Young (1994) identified logistic
complexity as a representative term for collective impact of characteristics
of the outsourcing firm’s business profile. They went further breaking this
down into network complexity, process complexity and product complexity.
The need to achieve a larger geographical coverage, efficient information
and communication systems, market relationships and to provide higher
level of customer services all contribute to outsourcing decisions. A higher
level of operational flexibility is also needed to cope with fast changing
business environment, shorter product life cycles and ever increasing
pressure due to changing patterns in market demand and customer

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expectation. The cost of investing in internal logistical assets is not only


very high but also the resulting levels of fixed assets tend to lock the
company in a certain way and reduce operational flexibility. Many other
authors, therefore, have pointed achievement of operational flexibility as
an important reason in outsourcing 3PLs.

Financial factors: As one of the main goals in business decisions is to


achieve and maintain a higher profitability; growth in revenues and cost
reduction therefore are apparently the main targets in logistic design
decisions. Many logisticians agree that cost reduction is a single or one of
the most important reasons for logistic outsourcing decisions. Furthermore,
it is argued that critical to deciding whether to maintain a logistic function
in-house is whether it provides cost-effective service at a quality level
competitive in the market (Rao and Young, 1994). However, logistics
activities are not always considered to be value producing functions and
thus there are often limited corporate resources for having dedicated fixed
investment in them (Sink and Langley, 1997).

Environmental factors: Changes in regulatory environment may also


prompt companies to alter parts of their business model or completely
redesign it. Some firms express willingness to outsource most of their
logistics activities but wants to retain those activities in-house when
hazardous materials or other controlled items (such as pharmaceutical or
defense-related goods) are involved (Rao and Young, 1994).

Activity B

❖What are the major factors leading to outsourcing logistic services?


…………………………………………………………………………………………………………………………
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8.3 What is 3PL? Definitions

“A third party logistics provider (abbreviated 3PL) is a firm that provides


outsourced or "third party" logistics services to companies for part, or
sometimes all of their supply chain management functions.”

Third party logistics providers typically specialize in integrated warehousing


and transportation services that can be scaled and customized to
customer’s needs based on market conditions and the demands and
delivery service requirements for their products and materials.

Referring to it as “contract logistics”, they define 3PL outsourcing as a


process whereby a shipper and 3PL provider enter into an agreement for
specific services at specific costs over some identifiable time horizon.

3PL firms provide outsourced or logistics services to companies for an


aspect, or sometimes all of their SCM functions. 3PL logistics providers
typically specialize in integrated warehousing and transportation.

These services are capable of being systematically scaled and customized


to clients’ needs in response to market conditions which determine the
demands and delivery service requirements for products and materials.

8.4 Types of 3PL Providers

Standard 3PL providers are the most basic form of a 3PL provider.
Activities performed include the most basic functions of logistics ─ ‘picking
and packing’, warehousing, and distribution. 3PL functions are not the main
activity of these firms.

Service developers are a type of 3PL provider which offers customers


advanced value-added services in the form of: ‘tracking and tracing’, cross-
docking, specific packaging, or a unique security system. A strong
information technology platform, combined with a focus on economies of
scale and scope, enable this type of 3PL provider to undertake these tasks.
Customer adapters are a form of 3PL provider which responds to requests
from a customer to take complete control of the company’s logistics
activities. New logistics services are not provided or dramatically improved.
The customer base is typically quite small.

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Customer developers are the highest level 3PL provider with respect to
its processes and activities. A 3PL provider integrates its activities with the
customer and controls the entire logistics function. Extensive and detailed
tasks are performed for few providers.

Activity C

❖Define a 3PL service. What do you understand by contract logistics?


…………………………………………………………………………………………………………………………
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8.5 Advantages of 3PL

Reduced Transportation and Distribution Cost


A third party logistics company deals with a large number of freight
carriers. They will have the ability to negotiate larger savings and develop
transportation that is more efficient. Outsourcing your warehousing needs
also reduces costs for machinery and inventory management.

Tailored Services
Third party logistics have the ability to tailor their services to what is
required of them and can offer a range of solutions for individual
companies to reduce their overall costs and increase efficiency. They can
ensure your company needs are met using the most effective, cost and
time efficient systems.

Enhanced Shipment Control


Third party logistics can offer enhanced shipment control. The outsourced
company can contract and work with overseas suppliers with their greater
booking options and service types. Shipping and transportation costs
become cheaper by combining greater volumes to be transported together.

Access to Valuable Information


As third party logistics are coordinating for a number of supply chain
processes, they have greater access to software that can provide
information on best transport at competitive pricing. This software can
greatly assist in determining the best carrier and the most reasonable cost,
with the power to access current rates and numerous qualified freight

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LOGISTICS OUTSOURCING AND BEST PRACTICES

companies. Therefore, your company can benefit from resources


unavailable through in-house sources.

Up-to-date Technology
If an organization feels they do not have the expertise, manpower or
infrastructure for their warehouse, logistics or operating systems, they can
still have an effective supply chain including reverse logistics by
outsourcing to a qualified third party logistics organization (3PL). 3PLs
ultimately allow companies to keep up-to-date with ever-changing
technology without the extra costs and time involved which can then be
spent on core business functions.

Activity D

❖What do you understand by ‘tailor-made service’?


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8.6 Disadvantages of 3PL

Lack of Direct Oversight


One of the downsides of using 3PL services is that the client businesses
have no direct control over their operation. They are relying on the 3PL
company to consistently come through in delivering the promised services.
This lack of direct control means that client companies are at the mercy of
any problems the 3PL company faces. Beyond the possible loss of business,
the damage that results from 3PL services failing to deliver certain
products on time is the client company's problem, not the 3PL’s.

Pricing Models
3PL services promote their service as the most cost-efficient way to get
logistics done. While this may be true, contracting with such a service
means that the company is locked into the pricing model specified in the
business agreement. By handing logistics over to a 3PL service, companies
are forgoing the possibility that an in-house logistics department could
figure out a cheaper and more efficient solution.

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Dependency
Handing over logistics to a 3PL service is a large commitment. Businesses
need a reliable structure to function. Logistical downtime can translate into
large amounts of lost productivity and revenue. Consequently, while the
free market dictates that a business which is dissatisfied with its 3PL
service could always find another, or develop its own logistical
infrastructure, the reality is not so simple. Switching the nature of a
company's logistical support can cost the company a great deal in
unforeseen costs resulting from the transition. When businesses contract
with 3PL services, it creates a dependency which is no small matter to
change. This dependency puts the client company in uncomfortable
situations if pricing schemes or service reliability from the 3PL service is
not working out as expected.

Activity E

❖What problems can a company face if they outsource their logistics


activities?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

8.7 Managing today's challenges in third party logistics

Logistics service providers (LSPs) or 3PLs are needed to provide tools to


their customers that demonstrate the effectiveness of their services while
dealing with the challenges of:

Scalability and reliability of systems to meets global customer


demand
Logistics service providers integrate functions across the supply chain,
from sourcing of raw materials, through to product manufacturing and the
distribution of finished goods. A consolidated view of this information is a
large part of the expected value to their customers. In order to deliver this
value, logistics service providers require scalable systems that effectively
manage the depth and breadth of data and that reliably delivers the data.

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Flexibility of the systems to model different customers’ supply


chain needs
Business processes differ by customers and product lines. Logistics service
providers need insight into business process in order to identify which
business processes are not working, where cost efficiencies and
opportunities can be gained and provide continuous improvement of supply
chain processes.

Leveraging existing investment in systems


Logistics service providers have investments in transportation management
systems, warehouse management systems and other technologies that
provide a portion of the capabilities needed by their customers. For real
end-to-end visibility and control of the supply chain, customers must have
an integrated view of orders, shipments and inventory.

Activity F

•What do you understand by integration of logistics services?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

8.8 Scope of Logistics Outsourcing

Companies outsource to solve a specific problem, improve performance, or


achieve any other goal fitting their needs. At the same time, why a
company would outsource logistics functions is as important as how they
would strategize its execution. From the 3PL definition, we get at least four
important features of a logistics outsourcing design: nature or type of
outsourced logistics activities; number of outsourced activities; proportion
of budget outsourced; and length of outsourcing relationships.

Type of outsourced logistic services: About scope of activities, 3PL


outsourcing does not necessarily mean overhauling the whole logistic
system. Sink and Langley (1997) define third party logistic outsourcing as
the use of external service providers to perform some or all logistics
functions that were traditionally performed internally by a firm. Millen et al.
(1997) also advises that outsourcing should not be taken as “all or
nothing” decision. These explanations indicate that most firms would settle
with a design entailing outsourcing of only those logistics functions critical

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LOGISTICS OUTSOURCING AND BEST PRACTICES

to addressing their specific or custom needs. As we have seen, the nature,


types and number of outsourced activities are presented in the definitions
as important elements in 3PL outsourcing. Therefore, for the rest of this
study, we will refer to these elements altogether as scope and this is going
to be one of our important parameters in the assessment of 3PL
outsourcing design. Transport and shipment, warehousing and inventory
control, Information system related, and value-added services as the most
outsourced logistic areas.

Proportion of budget outsourced: The share of Logistic budget


outsourced is also a good static picture of the extent that firms outsource
their logistics activities to 3PL or 4PL. If proper costing procedures are in
place and the firms keep tracks of all logistics expenditures, including those
in connection with 3PL, then it is the percentage of total logistics budget
that is covered by outsourced activities.

Length of outsourcing relationship: Another important parameter


explicitly indicated in the definitions is the length of outsourcing
relationship. While the visited definitions present types, nature and number
of outsourced activities as well as length of outsourcing agreements as
necessary features informal relationships between a firm and its 3PL
providers, they apparently waver on including basic logistics services. The
excluded services are normally general, informal and characterized by
arm’s length or also known as transactional logistic contracts.

This, therefore, indicates that a choice and nature of logistics services


provider is another important feature or parameter in the assessment of
3PL outsourcing design. The extent that firms outsource their logistic
activities depends on the nature of activities themselves, availability of
logistic providers with those capabilities, availability of internal capabilities,
nature of industry and other cost-benefit analysis. The two possible ways
to establish the extent that firms outsource their logistics functions is by
assessing the type and proportion of activities outsourced in these firms
and identifying the share of logistic budget outsourced to external
providers.

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Activity G

❖Can part of a logistics activity be outsourced? What are the major factors
which decide on outsourcing?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

8.9 Collaborative Relationship with 3PL Service Provider

Attaining a collaborative relationship is indispensable for improving logistics


performance of a 3PL outsourcing organization. Studies indicate that there
is an increasing recognition that firms need to manage closer, longer term
relationships with their suppliers or service providers. It is also argued that
outsourcing companies that are embedded in collaboration relationships
with 3PLs or 4PLs have been found to experience higher levels of trust and
commitment.

A number of challenges experienced by these organizations in establishing


collaborative relationship with their client organizations practically stand for
important issues to consider when developing effective relationship
strategies. Most of these issues touch specific areas of the organization like
functions, process or the whole organizational structure. For easy
understanding, they can be grouped into four major categories (factors):
(1) Top Management Commitment, (2) Organizational Issues, (3) Trust
and Perception Issues and (4) Resource Availability.

Top management commitment: The first factor to consider in


developing collaborative relationships with logistics providers is the
commitment of top management in the client organization. Lack of this
commitment in organization can be a source of many problems since the
top management is for many important decisions including approval of
needed resources, monitoring of performances and providing leadership in
ensuring organization goals are reached. Many other issues are related to
top management commitment; these are together with lack of willingness
to spend time necessary to develop relationships and changes in leadership
at the client organization. While relationships cannot improve without any
further effort and time from the parties, change in leadership may impact
original vision and strategies in the client organization. If the new

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LOGISTICS OUTSOURCING AND BEST PRACTICES

leadership has different opinion, the relationships with logistics providers


may be exposed to risks.

Organizational factors: Organizational factors are those related to the


structure and processes within the client organization. One of important
elements under this category is the choice of point(s) of contact for 3PL or
4PL providers. Having multiple contact points within the client organization
may bring confusion and result into failures to strengthen existing
relationships or breakdown of the same. Another element is the tendency
to excessively use consultants in managing bid processes; if carelessly
utilized, these get in the way of collaboration and create bottlenecks
between the service providers and client. Consensus within client
organization is also one of important elements in establishing relationships
with logistics providers. There is, therefore, a need for organization to have
well-defined techniques or procedures on how to achieve consensus.

Perception and Trust: Collaborative relationships require a high level of


trust as the parties to the relationship may need to share some sensitive
information as a means of achieving specified goals. Lack of trust may
trigger opportunistic behavior that may lead the both parties to lose. Some
client organizations may have perception that 3PLs and 4PLs basically
provide services and therefore cannot become strategic partners (shopping
on transaction basis and procurement instead of supply chain orientation).
There are also organizational biases against collaborative relationship with
vendors; these may cause risk-reward imbalance and lack of precise
performance metrics. Perception and level of trust may also be the result of
the organization’s past experiences in relating to its business partners or
its orientation towards relationship marketing with its own customers. This
means that, firms with more experience in partnering with 3PLs probably
have more realistic expectations and greater capability of sustaining close,
interactive relationships with other 3PLs.

Resources: Some organizations may just fail to take full advantage of 3PL
or 4PL outsourcing as a result of lack of necessary resources to support
real collaboration. The resources may be financial, labor or technological
resources like an adequate information system depending on the nature of
the organization. For successful outsourcing relationships, there is a need
to orchestrate necessary resources and facilitate collaboration; this has to
be done on time and at the level that matches requirements over the life of
the relationship. As we have seen, all these factors and their related

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LOGISTICS OUTSOURCING AND BEST PRACTICES

elements are critical for a successful collaborative relationship between a


client organization and its external logistics providers. Since different client
organizations have different goals and face different level of challenges in
their effort to establishing collaborative relationships with service
providers, most would calibrate these factors in such a way as to meet
their specific needs. One inevitable outcome from these calibrations is
availability of variety of strategies that organization pursue to facilitate
collaborative relationship with their 3PL and 4PL providers.

Activity H

❖How important are points of contact in a firm to service providers?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

8.10 Current State of the 3PL Market

It became clear that companies across industries and around the globe
regard logistics and supply chain management as intrinsic to their success.
Many place a high value on their partnerships with third party logistics
(3PL) companies. They credit 3PLs with helping them to attain goals
related to service, cost, and customer satisfaction.

The factors cited by 3PL users as contributing to this success can help
others maximize the benefits they receive from 3PLs:

Strong relationships: A substantial 74% of 3PL users see personal


relationships at an operational level as contributing to their success in
working with 3PLs. Just over half, 54%, agree that executive relationships
between 3PLs and customers are also important, to help provide guidance
and sponsorship. Client and provider must forge strong bonds up and down
the organization, from the executive level through operations.

Strong contracts: The second-most cited factor, at 60%, is a carefully


designed and signed contract that features detailed descriptions of services
and performance tracking. Although participants agree with the importance
of the contract, there was a concern that “over use” of the contract on a
daily basis can be counterproductive to building strong people and process
relationships between 3PLs and their clients.

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LOGISTICS OUTSOURCING AND BEST PRACTICES

Measurable and attained metrics: Understandably, clearly measured


improvements in service levels to customers (55%) and clearly measured
cost reductions (48%) are also cited as contributing factors to successful
3PL relationships.

The takeaway: Setting, and then driving toward, a commonly held set of
expectations is an essential element of success. Interestingly, larger the
revenue group, the more importance 3PL users place on a carefully
designed and signed contract that supports innovative arrangements
between a 3PL and a customer. One plausible explanation is that higher-
revenue companies may be more sensitive about carefully drafted
contracts, as they may have more at stake financially and otherwise. Also,
higher-revenue companies may have policies and procedures in place that
require use of a more formal agreement or contract that includes a
commensurate level of detail.

Activity I

❖What is the importance of a contract between the management and the


service providers?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

8.11 4PL (Fourth Party Logistics) Providers

Accenture™ first coined and registered the term 4PL as a trademark in


1996. 4PL providers (sometimes called Lead Logistics Providers) may be
defined as “A supply chain integrator that assembles and manages the
resources, capabilities, and technology of its own organization with those
of complementary service providers to deliver a comprehensive supply
chain solution.”

4PLs may be considered a refinement and extension of the 3PL concept.


One differentiator of 4PL lies in the capacity to “create unique and
comprehensive supply chain solutions that cannot be supplied or achieved
by any single provider.”

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LOGISTICS OUTSOURCING AND BEST PRACTICES

Essentially, a 4PL is an “integrator that assembles the resources,


capabilities, and technology of its own organization and other organizations
to design, build and run comprehensive supply chain solutions.”

A 4PL firm employs 3PL providers to supply services to customers through


proprietary computer systems and intellectual capital. A 4PL firm provides
outsourced or ‘third party’ logistics services to companies aspects of, or
sometimes all, of their SCM functions. A great deal of emphasis is placed
on the 4PL provider being a single point of contact for the shipper as an
integrated part of the business solution to the client. A fundamental feature
of a 4PL provider, which is considered a ‘non-asset’, is in principle of being
‘neutral’ in selecting shipping partners. The goal of 4PL is to achieve
benefits beyond the one-time operating cost by reducing asset transfers
gained from a traditional outsourcing relationship.

By adopting a holistic approach, 4PL has emerged as a breakthrough


supply chain solution by comprehensively integrating the competencies of
3PL providers, leading edge consulting firms and technology providers.
Such strategic alliances leverage the skill sets, strategies, technology and
global reach, which would have otherwise taken years to duplicate.

“4PL supply chain outsourcing has undergone a paradigm shift from a cost
centre to a revenue generating opportunity. It has leveraged logistics to
improve the service level to customers, accelerate the speed of launching
new products and stimulate market penetration.” Accordingly, 4PL’s main
competency lies in sustaining long-term investment and ongoing benefits
once initial cost savings are achieved.

Activity J

❖How is a 4PL service provider different from a 3PL service provider?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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8.12 Capabilities of 3PL and 4PL Services Providers

With all the array of 3PLs and 4PLs in the supply market, the challenge of
identifying and collaborating with the best service provider is left with the
firm that seek to outsource their logistics functions. This becomes even
harder when most providers claim to position themselves as having the
necessary capabilities to meet customer needs. How an outsourcing firm
determines whether its logistics providers have these capabilities is an
important parameter in determining its success in 3PL/4PL outsourcing.

Selection of Logistics Service Provider: In Analytic Network Process (ANP)


approach, they present a 9 steps provider selection model with three levels
of criterias: determinants, dimensions, and enablers, in a descending order.
In this model, Determinants represent compatibility, cost, quality and
reputation, dimensions stand for sub-criteria such as long-term
relationship, operational performance, financial performance, and risk
management.

Methodologies to use in this model are the following steps:

• Develop a team of competitive managers


• Define service and distribution objectives
• Develop distribution and functional specifications
• Identify potential providers
• Development and evaluation of request for information (RFI)
• Develop request for proposal (RFP)
• Evaluate RFP responses
• Field visit and inspection
• Final selection and Service agreement

While first 8 steps make a framework for initial screening, the final
selection of provider in this model is determined in the last step. This is
where the ANP methodology is actually applied by comparing shortlisted
providers based on dimensions, determinants and enablers and
interdependence among them.

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8.13 Contribution of 3PL Services in Firms’ Logistics


Performance

Undoubtedly, the ultimate goal of logistic outsourcing is improving logistic


performance. This therefore calls for logistic outsourcing firms to keep
track of their logistic performance starting with whether 3PLs deliver up to,
below, or above the expected level and whether a firm experiences any
significant progress from its outsourcing strategy. How to determine the
extent that this goal is reached and whether using 3PL providers is an
appropriate strategy is therefore an important challenge to be addressed. A
quantitative measurement based on key performance indicators (KPIs)
could perhaps be a more effective approach. On the other hand, logistics
executives are directly responsible for outsourcing processes in most firms
and therefore, as key informants, their assertions on the performance can
reliably be used for some inkling on the impact of outsourcing in their
business processes.

Some important performance measurements that can be used as both


input for quantitative measurements and parameters for qualitative opinion
by logistic executives are: Inventory accuracy, Number of on-time
shipments, Number of incidences of customer complaints, Number of
incidences of backorders, Warehouse cycle time, Number of kilos/unit
shipped; and Number of dollars shipped.

From the customer perspective, different factors are cited as critical to


success of logistic outsourcing. These include the capability to assess
competing 3PL service providers and outsourcing options, appropriate
contractual conditions, and effective monitoring of existing relationship,
close working relationships between trading partners and involvement of
senior management, clear definition of services and sharing information
with 3PL about the company’s policies and requirements. Exerting such a
level of effort in designing logistics outsourcing approach will be of no
meaning if the level of logistics performance is not improved or maintained
at relatively high. Whether or not there is an optimal combination of scope
of outsourced logistics functions, best 3PL providers and a good
collaboration with providers should be determined on the basis of the end
results in logistics operations. As the case may be, all relevant criteria like
lead time, costs, inventory levels, customer services and other capabilities
need to come into play when assessing a firm’s performance in logistics.

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LOGISTICS OUTSOURCING AND BEST PRACTICES

Managers and executives are expected to keep track of performances


bearing in mind all these indicators.

Activity K

❖How can logistics outsourcing firms keep track of the performance of


service providers?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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8.14 Summary

Customers of logistics services are seeking greater reliability at lower total


cost consistently – whether across the globe or in one sub-continent. But
as higher performance from greater end-to-end integration, supported by
better visibility tools, becomes more attainable, the approaches of
providers are diverging. More customers are recognizing that to realize the
full value of the potential trade-offs from outsourcing, they need to
broaden their span – from purchasing many piecemeal transportation and
warehousing services, to fewer, bigger contracts with much wider scope.

In response, the Logistics Provider industry has been evolving to offer


greater scope and more complex solutions. However, for the more
demanding customer segments – those seeking greater integration and
higher degrees of process conformance – there is often a gap between
buyer needs and provider capabilities. Often, providers market and
represent capabilities that they have not yet implemented, so they
overpromise and underdeliver. The business model of most providers traps
them because of their inability to scale offerings, thus failing to generate
returns which will allow them to meet the expectations of high process
conformance buyers. High process conformance, in this context, is the
ability to deliver end-to-end supply chain integration and synchronization
repeatedly for many customers, establishing de-facto process and
technology standards.

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8.15 Self Assessment Questions

1. What are the rationales for 3PL outsourcing?

2. How do manufacturers design their logistics outsourcing strategy?

3. How manufacturers facilitate collaborative relationships with their


logistics services providers? What challenges are involved and to what
extent these efforts are successful?

4. How much does the supply chain/logistics proficiency play a role in a


company’s competitive position in the industry?

5. Have supply chain/logistics needs surpassed the capabilities of a


company (core competency, technologies, infrastructure, etc…)?

6. Will a culture allow to appropriately manage an outside party through


the risks and perceptions of turning over control and customer
relationships?

7. How do manufacturers facilitate collaborative relationships with its


logistics services providers? What challenges are involved and to what
extent these efforts are successful?

8. How does 3PL outsourcing option impacts logistics performance in


manufacturing industry? What is the contribution of different factors
included in the logistics strategy?

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LOGISTICS OUTSOURCING AND BEST PRACTICES

REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter

Summary

PPT

MCQ

Video Lecture


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WAREHOUSING

Chapter 9
WAREHOUSING
Objectives

After going through the chapter, students should be able to understand:

• The concept and definition of warehousing

• The importance of warehousing in Whosale and Retail

• Function, Importance and Benefits of Warehousing

• Types of storage and warehouses

• Design and Layout of a warehouse

• WMS and safety and security of a warehouse

Structure

9.1 Definition
9.2 Concept of Warehousing
9.3 Importance of Warehousing in Wholesale and Retail
9.4 Functions and Importance of Warehousing
9.5 Economic Benefits of Warehousing
9.6 Types of Storage
9.7 Types of Warehouses
9.8 Warehouse Design
9.9 Warehouse Layout
9.10 Product Mix Analysis
9.11 Material Handling
9.12 WMS
9.13 Safety and Security
9.14 Summary
9.15 Self Assessment Questions

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WAREHOUSING

Introduction
Warehousing is an integral part of every supply chain system. It plays a
vital role in providing a desired level of customer service at the lowest
possible total cost. Warehousing is a link between producers and
customers. A warehouse is typically viewed as a place to hold or store
inventory. While effective logistics systems should not be designed to hold
inventory for extended times, there are occasions when inventory storage
is justified on the basis of cost and service.

Storage has always been an important aspect of economic development. In


the pre-industrial era, storage was performed by individual households
forced to function as self-sufficient economic units. Consumers performed
warehousing and accepted the attendant risks.

9.1 Definition

“Warehousing is that part of a firm’s logistics system that stores products


(raw materials, parts, goods-in-process, finished goods) at and between
point-of-origin and point-of-consumption, and provides information to
management on the status, condition, and disposition of items being
stored.”

9.2 Concept of Warehousing

As transportation capability developed, it became possible to engage in


specialization. Product storage shifted from households to retailers,
wholesalers, and manufacturers. Warehouses stored inventory in the
logistics pipeline, serving to coordinate product supply and consumer
demand. Because the value of strategic storage was not well understood,
warehouses were often considered necessary evils that added cost to the
distribution process. The concept that middlemen simply increase cost
follows from that belief. During earlier times, the need to deliver product
assortments was limited. Labor Productivity, Materials Handling efficiency,
and Inventory Turnover were not major concerns. Because labor was
relatively inexpensive, human resources were used freely. Little
consideration was given to efficiency in space utilization, work methods, or
materials handling. Despite such shortcomings, these initial warehouses
provided a necessary bridge between production and marketing.

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WAREHOUSING

Activity A

❖How does a warehouse act as a bridge between Production and


Marketing?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

9.3 Importance of Warehousing in Wholesale and Retail

In the distributive industries such as wholesaling and retailing, it was


traditionally considered best practice to dedicate a warehouse containing a
full assortment of inventory to every sales territory. As forecasting and
production scheduling techniques improved, management questioned such
risky inventory deployment. Production Planning became more dependable
as disruptions and time delays during manufacturing decreased. Seasonal
production and consumption still required warehousing, but the overall
need for storage to support stable manufacturing and consumption
patterns was reduced.

Changing requirements in retailing more than offset any reduction in


warehousing obtained as a result of these manufacturing improvements.
Retail stores, faced with the challenge of providing consumers to an
increasing assortment of products, found it more difficult to maintain
purchasing and transportation economics when buying direct from
suppliers. The cost of transporting small shipments made direct ordering
prohibitive. This created an opportunity to establish strategically located
warehouses to provide timely and economical inventory replenishment for
retailers. Progressive wholesalers and integrated retailers developed state-
of-the-art warehouse systems to logistically support retail replenishment.
Thus, the focus on warehousing shifted from passive storage to strategic
assortment. The term Distribution Center became widely used throughout
industry to capture this dynamic aspect of traditional warehousing.

Improvements in retail warehousing efficiency soon were adopted by


manufacturing. For manufacturers, strategic warehousing offered a way to
reduce holding or dwell time of materials and parts. Warehousing became
integral to Just-in-Time (JIT) and stockless production strategies. While the
basic notion of JIT is to reduce work-in-process inventory, such

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WAREHOUSING

manufacturing strategies need dependable logistics. Achieving such


logistical support across a global market typically requires strategically
located warehouses. Utilizing centralized parts inventory at a central
warehouse reduces the need for inventory at each assembly plant.
Products can be purchased and shipped to the strategically located central
warehouse, taking advantage of consolidated transportation. At the
warehouse, products are sorted, sequenced, and shipped to specific
manufacturing plants as needed. Where fully integrated, sortation and
sequencing facilities become a vital extension of manufacturing.

Activity B

❖What is the function of a central warehouse?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

9.4 Functions and Importance of Warehousing

!
Figure 9.1

In a nutshell, the various functions are:

• Receiving: A collection of activities involving receipt of materials, quality


assurance and disbursing of materials to appropriate places.

• Prepackaging: To break bulk and pack for single unit delivery in


merchandisable quantities with other parts to form assortments.

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WAREHOUSING

• Put away: For placing the merchandise in storage.

• Storage: Physical containment of merchandise.

• Order picking: Process of removing items from storage to meet specific


demand.

• Packaging and pricing: this is done when it is required, just before


sale.

• Sortation and accumulation: This is carried out when the order is


more than one item and accumulation is not done as the picks are made.

• Packing and shipping: The final stage before shipment of orders, which
include checking for completeness, containerization, documentation,
weighing, accumulating orders for outbound carrier, and loading of
trucks.

On the outbound, or market-facing, side of manufacturing, warehouses can


be used to create product assortments for customer shipment. The
capability to receive mixed product shipments offers customers two specific
advantages. First, logistical cost is reduced because an assortment of
products can be delivered while taking advantage of consolidated
transportation. Second, inventory of slow-moving products can be reduced
because of the capability to receive smaller quantities as part of a larger
consolidated shipment. Manufacturers that provide sorted and sequenced
product shipments on a timely basis are positioned to achieve a
competitive advantage.

An important goal in warehousing is to maximize flexibility. Flexibility is


facilitated by information technology. Technology has influenced almost
every aspect of warehouse operations by creating new and better ways to
perform storage and handling. Flexibility is also an essential part of being
able to respond to ever-changing customer demand in terms of product
assortments, value-added services, and the way shipments are sequenced
and presented. Information technology facilitates flexibility by allowing
warehouse operators to quickly react to changing customer requirements.

Benefits realized from strategic warehousing are classified as economic and


service. No warehousing should be included in a logistical system unless it

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WAREHOUSING

is fully justified on some combination of cost and service. Ideally, a


warehouse will simultaneously provide both economic and service benefits.

Strategic warehousing serves to satisfy requirements related to local


presence. While benefits of local presence may not be as obvious as other
service benefits, it is often cited by executives as a major advantage of
local warehouses. The underlying belief is that a local warehouse can
respond faster to customer needs than can a more distant warehouse. It is
anticipated that local warehouse presence will increase market share and
potentially profitability. While the local presence factor is a frequently
discussed strategy, little solid research exists to confirm or refute its
existence. In addition, more reliable transportation and technology-based
Order Processing are closing the response time gap regardless of distance.
Unless a warehouse is economically or service justified, it is unlikely that
local presence will favorably influence operational results. The fact remains
that a network of strategically located warehouses does provide key
customers the perception they will be logistically supported.

Activity C

❖Why emphasis is given to strategic warehousing?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

9.5 ECONOMIC BENEFITS OF WAREHOUSING

Economic benefits of warehousing occur when overall logistics costs are


reduced. For example, if adding a warehouse in a logistical system reduces
overall transportation cost by an amount greater than required investment
and operational cost, then the total cost will be reduced. When total cost
reductions are achievable, the warehouse is economically justified. Four
basic economic benefits are: (1) consolidation and break bulk, (2) sorting,
(3) seasonal storage, and (4) reverse logistics.

Consolidation and Break Bulk


The economic benefits of consolidation and break bulk are to reduce
transportation cost by using warehouse capability to group shipments.

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WAREHOUSING

In consolidation, the warehouse receives materials, from a number of


sources, those that are combined in exact quantities into a large single
shipment to a specific destination. The benefits of consolidations are the
realization of the lowest possible freight rate, timely and controlled
delivery, and reduced congestion at a customer’s receiving dock. The
warehouse enables both the inbound movement from origin and the
outbound movement to destination to be consolidated into a larger size
shipment, which generally results in lower transportation charges per unit
and most often quicker delivery.

A break bulk operation receives a single large shipment and arranges for
delivery to multiple destinations. Economy of scale is achieved by
transporting the larger consolidated shipment. The break bulk warehouse
or terminal sorts or splits out individual orders and arranges local delivery.

Both consolidation and break bulk arrangements use warehouse capacity to


improve transportation efficiency. Many logistical arrangements involve
both consolidation and break bulk. Figure 9.2 illustrates each activity.


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WAREHOUSING

!
Activity D

❖Describe the activity of consolidation


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Sorting
The basic benefit of sorting is to reconfigure freight as it flows from origin
to destination. Three types of assortment — cross-docking, mixing, and
assembly — are widely performed in logistical systems.

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Cross-docking is the transfer of goods and materials from an inbound


carrier to an outbound carrier, without goods or products actually entering
the warehouse or being put away into storage. Thus, the products "cross
the docks" from the receiving dock area to the shipping dock area. It is
primarily a warehousing practice, but in order for it to be efficient and
successful, there has to be close coordination and continuous, high-quality
information flow among manufacturer, distributor, and customer levels.
(Figure 9.3).

There are a number of different cross docking scenarios:

• Distributor Crossing-docking – Consolidating inbound products from


various suppliers into one shipment and delivering to the receiver once
the last item has been delivered to the depot.

• Retail Cross-docking – A shipment will be delivered to the depot,


splitted, relabelled (if required) and delivered to various customers.

• Manufacturing Cross-docking – A shipment of purchased and inbound


products are received into the depot that requires assembly. The
warehouse can receive the products and start putting the product
together for the production order.

!
Figure 9.3

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WAREHOUSING

Activity E

❖Describe the activity of cross-docking.


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Product Mixing
Product mixing for customer order means mixing products from multiple
supplier/production facilities to shipment to a single customer. Example:
meeting customer's order.

Supply mixing for manufacturing activities means mixing required


materials or sub-assemblies from multiple suppliers to shipment to a plant.
Example: meeting production order.

Cross-docking has the same effect as mixing and typically serves as


"distribution mixing center". Example: no storage involve, receive-sort-ship
action.

The basic benefit of mixing is to reconfigure transportation as it flows from


origin to destination. This usually results in significant transportation costs.
Mixing activities are carried out at distribution level (Distribution Centre).
(Figure 9.4).


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!
Figure 9.4
Seasonal Storage
For companies that experience seasonal demand for their products, the
supply of temporary building structures can be a cost-effective, flexible
method of storage to cope with the peaks in business.

Likewise, businesses that need additional space to protect goods over the
winter or require extra space for short periods of time, also find that
temporary on-site buildings can provide a perfect stopgap – and with no
large capital outlay or permanent build costs the expense can be kept to a
minimum.

Reverse Logistics Processing


Both products and packaging return for a variety of reasons, but returns
can be broadly divided between those that are unplanned and undesired
what we might call “traditional returns” – and those that are planned and
desired. Unplanned returns are typically limited to products which
customers have purchased.

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The reverse logistics of unplanned returns are particularly difficult because


organizations do not know what will be arriving when. This is the type of
return which the direct marketer in our study deals with.

An advantage of planned returns is that it is much easier for the


organization to know what is coming back when disposing of returns.

After a product has been returned, the question is what to do with it to


maximize its value. This is referred to as disposing of the product and
alternatives include:

• Reuse – where packaging is reused or a product is sent back to stock for


resale to another customer.

• Repair/repackage – where a moderate amount of repair and/or


repackaging will allow the product to be reused.

• Return to supplier – if the product was purchased from a supplier and


is returnable.

• Resell – where the product is resold in a secondary market “as is.” Some
logistics companies have found a niche in matching sellers with buyers in
secondary markets and say that there is a market for virtually anything.

• Junk – where the item is sent to a landfill, which can be a far more
expensive choice than most organizations realize due to landfill fees,
transportation costs, and the value of the impaired assets that are being
thrown away.

• Recycle – where the product is broken down and “mined” for


components that can be reused or resold.

• Renew – where a used product’s utility is restored by replacing worn


parts or remanufacturing in some manner, such that the product is again
useful and can be put back into service.

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Activity F

❖Mention differences between refurbished and recycled products.


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

9.6 Types of Storage

In planning warehouse layout, storage must be equipped to layout and


design racking systems to maximize storage and space. With state-of-the-
art design systems, designs can save operations time and money. The
main issue is to decide how to allocate the various storage locations of a
uniform storage medium to a number of SKUs.

Types of Storage Policies

Dedicated storage: Every SKU gets a number of storage locations,


exclusively allocated to it. The number of storage locations allocated to it
reflects its maximum storage needs and it must be determined through
inventory activity profiling.

Randomized storage: Each unit from any SKU can be stored in any
available location.

Class-based storage: SKUs are grouped into classes. Each class is


assigned a dedicated storage area, but SKUs within a class are stored
according to randomized storage logic.

Major criterion driving the decision-making process is by enhancing the


throughput of the storage and retrieval operations by reducing the travel
time, i.e., reducing the travel distance by allocating the most “active” units
to the most “convenient” locations.

Storage

• Slots (slotting) – specific assigned locations for material storage.

• Product velocity (volume movement) – drives warehouse layout.


High velocity items are positioned to minimize movement.

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WAREHOUSING

• Active storage – materials handling processes and quick movement.


Regardless of inventory velocity, most goods are stored for at least a
short time. Storage for basic inventory replenishment is referred to as
active storage.

• Extended storage – refers to inventory in excess of that required for


normal replenishment of customer stocks.

Another important factor in the slotting analysis is the SKU or product


velocity. Product velocity refers to the quantity and frequency of the SKU
picked over a designated period of time. Some rules of thumb when
considering the velocity of a SKU are:

1. Determine fast, medium and slow movers and place them in the
appropriate storage medium (i.e., pallet flow, carton flow, shelving, etc.)

2. Examine both average and peak-picking days.

3. Store high-velocity SKUs in a readily accessible and ergonomically


friendly area for ease of both picking and replenishment.

4. Establish whether individual SKU velocities are affected by seasonality


or special promotions.

Attempting to effectively slot your distribution center or warehouse


requires careful consideration of many factors and is frequently made more
complex by incomplete and/or inaccurate order fulfillment data. Good data
leads to positive results; bad or incomplete data to poor results. Some
common oversights often made by supply chain professionals when
developing a slotting plan on their own. Whether designing an effective
slotting system from scratch, or working within existing structural confines,
the key to developing a successful slotting strategy is an in-depth
understanding of product characteristics and movement.

It is essential that products be assigned specific locations, called slots, on


the basis of individual characteristics. The most important product
variables to consider in a slotting plan are product velocity, weight, and
special storage requirements.

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Figure 9.5: Warehouse Storage Based on Product Movement Velocity

Activity G

❖What do you understand by product velocity?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

9.6.1 Active Storage


Regardless of inventory velocity, most goods must be stored for at least a
short time. Storage for basic inventory replenishment is referred to as
active storage. Active storage must provide sufficient inventory to meet the
periodic demands of the service area. The need for active storage is usually
related to the capability to achieve transportation or handling economies of
scale. For active storage, materials handling processes and technologies
need to focus on quick movement and flexibility with minimal consideration
for extended and dense storage.

The active storage concept includes flow-through or cross-dock


distribution, which uses warehouses for consolidation and assortment while
maintaining minimal or no inventory in storage. The resulting need for
reduced inventory favors flow-through and cross-docking techniques that
emphasize movement and de-emphasize storage. Flow-through distribution

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is most appropriate for high-volume, fast-moving products where


quantities are reasonably predictable. While flow-through distribution
places minimal demands on storage requirements, it does require that
product be quickly unloaded, deunitized, grouped and sequenced into
customer assortments, and reloaded into transportation equipment. As a
result, the materials handling emphasis is on accurate information-directed
quick movement.

9.6.2 Extended Storage


When inventory is held for periods in excess of that required for normal
replenishment of customer stocks, it is referred to as extended storage. In
some special situations, storage may be required for several months prior
to customer shipment. Extended storage uses materials handling processes
and technologies that focus on maximum space utilization with minimal
need for quick access.

A warehouse may be used for extended storage for a variety of reasons.


Some products, such as seasonal items, require storage to await demand
or to spread supply across time. Other reasons for extended storage
include erratic demand items, product conditioning, speculative purchases,
and discounts.

Product conditioning sometimes requires extended storage, such as to


ripen bananas. Food warehouses typically have ripening rooms to hold
products until they reach peak quality. Storage may also be necessary for
extended quality checks.

Warehouses may also retain products for an extended basis when they are
purchased on a speculative basis. The magnitude of speculative buying
depends upon the specific materials and industries involved, but it is very
common in marketing of commodities and seasonal items. For example, if
a price increase for an item is expected, it is not uncommon for a firm to
buy ahead at the current price and warehouse the product for later use. In
this case, the discount or savings have to be traded off against extended
storage and inventory carrying cost. Commodities such as grains, oil, and
lumber may be purchased and stored for speculative reasons.

The warehouse may also be used to realize special discounts. Early


purchase or forward buy discounts may justify extended storage. The
purchasing manager may be able to realize a substantial price reduction

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during a specific time of the year. Under such conditions, the warehouse is
expected to hold inventory in excess of active storage. Manufacturers of
fertilizer, toys, and lawn furniture often attempt to shift the warehousing
burden to customers by offering offseason warehouse storage allowances.

Activity H

❖What is the difference between active and extended storage?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

9.7 Types of Warehouses

Private Warehousing
A private warehouse is typically operated by the firm owning the product.
The building, however, may be owned or leased. The decision concerning
ownership or lease is essentially financial. Sometimes it is not possible to
find a warehouse for lease that fits specialized logistical requirements; for
example, the physical nature of an available building may not be conducive
for efficient materials handling, such as buildings with inappropriate
storage racks or with shipping/receiving dock or support column
constraints. The only suitable course of action may then be to design and
arrange for new construction.

The major benefits of Private Warehousing are control, flexibility, cost, and
a range of intangibles. Private warehouses offer substantial control since
management has authority to prioritize activities. Such control should
facilitate integration of warehouse operations with the balance of a firm’s
logistics operations.

Private warehouses generally offer more flexibility since operating policies,


hours, and procedures can be adjusted to meet specific customer and
product requirements. Firms with very specialized customers or products
are often motivated to own and operate warehouses.

Private warehousing is usually considered less costly than Public


Warehousing because private facilities are not operated for a profit. As a
result, both the fixed and variable cost components of a private warehouse
may be lower than for-hire counterparts.

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Finally, private warehousing may offer intangible benefits. A private


warehouse, with the firm’s name on its sign, may stimulate customer
perceptions of responsiveness and stability. This perception may provide
marketing image in comparison to competitors.

Despite the above-noted benefits, the use of private warehousing is


declining because of an increasing managerial interest in reducing capital
invested in logistical assets. Also, the perceived cost-benefit of private
warehousing is potentially offset by a public warehouse’s ability to gain
operational economies of scale and scope as a result of the combined
throughput of multiple clients.

Activity I

❖What are the advantages of a private warehouse?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Public Warehousing
Public warehouses are used extensively in logistical systems. Almost any
combination of services can be arranged on a for-hire basis for either short
or long term. Public warehouses have traditionally been classified based on
operational specialization such as: (1) general merchandise, (2)
refrigerated, (3) special commodity, (4) bonded, and (5) household goods
and furniture.

General merchandise warehouses are designed to handle package products


such as electronics, paper, food, small appliances, and household supplies.
Refrigerated warehouses typically offer frozen or chilled capacity designed
to protect food, medical, photographic, and chemical products requiring
special temperatures. Special commodity warehouses are designed to
handle bulk material or items requiring special handling, such as tires or
clothing. Bonded warehouses are licensed by the government to store
goods prior to payment of taxes or import/export duties. They exert tight
control over movements in and out of the facility, since documents must
accompany each move. Finally, household goods or furniture warehouses
specialize in handling and storing large, bulky items such as appliances and
furniture. Of course, many public warehouses offer a combination of

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services. Public warehouses provide flexibility and shared services benefits.


They have the potential to offer operating and management expertise since
warehousing is their core business.

From a financial perspective, Public Warehousing may be able to achieve


lower operating cost than private facilities. Such variable cost differential
may result from lower wage scales, better productivity, and shared
overhead among clients. Public warehouses typically do not require capital
investment on the part of their customers. When management
performance is judged according to return on investment, the use of public
warehousing can be an attractive alternative. Public warehousing offers
flexibility concerning size and number of warehouses, thus allowing users
to respond to supplier, customer, and seasonal demands. In comparison,
private warehouses are relatively fixed and difficult to change because
buildings have to be constructed, expanded, or sold.

Public warehousing can also have the potential to share scale economies
since the combined requirements of users can be leveraged. Such leverage
spreads fixed costs and may justify investment in state-of-the-art handling
equipment. A public warehouse may also leverage transportation by
providing consolidation of multiple client freight. For example, rather than
require both supplier A and supplier B to deliver to a retail store from its
own warehouse, a public warehouse serving both clients could arrange
combined delivery, thus providing reduced transportation cost for the
customer.

A great many firms utilize public warehouses for Customer Accommodation


because of the variable cost, scalability, range of services, and flexibility. A
public warehouse charges clients a basic fee for in and out handling plus
storage. In the case of handling, the charge is assessed on the cases or
pounds moved. For storage, the charge is assessed on the cases or weight
in storage over a time. Special or value-added services provided by public
warehouses are typically priced on a negotiated basis.

Activity J

❖What are bonded warehouses?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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Contract Warehousing
Contract warehousing combines characteristics of private and public
operations. A long- term contractual relationship will typically result in
lower total cost than a public warehouse. At the same time, contract
warehouse operations can provide benefits of expertise, flexibility,
scalability, and economies of scale by sharing management, labor,
equipment, and information resources across multiple clients.

Contract warehouses typically offer a range of logistical services such as


transportation management, inventory control, order processing, customer
service, and return merchandise processing. Contract logistics firms,
typically called integrated service providers (ISPs), are capable of
performing the total logistics responsibility for an enterprise.

For example, Kraft Foods has increasingly utilized contract warehousing as


a replacement for private and public frozen and dry grocery facilities. Since
the late 1990s, Kraft has used AmeriCold Logistics, an integrated
warehousing and distribution services company, to perform storage,
handling, and distribution services. The arrangement has multiple benefits
for both parties. The long-term contractual arrangement allows Kraft to
expand its distribution network without incurring the time or cost of
building expansion. Kraft is assured that there will always be space for new
products, so its distribution network is protected. AmeriCold doesn’t have
to be concerned with selling space to Kraft. Moreover, the longer Kraft
utilizes AmeriCold’s services, the better the contract warehousing firm’s
capability to understand business needs and provide customized services.

Activity K

❖Which amongst the three warehouses – private, public and contract – are
best suited for companies?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………


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9.8 WAREHOUSE DESIGN

Warehouse design must consider product movement characteristics. Three


factors to be determined during the design process are the number of
floors to include in the facility, a cube utilization plan, and product flow.

The ideal warehouse design is a one-floor building that eliminates the need
to move product vertically. The use of vertical handling devices, such as
elevators and conveyors, to move product from one floor to the next
requires time and energy, and typically creates handling bottlenecks. So,
while it is not always possible, particularly in business districts where land
is restricted or expensive, as a general rule distribution warehouses should
be designed as one-floor operations to facilitate materials handling.

Warehouse design must maximize cubic utilization. Most warehouses are


designed with 25- to 30-foot clear ceilings, although selected automated
and high-rise handling equipment can effectively use heights over 100 feet.
Maximum effective warehouse height is limited by the safe lifting
capabilities of materials handling equipment, such as lift trucks, rack
design, and fire safety regulations imposed by sprinkler systems.

Warehouse design should facilitate continuous straight product flow


through the building. This is true whether the product is moving into
storage or is being cross-docked. In general, this means that product
should be received at one end of a building, stored as necessary in the
middle, and shipped from the other end. Figure 9.6 illustrates basic
straight-line product flow while minimizing congestion and redundant
handling.


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WAREHOUSING

Figure 9.6
Activity L

❖What are the specifications to be kept in mind when constructing a


warehouse?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

9.9 WAREHOUSE LAYOUT

The layout or storage areas of a warehouse should be planned to facilitate


product flow. The layout and the materials handling system are integral. In
addition, special attention must be given to location, number, and design of
receiving and loading docks.

There are five areas which are necessary to the functionality of the
Warehouse:

1. Receiving: Usually, the dock area where inventory will arrive, be signed
for by County personnel, and be counted for entry into the inventory
management system.

2. Storage: An area in the warehouse where supplies will be stored in


preparation for incoming orders.

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3. Warehouse Operations: This is the area where all paperwork and


inventory is tracked through systems provided by the County staff.

4. Staging: Where outgoing orders are compiled, verified, labeled, and


wrapped once, an order has been processed.

5. Vehicle Load Out: Where County-designated vehicles will arrive to pick


up the orders.

Depending on the facility being utilized, these areas may be either right
next to each other or on opposite ends of the building. The Material Unit
Leader is the staff member who will decide where these areas will be and
will relay that information to the Host Warehouse staff.

!
Figure 9.7: Warehousing Layout

Activity M

❖What do you understand by a ‘layout’ of a warehouse?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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9.10 PRODUCT-MIX ANALYSIS

An important area of analysis is analysis of products that will be distributed


through the warehouse. The design and operation of a warehouse are both
dependent on the product mix. Each product should be analyzed in terms
of annual sales, demand, weight, cube, and packaging. It is also important
to determine the total size, cube, and weight of the average order to be
processed through the warehouse. These data provide necessary
information for determining warehouse space, design and layout, materials
handling equipment, operating procedures, and controls.

9.11 MATERIALS HANDLING

Materials Handling system is the basic driver of warehouse design. As


noted previously, product movement and assortment are the main
functions of a warehouse. Consequently, the warehouse is viewed as a
structure designed to facilitate efficient product flow. It is important to
stress that the materials handling system must be selected early in the
warehouse development process.

(Covered in detail in Chapter 10)

9.12 (WMS)

To use the Warehouse Management Systems (WMS), it must first be


adjusted to meet business requirements. A WMS is a software application
that supports the day-to-day operations in a warehouse. WMS programs
enable centralized management of tasks such as tracking inventory levels
and stock locations. WMS systems may be standalone applications or part
of an Enterprise Resource Planning (ERP) system. Early warehouse
management systems could only provide simple storage location
functionality. Current WMS applications can be so complex and data
intensive that they require a dedicated staff to run them. High-end systems
may include tracking and routing technologies such as Radio Frequency
Identification (RFID) and voice recognition.

Project planning is critical to the success of any WMS implementation. The


project requires warehouse resources to collect data on the physical
warehouse, materials, inventory as well as defining the strategies required

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to operate the warehouse. There is the added challenge of implementing


the system whilst still operating the warehouse. A major factor of all
projects is still ship product whilst the WMS is being implemented.

The complexity of a WMS implementation varies with every business. The


physical dimensions and characteristics of each item in the warehouse are
required to be collected and entered into the new system. Capacity
calculations require the physical size and weight of the item as well as the
dimensions of all the storage bins or racks in the warehouse. The storage
options for each item are required, for example if the item can be stored
separately, in box, pallet or if it can be stacked. Each item must be
reviewed to see if it is physical limitations on its storage, such as requiring
refrigeration. Hazardous material information needs to be collected so that
the item is not stored in certain areas. This information is only part of the
requirements of the WMS implementation. The system requires decisions
or configuration to be made on how items are to be placed or removed
from the system, in what order, for what types of materials and what
methods of placement and removal should be used. The implementation
requires significant input from the resources that operate the warehouse
on a day-to-day basis and this can be a strain on warehouse operations. A
successful project will recognize this fact and ensure that the key personnel
required for the implementation are given adequate backup so that
warehouse operations do not suffer.

After the successful launch of the WMS system, many businesses will find
that the resources required to operate the system is greater than prior to
the implementation. This is primarily due to the data intensive nature of
the software and the fact that warehouses are in a state of flux; racks are
moved, placement and removal strategies changed, new items added, new
processes developed. Warehouse accuracy is paramount for the software to
operate and to do this data will need to be entered accurately and in a
timely fashion. Although most WMS implementations will reduce labor
costs in the placement and removal of materials, there is often an added
warehouse management function required just to operate the software.

Despite the complexity, WMS implementations do offer businesses


significant benefits. Not only will placement and removal cycle times be
reduced, but inventory accuracy should be improved as well as increased
storage capacity, more organized storage of materials and greater flexibility

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WAREHOUSING

of warehouse operations. Figure 9.8 summarizes WMS functionality and


decision support benefits.

!
Figure 9.8
Activity N

❖What are the value-added services offered in the activities of a


warehouse?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

9.13 Safety and Security

A safe, orderly, efficient warehouse is a key to a successful operation. The


warehouse plays an essential role in the way goods are sent, received,
stored, and circulated throughout the facility. With so much going on and
so much to keep track of, a warehouse may also have more potential for
accidents than areas with more limited functions. So, it is especially
important to pay close attention to safety in the warehouse.

Keeping workers safe and reducing warehouse liability is dependent upon


proper and thorough employee training. The following warehouse safety
checklist helps to keep employees and warehouse facility as safe and
productive as possible.

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WAREHOUSING

Safely Storing Materials

• Make sure that stacked loads are straight and even, to prevent them
from toppling over.

• Heavier loads should be stored on lower or middle shelves, so that they


create a center of gravity for your shelving units, as opposed to leaving
them top-heavy.

• When removing objects from shelves, only do so one item at a time.

• Keep the aisles and areas surrounding your shelf systems free from
obstruction.

Forklift Safety

• Never allow anyone who is under the age of 18 and/or not specifically
trained in forklift operation to operate a forklift.

• When driving a forklift, never exceed 5 mph, and always slowdown in


areas that have slippery floors or are likely to be congested with people,
materials, or other transport vehicles.

• Properly maintain forklifts, and always remember to do a walk-around


check for hazardous conditions before you operate one.

• Never operate a damaged or defective forklift until it has been


adequately repaired and proven safe for use.

• Make sure that aisles and loading docks that are traversed by forklifts are
kept clear, allowing plenty of space for a forklift to safely maneuver
through.

Damage
The moment a lift truck handles the product. The entire process of
reducing damage and how companies do it is interconnected with every
stop a product makes in the supply chain. Load damages represent the
largest cause of delivery exception in a supply chain. Communicating
changes in product case size along the supply chain is essential. A good
idea is to store product as much as possible off the floor, and using pallet

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WAREHOUSING

flow rails reduces damage from fork trucks and helps keep staged product
organized.

One of the most common causes of load damage is the result of the jolts
that occur to the load when the forklifts are crossing the dock levelers from
the dock to the trailers. Moving the loads from the dock floor to the trailer
floor causes the trailer to bounce during loading and this creates instability
in the lading process. A well-developed loading/unloading system will
enable the smooth, continuous flow of material into, through, and out of
the warehouse. The operating improvements achieved will more than
compensate for the initial cost of upgrading warehouse and loading dock
equipment.

Activity O

❖What care is to be taken to prevent accidents and damages in a


warehouse?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………


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9.14 Summary

Warehousing facilities play a vital role in the overall supply chain process.
This chapter addressed “back to the basics” that are fundamental for
warehouses to achieve both efficiency and effectiveness in supply chains,
and provide some perspective on current challenges and the future. It is
evident that continuing globalization and changes/challenges occurring in
such areas as reverse logistics, environmental sustainability, information
technology, and overall supply chain integration are further evolving the
strategies, roles, and responsibilities for warehouses.

In fact, the term “distribution center (DC)” may be much more appropriate
in representing the broad range of activities that now occur in modern
warehouses that go beyond filling customer orders to provide an ever
expanding array of value-added services.

As we view the future, the role and responsibilities of warehouses will


continue to be shaped by the globalization of business and the integration
of supply chains. As supply chains extend and become more complex and
costly to operate, information technology will be critical to achieve
efficiency and performance. Supply chain differentiation will continue to be
achieved through value-added services that reduce cost, improve service,
enhance overall product value and the customer experience. The WMS
replacement cycle is responsible for much of the recent growth in the
mature segments. Adoption of add-on modules such as labor management,
slotting optimization, and warehouse analytics will increase as users extend
their WMS footprints to increase warehouse productivity. Incumbent WMS
suppliers will support this trend with ongoing product development to meet
existing customers’ evolving requirements.

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WAREHOUSING

9.15 Self Assessment Questions

1. How can you reduce WMS integration risk?

2. What is meant by warehouse management?

3. What are the factors driving growth in the WMS market?

4. What is the concept of market presence, and how does it relate to the
functionality of warehousing?

5. How does technology play a part in warehousing operations?

6. Discuss the economic justification for establishing a warehouse.

7. How do warehouses perform assortment?

8. What is the benefit of consolidation and break bulk? How does a


warehouse help in this effort?

9. Why are contract warehouses classified as a combination of private and


public?

10.What are some of the hazards you might come across in a warehouse?

11.What the various reasons for holding inventory in a warehouse?

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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter

Summary

PPT

MCQ

Video Lecture - Part 1

Video Lecture - Part 2


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PACKAGING, MATERIAL HANDLING AND STORAGE SYSTEMS

Chapter 10
PACKAGING, MATERIAL HANDLING AND
STORAGE SYSTEMS
Objectives

After going through the chapter, students should be able to understand:

• The perspectives and objectives of packaging

• The meaning, objectives, role, functions, importance, methods


technology and equipment and principles of material handling

• The types of storage systems.

Structure

10.1 Perspectives of Packaging


10.2 Packaging for Material Handling Efficiency
10.3 Package Design
10.4 Unitization/Containerization
10.5 Material Handling System
10.6 General Objectives of Material Handling
10.7 Role of Material Handling in Supply Chain
10.8 Functions of Material Handling
10.9 Importance of Material Handling system
10.10 Tasks Performed During Material Handling
10.11 Material Handling Methods
10.12 Handling Technology and Equipment
10.13 Principles of Material Handling
10.14 Mechanized Systems
10.15 Automated Sortation
10.16 Special Handling Considerations
10.17 Automated Storage Systems
10.18 Summary
10.19 Self Assessment Questions

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Introduction

Almost every product we purchase as a consumer or a business is


packaged. The packaging was initially intended to provide protection for
the item as it being handled in the warehouse or when the item is being
shipped. Packaging can be extremely elaborate, and for the consumer it
can be an art form to entice you to make a purchase. For businesses, the
packaging on an item should be sufficient to limit any damage to the item
as it is moved in the warehouse. This chapter implements and enhances
the management of the packing operations within a warehouse. Once the
goods shipment is processed, the packing operation process commences.
The operation will be done individually by the warehouse worker who will
decide in which different handling unit will pack the product.

10.1 Perspectives of Packaging

Moving and storing items in the warehouse is very important for a


company. To maximize the storage capacity of a warehouse, the company
should develop their packaging so that the items can be stored easily on
pallets. By developing packaging that allows a certain number of items to
be stored safely and efficiently on a pallet, the cost of materials handling
will be reduced. Having packaging that reduces the number of items on a
pallet will increase costs only on in the warehouse but all along the supply
chain. Customers who will be purchasing items at the pallet level will also
benefit from efficient packaging.

Viewing materials handling delivery and store operations as an integrated


system resulted in a decision to discontinue reusing vendor cartons. The
new procedure used a standardized master carton that facilitated order
picking and materials handling. The new logistics practice was designed
around two concepts. First, standardized master cartons were adopted to
permit continuous conveyor movement from point of warehouse order
selection to truck loading.

Second, the integrated system used a computer process to assure that


each standardized master carton was packed to maximum practical cube
utilization. Under the new system, a picking list was generated for each
carton. After the individual pairs of shoes were placed into the carton, the
pick list was attached to the carton, providing a summary of contents for
retail store personnel.

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Activity A

❖What are the prime considerations of packaging while transporting goods


from one destination to another?
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10.2 Packaging for Materials Handling Efficiency

Materials handling efficiency in all of these cases is significantly influenced


by package design, unitization, and communication characteristics.

10.3 Package Design

Product packaging in standard configurations and order quantities


facilitates logistical efficiency. Total weight can sometimes be reduced by
product or package changes. Even when package design is not changed,
products that weight out before cubing out may offer special opportunities
as lightweight product can be top loaded to take advantage of the empty
cube without substantially changing total weight or transportation cost.

10.4 Unitization/Containerization

Unitization is the process of grouping master cartons into one physical unit
for materials handling or transport. The concept of containerization
includes all forms of unitization, from taping two master cartons together
to the use of specialized transportation equipment. The master carton and
the unitized load become basic handling units for logistical operations. The
weight, cube, and damage potential of the master carton determines
transportation and materials handling requirements. If the package is not
designed for efficient logistical processing, overall system performance
suffers.

A final logistics packaging concern is the relationship between the master


carton size, retail replenishment quantity, and retail display quantity. From
a materials handling perspective, master cartons should be standardized
and reasonably large to minimize the number of units handled in the
warehouse.

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Rigid Devices
These are packaging devices formed of substantially rigid material,
comprising a container, such as a cardboard carton, with a sheet of
substantially rigid material, such as a cardboard.

Rigid Packaging provides a variety of benefits:

• Barrier protection – Packaging provides a barrier to dust, water,


humidity and other contaminants that could potentially harm the
contents and decrease their shelf life.

• Containment – Grouping multiple cases, small objects or bulk materials


together aids in both manual and automated handling.

• Convenience – Rigid Packages can have features that add convenience


in distribution, handling, stacking, display, opening, reclosing, use,
dispensing, reuse, recycling, and ease of disposal.

• Physical protection – Rigid Packaged products are protected from


damage caused by dropping, shock, vibration, electrostatic discharge,
extreme temperature shifts and impacts.

• Security – Tamper resistant and tamper evident packaging can reduce


the risk of theft, or indicate that damage has occurred during handling.

• Sustainability – Returnable and reusable packaging can be used


repeatedly before it is recycled; some materials are engineered to
biodegrade.

Activity B

❖What is unitization? How does unitization help in reducing pilferage and


damage?
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Flexible Devices
As the name implies, flexible devices do not protect a product by complete
enclosure. The most common type of non-rigid unitization is stacked
master cartons on either pallets or slipsheets. A pallet is a flat transport
structure that supports goods in a stable fashion while being lifted by a
forklift, pallet jack, front loader, work saver or other jacking device. A
pallet is the structural foundation of a unit load which allows handling and
storage efficiencies. Goods or shipping containers are often placed on a
pallet secured with strapping, stretch wrap or shrink wrap and shipped. A
hardwood pallet is illustrated in Figure 10.2.

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Figure 10.2: Hardwood Four Way Entry Pallet

Produce package standardization is interpreted differently by different


groups. The wide variety of package sizes and material combinations is a
result of the market responding to demands from many different segments
of the produce industry. For example, many of the large volume buyers of
fresh produce are those most concerned with the environment. They
demand less packaging and the use of more recyclable and biodegradable
materials, yet would also like to have many different sizes of packages for
convenience. Packers want to limit the variety of packages they must carry
in stock, yet they have driven the trend toward preprinted, individualized
containers. Shippers and trucking companies want to standardize sizes so
the packages may be better palletized and handled.

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Figure 10.3: Basic Pallet Master Carton Stacking Patterns

The use of flexible unitization can increase damage potential if it is not


properly contained during handling or transport. In most situations, the
stability of stacking is insufficient to secure a unit load. Standard methods
of improving stability include rope tie, corner posts, steel strapping, taping,
antiskid adhesives, and wrapping. These methods essentially tie the master
cartons into the pallet stacking pattern. Increasingly popular methods for
securing unit loads are shrink wrap and stretch wrap. Both wraps use film
similar to that used in a kitchen for food preservation.

Pallet exchange pools have been organized as a way to overcome


traditional problems of return and exchange. High-quality pallets are
expensive and are difficult to retrieve once they leave the owner’s control.
When transfer to an external organization occurs, warehouses routinely
exchange poor-quality pallets and keep the higher-quality ones. Pallet
pools are third-party suppliers that maintain and lease high-quality pallets
throughout the country for a variable fee per single cycle. A cycle might be
defined as loading of pallets at a manufacturer and transporting to a
retailer’s warehouse. Pallet rental firms are responsible for developing,
purchasing, and maintaining pallets as well as providing control and
management systems.

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Activity C

❖What are the limitations of pallet packaging? How can they be overcome?
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Packaging has Several Objectives

Communication such as:

Information Transmission – Packages and labels communicate how to


use, transport, recycle, or dispose of the package or product. Some types
of information are required by governments.

Packages may include authentication seals to help indicate that the


package and contents are not counterfeit. Packages also can include anti-
theft devices, such as dye-packs, RFID tags, or electronic article
surveillance tags, that can be activated or detected by devices at exit
points and require specialized tools to deactivate.

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Product Code

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Figure 10.4: Identification Displays

Communication
The third important logistical packaging function is communication or
information transfer. This function is becoming increasingly critical to
provide: (1) content identification, (2) tracking, and (3) handling
instructions.

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1. Content Identification: The most obvious communication’s role is


identifying package contents for all channel members. Typical
information includes manufacturer, product, container type, count, and
Universal Product Code (UPC) number.

2. Tracking: Ease of package tracking is also important. Effective internal


operation and increasingly customers require that product be tracked as
it moves through the supply chain. Positive control of all movement
reduces product loss and pilferage.

3. Handling Instructions: The final role of logistics packaging is to


provide handling and damage instruction to material handlers. The
information should note any special product handling considerations
such as glass containers, temperature restrictions, stacking
considerations, or potential environmental concerns. If the product is
potentially dangerous, such as some chemicals, the packaging or
accompanying material should provide instructions for dealing with spills
and container damage.

Activity D

❖How does optimal packaging reduce transportation costs?


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10.5 Material Handling System

Introduction and Importance


Material handling is a necessary and significant component of any
productive activity. It is something that goes on in every plant all the time.
“Materials handling is the art and science of conveying, elevating,
positioning, transporting, packaging and storing of materials”. It is simply
picking up, moving, and lying down of materials through manufacture. It
applies to the movement of raw materials, parts in process, finished goods,
packing materials, and disposal of scraps. In general, hundreds and
thousands tons of materials are handled daily requiring the use of large
amount of manpower while the movement of materials takes place from
one processing area to another or from one department to another

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department of the plant. The cost of material handling contributes


significantly to the total cost of manufacturing.

It may be done manually or with some type of lifting equipment, such as


hand trucks and fork trucks. The majority of materials at the company will
be handled:

• Manually
• Using non-powered or powered hand trucks
• Using powered industrial trucks (i.e., a fork truck)
• Overhead cranes

Efficient and correct handling methods in factory and distribution


warehouses can contribute much to customer service and satisfaction.
Proper material handling helps in:

• Decrease the damage in handling


• Maintain the quality of storage
• Facilitate order processing
• In moving right goods at right time so as to make them available to the
right customers.

10.6 General Objectives of Material Handling

• Increase effective capacity of warehouse.


• Minimize aisle space.
• Reduce number of times product is handled.
• Develop effective working conditions.
• Reduce movements involving manual labor.
• Improve logistics service.
• Reduce cost.

10.7 Role of Material Handling in Supply Chain

In the last several years, material handling has become a new, complex,
and rapidly evolving science. For moving material in and out of warehouse,
many types of equipment and system are in use, depending on the type of
products and volume to be handled. The equipment is used, in loading and
unloading operations, for movement of goods over short distances. The

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handling of material in warehouse is restricted to unitized forms, which


require smaller size equipment.

However, for bulk handling of material at logistics nodes such as shipyards,


ports and airports, different types of equipment is used. In warehouses,
material handling operation is performed at the following stages:

• Moving the unloaded material to assigned storage place in warehouses.


• Unloading the incoming material from transport vehicle.
• Lifting the material from its storage place during order picking.
• Moving the material for inspection and packing.
• Loading packages/boxes/cartons on to transport vehicles.

The efficiency of material handling equipment adds to the performance


level of the warehouse. The internal movement of goods has a direct
bearing on the order picking and fulfillment cycle. The warehouse, wherein
the material handling equipment is in use, is more sensitive to labor
productivity than the manufacturing center as material handling is more
labor intensive. There is a scope for reducing labor and enhancing
productivity by emerging technology in material handling.

A good material handling system will enhance the speed and throughput of
material movement through the supply chain.

Activity E

•What are the benefits of efficient material handling equipment?


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10.8 Functions of Material Handling

Material handling function helps reduce the number of staff required for
managing inventory and reduce dangers of obsolescence. This, in turn,
helps reduce total cost. The need for material handling at various stages in
production and distribution has always existed. The cost of such activities
can represent anything up to 50% of total production cost of the product.
Logistics while stressing upon this activity, aims at reducing this cost
through development in material handling techniques. This activity centre

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deals with determining equipment selection and replacement policies, order


picking procedures and stock storage retrieval.

• Selection of equipment, machine and plant layout to eliminate or


minimize material handling requirement.

• Selection of appropriate and efficient the cost of material and safe


material equipment.

• Minimizing the cost of material handling by minimizing movement of


semi-finished goods during production.

• Planning movement of optimum number of pieces in one unit.

• Minimization of distance moved.

• Eliminating/minimizing back tracking and duplicate handling.

10.9 Importance of Material Handling System

Material handling is an important part of factory and industrial processes.


It covers the entire spectrum of functions such as waste handling,
assembly line management, storage and material transport. A material
handling system includes several smaller components that work side by
side, to make the everyday business more efficient and cost-effective.

Material handling is important as it is the key to warehouse productivity.


When materials in the warehouse are being managed well, there will be an
increase in efficiency and thus increase productivity. To maximise space,
the material needs to be stacked as close and as high as possible in a
warehouse. Manual labor faces constraints in the weight and height of
stacking they can handle which is an easy job for material handling
equipment. Heavy loads also bring safety issues in the picture since safety
is not given the importance it is due, something that can be attributed to
lack of safety regulations and cheap labour.

Material handling equipment can be used to move and lift heavy loads and
stack it, the movement of load can be done safely, etc. The use of material
handling equipment also results in higher productivity resulting in higher

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return on investment. Hence, material handling is very critical to the


operations of a warehouse.

Activity F

•How does effective material handling help in warehouse productivity?


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10.10 Tasks Performed During Material Handling

• Unloading the incoming material from transport vehicle.


• Moving the unloaded material to assigned storage place in warehouses.
• Lifting the material from its storage place during order picking.
• Moving the material for inspection and packing.
• Loading packages/boxes/cartons on to transport vehicles.

10.11 Material Handling Methods

The planner should select methods and equipment that can perform a
variety of tasks under a variety of operating conditions and in anticipation
of changing future requirements.

There are three types of picking methods:

• Order Picking
• Batch Picking
• Bulk Picking

Order Picking: Of all warehouse processes, order picking tends to get the
most attention. It is just the nature of distribution and fulfillment that you
generally have more outbound transactions than inbound transactions, and
the labor associated with the outbound transactions is likely a big piece of
the total warehouse labor budget. Another reason for the high level of
importance placed on order picking operations is its direct connection to
customer satisfaction. The ability to quickly and accurately process
customer orders has become an essential part of doing business.

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The methods for order picking vary greatly and the level of difficulty in
choosing the best method for your operation will depend on the type of
operation you have.

The characteristics of the product being handled, total number of


transactions, total number of orders, picks per order, quantity per pick,
picks per SKU (stock keeping units), total number of SKUs, value-added
processing such as private labeling, and whether you are handling piece
pick, case pick, or full-pallet loads are all factors that will affect your
decision on a method for order picking. Many times, a combination of
picking methods is needed to handle diverse product and order
characteristics.

Key objectives in designing an order picking operation include increases in


productivity, reduction of cycle time, and increases in accuracy. Often
times, these objectives may conflict with one another in that a method that
focuses on productivity may not provide a short enough cycle time or a
method that focuses on accuracy may sacrifice productivity.

Productivity: Productivity in order picking is measured by the pick rate.


Piece pick operations usually measure the pick rate in line items picked per
hour. Productivity gains are usually in the form of reducing the travel time.

Cycle Time: Cycle time is the amount of time it takes to get an order from
order entry to the shipping dock.

Accuracy: Regardless of the type of operation you are running, accuracy


will be a key objective. Virtually, every decision you make in setting up a
warehouse will have some impact on accuracy, from the product numbering
scheme, to the design of product labels, product packaging, the design of
picking documents, location numbering scheme, storage equipment,
lighting conditions, and picking method used. Employee training, accuracy
tracking, and accountability are essential to achieving high levels of
accuracy.

Activity G

❖What is the connection between order picking and customer satisfaction?


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Batch Picking: It is effective and relatively inexpensive to implement.


Batch picking is defined as picking multiple items in a single run to fulfill
multiple orders. Typically, a picker will use a cart with multiple cartons or
totes for multiple orders. The picker is then able to fulfill more picks on a
single trip to one bin or multiple bins in the same area. (Figure 10.5).

With a “man to goods” system where an order selector travels to the


product to fill orders, batch picking can drastically reduce the travel time.
In a “goods to man” system where product is delivered to the selector,
batch picking can reduce delivery traffic.

!
Figure 10.5

Bulk Picking: Bulk picking has around for a while and has been improved
since the original release. In a nutshell, this allows you to combine multiple
picks across several sales orders into one consolidated pick task. The
picker is then directed to drop this off to multiple destination locators. This
saves a significant time at picking – instead of executing 10 different pick
tasks for the same item, the picker is simply directed to execute one.

Activity H

❖Describe “man to goods” system and “goods to man system”.


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10.12 Handling Technology and Equipment

Handling
Advancements in handling technology and equipment offer the potential to
substantially improve logistics productivity. Handling processes and
technologies impact productivity by influencing personnel, space, and
capital equipment requirements. Handling is a key logistics activity. While
the technical details of handling technology are beyond the scope of this
discussion, the following section reviews some basic handling
considerations and alternative system solutions.

Basic Handling Considerations


Logistical handling occurs throughout the supply chain. A fundamental
difference exists in the handling of bulk materials and master cartons. Bulk
handling includes situations wherein the product is handled without first
being placed in master cartons. Specialized equipment is required for
handling bulk products such as solids and pallets. Bulk handling of such
fluids and gaseous materials is generally completed by using pipelines or
conveyors. The following discussion focuses on the non-bulk handling
wherein products are shipped in master cartons.

There are several basic principles to guide the selection of handling


processes and technologies. The principles summarized below offer an
initial foundation for evaluating handling alternatives.

Activity I

❖Describe the activity of bulk handling.


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10.13 Principles of Material Handling

• Equipment for handling and storage should be as standardized as


possible

• When in motion, the system should be designed to provide maximum


continuous product flow

• Investment should be in handling rather than stationary equipment

• Handling equipment should be utilized to the maximum extent possible

• In handling equipment selection the ratio of deadweight to payload


should be minimized

• Whenever practical, gravity flow should be incorporated in system design

Handling systems can be classified as mechanized, semi-automated,


automated, and information-directed. A combination of labor and handling
equipment is utilized in mechanized systems to facilitate receiving,
processing, and/or shipping. Generally, labor constitutes a high percentage
of overall cost in mechanized handling. Automated systems, in contrast,
attempt to minimize labor as much as possible by substituting equipment
capital investment. When a combination of mechanical and automated
systems is used to handle material, the system is referred to as semi-
automated. An information-directed system uses information technology to
direct mechanized or automated handling equipment.

10.14 Mechanized Systems

Mechanized systems employ a wide range of handling equipment. The


types of equipment most commonly used are lift trucks, rider trucks,
towlines, tractor trailer devices, conveyors, and carousels.

Lift Trucks
Lift trucks, also called forklifts, can move loads of master cartons both
horizontally and vertically but are limited to handling unit loads. Skids,
boxes, or containers may also be transported, depending upon the nature
of the product.

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Many types of lift trucks are available. High-stacking trucks are capable of
up to 40 feet of vertical movement. These new advances are discussed
under semi-automated handling systems. Conventional lift trucks are
utilized in shipping and receiving operations and to place merchandise in
high cube storage. The two most common power sources for lift trucks are
propane gas and battery.

Towlines

Towlines consist of either in-floor or overhead-mounted cable or drag


devices. They are utilized to provide continuous power to four-wheel
trailers. The main advantage of a towline is continuous movement.
However, such handling devices have far less flexibility than lift trucks.

The most common application of towlines is for master carton order


selection. Order selectors place master cartons on four-wheel trailers that
are then towed to the shipping dock. A number of automated decoupling
devices are available to route trailers from the main towline to specified
shipping docks.

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Tractor Trailer
Tractor trailers consist of a driver-guided power unit towing one or more
four-wheel trailers.

The tractor in combination with trailer, like a towline, is used during order
selection. The main advantage of a tow tractor with trailers is flexibility. It
is not as economical as the towline because each tow unit requires a driver.

Conveyors
Conveyors are used widely in shipping and receiving operations and serve
as the basic handling device for a number of order selection systems.
Conveyors are classified according to power, gravity, and roller or belt
movement. In power configurations, the conveyor is driven by a chain.

Gravity and roller-driven applications permit rearrangement with minimum


difficulty. Portable gravity-style roller conveyors are often used for loading
and unloading and, in some cases, are transported in over-the-road trailers
to assist in unloading vehicles.

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Carousels
A carousel operates on a different concept than most other mechanized
handling equipment. Rather than requiring the order selector to go to the
inventory storage location, the carousel moves inventory to the order
selector. A carousel consists of a series of bins mounted on an oval track or
rack. There may be multiple track levels, allowing for very high-density
carousel storage. The entire carousel rotates moving the storage bin to a
stationary product selection position.

The typical carousel application is for the selection of items to be packed


for shipment. The rationale behind carousel systems is to reduce order
selection labor by reducing walking length and time. Carousels, particularly
modern stackable or multi-tiered systems, also significantly reduce storage
space requirements.

Most systems combine different handling devices. For example, lift trucks
may be used for vertical movements while tow tractor with trailers or rider
trucks are the primary methods of horizontal transfer.

Semi-automated Systems
Mechanized handling is often supplemented by semi-automatic equipment.
Typical equipment utilized in semi-automated handling includes automated
guided vehicle systems, computerized sortation, robotics, and various
forms of live racks.

Automated Guided Vehicles (AGV)


An AGV system typically replaces mechanized tow tractors and trailers. The
essential difference is that AGVs are automatically routed, positioned, and
activated without a driver.

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AGV equipment typically relies on an optical, magnetic, or wireless radio


guidance system. In the optical application, directional lines are placed on
the warehouse floor. The AGV is then guided by a light beam focused on
the guide path. The primary advantage of an AGV is direct labor reduction.

Activity J

❖What are the functions of a forklift?


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10.15 Automated Sortation

Automated sortation devices are typically used in combination with


conveyors. As products are selected in the warehouse and placed on a
conveyor for movement to the shipping dock, they often must be sorted
into specific combinations for customer delivery. For example, inventory to
satisfy multiple orders may be selected in batches, creating the need for
sortation and sequencing into individual orders prior to shipment. Most
sortation devices can be programmed to permit customized flow and
decision logic to accommodate unique requirements.

Automated sortation provides two primary benefits. The first is a reduction


in labor. The second is a significant increase in speed and accuracy of order
selection. High-speed sortation systems, such as those used by United
Parcel Service, can sort and align packages at rates exceeding one per
second.

Robotics
One of the fastest growing methods of materials handling is the use of
robots. The robot is a machine that can be programmed to perform one or
more handling activities without the intervention of an attendant or driver.
The primary use of robotics today is materials handling in both
manufacturing and warehouse operating environments.

Robotics is increasingly being used in many different handling


environments. Robotics can be used for break bulk or consolidation
operations, for e.g., in palletizing, order selection, and routine material
handling situations.

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Other applications gaining popularity are inbound merchandise put-a-way


and order selection in frozen food distribution centers. In both examples,
the use of robots reduces exposure of workers to the low temperature
maintained in the working environment.

Live Racks
Live racks commonly used to reduce manual labor in warehouses is a
storage rack design in which product automatically flows to the desired
selection position. The use of the live rack reduces the need to use lift
trucks to transfer unit loads. The advantage of live rack storage is the
potential for automatic rotation of product as a result of rear loading.

The rear of the rack is elevated higher than the front, causing a gravity
flow toward the front. When cartons or unit loads are removed from the
front, all other cartons or loads in that specific rack flow forward. For
example, live racks are typically utilized to sequence palletized fresh bread
for shipping from bakeries.

Potential to Automate
The appeal of automation is that it substitutes capital equipment for labor.
In addition to requiring less direct labor, an automated system has the
potential to operate faster and more accurately with less product damage
than its mechanized counterpart.

To date, most automated systems have been designed and constructed for
specific handling applications. For example, storage equipment in an
automated system is an integral part of the handling capability and can
represent as much as 50 per cent of the total investment.

Although information technology plays an important part in all handling


systems, it is essential in automated systems. Information technology
controls the automated selection equipment and interfaces with the
Warehouse Management System (WMS).

Order Selection
Initially, automation was focused on master carton selection and order
assembly in the warehouse. Because of high labor intensity in order
selection, the basic objective was to integrate mechanized, semi-
automated, and automated handling into a system that offers the
advantages of high productivity and accuracy while using minimal labor.

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The general process begins with an automated order selection device


preloaded with product. Upon receipt of an order, the warehouse control
system generates sequenced instructions to trip the rack doors and allow
merchandise to flow forward onto powered conveyors. The conveyors in
turn transport merchandise to an order packing area for individual products
to be placed in shipment containers prior to transfer to the shipment
staging area. Product is, ideally, selected and loaded sequentially so it can
be unloaded in the sequence desired by the customer.

Information-directed Systems
The concept of information-directed handling is relatively new and the
subject of a great deal of research and development. Information-directed
systems use mechanized handling controlled by information technology.
There are two common examples of information-directed material handling
systems – RF Wireless (Wi-Fi) and Pick-to-Light

RF Wireless (Wi-Fi)
The basic use of Wi-Fi to instruct movement of lift trucks is expanded in an
information-directed application to become a highly integrated materials
handling system. The main advantage of RF is to improve speed and
flexibility of lift truck operations. RF technology provides real-time
communication to central data processing systems.

Pick-to-Light
Pick-to-light is a carousel system variation that is becoming increasingly
common. In these systems, order selectors pick designated items directly
into cartons or onto conveyors from lighted carousel locations or storage
bins.

Activity K

❖What are the benefits of “automated sortation process”?


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10.16 Special Handling Considerations

The primary mission of handling is to facilitate merchandise flow in an


orderly and efficient manner from manufacturer to point of sale. This
section identifies and discusses special considerations important to
selection and operation of materials handling equipment.

E-Fulfillment
Logistical support of Internet sales places some special demands on a
firm’s warehousing and handling. Both e-tailers and brick-and-mortar
retailers moving into the e-tail marketing space have been forced to adapt
their order processing procedures to meet the specific needs of this
marketplace. Specific considerations that influence warehousing and
handling in an e-fulfillment environment are order volume, small
shipments, and tracking.

First, to serve end consumers, an e-fulfillment facility typically must


process a large number of very small orders. This means that it is difficult
to achieve any substantial economies of scale for picking operations.

Second, e-fulfillment facilities must generally deal with a wide range of


product, which translates to large inventories and the use of flow-through
practices to consolidate orders for shipment. Firms electing to consolidate
orders must have the capability to effectively receive and merge a large
number of very small orders rapidly.

Finally, increased consumer expectations regarding shipment information


require many activities within the warehouse and with the carrier be
electronically scanned and tracked. Despite rapid growth in e-tailing, many
firms are still trying to resolve the warehousing and handling processes
most appropriate to support this activity. In many cases, these e-tailers are
outsourcing fulfillment to integrated service providers (ISPs). In any case,
the e-tailing environment will continue to place increasing demands on a
more timely, responsive, and integrated warehouse and materials handling
operation.

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10.17 Automated Storage Systems

Introduction
Storage is an essential function in an automation system. The material
storage system allows materials to be stocked for a specified period of
time, before they are re-introduced, or are introduced for the first time,
into the automation system. The sorts of stored material are related to the
product (e.g., raw materials, purchased parts, work-in-process, finished
products, and scrap and rework), the process (e.g., process refuse, such as
process waste products; and tooling), and the overall support functions in
the factory (e.g., maintenance spare parts, office supplies, and plant
records). Each of these material types is typically stored under different
conditions and controls.

Storage Systems
Storage systems are used to store materials related to the product (e.g.,
raw materials, purchased parts, work-in-process, finished products, and
scrap and rework), and the overall support functions in the factory (e.g.,
maintenance spare parts, office supplies, and plant records). Storage
systems can be classified into conventional storage systems and automated
storage systems.

Conventional Systems
Conventional systems are ideal for storing loads of varying sizes, shapes
and weights on the same rack. Item access is direct without having to
displace or move other stored items for easy, safe and cost-effective
warehousing.

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Features of conventional systems:

• Low cost per pick


• Direct access to stored items
• Safe and user-friendly racking operation
• Durable racking designs with high-strength rack bracing
• Customised warehouse pallet racking for any storage needs
• Low maintenance for low total cost of ownership

Automated Storage and Retrieval System (ASRS or AS/RS)


An automated storage and retrieval system (ASRS or AS/RS) consists of a
variety of computer-controlled systems for automatically placing and
retrieving loads from defined storage locations. Automated storage and
retrieval systems (AS/RS) are typically used in applications where: there is
a very high volume of loads being moved into and out of storage; storage
density is important because of space constraints; no value adding content
is present in this process; accuracy is critical because of potential
expensive damages to the load. The systems operate under computerized
control, maintaining an inventory of stored items. Retrieval of items is
accomplished by specifying the item type and quantity to be retrieved. The
computer determines where in the storage area the item can be retrieved
from and schedules the retrieval. It directs the proper automated storage
and retrieval machine (SRM) to the location where the item is stored and
directs the machine to deposit the item at a location where it is to be
picked up. A system of conveyors and or automated guided vehicles is
sometimes part of the AS/RS system. These take loads into and out of the
storage area and move them to the manufacturing floor or loading docks.
Figures 10.6 (a) and 10.6 (b).

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Concept of a High-rise AS/RS Warehouse

!
Figure 10.6(a)

The benefits of an AS/RS system include reduced labor for transporting


items into and out of inventory, reduced inventory levels, more accurate
tracking of inventory, and space savings. Items are often stored more
densely than in systems where items are stored and retrieved manually.

!
Figure 10.5(b)

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PACKAGING, MATERIAL HANDLING AND STORAGE SYSTEMS

Advantages

1. An effective automated storage and retrieval system provides several


benefits for supply chain management.

2. An efficient AS/RS system helps companies cut expenses by minimizing


the amount of unnecessary parts and products in storage, and
improving organization of the contents of a warehouse. Due to
automated processes, it also allows for more storage space due to high-
density storage, narrower aisles, etc.

3. Automation reduces labor costs while lowering workforce requirements


and increasing safety.

4. Enabling a seamless link to order processing and logistics management


in order to pick, pack, and ship product out of the facility.

5. Tracking where products are stocked, which suppliers they come from,
and the length of time they are stored. By analyzing such data,
companies can control inventory levels and maximize the use of
warehouse space. Furthermore, firms are more prepared for the
demands and supplies of the market, especially during special
circumstances such as a peak season on a particular month. Through
the reports generated by an AS/RS system, firms are also able to gather
important data that may be put in a model for it to be analyzed.

Activity L

❖Describe a conventional storage system.


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10.18 Summary

Packaging has a significant impact on the cost and productivity of logistics.


Purchasing of packaging materials, packaging design, and the subsequent
need for material disposal represent the most obvious costs of packaging.
Packaging affects the cost of every logistical activity. Inventory control
depends upon the accuracy of manual or automatic identification systems
keyed by product packaging. Order selection speed, accuracy, and
efficiency are influenced by package identification, configuration, and
handling ease. Handling cost depends upon unitization capability and
techniques. Transportation and storage costs are driven by package size
and density. Customer service depends upon packaging to help control
product damage during distribution, to provide customer education and
convenience, and to comply with environmental regulations. The concept of
packaging postponement to achieve strategic flexibility is particularly
important, given the increasing length and complexity of global supply
chains.

High-performance handling is a key to warehouse productivity for several


important reasons. First, a significant number of labor hours are devoted to
handling. Second, handling capabilities limit the direct benefits that can be
gained by improved information technology. While information technology
has introduced new technologies and capabilities, most handling remains
labor intense. Third, until recently, handling has not been managed on an
integrated basis with other logistical activities, nor has it received a great
deal of senior management attention. Finally, automation and information
management technology capable of reducing handling labor is only now
beginning to reach full potential. While the full potential of robotics and
probotics remains on the horizon, promising advancements are seeing
reported.

Although discussed separately, packaging, containerization, and handling


represent integral parts of the logistical operating system. All three must
be considered when designing an integrated supply chain.

Storage is an extremely important part of every warehouse space and a


crucial component of every material handling business. When you have the
right storage products and systems, you have more space available for
stock and equipment. And, most importantly, it can increase the efficiency
of your operations.

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10.19 Self Assessment Questions

1. Mention the differences between consumer and industrial packaging.

2. What is the purpose of Bar Codes or RFID in packaging?

3. Discuss the differences between rigid and non-rigid containers.

4. Discuss the importance of load securing in unitization.

5. What benefits do flexible unit load materials have in contrast to rigid


containers?

6. What trade-offs are involved in the use of returnable equipment?

7. In terms of basic handling, what is the role of a unit load?

8. Why have automated handling systems failed to meet their expected


potential? What is the logic of “live racks”?


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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter

Summary

PPT

MCQ

Video Lecture


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Chapter 11
COLD CHAIN MANAGEMENT
Objectives

After going through the chapter, students should be able to understand:

• The definition and meaning of cold chain

• The importance, equipment and supplies, standard operating procedures,


distribution and operations of cold chain

• The elements required for effective cold chain

• Type of temperature monitoring devices

• Role of cold chain in the retail and food industrial

Structure

11.1 Definition and Meaning


11.2 What is Cold Chain or Temperature-controlled pharmaceuticals?
11.3 Importance of Maintaining the Cold Chain
11.4 The Effective Cold Chain
11.5 Cold Chain Equipment and Supplies
11.6 Standard Operating Procedures
11.7 Cold Chain Distribution
11.8 The Operations of Cold Chain
11.9 Types of Temperature Monitoring Devices
11.10 Cold Chain Breach (CCB)
11.11 Carrier Equipment, Processes and Systems
11.12 Good Distribution Practices (GDPs)
11.13 Validation (Authenticate or Certify)
11.14 Cold Chain in the Retail and Food Industry
11.15 Summary
11.16 Self Assessment Questions

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Introduction
The transportation and delivery of temperature-controlled pharmaceutical
products and medical devices is a fast-growing part of the overall
healthcare logistics industry. There are three reasons for this:

• Growth (in type and volume) of pharmaceutical products and medical


devices;

• Globalization of pharmaceutical logistics as global trade rises, both for


active ingredients being delivered to manufacturing sites, and finished
products being delivered to more points on the globe;

• A more detailed, and more rigorous, regulatory framework, with tighter


specifications on “good distribution practices” (GDPs) and more rigorous
enforcement of industry standards.

A pharmaceutical or biopharma manufacturer has several options for


managing transportation and delivery of temperature-controlled products:
its own shipping and distribution system (which might include handing off
to its specified wholesaler); outsourcing to an integrated logistics provider;
outsourcing to a third-party logistics (3PL) provider who manages
relationships with freight carriers, warehouses, brokers and others.

There are several types of organizations that can be accurately defined as


3PLs. Generally, 3PLs combine warehousing with order processing and
fulfillment. Some operate carrier networks (air or ground); some do not.
Some include packaging services (primary, secondary or tertiary); some do
not. Some include not just order fulfillment, but order-to-cash services as
well. 3PLs may also manage reverse logistics and other distribution
services, including international brokerage and customs clearance, and
working with ocean-going carriers.

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11.1 Definition and Meaning

“Cold chain refers to the management of temperature-sensitive products as


they move through the supply chain.”

A cold chain is a temperature-controlled supply chain. An unbroken cold


chain is an uninterrupted series of storage and distribution activities which
maintain a given temperature range. It is used to help extend and ensure
the shelf life of products such as fresh agricultural produce, seafood, frozen
food, photographic film, chemicals and pharmaceutical drugs. It comprises
of planning and implementation of single processes and process steps as
well as implementation of instruments and methods of process monitoring
and control.

11.2 What is Cold Chain or Temperature-Controlled 



Pharmaceuticals?

“Cold chain” refers to the process used to maintain optimal conditions


during the transport, storage, and handling of vaccines, starting at the
manufacturer and ending with the administration of the vaccine to the
client. The optimum temperature for refrigerated vaccines is between +2°C
and +8°C. For frozen vaccines the optimum temperature is – 15°C or
lower. In addition, protection from light is a necessary condition for some
vaccines.

A pharmaceutical product usually does not lose its potency the moment its
temperature goes outside a specified range. Traditionally, pharmaceutical
companies (and the US FDA approval process) allowed for “excursions” of
certain duration – 4, 6, 24 hours or others depending upon the
manufacturer’s specifications and specialized mean temperatures – to
occur prior to administration.

But this allowance presents problems for ensuring safe delivery of products
unless the excursions are tracked to determine the length of the excursion
and analyze whether the excursion remains within the tolerance spectrum.
A regulator could legitimately ask a manufacturer (or its agent) to prove
that the cumulative amount of time a shipment has been out of range
remains below the maximum specified by the product label of the
shipment.

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Another element of temperature-controlled definitions is the ambiguity


around “room temperature,” which can sometimes be construed to mean
simply “no refrigeration necessary” – but nothing else.

Regulators and others now know that shipments – especially those in


transit from one continent to another – can experience very high (above
100°F) or very low (well below 32°F) temperature extremes.

Thus, it is becoming increasingly important to institute operating


procedures to ensure that temperature ranges are maintained even for
room temperature products.

Activity A

❖What do you understand by temperature excursions?


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Cold Chain Management

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11.3 Importance of Maintaining the Cold Chain

The “cold chain” is a system of transporting and storing vaccines within a


recommended temperature range of +2 to +8 degrees Celsius (°C). The
US Food and Drug Administration (FDA) regulates the manufacture of
pharmaceutical products. However, the FDA does require that
manufacturers ensure product integrity throughout its distribution (which
includes storage and warehousing), regardless of where that occurs. In
addition, regulatory requirements include control and validation of logistics
services. Pharma manufacturers are accustomed to complying with a body
of knowledge and regulatory requirements that are labeled “current good
manufacturing practices” (cGMP); in a like manner, companies handling
transport of life sciences products are evolving a body of knowledge and
rules coming to be known as “good distribution practices” (GDP).

It is therefore important that manufacturers and its staff review the


procedures and facilities of logistics providers to ensure that GMP/GDP
guidelines are being followed with the same exactitude the FDA would
expect of the manufacturers themselves. The end result is that the better
logistics and services companies will have “GMP compliant” processes in
place throughout the entire supply chain.

Maintaining the potency of vaccines is important for several reasons.

• There is a need to ensure that an effective product is being used. Vaccine


failures caused by administration of compromised vaccine may result in
the re-emergence or occurrence of vaccine preventable disease.

• Careful management of resources is important. Vaccines are expensive


and can be in short supply. Loss of vaccines may result in the
cancellation of immunization clinics resulting in lost opportunities to
immunize.

• Revaccination of people who have received an ineffective vaccine is


professionally uncomfortable and may cause a loss of public confidence
in vaccines and/or the health care system.

• The principal aims of Cold Chain Management are optimization of product


quality and product safety and minimization of wastage. In the inter-
operation temperature, monitoring the use of Time-Temperature-

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Indications and RFID systems with integrated temperature sensors are


discussed. Apart from temperature monitoring product characteristics,
technical equipment and facilities regarding cooling, laws, regulations
and supply chain management are important.

• This is important in the supply of vaccines to distant clinics in hot


climates served by poorly developed transport networks.

Activity B

❖What is the importance of monitoring the cold chain in transportation of


products?
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11.4 The Effective Cold Chain

Three main elements combine to ensure proper vaccine transport, storage,


and handling.

• Training personnel
• Transport and storage equipment
• Efficient management procedures

Each of these elements will be addressed in subsequent sections.

Training Personnel
All new staff that handle or administer vaccines should be trained in proper
vaccine storage and handling practices. All other new staff should be
trained to have an understanding of the importance of cold chain
maintenance and basic practices so they are aware of their responsibilities
to the cold chain. A refresher training session should be held annually for
all staff. Staff who monitor and record vaccine storage unit temperatures
should immediately report inappropriate storage conditions (including
exposure to inappropriate temperature or light exposures) to the
designated vaccine coordinator.

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Vaccine Storage and Handling Protocols


Where possible, vaccines should be stored in a vaccine-specific refrigerator.
Bar fridges are unsuitable for storing vaccines and cyclic defrost fridges are
not recommended. The refrigerator temperature should be checked and
recorded twice daily. Accurate determination of the refrigerator
temperature is important as deviations outside the recommended +2° to
+8°C range can affect the efficacy of vaccines.

A back up minimum/maximum thermometer or data logger in the


refrigerator is recommended. This will enable the refrigerator temperature
to be assessed in the event of a power outage that may result in reduced
vaccine wastage.

Various situations may compromise vaccine storage conditions, for


example, equipment failures, power outages, or natural disasters. It has to
be ensured that all staff (current and new) has appropriate training so that
they understand the urgent vaccine storage and handling protocols and
their responsibility in maintaining the cold chain.

Vaccine products that have similar packaging should be stored in different


locations to avoid confusion and medication errors. Likewise, vaccines that
have similar sounding names should be stored in different locations. For
example, DT and Td vaccines might be easily confused, as could Hib and
Hepatitis B vaccines.

The location of each specific vaccine inside the storage unit should be
clearly labeled. Storing each vaccine in its own specifically labeled section
of the refrigerator or freezer helps decrease the chance that someone will
mistakenly select the wrong vaccine.

When immunization providers have reasonable cause to believe that


weather conditions, natural disasters, or other emergencies might affect
vaccine storage conditions, urgent procedures should be implemented in
advance of the event.

Storage of Non-vaccine Products


Food or beverages should never be stored inside vaccine storage units.
Whenever possible, medications and/or other biological products should
not be stored with vaccines. Storing non-vaccine items results in frequent
opening of the storage unit door. This results in a greater chance for

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temperature instability and excessive exposure to light. It may also result


in spills and contamination inside the compartment. Introduction of other
items also impedes airflow and introduces varying temperatures to the
unit.

Activity C

❖What specific care should be taken while storing vaccines?


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11.5 Cold Chain Equipment and Supplies

Packaging
The vial or bottle that contains pharmaceutical tablets or liquids is the
“primary” packaging. The (typical) paperboard carton that contains the
bottle and medical information sheets is the “secondary “packaging. The
corrugated (or other material) box; complete with insulation, refrigerative
gel packs, and other protections is the “tertiary” or “shipping” packaging.
Generally speaking, manufacturers design their primary and secondary
packaging – and review it with the FDA – themselves. They sometimes
design their own tertiary packaging, but many work with packaging
vendors or with logistics providers to finalize the tertiary design.

There are many tertiary packaging vendors, nationally and internationally,


and there are a growing number of technologies, materials, design options
and features to be considered. Some packaging vendors offer “pre-
validated” containers that will keep a certain quantity of product at a
specified temperature for a specified period of time – but manufacturers
will test such containers anyway to ensure that it maintains their product
requirements and meets regulatory approvals. Testing shipping containers
is often a part of what is called the “stability testing” phase of a drug
product, when it is kept at a specified temperature for a year or more, and
then tested for potency.

One of the most critical design elements for tertiary packaging – and for
the overall cold chain system is the interplay between the longevity of the
packaging and the transportation mode. Many packages are designed to

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maintain temperature at 36 hours, which implies overnight delivery (with a


safety buffer). But packaging design could provide 72-hour or even more
longevity, which implies that a shipper could use second-day air service, or
a slower overland delivery method, thereby reducing transportation costs.
Evaluating the trade-offs between the (generally) higher cost of longer-
lived packaging and the shipping costs becomes an important business
consideration for the shipper.

11.6 Standard Operating Procedures


SOPs detail roles and responsibilities and set up the essential plans for
mitigating and overcoming hurdles to fast and efficient cold chain service.
It is important to establish a routine, systematic process for handling
vaccine shipments and vaccine transport. The most effective SOPs are
those that are developed between all relevant stakeholders; namely, the
shipper, the forwarder and the carrier.

Temperature validation must be agreed and implemented into the SOP


before shipping begins, agree to the temperature validation system and
prepare routing schedule. Vaccines should be transported by a secure
system using transit containers supplied by the client. The client must
ensure that packing materials and procedures have been validated for the
purpose to ensure the component surface temperature can be maintained
within the prescribed correct ranges during transport.

Maintaining the temperature by using other packaging materials and other


volumes than described in this procedure should be tested first before
making the shipment.

Despite the benefits, however, such collaboration is more often the


exception than the rule. Written SOPs are useful for reference, training,
and evaluation and should be included in the Routine Vaccine Storage and
Handling Protocols.

Activity D

❖Why are SOPs laid down for vaccine transportation?


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11.7 Cold Chain Distribution

Cold chain refers to the time and temperature management of temperature


sensitive products as they move through the supply chain. The supply
chain comprises all of the companies and people who have custody of a
product over its journey from manufacturer to end-user. For example, a
drug maker makes a product, ships it to a distributor, the distributor sends
it to a pharmacy, and the pharmacy dispenses the product to a patient.

During its long journey, a pharmaceutical, biological or medical device


product changes hands several times and passes through many different
environments, so it is critical for suppliers to be certain that it has not been
exposed to temperatures that may damage or degrade the product. Cold
chain management provides patient safety, product integrity, regulatory
compliance, process optimization, and cost optimization.

Shippers need to understand and control their supply chain as fully as


possible to ensure the delivery of safe, high quality products. Knowing the
temperature of products in transit is a key element of supply chain
integrity. Temperature monitoring is the foundation for validating shipping
methods and routes, mapping vehicles used for transport and space used
for storage, and assuring that specific products remain in appropriate
temperature ranges.

The cold chain is a shared responsibility between the manufacturer and the
transporter that begins from the time a vaccine is manufactured, and ends
when the vaccine is administered to the recipient. The cold chain
distribution process is an extension of the good manufacturing practice
(GMP) environment that all drugs and biological products are required to
adhere to, enforced by the various health regulatory bodies. As such, the
distribution process must be validated to ensure that there is no negative
impact to the safety, efficacy or quality of the drug substance. The GMP
environment requires that all processes that might impact the safety,
efficacy or quality of the drug substance must be validated, including
storage and distribution of the drug substance.

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Guidelines
The facility standard operating procedure should specify that the vaccines
are:

• Attended to at all times during transport;


• Not placed in the trunk of the vehicle;
• Delivered directly to the facility;
• Promptly unpacked and placed into appropriate storage units upon
arrival

11.8 The Operations of Cold Chain

Moving a shipment across the supply chain without suffering any setbacks
or temperature anomalies requires the establishment of a comprehensive
logistical process to maintain the shipment integrity. This process concerns
several phases ranging from the preparation of the shipments to final
verification of the integrity of the shipment at the delivery point:

• Shipment preparation. When a temperature sensitive product is being


moved, it is vital to first assess its characteristics. A key issue concerns
the temperature conditioning of the shipment, which should already be at
the desired temperature. Cold chain devices are commonly designed to
keep a temperature constant, but not to bring a shipment to this
temperature, so they would be unable to perform adequately if a
shipment is not prepared and conditioned. Other concerns include the
destination of the shipment and the weather conditions for those regions,
such as if the shipment will be exposed to extreme cold or heat along the
transport route. Using a reefer (refrigerated container) with its own
power unit usually mitigates such a concern.

• Modal choice. Several key factors play into how the shipment will be
moved. Distance between the origin and the final destination (which
often includes a set of intermediary locations), the size and weight of the
shipment, the required exterior temperature environment and any time
restrictions (perishability) of the product all effect the available
transportation options. Short distances can be handled with a van or a
truck, while a longer trip may require an airplane or a container ship. In
this case, the cost/perishability ratio becomes a factor in modal choice.
• Custom procedures. If the freight crosses boundaries, custom
procedures can become very important, since cold chain products tend to

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be time sensitive and more subject to inspection than regular freight


(e.g., produce (fresh fruits, vegetables, meat, fish and flowers),
pharmaceuticals and biological samples). The difficulty of this task differs
depending on the nation (or economic bloc) and the gateways since there
are variations in procedures and delays.

• The "Last Mile". The last stage is the actual delivery of the shipment to
its destination, which in logistics is often known as the "last mile". Key
considerations when arranging a final delivery concern not only the
destination, but the timing. Trucks and vans, the primary modes of
transportation for this stage, must meet the specifications necessary to
transfer the cold chain shipment. Also important is the final transfer of
the shipment into the cold storage facilities as there is potential for a
breach of integrity.

• Integrity and quality assurance. After the shipment has been


delivered, any temperature recording devices or known temperature
anomalies must be recorded and made known. This is the step of the
logistical process that creates trust and accountability, particularly if
liability for a damaged shipment is incurred. If problems or anomalies
that compromise a shipment do occur, an effort must be made to identify
the source and find corrective actions.

Therefore, the setting and operation of cold chains is dependent on the


concerned supply chains since each cargo unit to be carried has different
requirements in terms of demand, load integrity and transport integrity.
Because of the additional tasks involved as well as the energy required for
the refrigeration, unit transportation costs for cold chain products is much
higher than regular goods. The ongoing rise in standards of living and
economic specialization will remain important drivers for years to come in
the growing demand for perishable goods and the cold chain logistics
supporting their transport.

Activity E

❖What do you understand by “maintaining integrity” of the shipment


during transportation?
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11.9 Types of Temperature Monitoring Devices

1. Data Loggers
Digital data loggers are miniature, battery-powered, stand-alone
temperature monitors that record hundreds or thousands of temperature
readings. These are the ideal temperature monitors because they can
indicate when the exposure occurred and how long the vaccines were
exposed to the min/max temperatures. Data loggers may be single use and
used only in transport, or they may be multiple use. Single-use data
loggers have external lights (or symbols) that alert the user to out-of-
range temperature events; a green light indicates the cold chain was
properly maintained and a red light indicates inappropriate temperature
exposure occurred. If a red light is seen, the vaccine shipment must await
approval for use, and the device must be sent back to the manufacturer to
interpret the temperature data.

Multiple-use digital data loggers are accompanied by special software that


is installed in a computer. This software allows the user to set the
frequency of the temperature readings, download data from the device,
and calculate temperature averages, minimums, and maximums, as well as
the time spent at each temperature. Data loggers should be replaced or
recalibrated annually.

2. RFID
Radio frequency identification (RFID) is the wireless non-contact use of
radio frequency electromagnetic fields to transfer data, for the purposes of
automatically identifying and tracking tags attached to objects. The tags
contain electronically stored information. Logistics and transportation are
major areas of implementation for RFID technology. Yard management,
shipping and freight and distribution centers use RFID tracking technology.
In the railroad industry, RFID tags mounted on locomotives and rolling
stock identify the owner, identification number and type of equipment and
its characteristics. This can be used with a database to identify the lading,
origin, destination, etc. of the commodities being carried. (Detailed note in
Chapter 14)

3. Strip Monitors
Strip monitors are battery-powered single-use units that record continuous
temperature readings on a paper strip and may be used to monitor vaccine
temperatures during transport.

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4. Chart Recorders
Chart recorders consist of a graph wheel with replaceable graph paper and
ink pens. The pens mark the temperature on the graph paper as the wheel
turns. Temperatures are recorded continuously, 24 hours a day. The graph
paper has a Fahrenheit or Celsius scale on it, and the temperature is read
where the ink line falls on the scale. The graph paper must be changed
when it completes a full circle, usually weekly. Record the date on the
graph paper when it is fitted and when you remove or change the graph
paper. Keep old graphs as a permanent record of the performance of the
vaccine storage unit. As with other thermometers, temperature readings
should be checked and recorded at least twice daily.

5. Minimum and Maximum Thermometers


Min/max thermometers are available in fluid-filled and digital forms. They
show the current temperature and the minimum and maximum
temperatures that have been reached since the last time the thermometer
was reset. Temperature fluctuations outside the recommended range can
be detected by referring to the minimum and maximum temperature
readings.

6. Digital Thermometers
Digital thermometers have a screen in which the temperature is displayed
in Fahrenheit and/or Celsius. Some models have a temperature probe and
an alarm that can be set to ring at a specified temperature. Digital
thermometers with a min/max feature are easy to read because they
display a number indicating the temperature and do not require
interpretation. Temperature fluctuations outside the recommended range
can be detected by referring to the minimum and maximum temperature
readings. The digital thermometer must be reset regularly (after properly
recording temperatures) for meaningful readings.

Activity F

❖Explain the features of data loggers.


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11.10 Cold Chain Breach (CCB)

A cold chain breach (CCB) occurs when the temperature falls outside of the
recommended +2° to +8°C temperature range at any point during the cold
chain process. Instances where changes occur in the Cold Chain Monitor
will affect vaccine efficacy and the shelf life of the vaccine. Common breaks
in the cold chain occur through refrigeration failure, power outage,
overheating of vaccines during transportation, and freezing of vaccines.
Temperature variations outside the +2° to +8°C temperature range can
result in loss of efficacy to the vaccine.

Any disruption to the cold chain is to be investigated to prevent a


reoccurrence. Should you have concerns about a breach in cold chain, the
following protocol should be followed:

• Immediately isolate the vaccines within the refrigerator and label do not
use

• Report to the Regional Immunisation Coordinator (RIC)

• The disruption to the cold chain should be investigated to correct the


problem and prevent reoccurrence

• Prompt identification and reporting of a possible cold chain breach will


prevent patients from being administered ineffective vaccine.

Activity G

❖Why do breaches in cold chain occur?


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11.11 Carrier Equipment, Processes and Systems

There are many potential transportation carriers providing cold chain


services. All high-quality carriers will have sound SOPs and processes as a
part of their quality management system. When selecting carriers, it is
wise to qualify the carrier by understanding and reviewing their quality
management system. Such a review will provide a glimpse into the
operating environment and quality culture of the carrier. Given the nature
of the products flowing through the cold chain channel, it is imperative that
one has a high level of confidence in the carriers selected to handle these
products.

Reefer trucks and containers for ocean borne freight are available, narrow
body and wide body aircraft, along with the ULDs (unit load device) that
can be carried by wide body aircraft (or trucks for that matter). As part of
their quality and control systems, carriers should have a predefined
process for checking the integrity of the equipment, and maintaining it, on
a regular basis, and these processes can be part of the overall service
agreement between the manufacturer and the carrier.

!
Reefer Truck

!
UCD (Unit Load Device)

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Cold Box Cold Room

“Servicing” can include the shipment itself as well as the mechanical


components of carrier equipment. Provision is commonly made for
replenishing dry ice or other refrigerant when a shipment might involve
multiple flights and transfers. Repackaging of the tertiary packaging might
occur if a bulk shipment is being broken down into smaller units. Active
refrigeration units (ULDs) that run on batteries might need battery
replacement. All of these contingencies need to be incorporated into the
distribution plan between the manufacturer, the 3PL and the carrier.

Yet another complexity of the shipping process is contingency planning.


Trucks break down, refrigeration units stop working, weather or mechanical
issues affect air deliveries – in the event of such situations, how does the
carrier and the 3PL respond? Manufacturers and 3PLs do “what if” planning
to prepare for these eventualities. The key factor is that a cold chain
shipment has a defined time frame before it goes out of compliance with its
temperature specification, and plans need to be made to get the product
delivered or make other accommodations prior to that moment. In
addition, if the shipment completely fails delivery specifications,
contingency plans must be implemented to include returning and replacing
the product to ensure that compromised product is not used. The use of
pharmaceutical product that has not been correctly stored or transported
can potentially cause harm to the patients it was intended to help.

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Activity H

❖What contingency plan can be put in place in case of breakdowns in cold


chain transportation?
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11.12 Good Distribution Practices (GDPs)

In order to maintain product quality, safety and efficacy during distribution,


Good Distribution Practices (GDPs) specify that temperature-sensitive
products are to be distributed (stored, handled and transported)
throughout the distribution network (manufacturer, service providers and
customers) as per specified temperature conditions. While GDPs have been
in place for some time, recent regulatory scrutiny, industry initiatives and
products requiring specific temperature conditions demonstrate the need to
establish a company strategy for the distribution of temperature-sensitive
products in accordance with product requirements, regulations and
industry standards.

The initial focus of cold chain management should be the development and
implementation of the cold chain shipment conformance process and the
cold chain management processes (quality system) necessary to meet
product and regulatory requirements. Unlike product storage in qualified
temperature-controlled facilities, product shipping, even in qualified
temperature-controlled shipping systems, is subject to a greater number of
temperature excursions due to transportation process variability (ambient
temperature, route, mode, transit time and in-transit handling).

Consequently, temperature excursions occur during product shipping and


although these temperature excursions are generally supported by product
stability data, some countries enforce strict conformance with product label
claim temperature. The implication of this enforcement, at the very least,
is the risk of supply chain interruption due to shipment release delays and/
or shipment rejections due to temperature non-conformances. Therefore,
the initial focus of cold chain management should be the development and
implementation of the cold chain shipment conformance process and the
cold chain management processes (quality system).

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Good cold chain management practices throughout the distribution network


may be instituted by partnering with service providers and customers.
Temperature-sensitive products are distributed (stored, handled and
transported) within a distribution network comprised of manufacturer
(manufacturing sites, distribution centers, commercial affiliates), service
providers (carriers, freight forwarders, customs brokers, 3PLs/4PLs) and
customers (wholesalers/distributors, governments, pharmacies, physicians,
hospitals).

In order to maintain product quality, safety and efficacy during distribution,


it is important to raise awareness, communicate and educate supply chain
partners as appropriate so that temperature-sensitive products are
distributed in accordance with product requirements, regulations and
industry standards. This may be done by assisting supply chain partners to
establish processes to maintain product quality and ensure compliance with
global regulations and industry standards within their distribution network.

Beyond that basic criterion, there are various combinations of capabilities


that make for a productive and cost-effective relationship between the
manufacturer and its outsourced 3PL service. Cost is just one factor for
consideration.

Some services emphasize high-volume delivery of products with


standardized operations; others emphasize the ability to tailor solutions to
specialty products. Some are attuned to accepting as-designed packages
and operating procedures; some assist in package design and procedure
development. The best solution is one where the strengths of the 3PL
complement the service needs of the manufacturer’s organization.

Activity I

❖What care should be taken while choosing a cold chain transportation


partner?
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11.13 Validation (Authenticate or Certify)

Validation is documenting through testing and monitoring that we are in


control of our logistics process from a temperature standpoint. A cold chain
can be managed by a quality management system (QMS). It should be
analyzed, measured, controlled, documented, and validated.

The overall approach to validation of a distribution process is by building


more and more qualifications on top of each other to get to a validated
state. This is done by executing a Component Qualification on the
packaging components. Next, an Operational Qualification that
demonstrates the process performs at the operational extremes. The final
piece is the Performance Qualification that demonstrates that what
happens in the real world is within the limits of what was demonstrated in
the Operational Qualification limits.

In reality, the process monitoring of the distribution process is the only


assurance that a process has been successfully validated. If at any point in
time there is an anomaly in the distribution process, that process can no
longer be considered Validated, as an anomaly would invalidate that
process.

Cold chains need to be evaluated and controlled:

• Carriers and logistics providers can assist shippers. These providers have
the technical ability to link with airlines for real-time status, generate
web-based export documentation and provide electronic tracking.

• The use of refrigerator trucks, refrigerator cars, reefer ships, reefer


containers, and refrigerated warehouses is common.

• Shipment in insulated shipping containers or other specialized packaging.

• Temperature data loggers and RFID tags help monitor the temperature
history of the truck, warehouse, etc. and the temperature history of the
product being shipped. They also can help determine the remaining shelf
life.

Documentation is critical. Each step of the custody chain needs to follow


established protocols and to maintain proper records. Customs delays

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occur due to inaccurate or incomplete customs paperwork, so basic


guidelines for creating a commercial invoice should be followed to ensure
the proper verbiage, number of copies, and other details.

Activity J

Explain the process of validation in cold chain distribution.


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11.14 Cold Chain in the Retail and Food Industry

According to a recent study by the United Nations Environment Program


(UNEP) 1, over half of the food produced globally is lost, wasted or
discarded as a result of inefficiency in the human-managed food chain. Half
of that waste is a result of temperature problems experienced between the
grower and the retailer. Even relatively small variations in temperature can
significantly impact the shelf life of fresh produce and its value. Certain
types of produce are more susceptible than others.

Refrigerated foods are one of the fastest growing sectors of the grocery
and food service industries. Continued success relies upon effective
management of the ‘cold chain’, a term used to describe the series of
interdependent operations in the production, distribution, storage and
retailing of chilled and frozen foods. Control of the cold chain is vital to
preserve the safety and quality of refrigerated foods and comply with
legislative directives and industry ‘codes of practice’. Unique to fresh
produce cargoes, the cold chain requires to additionally maintain produce
specific environment parameters which include air quality levels (carbon
dioxide, oxygen, humidity and others), which makes this the most
complicated cold chain to operate.

Quality and Safety of Chilled and Frozen Foods


To preserve quality and safety in frozen foods, temperature requirements
exist for each major stage of the cold chain. It is recommended that
stabilized food temperatures are maintained at –18°C or colder, although
exceptions for brief periods are allowed during transportation or local
distribution when –15°C is permitted. Also, retail display cabinets should
be at –18°C, to an extent consistent with good storage practice, but not

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warmer than –12°C. Consideration should also be made for the likely
temperatures experienced by the foods within domestic freezers – this is
dependent upon the ‘star rating’ of the freezer; a three-star freezer is
capable of temperatures below –18°C, a two-star freezer of temperatures
below –12°C, and a one-star freezer of temperatures below –6°C. In the
latter, the practical storage time for frozen products is limited to just a few
days.

Throughout chilled and frozen food manufacturing, assurance of food


safety is paramount. Combining the principles of food microbiology, quality
control and risk assessment, a Hazard Analysis Critical Control Point
(HACCP) approach is recommended by many regulatory bodies to assure
food safety and demonstrate ‘due diligence’ in accordance with food safety
legislation.

Food safety and quality are drivers: Two issues that continue to drive
best practices for managing the cold chain are food safety and food quality.
Carriers, likewise, are also responsible for the quality and the condition of
the trailers and equipment that are used during the transportation of food
products.

The receiving party, too, has equally rigorous requirements and SOPs
(standard operating processes) for inspection of food shipments. For
produce deliveries, that could include physical inspection of the product as
well as the boxes and cartons. Wet or weakened packaging may indicate
that there was a breach in temperature during transportation. It is also
increasingly common for the receiving party to rely on temperature
recording devices that have been installed on the trailer, which can alert
them to any deviations from the required temperature range.

The sequence of events within a typical cold chain is illustrated in Figure


11.1.

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!
Figure 11.1: A Typical Cold Chain

Increasingly good temperature control is being achieved throughout the


cold food chains as a result of improved equipment design, quality control
and heightened awareness of issues surrounding food safety and quality.
However, it is important to avoid complacency and to integrate
temperature monitoring as a part of the Total Quality Management
programme.

Monitoring the cold chain requires detailed information on food product


temperatures. Temperature monitoring includes both measurement and
recording. Box 1 lists some of the relevant questions which define the
requirements of the monitoring system.


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Box 1: Defining the Temperature Monitoring System

What is the required temperature range and likely operating temperature range
for the instrument?

Do we need to measure product temperatures? Ambient temperatures? Package


temperatures?

Do we need to measure or measure/record temperature?

Do we need to measure time and temperature combination? What sampling


frequency is required?

Does the system need to provide a permanent record of temperatures?

What is the required accuracy?

What is the required response time?

If electronic, does the battery life compromise the application?

What shape of probe is required? A long flat probe to reach between packages?

Is water proofing of the probe/electronics required?

Can the temperature data be imported into commercial data analysis


spreadsheets or software packages?

Does the system allow ease of calibration?

Activity K

Why is the food cold chain considered to be the “most complicated” chain
to operate?
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The Role of Food Packaging in the Cold Chain


Packaging plays a key role in protecting the product from contamination by
external sources and from damage during its passage from the food
producer to the consumer. The choice of packaging is dictated primarily by
economic, technical and legislative factors. Also, a well-designed and
consumer-appealing package will help to portray an image of high quality
and responsible food production to the consumer.

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The primary function of food packaging is to protect the food from external
hazards. Similarly, the package itself should not affect the food in any
way, as indicated by European Directives on food contact materials,
including migration limits.

Package barrier properties protect the food from ingress of gas, light, and
water vapour, each of which can result in deterioration of colors, oxidation
of lipids and unsaturated fats, denaturation of proteins and a general loss
of characteristic sensory qualities. Ventilation allows cooling and product
respiration. Similarly, barrier properties protect against the loss of moisture
from the food to the external environment thereby eliminating dehydration
and weight loss.

Cold chain monitoring is an important part of the process. Refrigerated


units usually have thermometers and may sound alarms if the temperature
gets too high. Packaging can have specialized stickers that react to
excessive temperatures by changing color. The color change will alert
shippers to the fact that the goods may have been compromised in
shipping. If the product is particularly sensitive, it may be discarded, or the
company can test it to see if the temperature increase damaged it.

A wide range of materials is used for food packaging, including plastic,


metals and paper/card. Plastic packages can provide a wide variety of
properties, depending on the requirements of the food material and the
cost of the package.

Activity L

❖How can cold chain of perishables be monitored?


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11.15 Summary

The cold chain is a series of interconnected activities involving equipment,


personnel and processes that are critical for the safe storage and
transportation. Breaks in the cold chain happen for many reasons, such as
equipment that does not meet standards of quality and safety, is unsuitable
for storage, or is not properly maintained or repaired.

The major items of cold chain equipment are refrigerators, freezers and
transport boxes. Temperature monitors are essential during storage and
transportation, and alarms are fitted to storage equipment to alert users
should the temperature deviate from the acceptable range. There are many
other cold chain devices and accessories such as standby generators and
voltage regulators.

Selection and acquisition of cold chain equipment are covered extensively


in this chapter. WHO has provided cold chain managers, procurement
agencies and manufacturers with a description of, and minimum
performance specifications for all the essential equipment needed for the
efficient storage and transportation of vaccines and food components.
Detailed explanations, illustrations and standard operating procedures
provide all users of cold chain equipment with information on how to
receive, install, operate, maintain and monitor the equipment. Preventive
maintenance and rational use prolongs the life of the equipment,
significantly decreases safety risks and reduces replacement costs.
Activities and exercises are offered to make the information as relevant as
possible for the reader.

Cold chain managers are encouraged to adapt the information in this


manual to personalize training materials for their staff. The manual may
also serve colleges that train technical staff who will work in laboratories,
and act as a resource to familiarize refrigeration engineers with the special
requirements for cold chain in a hospital setting.


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11.16 Self Assessment Questions

1. What is cold chain and why is it necessary?

2. My product is temperature-sensitive. What do I need to do to package it


properly?

3. How is the cold chain industry regulated in the US?

4. How do I determine transit duration/temperature cycles?

5. Why do employees need to be trained to specific cold chain regulations,


SOPs and other related tasks?

6. What are the requirements for the storage and distribution of drug
products?

7. How are the responsibilities shared between clients and service


providers for good cold chain compliance?

8. Why should Standardized Operation Procedures (SOPs) be


implemented?

9. What are the instruments and equipment used to be adequately


qualified and 

up-to-date to ensure conservation and distribution of drugs?

10.How should storage and shipping conditions prevent deterioration of the


content, purity and physical characteristics of the drug?

11.How can the packaging used during the transportation of drugs ensure
the temperature uniformity within the container?

12.How long can frozen foods be kept fresh?

13.What can consumers do to keep chilled and frozen foods as fresh as


possible? 


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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter

Summary

PPT

MCQ

Video Lecture


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Chapter 12
RELATIONSHIP DEVELOPMENT AND
MANAGEMENT
Objectives

After going through the chapter, students should be able to understand:

• The development and management of internal logistics relationships?

• The development and management of supply chain relationships?

Structure

12.1 Development and Management of Internal Logistics Relationships

12.2 Development and Management of Supply Chain Relationships

12.3 The Operational Context

12.4 The Planning and Control Context

12.5 The Behavioural Context

12.6 Developing Trust

12.7 Reliability and Character Based Trust

12.8 Summary

12.9 Self Assessment Questions

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Introduction
Among topics in logistics, few hold more leadership interest than
development and management of organizational relationships. For most of
business history, emphasis has been devoted to developing and
implementing an appropriate internal structure to effectively and efficiently
perform the essential work of logistics. In more recent times, increased
attention has focused on logistics organizational integration with other
functions, especially customer relationship management, manufacturing,
and procurement. The information technology success, increasing global
engagements, and the focus on inter-organizational supply chain
integration are compelling senior management to rethink nearly every
aspect of traditional organizational strategy and to broaden their thinking
about collaborative relationships with suppliers and customers. The
essence of supply chain management is the ability to coordinate internally
collaborative relationships cross-functionally within their enterprises and
externally with supply chain partners.

12.1 Development and Management of Internal Logistics


Relationships

The management of internal logistics can enhance productivity and


performance within the value chain, improving service delivery, the
outcome of the audited financial statement and ultimately the optimal
spending of the allocated budget per financial year. Internal logistics has a
link with the elements of supply chain management. The elements of
supply chain management can be broken down into clear activities for the
management of internal logistics.

Logistical Organization
Internal logistics is one of the most important sections within enterprises,
especially in the large manufacturing companies. It manages, arranges,
plans and delivers the finished products. Internal Logistics also entails
purchase planning, specification development, supplier research, and
contract administration and quotations, ordering and inventory control.

It is an indispensable part of the supply chain, as well as reflects the result


of implementation company strategy. However, every department has to
constantly improve itself, and create maximum benefits. Internal supply
chain enterprises are only considering their own business without

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considering its extension. Figure 12.1 is a hypothetical organization chart


that depicts the typical fragmentation of logistical activities.

!
Figure 12.1: Traditional Organizations of Logistically Related Functions

Functional Aggregation or Accumulation


The stages of logistical development corresponds with the stages of
company development. In new, small and not logistics-intensive companies
logistical activities are dispersed in the organization, often performed
together with other tasks by the same employee. As the company grows,
logistical activities are more consciously organized, and there is a growing
need for efficient and transparent operations. This forces companies to step
into the phases of functional aggregation typically when the company is in
the phase of growth.

Phase 1. Functional Aggregation 1


The first step towards integration is grouping the logistical activities within
the original function. The overall organizational structure and hierarchy do
not change significantly. Typical aggregations in this phase are for
example:

• Marketing: aggregation of customer service activities


• Manufacturing: aggregation of materials management activities.

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Phase 2. Functional Aggregation 2


Logistics as a separate function operates within its own authority and
responsibility. The logistics department functions usually involves physical
distribution and material management at this stage. It still does not include
some important logistical activities such as procurement or order
processing. These tasks are performed by other functions

Phase 3. Functional Aggregation 3


In this phase of aggregation, the aim is to integrate all possible logistical
activities within the boundaries of a single functional unit and exploit
synergies. The logistics function includes planning and operations as well,
so logistics get into strategic level.

Advantage of the integration is that it can handle trade-offs, and overall


logistics cost, service level and efficiency can be optimized. Responsibility
is delegated to a Chief Logistics Officer (CLO).

Global logistics organization is an extended version of integrated logistics


organization, which is responsible for all logistical activities of a company
operating in more than one regions of the world.

Phase 4. Process Integration


Process-oriented organizations are able to reach a higher level of service
and productivity than functional organizations. Process management
appears in the following two types of organization.

• In process organization or process-driven organization, the core business


process defines its requirements for logistical activities, which are
performed by the logistics function. All activities are driven by the key
performance objectives of the core process, the other processes only
service them.

• Matrix organization is a combination of functional and process


organization. Usually, planning is the responsibility of the process
manager, while operations are the responsibility of the functional
manager. This provides high level customer service through process
management and cost efficiency through functional optimization.

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Phase 5. Virtuality and Organizational Transparency


These are the organizations of the future, but some companies (for
example, Dell) already apply this structure. Logistics operations are
dispersed to different functions or processes under the coordination of a
CLO. Advanced IT systems provide coordination through common database
and information sharing, making optimization possible not only in company
level but across companies in the supply chain. Performing operations
locally provides the best competencies and flexibility.

The highest level of functional aggregation in logistics organization is


depicted in Figure 12.2.

!
Figure 12.2: Illustration of High Functional Aggregation in Logistics
Organization

Activity A

❖What is process integration of logistical systems?


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A Shift in Emphasis from Function to Process


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

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

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


to be focused only on those activities, which contribute to customer value.
Systems integration is required to stimulate synergism. A shift from
functional to process orientation, has both positive and negative aspects.
Positive aspects include general adoption of a process orientation builds on
the basic principles of integration. Shifting the emphasis from function to
process means it will be positioned as a chief contributor to all initiatives,
which will focus on development of new products, customer order
generation, fulfillment and delivery. The negative aspect is a lesser
understanding of how the process will be performed and managed. Figure
12.3

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Process Structure
An organization might be structured around the eight supply chain
processes. Each key process is led by a process manager who manages a
team of members drawn from the critical functional areas that impact
process performance.

The key business processes are:

1. Customer relationship management


2. Supplier relationship management
3. Customer service management
4. Demand Management: Order fulfillment
5. Manufacturing flow management
6. Product development and commercialization
7. Returns management

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Factors Enabling the Process Structure

• Development of a highly involved work environment with self-directed


teams

• Improved productivity results found in organizations that started


managing processes rather than function

• Ability to rapidly share accurate information

• For this structure to work, you need self-directed teams

• The true focus has to be on improved productivity rather than managing


processes

• And information needs to move rapidly in the organization

Challenges of Managing from a Process Perspective

• All effort must be focused on value added to the customer

• All skills necessary to complete the work must be available to the process
owner

• Critical skills not shared can disrupt workflow and create “bottlenecks”

Work performed by processes should stimulate synergism in the


organization. With systems integration, the design of work as a process
meant that overall organizational trade-off was structured to achieve
maximum performance for minimum input investment.

A general shift to managing logistics as a process means that it will be


positioned as a central contributor to all initiatives that focus on new
product development and customer order generation, fulfillment, and
delivery. The overall trend of process integration expands the operational
potential and impact of logistics.

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Activity B

❖How was the organization going to achieve maximum performance from


minimum investment?
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Process Integration Barriers


Managers do not attempt to integrate operations in a vacuum or without
facing resistance from others within the organization. It is important to
recognize barriers that serve to inhibit process integration. Barriers to
internal integration find their origins in traditional functional practices
related to organization, measurement and reward systems, inventory
leverage, infocratic structure, and knowledge hoarding. (Figure 12.5).

!
Figure 12.5: The Great Divide Reflects an Organizational Gap in
Achieving End-to-end Integration

The organization structure of a business can serve to stifle cross-


functional processes. Most business organizations seek to align authority
and responsibility on the basis of functional work. The traditional belief was
that functional excellence would automatically equate to superior
performance. In integrated process management, it matters little how
much is spent to perform a specific function as long as process
performance goals are achieved at the lowest total cost expenditure.
Successful integration of processes requires that managers look beyond
their functional boundaries to achieve cross-functional integration.

Traditional measurement and reward systems also serve to make


cross-functional coordination difficult. Most reward systems are based on
functional achievement. To facilitate internal process integration, new
measures, increasingly called balanced scorecards, must be developed.

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Managers must be encouraged to view specific functions as contributing to


a process rather than their stand-alone performance.

Inventory can also serve as a barrier to process integration because it is a


proven fact that inventory can be leveraged to facilitate functional
performance. The desired position is to maintain only minimal inventory
necessary to protect against demand and operational uncertainty.
Stockpiling both materials and finished inventory facilitates maximum
manufacturing economy of scale. Such economy of scale can result in low
per unit cost of manufacturing. Forward commitment of inventory to local
markets can benefit sales. But, such forward commitment creates the
possibility of imbalance and potential inventory overstocks. The integrative
challenge is the cost/benefit balance of such leveraging and risks
associated with potential inventory obsolescence.

Information is typically formatted in terms of functional requirements and


accountability. This early practice in formatting information has developed
what is referred to as infocratic structure. The impact of infocratic structure
is one of the driving reasons why Enterprise Resource Planning (ERP)
systems have great general management appeal. The infocratic structure
also helps explain why ERP implementations are so difficult.

In most business situations, knowledge is power, so unwillingness to share


and a general lack of understanding regarding how to share knowledge are
not uncommon. For example, the case when an experienced employee
retires or for some other reason departs a firm. Replacement personnel
must be given sufficient time to learn, but if information is restricted, all
the time in the world may not help bring the new employee up to speed.
Much process work is shared between jobs and is not restricted to a
specific functional area, so transfer of knowledge and experience is vital.

Activity C

❖How can not sharing of knowledge act as a barrier to process


integration?
…………………………………………………………………………………………………………………………
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12.2 Development and Management of Supply Chain


Relationships

In implementing an integrated value system, organizations are continually


faced with the challenge of managing the “people” part of the equation.
Relationship management affects all areas of the supply chain and has a
dramatic impact on performance. In many cases, the information systems
and technology required for the supply chain management effort are
readily available and can be implemented within a relatively short time
period, barring major technical mishaps. Inventory and transportation
management systems are also quite well understood and can be
implemented readily.

A number of supply chain initiatives fail, however, due to poor


communication of expectations and the resulting behaviors. Managers
often assume that the personal relationships within and between
organizations in a supply chain will fall into place once the technical
systems are established. However, managing relationships among the
various personalities in the organizations is often the most difficult part of
the SCM initiative. Moreover, the single most important ingredient for
successful supply chain management may well be trusting relationships
among partners in the supply chain, where each party in the chain has
confidence in the other members’ capabilities and actions. Without positive
interpersonal relationships, the other systems cannot function effectively.

Creating and managing a strategic alliance often represents a major


change in the way companies do business. In creating new value systems,
companies must rethink how they view their customers and suppliers. They
must concentrate not just on maximizing their own profits, but also on how
to maximize the success of all organizations in the supply chain. Strategic
priorities must consider other key alliance partners that contribute value
for the end customer. Tactical and operational plans should be continuously
shared and coordinated. Instead of encouraging companies to hold their
information close, trust-building processes promote the sharing of all forms
of information possible that will allow supply chain members to make
better, aligned decisions.

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Activity D

❖What is relationship management?


…………………………………………………………………………………………………………………………
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…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Risk, Power, and Leadership


The concepts of risk, power, and leadership are essential to understanding
acknowledged dependency and how it makes supply chain integration
work.

Risk
Supply chain management incorporates a wide range of very significant
and inherent risks and opportunities. These risks and opportunities apply to
activities within the company’s organization as well as outside the
organization at suppliers, at the suppliers’ suppliers, and outward at the
organization’s customers and customers’ customers. In other words, these
risks and opportunities can affect the entire chain. For most organizations,
it is clear that supply chain management processes can greatly influence
the organization’s performance and the predictability of that performance.

For some industries, supply chain performance can be a real competitive


differentiator. For others, successfully managing supply chain and its
inherent risks has become a prerequisite for success or even survival. At
the mention of supply chain management, consumer products, retail,
energy, construction, and manufacturing are among the industries that
spring to mind. However, supply chain processes affect all industries in
some form or fashion. For example, procurement processes contain many
major risks and opportunities in supplier management, product and
services sourcing and outsourcing, contract management and control,
purchasing execution and control and so on. These risks exist at all kinds
of organizations and in every type of industry.

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These areas of risk include:

• A variety of supply interruption risks


• Product introduction and cycle time risks
• Demand and supply planning and integration risks
• Human resource skills and qualifications risks
• Purchase price risks
• Inventory and obsolescence risks
• Information integrity and availability risks
• Regulatory and compliance risks
• Project management risks
• Information privacy and security risks
• Customer satisfaction and service risks
• Contract compliance and legal risks
• Process inefficiency risks
• Employee and third party fraud risks
• Corporate culture and change management risks

Organizations of all sizes have recognized the need to put strategies and
capabilities in place to identify, prioritize, and manage risks and
opportunities across their entire supply chains and within and across their
internal supply chain processes.

Power
Dominance in the supply chain has shifted throughout history. Dominance
or power in supply chains concern the extent of influence one participant in
the chain has over one or more participants. The recognition of such
dominance in any industry has long been recognized. Emerson (1962)
defined power as the ability of one firm (the source) to influence the
intentions and actions of another firm (the target). Whilst Butaney and
Wortzel (1988) related power to supply chains by demonstrating that
distributors have power in supply chains when industry sales are
approximately equally distributed among manufacturers and the overall
competition within the industry is strong. Since these early days, it appears
that all participants along the supply chain including their second and third
tier suppliers within a network, can hold some extent of dominance over
some or all participants within the supply chain.

The extent of product brand power along the total supply chain will depend
on the type of power the dominant player exerts. The degree to which

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participants strategically collaborate with its partners and the extent of


collaborative management of the intra-and inter-organizational processes
will depend on the collaborative or coercive use of power by dominant
players.

Leadership
Just as individual organizations need leaders, so do supply chains. In many
situations, specific firms are thrust into a leadership position purely as a
result of their size, economic power, customer patronage, or
comprehensive product portfolio. In other arrangements, for less obvious
reasons, there is a clear presence of leadership on the part of one
enterprise, which is acknowledged in the form of mutual dependency and
respect on the part of other participating supply chain members.

Regardless of who leads, it has been shown that greater relationship


commitment exists in supply chain relationships when leaders exercise
power in the form of rewards and expertise. Firms that attempt to lead
through coercive practices find that partners are much less committed to
the relationship and more likely to seek alternative arrangements.

Activity E

❖Who in the supply chain is better placed; the manufacturer or the


retailer? Why?
…………………………………………………………………………………………………………………………
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Range of Extended Supply Chain Relationships

You are looking at the range of dependency in the supply chain relationship
which goes from limited to extensive.

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Figure 12.6
Contracting
Contracting with a supplier or customer introduces a time dimension to
traditional buying/selling, e.g., price, service and performance expectations
over specific period. A manufacturer may make a contract with a material
or parts supplier to purchase particular items for a specific period for a
specific price.

Outsourcing
Shifts focus from buying materials to performing a specific service or
activity. Typical outsourced activities range from manufacturing to logistics
activities such as transportation and warehousing. Firms that outsource
functions must maintain cordial relations with the service suppliers and
vice versa.

Administered
• Dominate firm governs by command and control
• Limited sharing of strategic information and limited joint planning
• Relationship has no specific termination or rebid time frame
• Alliance (e.g., Wal-Mart & Bharti Enterprises, Dell & Suppliers)
• Governed by desire to voluntarily work together both intellectually and
operationally
• Voluntary integration of human, financial, operational and technical
resources
• Extensive joint planning and expectations of ongoing relationship

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Enterprise Extension
It represents the extreme interdependence and information sharing to the
extent that can be viewed as a single entity. In such instances, two or
more firms willingly integrate to the extent of collaborative planning,
forecasting and replenishment (CPFR).

Activity F

❖What are the features related to an Alliance?


…………………………………………………………………………………………………………………………
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…………………………………………………………………………………………………………………………

Framework Constructs
The supply chain collaborative framework illustrated in Figure 12.8
encompasses a broad range of capabilities and competencies. The
framework serves to facilitate operations into a supply chain context by
integrating basic work, functions, capabilities, and competencies.

A job or basic work, such as order picking or truck driving, is the most
visible part of the logistical operations. Jobs are often industry or firm-
specific in content; however, they are usually grouped into organizational
units to facilitate control. For example, all the jobs related to warehousing
are often grouped. Another common grouping is to organize all jobs related
to transport into a transportation department.


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Figure 12.8: Integrative Framework Showing Supply Chain Flows,
Competencies and Context

Functional work arrangements constitute the drivers of logistical best


practice. It is the functions that combine to create value. The critical shift
in operational thinking is to view functional excellence in terms of process
performance that enhances overall supply chain integration.

To achieve integration, functional value should be focused in terms of


universal capabilities. A capability is the knowledge and achievement level
essential to developing integrated performance. Capabilities relate to why
work is being performed as contrasted to a functional perspective
concerning how it is performed. The capability reflects the value
contribution of the work. Inherent in a capability is the application of
integrative principles that allow multiple functions to be synchronized into
value-creating competencies.

Examples of capabilities include the ability to: (1) identify and


accommodate the needs of specific customers; (2) work with supply chain

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partners to achieve integrated operations; (3) effectively share operating


and planning information between supply chain partners; (4) measure
and understand overall supply chain performance; and (5) share benefits
and risks.

The fusing of capabilities results in universal competencies. Table 12.9


details the capabilities related to each of the six integrative competencies
grouped in terms of their supply chain context. The operational context
includes traditional processes related to procurement, production, and
customer relationship management. The planning and control context
incorporates information technology and planning systems, as well as
measurement competency. The behavioral context relates to how a firm
manages internal and external relationships among supply chain entities.

!
Figure 12.9

Activity G

❖How can functional excellence be achieved in process integration?


…………………………………………………………………………………………………………………………
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12.3 The Operational Context

Operations involve the processes that facilitate order fulfillment and


replenishment across the supply chain. To achieve leading performance in
an operational context, firms must be customer-focused, must achieve
inter-organizational coordination, and must excel in functional and process
performance.

Customer integration builds on the philosophies and activities that


develop intimacy and is the competency that builds lasting competitive
advantage. Any firm seeking supply chain integration must also
demonstrate strong commitment to the supportive capabilities of
segmentation, relevancy, responsiveness, and flexibility.

Internal integration focuses on the joint activities and processes within a


firm that coordinates functions related to procurement, manufacturing, and
customer relationship management. The capabilities that support internal
integration are cross-functional unification, standardization, simplification,
compliance, and structural adaptation.

Supplier integration focuses on capabilities that create operational


linkages with material- and service-providing supply chain partners. While
the customer is the overriding focal point or supply chain driver, overall
success also will depend on strategic alignment, operational fusion,
financial linkage, and supplier management.

Activity H

❖What is the purpose of customer, internal and supplier integration?


…………………………………………………………………………………………………………………………
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12.4 The Planning and Control Context

Planning and control integration concerns the design, application, and


coordination of information to enhance purchasing, manufacturing,
customer order fulfillment, and resource planning. This competency
includes database access to enable sharing of appropriate information
among supply chain participants. It also concerns transaction systems to
initiate and process replenishment and customer orders. In addition to
information management, it is essential that capabilities related to internal
communication, connectivity, and collaboration be developed. Collaborative
Planning, Forecasting, and Replenishment illustrate this capability.

12.5 The Behavioral Context

Effective relationship management is the final competency essential in


supply chain engagements. Successful implementation of supply chain
strategy rests on the quality of the basic business relationship between
partners.

Whereas guidelines exist for the development of meaningful and distinctive


supply chain relationships, no two situations are identical. No shortcuts or
substitutes exist for the detailed commitment necessary to build and
develop successful long-term relationships. In dealing with customers,
suppliers, and service providers, firms must specify roles, define
guidelines, share information, share risk and gains, resolve conflict, and,
when necessary, be able to dissolve an unproductive arrangement. The
managerial skill sets required for successful supply chain integration
require development of an inter-organizational culture. This is particularly
true since the dynamic environment in which firms compete requires
regular review of assumptions, processes, and measures to assure those
relationships remain relevant.

Activity I

❖How can relationships be effective amongst the supply chain partners?


…………………………………………………………………………………………………………………………
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12.6 Developing Trust

It is clear that no real collaboration can exist in supply chain relationships


without meaningful trust. While a powerful firm may be able to influence
the behavior of a less powerful organization, the change in behavior may
be temporary and certainly entered into unwillingly. In fact, while research
shows that issues such as technology compatibility, information exchange,
and appropriate measurement systems are all key issues to be resolved in
collaborative alliances, the human behavior issues related to culture and
trust are much more difficult issues to solve. To do so, the complexities of
different forms of trust must be understood.

12.7 Reliability and Character-Based Trust

It is clear that trust has more than one dimension. While several types of
trust exist, a meaningful way to understand trust in supply chain
collaboration is to distinguish between reliability-based trust and character-
based trust.

Reliability-based trust is grounded in an organization’s perception of a


potential partner’s actual behavior and operating performance. Essentially,
it involves a perception that the partner is willing to perform and is capable
of performing as promised. If supply chain participants cannot rely on
partner performance as promised, all efforts to develop collaborative
relationships fail. Simply put, a firm that is perceived as incapable of
delivering as promised will also be perceived as being unreliable and
therefore unworthy of trust in a relationship.

Character-based trust is based in an organization’s culture, leadership,


and philosophy. Essentially, it stems from perceptions that supply chain
partners are interested in each other’s welfare and will not act without
considering the action’s impact on the other. When this aspect of trust is
developed, participants do not feel vulnerable to the actions of one
another. Trusting partners believe that each will protect the other’s
interest. For example, a manufacturer who shares its plans for new product
introductions or promotion with a retailer trusts that the retailer will not
share that information with a competitive supplier. Likewise, sharing of
production schedule information with a supplier of component parts will
occur only when a manufacturer has trust that the information will be used
appropriately.

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It is clear that reliability-based trust is necessary to the formation of


collaborative relationships in supply chains, but it is not a sufficient
condition. For example, a partner who frequently threatens to punish and
consistently follows through with that punishment can be said to have
reliability. It is not likely, however, to be trusted in character.

Trust clearly develops over time and repeated interactions among


organizations. In particular, character-based trust evolves when partners
perceive that each acts fairly and equitably with the others. Notions of
character-based trust are especially relevant when one supply chain
partner is clearly more powerful than the others.

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12.8 Summary

To build trust first requires that a firm demonstrate reliability in its


operations, consistently performing as promised and meeting expectations.
As noted above, however, reliability is only one aspect of building trust.

The second key requirement for building trust is full and frank sharing of all
information necessary for the effective functioning of the relationship. In
fact, information sharing and communication have been stressed
throughout this text as the foundation for effective collaboration.
Companies that hoard information or fail to disclose vital facts are not
likely to be trusted.

Related to information sharing is explanation. Sometimes a company,


because of competitive pressures, may be required to undertake actions
that its supply chain partners may perceive as threatening. For example, a
manufacturer opening new distribution channels might threaten existing
dealers. A situation arose when John Deere introduced a second line of
lawn tractors and recruited Home Depot and other independent retailers,
bypassing its traditional dealer network. In such situations, trust may be
maintained through thorough explanation of the rationale and business
case that drove such a decision.

In many ways, the entire subject of supply chain management is also a


discussion of relationship management. The text has focused on issues
related to logistical processes in the supply chain and managing these
processes across company boundaries. Unique operating relationships
among supply chain participants differ significantly in their intensity and
extent of real collaboration. Power, leadership, conflict, cooperation, risk,
and reward are all critical issues in relationship management. Resolution of
these issues, however, ultimately depends upon the development of trust
among supply chain participants.

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12.9 Self Assessment Questions

1. What are the challenges the logistics official faces while developing
logistic functions?

2. How can these challenges be overcome?

3. How do reward systems serve as barriers to integration?

4. In your own words, describe and illustrate the great divide.

5. What are the benefits of collaborations and alliances in supply chain


relationships?

6. Why is character-based trust critical in collaborative relationships?

7. What are the different types of supply chain collaborative


arrangements? Elaborate.

8. What supply chain/procurement risks or concerns are most likely to


negatively impact your organization? Name any five.


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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter

Summary

PPT

MCQ

Video Lecture


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Chapter 13
OPERATIONAL, FINANCIAL AND SOCIAL
PERFORMANCE
Objectives

After going through the chapter, students should be able to understand:

• The objectives and perspectives of measurement system

• The internal and external performance measures

• The importance and process of benchmarking

• The characteristics of an ideal management system.

Structure

13.1 Measurement System Objectives

13.2 Perspectives of Measurement

13.3 Performance Measurements (Internal and External)

13.4 Supply Chain Comprehensive Metrics

13.5 Customer Perception Measurement

13.6 Best Practice Benchmarking

13.7 Characteristics of an Ideal Management System

13.8 Cost Reduction and Analysis

13.9 Summary

13.10 Self Assessment Questions

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Introduction
In a highly competitive business environment, logistical competency is
critical to the survival and growth of the organization. Logistical resources
are scarce and right allocation of such resources is vital. Performance
measurement is widely considered in the literature to be one of the key
points for facilitating the success of any organization as it produces
essential knowledge about performance for enabling competitive results to
be achieved. At the same time, the growing trend towards outsourcing
makes it increasingly necessary for the focus of performance measurement
to take into account the fact that companies are part of supply chains
rather than consider them as separate entities.

Logistical performance measurement is to ensure right allocation and to


monitor utilization of the resources. Performance measurement is required
to ensure careful evaluation and review of logistical performance of a
company. Importance of logistical performance can never be overstated in
competitive environment.

Activity A

❖How can logistical competency be achieved in a competitive


environment?
…………………………………………………………………………………………………………………………
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13.1 Measurement System Objectives

Objectives of logistical performance measurement systems:


Performance has to be measured for advantages to be guaranteed with the
goal of confirming that the objectives being pursued are being achieved.
This must be done through a set of indicators that can be measured using
both objective financial and operational data. Monitoring, controlling and
directing are said to be three objectives of measurement systems for
logistical performance. Specific measures are developed to keep fulfillment
of the above measurement objectives for logistical performance
measurement.

Monitoring measures: These measures are used to track historical


performance for reporting to management or customers. For example, data

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gathered is about fill rates and on-time deliveries and for logistics costs
such as transportation and warehousing.

Controlling measures: Controlling measures track ongoing performance


and are used to refine a logistics process in order to bring it into
compliance when it exceeds control standards.

Logistics management must take corrective measures for any system


failure and identify and modify them accordingly.

Directing measures: These measures are developed to encourage


performance by employees. Based on assessment done using these
measures, good performance is rewarded. One of the performance metrics
is “The Balanced Scorecard”.

Activity B

❖What is the objective of performance measurement?


…………………………………………………………………………………………………………………………
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…………………………………………………………………………………………………………………………

Balanced Scorecard
The Balanced Scorecard is a framework for performance measurement
developed by Kaplan and Norton (Figure 13.1). As a structure, balanced
scorecard methodology breaks broad goals down successively into vision,
strategies, tactical activities, and metrics. As an example of how the
methodology might work, an organization might include in its mission
statement a goal of maintaining employee satisfaction. This would be the
organization's vision. Strategies for achieving that vision might include
approaches such as increasing employee-management communication.
Tactical activities undertaken to implement the strategy could include, for
example, regularly scheduled meetings with employees. Finally, metrics
could include quantifications of employee suggestions or employee surveys.
A balanced scorecard incorporates measures from four different
perspectives.

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Activity C

❖What are the vision and mission statements in a balanced scorecard??


…………………………………………………………………………………………………………………………
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Financial Perspective: The importance of financial considerations is


paramount in most situations and in most organizations. For any strategic
choice, therefore, the timely and accurately presented funding data is
critical and the sources of funding and budgeting must be done. Another
key consideration is the prospects of sustainability of funding for the
initiative required to implement the strategy. This component of the
Balanced Scorecard therefore looks at the projects from a financial
perspective and discusses financial considerations.

Customer Perspective: This area focuses on what must be done and


what is most important, from the customer's perspective, to achieve the
mission. The importance of customer focus and customer satisfaction has

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gained considerable importance in recent management philosophy. The


increased competition in the markets means that it is easier than ever for
the dissatisfied customers to switch suppliers. The objectives, measures,
targets and, eventually activities are therefore planned to implement
strategy regarding the customer satisfaction.

Internal Process Perspective: This component focuses on what an


organization must be doing well to meet the customer needs defined in the
Customer Perspective. It also lets managers know how well their business
is running and how well the internal processes are designed to meet the
objectives. These may be divided into: (a) mission-oriented processes and
(b) support processes. Specific measures and benchmarks are then set to
monitor their effectiveness.

Learning and Growth Perspective: This perspective focuses on how an


organization is improving its ability to innovate, improve and learn in order
to support success with the critical operations and processes defined in the
Internal Process Perspective. This may include employee training and
corporate culture attitudes. In the modern management philosophy, it is
increasingly becoming important for the organizations to develop a culture
of learning where the employees constantly learn and share the knowledge
to facilitate growth. The on-the-job training and mentoring is also an
essential component of the perspective.

Activity D

❖What is the objective of conducting an internal process?


…………………………………………………………………………………………………………………………
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13.2 Perspectives of Measurement

The two types of measures developed are activity based and process
based. Activity based measures measure performance at individual
activity level. These activities are small tasks performed to execute
customer orders. Activity based performance measures indicate efficiency
and effectiveness of first level efforts in the process of customer
satisfaction.

Process based performance measures measure effectiveness and


efficiency of customer satisfaction process. They examine total
performance cycle time, or total service quality. These two examples
collectively indicate effectiveness and efficiency of customer satisfaction
process.

13.3 Performance Measurement (Internal and External)

An important ingredient to achieving logistical excellence is the


establishment of measurements that quantify process achievements as
contrasted to functional performance. Whereas no uniform set of metrics
exist that are common to all supply chain arrangements, some are
emerging. Table 13.1 provides a list of commonly observed process
performance metrics.

It should be pointed out that measures such as those listed in Table 13.1
are supplemental rather than substitutes for the more traditional five
categories of measuring logistics performance that are discussed later in
this chapter. In combination, metrics related to both functional and process
activity need to be combined to evaluate the effectiveness and efficiency of
overall logistics performance. To quote an old adage, "If you can't measure
it, you can't manage it." Firms who achieve world-class status are almost
compulsive when it comes to all facets of measurement.

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Table 13.1: List of Commonly Observed Process Performance Metrics


Category Outcomes Diagnostics
Delivery to commit date
Customer Perfect order fulfillment
warranty costs, returns
satisfaction/ Customer satisfaction
and allowances Customer
quality Product quality
inquiry response time
Source/make cycle time
Order fulfillment lead Supply chain response
Time
time time Production plan
achievement
Costs Total supply chain costs Value-added productivity
Cash-to-cash cycle time Forecast accuracy
Assets Inventory days of supply Inventory obsolescence
asset performance Capacity utilization

Activity E

❖What are the types of performance metrics related to customers and to


what purpose?
…………………………………………………………………………………………………………………………
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21% of firms apparently do not capture a measure of on-time delivery.


38% do not measure order cycle time. 48% do not capture invoice
accuracy. It seems that a large percentage of firms are not capturing
important measures of logistics performance. This sets up the observation:
If firms do not measure, they probably do not plan performance and,
therefore, do not take corrective action when appropriate to do so.
Consequently, firms lack control of important activities. (Table 13.2).

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Table 13.2 Performance Metrics


% %
Effectiveness Measures Efficiency Measures
Capture Capture
Involve Trading Partner Cost
Customer complaints 76.6 Outbound freight cost 87.3
On-time delivery 78.6 Inbound freight cost 68.9
Over/short/damaged 72.3 Inventory carrying cost 60.4
Returns and allowances 69.1 3rd party storage cost 58.6
Logistics cost per unit vs
Order cycle time 62.3 52.4
budget
Overall customer satisfaction 60.8 Cost to serve 37.4
Days sales outstanding 58.7 Average 60.8
Forecast accuracy 54.4 Productivity
Finished goods inventory
Invoice accuracy 52.1 80.2
turns
Perfect order fulfillment 39.5 Orders process/labor unit 43.3
Product units processed
Inquiry response time 29.6 47.6
per warehouse labor unit
Units processed per time
Average 59.5 37.2
unit
Orders processed per
Internal Focus 36.1
time unit
Product units processed
Inventory count accuracy 85.8 21.8
per transportation unit
Order fill 80.8 Average 44.4
Out of stocks 70.5 Utilization
Space utilization vs
Line item fill 68.5 46.5
capacity
Back orders 64.4 Equipment downtime 46
Equipment utilization vs
Inventory obsolescence 62.7 40.4
capacity
Labor utilization vs
Incoming material quality 61.6 35.8
capacity
Processing accuracy 45 Average 42.2
Case fill 39.1
Cash/cash cycle time 32.2
Average 61.1

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13.3.1 Internal Performance Measures


Broadly, there are two levels of performance measures, namely, internal
and external. The firm must first strike a balance between the external
measures such as customer satisfaction, and the internal measure such as
productivity, customer service, cost, quality, and asset management
because companies normally ignore the external results, believing the
internal measures to be enough. (Govindrajan and Anthony).

Functional Perspectives
While many different classifications of logistics functional measures exist,
research over a period of years suggests five categories: (1) cost, (2)
customer service, (3) quality, (4) productivity, and (5) asset management.

Operating Cost Measures


Logistical cost is a measure used to measure logistical performance to
indicate the resources spent to meet specific operating objectives. It is
measured in rupees or dollars as a percentage of sales or as a cost per unit
of volume, i.e., a percentage of total sales of inventory moved through the
system. Measuring operating costs helps to identify whether and where to
make operational changes to control expenses and to discover areas for
improved asset management. To attract and retain valuable customers, the
price/value of products offered can be enhanced through cost reductions
and service improvements in logistics activities. The returns on stockholder
investments and the market value of the firm are impacted by the
performance of firm logistics.

Customer Service Measures: In order to determine whether the desired


goods, services and information are consistently made available at the
designated place and time, and in the required condition and quantity,
feedback should be obtained directly and explicitly from the customer. In
short, they indicate a firm’s ability to meet customer expectations. To
achieve this end, many industry players are collaborating with their key
customers and vendors to improve their processes and systems and
provide better service quality, reduce costs and improve visibility. To gain
full advantage of such collaborative initiatives, building an efficient and
effective supply chain intelligence infrastructure is a must.

In doing so, the following measures were judged to be most critical:

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i. Percentage of consignments delivered at the right (i.e., designated)


place

ii. Percentage of consignments delivered on time (i.e., at the designated


time)

iii. Percentage of consignments delivered damage free (i.e., in the


required condition)

iv. Percentage of consignments delivered complete (i.e., in the required


quantity)

v. Percentage of orders fulfilled and invoiced accurately

Activity F

❖What is the purpose of measuring operating costs?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Productivity Measures
The productivity of the logistical system is judged by its output with
respect to the input into the system. For example, if one more salesperson
is recruited in the sales team, then he should bring in additional revenue
proportionately which justifies his recruitment. Productivity measures are
normally easily understood and extensively used although sometimes it
may become difficult to obtain all relevant details. These measure gives an
indication of resource utilization. Productivity measures are static, dynamic
and surrogate. Static measures take all factors of output and input into
account. This is also called total productivity. As the measurement is across
only one span of time, it is called static productivity measure.

Dynamic Measures compare one static measure against another. Total


productivity of one period is compared to static productivity of another
time period.

Surrogate Measures take into account such factors not normally included
in productivity calculations but correlated with the concept. For example,
customer satisfaction, profit, effectiveness, quality, efficiency etc. Some of

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the surrogate logistics productivity measures commonly used are: Units


shipped per employee, Units per labour dollar, Orders per sales
representative, Comparison to historical standards, Goal programs, and
Productivity Index.

Activity G

❖What are the five internal performance measures? Elaborate on any one.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Asset Management
Asset management is concerned with the utilization of the organization’s
mobile equipment (e.g., vehicles and handling equipment), durable
installed and stationary assets (e.g., workshop equipment), and current
assets in the form of inventory (i.e., merchandise). The following measures
were indicated as being the most important:

i. Fixed-asset output: Examples for vehicles: Ton-km per period,


container-km per period, deliveries per period, fuel consumption rates,
and tyre wear

ii. Fixed-asset time utilization ratio = Actual working time ÷ Total number
of hours available (Downtime ratio = 1 – Fixed-asset time utilization)

iii. Inventory turnover (A) = Units sold in a period ÷ Average units in stock
during the period

iv. Inventory turnover (C) = Sales revenue in a period ÷ Average inventory


at sales price during the period

v. Inventory turnover (B) = Cost of goods sold in a period ÷ Average


inventory at cost during the period

vi. * Is generally applied when dealing with finished goods (which are time-
sensitive) and

vii. Is in general applied when dealing with raw materials and semi-finished
goods (which can often be stockpiled).

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Facilities and equipment are also measured in terms of capacity utilization,


or the percentage of total capacity used. For example, if a warehouse has
the capacity to ship out 10,000 cases a day, but ships out only 8,000, then
the capacity utilization is only 80%. Equipment utilization is also measured
in terms of time, with the number or percentage of hours that equipment is
not utilized, as equipment downtime, applied to transportation, warehouse,
and materials handling equipment with respect to the effective or
ineffective utilization of capital asset investment.

Activity H

❖ In terms of capacity utilization, what is “downtime” and how is inventory


turnover for finished goods calculated?

…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Quality
‘Perfect order’ is treated as a concept for assessing quality of logistics.
Features of a perfect order are complete delivery of all items requested and
“One-time Delivery” with a mutually acceptable tolerance [of one day],
complete and correct documentation, product faultlessly installed.

Logistics quality is closely related to the objective of achieving optimal


customer service. Whereas customer service refers to how effectively
customers’ desires are conformed to, logistics quality refers to how
efficiently (or cost-effectively) customers’ desires are met. From this
perspective, the following measures were indicated as being most
important:

(i) Damage frequency


(ii) Frequency of credit claims by customers
(iii) Frequency of product returns by customers
(iv) Ratio of orders sorted, packed, shipped and delivered accurately
(v) Ratio of orders documented and invoiced accurately

Damage excludes faulty products that erroneously leave production/


manufacturing and enter distribution.

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Activity I

❖What is considered as a perfect order in a quality measurement system?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Measuring Customer Accommodation


There are many possible measures of customer service, including lead
time, responsiveness, costs, amount of damage, errors, product
availability, and so on. There are several value metrics mentioned in the
literature, ranging in financial sophistication from customer satisfaction to
shareholder value including: customer satisfaction, customer value-added
(CVA), total cost analysis, segment profitability analysis, strategic profit
model and shareholder value. Measurement of Perfect Orders, Complete
Logistics Performance, and Customer Satisfaction are major approaches.

Measurement of Perfect Orders as a Customer Accommodation


Metric
The Supply Chain Council defines perfect order fulfillment as, ‘the
percentage of orders meeting delivery performance with complete and
accurate documentation and no delivery damage. Components include all
items and quantities on-time using the customer’s definition of on-time,
and documentation – packing slips, bills of lading, invoices, etc.’

1. The first hierarchy relates the sales order to the actual shipment and
ultimate receipt by the customer.

2. The second hierarchy relates the customer request (primarily quantity


and date) to the ultimate customer receipt.

3. The third hierarchy relates the customer purchase order (primarily price,
quantity, date, and terms) to the customer payment of the invoice.

The hierarchies provide a robust way to define, measure, and analyze the
customer facing attribute of ‘delivery reliability’. This helps an organization
provide more flexibility for business units to define the metric in line with
how their customers measure them. Below are two metric examples under
the delivery category from two business units within the same company
serving two different markets:

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• Perfect Order Fulfillment – Sales Order is successfully received by


customer by committed date with expected quantity and passes
customer three-way match and is paid on time within terms.

• Perfect Line Shipment – Line is successfully shipped to customer by


committed date with expected quantity and passes customer three-way
match and is paid on time within terms.

Complete Logistic Performance as a Customer Accommodation


Metric

The absolute approach provides a better indication of how a firm's logistical


performance really impacts the customers. Example: Managers may feel
that 99.5% on-time delivery represents excellent performance.
Performance evaluation also helps to improve the efficiency of supply
chains and the functioning of related infrastructures, services, procedures
and regulation.

A sound and comprehensive set of national-level performance indicators is


critical for high-level policy dialogue, preparation and implementation.
Policymakers need a better understanding of:

1. The level of logistics costs in absolute terms and relative to other


costs;
2. The main drivers of logistics costs;
3. How costs and deficiencies in performance affect certain sectors in
the economy.

Customer Satisfaction as a Customer Accommodation Metric


Unlike other metrics, to quantify satisfaction requires monitoring,
measuring and collecting information from customers. Typical satisfaction
measurement requires careful investigation of customer expectations,
requirements, and perceptions of firm performance related to all aspects of
logistics operations. Only through collecting data from customers can real
satisfaction be assessed! Further, efforts to enhance customer success can
be measured only from the customer's perspective.

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13.3.2 External Performance Measures


Maintain an externally focused perspective. Performance of the
organization is measured through the perception screen of customer. These
measures are used to gain insight into the practices in other industries.
External performance measurement information is required by two main
groups. Shareholders and potential investors use this data to inform
investment decisions. Managers (including supply chain managers) use it
as a basis for strategic and tactical decision-making. The primary source of
this information for shareholders and investors is the company’s published
financial accounts. Interpretation of published financial accounts involves a
number of techniques, which can be applied to measure financial
performance based on the information contained within a company’s
annual, or interim, report.

13.4 Supply Chain Comprehensive Metrics

Processes and roles in the supply chain need to be mapped to key metrics
to determine performance. There must also be a mechanism in place to
periodically review actual supply chain performance and redefine
performance measures in the changing business context. Specific
measures to consider are cash-to-cash conversion time, supply chain
inventory days of supply, dwell time, on-shelf in-stock percentage, total
supply chain cost, and supply chain response time.

Cash-to-Cash Conversion
It is a measure of an organization’s effective use of cash. Cash-to-cash
cycle time is the time required to convert a dollar spent on inventory into a
dollar collected from sales revenue. It can be measured by adding a firm’s
days of supply of inventory and its days of accounts receivable
outstanding, subtracting the days of trade accounts payable outstanding. A
good cash-to-cash cycle, contrary to most other financial metrics, is as low
as possible. It means that the company is efficiently using cash and not
holding excess inventory, or allowing excessively lenient payables or
receivables terms.

Inventory Days of Supply


Supply chain inventory is focused on total inventory at all locations and is
typically defined as the total finished goods inventory at all plants,
warehouses, wholesalers, and retailers expressed as the calendar days of
sales available based on recent sales activity. This measure may include

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raw materials and components held by manufacturing plants and suppliers.


These unfinished inventories are converted to equivalent units of finished
goods and included as part of the true total supply chain inventory.

Dwell Time
It is another metric reflecting overall supply chain performance in
managing assets. It is the ratio of the days inventory sits idle in the supply
chain to the days it is being productively used or positioned. While it is
sometimes necessary for inventory to sit idle for reasons of quality control
or to buffer uncertainty, extended dwell time reflects the potential
magnitude of non-productive inventory. Assets that sit idle are not
contributing to productivity in the supply chain.

On-Shelf In-Stock Percentage


On-shelf Availability is the measure of a product being available for sale to
a shopper, in the place he expects it and at the time he wants to buy it.
The reason is that consumers typically cannot or will not select and buy an
item that is not easily available on the store shelf. Increasing the on-shelf
in-stock per cent benefits all members of the supply chain. Despite this,
out-of-stock levels on the shelf still remain persistently high, and in today’s
challenging economic environment it is even more critical than ever for
retailers and manufacturers to ensure that every product a customer wants
to buy is available every time he wants to buy it.

Activity J

❖An idle inventory is not ideal. Why?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

Supply Chain Total Cost

Figure 13.2 illustrates the fact that total supply chain cost is the aggregate
of costs across all firms in the supply chain, not an individual organization.

!
Figure 13.2

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Grouping these costs into these categories will help us understand the
source of these costs, but also provide an understanding of how to
measure them and how to optimize them to make the supply chain more
efficient and cost-effective. In doing so, though one must use caution, as a
single-minded focus on cost alone may not be the most optimal supply
chain strategy. Since supply chains must address the twin objectives of
cost and flexibility (or responsiveness), supply chain performance must be
measured using metrics that allow capturing both of these aspects.

Most corporations do not have a consolidated view of costs of their supply


chains. This constraints their ability to accurately identify opportunities and
problem areas, prioritize supply chain investments, and constrains their
ability to execute simple profitability analysis accurately. Creating a broad
cost view of the supply chain requires careful analysis, planning, and
processes to gather data, however, it allows for quickly analyzing the
impact of changes, even predict such changes, and manage an ever-
evolving supply chain for the optimal corporate efficiency.

Supply Chain Response Time (SCRT)


Supply Chain Response Time is a continuous measurement defined as the
amount of time it takes a supply chain to respond to an unplanned increase
or decrease in demand without service or cost penalty. The Supply Chain
Response Time metrics attempt to segment the time buckets unplanned
demand must go through to fulfill customer requirements. Generally, this
can be calculated by role in the supply chain and material type, i.e.,
Supplier Response Time for Raw Materials and/or Purchased Finished
Goods.

Activity K

❖What care must be taken while calculating total costs in a supply chain?
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

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13.5 Customer Perception Measurement

Customer perception is measured by carrying out surveys sponsored by


the organization interested in measurement or by the industry. Either the
firm, or consultants or delivery agents or industry organizations carry out
these surveys. Information surveyed is about firm’s and competition’s
performance in specific areas. Generally, information generated by these
surveys is customer’s perception of availability of firm’s products,
performance cycle time, information availability, and performance in the
areas of problem resolution and product support. Customer perception is
measured by carrying out surveys sponsored by the organization interested
in measurement or by the industry. Either the firm, or consultants or
delivery agents or industry organizations carry out these surveys.
Information surveyed is about firm’s and competition’s performance in
specific areas. Generally, information generated by these surveys is
customer’s perception of availability of firm’s products, performance cycle
time, information availability, and performance in the areas of problem
resolution and product support.

Activity L

❖What is the purpose of carrying out surveys?


…………………………………………………………………………………………………………………………
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…………………………………………………………………………………………………………………………

13.6 Best Practice Benchmarking

To facilitate development, it is a common practice for world-class


organizations to benchmark their metrics and processes to other
organizations within their firm, industry and throughout the logistics sector.
Such benchmarking not only compares absolute performance but also
focuses on alternative methods to create process excellence.

There are two initiatives to consider to enhance measurement and


benchmarking capability. First, firms should consider developing
benchmarking roundtables to foster the collection and exchange of key
metric and process data. Such roundtables would ideally consist of firms
who desire to develop standards for collection of metric and process data.
To effectively benchmark, such firms must also be willing to consider

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changing existing processes to enhance performance. Experience indicates


that the willingness to both exchange and change requires senior
management support. For roundtables to be effective, it is more important
that participating firms be comparable in terms of supply chain
sophistication and share a dedication to enhancing supply chain excellence.

Given benchmarking capabilities, a second initiative is a commitment to


share measurement standards throughout industry. Development and
promotion of common measurement standards facilitates communication
between supply chain members and provides a basis for cross-industry
benchmarking. The standards include the definition of key industry
measures, the basis and perspective for measurement and the level of
detail for collection. For example, some industries have defined the
relevant measure of customer service to be "shelf level availability at the
retailer" rather than the individual order fill rate for each supply chain
participant.

Review committee identifies key performance measures to improve in the


firm and tracks historical and current performance levels.

The Benchmarking Process


The most obvious and simple form of benchmarking is to buy your
competitor’s product or service. Many companies have used this technique,
also known as reverse engineering, in design and manufacturing where
they strip down the competitor’s product to examine the design,
manufacturing methods, sources of component supply and other relevant
factors. However, Xerox is usually credited as being the first to see the real
potential for benchmarking. They started in 1979 by stripping down
products but went on to experiment with the concept in other areas.
Several different ways to carry out benchmarking comparisons are:

Internal benchmarking: This is where operations within one company


are compared. For instance, in a large group, several strategic business
units (SBUs) might make similar products or use similar processes.
Benchmarking of performance between country operations in multinational
companies is also an example of this.

Competitive benchmarking: The next step might involve going outside


the company to direct competitors. There are many aspects of supply chain
performance which can be usefully benchmarked in this way. Access to

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appropriate data can be a problem between direct competitors but there


are ways of overcoming this obstacle.

Cooperative benchmarking: Compares one’s own organization with


other companies in different industries representing the best-in-class
companies for particular aspects of the selected business operations.

Examples of benchmarking are asset management cost, customer service,


productivity, quality, strategy, technology, transportation, warehousing,
order processing, etc.

Activity M

❖Why roundtables are considered important in benchmarking?


…………………………………………………………………………………………………………………………
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…………………………………………………………………………………………………………………………

13.7 Characteristics of an Ideal Measurement System

The ideal performance measurement system incorporates three


characteristics that provide accurate and timely direction for management:

Cost/Service Reconciliation: The difficulty that arise in collecting certain


data and in coordinating cause and effect relationships, a majority of
reports show logistics expenditures only during a specific period of time. As
cost and service (e.g., freight bill and shipment) are separated by time,
cause and effect relationship between them is not established. These get
apportioned to different heads of cost and benefit. An ideal measurement
system should reconcile them. An important benefit provided by an
operational plan is that activity levels are matched to projected cost levels.
When planned activities generate costs that are related to futures sales, it
is possible to reconcile the cost with the corresponding revenues.

Dynamic Knowledge Based Reporting: The biggest challenge in


logistical reporting is to present, a dynamic, rather than static, picture of
operational performance over an extended time period. Performance
reports generally report performance characteristics for a particular time
period. They do not reveal current situation. They do not reveal data in the
extended past nor do they reveal the trend in future. Thus, reporting

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systems should ideally possess diagnostic capacity to project where


operational trends are heading and to suggest appropriate corrective
actions.

Exception Based Reporting: Logistical measurement should be


exception-based. The comprehensive and detailed nature of logistics
requires that managerial attention be directed to exceptions from
anticipated results. The existence of an exception to planned results is
proof that unanticipated activity is occurring. Therefore, an ideal reporting
system will assist managers in isolating activities and processes requiring
attention. Such attention may identify areas requiring problem-solving
efforts or facilitate taking a more in-depth assessment of a specific process
or function.

Activity N

❖What are the limitations of reporting logistic expenditures?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

13.8 Cost Reduction and Analysis

Understanding your cost is a vital prerequisite of being able to reduce cost.


An important feature of activity based costing (ABC) is providing this
knowledge. But this is definitely not the only aspect, maybe not even the
most important one. Other ways of activity based management in this
category are:

• Gain knowledge on resource utilization


• Examine customer/product profitability
• Raise internal and external understanding of departmental cost drivers
• What-if analysis
• Support customer cost reduction
• Internal benchmarking

Within different types of businesses and business functions, ABC can be


used to gain knowledge on resource utilization.

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Activity Based Costing


Activity based costing (ABC) assigns manufacturing overhead costs to
products in a more logical manner than the traditional approach of simply
allocating costs on the basis of machine hours. Activity based costing first
assigns costs to the activities that are the real cause of the overhead. It
then assigns the cost of those activities only to the products that are
actually demanding the activities.

Activity based costing identifies cost drivers (activities that cause costs)
that were not previously accounted for by the costing system. A cost driver
refers to any activity that causes a cost. It can be anything from machine
hours, labor hours, or number of machine setups, to the number of parts in
a product. Once known, the production managers can control costs by
managing these cost drivers. Furthermore, by providing marketing
managers with more accurate product costs, they can make informed
decisions about pricing.

Activity based costing has grown in importance in recent decades because:


(1) the manufacturing overhead costs have increased significantly, (2) the
manufacturing overhead costs no longer correlate with the productive
machine hours or direct labor hours, (3) the diversity of products and the
diversity in customers' demands have grown, and (4) some products are
produced in large batches, while others are produced in small batches.

In case of logistics, the key event is a customer order and related activities
and relevant costs that reflect the work required to fulfill the order. In other
words, logistical activity based costing must provide managers the insights
needed to determine if a specific customer, product, order, or service is
profitable. This requires matching specific revenue with specific costs. The
guiding criteria for effective logistical activity based costing are relevancy
and consistency. Relevancy is important in the sense that the costs
assignment helps managers to better understand the major factors
affecting logistics expenses. Consistency is important in terms of
comparing related activities over time. In the final analysis, a logistical
costing system has to make sense only to the managers who are using it
as a guide to decision-making.

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Activity O

❖What are the cost constituents in activity based costing?


…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………

13.9 Summary

This study is a contribution to the growing research stream trying to clarify


the impact of supply chain management on performance. Specifically, we
explored the impact of the supply chain management as a
multidimensional construct (information sharing, long-term relationship,
cooperation and process integration) on different competitive priorities
(cost, flexibility, quality and time).

Creating competitive advantage through high-performance logistics


requires integrated measurement systems. The old adage, “If you don’t
measure it, you can’t manage it,” holds true for logistical activities both
internal to an organization and externally with supply chain partners. For
this reason, a framework for performance assessment must be established.

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13.10 Self Assessment Questions

1. Briefly discuss the three objectives for developing and implementing


performance measurement systems.

2. How does the balanced scorecard concept help guide logistics managers
in the development of a performance measurement system?

3. Is the ideal of a perfect order a realistic operational goal?

4. Why are comprehensive measures of supply chain performance, such as


total supply chain cost, so difficult to develop?

5. What is the benchmarking process related to competitors?

6. What are the cost drivers associated with Activity Based Costing?

7. Why are customer surveys undertaken?

8. What is the importance of reverse engineering in Benchmarking


Process?


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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter

Summary

PPT

MCQ

Video Lecture


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Chapter 14
IT IN LOGISTICS
Objectives

After going through the chapter, students should be able to understand:

• The role of IT in supply chain management

• The impact of advanced IT on customer satisfaction

• The operations of enterprise supply chain

• The advantages of RFID System

Structure

14.1 Role of IT in SCM

14.2 How IT Has Optimized the SCM?

14.3 Supply Chain Integration by 3PL Providers through Advanced IT

14.4 Inter-organizational Information System (IOIS)

14.5 Strategy-Structure-Process-Performance

14.6 Advanced IT Impact on Customer Satisfaction

14.7 Enterprise Supply Chain Operations

14.8 Enterprise Planning and Monitoring

14.9 Supply Chain Traceability

14.10 Summary

14.11 Self Assessment Questions

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Introduction
A well-designed information system is a key element of logistics in the
chain of managing, organizing and operating in both profit and non-profit
organizations. The advantages of applying strategic management in the
development of information technologies contribute to positive
development of logistics functions in an organization or institution as a
whole. A prerequisite for successful logistics management is systematic
gathering of required business information. Today, it is no longer possible
to run a successful operation without a working information system. A fully
constructed information system contributes essentially to an organization's
competitive advantage. These advantages are reflected in creating new,
competitive positions, in cost reduction and achieving a certain dependency
differentiation in operations, as well as in achieving better results of all the
logistics functions within the organization. The basic goal of an information
system within logistics management is to make successful connections
between suppliers, consumers, and competitors.

14.1 Role of IT in SCM

The use of information technology (IT) is considered a prerequisite for the


effective control of today’s complex supply chains. Because, today
companies are often not considered independent entities, but parts of
multi-company, multi-echelon networks, i.e., supply chains, delivering
goods and services to the final customer.

Companies today are under pressure to better manage the supply chain
and to improve efficiency and logistics operations while remaining
responsive to changing market conditions and customer demands. As a
result, organizations need to adopt IT to support their supply chains and
increase their efficiency by achieving tighter cooperation over the supply
chain.

Importers and exporters need to know where their product is. Lenders
need to know when and how to pay for it. Innovative companies have
sprung up to harness the power of the IT, making it easier than ever for
logistics managers to track and manage international shipments, and to
serve their changing needs as they reach ever further across the globe to
source goods. Companies such as Home Depot, Xerox and Sears already
use on-demand, web-based data hubs to identify where their goods are in

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real time, and if delays along the way should be corrected to avoid broader
supply chain disruptions and expensive recovery work.

Transaction processing stands for the use of IT for increasing the


efficiency of repetitive information exchanges between supply chain
partners. In this type of IT use, the exchanged information is typically
related to such tasks as order processing, billing, delivery verification,
generating and sending dispatch advices, and producing order quotes.

Supply chain planning and collaboration represents the use of IT for


sharing planning related information such as demand forecasts and other
demand information, inventory information, and production capacity
information, with the intention of increasing the effectiveness of the supply
chain.

Order tracking and delivery coordination refers to the monitoring of


individual orders or shipments, which may consist of components or final
products, with the aim of coordinating their delivery or conveying timely
information of their location.

Activity A

❖How are companies depending on IT to manage their supply chain?


…………………………………………………………………………………………………………………………
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14.2 How IT has Optimized the SCM

!
Figure 14.1: Type of IT Use for Optimizing SCM

IT plays an instrumental role in bringing together multiple technologies and


integrating them to optimize various scenarios in SCM. For instance, when
“Radio Frequency Identification” (RFID) is used with IT, the combination
promises to enable an automatic collection of supply chain data for
optimization purposes. The above combination makes it possible to
implement a finely grained and immediate collection of data, which in turn
enables more detailed and precise analyses on the “Business
Intelligence” (BI) side.

A connection of RFID, IT and BI has powerful business potential that goes


well beyond incremental operational improvements. The combination for
tracking and tracing, and sensor technologies additionally enables the
identification and localization of root causes for quality issues. Sensor data
such as abrasion, temperature, humidity, or brightness can be measured
automatically for each transport unit and stored on the RFID chip. Later
this data is made readily available by IT for aligning the flow of goods with
the actual demand.

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The pursued objectives are reducing storage space at the “Global


Distribution Centers” (GDC) while curbing the risk of out-of-stock
situations. In an optimal scenario, goods arriving at the GDC can be
directly forwarded to the retailers without stocking (Cross-docking).

The benefits of a combination of IT, RFID and BI on the manufacturer’s side


lead to efficiency gains within production environments. Overall, the results
indicate that it has powerful business potential that goes well beyond
incremental operational improvements.

Case Study

“YANSHA” department store embraces supplier collaboration to


streamline processes

Business Challenge: In order to maintain its market leadership position,


Chinese retailer Yansha needed to increase its competitiveness against
both local retailers and new foreign competitors in an increasingly
deregulated Chinese retail industry. Yansha saw that the best way forward
was to transform the way it does business with its supply chain partners
through the adoption of new business processes, automation and business
intelligence.

Solution: Yansha deployed a first-of-its-kind supply chain management


(SCM) platform that leverages a service-oriented architecture (SOA) to
integrate enterprise resource planning (ERP) and SCM applications. The
platform enables Yansha and its suppliers to leverage new real-time
performance information to provide transparency into supply chain
business processes and generate actionable business intelligence, setting
new standards of efficiency.

Business Benefits

• Increased supplier information service revenue by 50%


• Reduced order lead time from 2.5 days to 4.5 hours, driving down
inventory costs
• Improved order acknowledgement rate from 80% to 99%
• Reduced order error rate from 9% to 1%
• Achieved ROI in nine months

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• Enhanced operating business process efficiencies, visibility, asset


structure and both customer and supplier satisfaction
• Enabled the creation of a value-based supplier pricing model that uses
new supplier performance metrics
• Reduced operating risks due to optimization of supplier relationship
profitability and lower error rates

Activity B

❖What business strategy did “Yansha” employ to tackle competition?


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14.3 Supply Chain Integration by 3PL Providers through 



Advanced IT

The degree of integration between supply chain partners is also impacted


by the usage of advanced information technology services. The
technologies used in supply chain integration have impact on coordination
of logistics activities and information sharing within the organization.
According to some studies, it is noted that higher level of integration have
generally achieved by third party logistics providers. Also third party
logistics providers seek longer term relationships and higher level of
integration with partners through adaptation of advanced information
technologies in order to improve the integration between supply chain
partners. Third party logistics providers are offering advanced information
technology and broader global coverage. So, companies need a state-of-
the-art third party logistics provider with a wealth of information
technology deployment experience to achieve optimal information flow to
efficiently integrate the supply chain.

14.4 Inter-Organizational Information System (IOIS)

In supply chain management, the suppliers, producers, customers are the


members and are linked through the ultimate level of integration. These
members are continuously supplied with information in real time. The
foundation of the ability to share information is the effective use of
Information Technology within the supply chain.

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Appropriate application of these technologies provides decision-makers


with timely access to all required information from any location within the
supply chain. Recognizing the critical importance of information in an
integrated supply chain environment, many organizations are
implementing some form of an inter-organizational information system
(IOIS).

An IOIS is an integrated data processing/data communication system


utilized by two or more separate organizations. These organizations may
have a pre existing business relationship. What must exist is a computer-
based electronic link between the two organizations that automates some
element of work, such as order processing, order status, inventory level
review, and shipment tracking information or, minimally, transaction
transfer, which would previously have been performed manually or through
other media, such as the mail. The development of an IOIS for the supply
chain has a distinct advantage in cost reductions.

Cost Reductions
In these uncertain times, with many economic challenges ahead, the need
to contain costs across the business is as strong as ever. There still
remains one last major opportunity to take out costs – not from inside the
business per se but rather from the inter