Planning For Logistics

Planning for Logistics
Course Design
S
Advisory Council
Chairman
Dr Parag Diwan
PE
Members
Dr Kamal Bansal Dr Anirban Sengupta Dr Ashish Bhardwaj
Dean Dean CIO
Dr S R Das Dr Sanjay Mittal Prof V K Nangia

VP – Academic Affairs Professor – IIT Kanpur IIT Roorkee
SLM Development Team

Wg Cdr P K Gupta
Dr Joji Rao
Dr Neeraj Anand
Dr K K Pandey
)U
Print Production
Mr Kapil Mehra Mr A N Sinha

Manager – Material Sr Manager – Printing
Author
Reji Ismail
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other means,
without permission in writing from MPower Applied Learning Enterprise.
(c
Course Code: MDSL-832D
Course Name: Planning for Logistics
Version: July 2013
© MPower Applied Learning Enterprise

UNIT 20: Case Study
S
Contents
Block-I
Unit 1 Introduction to Logistics ................................................................................................ 3
PE
Unit 2 Logistics Operations ..................................................................................................... 17
Unit 3 Logistics and Supply Chain Strategy .......................................................................... 31
Unit 4 Supply Chain Management ......................................................................................... 41
Unit 5 Case Study .................................................................................................................... 55
Block-II
Unit 6 Organisational Planning Process................................................................................. 59

Unit 7 Strategic Planning Process .......................................................................................... 75
Unit 8 Developing Strategy ..................................................................................................... 89
Unit 9 Reverse Logistics and Environment .......................................................................... 113
)U
Unit 10 Case Study .................................................................................................................. 131
Block-III
Unit 11 Demand Planning and Forecasting ........................................................................... 135

Unit 12 Inventory Management .............................................................................................. 149
Unit 13 Transportation ............................................................................................................ 173
Unit 14 Warehousing ............................................................................................................... 195
Unit 15 Case Study .................................................................................................................. 217
Block-IV
(c
Unit 16 Packaging and Material Handling............................................................................. 221

Unit 17 Network Integration................................................................................................... 241
Unit 18 Selecting and Measuring Strategic Performance ..................................................... 263
Unit 19 Performance Measures............................................................................................... 289
Unit 20 Case Study .................................................................................................................. 305
iv
Block-V
S
Unit 21 Customer Accommodation.......................................................................................... 309
Unit 22 Management of Relationship and Developing Trust ................................................ 337
Unit 23 Information Technology Framework ......................................................................... 357
Unit 24 Supply Chain Logistics Administration .................................................................... 377
Unit 25 Case Study .................................................................................................................. 385
PE
Glossary ............................................................................................................................................ 389
)U
(c
UNIT 1: Introduction to Logistics
1
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
BLOCK-I
)U
(c
Detailed Contents Planning for Logistics
2
Notes
S
UNIT 1: INTRODUCTION TO LOGISTICS
___________________ UNIT 3: LOGISTICS AND SUPPLY CHAIN
STRATEGY
z Introduction
___________________ z Introduction
z Definition and Concept of Logistics
___________________ z Importance of Corporate Strategy
z Logistics Value Proposition
___________________
z Work of Logistics UNIT 4: SUPPLY CHAIN MANAGEMENT
___________________ z Introduction
PE
UNIT 2: LOGISTICS OPERATIONS
___________________ z Imperatives for Competitiveness
z Introduction z Supply Chain Management in India: Issues and
___________________
Challenges
z Integrated Logistics
___________________ z Logistics System
z Logistical Operating Arrangements
___________________
UNIT 5: CASE STUDY
___________________
)U
(c
Unit 1
3
Notes
S
Introduction to Logistics
___________________
___________________
___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following
topics: ___________________
PE
\ Definition and Concepts of Logistics ___________________
\ Logistics Value Proposition ___________________
\ Work of Logistics
___________________
___________________
Introduction
___________________
Logistics is the one of the most important segment of the
phenomenon of marketing in business. It is a subset of Supply
Chain Management. In the business functioning, the trader gets
order for supply of his goods or services through his marketing
executives or directly from customers and then to execute the order
to the satisfaction of the customer, the trader or his supplier
)U
company prepares the Logistics i.e., procures the product or
services, puts labels on them, or gives some identification
trademark name to them, makes necessary packing and packaging
so as to save them from damage of any kind during loading,
unloading, handling, transportation etc., till is supplied to the end
customer. More simply, it is a bundle of goods finally ready to be
supplied to the customer. In Logistics study, all factors
contributing till the last stage, when the goods or service is finally
supplied to the consumer are systematically studied.
Definition and Concept of Logistics

The word ‘Logistics’ is derived from French word 'Loger', which
means art of war pertaining to movement and supply of armies.
(c
1. A military concept
2. Fighting a war requires:
(i) Setting an objective
(ii) Meticulous planning to achieve the objective
(iii) Proper deployment of troops
4
(iv) Supply lines consisting of weaponry, food, etc.
Notes
S
___________________
3. A logistics plan should be such that there is minimum loss of
men and material.
___________________
Similar to fighting a war in battlefield, marketing managers also
___________________
prepare a suitable logistics plan that is capable of fulfilling the
___________________ company objective of meeting the demand of targeted customers in
___________________ a profitable way.
PE
___________________ Inbound logistics + Material Management + Physical Distribution
___________________ = Logistics
___________________ 1. Inbound logistics means the movement of materials received

from suppliers.
___________________
2. Material management means the movement of material &
___________________
components inside a firm.
3. Physical distribution refers to movement of goods outward
from the end of the assembly line to the customer.
4. Supply-chain management is larger than logistics and it links
logistics more directly within the user's total communication
network and with the firm engineering staff. It not only
)U
includes manufacturer and suppliers but also transporters,
warehouses, retailers and customers themselves.
5. According to Council of Logistics Management, "Logistics is
the process of planning, implementing and controlling the
efficient, effective flow and storage of goods, services and
related information from the point of origin to the point of
consumption for the purpose of conforming the customer
requirement".
Concept of Logistics
Logistics is that part of the supply chain process that plans,
implements and controls the effective forward and reverse flow and
storage of goods, services, and related information between the
(c
point of origin and the point of consumption, in order to meet the

customer's requirements.
Logistics Activities
1. Customers service
2. Demand forecasting
5
3. Distribution communication
Notes
S
4. Inventory control
___________________
5. Material handling
___________________
6. Order processing ___________________
7. Part and service support ___________________
8. Plant and warehouse side selection ___________________
PE
9. Procurement ___________________
10. Packaging ___________________
11. Return goods handling ___________________
12. Salvage and scrap disposal ___________________
___________________
13. Traffic and transportation
14. Warehousing and storage
Few areas of business involve the complexity or span the
geography typical of logistics. Logistics is core, they expect
products to be available and be fresh. It is rather difficult to
visualize any marketing or manufacturing without logistical
)U
support.
Logistics has been carried out since the beginning of civilization –
it is hardly new. However, implementing best practice of logistics
has become one of the most exciting and challenging operational
areas of business and public sector management.
Logistics is the designing and managing of a system in order to
control the flow of material throughout a corporation. This is a
very important part of an international company because of
geographical barriers. Logistics of an international company
includes movement of raw materials, coordinating flows into and
out of different countries, choices of transportation, cost of the
transportation, packaging the product for shipment, storing the
product, and managing the entire process.
(c
Supply Chain Management is the systematic, strategic

coordination of the traditional business functions and the tactics
across these business functions within a particular company and
across businesses within the supply chain, for the purposes of
improving the long-term performance of the individual companies
and the supply chain as a whole.
6
Logistics is typically considered as a sub-set of SCM. In SCM, five
Notes
S
key functions are: Procure, Make, Move, Store, and Service. Most
___________________
view logistics as the movement of products from point A to point B
___________________ and all the activities involved to make this happen (from carrier
___________________ selection to planning to execution).
___________________ Logistics is involved at various stages of a supply chain; from

supplier to plants, from plants to distribution centres, from
___________________
PE
distributions centres to stores, from stores to customers, or any of
___________________ these combinations.
___________________
___________________
___________________
___________________
)U
Source: Reji Ismail (2008), “Logistics Management”, Excel Books.
Figure 1.1: Complexity of a Typical Global Supply Chain
Logistics is the process of movement of materials and products

into, through and out of a firm.
Check Your Progress

Fill in the blanks:
1. The word ‘Logistics’ is derived from French word ………
2. ……………… management means the movement of
material and components inside a firm.
Logistics Value Proposition

(c
Thus far it has been established that logistics should be managed

as an integrated effort to achieve customer satisfaction at the
lowest total cost. Logistics performed in this manner creates value.
In this section, the elements of the logistical value proposition –
service and cost minimization – we discussed in greater detail.
Service Benefits 7
Notes
Almost any level of logistical service can be achieved if a firm is
S
Activity
willing to commit the required resources. In today's operating ___________________
Discuss the value generation
environment, the limiting factor is economics, not technology, for concept by taking any case
___________________
example of a logistics
example, a dedicated inventory can be maintained in close company.
___________________
geographical proximity to a major customer. A fleet of trucks can
be held in a constant state of delivery readiness. To facilitate order ___________________
processing, dedicated communications can be maintained on a real ___________________
PE
time basis between a customer and a supplier's logistical operation.
___________________
Given this high state of logistical readiness, a product or
___________________
component could be delivered within minutes of identifying a
customer requirement. ___________________
___________________
Cost Minimization
___________________
This is decision based on cost minimization criteria. The least-
total-cost system design includes both the transportation costs as
well as the inventory costs. Figure illustrates the concept. In the
figure, 'The total transportation cost' curve has a low at eight
facilities. However, the 'Total inventory cost' curve shows an
increase with each additional warehouse. For the overall system,
the optimal system network is reflected by the 'Total cost network',
)U
which in this figure is shown to be six locations.
Though a great many problems must be overcome to effectively
examine total cost, particularly the assumptions of single planning
period and average size shipment, the analysis for least-total-cost
solution shown in Figure 1.2 illustrates the trade-offs between
cost-generating activities.
Total-cost
network
Total cost
Total
inventory cost
(c
Total
transportation
cost
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Number of locations
Figure 1.2: Total Cost Warehousing Network

8
While the transportation costs determine the economically viable
Notes
number of locations; the inventory cost modulates both the number
S
___________________ and the size of the warehouse. The minimal total-cost point for the
___________________ system is not at the point of least cost for either transportation or
inventory reflecting the approach of integrated logistical analysis.
___________________
Logistics cost form an important part of the overall cost structure
___________________
in any organization. Focus needs to be on renegotiating freight and
___________________
shipping rates, reduction in overall freight costs and streamlining
PE
___________________ operations. Today logistics management has gained special
___________________ attention because of high emphasize on quality of goods and
services as well as intense price competition which is forcing
___________________
companies to control the costs to survive in the market.
___________________
For lowering logistics cost one has to understand following:
___________________
Step 1
Determining the customer service targets and
organizational goals
Step 2 Computing current logistics costs

)U
Step 3 Benchmarking the cost for performing a given set of
activities against the competitors in similar business
Developing lowest cost methods and implementing

Step 4 them to meet business needs
Figure 1.3: Steps for Lowering Logistics Cost
The percentage of logistics cost to the total value added signifies

(c
the importance of logistics related activities from the cost

perspective. It is high for bulk goods manufacturers, while it is low
for consumer goods manufacturers. For bulk goods, total logistics
cost as a proportion of value addition is about 70 per cent, out of
which transportation costs constitute nearly two-thirds.
Four main areas of logistics management are procurement,
transport, transshipment and storage of goods. Supply chain
logistics costs account from 5% to 50% of a product’s total cost, 9

depending on the industry. Following are the tips to reduce cost in Notes
S
these four areas: ___________________
Procurement ___________________
___________________
z Streamlining sourcing techniques: Understand the true
costs of sourcing, which include: ___________________
Freight ___________________
PE

___________________
Duty
___________________
Inventory carrying costs
___________________
Brokerage involved in procuring
___________________
z Order management: It includes understand various
___________________
specifications and design order requirements with each
suppliers, which will help in identifying ways of reducing cost
and also help in reducing price structure. Other methods
include: switching to lower priced substitutes, implementing
just-in-time deliveries from suppliers that can lower a
company’s inventory as well as internal logistics costs, which
in turn also allow suppliers to economize on company’s
)U
shipping, warehousing, and production scheduling costs, which
could be beneficial for both.
Transportation
z Selecting of appropriate mode of transportation: Each
mode has its own advantages and disadvantages in terms of
costs, speed, capacity, flexibility and safety, therefore selecting
optimal mode of transportation (air, water, rail, road and
through pipeline) which can best suits the quantity and
quality of goods to be supplied and required during delivery
time reduces the opportunity costs involved due to
unavailability of goods at right time.
z Loss due to damage to goods during transit can be avoided.
(c
z Optimal vehicle routing and scheduling can reduce the

in-transit inventory. Various mathematical and analytical
methods like shortest route method, transportation method,
etc. can be used for optimizing accompanying cost.
z Freight consolidation can also reduce the transportation cost
to a greater extent. It involves bringing together smaller
10 quantities of inventory, in order to create a bigger quantity for

Notes transportation. All these methods are elaborated further in
S
Activity
___________________ coming sections.
Visit a logistics firm and find
out the procedure for order
___________________
processing. Transshipment
___________________
It mainly involves controlling the express shipping costs, typically
___________________
when a company have an entire shipment sent on an express
___________________ service level basis for which higher cost is incurred. This can
PE
___________________ reduced by proper planning and by calculating amount of goods
required for immediate delivery by express service and can
___________________
distribute the costs accordingly.
___________________
___________________
Inventory
___________________ To build up inventory sufficient capital has to be tied up for a

length of time. Thus by proper analysing demand and supply
patterns and the nature of the product, will result in reduction of
cost that will also help in optimizing the level of inventory.
Logistics Value Generation

The key to achieving logistical leadership is to master the art of
matching operating competency and commitment to key customer
)U
expectations and requirements. This customer commitment, in an
exacting cost framework, is the logistics value proposition. It is a
unique commitment of a firm to individual or selected groups of its
customers. The typical enterprise seeks to develop and implement
an overall logistical competency that satisfies customer
expectations at realistic total cost expenditure. Very seldom will
either the lowest total cost or the highest attainable customer
service constitute the fundamental logistics strategy. Likewise, the
appropriate combination will be different for different customers.
A well-designed logistical effort must have high customer response
and capability while controlling operational variance and
minimizing inventory commitment. And, most of all, it must have
relevancy to specific customers. Significant advances have been
(c
made in the development of tools to aid management in the

measurement of cost/service trade-offs. Formulation of a sound
strategy requires a capability to estimate operating cost required
to achieve alternative service levels. Likewise, alternative levels of
system performance are meaningless unless viewed in terms of
overall business unit marketing, manufacturing, and procurement
strategies. Leading firms realize that a well-designed and
well-operated logistical system can help achieve competitive 11

advantage. In fact, as a general rule, firms that obtain a strategic Notes
S
advantage based on logistical competency establish the nature of ___________________
their industry's competition.
___________________
Check Your Progress ___________________
State whether the following statements are True or False: ___________________
1. The least-total-cost system design includes only the ___________________
PE
transportation costs. ___________________
2. Total inventory cost curve shows an increase with each ___________________
additional warehouse.
___________________
___________________
Work of Logistics
___________________
In the context of supply chain management, logistics exits to move
and position inventory to achieve desired time, place, and
possession benefits at the lowest total costs. Inventory has limited
value until it is positioned at the right time and at the right
location to support ownership transfer or value added creation. If a
firm does not consistently satisfy time and location requirements,
)U
it has nothing to sell. For a supply chain to realize the maximum
strategic benefit from logistics, the full range of functional work
must be integrated. Decisions in one functional area will impact
cost of all others. It is this interrelation of functions that
challenges the successful implementation of integrated logistical
management. Integrated work related to these functional areas
creates the capabilities needed to achieve logistical value.
Order Processing
The important of accurate information to achieving superior
logistical performance has historically been underappreciated.
While many aspects of information are critical to logistics
operations, the processing of orders is of primary importance.
(c
Failure to fully comprehend this importance resulted from not fully

understanding how distortion and operational failures in order
processing impact logistical operations. Current information
technology is capable of handling the most demanding customer
requirements. When desired, order information can be exchanged
between trading partners.
12
Inventory
Notes
The inventory requirements of a firm are directly linked to the
S
___________________ facility network and the desired level of customer service.
___________________ Theoretically, a firm could stock every item sold in every facility
dedicated to servicing each customer. Few business operations can
___________________
afford such a luxurious inventory strategy because the risk and
___________________
total cost are prohibitive. The objective of an inventory strategy is
___________________ to achieve desired customer service with the minimum inventory
PE
___________________ commitment. Excessive inventories may compensate for
deficiencies in basic design of a logistic system but will ultimately
___________________
result in higher-than-necessary total logistics cost. Logistical
___________________ strategies should be designed to maintain the lowest possible
___________________ financial investment in inventory. The basic goal is to achieve
___________________
maximum inventory turn while satisfying service commitments. A
sound inventory strategy is based on a combination of five aspects
of selective deployment:
(1) core customer segmentation,
(2) product profitability,
(3) transportation integration,
)U
(4) time-based performance, and
(5) competitive performance.
Transportation
Transportation is the operational area of logistics that
geographically moves and positions inventory. Because of its
fundamental importance and visible cost, transportation has
traditionally received considerable managerial attention. Almost
all enterprises, big and small, have managers responsible for
transportation. Transportation requirements can be satisfied in
three basic ways. Firstly, a private fleet of equipment may be
operated. Secondly, contracts may be arranged with dedicated
transport specialists. Thirdly, an enterprise may engage the
services of a wide variety of carriers that provide different
(c
transportation services as needed on a per shipment basis.

From the logistical system viewpoint, three factors are
fundamental to transportation performance: (1) cost, (2) speed and
(3) consistency. 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 13

that the least expensive method of transportation may not result in Notes
S
the lowest total cost of logistics. Speed of transportation is the time ___________________
required to complete a specific movement. Speed and cost of
___________________
transportation are related in two ways. Firstly, transport firms
capable of offering faster service typically charge higher rates. ___________________
Secondly, the faster the transportation service, the shorter the ___________________
time interval is during which inventory is in transit and
___________________
PE
unavailable. Thus, a critical aspect of selecting the most desirable
___________________
method of transportation is to balance speed and cost of service.
Consistency of transportation refers to variations in time required ___________________
to perform a specific movement over a number of shipments. ___________________
Consistency reflects the dependability of transportation.
___________________
Warehousing, Materials Handling and Packaging ___________________
The first three functional areas of logistics – order processing,

inventory, and transportation – can be engineered into a variety of
different operational arrangements. Each arrangement has the
potential to contribute to a specified level of customer service with
an associated total cost. In essence, these functions combine to
create a system solution for integrated logistics. The fourth
)U
functionality of logistics – warehousing, materials handling, and
packaging – also represents an integral part of a logistics operating
solution. However, these functions do not have the independent
status of those. Warehousing, materials handling, and packaging
are an internal part of other logistics areas.
Transportation vehicles require materials handling for efficient
loading and unloading. Finally, individual products are most
efficiently handled when packaged together into shipping cartons
or other unit loads.
Facility Network Design

Classical economics neglected the importance of facility location
and overall network design to efficient business operations. When
(c
economists originally discussed supply-and-demand relationships,

facility location and transportation cost differentials were assumed
either non-existent or equal among competitors. In business
operations, however, the number, size, and geographical
relationship of facilities used to perform logistical operations
directly impacts customer service capability and cost. Facility
network design is a primary responsibility of logistical
14 management, since a firm’s facility structure is used to ship

Notes products and materials to customers. Typical logistics facilities are
S
___________________ manufacturing plants, warehouses, cross-dock operations, and
retail stores.
___________________
___________________ Check Your Progress

___________________ Fill in the blanks:
___________________ 1. The …………….. requirements of a firm are directly
PE
___________________ linked to the facility network and the desired level of
customer service.
___________________
___________________ 2. …………….. is the operational area of logistics that

geographically moves and positions inventory.
___________________
___________________
Summary
Logistics is that part of the supply chain process that plans,
implements and controls the effective forward and reverse flow and
storage of goods, services, and related information between the
point of origin and the point of consumption, in order to meet the
customer's requirements.
)U
Logistics is the designing and managing of a system in order to
control the flow of material throughout a corporation.
Lesson End Activity

Explain the typical supply chain complexities of a logistics firm by
taking and case example of Indian logistics organisation.
Keywords
Logistics: Logistics is the process of planning, implementing and
controlling the efficient, effective flow and storage of goods,
services and related information from the point of origin to the
point of consumption for the purpose of conforming the customer
(c
requirement.
Inbound Logistics: It means the movement of materials received
from suppliers.
Material Management: It means the movement of material &
15
Physical Distribution: It refers to movement of goods outward
Notes
S
from the end of the assembly line to the customer.
___________________
Questions for Discussion ___________________
___________________
1. Illustrate a common trade-off that occurs between the work
areas of logistics. ___________________
2. Discuss and elaborate on the following statement: "The ___________________
PE
selection of a superior location network can create substantial ___________________
competitive advantage."
___________________
3. Describe the logistics value proposition. Be specific regarding ___________________
specific customer accommodation and cost.
___________________
4. Describe the fundamental similarities and differences between
___________________
procurement, manufacturing support, and market distribution
performance cycles as they relate to logistical control.
Further Readings
Books
)U
Ailawadi C Sathish & Rakesh Singh, Logistics Management,
Prentice Hall India, 2005.
Agrawal DK, Textbook of Logistics and Supply Chain Management,
MacMillan India Limited, 2003.
Bowersox D, Closs D, and Mixby Copper, M., Supply Chain
Logistics Management, McGraw Hill, 2002.
Ballou, Business Logistics/Supply Chain Management, Pearson
Education.
Bowersox, D. J., Logistics Management, Tata McGraw Hill, 2002.
Web Readings
http://sta559s11.pbworks.com/w/file/fetch/37766848/IntroLogisticR
egressionPengEducResearch.pdf
(c
http://www.tree4health.org/distancelearning/sites/www.tree4healt
h.org.distancelearning/files/readings/intro_logistic_regress.pdf
http://www.mc.vanderbilt.edu/gcrc/workshop_files/2004-11-12.pdf
(c
)U
PE
S
UNIT 2: Logistics Operations
Unit 2
17
Notes
S
Activity
Logistics Operations
___________________
Prepare a chart to show the
logistics planning and
___________________
coordination flow.
___________________
Objectives
___________________
topics: ___________________
PE
\ Integrated Logistics ___________________
\ Logistics Operating Arrangements ___________________
___________________
Introduction ___________________
Logistics is viewed as the competency that links an enterprise with ___________________

its customers and suppliers. Information from and about
customer’s flows through the enterprise in the form of sales
activity, forecasts and orders. The information is refined into
specific manufacturing and purchasing plans. As products and
materials are procured, a value-added inventory flow is initiated
that ultimately results in ownership transfer of finished products
)U
to customers. Thus, the process is viewed in terms of two
interrelated efforts, inventory flow and information flow.
Integrated Logistics
The need to integrate requirements and operations occurs in all
businesses as well as within public sector organizations.
Inventory Flow
The operational management of logistics is concerned with
movement and storage of materials and finished products.
Logistical operations start with the initial shipment of a material
or component part from a supplier and are finalized when a
manufactured or processed product is delivered to a customer.
(c
From the initial purchase of a material or component, the logistical

process adds value by moving inventory when and where needed.
Providing all goes well, a material gains value at each step of its
transformation into finished inventory. In other words, an
individual part has greater value after it is incorporated into a
machine. Likewise, the machine has greater value once it is
delivered to a buyer.
18
For a large manufacturer, logistical operations may consist of
Notes
S
thousands of movements, which ultimately culminate in the
___________________
delivery of products to an industrial user, retailer, wholesaler,
___________________ dealer, or other customer. For a large retailer, logistical operations
___________________ may commence with the procurement of products for resale and
may terminate with consumer pickup or delivery.
___________________
Example: For a hospital, logistics starts with procurement and
___________________
PE
ends with full support of patient surgery and recovery.
___________________
The significant point is that regardless of the size and type of
___________________
enterprise, logistics is essential and requires continuous
___________________ management attention. For better understanding, it is useful to
___________________ divide logistical operations into three areas: physical distribution,
manufacturing support, and procurement.
___________________
Physical Distribution
The area of physical distribution concerns movement of a finished
product to customers. In physical distribution, the customer is the
final destination of a marketing channel. The availability of the
product is a vital part of each channel participant's marketing
effort.
)U
It is through the physical distribution process that the time and
space of customer service become an integral part of marketing.
Thus, physical distribution links a marketing channel with its
customers. To support the wide variety of marketing systems that
exist in a highly commercialized nation, many different physical
distribution systems are utilized. All physical distribution systems
have one common feature: they link manufacturers, wholesalers,
and retailers into marketing channels that provide product
availability as an integral aspect of the overall marketing process.
Manufacturing Support
The area of manufacturing support concentrates on managing
work-in-process inventory as it flows between stages of
(c
manufacturing. The primary logistical responsibility in

manufacturing is to participate in formulating a master production
schedule and to arrange for timely availability of materials,
component parts, and work-in-process inventory. Thus, the overall
concern of manufacturing support is not how production occurs but
rather what, when and where products will be manufactured.
Manufacturing support has one significant difference when
compared with physical distribution. Physical distribution 19

attempts to service the desires of customers and therefore must Notes
S
accommodate the uncertainty of consumer and industrial demand. ___________________
Manufacturing support involves movement requirements that are
___________________
under the control of the manufacturing enterprise. The
uncertainties introduced by random customer ordering and erratic ___________________
demand accommodated by physical distribution are not present in ___________________

most manufacturing operations. From the viewpoint of overall
___________________
PE
planning, the separation of manufacturing support from outbound
___________________
(physical distribution) and inbound (procurement) activities
provides opportunities for specialization and improved efficiency. ___________________
___________________
Procurement
___________________
Procurement is concerned with purchasing and arranging inbound
___________________
movement of materials, parts, and/or finished inventory from
suppliers to manufacturing or assembly plants, warehouses, or
retail stores. Depending on the situation, the acquisition process is
commonly identified by different names. In manufacturing, the
process of acquisition is typically called purchasing. In government
circles, acquisition has traditionally been referred to as
procurement. In retailing and wholesaling, buying is the most
)U
widely used term. In many circles, the process is referred to as
inbound logistics. Although differences do exist concerning
acquisition situations, the term “procurement” is used here to
include all types of purchasing. The term “material” is used to
identify inventory moving inbound to an enterprise, regardless of
its degree of readiness for resale. The term “product” is used to
identify inventory that is available for consumer purchase. In other
words, materials are involved in the process of adding value
through manufacturing, whereas products are ready for
consumption. The fundamental distinction is that products result
from the value added to material during manufacturing, sorting, or
assembly.
Procurement is concerned with availability of the desired material
(c
assortments where and when needed. Whereas physical

distribution is concerned with outbound product shipments,
purchasing is concerned with inbound materials, sorting or
assembly. Under most marketing situations involving consumer
products, such as a grocery manufacturer that ships to retail
food-chain, the manufacturer's physical distribution is the same
process as a retailer's procurement operations. Although similar or
20 even identical transportation requirements may be involved, the

Notes degree of managerial control and risk related to performance
S
___________________ failure varies substantially between physical distribution and
procurement.
___________________
___________________ Within a typical enterprise, the three areas of logistics overlap.

Viewing each as an integral part of the overall value-adding
___________________
process creates an opportunity to capitalize on the unique
___________________ attributes of each while facilitating the overall process. The prime
PE
___________________ concern of an integrated logistical process is to coordinate overall
value added inventory movement. The three areas combine to
___________________
provide integrated management of materials, semi-finished
___________________
components, and products moving between locations, supply
___________________ sources, and customers of the enterprise. In this sense, logistics is
___________________ concerned with strategic management of total movement and
storage.
Information Flow
Information flow identifies specific locations within a logistical
system that have requirements. Information also integrates the
three operating areas. The primary objective of developing and
)U
specifying requirements is to plan and execute integrated logistical
operations. Within individual logistics areas, different movement
requirements exist with respect to size of order, availability of
inventory, and urgency of movement. The primary objective of
information sharing is to reconcile these differentials. In the
discussion that follows it is important to stress that information
requirements parallel the actual work performed in physical
distribution, manufacturing support, and procurement. Whereas
these areas contain the actual logistics work, information
facilitates coordination of planning and control of day-to-day
operations. Without accurate information the effort involved in the
logistical system can be wasted.
Logistical information involves two major types of flows:

(c
coordination flows and operational flows. The overall relationship

between the two logistical information flows is illustrated in Figure
2.1
The objective at this point is to provide an introductory overview of

the information requirements necessary to drive an integrated
logistics system.
Planning and Coordination Flows 21

Notes
Coordination is the backbone of overall information system
S
architecture among value chain participants. Coordination results ___________________
in plans specifying (1) strategic objectives, (2) capacity constraints, ___________________
(3) logistical requirements, (4) inventory deployment,
___________________
(5) manufacturing requirements, (6) procurement requirements,
and (7) forecasting. ___________________
___________________
PE
Strategic Capacity Logistics Manufacturing Procurement
Objectives Constraints Requirements Requirements requirements
___________________
___________________
Forecasting Inventory
deployment
___________________
___________________
___________________
Inventory
Management
Order Order Distribution Transportation Procurement

management processing operations and shipping
Figure 2.1: Planning and Coordination Flows

)U
The primary drivers of the overall value chain are the strategic
objectives that result from marketing and financial goals. Strategic
objectives detail the nature and location of customers, which are
matched to the required products and services to be performed.
The financial aspect of strategic plans detail resources required to
support inventory, receivables, facilities, equipment, and capacity.
Capacity constraints coordinate internal and external
manufacturing requirements. For non-manufacturing participants
in the value chain, this form of capacity planning is not required.
Given strategic objectives, capacities constraints identify
limitations, barriers, or bottlenecks within basic manufacturing
capabilities and determine appropriate outsource requirements.
To illustrate, whereas Kellogg owns the brand and distributes
(c
Cracklin Oat Bran, a third party on a contract basis performs all

manufacturing. The result of capacity constraints is a plan that
places strategic objectives in a time-phased schedule that details
facility utilization, financial resources and human requirements.
Logistics requirements specify the work that distribution facilities,
equipment, and labour must perform to implement the capacity
plan. Using inputs from forecasting, promotional scheduling,
22 customer orders, and inventory status, logistics requirements

Notes specify value chain performance.
S
___________________ Inventory deployments are the interfaces between
___________________ planning/coordination and operations that detail the timing and
composition of where inventory will be positioned. A major concern
___________________
of deployment to balance timing and consolidation to create
___________________ efficiency as inventory flows through the value chain. Inventory is
___________________ unique in that it is an integral part of the planning/coordination
PE
and operational flows involved in logistics. From an information
___________________
perspective, deployment specifies the what, where, and when of the
___________________ overall logistics processes. From an operational viewpoint,
___________________ inventory management is performed as a day-to-day event.
Because of this duality, inventory deployment and management
___________________
are illustrated in Figure 2.1 between the planning/coordination
___________________ and operational information flows.
In production situations, manufacturing plans are derived from
logistical requirements and typically result in inventory
deployment. The primary deliverable is a statement of time-phased
inventory requirements that drives Master Production Scheduling
(MPS) and Manufacturing Requirements Planning (MRP). The
deliverable from manufacturing requirements is a day-to-day
)U
production schedule that can be used to specify material and
component requirements.
Procurement requirements schedule material and components for
inbound shipment to support manufacturing requirements. In
retailing and wholesaling situations, procurement involves
maintaining product supplies. In manufacturing situations,
purchasing must facilitate inbound materials and component parts
from suppliers. Regardless of the situation, purchasing coordinates
decisions concerning supplier qualifications, degree of desired
speculation, third-party arrangements, and feasibility of long-term
contracting.
Forecasting utilizes historical data, current activity levels, and
planning assumptions to predict future activity levels. Logistical
forecasting is generally concerned with relatively short-term
(c
predictions (i.e., less than ninety days). The forecasts predict

periodic (usually monthly or weekly) sales levels for each product,
forming the basis of logistics requirement and operating plans.
The overall purpose of information planning/coordination flow is to
integrate specific activities within a firm and to facilitate overall
integrated performance. Unless a high level of coordination is
achieved, the potential exists for operating inefficiencies and 23

excessive inventory. Planning/coordination is illustrated in the Notes
S
health care business by the sidebar discussing how hospitals use ___________________
information to improve efficiency and customer service.
___________________
Operational Requirements ___________________
The second aspect of information requirements is concerned with ___________________

directing operations to receive, process, and ship inventory as ___________________
PE
required supporting customer and purchasing orders. Operational
___________________
information requirements deal with (1) order management,
___________________
(2) order processing, (3) distribution operations, (4) inventory
management, (5) transportation and shipping, and ___________________
(6) procurement. ___________________
Order management refers to the transmission of requirement ___________________
information between value chains members involved in finished

product distribution. The primary activity of order management is
accurate entry and qualification of customer orders. This transfer
of requirements between value chain participants is typically
achieved by phone, mail, facsimile (fax), or electronic data
interchange. The impact of information technology on order
)U
management is extensive. The availability of low-cost information
transfer has revolutionized the order management process.
Order processing allocates inventory and assigns responsibility to

satisfy customer requirements. The traditional approach has been to
assign available inventory or planned manufacturing to customers
according to predetermined priorities. In technology-rich order
processing systems, two-way communication linkage is maintained
with customers to generate a negotiated order that satisfies
customers within the constraints of planned logistical operations.
Distribution operations involve information flows required to

facilitate and coordinate performance within logistics facilities.
The primary purpose of a logistical facility is to provide material or
(c
product assortments to satisfy order requirements. Emphasis is

placed on scheduled availability of the desired assortment with
minimal duplication and redundant work effort. The key to
distribution operations is to store and handle specific inventory as
little as possible while still meeting customer order requirements.
24
Inventory management is concerned with using information to
Notes
S
implement the logistics plan as specified. Using a combination of
___________________
human resources and information technology, inventory is
___________________ deployed and then managed to satisfy planned requirements. The
___________________ work of inventory management is to make sure that the overall
___________________ logistical system has appropriate resources to perform as planned.
___________________ Transportation and shipping information directs the movement of
PE
___________________ inventory. To achieve efficiency, it is important to consolidate
orders so as to fully utilize transportation capacity. It is also
___________________
necessary to ensure that the required transportation equipment is
___________________
available when needed. Finally, because ownership transfer often
___________________
results from transportation, supporting documentation is required.
___________________
Procurement is concerned with the information necessary to
complete purchase order preparation, modification, and release
while ensuring overall supplier compliance. In many ways,
information related to procurement is similar to that involved in
order processing. Both forms of information exchange serve to
facilitate operations that link a firm with its customers and
)U
suppliers. The primary difference between procurement and order
processing is the type of operation that results from requirements
transfer.
The overall purpose of operational information is to provide the

detailed data required for integrated performance of physical
distribution, manufacturing support, and procurement operations.
Whereas planning/coordination flows provide information
concerning planned activities, operational requirements are
needed to direct the day-to-day logistics work. Within the context
of information and inventory flows, the managers within an
enterprise must achieve some specific objectives to fully exploit
logistical competency.
(c
Check Your Progress

State whether the following statements are True or False:
1. Logistics is viewed as the competency that links an
enterprise with its customers and suppliers.
2. The area of physical distribution concerns movement of
a finished product to customers.
Logistical Operating Arrangements 25

Notes
S
The potential for logistical services to favourably impact customers Activity
___________________
Prepare a presentation to
is directly related to operating system design. The many different
explain logistics operational
facets of logistical performance requirements make operational ___________________
arrangements.
design a complex task, as an operating structure must offer a ___________________
balance of performance, cost and flexibility. When one considers
___________________
the variety of logistical systems used throughout the world to
service widely diverse markets, it is astonishing that any ___________________
PE
structural similarity exists. But keep in mind that all logistical ___________________
arrangements have two common characteristics. Firstly, they are ___________________
designed to manage inventory. Secondly, the range of logistics
___________________
alternatives is limited by available technology. These two
characteristics tend to create commonly observed operating ___________________
arrangements. Three widely utilized structures are echelon, direct, ___________________
and combined.
Echelon Structured Logistics

Classification of a logistical system as having an echeloned
structure means that the flow of products typically proceeds
through a common arrangement of firms and facilities as it moves
)U
from origin to final destination. The use of echelons usually implies
that total cost analysis justifies stocking some level of inventory or
performing specific activities at consecutive levels of a supply
chain. Echelon systems utilize warehouses to create inventory
assortments and achieve consolidation economies associated with
large volume transportation shipments. Inventories positioned in
warehouses are available for rapid deployment to meet customer
requirements. Typical echelon systems utilize either break-bulk or
consolidation warehouses. A break-bulk facility typically receives
large-volume shipments from a variety of suppliers. Inventory is
sorted and stored in anticipation of future customer requirements.
Food distribution centres operated by major grocery chains and
wholesalers are examples of break-bulk warehouses. A
consolidation warehouse operates in a reserve profile.
(c
Consolidation is typically required by manufacturing firms that

have plants at different geographical locations. Products
manufactured at different plants are sorted in a central warehouse
facility to allow the firm to ship full-line assortments to customers.
Major consumer product manufacturers are prime examples of
enterprises using echeloned systems for full-line consolidation.
26
Direct Structured Logistics
Notes
In contrast to inventory echeloning are logistical systems designed
S
___________________ to ship products direct to customer’s destination from one or a
___________________ limited number of centrally located inventories. Direct distribution
typically uses the expedited services of premium transport
___________________
combined with information technology to rapidly process customer
___________________
orders and achieve delivery performance. This combination of
___________________ capabilities, designed into the order delivery cycle, reduces time
PE
___________________ delays and overcomes geographical separation from customers.
Examples of direct shipments are plant-to-consumer truckload
___________________
shipments, direct store delivery, and various forms of direct-to-
___________________ consumer fulfilment required to support e-commerce shopping.
___________________ Direct logistical structures are also commonly used for inbound
___________________
components and materials to manufacturing plants because the
average shipment size is typically large.
Flexible Logistics System

The ideal logistical arrangement is a situation wherein the
inherent benefits of echeloned and direct structures are combined
into a flexible logistics system. Anticipatory commitment of
inventory should ideally be postponed as long as possible.
)U
Inventory strategies often position fast-moving products or
materials in forward warehouses, while other, more risky or costly
items are stocked at a central location for direct distribution to
customers. The basic service commitment and the order size
economics determine the most desirable and economical structure
to service a specific customer.
Emergency Flexible Structure

Emergency flexible operations are pre-planned strategies to resolve
logistical failures. A typical emergency occurs when an assigned
shipping facility is out of stock or for some other reason cannot
complete a customer's order. For example, a warehouse may be out
of an item with no replenishment inventory scheduled to arrive
(c
until after the customer's specified order delivery date. To prohibit

back-order or product cancellation, a contingency operating policy
may assign the total order, or at least those items not available, for
shipment from an alternative warehouse. The use of emergency
flexible operation procedures is typically based on the importance
of the specific customer or the critical nature of the product being
ordered.
Routine Flexible Structure 27

Notes
S
A flexible logistics capability that has gained popularity as a result
of improved communications involves procedures for serving ___________________
specified customers developed as part of the basic logistical system ___________________
design. The flexible logistics rules and decision scenarios specify ___________________
alternative ways to meet service requirements, such as assignment ___________________
of different shipping facilities. A strategy that exploits routine
___________________
PE
flexible operations may be justified in at least four different
___________________
situations.
___________________
Fill in the blanks:
___________________
1. The use of …………… usually implies that total cost ___________________
analysis justifies stocking some level of inventory or
performing specific activities at consecutive levels of a
supply chain.
2. …………… is typically required by manufacturing firms
that have plants at different geographical locations.
)U
Summary
Supply Chain Management is the systematic, strategic
coordination of the traditional business functions and the tactics
across these business functions within a particular company and
across businesses within the supply chain, for the purposes of
improving the long-term performance of the individual companies
and the supply chain as a whole.
Logistics cost form an important part of the overall cost structure

in any organization.
A well-designed logistical effort must have high customer response

and capability while controlling operational variance and
minimizing inventory commitment. Inventory has limited value
(c
until it is positioned at the right time and at the right location to

support ownership transfer or value added creation.
The first three functional areas of logistics – order processing,

inventory, and transportation – can be engineered into a variety of
different operational arrangements.
28
Logistics is viewed as the competency that links an enterprise with
Notes
S
its customers and suppliers.
___________________
___________________
Lesson End Activity
___________________
Find out why are market distribution operations typically more
___________________
erratic than manufacturing support and procurement operations?
___________________
PE
___________________ Keywords
___________________
Order Management: It includes understand various
___________________ specifications and design order requirements with each suppliers,
___________________ which will help in identifying ways of reducing cost and also help
in reducing price structure.
___________________
Transportation: It is the operational area of logistics that
Warehousing: A warehouse is a commercial building for storage
of goods. Warehouses are used by manufacturers, importers,
exporters, wholesalers, transport businesses, customs, etc.
Physical Distribution: Physical distribution is the set of
)U
activities concerned with efficient movement of finished goods from
the end of the production operation to the consumer.
Procurement: It is concerned with purchasing and arranging
inbound movement of materials, parts, and/or finished inventory
from suppliers to manufacturing or assembly plants, warehouses,
or retail stores.
Questions for Discussion

1. Discuss uncertainty as it relates to the overall logistical
performance cycle.
2. Discuss and illustrate how performance cycle variance can be
controlled.
(c
3. What is the logic of designing echeloned logistical structures?

Can echeloned and direct structures be combined?
4. Distinguish between Performance Cycle Structure and Market
Distribution Performance Cycles.
5. Write brief note on Echelon Structured Logistics.
29
6. Define Order management.
Notes
S
7. “Coordination is the backbone of overall information system
___________________
architecture among value chain participants.” Elucidate.
___________________
8. Discuss the phases included in the Integrated Logistic.
___________________
Further Readings ___________________
___________________
PE
Books
___________________
___________________
___________________
Logistics Management, McGraw Hill, 2002. ___________________
___________________
Education.
Web Readings
http://highered.mcgraw-hill.com/sites/dl/free/007298239x/450202
)U
/Chapter_1.pdf
http://logistics.about.com/od/supplychainintroduction/Introduction_
to_Supply_Chain.htm
http://monstertrucksvideos.com/find/?query=introduction%20suppl
y%20chain&sid=1&saff=101
(c
(c
)U
PE
S
UNIT 3: Logistics and Supply Chain Strategy
Unit 3
31
Notes
S
Activity
Logistics and Supply Chain

___________________
Prepare an assignment on the
corporate strategy of
___________________
McDonald’s.
Strategy ___________________
___________________
Objectives ___________________
PE
___________________
topics:
___________________
\ Importance of Corporate Strategy
\ Logistics Strategic Planning ___________________
___________________
Introduction ___________________
Organizations that exist only to produce profit don't last long and
organizations that don't pay attention to profits cannot survive to
fulfil their long-term purpose. Business decisions have become
more complex in the face of the tremendous challenges the
organizations face owing to sudden change of priorities;
uncertainty about the future, and ever-accelerating pace of change.
)U
Strategies surface at different tiers in the organizational hierarchy
depending on the architecture of the organization. They form a
hierarchy, with the corporate strategies being the basis for the
business strategies. Corporate strategy is the highest, in the sense
that it is the broadest, applying to all parts of the organization.
Corporate strategies are concerned with the broad and long-term
questions of what business(es) the organization is in or wants to be
in, and what it wants to do with those businesses.
Importance of Corporate Strategy

The corporate level strategies or grand strategies are the general
plan by which the organization intends to achieve its purpose and
(c
long-term objectives.
Grand strategies are concerned with the type of business the
organization is in, its overall competitive position and how the
resources of the organization have to be deployed. They set the
overall direction the organization will follow. This can be clearly
seen in Figure 3.1 that graphically represents the structure of
strategies.
32
At the corporate level, the firm finds answers to several strategic
Notes
S
questions viz., what businesses should we compete in, given our
___________________
strengths and weaknesses? Which new product markets should we
___________________ enter? Which should we exit? This is the "domain choice" question.
___________________ It delineates the product-market domain of the firm and describes
the firm's scope of operations. Depending on the nature and
___________________
purpose of the organization, corporate strategies provide
___________________ significant support to the various activities of organization.
PE
___________________
Corporate or Grand Strategy
___________________ • Vision
• Corporate goals
___________________ • Philosophy and culture
___________________
Business Unit Strategy
___________________ Mission
Business goals
Functional Strategies
Information Research &

Manufacturing
Systems Development
Human
Finance Marketing
)U
Resources
Figure 3.1: Structure of Strategies
Importance of Corporate Strategy to Logistics and Supply

Chain Management
Corporate Strategy is basically concerned with the choice of
businesses, products and markets. It tries to answer certain key
questions: (i) what businesses the firm should be in, in terms of the
range of products it supplies? Punjab Tractors is a specialized
company. It is involved almost exclusively in the manufacture of
tractors. Hindustan Lever Ltd. is highly diversified with interests
in soaps, tea, washing powders, detergents, tooth pastes, shampoo,
creams, salt, hair oils, etc. (ii) What should be the optional
geographic spread of activities for the firm? In the restaurant
(c
business, most firms serve small local markets, whereas

McDonald’s operates in more than one hundred countries
throughout the world. (iii) What range of vertically linked
activities should the firm encompass? Reliance Industries is a key
player in each of the products in the Petrochemical—Fibre
intermediate chain (synthetic textiles, PSF, PFY, PTA MEG)
(iv) How should the corporate office manage its group of 33

businesses? Corporate strategy spells out the businesses in which Notes
S
the firm will participate, the markets it will serve and the ___________________
customer needs it will satisfy. Corporate-level strategy, thus,
___________________
pertains to the organisation as a whole and the combination of
business units and product lines that make up the corporate ___________________
entity. It addresses the overall strategy that an organisation will ___________________

follow. The process generally involves selecting a grand strategy
___________________
PE
and using portfolio strategy approaches to determine the types of
___________________
businesses in which the organisation should be engaged.
___________________
The strategy provides beneficial support to logistics and supply
chain management. The following points signify the contribution of ___________________
corporate strategy towards logistic and supply chain management: ___________________
Bridge the gaps: Strategy helps the supply chain and logistics ___________________
performance to identify the strategic planning gaps and bridge
them through appropriate actions.
Exploit the opportunities: Through environmental analysis, the
firm can identify the areas where it can profitably operate—
keeping its own capabilities in mind. It can also counter the
threats posed by competitive forces from time to time. Events are
)U
not left to chance. Everything in the supply chain and logistics is
planned in advance so that the firm can set its own growth plan; in
tune with its internal strengths and weaknesses.
Develop core competencies: By focusing on its strengths, the
firm can build core competencies in its supply chain and logistics
field, and serve the needs of customers better than its competitors.
Strategy provides a sense of purpose and direction to the firm in
terms of where to operate and how to integrate the various
businesses to ensure competitiveness and above average returns.
In a way, strategy is more than the sum of the firm’s individual
business unit activities; it seeks to leverage the firms’ distinctive
competence from one business to new areas of activity.
Corporate logistics and supply chain strategies have an impact on
(c
the volume of freight transportation and in turn on the

environment as well as land resources. New corporate behaviour
can increase as well as reduce freight transportation. The interface
between strategy and supply chain is a significant issue for the
successful achievement of business logistical and supply chain
mission. Although it is obvious that corporate behaviour today is
34 heterogeneous, the various empirical case studies produce some

Notes clusters of key factors which determine corporate logistics.
S
___________________
Organisational Planning
___________________
The necessity for planning arises because of the fact that business
___________________
organisations have to operate, survive and progress in a highly
___________________ dynamic environment where change is the rule, not the exception.
___________________ The change may be sudden and extensive, or it may be slow and
PE
almost imperceptible.
___________________
The rapid advances in technology, global competition, changing
___________________
preferences of customers, changing policies of government, have
___________________
multiplied the problems of managers all over the globe. Most of
___________________ these changes are thrust on managers and they are forced to
___________________ adjust their activities (customer service, teamwork, speed,
product/service quality, productivity improvement have become the
new corporate mantras!) in order to take full advantage of
favourable developments or to minimise the adverse effects of
unfavourable ones. Successful managers try to visualise the
problems before they turn into emergencies. Successful managers
deal with foreseen problems, and unsuccessful managers’ struggle
with unforeseen problems. The difference lies in planning (Terry).
)U
Managers charged with the responsibility of achieving definite
targets do not wait for the future. They make the future (Drucker).
They introduce original initiatives by removing present difficulties;
anticipating future problems; changing the goals to meet internal
and external challenges; experimenting with creative ideas;
attempting to shape the future and creating a more desirable
environment.
Planning is the process of deciding in advance what should be
accomplished and how it should be realised. It involves selecting
objectives and how to achieve them. Strategic planning is a type of
planning. But unlike short-term planning, organisational planning
involves an extended time-frame, the deployment of a large
percentage of the resources of an organisation, a wide spectrum of
(c
activities and a major eventual impact.

Organisational planning, thus, is long-term in nature. It tends to
be a top management responsibility. It requires looking outside the
organisation for threats and opportunities. It also requires looking
inside the organisation for finding out weaknesses and strengths.
It affects many parts of the organisation as its decisions have
enduring effects that are difficult to reverse. It tries to equip the 35

organisation with capabilities needed to confront future Notes
S
uncertainties by taking a holistic view of the entire organisation. ___________________
Its focus is clearly on the ‘jungle, not the trees’. The main objective
___________________
is to position the firm in an advantageous position in relation to
the environment, keeping its own internal capabilities in mind. ___________________
In simple terms, organisational planning is the process of ___________________

determining the major objectives of an organisation and the
___________________
PE
policies and strategies that will govern the acquisition, use and
___________________
disposition of resources to achieve those objectives.
___________________
Box 3.1: Features of an Organisational Plan
___________________
z It is of a high-level.
___________________
z It is general.
z Its time-span is long-range. ___________________
z It affects the whole organisation.
z It is usually developed from the ground upwards.
z It covers a wide range of activities.
z It exploits a particular concept.

Source: R I Ackoff, A Concept of Corporate Planning, Wiley, New York, 1970.
)U
As mentioned earlier, organisational plans are designed to meet
the broad objectives of an organisation. They are long-range plans.
Organisational plans are also concerned with implementing
strategic plans by coordinating the work of various departments in
an organisation. These are known as intermediate plans.
Operational plans are short-range plans. They offer details as to
how the organisational plans will be accomplished.
Relationship between Logistics Strategy and Corporate

Strategy
Corporate strategies once resembled the old Soviet five-year plans.
They were monumental pieces of work, for which a lot of effort
went in. They conceived blue-sky ideas and put them into to some
extent actionable elements and attempted to execute them,
(c
without ever considering whether the plans succeeded or failed;

whether they were feasible or not.
The corporate strategy was somewhat similar; a wide binder put
together by the most expensive and famous consultants that
money could buy, with no regard to how well the company could
implement on it to deliver the potential results implied therein.
36
By contrast today, corporate strategies are vibrant documents that
Notes
S
reflect more of a business plan than a business monument. These
___________________
live documents are the navigation charts of the chief executive
___________________ officer and the board, to direct them through the perilous waters of
___________________ competitive marketplaces, internationalization, mergers and
acquisitions, diversification, divestiture, new market exploration,
___________________
and many more exciting concerns. Corporate strategies also
___________________ present the company’s leaders with an organized approach to the
PE
___________________ mundane necessities of cost reductions, efficiency and productivity
increases, and operational effectiveness.
___________________
___________________
Accelerated relocation of manufacturing and knowledge-based
businesses to lesser cost labour markets is influencing logistics
___________________
decisions. We find that sales and operations planning,
___________________ organizational agility, and global sourcing are becoming more and
more critical in today’s shifting corporate environment. Mergers
and acquisitions activity is on the mount once again. Lanes are
becoming more and more congested globally, forcing companies to
think of their largely distribution and manufacturing strategies.
Further, with the focal point on growth these days, in many
industries, working capital is becoming of great interest to
)U
corporate strategy agendas, along with third-party logistics
outsourcing. Considering these factors, we find, with escalating
frequency, that corporate strategies are having impact on logistics
decisions.
Due to a variety of changes in competitive strategy and
globalization, more logistics-related issues are entering boardroom
discussions. Logistics directors are induced to think of themselves
more and more as global business partners and strategic advisors
than merely line managers of a corporate functional silo. Besides
having their particular subject matter knowledge in logistics, they
are and will also be expected to be aware of increasing trends in
business competitiveness and in corporate strategy matters.
Strategic matters comprise concepts such as outsourcing, vertical
integration, contingency planning, growth agendas, global
(c
sourcing, information technology, working capital related issues,

speed to market, charming with customers, and fiscal incentives.
They are likely going to be asked about their opinions on all these
areas, in company board discussions, as the road map of the
company is laid out or modified on a recurrent basis.
Logistics Strategic Planning 37

Notes
Companies everywhere are under mounting pressure to improve
S
customer service levels, while at the same time holding or, more ___________________
likely, reducing the costs of their logistics operations. Meeting the ___________________
twin challenge of customer service improvement and cost reduction
___________________
now places distribution network design centre stage as a key
business main concern. ___________________
Strategic logistics planning modelling is the finest way to simulate ___________________
PE
the options. ___________________
Strategic logistics planning helps you decide the best service, least ___________________
cost options for your business. ___________________
Supply Chain Logistics Consulting branch of any organisation has ___________________

the strategic logistics planning expertise and the tools to help you
___________________
plan and optimise your distribution operations in ways that will
significantly:
z Improve customer service, and
z Reduce distribution costs.
By using a collection of sophisticated strategic logistics planning
)U
software tools we can model every aspect of your distribution
network, including:
z Product flows,
z Customer locations,
z Inventory profile and throughput,
z Sales forecasts, and
z Risk profiles.
The organisations use the resulting data picture to develop
potential alternative distribution strategies that reflect both
current and best possible network designs. This enables to develop
in relatively short time-scales fully costed strategy options to
facilitate effective decision-making.
(c
Strategic logistics planning options might include, for instance:

z Maintaining the present network design,
z Consolidation of existing distribution depots,
z Relocation of depot sites, and
z Outsourcing warehousing operations.
38
The strategic plan is the building block that blueprints purchasing
Notes
S
and logistics direction for the next coming years. The plan
___________________
identifies key initiatives and strategies to advance supply chain
___________________ value for money to support service delivery and achieve recognised
___________________ excellence in supply chain management.
___________________ Strategic plan is based on the purchasing and logistics strategy

chart which aligns with corporate or business strategic intention.
___________________
PE
Strategic plan is updated yearly to ensure it is consistent with
___________________
developments in the business and reflects the changing directions
___________________
of the organisation. All new strategies are subject to appropriate
___________________ business case development and approval.
___________________ Priorities will be recommended by the Purchasing and Logistics
___________________ Policy and Strategy (PALPAS) and approved by the Resource
Committee or its nominated subsidiary.
Check Your Progress

Fill in the blanks:
1. The ……………………. strategies are the general plan by
which the organization intends to achieve its purpose
)U
and long-term objectives.
2. ………………….. is the process of deciding in advance
what should be accomplished and how it should be
realised.
Summary
Strategy provides a sense of purpose and direction to the firm in
terms of where to operate and how to integrate the various
businesses to ensure competitiveness and above average returns.
Organisational plans are concerned with implementing strategic

plans by coordinating the work of various departments in an
organisation.
(c
Strategic matters comprise concepts of outsourcing, vertical

integration, contingency planning, growth agendas, global
sourcing, information technology, working capital related issues,
speed to market, charming with customers, and fiscal incentives.
The strategic plan is the building block that blueprints purchasing

and logistics direction for the next coming years.
Lesson End Activity 39

Notes
S
The political and economic barriers are continuing to come down
___________________
among the several countries of the Asia. If you are a manager of
physical distribution for a multinational company that sells ___________________
finished consumer goods (e.g., Procter & Gamble of Italy) within ___________________
your own country, what distribution decisions are facing you in the
___________________
future?
___________________
PE
Keywords ___________________
___________________
Corporate Strategy: It is a critical approach which forms the
framework that enables the organization to cope with the external ___________________
and internal environments. ___________________
Organisational Planning: A plan that involves an extended ___________________

time-frame for the deployment of a large percentage of the
resources of an organization and a wide spectrum of activities
having a major eventual impact.

)U
1. What do you mean by logistics strategic planning?
2. Discuss the relationship between logistics strategy and
corporate strategy.
3. Explain the importance of corporate strategy to logistics and
supply chain management.
4. Discuss the importance of corporate strategy.
Further Readings
Books
Ailawadi C Sathish & Rakesh Singh, Logistics Management,
Prentice Hall India, 2005.
(c

Education.
40
Web Readings
Notes
http://www.logisticsbureau.com/supply_chain_strategy_alignment.
S
___________________ htm
___________________
http://logistics.about.com/od/strategicsupplychain/a/strategic.htm
___________________
http://www.supplychainbrain.com/content/index.php
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
UNIT 4: Supply Chain Management
Unit 4
41
Notes
S
Activity
Supply Chain Management

___________________
Study a case example of
managing supply chain global
___________________
competitiveness and prepare
a brief report on it.
___________________
Objectives
___________________
topics: ___________________
PE
\ Importance for Competitiveness ___________________
\ Supply Chain: Issues and Challenges ___________________
\ Logistics System
___________________
___________________
Introduction
___________________
Supply Chain Management (SCM) maximizes revenue by
integrating three key flows across the boundaries of the companies
that form the supply chain: flow of value (product/materials),
information, and funds. Successful integration or coordination of
these three flows produces improved efficiency and effectiveness
for business organizations in the competitive global market.
)U
In theory, supply chains can work as cohesive, singularly
competitive units similar to a large, vertically integrated firm,
without significant financial investments by the members of the
chain.
Supply chain management in the global context is the design and
management of seamless, value added processes across
organizational boundaries to meet the real needs of the end
customer. The development and integration of people and
technological resources are critical to successful supply chain
integration.
Imperatives for Competitiveness

Regionally configured supply chains will be the input to success.
(c
These supply chains serve regional customers according to their

requirements, at the same time as bundling supply chain partners,
manufacturing facilities, and distribution centres as much as is
economically possible.
Enhanced globalization of the supply chain and still more
outsourcing were viewed as the main two levers to reduce supply
42 chain costs. Leading companies understand the impact of these

Notes concealed costs and are taking aggressive steps to identify and
S
___________________ manage them.
___________________ Numerous companies are required to improve their supply chain
___________________ performance by shifting more risk on to the backs of suppliers—
and that means a new set of risk management challenges.
___________________
“Important companies are taking an end-to-end approach in
___________________
PE
managing risk at each node of the supply chain. To keep the supply
___________________ chain as lean as possible, they are taking a more vigorous role in
___________________ demand planning, which ensures that they order only the amount
___________________
of materials needed to fill firm orders.”
___________________ Companies are required to manage supply chain planning on a

globally integrated level. More and more companies functioning in
___________________
global environment are required to appoint a chief supply chain
officer and at least a single executive responsible for the
end-to-end supply chain. But it is just one step in building a truly
integrated supply chain. The supply chain organization and its
capabilities need to be seen as a “single resource” to the enterprise,
in order to meet the global challenges.
)U
Managing Supply Chains for Global Challenges
For a lot of enterprises, the ability to do business globally may well
centre on the extent to which they can authenticate their
individual identities and those of their business partners. Cash-
strapped organisations desperately require financing to invest in
the automation that will integrate them with suppliers and
partners worldwide. In particular, manufacturers are profoundly
dependent on cash to fund their complex supply chains. Lenders,
however, are rarely willing to deal with unknown borrowers whose
credit history is not available. Employing authentication tools
would facilitate companies’ identities to be verified with greater
certainty, thereby improving their chances of obtaining funds to
invest in supply chain automation.
(c
Corporations are focusing first and foremost on deepening

collaboration with key customers to reduce unanticipated changes
in demand in the global environment. Many organisations plan to
implement combined “real-time” planning with their key
customers, and plan to develop processes for improved demand
sensing—that is, understanding the market rate of demand in real
time, relatively than having to wait for after-the-fact reporting.
43
Supply chain management from across the globe identified five key
Notes
S
supply chain challenges for the coming years. Successful
management of the challenges will be central to a company’s ___________________
ability to capture benefit from an eventual economic upturn. Those ___________________
supply chain challenges are:
___________________
1. Increase in Supply Chain Instability and Uncertainty:
___________________
Market transparency and larger price sensitivity have led to
___________________
PE
lower customer loyalty. Product commoditization reduces true
differentiation in both the consumer and business-to-business ___________________
(B2B) environments. ___________________
Increasing volatility is a foremost issue. Many organisations ___________________
consider demand and supply volatility and poor forecast
___________________
accuracy to be the biggest supply chain roadblocks they
currently face. ___________________
The increased commoditization of products plays a key role,

even beyond the demand volatility connected with the
recession. With an increasing ability and willingness of
customers to find alternative supply sources, B2B customer
demand can move up or down dramatically and rapidly.
)U
2. Effective Management of Increased Supply Chain
Globalization and Complexity: Future business growth will
come principally from new international customers and/or
products that are customized to meet customer needs. “As a
result, many companies expect the complexity of their supply
chains to grow significantly.
While the majority of companies expected growing complexity
in the number and location of customers and in product
variants, the majority expects a decrease in the number of
manufacturing locations, primarily due to outsourcing, and in
the number of suppliers they work with.
3. Criticalness of End-to-end supply chain costs
optimization: Gross margins may enlarge over the next few
years, not from better pricing power but from further
(c
reductions in supply chain costs.

Companies with large expectations for savings from
outsourcing have to be careful. While they can achieve
substantial material and labour cost reductions through
outsourcing, there are many complexities to be deal with for
significant reductions in process or management costs.
44
4. Complication of Risk Management under the Supply
Notes
S
Chain: The global recession can turn out to be a tough time
___________________
for supply management. Managing supplier financial risk is a
___________________ critical task. Some of these pressures are quite serious.
___________________ It focuses that leading companies are facing the intricacy of
___________________ products that receive late-stage customization, and mitigating
inventory-related risks by in relation to their suppliers.
___________________
PE
5. Lack of Integration and Empowerment of Existing
___________________
Supply Chain Organizations: The supply chain
___________________
organization needs to be treated as a particular integrated
___________________ organization which is a huge challenge. In order to be effective,
___________________ significant improvements require support across all supply
chain functions which is a multifaceted task for many
___________________
organisations.
Supply chain arrangements for the majority of companies are quite
older, but most companies still have a long way to go to integrate
their supply chains as per the global requirements.
Agenda for the Starting Point

)U
The following five supply chain priorities are listed in the agenda
for the coming years, as shown in the Table 4.1.
Table 4.1: Agenda for the Starting Point

(c
z Improve customer access and accuracy in supply chain

planning,
z Increase upstream and downstream flexibility,
45
z Focus on total supply chain management,
Notes
S
z Implement end to end supply chain risk management, and
___________________
z Integrate and empower supply chain organisation.
___________________
___________________
Supply Chain Management in India: Issues and
___________________
Challenges
___________________
PE
India is the second largest economy in Asia with a total trade value
___________________
of USD 126 billion in 2007, enjoying unprecedented manufacturing
growth. In view of the liberalization and globalization of ___________________
developing economies, the supply-chain solutions face several ___________________

challenges. Some of the developing nations, including India, may
___________________
emerge as an important manufacturing hub in the near future for
___________________
a number of industries due to knowledge capital and strong
technological and industrial capabilities in several sectors.
However, the lack of good, physical infrastructure in India such as
roadways; sea and airports, effective layout of city and regional
functions, and reliable energy sources all contribute to the missing
underlying foundation required to support the general framework
)U
from which a good Indian supply chain can begin to develop and
thrive.
For example, shortage of cold storage facilities and refrigerated
transport equipment lead to inefficiencies in handling perishable
products which manifest themselves in the wastage, which
according to some estimates, is more than the total production of
fresh fruits and vegetables in Great Britain. Because of the lack of
adequate storage facilities, 35–40% of all perishable food produce
in India is spoilt before reaching the end consumer. ` 50,000 crore
is the estimated annual physical and value loss the farmers incur
due to the lack of post-harvest infrastructure.
According to 2007 estimates, India spends about 14 per cent of its
gross domestic product on its logistics system, versus eight per
cent for developed nations. A safe and sound infrastructure is the
(c
foundation of an efficient and effective supply chain. Infrastructure

can broadly be classified as hardware and software. Hardware
consists of physical assets that comprise terminals, storage
facilities, right of way for movement and vehicles/equipment.
Software, which is essentially the service superstructure, consists
primarily of maintenance, operations and value added services.
46
India has one of the largest road networks in the world (over 3.3
Notes
S
million km in 2002). However, the upgrading of roads has not
___________________
matched with this phenomenal growth in traffic. The deficiencies
___________________ in the road network are causing huge economic losses because of
___________________ slow transportation. According to an MNC executive, “It does no
good to a company to have printed circuit boards or finished goods
___________________
inventory in the factory and are unable to reliably move inventory
___________________ to, and beyond, air or seaport in a timely and efficient manner.”
PE
___________________ India's railroad system is the fourth most heavily used system in
___________________ the world, which suggests the large investment made in rail
___________________
transportation. However, the Railways system has not been able to
cope with the traffic growth of the growing economy.
___________________
The Major Ports handled a total traffic of 344.8 million tonnes
___________________
during the financial 2003-04. However due to capacity constraints,
Indian ports are characterized by the ships having to wait long in
the channel for berthing, mechanization process is non-existent,
slow or outdated and obsolete, and the road links to ports are
insufficient and badly maintained, etc. The efficiency of some
major ports in India is extremely poor compared to international
standards.
)U
Air freight is the newest but least utilized mode of transport. There
are more than 20 international airports located within India.
However, airport operations are often a bottleneck. Recently,
airports have been opened up for privatization starting with the
privatization of the Delhi and Mumbai Airports. As these two
airports carry the bulk of the traffic into India, future growth of
this transportation mode is very encouraging.
Inter-modal transport refers to transportation of goods across more
than one mode in an integrated and seamless, manner from the
origin to the destination. An example is containerization of goods
which is a key technology in making multimodal transport more
effective and efficient. Inter-modal operators take advantage of the
inherent economies of each mode of transport and thus, provide
(c
integrated service at the lowest possible cost.

Terminal infrastructure like Inland Container Depots (ICDs) and
Container Freight Stations (CFSs) are provided by the Central
Warehousing Corporation (CONCOR), and certain shipping lines.
While multimodal service infrastructure has developed in the
export-import domain, its scope in domestic movement is largely
untapped. The exceptions are in the form of inter-modal transport 47

as a combination of air and road services and RORO services. Notes
S
Activity
___________________
Prepare a brief report on
Check Your Progress Indian logistics.
___________________
Fill in the blanks:
___________________
1. Enhanced globalization of the supply chain and still
___________________
more outsourcing were viewed as the main two levers to
reduce supply chain …………………. ___________________
PE
2. Corporations are focusing first and foremost on ___________________
deepening collaboration with key customers to reduce ___________________
unanticipated changes in demand in the …………….
___________________
environment.
___________________
Logistics System ___________________
Business logistics has come to the forefront in the recent past

because, in competitive markets, efficient business processes are
the fundaments for the value creation logic. Logistics is one of
these critical processes. The importance of business logistics stems
from the fact that it is difficult to accomplish any marketing or
)U
manufacturing without logistical support.
If products do not get to the customer on time, you cannot satisfy
customer needs. Or as a matter of fact, if they do not get to the
customer at all, there will be no customer with you in the long run.
Many companies designated as service firms, in fact, produce a
product. Some such examples include: Times of India (newspaper
publishing), and Big Bazaar (merchandise retailing). These
companies carry out all the typical logistics activities of any
manufacturing firm. Other service companies such as ICICI Bank
(retail banking), Indian Hotel Corporation (hospitality), and
Reliance Energy (electric power), logistic system, especially those
associated with physical distribution, also play a very important
role.
(c
Even in service-oriented organizations that distribute an

intangible, non-physical product, the physical distribution
activities and decisions are logistical in nature. Examples are
organizations such as hospitals, IT services, BPO services, etc. If
Fortis hospitals want to extend emergency medical care
throughout Delhi, they must make decisions as to the locations of
the centres. Similarly, Infosys has to decide where to locate its
48 offices to service its clients. ICICI Bank must locate and have cash
Notes inventory on hand for its ATMs. The cash must be assembled and
S
___________________ delivered to each ATM precisely on time. Each of them must rely
on good logistics management to assure that their organizational
___________________
objectives can be met.
___________________
NDTV may have a problem if there were four major stories on the
___________________
same day in different parts of the country that would draw large
___________________ TV audiences. It will have major logistical problems with covering
PE
___________________ the four major news stories. There would be logistic issues in
sending reporters to cover the stories, of allocating airtime to the
___________________
stories, etc.
___________________
Managing logistics system in service industries is a new direction
___________________
in which logistics practice is developing.
___________________
Logistical Environment
Directly or indirectly, over 70 per cent of the resources of a typical
organization are used in operations. Out of this, logistics
expenditures range up to 35 per cent of sales. This percentage
depends, to a large extent, on the type of business, geographical
area of operation, and weight/value ratio of products and
)U
materials. In other words, logistics is one of the highest costs of
doing business. It is second only to materials in manufacturing or
cost of goods sold in wholesaling or retailing.
For individual firms, the preponderance of resources used by

logistics makes its selection as a vital component to business
success a natural outcome. Globalization has added a new
dimension to logistics environment. Not only do firms outsource
across international borders, their markets often lie in other
countries. In order to be successful, business organizations need to
correctly determine customer requirements and to meet their
expectations consistently to survive. They also need to know how to
develop an economical international supply chain. Logistical
(c
environment plays an important part in satisfying customers and

coordinating with suppliers in the most efficient manner.
Logistical environment, as a business impression on its own,

evolved only in the 1950s. This was mainly due to the increasing
complexity of globalized supply chains. Companies increasingly
wanted to have a say in where they should source, where they
should manufacture, and where they should market their products. 49

It made warehousing, distribution and transportation decisions Notes
S
critical for the companies, and supplying one’s business with ___________________
materials and shipping out products became increasingly difficult, ___________________
expensive and complicated. To be successful, companies had to
___________________
manage activities effectively and efficiently to build and sustain
___________________
competitive advantage and profitability.
___________________
PE
The 1980s and 90s also saw the emergence of a power shift in the
___________________
distribution and logistics environment – which was controlled by
manufacturers – to retailers. This was a result of the retail ___________________
consolidation that took place in the United States and the ___________________
emergence of mega-retailers such as Wal-Mart, Home Depot, The ___________________
Kroger Company, Target, Sears Roebuck & Co., and K-Mart, etc.
___________________
While manufacturers had designed their distribution channels to
distribute products evenly, with the emergence of these giant
retailers, manufacturers found that 15 to 20 per cent of these
accounted for 75 to 85 per cent of their sales. This forced
manufacturers to distribute their products in a manner that
improved the efficiency of retailers. The logistical environment,
)U
under these circumstances, needed to be designed around the
customer rather than the manufacturer.
In addition, changes in technology that emerged in the 1990s

associated with the internet and development of new
communication technologies changed how buyers and sellers
interacted in the market place. This enabled organizations to adopt
entirely new ways to communicate and reach customers and
suppliers. The new business models that evolved, like business-to-
business (B2B) and business-to-consumer (B2C), required a more
efficient and effective logistics system. There was a requirement
for speed in deploying appropriate levels of inventory and
completed orders to customers, without sacrificing the
effectiveness and efficiency of the systems.
(c
These complex turns in events changed the way in which firms

operated. With companies trying hard to retain customers using
new technologies and with customer requirements and
expectations increasing over time, companies have to face major
challenges. These difficulties make businesses more complex as
50 companies are compelled to constantly strive to improve their

Notes operations to meet competition.
S
___________________
The impact of these changes on costs and the profitability of
___________________ organizations called for new expertise in the field—and this has
___________________ been provided by detailed understanding of logistical environment
___________________ through logistics management. However, the real challenge of
logistics is not just cost reduction, but in understanding how they
___________________
PE
position their logistical competency to provide customers with
___________________
superior service and thereby, gain competitive advantage.
___________________
Logistical environment involves the integration of various sub
___________________
environments focusing on information, transportation, inventory,
___________________ warehousing, material handling, and packaging. All these
___________________ activities are required to facilitate the operating responsibility of
logistics, i.e., to geographically reposition raw materials, work in
process, and finished inventories, wherever these may be required,
at the lowest cost possible. It optimizes a steady flow of material
through a network of transport links and storage nodes by
coordinating a sequence of resources necessary to carry out the
processes required for executing these activities.
)U
The operating functionality under logistical environment is the
geographical positioning of raw materials, work-in-process,
finished inventories and information where required at the lowest
cost possible. It is through the logistical process that materials and
information flow into the vast manufacturing capacity of an
industrial nation and products are distributed through marketing
channels to consumers.
Logistics in the Country

The responsibilities and complexity in the course of logistics
management is tremendous. In India, the structure of marketing
involves approximately 11 million retailers of FMCG goods and
over 1,000,000 wholesalers. These retailers provide employment to
(c
around 41 million people—nearly 8 per cent of the total workforce

in the country. To move products and materials to and from these
businesses, nearly 1.5 million commercial trucks move goods on
the national highways each day. As 98 per cent of the retailers are
in the unorganized sector, in addition to trucks, a complex
combination of other modes of transport including handcarts,
rickshaws, bullock carts, three wheelers, and mini vans are used to 51
reach the products to these retailers. Notes
S
Logistics is also a huge business opportunity. The complexity of ___________________
logistics is impacted with the highly fragmented nature of the ___________________
transportation industry with 67 per cent of vehicle owners, with a
___________________
fleet of less than five vehicles.
___________________
Based on these discussions, the general conclusions one could
___________________
PE
arrive at by broadly surveying the logistics scenario in India are:
___________________
The potential for cost reduction and service level improvement in
logistics is substantial. Infrastructure development and reduction ___________________
in regulation need to take place to a large extent. The government ___________________

is the main facilitator for this.
___________________
Since complexities of coordination are large, logistics should evolve ___________________
as a function in industry. Shippers are the main actors for this.
Communications technology, computing technology and problem-
solving technology are improving tremendously. This opportunity
should be exploited in logistics management. The supply industry
in logistics as well as shippers should act on this.
)U
SWOT Analysis for Micro-level Components
Under SWOT, strengths and weaknesses are internal factors.
Strengths include:
z Your specialist marketing expertise.
z An innovative product or service.
z Location of your business.
z Quality processes and procedures.
z Any supplementary aspect of your business that adds value to
your product or service.
Weaknesses include:
z Short of marketing expertise.
(c
z Undifferentiated products or services (i.e. in relation to the

competitors).
z Location of your business.
z Poor quality goods or services.
z Damaged reputation.
52
Under SWOT, opportunities and threats are external factors.
Notes
S
___________________
An opportunity might be:
___________________ z A developing market such as Internet (e-marketing).
___________________ z Mergers, joint ventures or strategic alliances.
___________________ z Moving into new market segments that suggest improved

___________________
profits.
PE
___________________ z A new international market.
___________________ z A market vacated by an ineffective competitor.
___________________ A threat might be:

___________________ z A new competitor in your home market.
___________________ z Price wars among competitors.
z A competitor has a new, innovative product or service.
z Competitors have better access to channels of distribution.
z Tax provisions on your product or service.
Once key issues have been identified with the SWOT analysis, they
feed into logistics objectives. SWOT can be used in conjunction
)U
with supplementary tools for audit and analysis, such as PEST
analysis and Porter's Five Forces analysis. So SWOT is a very
popular tool with supply chain administrators because it is quick
and easy to implement.
Check Your Progress

Fill in the blanks:
1. Logistical …………………. involves the integration of
various sub environments focusing on information,
transportation, inventory, warehousing, material
handling, and packaging.
2. ………………. SWOT can be used in conjunction with
supplementary tools for audit and analysis.
(c
Summary
Due to a variety of changes in competitive strategy and
globalization, more logistics-related issues are entering boardroom
discussions. Logistics directors are having to think of themselves
more and more as global business partners and strategic advisors
than merely line managers of a corporate functional silo. Strategic 53

logistics planning modelling is the finest way to simulate the Notes
S
options. Strategic logistics planning helps you decide the best
___________________
service, least cost options for your business. Supply Chain Logistics
Consulting branch of any organisation has the strategic logistics ___________________
planning expertise and the tools to help you plan and optimise ___________________
your distribution operations in ways that will significantly:
___________________
Improve customer service and Reduce distribution costs.
___________________
PE
India is the second largest economy in Asia with a total trade value
___________________
of USD 126 billion in 2007, enjoying unprecedented manufacturing
growth. In view of the liberalization and globalization of ___________________
developing economies, the supply-chain solutions face several ___________________
challenges. Some of the developing nations, including India, may
___________________
emerge as an important manufacturing hub in the near future for
a number of industries due to knowledge capital and strong ___________________
technological and industrial capabilities in several sectors.
After key issues have been identified with the SWOT analysis,
they feed into logistics objectives. SWOT can be used in
conjunction with supplementary tools for audit and analysis, such
as PEST analysis and Porter's Five Forces analysis. So SWOT is a
very popular tool with supply chain administrators because it is
)U
quick and easy to implement.
Lesson End Activity

Prepare a project report on the issues and challenges of supply
chain management in India.
Keywords
Inter-modal Transport: It refers to transportation of goods
across more than one mode in an integrated and seamless, manner
from the origin to the destination.
Logistical Environment: It involves the integration of various
sub environments focusing on information, transportation,
(c
inventory, warehousing, material handling and packaging.

1. Explain SWOT analysis for micro-level components.
2. Describe logistical environment.
54
3. Write a brief note on managing supply chains for global
Notes
S
challenges.
___________________
___________________
Further Readings
___________________
___________________
Books
___________________
PE
___________________
___________________
___________________
___________________ Education.
___________________
Web Readings
http://lcm.csa.iisc.ernet.in/scm/supply_chain_intro.html
http://www.in.capgemini.com/supply-chain-management
http://scm.ncsu.edu/scm-articles/article/what-is-supply-chain-
)U
management
(c
UNIT 5: Case Study
Unit 5
55
Notes
S
Case Study
___________________
___________________
___________________
Objectives
___________________
After analysing this case, the student will have an appreciation of the
concept of topics studied in this Block. ___________________
PE
___________________
Case Study: Improving Supply Chain
___________________
Responsiveness at a Leading European Grocery Retailer
___________________
How does a leading European Grocery Retailer with nearly 1000
stores and over 10 million SKU/Store combinations respond when ___________________
the need to cater to rising consumer incomes, expectations and
individualism translates into higher supply chain complexity and ___________________
costs? The answer: Improve visibility and enhance collaboration
between retail stores and central functions in order to replenish
stores more efficiently while simultaneously lowering logistics
costs.
Working with a leading edge supply chain consulting form, the
retailer realized that the increasingly unpredictable nature of
consumer behaviour makes planning more and more difficult. So,
more time is spent on planning but the results are less valuable
)U
because planning involves making assumptions about what will
happen rather than reacting to what customers are actually
doing. Consequently, the retailer determined that the only way to
be responsive to increasing consumer demands was to build
processes and define rules that required less day to day planning.
According to the retailer’s VP of Supply Chain, “Ten years ago we
made a fundamental choice to no longer believe in the power of
forecasting. We don’t believe in the predictability of customer
behaviour. As the offer in products, information and services
keeps growing forecasting is getting more difficult.” They quickly
determined that this required development of a highly automated
replenishment process with a single point of customer demand
forecasting and centralized control management.
“Now the supply chain is designed as a pull chain with input from
customer behaviour and forecasting models. The base for logistics
is what the customer buys supported by other parameters around
when do customers visit.” says the retailer’s VP of Supply Chain.
(c
Decisions and store planning and forecasting needed to be much

more reactive which required the availability of continuous, near
real-time information. Traditional processes were typically built
around batch processing cycles, usually one per day. Moving from
a batch to a flow system (continuous operation and continuous
decision making) facilitated individualized delivery schedules
based on geography, transport costs, type of merchandise etc.
Naturally, some batching still occurred in the process, such as
Contd…
56 deliveries to the distribution centre from suppliers or the start of

Notes a new promotion but the emphasis is on continuous flow of
S
information, with no artificial barriers to impede the reaction
___________________ time.
___________________ To determine how much of a particular product to send to a
particular store requires knowledge of the present and historic
___________________ service levels as well as constraints of both the product and the
store. Each item/store combination has a unique set of
___________________
parameters. For some products, such as dry groceries, the
___________________ parameter is simple- when one full case is sold, one new case is
PE
ordered. But for items like fresh produce, factors like the desire
___________________ for freshness, an attractive presentation and the cost of shrinkage
must all be taken into account before deciding on an order
___________________
schedule. Predictive forecasting is only used for special situations
___________________ such as promotions and events. Once the promotion is started,
however, ordering is quickly adjusted to reflect actual consumer
___________________ behaviour in the store (e.g. real time POS data).
___________________ According to the retailer’s VP of Supply Chain “The
replenishment process is now fully automated. We have a central
control room where the switchboard is operated. Here we monitor
the assortment behaviour, the effect of the weather, the
differences in revenues compared to that type of local store etc. It
is all in one place and there is centrally integrated responsibility
for all DCs, local stores etc. Local stores only have to focus on
sales, their store (clean, products available) and customer
attention. The central department decides what products come in,
in what amounts and prescribes how to fill the store. The store
)U
just has to execute. “As a result of these enhancements to their
planning and replenishment processes, the retailer was able to
realize some substantial benefits including a 50% reduction in out
of stocks. The amount of time employees spend on store
processing has declined significantly and improved availability of
goods, fewer leftovers and less time spent on ordering has
translated into more time for employees to work directly with
customers.
In addition, supplier investigation into product availability also
proved that availability increased 14% during promotions. Most
importantly, however, the net result of creating a collaborative,
automated, real-time event driven system is increased confidence
that on any given day a customer who walks in to any one of the
retailer’s stores will leave satisfied.
Question
Analyse the case and write down the case facts.
(c
Source: http://www.capgemini.com/m/en/tl/tl_18th_Annual_Trends_in_Logistics_and_Tran
sportation__Synchronization.pdf
UNIT 6: Organisational Planning Process
57
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
BLOCK-II
)U
(c
58
Notes
S
UNIT 6: ORGANISATIONAL PLANNING PROCESS
___________________ UNIT 8: DEVELOPING STRATEGY
z Introduction z Introduction
___________________
z Organisational Planning Process z Developing Logistics/Supply Chain Strategy
___________________ z Developing Logistics and Supply Chain Planning
z Logistics Audit
___________________
UNIT 9: REVERSE LOGISTICS AND
UNIT 7: STRATEGIC PLANNING PROCESS
___________________ ENVIRONMENT
PE
___________________
z Definitions of Strategic Planning z Reverse Logistics as a Competitive Strategy
___________________
z Strategy Implementation z Environment and Resource Analysis
___________________
___________________ UNIT 10: CASE STUDY
___________________
)U
(c
Unit 6
59
Notes
S
Activity
Study and prepare report on
Organisational Planning Process
___________________
the organisational planning on
Pizza Hut.
___________________
___________________
Objectives
___________________
topics: ___________________
PE
\ The Organisational Planning Process ___________________
\ Logistics Audit ___________________
\ Managing Supply Chain for Business Transformation
___________________
___________________
Introduction
___________________
Strategic planning process is a systematic approach to logistics and
supply chain strategy based on the organisational planning
pyramid. The strategic planning process by the way of strategy
defines performance measures and goals, processes, system
requirements, and organization requirements for customer service
and order processing, inventory planning and management,
)U
supply, transportation and distribution, and distribution channel
operations.
In this unit, we will first discuss organisational planning process
and in the next unit, we will talk about strategic planning.
Organisational Planning Process

Organisational planning process is the process of identifying an
organization's immediate and long-term objectives, and
formulating and monitoring specific strategies to achieve them. It
also involves staffing and resource allocation, and is one of the
most important responsibilities of a management team.
Step 1: Getting Organized

(c
To get ready for strategic planning, an organization has to first

assess if it is prepared. While a number of issues must be
addressed in assessing readiness, the determination essentially
comes down to whether an organization's leaders are truly
committed to the effort, and whether they are proficient to devote
the necessary attention to the "big picture". For example, if a
60 funding crisis looms, the founder is about to depart, or the

Notes environment is turbulent, then it does not make sense to take time
S
___________________ out for strategic planning attempt at that time.
___________________ An organization that determines it is certainly ready to begin
___________________ strategic planning must perform five tasks to pave the way for an
organized process:
___________________
z Identify specific issues or choices that the planning process
___________________
PE
should deal with
___________________
z Clarify roles (who does what in the process)
___________________
z Create a planning committee
___________________
z Develop an organizational profile
___________________
z Identify the information that must be collected to help make
___________________
good decisions.
z The product developed at the end of the Step One is a
Workplan.
Step 2: Expressing Mission and Vision

A mission statement is like an introductory paragraph. It lets the
)U
people know where the organisation is going, and it also shows
that the organisation knows where it is going. Likewise, a mission
statement must communicate the essence of an organization to the
people. An organization's ability to articulate its mission indicates
its focus and purposefulness. A mission statement
characteristically describes an organization in terms of its:
Purpose: Why the organization exists, and what it seeks to
accomplish?
Business: The major method or activity through which the
organization tries to fulfil this purpose.
Values: The principles or beliefs that guide an organization's
members as they pursue the organization's purpose.
While the mission statement summarizes the what, how, and why
(c
of an organization's work, a vision statement presents an image of

what success will look like. For example, the mission statement of
the Support Centres of America is as follows:
“With mission and vision statements in hand, an organization has
taken a significant step towards creating a shared, coherent idea of
what it is strategically planning for.”
61
At the end of Step Two, a draft mission statement and a draft
Notes
S
vision statement is developed.
___________________
Step 3: Assessing the Situation
___________________
Once an organization has committed to why it exists and what it
___________________
does, it must take a clear-eyed glance at its current situation.
___________________
Remember, that part of strategic planning, thinking, and
management is an awareness of resources and an eye to the future ___________________
PE
environment, so that an organization can successfully react to ___________________
changes in the environment. Situation assessment, therefore,
___________________
means obtaining current information about the organization's
strengths, weaknesses, and performance – information that will ___________________
show up the critical issues that the organization faces and that its ___________________
strategic plan must address. These could include a variety of
___________________
primary concerns, such as funding issues, new program
opportunities, changing regulations or changing needs in the client
population. The point is to choose the most significant issues to
address. The Planning Committee should agree on no more than
five to ten critical issues around which to organize the strategic
plan.
)U
The products of Step Three include: a data base of value
information that can be used to make decisions; and a list of
critical issues which demand a response from the organization –
the most significant issues the organization needs to deal with.
Step 4: Building Strategies, Goals and Objectives

Once an organization's mission has been affirmed and its essential
issues identified, it is time to figure out what to do about them: the
broad approaches to be taken (strategies) and the general and
specific results to be sought (the aim and objectives). Strategies,
goals, and objectives may come from individual inspiration, group
discussion, formal decision-making techniques, and so on - but the
base line is that, in the end, the leadership agrees on how to
address the critical issues.
(c
This can take considerable time and flexibility: discussions at

this stage frequently will entail additional information or a
re-evaluation of conclusions reached during the situation
assessment. It is even possible that new insights will emerge which
change the thrust of the mission statement. It is significant that
planners are not afraid to go back to an earlier step in the process
62 and take advantage of available information to create the best

Notes possible plan.
S
___________________
The product of Step Four is a sketch of the organization's strategic
___________________ directions – the general strategies, long-range goals, and specific
___________________ objectives of its response to critical issues.
___________________ Step 5: Carrying out the Written Plan

___________________ The mission has been expressed, the critical issues identified, and
PE
___________________ the goals and strategies agreed upon. This step essentially involves
putting all that down on paper. Usually one member of the
___________________
Planning Committee will draft an ultimate planning document and
___________________
submit it for review to all key decision makers. This is also the
___________________ time to consult with senior staff to determine whether the
___________________ document can be converted into operating plans (the subsequent
detailed action plans for accomplishing the goals proposed by the
strategic plan) and to ensure that the plan answers key questions
about priorities and directions in adequate detail to serve as a
guide. Revisions should not be dragged out for months, but action
should be taken to answer any important questions that are raised
at this step. It would surely be a mistake to bury conflict at this
step just to wrap up the process more quickly, because the conflict,
)U
if serious, will inevitably undermine the effectiveness of the
strategic directions chosen by the planning committee. The
outcome of Step Five is a strategic plan!
The Strategic Logistical Plan

Strategic logistics plan provides powerful and flexible supply chain
optimization tool for managing distribution and transportation
networks at the tactical and strategic levels. Strategic Logistical
Plan includes a wide range of advanced strategic planning tools,
including:
Strategic Supply Chain Optimization: It calculates assignment
of products to manufacturing and distribution centres; optimizes
allocation of volumes to suppliers.
(c
Logistics Network Optimization: It determines perfect

warehouse, depot, factory, hub or terminal locations (and
corresponding capacities); strategic planning of delivery/collection
routes, trucking operations and driver routes.
63
Territory Management: It focuses on territory planning (e.g.,
Notes
S
sales territory management); assignment of customers and regions
to sales teams, distribution depots, service centres or factories. ___________________
Supply Chain Planning: It includes integrated optimization of ___________________
manufacturing and logistics; inventory control and supply chain ___________________

analysis tools; strategic planning of supply chain operations.
___________________
Inter-modal Logistics Scheduling: It consists of multi-modal ___________________
PE
freight logistics optimization; maximising throughput in hubs and
___________________
terminals while minimising transport costs.
___________________
Logistics Capacity Planning: It includes strategic planning and
analysis of logistics resources and third party logistics contracts; ___________________
supply chain capacity planning. ___________________
Strategic Modelling Tool: It comprises of analytical tools such as ___________________

what-if scenarios, analysis of new networks, strategic business
optimization and long-term planning.
Evaluation and Selection of Channel Members

Logistic activities involve management and integration of
internal/external and upstream/downstream supply chain. This
)U
means that it has to ensure the quality and reliability of its
external linkages. This also means that it selects suppliers that
have the right capabilities to develop a long-term relationship with
the organization.
A true measurement of an effective logistics department is
obtained by the quality and reliability of channel members. This is
carried out through the processes of channel member selection.
Both are closely related activities.
For the firm to get best value for money, logistics activity should be
in a position to select channel member and assess their
performance in an objective manner. Though an absolute standard
is difficult to define with any degree of exactness, a number of
models are available. However, first the firm has to choose the
(c
criteria by which it will proceed in the matter.

The following considerations should normally be an integral part of
the planning and conduct of the process:
1. Evaluation procedures should include specific evaluation of
channel member competencies.
64
2. Scope of work should be precisely defined, with details on the
Notes
S
nature and extent of collaboration between channel members.
___________________
3. Should incorporate safeguards for performance and cost
___________________
control in negotiations.
___________________
4. Should be specific on methods and procedures for measuring
___________________ activity of channel partner performance.
___________________
PE
Channel Member Qualifications
___________________
With the changing requirements of the marketplace, selecting
___________________
channel members for strategic items on the basis of competitive
___________________ advantage is no longer valid. It is imperative that logistic activity
___________________ has the appropriate configuration and focus. The configuration and
focus largely depends on its ability to select the best network so
___________________
that the function can perform at a more strategic level and
contribute better to the firm's competitive success. Strategic
channel members are trusted partners and become an integral
part of the firm's operations.
It is not easy to answer the question as to which one from the
channel member base should be selected as the most qualified.
)U
This assessment should be taken up by a cross-functional team.
Such a team generally includes members from quality assurance,
design engineering, manufacturing engineering, purchasing,
industrial engineering, and accounting. They should individually
and collectively evaluate the potential channel member.
Table 6.1: Channel Partner Selection Criteria

Quality Reliability Overview
Technical Specification On-time delivery of Channel member
Properties Performance history Selection
Design Warranty Criteria
Product Life Availability of Spares
Dependability Ability to face
Maintenance Emergencies
Capability Financial Desirable Qualities
Production Capability Product Cost Management
Technical Capability Volume Discounts Length of time in
(c
Design Capabilities Return on Assets Business

VE/VA Capabilities Funds and Cash Flow Reputation
Operating Controls Analysis Attitude
Labour Relations Maintenance Training
Integrity and Honesty
Some factors that are important in selecting channel members are

discussed below. Channel partner selection criteria can be grouped
as technical, financial, managerial and service. Most of these are
included in vendor evaluation schemes. However, the first step in 65

any channel partner selection process should be the specification Notes
S
review – is each element included in material specification really ___________________
necessary? Very often, if the specifications are overstated or
___________________
understated, it can cause the evaluation criteria to be skewed and
the wrong channel partners to be selected. ___________________
The table identifies some of the criteria in channel partner ___________________
selection. These are discussed in greater detail below: ___________________
PE
1. Quality: A significant change in the global manufacturing ___________________
sector is the quality revolution. Due to the growing demand for ___________________
higher quality products and services by consumers,
___________________
manufacturers around the world are becoming increasingly
more quality conscious. Businesses are realizing that they will ___________________
have to provide high quality products and/or services at a ___________________
competitive price in order for them to compete in global
markets. In this environment, not only are quality standards
higher, is the most important consideration and the channel
partner has to assume the major responsibility for this.
2. Reliability: Reliability, after quality, is the most important
consideration. The responsibility of purchasing is to prevent
)U
production line shutdowns resulting from longer-than-
expected lead times or inconsistent supply. The firm requires
consistent, on-time deliveries. The vendor's warranty and
claim procedures are also a reliability measure. Reliability is
often considered a part of a total quality management
program. Reliability becomes more significant as a critical
selection criterion in the case of global supply chains, because
of the distances involved.
3. Capability: Capability reflects the potential channel partner's
production facilities and capacity, technical capability,
management and organizational capabilities, and operating
controls. These are indicator of the channel partner's ability to
deliver both quality and quantity of material in a timely
manner. The evaluation should examine the channel partner's
(c
physical capability to provide the material the user needs on a

consistent basis over an extended time period.
The channel members’ relations record may indicate a record
of channel partner activity. Again, when sourcing from global
suppliers, this assessment becomes more challenging.
4. Financial Considerations: Financial considerations, in
addition to price, include the channel partner financial
66 position. Financially unstable channel partner pose risks in a

Notes long-run continued supply of material. In case of bankruptcy
S
___________________ or a shutdown, a channel member that supplies materials
critical to a final product could stop a buyer's production.
___________________
This criterion becomes especially important in purchasing
___________________
from small scale and medium scale vendors. Transportation
___________________ service is one such area where the vendors are small and the
___________________ financial failure of such a channel partner, especially if it is a
PE
single source, is a major problem and source of disruption in a
___________________
supply chain.
___________________
5. Geographical Location: Another channel partner selection
___________________ factor is geographical location. This factor is becoming
___________________ increasingly important due to many companies adopting JIT
practices. The issues involved in buying from distant vendors
___________________
includes transportation cost, the ability to fill rush orders,
meet shorter delivery dates, provide shorter delivery times,
and vendor dependability.
6. Other: The remaining channel partner selection factors are
the member's attitude, integrity, corporate image, etc. Many of
these attributes are difficult to quantify, but these often affect
the channel member selection decision. Some factors may be
)U
dependent on the nature of the product. For example,
packaging is important for easily damaged material, such as
glass, but not important to buyers purchasing a commodity
that is not easily damaged, such as coal. Training aids are
important to a firm selecting vendors to supply technical
machinery such as machining centres, robots, etc., but not
when purchasing seeking office supplies.
Considering the complexity and inter-relationships between the
different areas, a method that is commonly used in channel
member selection is the Analytical Hierarchy Process (AHP).
Check Your Progress

Fill in the blanks:
(c
1. A true measurement of an effective logistics department

is obtained by the quality and reliability of ………….
members.
2. ……………………. focuses on territory planning (e.g.,
sales territory management); assignment of customers
and regions to sales teams, distribution depots, service
centres or factories.
Logistics Audit 67
Notes
S
A logistics audit is a vital prerequisite to task, process, or system Activity
___________________
Prepare a presentation on the
modification. The logistics audit will determine or validate the "as
key components of supply
is" baselines by which intervention successes are measured. ___________________
chain strategy.
The audit must answer the following questions: What resources ___________________
are available, such as storage, production, and throughput ___________________

capacities; buildings by size; number of workers by type; materials-
___________________
PE
handling equipment by type; conveying systems; and budgeted
___________________
capital expenditures? What constraints does the action face, such
as building layouts, storage capacities, time allotted for given ___________________
production requirements, use of certain automation systems, ___________________
regulatory compliance requirements, flow requirements, and
___________________
capital expenditure budget? What processes does the activity use,
and what are the current standards governing those processes? ___________________
Preferably, an activity should use flow charts to demonstrate the

processes used to perform tasks, the performance standards
required for those processes, and the metrics employed to monitor
success. If flow charts are not used, the processes must be
documented to make certain that tasks are being performed
consistently.
)U
The logistics audit provides groundwork for understanding an
activity, analysing feasible solutions, and measuring the value of
implemented solutions.
Quality engineers employ the DMAIC, (Define, Measure, Analyse,
Improve, and Control), model to document processes before
beginning the process improvement. If processes are documented,
another sequence of logical questions apply viz., Are the processes
being followed? Are they within acceptable control and
performance parameters? Are they outdated? Can they be
improved?
It is significant to note that processes being performed consistently
and within statistical control still may be well outside required
(c
performance standards. Processes that appear to be outside the

tolerance of established performance parameters must be analysed
for the factors that contribute to inconsistencies. This may be a
consequence of process deviations or inconsistencies in process
measurement. Each process analysed must have a process owner
who must be able to demonstrate the performance data that
validate process control. Controlling processes contained by
68 pre-established performance parameters should be part of the

Notes activity's ongoing quality control.
S
___________________
When processes are documented, analysts can diagram process and
___________________ system relationships in order to investigate task relationships
___________________ within processes and process relationships within systems. This
approach is described as network diagramming. Although network
___________________
diagramming is most commonly used in the construction industry
___________________ for project management, the concept also can be helpful in
PE
___________________ designing a logistics activity. Network diagramming is helpful for
determining a comprehensive cycle time of more than one task,
___________________
process, or activity.
___________________
Network diagramming helps to recognize the time required to
___________________
complete a given process, activity, or project. This technique
___________________ provides an ability to identify those tasks on the critical path—a
task or process for which any deviation in time will influence the
overall process, activity, or project time. Those tasks not on the
critical path may have a degree of float time, or system slack,
associated with them and may slip forward or backward founded
on the amount of float time. As long as a task does not slip past the
amount of float time, it will not affect the overall process or project
)U
time. Changes in the relationships among tasks can influence the
critical path and the overall cycle time. For example, if two tasks
are performed simultaneously rather than sequentially, the time
required to complete the process will be shorter.
If the relationships of a known process, activity, or project are
fixed, all efforts to decrease the time must focus on critical path
tasks, processes, or activities. This approach is known as system
"crashing," or system compression. Efforts to shorten period by
compressing tasks not on the critical path will not produce results
until all system float time is eliminated. Therefore, the most
effective approach requires a focus on critical path activities. This
can be accomplished by modernizing equipment, changing task or
process performance, or adding resources. Ideally, the system is
only compressed to a point of optimal investment. Habitually the
(c
cost to compress outweighs the amount saved by the compression;

however, other drivers, such as time constraints, may necessitate
the addition of compression.
The boxes employed in network diagramming typically show the
task to be performed, the task duration, early and late starts, and
early and late finishes. Determining float time requires two passes
through the network, one forward and one backward. Once 69

complete, subtracting the late start and finish times from the early Notes
S
start and finish times will show the amount of float time. ___________________
This logistics audit can be applied as a pure assessment tool for ___________________
benchmarking, for identifying opportunities for further
___________________
improvement of the logistics processes or as a supporting tool to
(re)design manufacturing in addition to logistics strategies. ___________________
___________________
PE
Basics of Logistics and Supply Chain Strategy
___________________
At the strategic level, company management makes elevated level
___________________
strategic supply chain decisions that are relevant to the whole
organization. The decisions that are made with regards to the ___________________
supply chain should replicate the overall corporate strategy that ___________________
the organization is following.
___________________
Key Components of Supply Chain Strategy

The strategic supply chain that management has to decide upon
will cover the breadth of the supply chain. These include
components of product development, customers, manufacturing,
vendors and logistics.
)U
1. Product Development: Senior Management has to identify a
strategic direction when considering the products that the
company should manufacture and offer to their customers. As
product cycles mature or products sales decline, management
has to make strategic decisions to develop and introduce
innovative versions of existing products into the marketplace,
rationalize the current product offering or develop a new range
of products and services. These strategic decisions may include
the call for to acquire another company or sell existing
businesses. However, when making these strategic product
development decisions, the overall objectives of the firm should
be the influential factor.
2. Customers: At the strategic level, a company has to recognize
(c
the customers for its products and services. When company

management makes strategic decisions on the products to
manufacture, they have to then identify the key customer
segments where company marketing and advertising will be
targeted.
3. Manufacturing: At the strategic level, manufacturing
decisions classify the manufacturing infrastructure and
70 technology that is required. Based on high level forecasting

Notes and sales estimates, the company management has to make
S
___________________ strategic decisions on how products will be manufactured. The
decisions can necessitate new manufacturing facilities to be
___________________
built or to increase production at existing facilities. However, if
___________________
the overall company objectives include moving manufacturing
___________________ overseas, then the decisions may bend towards using
___________________ subcontracting and third party logistics. As environmental
PE
issues influence corporate policy to a greater extent, this may
___________________
persuade strategic supply chain decisions with regards to
___________________ manufacturing.
___________________
4. Suppliers: Company management has to make a decision on
___________________ the strategic supply chain policies with regards to suppliers.
___________________ Reducing the purchasing spends for a company can directly
relate to an increase in profit and strategically there are a
number of decisions that can be taken to obtain that result.
Leveraging the total company’s purchases over many
businesses can allow company management to select strategic
global suppliers who offer the greatest discounts. But these
decisions have to be in contact with the overall company
objectives. If a company has adopted policies on quality, then
)U
strategic decisions on suppliers will have to fall within the
overall company objective.
5. Logistics: The logistics function is a means to the success of
the supply chain. Order fulfilment is an important part of the
supply chain and company management need to make
strategic decisions on the logistics network. The devise and
operation of the network has a significant influence on the
performance of the supply chain. Strategic decisions are
required on warehouses, distribution centres which
transportation modes should be used. If the general company
objectives identify the use of more third party subcontracting,
the company may strategically decide to use third party
logistics companies in the supply chain.
(c
Strategic decisions decide the overall direction of company’s supply

chain. They should be made in conjunction with the company’s
overall objectives and not biased towards any particular product or
regional location. These high rank decisions can be refined, as
required, to the specific needs of the company at the lower levels
which allow for tactical and operational supply chain decisions to
be made.
Managing Supply Chain for Business Transformation 71

Notes
Business situations change in the competitive era with large pace.
S
To cope up with the changing situation, the transformation of ___________________
business processes along with the supplementary activities is ___________________
required. In situations of high growth, companies need a flexible
___________________
supply chain to ensure that their growth plans can be absorbed at
an incremental cost. In more certain demand situations, companies ___________________
should aspire to ensure that their supply chain operates to ___________________
PE
optimum levels, with balance between service and cost.
___________________
The following actions need be taken while managing the ___________________
transformation of business:
___________________
a) Overall improvement of Supply Chain Strategy
___________________
b) Alignment of customers and suppliers to inner company
___________________
operations
c) Alignment of marketing and sales plans with supply chain
strategy
d) Alignment of capital disbursement to supply chain operations
e) Alignment of HR strategy to supply chain operations
)U
f) Alignment of supply chain strategy to congregate investment
aims
g) Alignment of supply chain strategy to meet up growth targets
h) Optimisation of supply chain to meet broad business goals.
Check Your Progress

State whether the following statements are True or False:
1. At the strategic level, company management makes
elevated level strategic supply chain decisions that are
relevant to the whole organization.
2. Network diagramming helps to recognize the time
required to complete a given process, activity, or project.
(c
Summary
The organisational planning process is the process of identifying
an organization's immediate and long-term objectives, and
formulating and monitoring specific strategies to achieve them. It
72 also involves staffing and resource allocation, and is one of the

Notes most important responsibilities of a management team.
S
___________________
The strategic supply chain that management has to decide upon
___________________ will cover the breadth of the supply chain. These include
___________________ components of product development, customers, manufacturing,
vendors and logistics.
___________________
___________________
Lesson End Activity
PE
___________________
Research on how business transformation can be accomplished
___________________
through supply chain.
___________________
___________________ Keywords
___________________
Strategic Planning Process: It is a systematic approach to
logistics and supply chain strategy based on the organisational
planning pyramid.
Organisational Planning Process: It is the process of identifying
an organization's immediate and long-term objectives, and
formulating and monitoring specific strategies to achieve them.
Strategic Supply Chain Optimization: It calculates assignment
)U
of products to manufacturing and distribution centres; optimizes
allocation of volumes to suppliers.
Inter-modal Logistics Scheduling: It consists of multi-modal
freight logistics optimization; maximising throughput in hubs and
terminals while minimising transport costs.
Strategic Modelling Tool: It comprises of analytical tools such as
what-if scenarios, analysis of new networks, strategic business
optimization and long-term planning.

1. Explain the organisational planning process.
2. Discuss evaluation and selection of channel members.
(c
3. Explain channel member qualifications.

4. What do you mean by logistics audit?
Further Readings 73
Notes
S
Books ___________________
W F Glueck, Business Policy, McGraw Hill, Tokyo, 1976. ___________________
F R David, Strategic Management, Prentice Hall, New Jersey, ___________________
1997.
___________________
R McGlashan and T Singleton, Strategic Management, Merill ___________________
PE
Publishing, Columbus.
___________________
J A Pearce and R B Robinson, Strategic Management, McGraw
___________________
Hill, New York, 2000.
___________________
Web Readings ___________________
http://www.tutorialspoint.com/management_concepts/supply_chain ___________________
_management.htm
http://www.pwc.com/us/en/operations-
management/assets/achieving-agility-through-the-sales-inventory-
operations-planning-process.pdf
http://www.soltar.biz/tl_files/artack/pdfs/100205%20Global%20SC
M.pdf
)U
(c
(c
)U
PE
S
UNIT 7: Strategic Planning Process
Unit 7
75
Notes
S
Activity
Strategic Planning Process

___________________
conceptual model for strategic
___________________
planning.
___________________
Objectives
___________________
topics: ___________________
PE
\ Definitions of Strategic Planning ___________________
\ Strategy Implementation ___________________
___________________
Introduction ___________________
Strategic planning ascertains where an organization is going over ___________________

the next year or more, how it is going to get there, and how it will
know if it got there or not. The focus of a strategic plan is generally
on the entire organization, while the focus of a business plan is
usually on a particular product, service or program.
There are a multiplicity of perspectives, models and approaches

)U
used in strategic planning. The way that a—strategic plan is
developed depends on the nature of the organization's leadership,
culture of the organization, complexity of the organization's
environment, size of the organization, expertise of planners, etc.
Goals-based planning is probably the most widespread and starts

with focus on the organization's mission (and vision and/or values),
goals to work toward the mission, strategies to achieve the goals,
and action planning (who will do what and by when).
Issues-based strategic planning habitually starts by examining the

issues facing the organization, strategies to address those issues
and action plans.
Organic strategic planning might initiate by articulating the

(c
organization's vision and values, and then action plans to achieve

the vision while adhering to those values. Some planners prefer a
particular approach to planning, e.g. appreciative inquiry.
76
Definitions of Strategic Planning
Notes
S
Some familiar definitions of strategic planning are as follows:
___________________
___________________
Strategic planning is a defined, recognizable set of activities.
Techniques vary with the particular author but the substantive
___________________
issues are essentially the same across authors. They are the
___________________ determination of the basic long-term goals and objectives of an
___________________ enterprise, and the adoption of courses of action and the allocation
PE
of resources for carrying out these goals.
___________________
—Alfred D. Chandler
___________________
___________________ The pattern of objectives, purposes or goals and major policies and
plans for achieving these goals stated in such a way as to define
___________________
what business the company is or is to be in and the kind of company
___________________ it is or is to be.
—Kenneth R Andrews
Strategic planning is a constant and systematic process where
people make decisions about intended future outcomes, how
outcomes are to be accomplished, and how success is considered
and evaluated.
)U
By merging the two models of planning viz., the long-range
planning and environmental scanning to form an inter-related
model, the Strategic Planning Model was formed. The strategic
planning model is a tool that helps an organization in setting up
goals or objectives; the analysis of the environment and the
resources of the organization; the generation of strategic options
and their evaluation; and the planning, design and implementation
of control systems or monitoring mechanisms.
Segments
This model consists of six identifiable segments that fulfil the
requirements of the management thinkers:
z Environmental scanning,
(c
z Evaluation of issues,
z Forecasting,
z Goal setting,
z Implementation, and
z Monitoring.
77
The merged model allows information from the external
Notes
S
environment in the form of emerging developments to enter the
traditionally inwardly focused planning system, thereby enhancing ___________________
the overall effectiveness of an organization's planning. More ___________________
specifically, it allows the identification of issues and trends that
___________________
must be used to modify the internal issues derived during
monitoring. ___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
Figure 7.1: Conceptual Model for Strategic Planning

)U
The argument for combining these two models becomes apparent
when the future that ‘happens to the organization’ and the future
that happens ‘for the organization’ are contrasted.
In the future that happens to the firm (the typical "planned"
future), new developments are not anticipated before they force
their way to the top of the agenda, demanding crisis management
and the latest fire-fighting techniques. In this future, issues are
usually defined by others whose interests do not necessarily
include those of the firm or its purpose. Not only are threats from
the external environment not anticipated as early as possible; key
opportunities will be missed or diminished in value.
In the future that happens for the organization, in contrast (the
"strategic" future), management leadership is focused more on fire
(c
prevention and less on fire fighting. Hence, it is able to exercise

more careful judgment in the orderly and efficient allocation of
resources. Certainly management will still have to deal with
unforeseen developments, but they will probably be fewer and less
traumatic. Thus, organizations are able to pursue their mission
with greater confidence and consistency because they will be
interrupted by fewer and smaller fire-fighting exercises.
78
The words, 'strategic planning', provide the key elements that
Notes
S
underlie its meaning. The process is strategic because it involves
___________________
preparing the best way to respond to the circumstances of the
___________________ organization's environment. It is strategic, because it is clear about
___________________ the organization's objectives and resources. It involves anticipating
the future environment, of decisions that are made in the present.
___________________
The process is about planning because it involves developing an
___________________ approach to achieving this future. The plan is a set of decisions
PE
___________________ about what to do, why to do it, and how to do it.
___________________ Strategic planning and management are joined together in a single

___________________
process in the Phase IV stage. This phase links strategic planning
and operational decision making. Strategic planning provides
___________________
management a tool to dynamically align strategies. It is a
___________________ disciplined effort to produce decisions and actions that shape and
guide what an organization is, what it does, and why it does it,
with a focus on the future. It helps the organization to focus its
energy, to work toward its goals, to assess and adjust the direction
of the organization more efficiently in response to a changing
environment.
Communicating the Strategy

)U
Communicating business strategy to people in a compelling and
engaging way is something all communicators strive for.
Ultimately, employees who feel part of the ‘bigger picture’ and are
pulling in the same direction will not only have a constructive
impact on the bottom line, but also give your company a
competitive advantage.
The important questions with regard to communicating the

strategy include how to ensure that your strategy translates not
only to senior executives but also to the front line? What
information should you communicate, how frequently and to
whom? And what are the best channels to use—intranet, road
shows, newsletters, senior leaders, line managers?
(c
Communicating business strategy to employees and expert

analysis on the pitfalls to avoid or how to tailor messages for
different divisions and communicate them effectively across your
organization is a solemn subject. The following points are to be
considered for communicating the strategy effectively within the
organization:
79
1. Planning and Logistics of Policy Communication: The
Notes
S
important purpose of strategy is that it is thought out in
advance, contains contingencies, and looks at a problem from ___________________
every angle. Before examining the tools and tactics for ___________________
increasing audience’s understanding of strategy, it’s important
___________________
to look at the pre-communication phase—the planning that
precedes implementation. ___________________
___________________
PE
A key feature of the planning process is aligning
communication with the business to ensure the strategy is ___________________
executed. For some, the critical success factor was to limit the ___________________
number of strategic goals.
___________________
2. Handling External Challenges to Strategy
___________________
Communication: “Corporate governance” has become
___________________
something of a motto in recent years, after the corporate
scandals of Enron, WorldCom and so on. The ensuing
regulations added to an already complicated situation for
companies and communicators trying to practice open-book
management.
When spending important time and money on communicating
business results, it is important to ensure it is worthwhile and
)U
that there is no misinterpretation of the messages you are
trying to express from other forms of media. Vodafone, for
example use SMS technology to ensure their employees get
their messages before hearing them in the news.
3. Audience for Strategy Communication: Communication
gravitates around the audience: without a solid understanding
of your audience, you are not communicating properly thus, you
are merely dropping information into a vacant area and hoping
for the best.
There are many internal challenges to communicating about
the business to employees, not least appreciating their level of
understanding and planning appropriately according to the
needs and capabilities of different segments. The various
(c
extracts show a model for measuring employee understanding

and commitment to strategic goals.
4. Release of strategy information: Communicating about the
business presents a range of challenges, even with the
maximum amount of planning and research. Key to this is how
80 you effectively cascade material in a way that will create a

Notes clear line of sight at every level.
S
Activity
___________________
Prepare an assignment on the In a large multinational, striking the right balance between
supply chain strategy
___________________
implementation. global and local strategy, effectively balance among local and
___________________ corporate businesspriorities are vital issues. How to make
messages interesting, compelling, and convey a clear direction
___________________
for action is essentially the ultimate aim of strategy
___________________ communication.
PE
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. The important questions with regard to communicating
___________________
the strategy include how to ensure that your strategy
___________________ translates not only to senior executives but also to the
……………….. line?
2. ………………………. process is about planning because it
involves developing an approach to achieving this
future.
Strategy Implementation
)U
Strategy may be about deciding what to do based on competitive
considerations; implementation is about getting it done through
the use of resources and competencies. In order to have a
competitive edge over its rivals, an organization with a superior
strategy needs a superior ability to execute strategy. The
superiority comes from its portfolio of resources and competencies.
The superiority can be maintained by continuously improving on
the strategic architecture, both by strengthening existing
competencies and also by developing or acquiring new ones.
Conventional management models also view implementation of
strategy as being as important as the strategy itself, but they see
the relationship between structure and strategy in a different way.
They view strategy formulation as a top management function and
(c
the rest of the organization as a means to implement the strategy.

Therefore, for the proper implementation of strategy, strategy has
to be translated such that it is accepted and adopted by the rest of
the organization. This requires the capacity to design good working
environments, working environments that motivate and effectively
coordinate the activities of the people working in the organization.
81
Though successful strategy implementation requires a suitable
Notes
S
organization structure to translate ideas into concrete action plans,
in spite of having all these supporting elements, strategy ___________________
implementation is still found to be challenging. Creating a 'fit' of ___________________
the organization's strategic intent with its activities is complex.
___________________
Activating Strategies ___________________
Strategy is dependent on many variables - internal as well as ___________________
PE
external. In addition, there are countless, interrelated change ___________________
factors that could upset managerial calculations overnight.
___________________
Towards the end of 1970s, Mckinsey Company, a well-known
management consultancy firm, was asked to find a solution to this ___________________
issue. ___________________
___________________
)U
Figure 7.2: Mckinsey's 7-S Model
Based on the findings, Mckinsey came out with a report which was
later published as a book, "In Search of Excellence". The
researchers, Peters and Waterman, suggested a model for
(c
organisational excellence that has been popularly called the 7-S

framework. They found, after examining America's best run
companies that the problem in strategy lay in its implementation.
There were seven levers that needed to be considered and a
strategy is usually successful when all the elements in the 7-S
framework fit into or support the strategy. The 7-S framework is
shown in the figure.
82
The different elements of the model are described below:
Notes
S
___________________
1. Super-ordinate Goals or Shared Values: The
interconnecting centre of McKinsey's model is 'Shared Values'
___________________
– What the organization stands for and what it believes
___________________ in the shared vision of the company. This is strongly related to
___________________ the culture of the organization.
___________________ 2. Strategy: The broad framework for the allocation of a firm's
PE
scarce resources, over time, to reach identified goals.
___________________
___________________ 3. Structure: The way the organization's units relate to each

other in accomplishing the successful implementation of
___________________
strategies: centralized, functional divisions; decentralized;
___________________ matrix, network, holding, etc.
___________________ 4. System: The procedures, rules and regulations and routines
that characterize how important work is to be done: financial
systems; hiring, promotion and performance appraisal
systems; information systems. It includes both the formal and
informal systems.
5. Style: Cultural style of the organization and how key
managers behave in achieving the organization's goals.
)U
6. Staff: Selection, placement, training and development of
appropriately qualified personnel within the organization,
both in terms of numbers and type.
7. Skill: Distinctive capabilities of personnel or of the
organization as a whole. It includes the characteristics that
most people use while describing a company. For example,
Larsen & Toubro is generally described as an engineering firm
because of its distinctive skills.
These seven elements are distinguished in so called hard Ss and
soft Ss. The hard elements – strategy, structure and systems – are
easy to identify. They can be found in strategy statements,
corporate plans, organizational charts and other documentations.
(c
Management has some control over the hard elements and can
exercise influence over them. The four soft Ss – shared values,
style, staff and skills – are difficult to describe since capabilities,
values and elements of corporate culture are continuously
developing and changing. They are determined by the people at
work in the organization. Therefore, it is much more difficult to
plan or to influence the characteristics of the soft elements.
83
The successful implementation of a strategy depends on the right
Notes
S
alignment of all the seven elements. Generally, it has been found
that it is difficult to identify which of the seven factors would be ___________________
the driving force in changing an organization at a point of time. ___________________
When the seven elements are in good alignment, an organization is
___________________
poised and energized; though benchmarking the hard elements in
the model is a highly subjective matter. The 7-S framework ___________________
highlights the importance of some interrelated and interconnected ___________________
PE
factors within the organization and their role in successful ___________________
implementation of strategy.
___________________
The model has been effectively used to audit various organizations.
___________________
However, Peters and Waterman found that in the successful
implementation of strategy perhaps the most effective tools within ___________________
the control of management were the 'structure', ‘strategies’ and ___________________

'systems' – the 3 hard Ss.
The other elements of the 7-S framework, the soft Ss, were
generally not within the control of management, at least in the
short and medium run, although they can have a great impact on
the hard Structures, Strategies and Systems of the organization.
)U
Structural Implementations
Organizational structure and design not only affects strategy, it
affects other factors too – environmental stability, workflow,
technology, size and life cycle, and corporate culture. Hence, it has
an indirect effect on the other elements in the Mckinsey
framework. Therefore, it is not surprising that there is an
overriding importance given to the 'structure' in the
implementation of strategy. With a structural framework in place,
people working within a firm know how to interrelate their actions
with the actions of others to support and execute the organization's
strategy.
Organizations are social entities that are goal directed, with
deliberately structured activity systems, and with a link to the
(c
external environment. They create value for owners, customers,

and employees by their activities.
They bring together resources to accomplish specific goals, whether
those goals are to put a man on the moon, sell lottery tickets,
produce goods and services, or provide value to its customers. They
organize the activities of the people to meet organizational
objectives.
84
The structure of the organization determines three key
Notes
S
components pertaining to organizing the activities of the people in
___________________
the organization and their relationships with each other:
___________________
z Designation of formal reporting relationships including number
___________________ of levels in the hierarchy and span of control of managers and
___________________ supervisors;
___________________ z Grouping of individuals into departments and of departments
PE
into the total organization; and
___________________
___________________ z Design of systems to ensure effective communication,

coordination, and integration across departments.
___________________
___________________ Behavioural Implementations

___________________ Strategy implementation requires support, discipline, motivation
and hard work from all managers and employees. Managers should
pay careful attention to a number of key issues while executing the
strategies. Chief among them are how the organisation should be
structured to put its strategy into effect and how such variables as
leadership, power and organisational culture should be managed to
enable employees to work together while implementing the firm’s
)U
strategic plans.
Apart from a suitable structure, commitment from leaders at the
top is important to successfully implementing and achieving
objectives. To this end, they must establish the firm’s direction –
by developing and communicating a vision of the future – and to
motivate and inspire organisation members to move in that
direction. Leadership success is often linked to the ability of a
leader to exercise the right kind of influence at the right time.
Leaders often use their power to influence others and implement
strategy. Formal authority that comes through the leader’s
position in the organisation – say CEO – may not always help in
influencing others.
A significant recent trend in corporate India is for top executives to
empower lower employees. Empowerment usually occurs when
(c
employees are adequately trained, provided with all relevant

information and the best possible tools, fully involved in key
decisions and fairly rewarded for results. Research surveys have
also indicated that most executives, currently, are not interested in
hoarding power. They are more participatory, more concerned with
consensus building and more open with employees as regards
information sharing. Empowerment helps everyone to have a say 85

in decision making and creates an atmosphere where goals are set Notes
S
and implemented in a participative climate. Therefore, in many ___________________
progressive corporations (such Proctor & Gamble, LG, Hughes
___________________
Software Systems, HLL, etc.), top executives are not willing to
wield power in the traditional way, rather, they prefer to give it ___________________
away to people who can get jobs done, (Yukl and Taber; McGill and ___________________
Slocum).
___________________
PE
Training, self-managed work groups, eliminating whole levels of ___________________
management in organisations and aggressive use of automation
___________________
are some of the ways to empower people at various levels. The
obvious purpose of this effort should be to ensure that decision ___________________
making is consistent with the mission, strategy and tactics of the ___________________
business while, at the same time, allowing considerable latitude to
___________________
operating personnel. In this regard, establishment of clear-cut
policies guides the actions of subordinates while implementing a
firm’s strategy. Of course, such policies should be derived from
functional tactics with the key purpose of aiding strategy
execution.
To bring about change and to implement strategies successfully,
)U
organisations are now pinning hopes on the unique capabilities of
transformational leaders. Le Iacocca is often used as an example of
a successful transformational leader because of his successful
efforts in transforming Chrysler Corporation from a floundering
company into a much more successful company that could avoid
bankruptcy. The word, ‘transformational leadership’ is used to
signify leadership that goes beyond ordinary expectations by
transmitting a sense of mission, stimulating learning experiences
and inspiring new ways of thinking. In 1914 Henry Ford, for
example, offered unusually high wages for workers @$5 a day in
exchange for their accepting tight controls to be imposed on them
(strict discipline, no idle time, etc.).
Functional and Operational Implementations

(c
The operations function plays a very important role in

implementing strategy. It establishes the level of quality as a
product is manufactured or as a service is offered. For example, the
decision whether to stress high quality regardless of cost, lowest
possible cost regardless of quality or some combination of the two
has numerous important implications. A highest possible quality
strategy dictates state of the art technology and strict adherence to
86 design and material requirements. A combination strategy may

Notes require lower grade technology and less concern about product
S
___________________ design and materials specifications. If the firm decides to upgrade
the quality of its products but lacks production capabilities and
___________________
does not have the resources to replace its technology, it becomes
___________________
difficult to reach the new standards. Therefore, just as strategy
___________________ affects operations management, so too does operations
___________________ management affect strategy. Operations decisions must always be
PE
consistent with corporate strategy so that the full potential of
___________________
operations, resources can be harnessed in pursuit of the company’s
___________________ goals.
___________________
Operations strategy is the recognition of the important role of
___________________ operations in organisational success and the involvement of
___________________ operations managers in the organisations’ strategic planning.
According to Wheel Wright and Hayes, there are four stages in the
evolution of operations strategy.
At stage 1, business strategy is set without taking the capability of
operations into account. Operations management is regarded as an
essentially neutral function and is viewed as incapable of positively
impacting the organisation’s competitive success. The primary
)U
focus, then, is on labour costs and operational efficiency—trying to
minimise any negative impact that internal operations may have
on the organisation.
At stage 2, the operations department sets goals according to
industry practice. The operations attempt to be current with
regard to operations management techniques and views capital
investment in plant and equipment, quality control and inventory
management as ways to be competitive.
At stage 3, operations strategy is in line with company strategy
and the operations department will find new ways to enhance
competitiveness. Operations managers are involved in
implementing and supporting strategy but not in formulating it.
At stage 4, operations managers adopt new technologies on their
(c
own with a view to deliver goods and services of highest quality.

Here operations strategy is regarded as a genuine competitive
weapon. Managers try to anticipate potential technological
advances that could impact operations and to gain the necessary
internal expertise well before the implications are obvious. At this
stage, organisations try to use innovation as a means of making
strategic jumps ahead of the competition.
87
In order to carry out operations strategy successfully, it is
Notes
S
necessary to design and implement well-conceived operating
systems. ___________________
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. ………………… strategy is the recognition of the
___________________
PE
important role of operations in organisational success
and the involvement of operations managers in the ___________________
organisations’ strategic planning. ___________________
2. …………. success is often linked to the ability of a leader ___________________

to exercise the right kind of influence at the right time.
___________________
___________________
Summary
Strategic planning ascertains where an organization is going over
the next year or more, how it is going to get there, and how it will
know if it got there or not. The focus of a strategic plan is generally
on the entire organization, while the focus of a business plan is
usually on a particular product, service or program.
)U
Organic strategic planning might initiate by articulating the
organization's vision and values, and then action plans to achieve
the vision while adhering to those values. Some planners prefer a
particular approach to planning, e.g. appreciative inquiry.
Lesson End Activity

“Better supply chain management need knowledge of the key
trade-offs within the business and informed decision-making”.
Explain the statement with the help of some real life examples.
Keywords
Strategic Planning: It is a constant and systematic process
(c
where people make decisions about intended future outcomes, how

outcomes are to be accomplished, and how success is considered
and evaluated.
Operations Strategy: It is the recognition of the important role of
operations in organisational success and the involvement of
operations managers in the organisations’ strategic planning.
88
Notes
S
1. What do you mean by functional and operational
___________________
implementations?
___________________
2. Explain Mckinsey's 7-S Model.
___________________
3. What are the points that are to be considered for
___________________
communicating the strategy effectively within the
___________________ organization?
PE
___________________
___________________ Further Readings

___________________
Books
___________________
A D Chandler, Strategy and Structure, MIT Press, Cambridge,
___________________ 1962.
W F Glueck, Business Policy, McGraw Hill, Tokyo, 1976.
F R David, Strategic Management, Prentice Hall, New Jersey,
1997.
R McGlashan and T Singleton, Strategic Management, Merill
)U
Web Readings
http://www.farrell-associates.com.au/Ops%20Mgmt/Papers/Strate
gic SupplyChainPlanning.pdf
http://www.kpmg.com.cn/en/virtual_library/Risk_advisory_services
/BPS_supplyChain_060808.pdf
http://vuir.vu.edu.au/161/
(c
UNIT 8: Developing Strategy
Unit 8
89
Notes
S
Activity
Developing Strategy
___________________
Conduct a research on the
supply chain strategy of Big
___________________
Bazzar.
___________________
Objectives
___________________
topics: ___________________
PE
\ Developing Logistics/Supply Chain Strategy ___________________
\ Developing Logistics and Supply Chain Planning ___________________
___________________
Introduction ___________________
Supply Chain and logistics strategy starts before the physical ___________________
distribution. It includes the sourcing of the right inputs, processing
them, converting them to marketable products and finally shipping
them to the ultimate consumers. In the fullest form, Supply chain
and logistics strategy even looks into the appraisal of the suppliers
to the firm, in terms of the capacity, reliability and quality.
In essence, the supply chain enables the flow of products, services,
)U
and information both up and down the chain. Successful
integration or coordination of these three flows produces improved
efficiency and effectiveness for business organizations.
Supply Chain and logistics strategy is defined as a set of
approaches utilized to efficiently integrate suppliers and clients
(comprised of stores, retailers, wholesalers, warehouses, and
manufacturers) so that merchandise is produced and distributed at
the right quantities, to the right locations, and at the right time, in
order to minimize system wide costs while satisfying service level
requests.
Developing Logistics/Supply Chain Strategy

The current method that most companies choose for improving
(c
supply chain performance is to develop logistics and supply chain

strategy as well as implement sophisticated advanced planning
systems, operations management software and real time inventory
management processes. These processes and systems have
improved inventory management practices and clearly reduced the
cost structure. But the focus of these processes and systems is
90 operational and does not quite influence the design, manufacturing

Notes and supply chain decisions that set basic targets for supply chain
S
___________________ performance of a product.
___________________ Supply chain strategy extends to a much higher level than that of
___________________ a concern with improved inventory management practices and
clearly reduced cost structure, which relate to the physical flow of
___________________
material. The supply chain strategy will, if properly designed and
___________________ managed:
PE
___________________ z Improve customer service.
___________________
z Achieve the necessary balance between costs and service.
___________________
z Give the corporation a competitive advantage.
___________________
These are required to reinforce the strategic objectives of the firm.
___________________ However, the strategy of the supply chain/logistics is a challenging
exercise. A good supply chain strategy achieves the objectives of
SCM, and simultaneously the strategic objectives of the firm.
There are three basic requirements that need to be met for
effective development of supply chain and logistics strategy is
discussed below:
)U
1. Understanding the Customer,
2. Assessing Supply Chain Uncertainty (Implied Demand
Uncertainty), and
3. Understanding the Supply Chain Capabilities.
Understanding these, it is possible to decide on the supply chain
strategy and design a supply chain that has a strategic fit with the
functional strategies of the firm.
Understanding the Customer

The supply-chain management philosophy is to treat the entire SC
as a single, integrated entity; the cost, quality, and delivery
requirements of the manufacturing customer are objectives shared
by every firm in the chain; and inventory is the last resort in
(c
solving supply-and-requirement imbalances between the tiers.

In order to meet the requirements of this philosophy, each supplier
in the supply chain should understand its customers. This
understanding includes more than just knowledge of delivery,
quality, quantity, and cost requirements; it includes also the
knowledge of the customer's markets, processes, and
organizational cultures as well as their problems, constraints, and 91

requirements. Notes
S
To understand the customer, a company must identify the needs of ___________________
the customer segment being served. Let us compare Palika Bazaar ___________________
in Delhi with Shopper's Stop. When customers go to Shopper's
___________________
stop, they go there to purchase quality goods and are not
necessarily looking for the lowest price. In contrast, a low price is ___________________
very important consideration to a customer going to Palika Bazaar. ___________________
PE
This customer may be willing to tolerate less variety and even ___________________
purchase very large package sizes as long as the price is low. Even
___________________
though the customers may purchase the same products at both
places, the demand varies along certain attributes. ___________________
In general, customer demand from different segments may vary ___________________
along several attributes as follows: ___________________
z The quantity of the product needed.

z The response time that customers are willing to tolerate.
z The variety of products needed.
z The service level required.
)U
z The price of the product.
z The desired design and innovation in the product.
Each customer segment will tend to have similar needs. The goal of
the firm is to identify key measures that combine the attributes
the firm's customers’ demand. These key measures help define
what the supply chain should do particularly well. The best
situation is when these attributes can be reflected by a single
measure.
While the aim of the supply chain is to eliminate waste in the
chain and improve customer service, the objective of SCM is to
achieve revenue growth and cost reduction simultaneously. This
means a balance between the goals of a high customer service level
and the goals of low inventory investment and low unit cost. These
(c
are difficult trade-offs. These trade-offs are made easier when the
organization understands the customer.
Ultimately, the measure of the supply chain is in terms of service
quality. The major output from the supply chain has always been
considered to be customer service. All the activities in the supply
92 chain must be in balance, in order to provide a higher level of

Notes customer service without incurring an undue burden of cost.
S
___________________
Implied Demand Uncertainty
___________________
It views each of the customer needs and categorizes the attributes
___________________
into one measurable metric. Implied demand uncertainty is the
___________________ resulting uncertainty for only the portion of the demand that the
___________________ supply chain must handle and the attributes the customer desires.
PE
For example, a firm supplying ordinary groceries will face a higher
___________________
implied demand uncertainty than a firm that supplies the same
___________________ groceries which are organically grown. A customer will shop in the
___________________ first place for convenience, but in the other grocery store, he will be
___________________
willing to provide for a long lead time.
___________________ Another example to illustrate the concept is the impact of service

level. A supply chain that boasts of a high service level is expected
to meet a higher percentage of actual demand. This means that it
should be prepared for unusual surges in demand. This increases
the implied demand uncertainty. Raising the service level means
higher implied demand uncertainty even though the product's
underlying demand uncertainty does not change. Both the product
demand uncertainty and various customer needs that the supply
)U
chain tries to fill affect implied demand uncertainty.
As each individual customer need contributes to the implied
demand uncertainty, implied demand uncertainty is a common
metric with which to distinguish different types of demand. From
the supply chain manager's point of view, products with lower
demand uncertainty can facilitate more accurate forecasting, as
demand is more predictable.
The impact of customer needs on implied demand uncertainty is
shown in Table below.
Table 8.1: Impact of Customer Needs on Implied Demand Uncertainty
Customer Need Impact on Implied Demand Uncertainty

Range of quantity Increases because a wider range of the quantity
(c
required required implies greater variance in demand

Lead time decreases Increases because there is less time in which to
react to orders
Variety of products Increases because demand per product becomes
required more disaggregate
Contd…
Number of channels Increases because the total customer demand is 93

through which product now disaggregated over more channels Notes
S
may be acquired
___________________
Rate of innovation Increases because new products tend to have
more uncertain demand ___________________
Required service level Increase because the firm now has to handle ___________________
increases unusual surges in demand
___________________
An example of a product with low implied demand uncertainty is
___________________
PE
flour. Flour has a very low contribution margin, accurate demand
___________________
forecasts, low stock out rates, and virtually no markdowns. An
example of a product with high implied demand uncertainty is a ___________________
new "palmtop" computer. It will have a high margin; demand ___________________
forecasts will not be very accurate. If it is successful, it will have
___________________
high stock out rates and if it fails, there will be large markdowns.
This is shown in Table below. ___________________
Table 8.2: Correlation between Implied Demand Uncertainty

and Other Attributes
Low Implied High Implied

Uncertainty Uncertainty
Product margin Low High 40% to 100%
Average forecast error 10% 10% to 40%
)U
Average stock out rate 1 % to 2% 10% to 25%
Average forced season end 0%
markdown
Implied demand uncertainty is often correlated with other

characteristics of demand. For example, implied demand
uncertainty is strongly affected by the product life cycle. New
products at the 'inception stage' have higher supply uncertainty.
This is because designs and production processes are still evolving.
In contrast, mature products have a more stable demand and the
products also do not change much. Such products show less implied
demand uncertainty.
Products with uncertain demand are often less mature and have
(c
less direct competition. As the implied demand uncertainty

increases, there is greater difficulty matching supply with demand.
Increased implied demand uncertainty leads to both higher
oversupply and a higher stock out rate. As a result, margins for
such products tend to be high. Such products also have higher
markdowns because oversupply often results due to high implied
demand uncertainty.
94
Understanding the Supply Chain Capabilities
Notes
The supply chain strategy needs to be designed such that it best
S
___________________ meets demand that a company has targeted given the uncertainty
___________________ it faces. Supply chains have many different characteristics. The
characteristics of the supply chain which meet these criteria are
___________________
responsiveness and efficiency.
___________________
Supply chain responsiveness is those abilities of a supply chain
___________________
necessary to meet the demand and supply requirements of the
PE
___________________ supply chain. It includes a supply chain's ability to:
___________________ z cater to wide demand fluctuations in the market;
___________________
z deliver with short lead times;
___________________
z handle a large variety of products;
___________________
z provide a very high service level; and
z handle supply uncertainty promptly.
These abilities are similar to many of the characteristics of
demand and supply that lead to high implied uncertainty.
Supply chain efficiency is the cost of making and delivering a
product to the customer. By definition, increases in supply chain
)U
costs reflect a lower efficiency of the supply chain. The supply
chain design framework should consider three specific costs that
are relevant: unit manufacturing cost, safety stock cost, and
pipeline stock cost. The supply chain design problem should
attempt to minimize the sum of these costs when designing a
supply chain.
To respond to a wider range of quantities demanded, the supply
chain capacity must be increased, this in turn increases costs.
Therefore, increased responsiveness means additional costs and,
therefore, lowers efficiency. There is this trade-off between
responsiveness and efficiency that determines the design of the
supply chain.
The cost-responsiveness efficient frontier is the curve in
(c
Figure 8.1. The efficient frontier represents the benchmark for

cost-responsiveness performance. A firm that is not on the efficient
frontier can improve both its responsiveness and its cost
performance by moving towards the efficient frontier. However,
when a firm reaches the efficient frontier, it can then only improve
its responsiveness by increasing cost and becoming less efficient.
95
R e sp on siven ess Notes
S
H ig h
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
L ow
___________________
H ig h C o st L ow ___________________
___________________
Figure 8.1: Responsiveness Efficient Frontier
Given the competitive environment, firms on the efficient frontier

continuously improve their processes and change technology to
shift the efficient frontier itself. A key strategic choice for any
supply chain is the level of responsiveness it seeks to provide.
Table 8.3: The Responsiveness Spectrum

)U
Highly Somewhat Somewhat Highly
Efficient Efficient Responsive Responsive
Integrated steel Vikas Publications: Most automotive Most fast

mills: Production Books are production: food
scheduled weeks or traditional make-to- Delivering a businesses:
months in advance stock items with large variety of Orders are
with little variety production lead time products in a satisfied
or flexibility of several months couple of weeks within
minutes
These parameters are the basic blocks for the design of the supply
chain. Based on these, supply strategies are integrated into the
design of the supply chain.
A supply chain can be viewed as a network with precedence
(c
constraints among the functions. A function might be the

procurement of a raw material, the manufacture of an assembly, or
the shipment of a product to a distribution centre. For each of
these functions, there are a number of constraints. Furthermore,
there are one or more options available to satisfy the function. The
role of the design is to identify the options that can satisfy each
function and then to decide which options to select.
96
This is not easy. A question every firm faces, one time or the other,
Notes
S
is whether to create a higher unit manufacturing cost, but more
___________________
responsive, supply chain versus a lower manufacturing cost, less
___________________ responsive supply chain. The correct answer to this question,
___________________ finally, should lead to a supply chain that has a strategic fit in
terms of meeting customer satisfaction, efficiency and
___________________
responsiveness.
___________________
PE
___________________
Developing Corporate Strategy
Corporate strategy is primarily about the choice of direction for the
___________________
corporation as a whole. The basic purpose of a corporate strategy is
___________________
to add value to the individual businesses in it.
___________________ A corporate strategy involves decisions relating to the choice of
___________________ businesses, allocation of resources among different businesses,
transferring skills and capabilities from one set of businesses to
others, and managing and nurturing a portfolio of businesses in
such a way as to obtain synergies among product lines and
business units, so that the corporate whole is greater than the sum
of its individual business units. The development of a corporate
strategy vis-a-vis a business-level strategy is summarized below:
)U
The main aspects in developing corporate strategy are:
1. Deciding what the purpose of the organisation is and what are
the strategies to achieve this.
2. At the general corporate level, the development of corporate
strategy comprises of decision related to following aspects:
(i) What business are we in and what business should we be
in?
(ii) What are the basic directions for the future?
(iii)What are the cultural consideration and leadership style to
be followed?
(iv) What is the organization attitude to strategic change? What
should it be?
(c
3. At the individual business level, the development of corporate

strategy comprises of decisions related to following issues:
(i) How do we compete successfully? What is our Sustainable
competitive advantage?
(ii) How can we innovate?
97
(iii) Who are our customers?
Notes
S
(iv) What value do we add? Where? Why? How? Activity
___________________
Quote few real life examples
for developing logistics and
supply chain planning.
Fill in the blanks: ___________________
1. Supply chain ………………… is the cost of making and ___________________

delivering a product to the customer. ___________________
PE
2. …………………. is the trade-off between responsiveness ___________________
and efficiency that determines the design of the supply
___________________
chain.
___________________
Developing Logistics and Supply Chain Planning ___________________
___________________
Our vision of the future guides us in deciding what product to
provide, what process to use, and what values are to be provided to
the customers. We need to be able to see around the corner to
ensure that things do not go out of hand. To do so, we require a
variety of tools. Forecasting tools help in the analysis of the
environment and provide inputs on how the organization can use
its resources for maximum leverage.
)U
An analysis of the factors that influence future values determines
how future values are estimated. One way to characterize different
kinds of plan that can be based on how far into the future they
focus. Detailed forecasts for individual items are generally
short-term forecasting. Such forecasts are used to plan the
short-run decisions which are used for inventory control, order
sizing, or transport scheduling, etc. Medium-term forecasts are used
to plan for capacity, location and layout over a much longer time
span. Long-term forecasts are used for strategic decision-making.
Forecasting demand levels is a part of medium-term forecasts. This
is vital to the firm as a whole, as it provides the basic inputs for
the planning and control of all functional areas including the
supply chain. The need for demand projections is a general need
(c
throughout the planning and control process. Logistics and supply

chain planning tries to answer the questions raised by these
concerns. Some such broad basic questions are the following:
z How to determine which new products or services to introduce
or discontinue; which markets to enter or exit; and which
products to promote?
98
z What sales plans to make, since sales quotas are generally
Notes
S
based on estimates of future sales?
___________________
z How to absorb the fluctuations in demand that will occur over
___________________
the next 6 to 18 months; how to make production, procurement,
___________________ and logistical plans?
___________________ z What should be our financial plans; how can demand
___________________ fluctuations be absorbed through inventory, workforce, work
PE
hours, suppliers’ activity, etc. and what is their impact on
___________________
earnings expectations?
___________________
z Will the organization lose orders if it does not meet all
___________________
demands? What policy should the firm adopt?
___________________
Each of these choices determines the tactical moves (medium term
___________________ plan policy) of the organization. Once decided upon, the policy
drives the activities of the organization. A successful logistics and
supply chain planning needs to be based on a fundamental
understanding of what customers' value. For example, if a policy of
not meeting all demands shifts customers to a competitive product,
the company may find it difficult to wean them back when demand
falls.
)U
Demand levels and their timing greatly affect capacity levels,
financial needs, and general structure of the business. Each
functional area has its special forecasting problems. Forecasting
demand is also a critical component of supply and demand
management.
Supply chain planning concerns the spatial as well as variation of
demand with time, the extent of its variability, and its degree of
randomness. Planning and controlling supply chain activities
require accurate estimates of the product and service volumes to be
handled by the chain. These estimates are typically in the form of
forecasts and predictions. The supply chain professional often finds
it necessary to take it upon him or herself to produce forecasts for
short-term planning such as inventory control, order sizing, or
(c
transport scheduling. For longer-term decisions, demand planning

becomes necessary.
Supply and demand reflect the time dimension. It is important to
recognize that both supply and demand can be influenced by
management actions. In business and economics, planning has
various meanings. There are two distinct quantities involved in
planning, a forecast and a prediction. A prediction is a broader 99

concept. It is an estimate of a future event achieved through Notes
S
subjective considerations other than just past data; this subjective ___________________
consideration need not occur in any predetermined way.
___________________
In supply chain management, we adopt a rather specific definition
___________________
of a forecast, which is given below:
___________________
A forecast is an estimate of a future event achieved by
___________________
PE
systematically combining and casting forward in a predetermined
way data about the past. ___________________
The supply chain and logistics plan has both space and time ___________________
dimensions. That is, the supply chain professional must know ___________________
where demand volume will take place as well as when it will take
___________________
place. Spatial location of demand is needed to plan warehouse
___________________
locations, balance inventory levels across the supply chain
network, and geographically allocate transportation resources.
The nature of logistics and supply chain planning can differ
greatly, depending on the operations of the firm and the activity
for which the forecast is required.
Levels of Planning
)U
Long-range Planning (LRP) /Strategic Planning
Long-range planning covers a relatively long period of time
(anything over a five-year period), and affects many
departments/divisions of the organisation. It includes the
formulation of overall broad objectives and the selection of
appropriate means by which the objectives are to be achieved. LRP
is quite common in stable industries such as steel, public-utilities
and automobiles. In India, public sector companies generally adopt
the national planning period of five years. LRP is the result of a
series of interrelated steps:
1. The first basic step is the estimation of the international,
national and local situation. The possible future changes that
(c
might take place, in areas external to an organisation are

examined.
2. The second step of LRP is defining the goals to be pursued by
the organisation and the philosophy to be adopted.
100
3. The third step in LRP answers the simple question: where are
Notes
S
we now? For this, an objective assessment of the degree of
___________________
success in accomplishing goals, on a day to day basis, is made.
___________________
4. In the fourth step, an attempt is made to find out the strong or
___________________ weak spots in the company's programmes till date in the light
___________________ of additional information on sales, selling expenses, production
targets, capital inflow, etc. The deficiencies are rectified
___________________
PE
promptly.
___________________
5. Now, a full blown programme of longer range planning is
___________________
developed and approval is sought for its adoption.
___________________
6. The last step is concerned with placing LRP into work, to
___________________ reduce ambiguity and achieve some measure of specificity.
___________________ LRP is divided into action plans, that is, intermediate and
short-term plans for the sake of convenience and easy
implementation.
Long-range planning is necessary precisely because we cannot
forecast the uncertain future. It is essential even though the
eventuality for which plans are prepared is not likely to occur. Is it
not foolhardy to stop military planning simply because the planner
)U
must operate under conditions of uncertainty? This is doubly true
in the case of business organisations, for a failure to plan may have
serious consequences on its survival and growth in future. The
business executives should not always sit back and wait for
lightning to strike. Even in times of emergency and adversity,
long-range planning is important. It is important because a
planned contraction of operations is less costly and disruptive than
a make-shift contraction. It is true, that accurate planning beyond
one year is difficult and long-range plans are very likely to be
changed before completion. Nevertheless, they definitely serve a
purpose in setting up an orderly approach to the problems of
long-range growth of the company. The consequences of taking a
short-term perspective can be severe. The US automobile industry
lost a large share of the market (28% by 1980) to imported cars
(c
because of an earlier failure to focus on the long-term need to

develop fuel-efficient vehicles. Long-range planning helps in
preparing in an orderly manner for future events. It opens up new
avenues, new ways of doing things and reveals specific
opportunities, previously unknown to the planner. It helps in
seeking new opportunities actively, instead of merely reacting
defensively to competition. In fact, a study by Ansof, clearly shows
that strategically planned companies outperformed the non- 101

planners. Stagner studied 109 firms and found that those Notes
S
companies that used their top managers in long-range planning ___________________
consistently obtained better results than those that did not have a
___________________
strong planning activity. The evidence furnished in other studies is
equally strong. There is a good reason for confidence in long range ___________________
planning. And there is no substance in the argument that long- ___________________

range planning is useless in the face of uncertainties.
___________________
PE
Long-range planning is not forecasting. Forecasting is of little use ___________________
to planners who seek to direct their organisations to the future. It
___________________
is does not provide an adequate basis even for purely adaptive
behaviour. The answer for this dilemma lies in long-range ___________________
planning. Long range planning is much more than a mere ___________________
projection of trends. It is that activity in a company which sets
___________________
long-range goals for the firm and then proceeds to formulate
specific plans for attaining these goals. Long-range planning
attempts typically to grapple with the question "what must our
company do, today to be ready for the uncertainties of tomorrow."
It does not deal with future decisions. It deals with the futurity of
present decisions. What an organisation should do tomorrow is not
important or relevant. What is more important is an answer to the
)U
question: What do we have to do today to be ready for an uncertain
tomorrow? Thus, long-range planning is a risk-taking decision-
making. There is no attempt to mastermind the future.
Short-range Planning or Operational Planning

Short-range planning covers a period of one to twelve months,
depending on the nature of business and the traditions prevailing
in the industry. Short-range plans are otherwise called operational
plans. They are usually made in a specific and detailed manner.
The emphasis is on flexible budgets, on goals and targets,
expressed in a clear and precise language. The primary concern is
efficiency (doing things right) rather than effectiveness (doing the
right things). To this end, short range plans gather information,
(c
evaluate alternatives and select the most suitable course of action.

Operative plans provide content and form to long-range plans. In
fact, short-range planning is an extension of long-range corporate
plans. Market plans, production plans and financial plans are
typical examples of operational planning.
102
Long-range planning and short-range planning are expressions of
Notes
S
the breadth of planning periods. The terms, short-term and long-
___________________
term, sometimes present an erroneous picture because people
___________________
generally associate short-term with a narrow perspective and long-
___________________ term with a broad view.
___________________
The time dimension of planning cannot be reduced to simplified
___________________ expressions such as short-term or long-term. The time span varies
PE
___________________ usually depending on the factors like industry characteristics,
___________________ market demand, availability of resources and skills, environmental
complexities, etc. What may appear to be long-range planning, in
___________________
the case of one company may turn out to be short-range planning
___________________
in the cases of other companies.
___________________
The major planning areas are:
1. Customers service
2. Demand forecasting
3. Distribution communication
4. Inventory control
)U
5. Material handling
6. Order processing
7. Part and service support
8. Plant and warehouse side selection
9. Procurement sources
10. Packaging issues
11. Return goods handling
12. Salvage and scrap disposal
13. Traffic and transportation

(c
14. Warehousing and storage.
Few areas of business planning concerning with logistics and

supply chain involve the complexity or span the geography typical
of logistics. Planning is concerned with developing the most
efficient strategy so that organizations have system of getting
products and services wherever they are needed whenever they are 103
required. Notes
S
___________________
Conceptualizing the Logistics and Supply Chain Planning
___________________
Problem
___________________
Supply chain and logistics planning is used to optimize the
operations of the organization. A number of options are available ___________________
to manage supply and logistics. When the organization has excess ___________________
PE
capacity, it tries to manage supply and when it has less capacity, it ___________________
tries to manage demand. These options permit realization of better
___________________
returns to the organization. Forecasting demand, therefore, is a
critical component of supply chain and logistics planning problem. ___________________
___________________
Once the plan has been determined, there are basically three
strategies in planning to manage the problem related to supply ___________________
chain and logistics:
1. Chase Strategy: It is a strategy aimed at adjusting capacity

in anticipation of requirement. You are "chasing requirement"
by regulating capacity to the demand doing it as dynamically
and quickly as you can. Here an organization regulates
)U
capacity to the demand doing it as dynamically and quickly as
it can.
2. Level Strategy: In a level strategy, an organization maintains

a constant capacity over a period of time, irrespective of
fluctuations in demand.
3. Mixed Strategy: Individual firms devise infinite combinations

of these three pure strategies to suit their own circumstances.
The uncertainty of the future and unpredictability of the course of

environmental forces that determine events impacts all
organizations. To reduce this uncertainty, you need to find the
right balance between having what your customers want and the
cost of carrying that inventory. If you are short on demand, you
could have backorders, cancellations and unsatisfied customers.
(c
But if you overstock the product, you waste time, money and space.
This solution lies in generating predictions that are precise and

accurate. In order to reduce the uncertainty, the organization has
to be able to anticipate demand before it happens and prepare for
what is ahead. It has to find means to understand how
environmental forces will impact its business.
104
Not all factors will be relevant to every organization.
Notes
S
Environmental forces that are important to one organization may
___________________
not be important for another. A small scale or medium scale
___________________ manufacturer may be interested in demand in the local market,
___________________ governmental plans in infrastructure development, cost and
availability of power, etc. in his own geographical area. On the
___________________
other hand, a manufacturer of tobacco products would like relevant
___________________ information on the decline in tobacco use over the past few years
PE
___________________ that will ensure the forecast for those products is sensible.
___________________ Conceptualizing the logistics and supply chain planning problem

___________________
involves the following aspects:
___________________ z Forecasting,
___________________ z Modelling, and

z Characterization.
The 'logical order' in which these three goals are to be tackled
depends on the objective of the organization. Often, modelling and
forecasting proceed in an iterative way; however, there is no
'logical order' in the broadest sense. The conceptualization of
planning is shown in figure below:
)U
Forecasts
3
D ecisions
The 4
Interaction P erform ance
D ecision
5 1
M aker A ction
6
R esources
2
Figure 8.2: Conceptualization of Planning
Forecasting is the start of any planning activity. Forecasting

systems generally provide three pieces of information:
(c
1. Indications of whether a product market is static or dynamic

(i.e. Growth or decline after seasonal adjustment);
2. The best forecast in the next n periods;
3. The forecast range within which the actual value is expected to
fall.
105
Therefore, the main purpose of forecasting is to estimate the
Notes
S
occurrence, timing or magnitude of future events. Forecasting is
not precise because of the interaction between many factors or ___________________
environmental forces that lead to the events. The effect of these ___________________
interactions is increased uncertainty. This often leads to
___________________
indecision.
___________________
Is this an oxymoron? It need not be so. We must remember that
___________________
PE
indecision and delays are the parents of failure. In order to avoid
indecision and delays in decision-making, we need to use ___________________
forecasting which can play a pivotal role in assisting decision- ___________________
making.
___________________
Interactions among the different environmental forces generally
___________________
follow certain logical rules. This makes it possible to use
___________________
mathematical functions to represent the cause-and-effect
relationship among inputs, resources, forecasts, and the outcome.
The relationships are captured in a model that reflects how these
environmental forces impact the future. There should be no
compromise in the quality of the model.
The model establishes a link between planning, controlling
)U
systems and the forecasts necessary for planning, scheduling, and
controlling the system for an efficient output. Models reflect the
realization of the uncertainty in forecasting and reflect the level of
sophistication and accuracy required for effective decision-making.
Therefore, in building a model, it is essential that the model
provides satisfaction on these two critical questions:
1. Is the model adequate?
2. Is the model stable?
This also means that the model should reflect the objectives of the
management. For example, the type of model that will be adequate
for short-term forecasts may not be adequate for long-term
forecasts. In order that the model forecasts are stable, it will have
to reflect and compensate for the actual performance. This is done
(c
by developing a model so that the forecast is an iterative process,

which means the forecasts are updated so as to form a feedback
loop to correct the original forecast.
Figure 8.3 highlights the systematic development and the
relationship between modelling and forecasting and highlights the
relationship between the model and the forecast.
106
Even simple business problems require good models. For example,
Notes
S
your boss calls you. He wants you to make a sales forecast for the
___________________
next two years for the major products manufactured and marketed
___________________ by your organization. At first glance, this seems to be a very easy
___________________ exercise. In a static world, perhaps, you can take last year's sales
figures and add an appropriate internal growth to these figures
___________________
and arrive at the projections.
___________________
PE
___________________ P a st D a ta &
M od el
M an ag erial
S p ecification
___________________ Jud ge m en t
___________________
M od el E stim a tion
___________________
___________________
)U
Figure 8.3: Modelling and Forecasting
But the world is dynamic. Things change and any projection should
consider the changes that have taken place and the changes that
are expected in the business environment. You know that the
figures you give your boss will be used to determine the resources
of your department. Therefore, you would like the figures to reflect
the real situation on the ground.
(c
Characterization is more important for organizations to grow their

market share rather than just try to protect the sales volumes; the
model should reflect this reality. First you need to identify outside
factors that have an impact on the forecast. If the historical growth
of the market was 5 per cent and it is projected to grow at 10 per
cent, your historical sales figures will not be a good guide for the
future, as this would result in a reduction of market share. So, if 107

you need to protect your market share, you need different Notes
S
forecasting models to determine the parameters within which you ___________________
will operate.
___________________
Time to Plan ___________________
Plans should be integrated and interconnected in such a way as to ___________________

achieve the stated objectives economically and efficiently. A ___________________
PE
manager should review events and expectations regularly; refine
___________________
and redraw the plan and keep it on track.
___________________
Superior cost, quality and technological performance do not
___________________
guarantee success in today's marketplace. Increasingly,
___________________
organizations find that time is the basis of competition. This
competitive environment presents new challenges and ___________________
opportunities. Organizations have to find how time can be used

more effectively and saved by identifying, improving and/or
eliminating a wide range of activities and events that are
counterproductive. The start is to find the effective time.
'Time to Plan' is a significant issue to be considered, aimed at

)U
getting strategic people engaged in planning for the future of the
organization. It will inform the production of the Local
Development Framework – the new planning strategy for the
organization. By understanding what people value or want,
changes in the strategic framework at right time in the
organizations can make better informed decisions that reflect
longer term organizational aspirations and help in their fulfilment.
Guidelines of Strategy Formulation

The following are the guidelines of effective strategy formulation:
1. Understanding the “big picture”: Instead of examining
issues from a functional angle, Strategy tends to view all key
issues from a broader perspective i.e. assessing the overall
(c
impact of a decision on the entire organization. This, of course,

involves choosing a right path, keeping organizational
capabilities and environmental pressures in the background.
2. Integration of Functional Areas: Strategy is a capstone

course, demonstrating interdependence between separate
functional areas.
108
3. Resource Focus: Strategy is to be formulated in a way that it
Notes
S
can chiefly be concerned with the mobilization of various
___________________
resources in order to achieve the goals of an enterprise in an
___________________ effective way in the face of severe competition or adverse
___________________ circumstances.
___________________ 4. Externally Tuned: Strategy must be formulated in such a

manner such that it tries to underscore the importance of
___________________
PE
environmental impact on organizations and the need for top
___________________ management to come out with appropriate responses. The
___________________ most important factor in assessing organizational effectiveness
___________________
is adaptability to environmental change.
___________________ 5. Wider Application: Strategy must be formulated in a

manner such that it can be applied in almost all types of
___________________
organizations. Barring some differences in application,
especially in non-profit organizations, the concepts and
principles of business policy can be applied to a number of
small and big businesses, public sector enterprises and non-
government organizations.
6. Enhancement of Analytical Skills: Strategy formulation is
carried out in a manner so that it can emphasize on active
)U
participation of people in the learning process through
methodologies like case discussions, oral and written
presentations, reports, etc. This enhances the analytical and
decision making skills of people.
What is a ‘Good Strategy’?

Generally, a ‘good’ strategy is the one that delivers the purpose set
out for the strategy in the beginning. However, Richard Lynch
suggests a few tests to decide whether a strategy is good or not.
They are;
1. Value-added Test: A good strategy will deliver increased
value in the market place. This might show itself in increased
profitability and also gain in business performance such as
(c
market share, innovative ability, and satisfaction for

employees.
2. Consistency Test: A good strategy will be consistent with the
circumstances that surround a business at any point of time.
For example, it enables a firm to use its resources efficiently
and its organizational ability to cope with the circumstances of
that time.
109
3. Competitive Advantage Test: For most organizations, a good
Notes
S
strategy will increase the sustainable competitive advantage of
the organization. ___________________
4. Originality Test: A good strategy is often original i.e. doing ___________________
something totally different. But this needs to be used with ___________________

caution to avoid wild and illogical ideas that have no
___________________
grounding in the organization.
___________________
PE
5. Purpose Test: A good strategy should make full attempt to
___________________
address whatever purpose has been identified for the
organization, and such a definition of purpose might be taken ___________________
to include the aspirations and ambitions of the leaders of the ___________________

organization along with its stakeholders.
___________________
6. Logical Consistency: A good strategy should flow in a clear ___________________
and logical way from the goals.
7. Risk and Resources Test: The risks and resources associated
with the strategy should be sensible in relation to the
organization. They might be consistent with the overall
purpose, but should not involve such large levels of risk that
they are unacceptable. Moreover, some strategies may require
)U
resources that are substantially beyond those available to the
organization, such as finance, people and skills. Such
strategies should be avoided.
8. Flexibility Test: A good strategy should not lock the
organization into the future even though the environment and
the resources might change. It should allow some flexibility,
depending on the way that competition, economy,
management, employees and other material factors change.
Check Your Progress

Fill in the blanks:
1. ………………………… is a strategy aimed at adjusting
capacity in anticipation of requirement.
(c
2. ……………. plans are otherwise called operational plans.
Summary
There are three basic requirements that need to be met for
effective development of supply chain and logistics strategy:
Understanding the Customer, Assessing Supply Chain
110 Uncertainty (Implied Demand Uncertainty), and Understanding

Notes the Supply Chain Capabilities. Understanding these, it is possible
S
___________________ to decide on the supply chain strategy and design a supply chain
that has a strategic fit with the functional strategies of the firm.
___________________
Corporate strategies help firms to leverage their resources and
___________________
skills to extend their competitive advantage to new areas of
___________________ activity. Corporate strategy is basically concerned with the choice
___________________ of businesses, products and markets. It tries to answer certain key
PE
question like what businesses the firm should be in, in terms of the
___________________
range of products it supplies.
___________________
Supply chain planning concerns the spatial as well as variation of
___________________ demand with time, the extent of its variability, and its degree of
___________________ randomness. Planning and controlling supply chain activities
require accurate estimates of the product and service volumes to be
___________________
handled by the chain. These estimates are typically in the form of
forecasts and predictions. The supply chain professional often finds
it necessary to take it upon him or herself to produce forecasts for
short-term planning such as inventory control, order sizing, or
transport scheduling. For longer-term decisions, demand planning
becomes necessary.
Conceptualizing the logistics and supply chain planning problem
)U
has actions of Forecasting, Modelling and Characterization. The
'logical order' in which these three goals are to be tackled depends
on the objective of the organization. Often, modelling and
forecasting proceed in an iterative way; however, there is no
'logical order' in the broadest sense.
Lesson End Activity

Research on the problems faced by the companies while
conceptualizing the logistics and supply chain planning
Keywords
Chase Strategy: It is a strategy aimed at adjusting capacity in
(c
anticipation of requirement.
Level Strategy: In a level strategy, an organization maintains a
constant capacity over a period of time, irrespective of fluctuations
in demand.
Strategy: The broad framework for the allocation of a firm's scarce
resources, over time, to reach identified goals.
Questions for Discussion 111

Notes
S
1. Discuss few tests to decide whether a strategy is good or not.
___________________
2. What are the guidelines of effective strategy formulation?
___________________
3. Discuss the strategies in planning to manage the problem
___________________
related to supply chain and logistics.
___________________
4. What are the various levels of planning?
___________________
PE
___________________
Further Readings
___________________
Books ___________________
A D Chandler, Strategy and Structure, MIT Press, Cambridge, ___________________
1962.
___________________
1997.
)U
Web Readings
http://www.ups-scs.com/solutions/white_papers/wp_supply_chain
.pdf
http://www.scmr.com/article/developing_a_supply_chain_strategy_f
or_the_years_ahead
http://bus.utk.edu/supplychain/chain_lightning/oct_2010/document
s/Supply_Chain_Strategy.pdf
(c
(c
)U
PE
S
UNIT 9: Reverse Logistics and Environment
Unit 9
113
Notes
S
Activity
Reverse Logistics and

___________________
Taking any real life example
explain the process of reverse
___________________
logistics.
Environment ___________________
___________________
Objectives ___________________
PE
___________________
topics:
___________________
\ Reverse Logistics as a Competitive Strategy
\ Environment and Resource Analysis ___________________
\ SWOT Analysis ___________________
___________________
Introduction
Environmental pressures across the world have led to the
development of legislation and regulations that place the onus on
consumers as well as manufacturers to collect used products, and
make possible the disassembly of these products into their
constituent parts and then distribute these for reuse, recycling, or
)U
safe disposal. The remanufacturing of used products has been
accepted and identified as an improvement for many corporations
and precludes the wasteful and environmentally damaging option
of sending such goods to landfill or incineration.
Reverse Logistics as a Competitive Strategy

Researchers have reviewed the methodical literature on the
process of reverse logistics and have found that despite the
additional costs of waste transportation and third-party
"remanufacturing", the process can provide companies, such as
Dell and IBM, with a competitive advantage. The speedy
obsolescence and turnover of information technology equipment,
such as computers, monitors, printers, and other devices is a prime
(c
target for reverse logistics.

Because of legislation forcing corporations to dispose of returned
electrical waste goods in some regions, some manufacturers are
already implementing reverse logistics and finding ways to
decrease costs, gain a financial return on the process through the
114 sale of refurbished goods, as well as capitalizing on their "green"

Notes credentials in promotion terms.
S
___________________
For the sake of financial side and the environment, organizations
___________________ need to create a well-established reverse logistics system in order
___________________ to ensure easy and efficient returning of damaged and already-
used merchandise and to attain the competitive strategic
___________________
advantage.
___________________
PE
___________________
A Workable Definition
Reverse logistics is characterized as the procedure of setting up,
___________________
put into practice, and controlling the disciplined, cost effective
___________________
stream of raw supplies, in-process stock, completed goods and
___________________ related information from the point of consumption to the point of
___________________ commencement for the rationale of recapturing worth or proper
disposal.
Many organizations and persons have tried to define Reverse
Logistics. We refer to the expression "reverse logistics" as all action
associated with a product/service after the point of sale, the
ultimate goal to optimize or make more effective aftermarket
activity, thus, saving money and environmental resources.
)U
Other expressions synonymous to Reverse Logistics (RL) are
Aftermarket Logistics, Retrogistics, or Aftermarket Supply Chain.
The reverse supply chain is as well a term used in the industry. RL
is not to be confused with forward logistics or getting the product
to market frequently known as the forward supply chain. Types of
activity common with reverse logistics includes: logistics,
warehousing, repair, refurbishment, recycling, e-waste, after
market call centre support, reverse fulfilment, field service, etc.
The Process and Steps Involved

Today, reverse logistics has been adapted in a big way by
automotive after-market spare parts field as well as electronics
and computer hardware markets. Retail and book publishing also
have implemented reverse logistics schemes but the volumes that
(c
are returned are relatively lesser than the other fields.

Reverse logistics was considered as a drain on company profits in
earlier times. In today’s competitive markets, more and more
manufacturing firms are planning of incorporating the reverse
logistics system in their supply chain process for the following
reasons:
115
z Growing apprehension for environment pollution
Notes
S
z Government regulations on product recycling
___________________
z Waste disposal
___________________
z Growing consumerism ___________________
z Stiff competition. ___________________
The reverse logistics network can be exercised for various purposes ___________________
PE
such as refilling, repairs, re-furbishing, re-manufacturing, etc.,
___________________
depending on the nature of the product, unit value, sales volume
___________________
and distribution channels.
___________________
The Process
___________________
Customer ___________________
Receive
Sends Refund
Package or Exchange
Returns
Center
Sort Packages
)U
Process
Packages & Financial
Transaction
Sort Merchandise
Assess Quality,
Prepare Merchandise
& Consolidate
Exchanges
Only
on First
To other
Destinations Quality?
yes
Distribution
Center
Reshelf Ship Exchange
Item(s) Item(s)
(c
Source: https://umdrive.memphis.edu/g-cscm/www/ctr5 /reverse logistics.pdf
Figure 9.1: Process of Reverse Logistics
The reverse logistics process commences when a customer decides

to return one or more products. Each item is assessed and the item
is prepared. In majority instances, these are fresh products, which
116 the customer has freshly ordered and received. Reasons for return
Notes often include customer changing his/her mind, wanting a different
S
___________________ colour or size, etc. Further to return of new-fangled products,
customers also return used products that they feel did not live up
___________________
to expectations, so these would fall under the category of warranty
___________________
returns. Regardless of whether the product is old or new, the buyer
___________________ will request either an exchange or a refund.
___________________ Figure 9.1 depicts an easy version of the current reverse logistics
PE
___________________ process map. This includes numerous processes and sub-processes
to effectively manage arrival of a large volume of packages
___________________
containing items from a variety of product lines. These packages
___________________
need to be sorted and routed to the correct locations, which is a
___________________ difficult assignment given that the only indication of what the
___________________ package might contain is the size and shape of the box. For this
reason, package processing is a separate operation from
merchandise preparation. In package processing each package is
opened, its paperwork read, and its contents assessed and sorted
by product line. This is the point at which the client transaction is
separated from the merchandise and the two processes proceed
independently and in parallel.
)U
The documents are transferred to the financial transaction process,
where depending on the initial means of transaction – credit card,
personal check, or gift certificate – customers are refunded for the
returned merchandise. If an exchange has been requested, the
appropriate information proceeds to the distribution centre, from
which the exchange item is shipped. This completes the client
transaction process.
In the meantime the merchandise has been removed from the
package and sorted into the various product groups. It is then
conveyed to the appropriate merchandise preparation area. Here
the superiority of each item is assessed and the item is prepared as
needed for its destination. First-quality items are repackaged for
return to the distribution centre. Inferior quality items go to a
variety of destinations depending on their condition. For example,
(c
some items are donated to charity while the lowest level of quality
is discarded. Items are combined and shipped to the appropriate
destination. Notice that there is some duplication of effort between
package processing and merchandise preparation because two
dissimilar people have spent time handling and assessing the
merchandise.
117
Also, observe that the customer financial transaction waits to
Notes
S
commence until the package has been received, opened, and its
contents assessed. Only at this point can the information needed ___________________
for the client financial transaction is separated from the ___________________
merchandise. This is the usual procedure in virtually all return
___________________
processes; the merchandise must be in hand before any
supplementary transaction takes place. The bulk of the time from ___________________
when a customer decides to return something until the financial ___________________
PE
process can begin is taken up by the shipping time. ___________________
The Hidden Value in Reverse Logistics ___________________
Reverse logistics offers a number of advantages to the company in ___________________
terms of both tangible and intangible benefits. In the first instance, ___________________
companies are able to retrieve defective equipments and
___________________
components which are either salvaged or refurbished and thus,
reclaim value out of the defective parts. Secondly, the packaging
and defective materials are collected and recycled thereby
generating scrap worth back for the company. Thirdly unsold and
obsolete equipments are collected back from point of sale which
encourages the distributors and stockists to self-assuredly buy
stocks from the company knowing that he can always return
)U
unused inventory and not stand to loose in the bargain.
Distributors are more likely to be open to stocking all quick moving
as well as slow moving stocks.
In the eyes of the client and society, the organization stands to gain
a good standing and reputation of being a responsible company
which takes care of the e-waste and hazardous waste generated and
therefore, stands out for its corporate governance policies.
Disposal Process
Leftover materials, second-hand products and wrapper/packages
wastes are causing environmental pollution and creating problems
for disposal. In many countries, governments are devising
regulations to make manufacturers accountable for minimizing
(c
waste by way of recycling products.

The process involves:
z Collecting waste substance
z Delivering them to unit responsible for recycling
z Processing recyclables to generate secondary inputs
118
z Using secondary materials for manufacturing new-fangled
Notes
S
products
___________________
z Returning the products to the producer for recovering the
___________________
inputs for re-use.
___________________
___________________
Making Reverse Logistics Profitable
Reverse logistics has been fruitfully adapted as a marketing
___________________
PE
strategy. Refurbished computers are sold at cheaper prices by all
___________________
leading brands and the demand for such laptops seems to be
___________________ growing. The additional parts used by the computer manufacturers
___________________ to service the laptops and computers on warranty or on sale,
include refurbished parts. Many electronic and consumer durable
___________________
manufacturing companies put forward buy back or exchange offer
___________________ for the old equipments in lieu of the customer purchasing a brand
new product. In consumer electronics as well as white goods, the
exchange offers are a big hit during discount sale seasons.
Reaction of the Industries to Reverse Logistics

Administering reverse logistics process is as operations intensive
and complex as FG supply chain and demands the same focus and
)U
involves multiple logistics partners. Companies like IBM, HP, Dell
and further equipment manufacturers like Xerox have established
processes and network of refurbishing centres together with spare
parts distribution centres. Unlike managing good parts inventory,
defective spare parts require more handling and processes at the
logistics providers end. Commonly it has been noticed that the
good parts are handled smartly by all involved in the supply chain
including distributors and retailers. On the other hand, while the
process demands that the defective part be returned in good
condition, mutually users and retailers do not give enough
attention to handling defective parts. Statistics have shown that
the defective parts are found to have suffered more transportation
damage and handling damage than good part. A lack of
understanding that the defective part has value to the organization
(c
is noticed in little cases of the sales staff of the organizations as

well as retailers, who treat defectives as scrap.
However, the reverse logistics processes followed by the computer
and electronic equipments industry are encouraging for other
industries to begin looking at adapting similar strategies in their
markets too.
Reverse Logistics Experience 119

Notes
Reverse logistics practices differ based on industry and channel
S
position. Industries where returns are a larger portion of ___________________
operational cost tend to have enhanced reverse logistics systems
___________________
and processes in place. In the book industry, where great change in
the industry structure has occurred in the preceding few years, ___________________
returns are a major determinant of profitability. In the computer ___________________
industry where life cycles are nearly as short as grocery life cycles,
___________________
the speedy handling, and disposition of returns is at present
PE
recognized as a critical strategic variable. Successful retailers ___________________
understand that managing reverse logistics effectively will have an
___________________
affirmative impact on their bottom line. Industries that have not
had to spend much time and energy addressing return issues are ___________________
now trying to make major improvements. Now, more than ever, ___________________
reverse logistics is seen as being significant.
___________________
While many companies are yet to be familiar with the strategic
potential of efficient reverse logistics, it is clear that the tide is
beginning to turn. There is more interest in reverse logistics now
than ever before. Firms are beginning to build serious investments
in their reverse logistics systems and organizations. One clear
indication of the strategic importance of a business constituent is
the amount of money spent on managing that element.
)U
Specified the volume of returned products experienced in some
industries, it is not surprising that the firms in those industries
consider returns a strategic and core competency.
It appears likely that corporations in industries that generally do
not place much value on good reverse logistics practices, will, over
the next few years, find that making investments in their return
systems will augment their profitability. It is clear that for many
firms, excellent reverse logistics practices add considerably to their
bottom line.
Check Your Progress

Fill in the blanks:
1. …………………………… is characterized as the
procedure of setting up, put into practice, and
(c
controlling the disciplined, cost effective stream of raw

supplies, in-process stock, completed goods and related
information from the point of consumption to the point
of commencement for the rationale of recapturing worth
or proper disposal.
2. The reverse logistics process commences when a
customer decides to ………………. one or more products.
120
Environment and Resource Analysis
Notes
S
Activity
Managers must have a deep understanding and appreciation of the
___________________
Study the internal and external
environment of McDonald’s. environment in which they and their organisations function. To
___________________ illustrate the importance of environment to an organisation,
___________________ consider the analogy of a swimmer crossing a wide stream. The
___________________
swimmer must assess the current, obstacles and distance before
setting out. If these elements are not properly understood, the
___________________
swimmer might end up too far upstream or downstream. The
PE
___________________ organisation is like a swimmer and the environment is like the
___________________ stream. Just as the swimmer needs to understand conditions in the
water, the organisation must understand the basic ingredients of
___________________
its environment to properly manoeuvre (or change direction)
___________________
among them.
___________________
The environment of business is the ‘aggregate of conditions, events
and influences that surround and affect it’ (Davis). Since the
organisation is part of a broader social system, it has to work
within the framework provided by the society and its innumerable
constituents. For the sake of simplicity, the environmental forces
could be classified into two categories: Internal Environment and
External Environment. The internal environment consists of
)U
conditions and forces within an organisation that affect its
management. The internal environment includes the
organisation’s mission, corporate culture, owners and the board of
directors, employees, other units of the organisation and unions.
The external environment consists of those factors that affect a
firm from outside its organisational boundaries. Of course, the
boundary that separates the organisation from its external
environment is not always clear and precise. For example,
shareholders are part of the organisation, but in another sense,
they are a part of its environment.
In order to survive and flourish in a highly competitive and
turbulent environment, every organisation must strike a happy
balance between environment, values and resources (Thompson).
(c
Because organisations are open systems, environmental factors

inevitably influence them and it is up to managers to ensure that
this influence is harnessed in a positive way, leading to
organisational success (P S Thomas). Environmental Analysis is
the process of monitoring the organisational environment to
identify both present and future threats and opportunities that
may influence the firm’s ability to reach its goals.
121
If properly used, environmental analysis can help ensure
Notes
S
organisational success in many ways:
___________________
z It helps firms to adjust to environmental change at the right
time, that is, encashing opportunities as they arise and ___________________
eliminating the negative impacts of environmental threats ___________________

through proactive planning. It also helps the organisation to
___________________
come out with an early warning system to ward off threats from
___________________
PE
competitive forces and develop suitable strategies to turn
problems into opportunities. ___________________
z It tries to improve organisational performance by making ___________________
managers and divisional managers aware of issues that arise in ___________________

the firm’s environment by having a direct impact on planning and
___________________
by linking corporate and divisional planning (Certo and Peter).
___________________
z It helps strategists to focus on alternatives that help achieve
predetermined goals and eliminate those options that are not in
line with anticipated opportunities or threats.
Box 9.1: Features of Environmental Analysis (Ian Wilson)
Holistic Exercise: EA takes a holistic, broad view of the environment

instead of scanning trends in a piecemeal fashion. It is a way of looking
)U
at the forest, rather than the trees.
Exploratory Process: EA tries to explore the unknown terrain, putting

emphasis on what could happen. The focus is clearly on alternative
future choices, seeking clarification of the assumptions about future,
speculating systematically about various outcomes, assessing
probabilities and drawing more rational conclusions.
Continuous Activity: EA is not a one-shot deal; it is a continuous

process of picking up new signals from the environment and keeping
track of shifts in the overall pattern of trends. To this end, detailed
studies are carried out from time to time to keep a close watch on
previously identified trends that were found to be important from the
organisation’s point of view.
Components of External Environment

Most managers readily agree that an organisation’s external
(c
environment is more difficult to understand and manage than the

internal environment. The reasons are fairly obvious. The external
forces are frustratingly large in number, difficult to assess and
predict and are not easily amenable to advance planning and policy
making. Writers like Schilit have, therefore, suggested that
“changes in the external environment are very significant;
managers must be able to recognise opportunities and threats from
122 outside and respond to these properly”. Essentially, organisations

Notes have to deal with economic, social, political, technological,
S
___________________ regulatory, market and supplier related effects which offer
opportunities and pose threats at regular intervals. To remain
___________________
competitive, organisations must visualise these trends and deploy
___________________
their resources judiciously.
___________________
Industry Analysis
___________________
PE
According to Michael Porter, the nature and degree of competition
___________________
in an industry depends on five forces: the threat of new entrants,
___________________ the bargaining power of suppliers, the threat of substitute products
___________________ or services, and the jockeying among current contestants. To
establish a strategic agenda for dealing with these competing
___________________
currents and to grow despite them, a company must understand
___________________
how they operate in an industry and how they affect the company
in its particular situation.
1. Threats of Entry: New entrants to an industry bring new
capacity, the desire to gain market share, and often substantial
resources. Gaining entry is always not easy as there are
barriers to entry.
)U
The economies of scale prohibit entry by forcing the aspirant
either to come in on a large scale or to accept a cost
disadvantage.
Brand identification (product differentiation) creates a strong
barrier by forcing entrants to spend heavily to overcome
customer loyalty (remember Lux, Bournvita, Vicks, Good Day).
The need to invest large financial resources in order to compete
creates a barrier to entry, especially if the capital requirement
is for projects with a long gestation period (ex-fertilizer plants,
steel plants with minimum investments of over ` 500 crore and
gestation period of over 8 years).
Entrenched companies many have cost advantages not
available to potential rivals, no matter what their size and
(c
attainable economies of scale (access to raw materials, assets

bought at pre-inflation prices, government subsidies,
favourable locations, etc.).
Access to distribution channels is another powerful barrier,
replacing existing ones is not easy (price breaks, promotions,
intense selling effort) and creating one’s own distribution
channels takes time and costs a fortune.
123
The government can limit or even foreclose entry to industries,
with such controls as license requirements, and limits on access Notes
S
to raw materials. ___________________
2. Powerful Suppliers: This is a situation where suppliers can ___________________

force buyers to pay higher prices and thus, affect their ___________________
profitability. This would happen if the supplier enjoys
___________________
monopoly, where the switching cost of the buyer is
substantially higher, where the industry is not an important ___________________
PE
customer of the supplier group, where it sells products having ___________________
no substitutes, etc.
___________________
3. Powerful Buyers: Customers likewise can force down prices,
___________________
demand higher quality or more service and play competition
against each other - all at the expense of industry profits. This ___________________
can usually happen when buyers have choice of substitutes or ___________________

an alternative source of supplies for the same product. Also,
high buyer concentration, threat of backward integration, and
low switching costs add to the power of buyers.
4. Substitute Products: By placing a ceiling on the prices it can
charge, substitute products or services limit the potential of an
industry. For example, jute industry suffered badly after facing
)U
competition from petro-chemical based packing products. The
demand for fibre glass suffered likewise when insulation
substitutes emerged in the form of cellulose, rockwool and
Styrofoam.
5. Jockeying for Position: The combined strength of the above
five forces determines the attractiveness of an industry. The
strongest forces which influence the profitability of a firm
become the determining factors in strategy formulation. In
India firms like Reliance, TELCO, NIRMA, TISCO had rightly
spotted the potential dangers arising out of shortages of raw
materials, components and other inputs. A series of timely
backward (or even forward) integration decisions enabled them
to remain at the top in their respective fields.
The goal of a competitive strategy for a firm is to find a position
(c
in the industry from which it can best defend itself against

these competitive forces or can influence them to its advantage.
In this connection, it is worth looking at what MUL has done in
recent times to position its best-selling model Marti 800,
protecting its own turf against competitive onslaughts
repeatedly and get ahead with confidence.
124 Utility of Industry Analysis

Notes
S
The basic purpose of industry analysis is to assess the relative
___________________
strengths and weaknesses of an organisation relative to other
___________________ players in the industry. It tries to highlight the structural realities
___________________ of a particular industry and the extent of competition within that
industry. Through industry analysis, an organisation can find
___________________
whether the chosen field is attractive or not and assess its own
___________________ position within the industry. Industry analysis involves evaluating
PE
___________________
1. Industry Attractiveness: Industry analysis helps to find out:
___________________
(i) the growth potential of the industry;
___________________
(ii) the profitability of the industry; and
___________________
(iii) the relative abilities of players in that industry.
___________________
Where the growth prospects are good and profit potential is
great, the firm can safely conclude that the field is attractive and
offers enough room for others to enter and exploit the field. At
this stage, the firm needs to answer certain basic questions like:
(a) Is it a growing industry?
(b) If yes, at what pace the industry is growing?
)U
(c) Are there any limits to growth in the industry?
(d) Does it offer good returns consistently etc.
2. Competitive Position: Where does the firm stand in
comparison to others in a particular industry. Finding answers
to such a question is important for various reasons. Firstly, it
helps the firm to find its own advantageous/disadvantageous
place. Secondly, it enables the firm to know whether it is able
to deliver value for money when compared to others in the
industry. Thirdly, it can think of effecting improvements in its
product and service offerings in an attempt to defend and
improve its standing in the market place.
By analysing competition, the firm can have a realistic picture of
(c
its own strengths and weaknesses. It can think of defending its

territory by focussing attention on its strengths and launch attacks
on the weak spots of its rivals in a precise way. A superior
competitive position in an attractive industry helps a firm to run
the race ahead of others. But in a dynamic, ever-changing world, it
is not easy to remain at the top of the ladder, (remember
yesterdays sun-rise industries such as floriculture, granite
industry, and aqua culture). Unless the firm is able to create a 125
superior or distinctive competence in some function/area relative to Notes
S
the competition (Sony’s walkman; caterpillars’ earth moving ___________________
equipment, Maruti’s small car, Honda in engines, canon in optics
___________________
and Honda in design and manufacture of engines).
___________________
Competitive Analysis ___________________
It is carried out by firms – competing in an industry – with just a
___________________
PE
few firms possessing relatively equal capabilities (like Nike vs
___________________
Reebok, Coca-Cola vs Pepsi) to understand: (Porter).
___________________
z What drives the competitor? (Future Objectives)
___________________
z What the competitor is doing and can do? (Current Strategy)
___________________
z What the competitor believes about itself and the industry?
___________________
(Assumptions)
z What the competitor’s capabilities are? (Capabilities)
Future objectives
• How do our goals compare with our competitor’s
goals?
• Where will emphasis be placed in the future?
• What is the attitude toward risk?
)U
Current strategy
• How are we currently competing?
• Does this strategy support changes in the Response
competitive structure? • What will our competitors do in the future?
• Where do we hold an advantage over our
competitors?
• How will this change our relationship with our
Assumptions
• Do we assume the future will be volatile? competitors ?
• Are we operating under a status quo?
• What assumptions do our competitors hold
about the industry and themselves?
Capabilities
• What are our strengths and weaknesses?
• How do we rate compared to our competitors?
Figure 9.2: Competitive Analysis
Information about these four issues helps the firm prepare an

anticipated response profile for each competitor. The information
(c
obtained through competitor analysis often helps a firm,

understand, interpret and predict its competitor’s actions and
initiatives (Young).
126
Internal Analysis
Notes
The emphasis on the industry environment and the firm’s
S
___________________ competitive positioning in relation to its rivals was the dominant
___________________ theme of the 1970s and most of the 1980s. The firm’s internal
environment remained a relatively unexplored topic. Theorists
___________________
believed that internal analysis is mostly concerned with issues of
___________________
strategy implementation, such as choice of a suitable structure,
___________________ systems of control, management style, etc. (Ansoff, Henderson).
PE
___________________ During the late 1980s and early 1990s, interest in the role of
strategy in building competitive advantage resulted in a shift of
___________________
focus towards the internal aspects of the firm (also known as
___________________ corporate appraisal or organisational appraisal).
___________________
Box 9.2: Why Internal Analysis?
___________________ Managers perform internal analysis to identify strengths to build on and
weaknesses to overcome as they formulate strategies for competitive
advantage. Over the years, research has shown that a firm’s overall
strengths and weaknesses and its ability to execute is more important to
its performance than environmental factors. Even where the industry
was unattractive and generally unprofitable, firms that came out with
superior products enjoyed good profits. For example, when TVS motor
company parted ways with Suzuki after 19 years of co-existence, analysts
had almost removed the company from their radar screens. In a highly
)U
competitive two-wheeler market, they felt the company had very little
steam left to get ahead. But with Victor, a product of five years of R&D
effort, TVS rode back to success with a vengeance and is still going
strong. Bajaj Auto is waging a relentless battle with foreign majors to
wrest its crown back through a superior product range. Thanks to Aamir
Khan’s can-do attitude, a simple film Lagaan has created history in the
Hindi film industry had turned very unattractive due to a series of flop
shows in the year. Indian firms, thus, proved their worth under very
trying circumstances, though operating in tough, unattractive,
unremunerative fields (auto components, printing inks, optical media,
where margins are not very fat) in the recent past: e.g. Hindustan Inks
(` 563 crore sales in 2002); Bharat Forge (` 473 crore sales in 2002);
Moser Baer (` 678 crore sales in 2002); Essel Propack (` 600 crore sales
in 2002) etc. Those who think Indian brands are disappearing should
seriously look at what Titan is doing in the watch industry; Maruti in the
car industry; Taj and Oberoi in the hotel industry; Asian paints in
the paints business and, of course, Reliance and Hindalco in the
commodity businesses – petrochemicals and aluminium (Hall). A
(c
systematic internal analysis helps a firm:
z To find where it stands in terms of resources, strengths and

weaknesses.
z To exploit the opportunities that are in line with its capabilities.
z To assess the capability gaps and take steps to enhance its

capabilities with a view to achieve its growth objectives.
Approach to Internal Analysis 127

Notes
To identify and evaluate whether its resources have got any
S
strategic value or not a firm generally use SWOT Analysis ___________________
approach. Possessing valuable resources, does not guarantee ___________________
profits unless they are deployed in an effective and efficient
___________________
manner. The SWOT analysis discussed below aims at achieving
this purpose. ___________________
___________________
PE
SWOT Analysis
___________________
SWOT is an acronym for the internal strengths and weaknesses of
___________________
a firm and the external opportunities and threats facing that firm.
SWOT analysis helps managers to have a quick overview of the ___________________
firm’s strategic situation and assess whether there is a sound ‘fit’ ___________________
between internal resources, values and external environment (E-V- ___________________
R Congruence).
The greater the congruence the greater the likelihood that the
organisation is managing its resources effectively to match the key
success factors dictated by the environment.
)U
SWOT
SW OT
Matching
strengths/weaknesses
Strategies and Resources I Environment opportunities/threats
vision
II III
Values
Figure 9.3: E-V-R Congruence
Terminology
The word ‘Strength’ implies competitive advantage and other
(c
distinct competencies, which a firm enjoys in the market place.

Having an ability to deliver against the placement of an order
within 12 hours is strength to a firm if customers require delivery
within a day and its major competitors are not able to fulfil this
requirement. Strength is only strength if it is something that is of
value to customers and is also something which a firm does better
than its competitors. The term ‘weakness’ refers to an inherent
128 limitation that creates; a strategic disadvantage for a firm. It could

Notes come from an inappropriate location, uneconomical operation,
S
___________________ outdated plant, worn out machinery or militant labour class, etc.
___________________ Opportunities and threats refer to external issues and are
___________________ identified after environmental and competitive analysis. Generally,
speaking, opportunities result from external market changes or
___________________
existing needs which are poorly served. It is often difficult to
___________________ identity relevant opportunities and threats. Academically speaking
PE
___________________ a firm is faced with limitless opportunities and myriads of threats.
These can range from the opportunities in new markets, new
___________________
products or the likelihood of increased market share, to the threats
___________________
of nuclear war, earthquakes, and competitive battles. What makes
___________________ an opportunity or a threat relevant is its importance to the firm
___________________ and its likelihood of occurring? In order to carry out a good SWOT,
the firm should look into certain key issues (Thompson):
Table 9.1: Key Issues in SWOT Analysis
Strengths Weaknesses
A distinctive competence? No clear strategic direction?
Adequate financial resources? A deteriorating competitive position?

)U
Good competitive skills? Obsolete facilities?
Well thought of by buyers? Subpar profitability because…?
An acknowledged market leader? Lack of managerial depth and talent?
Opportunities Threats
Enter new markets or segments? Likely entry of new competitors?
Add to product line? Rising sales of substitute products?
Diversify into related products? Slower market growth?
Add complementary products? Adverse government policies?
Vertical integration? Growing competitive policies?
Check Your Progress

Fill in the blanks:
(c
1. ………………………… to an industry bring new capacity,

the desire to gain market share, and often substantial
resources.
2. …………………. is a situation where suppliers can force
buyers to pay higher prices and thus, affect their
profitability.
Summary 129
Notes
S
In today’s competitive markets, more and more manufacturing
___________________
firms are planning of incorporating the reverse logistics system in
their supply chain process for reasons such as growing ___________________
apprehension for environment pollution, government regulations ___________________
on produce recycling, waste disposal, growing consumerism and
___________________
stiff competition.
___________________
PE
The reverse logistics network can be exercised for various purposes
___________________
such as refilling, repairs, re-furbishing, re-manufacturing, etc.,
depending on the nature of the product, unit value, sales volume ___________________
and distribution channels. ___________________
Environmental analysis can help ensure organizational success in ___________________

many ways such as it helps firms to adjust to environmental
___________________
change at the right time, that is, encashing opportunities as they
arise and eliminating the negative impacts of environmental
threats through proactive planning. It also helps the organization
to come out with an early warning system to ward off threats from
competitive forces and develop suitable strategies to turn problems
into opportunities.
)U
The basic purpose of industry analysis is to assess the relative
strengths and weaknesses of an organization relative to other
players in the industry. It tries to highlight the structural realities
of a particular industry and the extent of competition within that
industry. Through industry analysis, an organization can find
whether the chosen field is attractive or not and assess its own
position within the industry.
Managers perform internal analysis to identify strengths to build
on and weaknesses to overcome as they formulate strategies for
competitive advantage. SWOT is an acronym for the internal
strengths and weaknesses of a firm and the external opportunities
and threats facing that firm. SWOT analysis helps managers to
have a quick overview of the firm’s strategic situation and assess
whether there is a sound ‘fit’ between internal resources, values
(c
and external environment.
Lesson End Activity

Find out the applicability of the principle of reverse logistics in the
automobile industry and the effect of that principle on the industry
effectiveness.
130
Keywords
Notes
S
Environmental Analysis: It is the process of monitoring the
___________________
organisational environment to identify both present and future
___________________ threats and opportunities that may influence the firm’s ability to
___________________ reach its goals.
___________________ Long-range planning: Planning that covers a relatively long
___________________ period of time (anything over a five-year period), and affects many
PE
departments/divisions of the organisation.
___________________
___________________
___________________
1. Discuss industry analysis.
___________________
2. Explain the process and steps involved in reverse logistics.
___________________
3. What are the various approaches to internal analysis?
4. Write a brief note on the hidden value in reverse logistics.
Further Readings
Books
)U
A D Chandler, Strategy and Structure, MIT Press, Cambridge,
1962.
1997.
Web Readings
http://www.inboundlogistics.com/cms/article/reverse-logistics-
(c
customer-satisfaction-environment-key-to-success-in-the-21st-
century/
http://eetimes.com/design/smart-energy-design/4013545/Going-
green-with-reverse-logistics
http://phys.org/news150556935.html
UNIT 5: Case Study
Unit 10
131
Notes
S
Case Study
___________________
___________________
___________________
Objectives
___________________
PE
___________________
Case Study: Whirlpool’s Supply Chain System
___________________
The supply chain at Whirlpool in 2000 was broken. Indeed, a
manager there at the time quipped that among the four major ___________________
appliance makers in the U.S., Whirlpool ranked fifth in delivery
performance. ___________________
"We had too much inventory, too little inventory, wrong ___________________
inventory, right inventory/wrong place, any combination of those
things," says J.B. Hoyt, who was then supply chain project
director. He says a sales vice president approached him one day
and said he'd accept even worse performance from supply systems
if they would just be consistent rather than wildly bouncing back
and forth between good and poor production and shipping plans.
So in 2001, Whirlpool embarked on a multi-project global
overhaul of its supply chain systems. The metaproject remains a
)U
work in progress today, with a number of systems yet to be rolled
out and some major technical issues to be resolved. But managers
at Whirlpool say its success to date – including huge
improvements in customer service and reduced supply chain costs
– is providing the psychological and financial impetus to drive the
remaining systems work.
Whirlpool CIO Esat Sezer says that by 2000, the company had
grown by acquisition and geographic expansion to the point that
old systems, stitched together by spreadsheets and manual
procedures, couldn't cope with the exploding complexity. "Our
supply chain was becoming a competitive disadvantage for us," he
says. Availability—the percentage of time a product is in the right
place at the right time—was an unacceptably low 83 per cent,
even as inventories remained too high overall.
The home-grown supply systems were primitive and not well
integrated with the company's SAP ERP system, which had been
installed in 1999, or with a legacy production scheduling system,
(c
Sezer says. And they weren't integrated with the systems of major
wholesale customers or suppliers of parts and materials. "The
plans we were creating weren't linking back into reality," he says.
In particular, Sezer says, supply chain systems weren't fine-
grained enough, nor were they very good at juggling priorities and
constraints except through slow and cumbersome manual
methods. Often, they would optimize locally—a single product line
at one location, for example—but not for the supply chain as a
whole.
Contd…
132
Here's what Whirlpool was using for its North American supply
Notes chain in 2000:
S
___________________ z A home-grown production scheduling system, the Whirlpool
Manufacturing Control System (WMCS), which was developed
___________________ in the mid-1980s and extensively modified over the years.
___________________ z SAP's R/3 ERP system which was installed in 1999 and used
for transaction-processing applications such as accounting
___________________ and order processing.
___________________ z i2 Technologies' Demand Planner (now called Demand
PE
Manager), which was installed in 1997 and used for demand
___________________ forecasting.
___________________ z A system for distribution planning that was custom-developed
for Whirlpool in the 1980s that used optimization software
___________________
from ILOG.
___________________ Then, in 2001, Whirlpool began to implement an Advanced
Planning and Scheduling (APS) system. It included a suite of
___________________
supply chain integration and optimization tools from i2 – Supply
Chain Planner for Master Scheduling, Deployment Planning and
Inventory Planning. Those three modules, the heart of Whirlpool's
efforts to fix its supply chain, went live in three phases over 2001
and 2002.
In mid-2002, Whirlpool installed the i2 Trade Matrix
Collaborative Planning, Forecasting and Replenishment (CPFR)
system, a Web-based collaboration tool for sharing and combining
the sales forecasts of Whirlpool and its major trade partners –
)U
Sears, Roebuck and Co., Lowe's and Best Buy Co.
The rollout of a component for Web-based collaboration with
suppliers, based on SAP's Inventory Collaboration Hub, is just
getting under way. And Whirlpool continues to use the old WMCS
for production scheduling but plans to replace that with SAP's
Production Planning module.
Question
Critically analyse the case.
Source: http://logistics.about.com/gi/o.htm?zi=1/XJ&zTi=1&sdn=logistics&cdn=b2b&tm=
190&gps=150_798_1004_579&f=11&tt=14&bt=1&bts=1&zu=http%3A//www.compute
rworld.com. au/index. php/id%3B1550407298%3Bfp%3B4%3Bfpid%3B1398720840
(c
UNIT 11: Demand Planning and Forecasting
133
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
BLOCK-III
)U
(c
134
Notes
S
UNIT 11: DEMAND PLANNING AND
___________________ UNIT 13: TRANSPORTATION
FORECASTING z Introduction
z ___________________
Introduction z Transportation Infrastructure
z ___________________
Demand Forecasting z Transport Service
z Collaborative Forecasting
___________________ z Transportation Administration and Documentation
___________________
PE
UNIT 12: INVENTORY MANAGEMENT UNIT 14: WAREHOUSING
___________________ Introduction
z Introduction z
z ___________________
Functionality and Definitions z Strategic Warehousing
___________________ z Ownership Arrangements

z Inventory Costs
z Planning Inventory
___________________ UNIT 15: CASE STUDY
___________________
)U
(c
Unit 11
135
Notes
S
Activity
Demand Planning and

___________________
Conduct a research on the
various demand forecasting
___________________
methods used by companies.
Forecasting ___________________
___________________
Objectives ___________________
PE
___________________
topics:
___________________
\ Demand Forecasting
\ Collaborative Forecasting ___________________
\ Collaborative Planning, Forecasting, and Replenishment ___________________
___________________
Introduction
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
)U
agreement on joint business plans along the supply chain. Forecast
and demand planning is the process of identifying and forecasting
recipient needs to ensure that the end client consistently receives
the required quantities of commodities at the right time and
location, and in the most cost-effective manner. Demand planning
and forecasting is both an art and a science. It requires informed
judgment, business expertise, and technical skills.
Demand Forecasting
Forecasting product demand is crucial to any supplier,
manufacturer, or retailer. Forecasts of future demand will
determine the quantities that should be purchased, produced, and
shipped. Demand forecasts are necessary since the basic operations
(c
process, moving from the suppliers' raw materials to finished goods

in the customers' hands, takes time. Most firms cannot simply wait
for demand to emerge and then react to it. Instead, they must
anticipate and plan for future demand so that they can react
immediately to customer orders as they occur.
136
In other words, most manufacturers "make to stock" rather than
Notes
S
"make to order" – they plan ahead and then deploy inventories of
___________________
finished goods into field locations. Thus, once a customer order
___________________ materializes, it can be fulfilled immediately – since most customers
___________________ are not willing to wait the time it would take to actually process
their order throughout the supply chain and make the product
___________________
based on their order.
___________________
PE
An order cycle could take weeks or months to go back through part
___________________ suppliers and sub-assemblers, through manufacture of the product,
___________________ and through to the eventual shipment of the order to the customer.
___________________
Firms that offer rapid delivery to their customers will tend to force
all competitors in the market to keep finished good inventories in
___________________
order to provide fast order cycle times. As a result, virtually every
___________________ organization involved needs to manufacture or at least order parts
based on a forecast of future demand. The ability to accurately
forecast demand also affords the firm opportunities to control costs
through leveling its production quantities, rationalizing its
transportation, and generally planning for efficient logistics
operations.
In general practice, accurate demand forecasts lead to efficient
)U
operations and high levels of customer service, while inaccurate
forecasts will inevitably lead to inefficient, high cost operations
and/or poor levels of customer service. In many supply chains, the
most important action we can take to improve the efficiency and
effectiveness of the logistics process is to improve the quality of the
demand forecasts.
Logistics professionals are typically interested in where and when
customer demand will materialize. Consider a retailer selling
through five superstores in Boston, New York, Detroit, Miami, and
Chicago. It is not sufficient to know that the total demand will be
5,000 units per month, or, say, 1,000 units per month per store, on
the average.
Rather it is important to know, for example, how much the Boston
(c
store will sell in a specific month, since specific stores must be

supplied with goods at specific times. The requirement might be to
forecast the monthly demand for an item at the Boston superstore
for the first three months of the next year. Using available
historical data, without any further analysis, the best guess of
monthly demand in the coming months would probably be the
average monthly sales over the last few years. The analytic
challenge is to come up with a better forecast than this simple 137

average. Notes
S
Forecasting is a problem that arises in many economic and ___________________
managerial contexts, and hundreds of forecasting procedures have ___________________
been developed over the years, for many different purposes, both in
___________________
and outside of business enterprises. The procedures that we will
discuss have proven to be very applicable to the task of forecasting ___________________
product demand in a logistics system. ___________________
PE
Other techniques, which can be quite useful for other forecasting ___________________
problems, have shown themselves to be inappropriate or ___________________
inadequate to the task of demand forecasting in logistics systems.
___________________
In many large firms, several organizations are involved in
generating forecasts. The marketing department, for example, will ___________________
generate high-level long-term forecasts of market demand and ___________________

market share of product families for planning purposes. Marketing
will also often develop short-term forecasts to help set sales targets
or quotas. There is frequently strong organizational pressure on
the logistics group to simply use these forecasts, rather than
generating additional demand forecasts within the logistics
system.
)U
As a general rule, the farther into the future we look, the more
clouded our vision becomes -- long range forecasts will be less
accurate that short range forecasts. The answer depends on what
the forecast is used for. For planning new manufacturing facilities,
for example, we may need to forecast demand many years into the
future since the facility will serve the firm for many years.
On the other hand, these forecasts can be fairly aggregate since
they need not be SKU-specific or broken out by stockage location.
For purposes of operating the logistics system, the forecasting
horizon need be no longer than the cycle time for the product.
It is also important to note that the demand forecasts developed
within the logistics system must be generally consistent with
planning numbers generated by the production and marketing
(c
organizations. If the production department is planning to

manufacture two million units, while the marketing department
expects to sell four million units, and the logistics forecasts project
a total demand of one million units, senior management must
reconcile these very different visions of the future.
138
Forecasting Methods
Notes
Different forecasting methods can be used to develop the forecast.
S
___________________ The appropriate method will depend on the nature of the item
___________________ being forecast and the availability of historical data. These are two
factors that often determine the method you choose to form the
___________________
forecast.
___________________
There are four common approaches to forecasting which are given
___________________
below:
PE
___________________
1. Qualitative: These forecasts are used where there is little or
___________________ no historical performance data to determine demand. They are
___________________ typically based on an expert's familiarity of products, the
___________________
industry and customer preferences. An expert's opinion is
usually useful when new products are being introduced into the
___________________
market.
2. Time Series: Time series forecasts rely on historical demand
in order to predict the future demand. There are a variety of
computational methods that can be used. Usually, this method
is ideal for items that have a generally defined historical
pattern that does not change radically from one year to the
next e.g. "staple stock" items in a retail store.
)U
3. Causal: Causal forecasting is used when there is a visible
correlation between one or more variables to the demand for
the product. For example, disposable income, lifestyle
indicators, etc. may be used to determine the demand for many
consumer durable items. The method, however, requires a high
level of sophistication in modelling.
4. Simulation: This method is highly sophisticated and is mainly
used where the organization needs to generate multiple 'what-
if' scenarios. For example, such a model would be able to
provide answers on the impact on product demand if prices are
increased or if disposable income decreases. In many cases,
firms require to evaluate these types of sensitivities so as to
have a more robust forecast.
(c
The method used should adequately meet the objectives of the

forecasting model required. More than one method may be used
to provide the types of outputs desired. For example, the
method used for short-term forecasts could be different than
the one used for long-term forecasts.
Accuracy and Validation Assessments 139

Notes
All models need to be validated and verified. Validation is
S
concerned with the question "Are we building the right system?" ___________________
Verification, on the other hand, seeks to answer the question "Are ___________________
we building the system right?"
___________________
Since validation is used for the purpose of establishing a model's
___________________
credibility, it is important that the method used for the validation
is, itself, credible. Features of time series, which might be revealed ___________________
PE
by examining its graph, with the forecasted values, and the ___________________
residuals behaviour, condition forecasting modelling. ___________________
An effective approach to modelling forecasting validation is to hold ___________________
out a specific number of data points for estimation validation (i.e.,
___________________
estimation period), and a specific number of data points for
forecasting accuracy (i.e., validation period). The data, which are ___________________
not held out, are used to estimate the parameters of the model, the
model is then tested on data in the validation period, if the results
are satisfactory, then the forecasts are generated beyond the end of
the estimation and validation periods.
A good model should have small error measures in both the
estimation and validation periods and its validation period
)U
statistics should be similar to its own estimation period statistics.
Holding data out for validation purposes is probably the single
most important diagnostic test of a model; it gives the best
indication of the accuracy that can be expected when forecasting
the future. It is a rule that one should hold out at least 20 per cent
of data for validation purposes.
Check Your Progress

Fill in the blanks:
1. ……….…… tools help in the analysis of the environment
and provide inputs on how the organization can use its
resources for maximum leverage.
(c
2. Forecasting demand levels is a part of ……….……

forecasts.
140
Collaborative Forecasting
Notes
S
Activity
As technology becomes faster and smarter and as the willingness
___________________
Prepare a chart to show
CPRF model and the activities of supply chains to share information increases, companies will
___________________
in the CPRF process.
benefit from such forecasting models. Inventory will increasingly
___________________
be replaced with information. This hope is reflected in
___________________ Collaborative Planning, Forecasting and Replenishment (CPFR).
___________________ CPFR is accepted as an extension of supply chain management and
PE
___________________
as a part of supply chain philosophy.
___________________ The first CPFR exercise was undertaken by Wal-Mart and Warner-
___________________ Lambert for Listerine products. They used special CPFR software
to exchange forecasts. Supportive data, such as past sales trends,
___________________
promotion plans and even the weather, were transferred in an
___________________
iterative fashion. This allowed them to develop a single forecast
based their original forecasts. The results were gratifying.
Listerine sales increased, the fill rates improved, and there was a
significant reduction of inventory investment.
CPFR is forecasting based on the concept of supply chain

management. It is a business model that takes a holistic approach
)U
to supply chain management and information exchange among
trading partners. It uses common metrics, standard language, and
firm agreements to improve supply chain efficiencies for all
participants.
In other words, collaborative forecasting is based on considering

the entire supply chain or partnerships as a single unit and the
sharing of information between the links in the chain. The
objective is to collectively, as members of the supply chain, meet
the needs of the final consumer. This is accomplished by supplying
the right product at the right place, right time and right price to
the customer.
According to the Round Table held at the University of Denver in

(c
May, 2002, the "CPFR Overview Committee." developed target

objectives of business benefits using CPRF. These are shown
below:
z Increased in-stock at shelf 5-8%
z Reduced average network inventory 10%

141
z Increased sales 8-10%
Notes
S
z Reduced operating expense 1-2% ___________________
z Reduced cost of goods 3-4% ___________________
z Reduced lead time/cycle time 25-30% ___________________
___________________
z Decreased account receivables 8-10%
___________________
PE
z Reduced forecast error +/- 20% (six weeks out) and +/- 30%
___________________
(twelve weeks out)
___________________
To successfully implement a supply chain management strategy,
___________________
forecasting along with demand planning, are key factors. Bringing
___________________
down investments in inventory and enhancing customer service
levels is directly connected to the level of accuracy and efficiency ___________________
with which this demand is forecast and is communicated up and

down the supply chain.
Though accurate and effective forecasting is an elusive target,

many companies are now using an approach of collaborative
forecasting. Collaborative forecasting involves the entire supply
)U
chain that participates in decisions about demand. This demand
involves gathering forecasting information both internally and
externally, and is used to drive the activities of the supply chain.
Collaborative forecasting overcomes some of the inherent problems

with traditional forecasting. It is a method by which enterprise-
wide knowledge is unified into a forecast more accurate than a
traditional forecast, and has the support of the entire supply chain.
The objective is to be able to provide the best and most timely
predictions of demand.
The need for collaborative forecasting arises due to increasing

competition and the requirement that manufacturers in a supply
chain must synchronize operations to derive the benefits of
(c
collaboration. Understocking as well as overstocking of inventory,

both cause problems and decrease a manufacturer's
competitiveness. Collaborative forecasting can help eliminate
excess inventory and at the same time, support the supply chain
management initiative of the participating companies. A generic
model of CPFR system is shown as Figure 11.1.
142
Notes Business M odel - G eneric
S P la n n ing
___________________ 1
D eve lo p Fro nt-E n d
___________________ Distribu tor Bu sin ess

Develop m en t Activities
C rea te J oint Manufactu rer Business
Developm ent Activities
2 B usin es s P la n
___________________ C re ate S a le s
Ex ce p tio n C riteria
3 Fo rec a st
E x ce p tion C rite ria

___________________ M a n ufa cture r
D istrib u to r Ide n tify Ex ce ption s E xc ep tio n Trig g ers
E xc ep tio n Trig g ers 4 fo r S a les Fore c as t
___________________
PE
D istrib u to r D ec is io n R eso lve /C olla bo rate M a n ufa cture r
___________________ S up p ort D ata 5 o n Ex ce ption Item s D e cision S up po rt D ata
F ore ca s tin g
P O S D ata
___________________ 6
Manufactu rer
Materials &
___________________ O rd er F ore ca st
F roz en Fo rec a st Produ ction
Planning
C o ns tra ints
___________________ D istrib u to r Ide n tify Ex ce ption s
7 for O rde r Fore c a st M a n ufa cture r
E xc ep tio n Trig g ers E xc ep tio n Trig g ers
E xc e ption
___________________ Item s
D istrib u to r D ec is io n R e so lve/C o llab o ra te M a n ufa cture r

S up p ort D ata 8 O n E xc ep tion Ite m s D e cision S up po rt D ata
U pd a te d D a ta for U n res olve d S u pp ly C on stra nts

E xc e ption Ite m s
Lo n g
Term S ho rt
Te rm Pro duce
O rd e r G en e ra tio n Pro duct
9 O rd er/P O
R e p le nishm e nt
R eta il S tore
Fe ed ba ck
D e liv ery E xec utio n Order Filling /
D istrib utor R e ceivin g 10 Shipm en t Execu tion
)U
O rde r Fillin g Fee d ba ck
D istribu to r Ac tiv itie s E ithe r/J o in t Ac tiv itie s M a n ufac tu rer A ctivities
Source: Upendra Kachru (2010), Exploring the Supply Chain, Excel Books.
Figure 11.1: CPFR Model
Collaborative Planning, Forecasting, and Replenishment

(CPFR)
Collaborative Planning, Forecasting, and Replenishment is a
nine-step approach to improving supply chain management, and
ties demand planning and supply planning into one process. The
CPFR process has three major sub-processes – namely planning,
forecasting and replenishment – each of which is formed by a
number of steps as is shown in Figure 11.2.
(c
Figure 11.2: Activities in the CPRF Process

It usually begins with identifying a 'forecasting champion'. The 143
forecasting champion can be a single person, a department, or a Notes
S
firm. Identification of a 'forecasting champion' is critical to the ___________________
collaborative forecasting technique. The role of the champion is to
___________________
effectively communicate and lead the organizations involved to
___________________
share and agree upon information sharing, forecasting methods
and technologies. There are a number of methods used for ___________________
collaborative forecasting. These forecasting processes are generally ___________________
PE
custom-built and developed to meet the specific needs of individual
___________________
companies. To be successful in the task, the champion has to
understand and emphasize the critical nature of the process. The ___________________
champion also has to facilitate cross-functional efforts required for ___________________

improved forecasting.
___________________
The next step is forming the forecast collaboration group. Each ___________________
organization should choose its member in this group. However, the
composition of the group should be such that its members
represent a variety of functional areas including sales, marketing,
logistics/operations, finance, and information systems. This
description includes the members from external partners like
suppliers and customers. The effort has to be focused to ensure two
)U
objectives, (a) the most recent and best possible information is
included in the final forecast, and (b) the forecast addresses the
changing needs and environments facing the business.
The group is given the responsibility of deciding on the goals,
objectives and immediate needs of the collaborative forecast
process. These are based on the informational needs of all forecast
users. The group will identify the factors, processes, technologies
that impact the forecast, and the relevant sources of information
available. The sources could be internal or external. The final
result is dependant of the ability of the group to ensure that
information can be accessed at all necessary levels by all the users.
Companies often hold at least two meetings during the month,
scheduled on a regular basis. The first meeting is for the purpose of
gathering information and preparing the base forecast. The second
(c
meeting is to bring alternative forecasts together and work

through issues to arrive at a consensus.
Once the relevant information is decided upon and available, the
next step is at the level of the firm. The members of the supply
chain decide on the process by which the various pieces of
information will be brought together. After necessary approvals,
144 the consensus forecast is used for the company's sales and
Notes planning systems.
S
___________________
For example, Gillette found that senior managers connect to each
___________________ other; distributors connect with Gillette; and so on.
___________________ The aligned teams give it an added advantage; they support the
___________________ company's mission to strengthen key customer relationships
through an effective, collaborative, improvement-oriented process.
___________________
PE
From doing it in this way, Gillette found numerous opportunities
___________________ to improve issues such as shrinkage, shelf replenishment,
___________________ packaging, and display design. It also makes sense because by
___________________
worrying about customers' performance issues, they reduce the
retailer loss of sale, and in the bargain increase their own sale, too.
___________________
However, to make this type of synergy happen, measurements and
___________________
incentives must be a part of the process. These ensure that the
forecast accuracy and related supply chain performance actually do
improve as a result of the collaborative process. Measurements
should be such that demonstrate the success of the collaborative
efforts, not just at a fixed point in time, but that measure the rate
of improvement over time.
Measurements can vary, but should include the measurement of
)U
the actual versus the forecast. These provide the firms the ability
to compare the forecasts both for consistency and comparability. A
common method is to compute the absolute error for each item (the
actual minus the forecast, divided by the actual, without the sign).
Another key measurement is a bias indicator. This shows the
percentage of items that were either over or under forecasted. The
bias indicator points out trends and tendencies that lead to over or
under forecast certain items. Compensating for this bias can be
critical to improving the affected forecasts.
The collaborative approach is a deviation from tradition and
requires members to make significant changes in the ways they
worked in the past. The changes in working methods often result
in resistance issues. If participants do not actually change their
(c
behaviour, the effort that goes into creating an improved forecast

process will generally not produce the best results. In addition to
changing old work habits, the collaborative process also demands
more work for many of the participants. Participants who were
previously not involved with the forecasting process often may
view the process as extra work.
145
However, results do not come in immediately. It takes time to put
Notes
S
the system in place and get results from it. There is a learning
curve for participants, systems and sub-systems have to be ___________________
developed and process decisions have to be made, before results ___________________
come in. All of these issues combine to make a change to
___________________
collaborative forecasting as a challenge to each of the organizations
in the entire supply chain. ___________________
___________________
PE
In the collaborative forecasting environment, the information is
current and more accurate as companies supplement statistics ___________________
with information gathered directly from the customer, the market, ___________________
and other sources. This supplemental information reduces the
___________________
uncertainty that exists in the forecast and therefore minimizes the
inventory carried as it the need for inventory to cover uncertainty ___________________
is reduced. ___________________
The driving premise of CPFR is that all supply chain participants

develop a synchronized forecast. A company can collaborate with
numerous other supply network members both upstream and
downstream in the supply network. Every participant in a CPFR
process - supplier, manufacturer, distributor, retailer – can view
and amend forecast data to optimize the process from end to end.
)U
Essentially, CPFR puts an end to guesswork in forecasting. It
means that manufacturers and retailers share their plans, with
detailed knowledge of each other’s assumptions and constraints.
However, there is a high investment involved and sophistication
required in using such systems. Gillette found that not everyone in
the supply chain could become a member of the integrated supply
chain. Finally, it decided to differentiate its customer strategy by
customer size. More complex, sophisticated retail chains received
the more differentiated and integrated service based on Gillette's
value chain structure. Smaller, independent operators receive a
standardized set of supply chain services. Both the cost-to-serve
and the sophistication of the customer drive this distinction. Thus,
Gillette only does CPFR with its largest accounts.
(c
For example, there are many successful examples of CPRF.

Heineken USA employs CPFR and has successfully cut its order-
cycle time. It is extending its programme and is currently
providing collaborative planning and replenishment software to its
top 100 distributors.
146
Notes Check Your Progress
S
___________________ 1. The CPFR process usually begins with identifying a
___________________ ……………
___________________ 2. The champion also has to facilitate …………… efforts

required for improved forecasting.
___________________
PE
___________________
Summary
___________________
An analysis of the factors that influence future values determines
___________________
how future values are estimated. Forecasting demand levels is a
___________________ part of medium-term forecasts.
___________________
A forecast is an estimate of a future event achieved by
systematically combining and casting forward in a predetermined
way data about the past. Different forecasting methods can be used
to develop the forecast.
A good model should have small error measures in both the
estimation and validation periods and its validation period
statistics should be similar to its own estimation period statistics.
)U
CPFR is forecasting based on the concept of supply chain
management. Collaborative forecasting overcomes some of the
inherent problems with traditional forecasting.
Lesson End Activity

Do you agree with the statement that CPFR is forecasting based on
the concept of supply chain management? If yes, give reasons.
Keywords
Demand Forecasting: Demand forecasting is a method of
projecting the demand for goods and services over a specific period
of time.
(c
Collaborative Forecasting: Collaborative forecasting enables

companies to transition from periodic, disparate and isolated
forecasting activities to a single, real-time enterprise forecasting
process.
147
Supply Chain Forecasting: It concerns the spatial as well as
Notes
S
variation of demand with time, the extent of its variability, and its
degree of randomness. ___________________
Forecast: A forecast is an estimate of a future event achieved by ___________________
systematically combining and casting forward in a predetermined ___________________

way data about the past.
___________________
Time Series: Time series forecasts rely on historical demand in ___________________
PE
order to predict the future demand.
___________________
Causal: Causal forecasting is used when there is a visible
___________________
correlation between one or more variables to the demand for the
product. ___________________
___________________
Simulation: This method is highly sophisticated and is mainly
used where the organization needs to generate multiple 'what-if' ___________________
scenarios.
Validation Assessments: Assessment validation refers to a
process where assessors compare and evaluate against the relevant
competency standard/s to ensure, validity, reliability, fairness,
flexibility and effectiveness.
)U
Collaborative Planning, Forecasting and Replenishment
(CPFR): Collaborative Planning, Forecasting and Replenishment,
is a concept that aims to enhance supply chain integration by
supporting and assisting joint practices.

1. Define demand forecasting.
2. Highlight different forecasting methods.
3. Discuss accuracy and validation assessments.
4. Discuss Collaborative Planning, Forecasting and
Replenishment (CPFR).
5. “Collaborative forecasting overcomes some of the inherent
(c
problems with traditional forecasting.” Explain.

6. Write brief note on CPFR model.
7. What are the activities in the CPRF process?
8. Define collaborative approach.
9. “Supply and demand reflects the time dimension.” Discuss.
148
Further Readings
Notes
S
___________________ Books
___________________ Reji Ismail, Logistics Management, Excel Books, Delhi.
___________________ Ailawadi C Sathish & Rakesh Singh, Logistics Management,
___________________ Prentice Hall India, 2005.
___________________ Agrawal DK, Textbook of Logistics and Supply Chain Management,
PE
___________________
___________________
___________________
___________________ Web Readings

___________________ http://www.informationweek.com/software/business-
intelligence/six-steps-to-better-sales-forecasting-an/209000118
http://www.igd.com/our-expertise/Supply-chain/Strategy-planning-
technology/3586/Demand-Planning--Forecasting/
http://www.netsuite.com/portal/industries/wd/demand-
planning.shtml
)U
(c
UNIT 12: Inventory Management
Unit 12
149
Notes
S
Activity
Inventory Management Make___________________

a group discussion on
the difference between
___________________
decoupling and geographical
specialisation.
___________________
Objectives
___________________
topics: ___________________
PE
\ Functions and Definitions ___________________
\ Inventory Cost ___________________
\ Planning Inventory
___________________
___________________
Introduction
___________________
Inventory decisions are high-risk and high-impact from the
perspective of logistics operations. Commitment to a particular
inventory assortment and subsequent shipment to a market or
region in anticipation of future sales determine a number of
logistics activities. Without proper inventory assortment,
marketing may find that sales are lost and customer satisfaction
)U
will decline. Likewise, inventory planning is critical to
manufacturing. Raw material shortages can shut down a
manufacturing line or modify a production schedule, which, in
turn, introduces added expense and potential for finished goods
shortages. Just as shortages can disrupt planned marketing and
manufacturing operations, overstocked inventories also create
problems. Overstocks increase cost and reduce profitability
through added warehousing, working capital requirements,
deterioration, insurance, taxes, and obsolescence.
Functionality and Definitions

The ideal inventory process consists of manufacturing a product to
a customer's specifications once an order is placed. This is called a
(c
make-to-order operation and is characteristic of customized

equipment. Such a system does not require stockpiles of materials
or finished goods in anticipation of future sales.
Geographical Specialization
One function of inventory is to allow geographical specialization for
individual operating units. Because of the requirements for factors
150 of production such as power, materials, water, and labour, the

Notes economical location for manufacturing is often a considerable
S
___________________ distance from major markets.
___________________ For example, tires, batteries, transmissions, and springs are
___________________ significant components in automobile assembly.
___________________ The technology and expertise to produce each of these components

are traditionally located in proximity to material sources in order
___________________
PE
to minimize transportation. This strategy leads to geographical
___________________ separation of production so that each automobile component can be
___________________ produced economically. However, geographical separation requires
___________________
internal inventory transfer to completely integrate components
into final assembly.
___________________
Geographical separation also requires inventories to create market
___________________
assortments. Manufactured goods from various locations are
collected at a single warehouse and then combined as a mixed-
product shipment.
Geographical separation permits economic specialization between
the manufacturing and distribution units of an enterprise. When
geographical specialization is utilized, inventory in the form of
materials, semi-finished goods or components, and finished goods
)U
is introduced to the logistical system. Each location requires a
basic inventory. In addition, in-transit inventories are necessary to
link manufacturing and distribution. Although difficult to
measure, the economies gained through geographical specialization
are expected to more than offset increased inventory and
transportation cost.
Decoupling
A second inventory function, decoupling, provides maximum
operating efficiency within a single manufacturing facility by
stockpiling work-in process between production operations.
Decoupling processes permit each product to be manufactured and
distributed in economical lot sizes that are greater than market
(c
demands. Warehouse inventory produced in advance of need

permits distribution to customers in large quantity shipments with
minimum freight cost. In terms of marketing, decoupling permits
products manufactured over time to be sold as an assortment.
Thus decoupling tends to "buffer," or cushion, the operations of the
enterprise from uncertainty.
151
Decoupling differs from geographical specialization: the former
Notes
S
enables increased operating efficiency at a single location, while
the latter includes multiple locations. ___________________
___________________
Balancing Supply and Demand
___________________
A third inventory function, balancing, is concerned with elapsed
___________________
time between consumption and manufacturing. Balancing
inventory reconciles supply availability with demand. ___________________
PE
For example, the most notable examples of balancing are seasonal ___________________
production and year-round consumption. Orange juice is one such ___________________
product. Another example of year-round production with seasonal
___________________
consumption is antifreeze. Balancing inventories link the
economies of manufacturing with variations of consumption. ___________________
___________________
Buffer Uncertainties
The safety stock or buffer stock function concerns short-range
variation in either demand or replenishment. Considerable
inventory planning is devoted to determining the size of safety
stocks. In fact, most overstocks are the result of improper
planning.
)U
The safety stock requirement results from uncertainty concerning
future sales and inventory replenishment. If uncertainty exists, it
is necessary to protect inventory position. In a sense, safety stock
planning is similar to purchasing insurance.
Safety stock protects against two types of uncertainty. The first
type concerns demand in excess of forecast during the performance
cycle. The second type of uncertainty involves delays in the
performance-cycle length itself. An example of demand uncertainty
is a customer request of more or less units than planned.
Performance-cycle length uncertainty results from a delay in order
receipt, order processing, or transportation.
Thus we can say that or rather we can conclude that:
1. The four functions of inventory are geographical specialization,
(c
decoupling, balancing supply and demand, and buffering

uncertainties with safety stock.
2. Inventory policy consists of guidelines concerning what to
purchase or manufacture, when to take action, and in what
quantity. It also includes decisions regarding inventory
positioning and placement at plants and distribution centres.
152
For example, some firms may decide to postpone inventory
Notes
S
positioning by maintaining stock at the plant.
___________________
3. The second inventory policy element concerns inventory
___________________
management strategy.
___________________
4. The service level is a target specified by management. It
___________________ defines the performance objectives that the inventory function
___________________ must be capable of achieving.
PE
___________________ 5. The service level can be defined in terms of an order cycle time,
___________________ case fill rate, line fill rate, order fill rate, or any combination of
the above.
___________________
6. The performance cycle is the elapsed time between the release
___________________
of a purchase order by a customer and the receipt of the
___________________ corresponding shipment.
7. Average inventories include cycle, safety stock, and transit
inventory components.
8. Cycle Inventory Cycle inventory, or base stock, is the portion of
average inventory that results from the replenishment process.
At the beginning of a performance cycle, stock is at a maximum
)U
level. Daily customer demands "draw off" inventory until the
stock level reaches zero.
9. A replenishment order is initiated so that stock will arrive
before a stock out occurs. The replenishment order must be
initiated when the available inventory is greater than or equal
to the customer demand during the performance-cycle time.
The amount ordered for replenishment is called the order
quantity.
10. The average inventory held as a result of the order process is
referred to as base stock.
11. Another commonly used term to identify this aspect of
inventory is lot size stock.
12. Transit Inventory represents stock that is either moving or
(c
awaiting movement in transportation vehicles. This portion of

total inventory is referred to as transit or pipeline inventory.
13. From a logistics management perspective, transit inventory
introduces two sources of complexity into the supply chain.
Firstly, transit inventory represents real assets and must be
paid for, even though it is not accessible or usable. Secondly,
there has typically been a high degree of uncertainty associated 153

with transit inventory because shippers were unable to Notes
S
Activity
determine where a transport vehicle was located or when it was
Give___________________
a diagrammatic
likely to arrive. representation to show that
cost___________________
of inventory increases
14. The second part of average inventory is the stock held to with time.
___________________
protect against the impact of uncertainty on each facility. This
portion of inventory is called safety stock. Safety stock ___________________
inventory is used only at the end of replenishment cycles when ___________________
PE
uncertainty has caused higher than expected demand or longer ___________________
than expected performance-cycle times.
___________________
1. …………….. permits economic specialization between ___________________

the manufacturing and distribution units of an
enterprise.
2. …………….. processes permit each product to be
manufactured and distributed in economical lot sizes.
Inventory Costs
)U
Inventory is the major source of cost in the supply chain and also
the basis for improving customer service and enhancing customer
satisfaction.
For example, high inventory at retail outlets may help in making
the goods easily available to customers and also result in a growth
in sales, but it will also increase costs and bring down profitability.
These are two major issues in conflict with each other that need to
be resolved, in order to optimize the inventory carried by the
organization.
Excess inventory is a cost burden to industry in terms of capital
tied up, the cost of obsolescence and the cost of servicing product in
the supply chain. However, having the right amount of inventory
(c
to meet customer requirements is critical. Inventory management

is about two things: not running out, and not having too much.
Essentially, inventory is a reserve system to prevent stockouts.
However, as important as it is to prevent such a stockout, you also
don't want to hold onto too much inventory because holding costs
can become a major encumbrance. So how do you balance the two
154 and what is the right amount? More importantly, when should you
Notes reorder in order to prevent a stockout? The answer to this can be
S
___________________ determined by obtaining and applying the appropriate inventory
models in decision-making.
___________________
___________________ The heart of inventory decisions lies in the identification of

inventory costs and optimizing the costs relative to the operations
___________________
of the organization. As inventory is a necessary but idle resource,
___________________ stock levels and inventory costs in manufacturing need to be
PE
___________________ minimized.
___________________ storage
C
___________________ B assem bly
storage
___________________ subassem bly
___________________ COST
fabrication storage
Storage
A
R aw F inished
M aterial W ork-in-P rocess G oods
O
M anufacturing C ycle Tim e
Throughput Tim e
M aterials TIM E P roduct
Acquisition S hipm ent
O A = m aterial cost
)U
A B = labour cost
B C = factory overhead
O C = total product cost
Figure 12.1: Cost of Inventory with Time
The total inventory held is additive in nature. Raw materials are

converted to finished goods through a number of incremental
processes. Regardless of the operating process, all production costs
incurred during a particular period to the jobs or products
produced during that time period are assigned to the inventory.
These processes also add to the cost of inventory held by the
organization. Therefore, the cost of inventory increases with time.
This is shown in Figure 12.1.
What are the costs identified with inventory? The costs generally
(c
associated with inventories are shown in Figure 12.2 and each

component of this cost is described below.
155
600
Notes
S
500 ___________________
___________________
Cost of Stocking a Material ( `)
400
Minimum ___________________
Total Inventory
300
Costs ___________________
osts
ntory C
Total Inve
ts ___________________
PE
C os
r r ying
200 Ca
___________________
Stock-out Costs
___________________
100
Procure ment Costs /Set-up Costs
EOQ ___________________
___________________
0 200 400 600 800 1000
Source: Upendra Kachru (2010), Exploring the Supply Chain, Excel Books. ___________________
Figure 12.2: Total Inventory Costs
Average Inventory
Average inventory is defined as half the batch size plus safety
stock.
Average inventory = (Order quantity + Safety stock)/2
)U
The assumption made is that at any point in time, the cycle stock
(stock planned to be used excluding safety stock) is on an average
half the recipient quantity i.e. it is half-way in-between the receipt
quantity and zero left. The practical implication of this is that it
reduces order quantity and the average cycle stock by half. If a
part is manufactured in smaller batches, the inventory goes down.
Safety stock is determined from such factors as customer service
level required, demand variability and replenishment lead-time.
Once the customer service level required is agreed upon, safety
stock is calculated.
Holding (or Carrying) Costs

The very fact that an item is held in stock accrues cost. These are
(c
the real costs to hold inventory. Such costs are called inventory
holding costs or carrying costs. This broad category includes the
costs for:
Storage and Handling: This includes the total warehousing
facility. This is typically 6 per cent. It is estimated that the total
cost to the company is 35 per cent per annum of the value of
inventory held, or 3 per cent a month.
156
Insurance: Insurance accounts for a portion of the inventory
Notes
S
costs. Since it is better to be safe than sorry, companies generally
___________________
get the material insured. It generally works out to 1 per cent.
___________________
Pilferage and Spoilage: This accounts for anything from 2 per
___________________ cent upwards, depending on the industry and the type of inventory
___________________ that is being carried.
___________________ Obsolescence and Deterioration: This is inventory which is
PE
classified as being unfit to sell, or lying in the storage waiting for
___________________
the appropriate use. It is typically estimated to be about 1 per cent
___________________
of the Inventory carrying cost.
___________________
Opportunity Cost of Capital: This is the cost to set-up the
___________________ warehousing facility. This is charged at the "Lost opportunity cost"
___________________ and not the interest rate.
Typically rated at 25 per cent, this "Lost opportunity cost" is the
return that could have been obtained if the capital had been
invested in anything other than inventory.
In addition, there are some other charges that may among other
things include depreciation and taxes.
)U
Holding costs increase proportionately with the increase in the
inventory level. Obviously, if the holding costs are high, the
organization should try to carry lower inventory and frequently
replenish the stock.
Though holding costs are represented by a straight line, there are
some fixed and variable costs of holding inventory i.e. some of the
costs will not change by increase or decrease in inventory levels,
while some costs are dependent on the levels of inventory held. The
general breakdown for inventory holding costs has been shown in
Table 12.1.
Table 12.1: Fixed and Variable Holding Costs

Fixed costs Variable cost
Capital costs of warehouse or store Cost of capital in inventory
Cost of operating the warehouse or Insurance on inventory value
(c
store Losses due to obsolescence, theft,

Personnel costs spoilage
Cost of renting warehouse or storage
space
157
Capital costs and costs of operating the warehouse including the
Notes
S
personnel are fixed, but interest costs of capital held in inventory
etc. are variable. ___________________
___________________
Ordering Costs
___________________
What is the real cost of placing and processing a purchase order?
___________________
The total cost includes the cost of purchasing, receiving, incoming
inspection and the accounts payable. Each of these departments ___________________
PE
exists to satisfy continuous demand for material. We arrive at a ___________________
simple equation to calculate the Avg. cost per order as:
___________________
Avg. Cost per Order = Total Budget/Number of Orders placed per
___________________
year
___________________
Although it costs money to hold inventory, it also, unfortunately,
___________________
costs money to replenish inventory, either through the purchase
cycle or through the manufacturing cycle.
Inventory Ordering Costs are those costs that are incurred in the
purchase cycle are called procurement costs or inventory ordering
costs. Ordering costs have two components:
(a) One component that is relatively fixed, and
)U
(b) Another component that will vary.
Table 12.2: Fixed and Variable Ordering Costs
Fixed Costs Variable Costs
Staffing costs (payroll, benefits, Shipping costs

etc.)
Cost of placing and order (phone,
Fixed costs on IT systems postage, order forms)
Office rental and equipment costs Running costs of IT systems
Fixed costs of vendor development Receiving and inspection costs
Variable costs of vendor development
The fixed and variable components of the ordering or procurement

(c
costs are shown in Table 12.2. Referring back to Figure 12.2, it will
be seen that inventory ordering costs decrease increasingly with
the increase in inventory. This can be explained if we are able to
clearly differentiate between those ordering costs that do not
change much and those that are incurred each time an order is
placed.
158
One major component of cost associated with inventory is the cost
Notes
S
of replenishing it. If a part or raw material is ordered from outside
___________________
suppliers, and places orders for a given part with its supplier three
___________________ times per year instead of six times per year, the costs to the
___________________ organization that would change are the variable costs, and which
would probably not are the fixed costs.
___________________
There are costs incurred in maintaining and updating the
___________________
PE
information system, developing vendors, evaluating capabilities of
___________________ vendors. Ordering costs also include all the details, such as
___________________ counting items and calculating order quantities. The costs
___________________
associated with maintaining the system needed to track orders are
also included in ordering costs. This includes phone calls, typing,
___________________
postage, and so on.
___________________
Clearly, the fixed costs related to procurement or order placement
are significantly greater than the variable costs associated with
placing orders.
Setup (or Production Change) Costs

Ordering costs are incurred in the purchase cycle, while set-up
costs are incurred in the manufacturing cycle. These two costs are
)U
considered to be exclusive.
For manufactured items, the equivalent cost is known as set-Up.
In the case of subassemblies, or finished products that may be
produced in-house, the costs associated with changing over
equipment from producing one item to producing another is
usually referred to as setup costs.
This includes all the costs that are not related to the order
quantity (the costs incurred to prepare the order paperwork,
processing and tracking the order operations, the cost of setting up
the machine, and first off inspection). This total
ordering/processing cost is eventually passed on to the products.
Set-up costs reflect the costs involved in obtaining the necessary
materials, arranging specific equipment setups, filling out the
(c
required papers, appropriately charging time and materials, and

moving out the previous stock of materials, in making each
different product.
Shortage or Stock-out Costs

No manufacturing facility can afford to keep sufficient stock to
meet every demand. Stock-outs occur at some point. Stock-outs
result in either a lost sale, or if the customer is prepared to wait, a 159

back order. Lost sale reflects the risk of losing the business to Notes
S
competition. In addition, back orders cause additional costs, viz. ___________________
extra paperwork, the time spent handling this extra paperwork, a ___________________
system to handle the back orders, extra delivery notes, and
___________________
invoices, extra packing and delivery costs.
___________________
When the stock of an item is depleted, an order for that item must
___________________
PE
either wait until the stock is replenished or be cancelled. There is a
___________________
trade-off between carrying stock to satisfy demand and the costs
resulting from stockout. The costs that are incurred as result of ___________________
running out of stock are known as stock out or shortage costs. ___________________
Understanding the cost of a stockout is critical to the ___________________
implementation of any inventory model. Unless these costs are ___________________

known, the organization cannot balance the costs (and risk) of
holding inventory with the loss of profits when an item is out of
stock.
For a retailer, the costs include both the lost profits from the
immediate order because of cancellations, and the long-run costs if
)U
stockouts reduce the likelihood of future orders. For a
manufacturer, these include the loss of production as well as
capacity. In addition, the ultimate consequence is that sales of
goods may be lost, and finally customers can be lost.
If the unfulfilled demand for the items can be satisfied at a later

date (back order case), in this case, cost of back orders are assumed
to vary directly with the shortage quantity (in rupee value) and the
cost involved in the additional time required to fulfil the backorder
(`/`/year).
However, if the unfulfilled demand is lost, the cost of shortages is

assumed to vary directly with the shortage quantity (`/unit
shortage). When this is related to the total cost of inventory, the
(c
cost decreases increasingly with the increase in inventory, as this

cost is relatively fixed with respect to the value of the inventory.
Frequently, the assumed shortage cost is little more than a guess,

although it is usually possible to specify a range of such costs.
160
Check Your Progress
Notes
S
Activity
State whether the following statements are True or False
Do ___________________
you agree with the
statement that ordering costs 1. Raw materials are converted to finished goods through a
are ___________________
incurred in the purchase
cycle? If yes, give reasons. number of incremental processes.
___________________
2. Inventory is not a reserve system to prevent stockouts.
___________________
___________________
Planning Inventory
PE
___________________
This section describes the key parameters and procedures for
___________________
planning inventory. The discussion focuses on three issues: when
___________________ to order, how much to order, and inventory control procedures.
___________________
Determining Order Point (When to Order?)
___________________
The reorder point determines when a re-supply shipment should be
initiated. The reorder point, which is defined by item and
distribution centre, can be specified in terms of units or days of
supply.
This discussion focuses on determining reorder points under
conditions of demand and performance-cycle certainty. The
)U
certainty conditions imply that future demands and performance-
cycle lengths are known.
The basic reorder point formula is:
R =D × T
where,
R = Reorder point in units
D = Average daily demand
T = Average performance-cycle length
To illustrate this calculation, assume demand of 10 units/day and a
20-day performance cycle. In this case,
= 10 units/day × 20 days = 200 units
(c
The use of the reorder point formulations implies that the

re-supply shipment will arrive just as the last unit is shipped to a
customer. This approach is satisfactory as long as both demand
and performance cycles are certain. When there is uncertainty in
either demand or performance-cycle length, an inventory buffer is
necessary to compensate for the uncertainty.
161
When this buffer stock is necessary for conditions of uncertainty,
Notes
S
the reorder point formula is
___________________
R = D × T + SS
___________________
where,
___________________
R = Reorder point in units
___________________
D = Average daily demand
___________________
PE
T = Average performance-cycle length
___________________
SS = Safety or buffer stock in units ___________________
Determining Lot Size (How Much?) ___________________
The lot sizing concept balances the cost of maintaining inventories ___________________
against the cost of ordering. The key to understanding the ___________________

relationship is to remember that average inventory is equal to
one-half the order quantity. Therefore, the larger the order
quantity, the larger the average inventory and, consequently, the
greater the maintenance cost per year is. However, the larger the
order quantity, the fewer orders required per planning period and,
consequently, the lower the total ordering cost. Lot quantity
)U
formulations identify the precise quantities at which the annual
combined total cost of ordering and maintenance is lowest for a
given sales volume.
Economic Order Quantity (EOQ)

The Economic Order Quantity is the replenishment order quantity
that minimizes the combined cost of inventory maintenance and
ordering. Identification of such a quantity assumes that demand
and costs are relatively stable throughout the year.
Since an EOQ is calculated on an individual product basis, the
basic formulation does not consider the impact of joint ordering of
products.
The most efficient method for calculating economic order quantity
(c
is mathematical. To make the appropriate calculations, the

standard formulation for EOQ is
EOQ = 2Co D/Ci U
where,
EOQ = Economic Order Quantity (EOQ)
162
Co = Cost per order
Notes
S
___________________
Ci = Annual inventory carrying cost
___________________ D = Annual sales volume, units
___________________ U = Cost per unit
___________________ While the EOQ model determines the optimal replenishment

___________________
quantity, it does require some rather stringent assumptions that
PE
constrain its direct application. The major assumptions of the
___________________
simple EOQ model are:
___________________
1. Satisfaction of all demand
___________________
2. Continuous, constant, and known rate of demand
___________________
3. Constant and known replenishment performance-cycle time
___________________
4. Constant price of product that is independent of order quantity
or time (i.e., no purchase quantity or transportation price
discounts are available)
5. Infinite planning horizon
6. No interaction between multiple items of inventory
7. No inventory in transit
)U
8. No limit on capital availability. The constraints imposed by
some of these assumptions can be overcome through
computational extensions. However, the EOQ concept
illustrates the importance of the trade-offs associated with
holding and acquisition cost.
EOQ Extensions
While the EOQ formulation is relatively straightforward, there are
some other factors that must be considered in actual application.
The most persistent problems are those related to various
adjustments necessary to take advantage of special purchase
situations and unitization characteristics.
(c
Three typical adjustments are volume adjustment, quantity

discounts, other adjustments, volume transportation rates.
In the EOQ formulation, no consideration was given to the impact
of transportation cost on order quantity. When products are
purchased on a delivered basis and the seller pays transportation
cost from origin to the inventory destination, such neglect may be
justified. The seller is responsible for the shipment until it arrives
at the customer's place of business. However, when product 163

ownership is transferred at origin, the impact of transportation Notes
S
rates on total cost must be considered when determining order ___________________
quantity.
___________________
As a general rule, the greater the weight of an order, the lower the
___________________
cost per pound of transportation from any origin to destination is.
A freight-rate discount for larger-size shipments is common for ___________________
both truck and rail and is found in most transportation rate ___________________
PE
structures. Thus, all other things being equal, an enterprise ___________________
naturally wants to purchase in quantities that maximize
___________________
transportation economies. Such quantities may be larger than the
purchase quantity determined using the EOQ method. ___________________
Increasing order size has a twofold impact on inventory cost. ___________________
___________________
Rates
The second impact is a decrease in the number of orders required.
The decreased number of orders increases the shipment size, which
provides better transportation economies.
To complete the analysis, it is necessary to formulate the total cost

with and without transportation savings. While this calculation
)U
can be directly made by modification of the EOQ formulation,
comparison provides a more insightful answer. The only additional
data required are the applicable freight rates for ordering in
quantities to complete the analysis.
The impact of volume transportation rates on total cost of

procurement cannot be neglected. Thus, any EOQ must be tested
for transportation cost sensitivity across a range of weight breaks
if transportation expenses are the buyer's responsibility. Finally,
two factors regarding inventory cost under conditions of origin
purchase are noteworthy. (Origin purchase means that the buyer
is responsible for freight cost and product risk when the product is
in transit.) Firstly, the buyer assumes full risk on inventory at
(c
time of shipment. Depending on time of required payment, this

could mean that transit inventory is part of the enterprise's
average inventory and therefore subjected to an appropriate
charge. It follows that any change in weight break leading to a
shipment method with a different in-transit time should be
assessed the added cost or savings as appropriate in a total-cost
analysis.
164
Secondly, the transportation cost must be added to the purchase
Notes
S
price to obtain an accurate assessment of the value of goods tied up
___________________
in inventory. Once the inventory has been received, the amount
___________________ invested in the product must be increased by the transportation
___________________ expenses. Inventory carrying cost should then be assessed on the
combined cost of the item plus transportation.
___________________
Quantity discounts can be handled directly with the basic EOQ
___________________
PE
formulation by calculating total cost at any given volume-related
___________________ purchase price to determine associated EOQs. If the discount at
___________________ any associated quantity is sufficient to offset the added cost of
___________________
maintenance less the reduced cost of ordering, then the quantity
discount offers a viable alternative. It should be noted that
___________________
quantity discounts and volume transportation rates each affect
___________________ larger purchase quantities. This does not necessarily mean that
the lowest total-cost since it represents a fixed cost once the
decision is made to replenish product. If it is decided to use a
private fleet to transport replenishment product, the enterprise
should fill the truck regardless of the EOQ.
Another consideration when establishing the order quantity is the
unitization characteristic. Many products are stored and moved in
)U
standard units such as cases or pallets. Since these standardized
units are designed to fit transportation or handling vehicles, there
may be significant diseconomies when the EOQ is not a unit
multiple.
Other EOQ Adjustments

A variety of special situations may occur that will require
adjustments to the basic EOQ. Examples are:
1. Production lot size,
2. Multiple-item purchase, and
3. Limited capital.
Private trucking Production lot size refers to the most economical
(c
quantities from a manufacturing perspective. Multiple-item

purchase describes situations when more than one product is
bought concurrently, so that quantity and transportation discounts
must consider the impact of product combinations. Limited capital
refers to situations with budget limitations for total inventory
investment. Since the product line must be satisfied within the
budget limitations, order quantities must recognize the need to 165

allocate the inventory investment across the product line. Notes
S
___________________
Discrete Lot Sizing
___________________
Not all re-supply situations operate with uniform usage rates like
those in the previous EOQ computations. In many manufacturing ___________________
situations, the demand for a specific component tends to occur at ___________________
irregular intervals and for varied quantities. The irregular nature
___________________
PE
of usage requirements is a consequence of demand being
dependent upon the production schedule. That is, the required ___________________
assembly parts must be available at the time manufacture occurs. ___________________
Between requirement times, no need exists to maintain component
___________________
inventory in stock if it can be obtained when needed. Inventory
servicing of dependent demand requires a modified approach to the ___________________
determination of order quantities, referred to as discrete lot sizing. ___________________
Identification of the technique as "discrete" means the
procurement objective is to obtain a component quantity equal to
the net requirements at a specific point in time. Because
component requirements fluctuate, purchase quantities using
discrete lot sizing will vary between orders. Varieties of lot sizing
techniques are available. The options of:
1. Lot-for-lot sizing
)U
2. Period order quantity
3. Time-series lot sizing.
Lot-for-lot Sizing
The most basic form of discrete ordering is to plan purchases to
cover net requirements over a specified period. No consideration is
given to the cost of ordering under lot-for-lot sizing. In one sense,
the lot-for-lot technique is pure dependent-demand-oriented, since
no ordering economies are considered. The order quantity exactly
matches manufacturing or demand quantity. The basic technique
is often used when the item being purchased is inexpensive and
the requirements are relatively small and irregular. Lot-for-lot
sizing often uses electronic order transfer and premium
(c
transportation to minimize processing and delivery time.
Period Order Quantity (POQ)

The Period Order Quantity technique builds on the EOQ logic.
Here, three steps are performed to accomplish component
procurement. Firstly, the standard EOQ is calculated. Secondly,
166 the EOQ quantity is divided into forecasted annual usage to

Notes determine order frequency. Thirdly, the number of orders is
S
___________________ divided into the relevant time period (e.g., fifty-two for weeks or
twelve for months) to express the order quantity in time periods.
___________________
___________________ To illustrate, let's work with an EOQ of 300 and a forecast of 2,400.
To adjust to a twelve-period year, the POQ technique would be as
___________________
follows:
___________________
PE
EOQ = 300
___________________
Forecast = 2400
___________________
Orders per Year = 2400/300
___________________
= 8.00
___________________
Order Interval = 12/8.00
___________________
= 1.5 Months
Under the POQ application, orders are planned approximately
every six weeks. The typical order is 300 units unless usage
deviates from planned quantity and requires a "catch-up" or "light"
re supply order.
The main advantage of the POQ approach is that it considers
)U
inventory-carrying cost and thereby minimizes inventory
carryover. The disadvantage is that similar to the basic EOQ, POQ
also requires stable demand to realize its full potential.
Time-series Lot Sizing

The fundamental objective of time-series lot sizing is to combine
requirements over several periods to arrive at procurement logic.
The time-series approach is dynamic because the order quantity is
adjusted to meet current requirement estimates. This is in contrast
to basic EOQ, which is static in the sense that once the order
quantity is computed, it continues unchanged for the demand-
planning horizon.
The key to dynamic lot sizing is that requirements are expressed in
(c
varying quantities across time rather than in usage rates per day
or week, as is typical of the basic EOQ. Given substantial usage
fluctuation, fixed order quantities are replaced by a lot sizing
system that can calculate an economical order given changing and
intermittent usage. Three such techniques are widely discussed in
the literature and are briefly reviewed here: least unit cost, least 167
total cost, and part period balancing. Notes
S
___________________
Least Unit Cost
___________________
It seeks to identify a combination of requirements over a number of
___________________
periods resulting in the lowest cost per SKU. Starting with initial
period net requirements, each future period's per unit ___________________
requirements are evaluated to determine a combined quantity for a ___________________
PE
given number of periods in which the unit cost is minimized. The
___________________
least-unit-cost approach essentially evaluates purchasing
requirements in incremental number of weeks of supply into the ___________________
future. ___________________
The first week considers one week of supply. The analysis then ___________________
considers adding a second week. Unit cost-including quantity ___________________
discounts, ordering cost, inventory-carrying cost, and
transportation cost-is evaluated for each option.
While the discount, ordering, and transportation costs will cause
average unit cost to decline as more periods are added, inventory-
carrying cost will increase as more time periods are added because
of the additional inventory. Thus, order quantities and order
)U
frequency will vary substantially under the least-unit-cost
technique. While this approach does provide a way to overcome the
static features of EOQ and POQ, the technique may cause unit
costs to vary widely between time periods.
Least Total Cost

The least-total-cost approach seeks the quantity that minimizes
total cost for successive periods. In this sense, least total cost,
which is the balancing of ordering and carrying, is similar to EOQ
in objective. The fundamental difference is that order interval is
varied to seek the least total cost. The calculation is based on a
ratio of ordering to carrying cost (CdCi), called the economic part
period. The economic part period defines the quantity of a specific
component that, if carried in inventory for one period, would result
(c
in a carrying cost equal to the cost of ordering. The least-total-cost

technique selects order sizes and intervals that most nearly
approximate the economic part-period calculation. Thus, order
sizes remain fairly uniform; however, substantial differences do
occur in elapsed time between order placements. The least-total-
168 cost technique overcomes the failure of the least unit cost to
Notes consider trade-offs across the overall planning period.
S
___________________
Part-period Balancing
___________________
Part-period balancing is a modified form of the least-total-cost
___________________
technique that incorporates a special adjustment routine called
___________________
look-ahead look-back.
___________________
The main benefit of this feature is that it extends the planning
PE
___________________ horizon across more than one ordering point to accommodate usage
___________________ peaks and valleys when calculating order quantities. Adjustments
are made in order time or quantity when a forward or backward
___________________
review of more than one order requirement indicates that
___________________ modifications to the economic part-period may be beneficial. The
___________________ typical procedure is to first test the look-ahead feature to
determine if more time results in approximation of the economic
part-period quantity. Look-back is typically utilized if look-ahead
leaves the lot size unchanged. In this sense, look-back means that
a future order, which under the economic part-period rule would
normally be scheduled for delivery during the fourth period, should
be advanced if earlier delivery would reduce total cost. The net
)U
result of incorporating the look-ahead/look-back feature is that it
turns the application of the economic part period concept into a
simultaneous review of multiple periods.
Managing Uncertainly
Global optimization is made even more difficult because supply
chains need to be designed for, and operated in, uncertain
environments, thus creating sometimes enormous risks to the
organization. A variety of factors contribute to this:
1. Matching supply and demand is a major challenge:
a. Boeing Aircraft announced a write-down of US $2.6 billion in
October 1997 due to “raw material shortages, internal and
supplier parts shortages and productivity inefficiencies . . .”
(c
b. “Second quarter sales at U.S. Surgical Corporation declined

25 per cent, resulting in a loss of US $22 million. The sales
and earnings shortfall is attributed to larger than
anticipated inventories on the shelves of hospitals”.
c. “EMC Corp. said it missed its revenue guidance of US $2.66
billion for the second quarter of 2006 by around $100
million, and said the discrepancy was due to higher than 169
expected orders for the new DMX-3 systems over the DMX- Notes
S
2, which resulted in an inventory snafu”. ___________________
d. “There are so many different ways inventory can enter our ___________________
system it’s a constant challenge to keep it under control”
___________________
[Johnnie Dobbs, Wal-Mart Supply Chain and Logistics
Executive]. ___________________
___________________
PE
e. “Intel, the world’s largest chip maker, reported a 38 per
cent decline in quarterly profit Wednesday in the face of ___________________
stiff competition from Advanced Micro Devices and a ___________________
general slowdown in the personal computer market that
___________________
caused inventories to swell”.
___________________
Obviously, this difficulty stems from the fact that months
___________________
before demand is realized, manufacturers have to commit
themselves to specific production levels. These advance
commitments imply huge financial and supply risks.
2. Inventory and back-order levels fluctuate considerably across
the supply chain, even when customer demand for specific
products does not vary greatly.
)U
3. Forecasting doesn’t solve the problem. Indeed, we will argue
that the first principle of forecasting is that “forecasts are
always wrong.” Thus, it is impossible to predict the precise
demand for a specific item, even with the most advanced
forecasting techniques.
4. Demand is not the only source of uncertainty. Delivery lead
times, manufacturing yields, transportation times, and
component availability also can have significant supply chain
impact.
5. Recent trends such as lean manufacturing, outsourcing, and
offshoring that focus on cost reduction increase risks
significantly.
For example, consider an automotive manufacturer whose parts
(c
suppliers are in Canada and Mexico. With little uncertainty in

transportation and a stable supply schedule, parts can be delivered
to assembly plants “just-in-time” based on fixed production
schedules.
However, in the event of an unforeseen disaster, such as the
September 11 terrorist attacks, port strikes, or weather-related
170 calamities, adherence to this type of strategy could result in a

Notes shutdown of the production lines due to lack of parts. Similarly,
S
___________________ outsourcing and off shoring imply that the supply chains are more
geographically diverse and, as a result, natural and man-made
___________________
disasters can have a tremendous impact.
___________________

PE
___________________ 1. The ……………. determines when a re-supply shipment
should be initiated.
___________________
___________________ 2. The ……………. is the replenishment order quantity

that minimizes the combined cost of inventory
___________________
maintenance and ordering.
___________________
Summary
The ideal inventory process consists of manufacturing a product to
a customer's specifications once an order is placed. Decoupling
processes permit each product to be manufactured and distributed
in economical lot sizes that are greater than market demands.
)U
The safety stock or buffer stock function concerns short-range
variation in either demand or replenishment. Safety stock protects
against two types of uncertainty. Inventory is the major source of
cost in the supply chain and also the basis for improving customer
service and enhancing customer satisfaction.
Lesson End Activity

Illustrate how fine-line inventory classification can be used with
product and market segments. What are the benefits and
considerations when classifying inventory by product, market, and
product/market?
Keywords
(c
Inventory: Stocking of raw materials, in-process, finished,

packaging, tools and equipments, spares and others in order to
meet an expected demand or distribution in future.
Decoupling Processes: It permit each product to be
manufactured and distributed in economical lot sizes that are
greater than market demands.
171
Safety Stock: The safety stock or buffer stock function concerns
Notes
S
short-range variation in either demand or replenishment.
___________________
Excess Inventory: It is a cost burden to industry in terms of
capital tied up, the cost of obsolescence and the cost of servicing ___________________
product in the supply chain. ___________________
Inventory Costs: Costs associated with the maintenance of ___________________

inventory. ___________________
PE
Average Inventory: It is defined as half the batch size plus safety ___________________
stock.
___________________
Inventory Ordering Costs: These are those costs that are
___________________
incurred in the purchase cycle are called procurement costs or
___________________
inventory ordering costs.
___________________
Ordering Costs: These are incurred in the purchase cycle, while
set-up costs are incurred in the manufacturing cycle.

1. Define decoupling.
2. What is buffer uncertainties?
)U
3. Explain the cost of inventory with time.
4. Discuss total inventory costs.
5. What is holding (or carrying) costs?
6. Distinguish between fixed and variable ordering costs.
7. Write brief note on planning inventory.
8. Highlight the factors that contribute to manage uncertainty.
Further Readings
Books
M/s Douglas M. Lambert, James R. Stock and Lisa M. Ellram,
(c
Fundamentals of Logistics Management, Mcgraw-Hill

International Editions.
Mr. Vinod V. Sople, Logistics Management – The Supply Chain
Imperative, Pearson Education.
Mr. H. Kaushal, Case Study Solutions – Materials Management,
Macmillan India Ltd.
172
Ballou, R.H., Business Logistics Management: Planning,
Notes
S
Organizing, and Controlling the Supply Chain, 4th Ed., Prentice
___________________
Hall, 1998.
___________________
Jones, J.V., Integrated Logistics Support Handbook, Special
___________________ Reprint Ed., McGraw Hill, 1998.
___________________
Web Readings
___________________
PE
http://www.barcodesinc.com/articles/what-is-inventory-manageme
___________________
nt.htm
___________________
http://www.managementstudyguide.com/inventory-management.
___________________ htm
___________________ http://scm.ncsu.edu/scm-articles/scm-inventory-management
___________________
)U
(c
UNIT 13: Transportation
Unit 13
173
Notes
S
Activity
Transportation
___________________
Highlight the modal
comparison and dominant
___________________
traffic composition.
___________________
Objectives
___________________
topics: ___________________
PE
\ Transportation Administration and Documentation ___________________
\ Transport Service ___________________
\ Transportation Infrastructure
___________________
___________________
Introduction
___________________
The transportation system is the physical link connecting a
company with the customers, raw material suppliers, plants, ware
houses and distribution channel members. It’s interesting to note
that all these elements of logistic system are fixed points,
transportation is the connecting medium. The better is the
performance and efficiency of transportation system the better will
)U
be organisational performance in terms of cost and customer’s
satisfaction. Knowledge of logistics and transportation is
fundamental to the operations of any business. Transportation
adds value to the goods by providing time and place utility, by
ensuring availability of items when they are needed, and where
they are needed. For most companies there is a geographical
spread between the source and market of goods produced because
of economies of scale and mass production, specialization of labour,
infrastructural facilities, etc. Transportation is the connecting link.
Transportation Infrastructure
Transportation infrastructure can broadly be classified as
hardware and software. Hardware consists of physical assets that
(c
comprise terminals, storage facilities, right of way for movement

and vehicles/equipment. Software, which is essentially the service
superstructure, consists primarily of maintenance, operations and
value added services.
The nature of the infrastructure also determines a variety of
economic and legal characteristics for each mode or inter-modal
(multimodal) system. A mode identifies the basic transportation
174 method or form. Bulk goods are typically transported in large

Notes shipment sizes. Therefore, dedicated vehicles and specialized
S
___________________ modes of transport and handling are important. Industrial goods
have high value and are often critical. Therefore, there is a need
___________________
for speedier transport of goods. The selection of the mode of
___________________
transportation is based on these criteria.
___________________
Transportation infrastructure consists of the rights-of-way,
___________________ vehicles, and carrier organizations that offer transportation
PE
___________________ services on a for-hire or internal basis. The nature of the
infrastructure also determines a variety of economic and legal
___________________
characteristics for each mode or multimodal system. A mode
___________________
identifies the basic transportation method or form.
___________________
Modal Characteristics
___________________
The five basic transportation modes are rail, highway, water,
pipeline, and air. The relative importance of each mode can be
measured in terms of system mileage, traffic volume, revenue, and
the nature of traffic composition. Each mode is discussed with
respect to these measures.
Rail Network
)U
Historically, railroads have handled the largest number of
ton-miles continental. As a result of the early establishment of a
comprehensive rail network connecting almost all cities and towns,
railroads dominated intercity freight tonnage until after World
War II. This early superiority resulted from the capability to
transport large shipments economically and to offer frequent
service, which gave railroads a somewhat monopolistic position.
However, with the advent of serious motor carrier competition
following World War II, the railroads' share of revenues and
ton-miles started to decline.
The capability to efficiently transport large tonnage over long

distances is the main reason railroads continue to handle
(c
significant intercity tonnage and revenue. Railroad operations

incur high fixed costs because of expensive equipment, right of way
(railroads must maintain their own track), switching yards, and
terminals. However, rail experiences relatively low variable
operating costs. The replacement of steam by diesel power reduced
the railroads' variable cost per ton-mile, and electrification offers
potential for more reductions.
Motor Carriers 175

Notes
S
Highway transportation has expanded rapidly since the end of
World War II. To a significant degree the rapid growth of the ___________________
motor carrier industry results from door-to-door operating ___________________

flexibility and speed of intercity movement.
___________________
Motor carriers have flexibility because they are able to operate on ___________________
all types of roadways. In comparison to railroads, motor carriers
___________________
PE
have relatively small fixed investments in terminal facilities and
operate on publicly maintained highways. Although the cost of ___________________
license fees, user fees and tolls is considerable, these expenses are ___________________
directly related to the number of over-the-road units and miles
___________________
operated. The variable cost per mile for motor carriers is high
___________________
because a separate power unit and driver are required for each
trailer or combination of tandem trailers. Labour requirements are ___________________
also high because of driver safety restrictions and the need for
substantial dock labour.
The characteristics of motor carriers favour manufacturing and
distributive trades, short distances, and high-value products.
Motor carriers have made significant inroads into rail traffic for
medium and light manufacturing. Because of flexibility of delivery,
)U
they have captured almost all freight moving from wholesalers or
warehouses to retail stores. The prospect for maintaining stable
market share in highway transport remains bright.
The primary difficulties relate to increasing cost to replace
equipment, maintenance, driver wages, and platform and dock
wages. Although accelerating labour rates influence all modes of
transport, motor carriers are more labour-intensive, which causes
higher wages to be a major concern. To counteract this trend,
carriers have placed considerable attention on improved line-haul
scheduling that bypasses terminals, computerized billing systems,
mechanized terminals, tandem operations that pull two or three
trailers by a single power unit, and utilization of coordinated
intermodal systems. These enhancements reduce labour intensity
(c
and, thus cost.
Water Transport
Water is the oldest mode of transportation. The original sailing
vessels were replaced by steamboats in the early 1800s and by
diesel power in the 1920s. A distinction is generally made between
deep-water and navigable inland water transport.
176
The main advantage of water transportation is the capacity to
Notes
S
move extremely large shipments. Water transport employs two
___________________
types of vessels. Deep-water vessels, which are generally designed
___________________ for ocean and great lakes use, are restricted to deep-water ports for
___________________ access. In contrast, diesel-towed barges, which generally operate
on rivers and canals, have considerably more flexibility.
___________________
Water transport ranks between rail and motor carrier in respect to
___________________
PE
fixed cost. Although water carriers must develop and operate their
___________________ own terminals, the right-of-way is developed and maintained by
___________________ the government and results in moderate fixed costs compared to
___________________
rail and highway.
___________________ The capability of water to carry large tonnage at low variable cost
places this mode of transport in demand when low freight rates are
___________________
desired and speed of transit is a secondary consideration.
Pipelines
It operates on a twenty-four-hour basis, seven days per week, and
is limited only by commodity changeover and maintenance. Unlike
other modes, there is no empty "container" or "vehicle" that must
be returned. Pipelines have the highest fixed cost and lowest
)U
variable cost among transport modes. High fixed costs result from
the right-of-way, construction and requirements for control
stations, and pumping capacity. Since pipelines are not labour-
intensive, the variable operating cost is extremely low once the
pipeline has been constructed. An obvious disadvantage is that
pipelines are not flexible and are limited with respect to
commodities that can be transported: only products in the form of
gas, liquid, or slurry can be handled.
Air Transport
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
(c
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.
Air transport still remains more of a potential opportunity than a
reality. Although the mileage is almost unlimited, airfreight
accounts for significantly less than 1 per cent of all intercity ton- 177
miles. Air transport capability is limited by lift capacity (i.e., load Notes
S
size constraints) and aircraft availability. Traditionally, most ___________________
intercity airfreight utilized scheduled passenger flights. While this
___________________
practice was economical, it resulted in a reduction of both capacity
and flexibility. ___________________
___________________
Table 13.1: Modal Comparison and Dominant Traffic Composition
___________________
PE
Mode Nature of traffic Composition
Rail Extracting industries, Heavy manufacturing, ___________________
Agricultural commodities
___________________
Highway Medium and light manufacturing, Distribution
between wholesalers and retailers ___________________
Water Mining and basic bulk commodities, Chemicals, ___________________

Cement, Some agricultural products
___________________
Pipeline Petroleum, Coal slurry, No particular commodity
Air Emergency rather than regular basis
Transport Functionality and Principles

Transportation functionality provides two major functions:
)U
z Product Movement: Whether the product is in the form of
materials, components, assemblies, work in process, 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.
z 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
(c
exceed. 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.
178
In summary, although product storage in transportation vehicles
Notes
S
can be costly, it may be justified from a total-cost or performance
___________________
perspective when loading or unloading costs, capacity constraints,
___________________ or the ability to extend lead times are considered.
___________________
Principles
___________________
There are two fundamental principles guiding transportation
___________________ management and operations. They are economy of scale and
PE
___________________ economy of distance.
___________________
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 pound than Less-
than Truckload (LTT) 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 motor or air. Transportation
)U
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.
Economy of Distance
It refers to the characteristic that transportation cost per unit of
distance decreases as distance increases.
For example, a shipment of 800 miles will cost less than two
(c
shipments (of the same combined weight) of 400 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 179

spread over more miles, resulting in lower overall per mile charges. Notes
S
These principles are important considerations when evaluating ___________________
alternative transportation strategies or operating practices. The ___________________
objective is to maximize the size of the load and the distance that it
___________________
is shipped while still meeting customer service expectations.
___________________
Participants ___________________
PE
Transport transactions are often influenced by five parties: the ___________________
shipper (the original party), the consignee (destination party or
___________________
receiver), the carrier, the government, and the public.
___________________
___________________
___________________
Figure 13.1: Participants in Transportation

)U
Relationship between the Shipper, the Consignee and the Public
Figure 13.1 illustrates the relationship between these parties.
They may be related by ownership in some situations, such as
when company-owned vehicles are used to transport goods between
two company locations. In many cases, however, the parties are
independently owned and operated. In order to understand the
complexity of the transportation environment, it is necessary to
review the role and perspective of each party.
Shippers and Consignees

The shipper and consignee have the common objective of moving
goods from origin to destination within a prescribed time at the
lowest cost. Services include specified pickup and delivery times,
(c
predictable transit time, zero loss and damage, as well as accurate

and timely exchange of information and invoicing.
Carriers
The carrier, as the intermediary, takes a somewhat different
perspective. Carriers desire to maximize their revenue associated
180 with the transaction while minimizing the costs necessary to

Notes complete the transaction. The perspective suggests that a carrier
S
___________________ wants to charge the highest rate that the shipper (or consignee)
will accept and minimize the labour, fuel, and vehicle costs
___________________
required to move the goods. To achieve this objective, the carrier
___________________
desires flexibility in pickup and delivery times to allow individual
___________________ loads to be consolidated into economic moves.
___________________
PE
Government
___________________
The government maintains a high interest level in the transaction
___________________
because of transportation's impact on the economy. Government
___________________ desires a stable and efficient transportation environment to
___________________ sustain economic growth. Transportation enables the efficient
movement of products to markets throughout the country and thus
___________________
promotes product availability at a reasonable cost. The situation in
the Soviet Union prior to its breakup demonstrates the impact of
an inadequate transportation system. Although not the only
reason, the transportation system was a contributing factor in the
Soviet economy's inability to supply food to the market even
though adequate production existed.
)U
A stable and efficient commercial economy requires that carriers
offer competitive services while operating profitably. Many
governments are more involved with carrier activities and
practices than with other commercial enterprises. Involvement
may take the form of regulation, promotion, or ownership.
Governments regulate carriers by restricting the markets they can
service or by setting the prices they can charge. Governments
promote carriers by supporting research and development or by
providing rights-of-way such as roadways or air traffic control
systems. In countries like the United Kingdom or Germany, some
carriers are owned by the government, which maintains absolute
control over markets, services, and rates. Such control allows
government to have a major influence on the economic success of
regions, industries, or firms.
(c
Public
The final participant, the public, is concerned with transportation
accessibility, expense, and effectiveness, as well as environmental
and safety standards. The public ultimately determines the need
for transportation by demanding goods from around the world at
reasonable prices. While minimizing transportation cost is
important to consumers, trade-offs associated with environmental 181

and safety standards also require consideration. The effects of air Notes
S
Activity
pollution and oil spills remain a significant transportation issue ___________________
Do an online research on the
even though there have been tremendous strides in pollution emerging concepts of
___________________
transportation.
reduction and consumer safety during the past two decades. The
cost of reducing the risk of environmental or vehicle accidents is ___________________
passed on to consumers, who must collectively judge how much ___________________

safety is necessary.
___________________
PE
The transportation relationship is complex because of the ___________________
interaction between the parties. This leads to frequent conflicts
___________________
between parties with micro interest shippers, consignees, and
carriers-as well as parties with a macro interest-government and ___________________
the public. These conflicts have led to duplication, regulation, and ___________________
restrictions of transportation services.
___________________
Check Your Progress

Fill in the blanks:
1. Transport transactions are often influenced by ………….
parties.
2. …………. desire to maximize their revenue associated
)U
with the transaction while minimizing the costs
necessary to complete the transaction.
Transport Service
Transportation service is achieved by combining the capabilities of
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. The following section
reviews the current range of services offered by different carriers.
The description also includes examples of carriers’ representative
(c
of each category.
The selection of a suitable mode of transport to provide an effective
transport service to the customer is an important aspect of
transport operations. The modes and specific operations of
transporting passengers are explored, the logistics regarding
passenger tickets, passenger belongings and claims and refunds to
182 passengers are investigated to ensure smooth performance of all

Notes activities and safe operations when dealing with the transportation
S
___________________ of passengers.
___________________
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
PE
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.
___________________ For example, 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
)U
common carriers to provide reasonably priced small-shipment
service due to overhead cost associated with terminal and line haul
operations. This overhead forced motor comers to charge a
minimum charge. The minimum was generally in the range of
US $100, regardless of shipment size or distance.
Due to the minimum charge and lack of alternatives, an

opportunity existed for companies offering specialized service to
enter the smalI-shipment or package-service market.
Package services represent an important part of logistics, and the

influence of carriers in this segment is increasing due to their size
and intermodal capabilities. The advent of e-commerce and the
need for consumer-direct fulfilment have significantly increased
(c
demand for package delivery. While package services are

expanding, the services required do not fall neatly into the
traditional modal classification scheme. Packages are regularly
transported using the line-haul services of rail, motor, and air.
Package service provides both regular and premium services.
Intermodal Transportation 183

Notes
Intermodal transportation combines two or more modes to take
S
advantage of the inherent economies of each and thus provide an ___________________
integrated service at lower total cost. Many efforts have been made ___________________
over the years to integrate different transportation modes. Initial ___________________
attempts at modal coordination trace back to the early 1920s, but
___________________
during that early period, cooperation was restrained by regulatory
___________________
PE
restrictions designed to limit monopoly practices. Intermodal
offerings began to develop more successfully during the 1950s with ___________________
the advent of integrated rail and motor service commonly termed ___________________
piggyback service. This common intermodal arrangement combines ___________________
the flexibility of motor for short distances with the low line-haul
___________________
cost associated with rail for longer distances.
___________________
Non-operating Intermediaries
The overall transportation industry also includes several business
types that do not own or operate equipment. These non-operating
intermediaries broker the services of other firms. A transportation
broker is somewhat analogous to a wholesaler in a market channel.
)U
Non-operating intermediaries economically justify their function
by offering shippers lower rates for movement between two
locations than would be possible by direct shipment via common
carrier. Because of peculiarities in the common-carrier rate
structure, such as minimum freight charges, surcharges, and less-
than-volume rates, conditions exist whereby non-operating
intermediaries can facilitate savings for shippers.
Interestingly, there are cases where non-operating intermediaries

charge higher rates than offered by carriers. The justification for
the higher charges is based on ability to arrange faster delivery
and/or more complete service. The primary intermediaries are
freight forwarders, shipper associations, and brokers.
(c
Transport Economics and Pricing

The area of physical distribution concerns movement of a finished
product to customers. In physical distribution, the customer is the
final destination of a marketing channel. It is through the physical
distribution process that the time and space of customer service
become an integral part of marketing, linking marketing channels
with its customers.
184
The typical physical distribution performance cycle involves five
Notes
S
activities: order transmission, order processing, order selection,
___________________
order transportation and customer delivery. These activities have
___________________ been shown in Figure 13.2.
___________________
___________________
___________________
PE
___________________
___________________
___________________ Source: Upendra Kachru (2010), Exploring the Supply Chain, Excel Books.
___________________ Figure 13.2: Physical Distribution Cycle Activities
___________________ This cycle links the seller and the buyer. We will discuss one
element in this cycle, namely transportation. Transportation
decisions should be based on sound economics. In order to
understand transportation economics, it is necessary to first
understand the transportation environment, which is unique
compared to many commercial enterprises.
Transportation transactions are influenced by five parties: the
)U
shipper (originating party), the consignee (destination party or
receiver), the carrier, the government, and the public. The
relationship is shown in Figure 13.3. In order to understand the
complexity of the transportation environment, it is necessary to
review the role and perspective of each party.
Goods Flow
Information Flow
(c
Figure 13.3: The Transportation Environment
The shipper and consignee have the common objective of moving

goods from origin to destination within a prescribed time at the
lowest cost. Carriers, as the intermediary, want to charge the
highest rate that the shipper (or consignee) will accept and 185
minimize the labour, fuel, and vehicle costs required to move the Notes
S
goods. To achieve this objective, the carrier desires flexibility in ___________________
pickup and delivery times to allow individual loads to be
___________________
consolidated into economic moves.
___________________
The government is the largest investor in infrastructure and
therefore maintains a high interest in transportation's impact on ___________________
the economy. The government provides rights-of-way such as ___________________
PE
roadways, ports, airports and air traffic control systems. ___________________
Government's involvement takes the form of regulation, promotion,
___________________
or ownership. As a monopoly owner who maintains absolute
control over markets, services and rates, the government can ___________________
regulate carriers by restricting the markets they can service or by ___________________
setting the price they can charge. For example, Indian Railways is
___________________
a government monopoly.
The final participant, the public, is concerned with transportation
accessibility, expense, and effectiveness, as well as environmental
and safety standards. The public ultimately determines the need
for transportation by demanding goods and services and
determining the value of such services. The development of the
)U
airfreight industry shows that consumers may find cost less
important than speed and service. Very often, trade-offs are
associated with cost, environmental and safety standards.
The transportation relationship is complex because of the
interaction between the parties. This leads to frequent conflicts
between parties with a micro interest shippers, consignees, and
carriers–as well as parties with a macro interest – government and
the public.
Transport Economics
Transport economics and pricing are concerned with the factors
and characteristics that determine transport costs and rates.
Transport economics is influenced by seven factors. These factors
are important while developing transportation rates. The specific
(c
factors are discussed below:

Distance: Distance is a major influence on transportation cost
since it directly contributes to variable cost, such as labour, fuel,
and maintenance. This is reflected by the cost-distance curve. The
cost curve does not begin at the origin because there are fixed costs
associated with shipment pickup and delivery regardless of
186 distance. It increases at a decreasing rate as a function of distance.

Notes This is shown in Figure 13.4.
S
___________________
___________________
___________________
P rice
___________________
___________________
PE
___________________
___________________ D is tan c e
___________________
___________________ Figure 13.4: Relationship between Distance and Transportation Cost
___________________ Volume: The load volume relationship reflects economies of scale

in transportation activities. This is illustrated in Figure 13.5. The
curve indicates that transport cost per unit of weight decreases as
load volume increases. The relationship is limited to the maximum
size of the vehicle. Economic transportation requires the
consolidation of small loads into larger loads to take advantage of
scale economies.
)U P rice
W eight of load
(c
Figure 13.5: Relationship between Weight and Transportation Cost
Density: The product weight is a function of the product density

and volume. Figure 13.5 reflects weight considerations. If the
product is light, it is not possible to increase the amount carried if
the space consideration has been met. Since vehicles are limited by
both space and weight considerations, once the vehicle is full,
actual labour and fuel expenses are not dramatically influenced.
Generally, higher density products are assessed at lower transport 187

costs per unit of weight as the capacity is better utilized. Notes
S
Stowability: Stowability refers to vehicle space utilization as is ___________________
reflected by product dimensions. Odd sizes and shapes, as well as ___________________
excessive weight or length, do not stow well and typically waste
___________________
space.
___________________
Handling: Special handling equipment may be required for
___________________
PE
loading or unloading trucks, railway wagons or ships. By grouping
together products, e.g. taping, boxing, or palletizing products, for ___________________
transport and storage, handling costs can be reduced. ___________________
Liability: Liability includes susceptibility to damage, property ___________________

damage to freight, perishability, susceptibility to theft,
___________________
susceptibility to spontaneous combustion or explosion, and value
___________________
per kilogram. Carriers insure their cargoes to protect against
possible claims or accept responsibility for any damage. Shippers
can reduce their risk, and ultimately the transportation cost, by
improved protective packaging or by reducing susceptibility to loss
or damage.
Market Factors: Since transportation vehicles and drivers must
return to their origin, either they must find a load to bring back
)U
("back-haul") or the vehicle is returned empty ("deadhead"). When
deadhead movements occur, labour, fuel, and maintenance costs
must be charged to the shipper. A “Balanced” move, where volume
is equal in both directions, is rarely possible because of factors
such as demand imbalances in manufacturing and consumption
locations, seasonality, etc.
Total Transportation Costs

In addition to the basic cost charged for movement of goods, the
total transportation cost reflects a large number of other factors,
such as transit time costs, obsolescence and deterioration costs,
protective packaging costs, and transit insurance costs, etc. These
components are discussed below:
(c
Transit Time Cost: This element reflects the temporal cost of

transportation. From total logistics costs point of view, cost of
inventory in transit is a very significant factor. The longer the
transit time of a particular mode of transport, the inventory is
inaccessible to the user. This adds to the safety stock the company
has to carry and the requirement of working capital. The
188 transportation cost must consider that if inventory is available

Notes after a longer period of time, it will result in higher total costs.
S
___________________
Obsolescence and Deterioration Costs: There are certain
___________________ categories of products which are perishable and delicate in nature,
___________________ whose physical attributes deteriorate over a period of time,
gradually resulting into devaluation of the product. For instance,
___________________
vegetables such as tomatoes are transported from Punjab to Delhi;
___________________ any delay in transit or poor stowing may force the marketers to sell
PE
___________________ them at a less-than-desired price. Such a cost is classified as
obsolescence and deterioration costs during transportation.
___________________
___________________
Protective Packaging Costs: For many products, there may be
requirements of special packaging. This cost is also a part of the
___________________
total transport cost. For instance, if a product is shipped using a
___________________ container, it may require less protective packaging for safe
shipment in comparison being shipped in a truck. Another example
is given later on for transportation of glass in the rating system for
goods transportation.
Insurance Cost: Goods in transit insurance covers property
against loss or damage while it is in transit from one place to
another or being stored during a journey. This insurance can be for
)U
goods being distributed in company's vehicle or by a third-party
carrier, both domestically and abroad. Policies often specify the
means of transport to be used, which may include the postal
service.
Class Rates: In transportation terminology, the price per
kilogram to move a specific product between two locations is
referred to as the rate. The rate is also called the tariff. The
classification does not define the price charged for movement of a
product. It refers to a product's transportation characteristics in
comparison to other commodities.
Classification of individual products is based on a relative
percentage index of 100. Class 100 is considered the class for an
average product, while other classes run as high as 500 and as low
(c
as 35. Each product is assigned an item number for listing

purposes and then given a classification rating. As a general rule,
the higher the class rating, the higher the transportation cost for
the product.
Products are also assigned different ratings on the basis of
packaging. Glass may have a different rating when shipped loose,
in crates, or in boxes than when shipped in wrapped protective 189

packing. Very often, packaging differences influence product Notes
S
Activity
density, stowability, and liability. The same product may be ___________________
Throw some light on the
differently classified depending on where it is being shipped, transportation administration
shipment size, transport mode and product packaging. and___________________
documentation.
___________________
Other Costs: Common costs, such as terminal or management
expenses are often allocated to a shipper according to a level of ___________________
activity like the number of shipments handled. Other costs may ___________________
PE
also include local taxes, octroi, toll taxes, etc. These are generally ___________________
applicable in case of road transportation.
___________________
Joint Costs: Joint costs are expenses unavoidably created by the
___________________
decision to provide a particular service.
___________________
For example, when a carrier transports a truckload from point A to
point B, there is an implicit decision to incur a 'joint' cost for the ___________________
back-haul from point B to point A. Either the cost must be covered

by the original shipper from A to B, or a back-haul shipper must be
found.
These costs have significant impact on transportation charges as in
the absence of an appropriate backhaul shipper; the original
shipper pays for an empty trip.
)U
Transportation has been recognized for many years as being one of
the most important activities in the physical distribution function.
The shipper's choice of transportation option in a single market
could be viewed as a cost model that provides the total
transportation and inventory cost associated with each
transportation option. There exists a correlation between purchase
quantity and transportation mode decision.
Strategic transportation decisions include choice of transportation
mode (rail, truck, air, ship) and choice of type of carriage (common,
contract, private). Other decisions can include the size of shipments
(or shipment frequency), and assignment of loads to vehicles. These
decisions are generally taken with the help of models.
Check Your Progress

(c
Fill in the blanks:

1. ……………… service is achieved by combining the
capabilities of modes.
2. ……………… services represent an important part of
logistics.
190
Transportation Administration and Documentation
Notes
S
While traffic 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
PE
administrative responsibilities. From an operational
___________________
perspective, key elements of transportation management are
___________________ equipment scheduling, load planning, routing, and carrier
___________________ administration.
___________________ 2. Freight Consolidation: Freight consolidation is a service
___________________ offered by some shipping companies to lower the total shipping
cost and to increase shipping security. It is also known as
consolidation service, assembly service, and cargo
consolidation. The fact that 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 achieving
)U
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.
(c
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.
191
6. Logistical Integration: For any given operating period,
Notes
S
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.
___________________
As operational expectations become more precise, order-to-delivery
___________________
performance cycles more compact, and margins for error reduced
___________________
PE
near zero, successful firms have come to realize that there is no
such thing as cheap transportation. Unless transportation is ___________________
managed in an effective and efficient manner, procurement, ___________________
manufacturing, and customer accommodation performance will not
___________________
meet expectations.
___________________
Documentation ___________________
Well-defined documentation is required to perform a
transportation service. With the exception of private transfer
within the confines of a single firm, products are typically being
sold between the shipper and the consignee. Three primary types
of transport documentation are bills of lading, freight bills, and
shipment manifests.
)U
1. Bill of Lading: The bill of lading is the basic document
utilized in purchasing transport services. It serves as a receipt
and documents products and quantities shipped. The bill of
lading specifies terms and conditions of carrier liability and
documents responsibilities for all possible causes of loss or
damage except those defined as acts of God.
2. Freight Bill: The freight bill represents a carrier's method of
charging for transportation services performed. It is developed
using information contained in the bill of lading. The freight
bill may be either prepaid or collect.
3. Shipment Manifest: The shipment manifest lists individual
stops or consignees when multiple shipments are placed on a
single vehicle. Each shipment requires a bill of lading. The
(c
manifest lists the stop, bill of lading, weight, and case count for
each shipment. The objective of the manifest is to provide a
single document that defines the overall contents of the load
without requiring review of individual bills of lading. For
single-stop shipments, the manifest is the same as the bill of
lading.
192
Well-defined documentation is required to perform a
Notes
S
transportation service. With the exception of private transfer
___________________
within the confines of a single firm, products are typically being
___________________ sold when being transported. Thus, legal title to ownership occurs
___________________ during the time the transport service is performed. When for-hire
carriers are engaged to perform the transportation, the transaction
___________________
must establish clear legal responsibility for all parties involved.
___________________ Students shall keep it in mind that the primary purpose of
PE
___________________ transportation documentation is to protect all parties involved in
the performance of the transaction.
___________________

___________________ State whether the following statements are true or false:
___________________ 1. In small-scale organizations, traffic operations
management involves a wide variety of administrative
responsibilities.
2. Freight consolidation is a service offered by some
shipping companies to lower the total shipping cost and
to increase shipping security.
)U
Summary
Transportation infrastructure can broadly be classified as
hardware and software. The five basic transportation modes are
rail, highway, water, pipeline, and air. Although product storage in
transportation vehicles can be costly, it may be justified from a
total-cost or performance perspective when loading or unloading
costs, capacity constraints, or the ability to extend lead times are
considered.
Transportation economy of distance is also referred to as the
tapering principle since rates or charges taper with distance.
Transport transactions are often influenced by five parties: the
shipper (the original party), the consignee (destination party or
receiver), the carrier, the government, and the public.
(c
Lesson End Activity

Critically analyse the condition of transportation system of our
country.
Keywords 193
Notes
S
Transportation Infrastructure: Transportation infrastructure
___________________
consists of the rights-of-way, vehicles, and carrier organizations
that offer transportation services on a for-hire or internal basis. ___________________
Fixed Cost: A cost that does not change with an increase or ___________________
decrease in the amount of goods or services produced. ___________________
Economy of Scale: It refers to the characteristic that ___________________
PE
transportation cost per unit of weight decreases when the size of ___________________
the shipment increases.
___________________
Economy of Distance: It refers to the characteristic that
___________________
transportation cost per unit of distance decreases as distance
increases. ___________________
___________________

1. Define Transportation infrastructure.
2. Explain the five basic transportation modes.
3. What are the two functions of transportation functionality?
)U
4. Describe the fundamental principles guiding transportation
management and operations.
5. “Transport transactions are often influenced by five parties.”
Elucidate.
6. What do you understand by Export documentation?
7. Explain Transport Economics and Pricing.
8. Discuss Total transportation costs.
9. Throw some light on the Transportation Administration and
Documentation.
10. Discuss Intermodal Transportation.
Further Readings
(c
Books
Mr. H. Kaushal, Case Study Solutions – Materials Management,
Macmillan India Ltd.
194
Ballou, R.H., Business Logistics Management: Planning,
Notes
S
Organizing, and Controlling the Supply Chain, 4th Ed., Prentice
___________________
Hall, 1998.
___________________
___________________ Reprint Ed., McGraw Hill, 1998.
___________________ Tompkins, J.A. and D.A. Harmelink (Editors), The Distribution
___________________ Management Handbook, McGraw Hill, 1993.
PE
___________________ Donald Waters. Logistics-An Introduction to SCM, Palgrave, 2003.
___________________ Bowersox, D.J. and D.J. Closs, Logistical Management: The
___________________ Integrated Supply Chain Process, McGraw Hill, 1996.
___________________
Web Readings
___________________
http://www.siam.org/journals/plagiary/1657.pdf
http://www.cambridgecollege.co.uk/coursesattachments/LSCTMM
OD1.pdf
http://publications.gc.ca/collections/collection_2010/ic/Iu44-74-2-
2009-eng.pdf
)U
(c
UNIT 14: Warehousing
Unit 14
195
Notes
S
Activity
Warehousing Do ___________________
a research on the basic
service benefits that are
___________________
achieved through
warehousing.
___________________
Objectives
___________________
topics: ___________________
PE
\ Strategic Warehouse ___________________
\ Warehouse Operations ___________________
\ Ownership Arrangements
___________________
___________________
Introduction
___________________
Manufacturers were able to recognize the fact that the customers’
needs need to be fulfilled as soon as he is asking for the product in
order to retain him. This perspective of storage created a tendency
to consider warehouses "a necessary evil" that added costs to the
distribution process and that resulted in creation of operating
expenses with little appreciation of the broader logistical spectrum
in which warehousing played a vital role. Warehousing capability
)U
used to group products into assortments desired by customers was
given little emphasis. Internal control and maximum inventory
turnover received little managerial attention.
Strategic Warehousing
Benefits realized from strategic warehousing are classified on the
basis of economics and service. From a conceptual perspective, no
warehouse should be included in a logistical system unless it is
fully justified on a cost-benefit basis. While there is some overlap,
the major warehouse benefits are reviewed individually.
Economic Benefits
Economic benefits of warehousing materialise when overall
(c
logistical costs are directly reduced by utilizing one or more

facilities. It is not difficult to quantify the return on investment of
an economic benefit because it is reflected in a direct cost-to-cost
trade-off.
For example, if adding a warehouse to a logistical system will
reduce overall transportation cost by an amount greater than the
196 fixed and variable cost of the warehouse, then total cost will be
Notes reduced. Whenever total-cost reductions are attainable, the
S
___________________ warehouse is economically justified. Four basic economic
benefits are consolidation, break bulk and cross dock,
___________________
processing/postponement, and stockpiling.
___________________
___________________ Consolidation
___________________ Shipment consolidation is an economic benefit of warehousing.
PE
With this arrangement, the consolidating warehouse receives and
___________________
consolidates materials from a number of manufacturing plants
___________________ destined to a specific customer on a single transportation
___________________ shipment. The benefits are the realization of the lowest possible
___________________
transportation rate and reduced congestion at a customer's
receiving dock. The warehouse allows both the inbound movement
___________________
from the manufacturer to the warehouse and the outbound
movement from the warehouse to the customer to be consolidated
into larger shipments.
In order to provide effective consolidation, each manufacturing
plant must use the warehouse as a forward stock location or as a
sorting and assembly facility.
)U
The primary benefit of consolidation is that it combines the
logistical flow of several small shipments to a specific market area.
Consolidation warehousing may be used by a single firm, or a
number of firms may join together and use a for-hire consolidation
service. Through the use of such a programme, each individual
manufacturer or shipper can enjoy lower total distribution cost
than could be realized on a direct shipment basis individually.
Break Bulk and Cross Dock

Break bulk and cross-dock warehouse operations are similar to
consolidation except that no storage is performed. A break bulk
operation receives combined customer orders from manufacturers
and ships them to individual customers figure 14.1 illustrates the
break bulk flow. The break bulk warehouse or terminal sorts or
(c
splits individual orders and arranges for local delivery. Because

the long-distance transportation movement is a large shipment,
transport costs are lower and there is less difficulty in tracking.
A cross-dock facility is similar except that it involves multiple
manufacturers. Retail chains make extensive use of cross-dock
operations to replenish fast-moving store inventories. For example,
full trailerloads of product arrive from multiple manufacturers. 197

As the product is received, customer either sorts it if it is labelled Notes
S
or allocated to customers. If it has not been labelled, the product is ___________________
then literally moved "across the dock" to be loaded into the trailer
___________________
destined for the appropriate customer. The trailer is released for
transport to the retail store once it has been filled with mixed ___________________
product from multiple manufacturers. The economic benefits of ___________________

cross docking include full trailer movements from manufacturers
___________________
PE
to the warehouse and from the warehouse to retailers, reduced
___________________
handling cost at the cross-dock facility since product is not stored,
and more effective use of dock facilities because all vehicles are ___________________
fully loaded, thus maximizing loading dock utilization. ___________________
___________________
Customer
A ___________________
Break Bulk
Plant A Customer
Warehouse
B
Customer
C
)U
Figure 14.1: Break Bulk Flow
Processing/Postponement
Warehouses can also be used to postpone, or delay, production by
performing processing and light manufacturing activities.
A warehouse with packaging or labelling capability allows
postponement of final production until actual demand is known.
For example, vegetables can be processed and canned in "Brights"
at the manufacturer. Brights are cans with no pre-attached labels.
The use of Brights for a private label product means that the item
does not have to be committed to a specific customer or package
configuration at the manufacturer's plant. Once a specific customer
order is received, the warehouse can complete final processing by
(c
adding the label and finalizing the packaging.

Processing and postponement provide two economic benefits. First,
risk is minimized because final packaging is not completed until an
order for a specific label and package has been received. Second,
the required level of total inventory can be reduced by using the
basic product (brights) for a variety of labelling and packaging
configurations. The combination of lower risk and inventory level
198 often reduces total system cost even if the cost of packaging at the
Notes warehouse is more expensive than it would be at the
S
___________________ manufacturer's facility.
___________________
Stockpiling
___________________
The direct economic benefit of this warehousing service is
___________________ secondary to the fact that seasonal storage is essential to select
___________________ businesses.
PE
___________________ For example, lawn furniture and toys are produced year-round and
primarily sold during a very short marketing period.
___________________
___________________ In contrast, agricultural products are harvested at specific times

with subsequent consumption occurring throughout the year. Both
___________________
situations require warehouse stockpiling to support marketing
___________________ efforts. Stockpiling provides an inventory buffer, which allows
production efficiencies within the constraints imposed by material
sources and the customer.
Service Benefits
Service benefits gained through warehouses in a logistical system
may or may not reduce costs. When a warehouse is primarily
)U
justified on the basis of service, the supporting rationale is an
improvement in the time and place capability of the overall
logistical system.
For example, placing a warehouse in a logistical system to service
a specific market segment may increase cost but might also
increase market share, revenue and gross margin.
At a conceptual level, a service-justified warehouse would be added
if the net effect was profit-justified. At an operational level, the
problem is how to measure the direct revenue impact.
Five basic service benefits are achieved through warehousing: spot
stock, assortment, mixing, product support, and market presence.
Spot Stock
(c
Stock spotting is most often used in physical distribution.

In particular, manufacturers with limited or highly seasonal
product lines are partial to this service. Rather than placing
inventories in warehouse facilities on a year-round basis or
shipping directly from manufacturing plants, delivery time can be
substantially reduced by advanced inventory commitment to
strategic markets. Under this concept, a selected amount of a 199

firm's product line is placed or "spot stocked" in a warehouse to fill Notes
S
customer orders during a critical marketing period. Utilizing ___________________
warehouse facilities for stock spotting allows inventories to be
___________________
placed in a variety of markets adjacent to key customers just prior
to a maximum period of seasonal sales. ___________________
Suppliers of agricultural products to farmers often use spot ___________________
stocking to position their products closer to a service-sensitive ___________________
PE
market during the growing season. Following the sales season, the ___________________
remaining inventory is withdrawn to a central warehouse.
___________________
Assortment ___________________
An assortment warehouse may be utilized by a manufacturer, ___________________

wholesaler, or retailer-stocks product combinations in anticipation
___________________
of customer orders. The assortments may represent multiple
products from different manufacturers or special assortments as
specified by customers. In the first case, for example, an athletic
wholesaler would stock products from a number of clothing
suppliers so that customers can be offered assortments. In the
second case, the wholesaler would create a specific team uniform
including shirt, pants, and shoes.
)U
The differential between stock spotting and complete line
assortment is the degree and duration of warehouse utilization.
A firm following a stock spotting strategy would typically
warehouse a narrow product assortment and place stocks in a
large number of small warehouses dedicated to specific markets for
a limited time period. The distribution assortment warehouse
usually has a broad product line, is limited to a few strategic
locations, and is functional year-round.
Mixing
Warehouse mixing is similar to the break bulk process except that
several different manufacturer shipments may be involved. When
plants are geographically separated, overall transportation charges
(c
and warehouse requirements can be reduced by in-transit mixing.

In a typical mixing situation, carloads or truckloads of products are
shipped from manufacturing plants to warehouses. Each large
shipment enjoys the lowest possible transportation rate. Upon
arrival at the mixing warehouse, factory shipments are unloaded
and the desired combination of each product for each customer or
market is selected.
200
The economies of in-transit mixing have been traditionally
Notes
S
supported by special transportation tariffs that are variations of
___________________
in-transit privileges. Under the mixing warehouse concept,
___________________ inbound products may also be combined with products regularly
___________________ stored in the warehouse. Warehouses that provide in-transit
mixing have the net effect of reducing overall product storage in a
___________________
logistical system. Mixing is classified as a service benefit because
___________________ inventory is sorted to precise customer specifications.
PE
___________________
Production Support
___________________
The economics of manufacturing may justify relatively long
___________________
production runs of specific components. Production support
___________________ warehousing provides a steady supply of components and
___________________ materials to assembly plants. Safety stocks on items purchased
from outside vendors may be justified because of long lead times or
significant variations in usage. In these, as well as a variety of
other situations, the most economical total-cost solution may be
the operation of a production support warehouse to supply or "feed"
processed materials, components, and sub-assemblies into the
assembly plant in an economic and timely manner.
)U
Market Presence
While a market presence benefit may not be as obvious as other
service benefits, it is often cited by marketing managers as a major
advantage of local warehouses. The market presence factor is
based on the perception or belief that local warehouses (and
presumably local inventory) can be more responsive to customer
needs and offer quicker delivery than more distant warehouses.
As a result, it is also thought that a local warehouse will enhance
market share and potentially increase profitability. While the
market presence factor is a frequently discussed strategy, little
solid research exists to confirm its actual benefit impact.
Warehouse Operations
(c
Stores range from ordinary ones with shelves and bins to cold or
dehumidified storages, huge silos for storage of food grains or
bonded stores for keeping goods on which customs and excise
duties have not been paid. The number of different storage devices
is almost as large as the number of different materials.
A schematic diagram of production support store's activities is
given in Figure 14.2.
201
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
Source: Upendra Kachru (2010), Exploring the Supply Chain, Excel Books. ___________________
Figure 14.2: General Schematic of Stores Activities ___________________
Stores functions focus on the physical movement and storage of

goods and materials. This involves managing the physical flow of
materials into and out of the organization and developing and
managing networks of warehouses when needed.
The functions shown in Figure 14.2 can be divided into a number
of duties and responsibilities. These are as follows:
)U
(a) To receive materials, arrange for inspection and accept them
after proper verification of documents.
(b) To prepare stores received note promptly and circulate the
copies to other departments.
(c) To store the accepted materials of right quantities against
authorized stores requisitions.
(d) To issue correct materials of right quantities against
authorized stores requisitions.
(e) To enter receipt, issues and return of materials in the bin
cards, and to maintain other stores records.
(f) To issue purchase requisition when reordering level is reached.
(c
(g) To check bin card balances with the physical quantities in the
bins periodically.
(h) To follow rotation of stocks to avoid holding old stocks.
(i) To report on waste, scrap, slow-moving, non-moving and
obsolete items.
202
(j) To maintain stores in a tidy manner for easy access to bin at
Notes
S
any time.
___________________
(k) To receive and issue finished products for despatch to the
___________________
distribution chain.
___________________
The procedures for receipt start even before the time the material
___________________ reaches the plant; when a purchase order is placed, a copy is sent
___________________ to the stores. Once a Purchase Order has been issued, the
PE
information sits in the system until the goods/service is received.
___________________
Inbound deliveries which include stock transport orders,
___________________
production orders, and Advanced Shipping Notification (vendor
___________________ document) contain the exact materials, quantities, and the delivery
___________________ date with reference to a purchase order. This becomes the basis for
the receipt process.
___________________
Goods Receipt
The goods received are entered into the Inward Consignment
Register. This document keeps the record of all the P.O. No., date
of receipt, incoming Railway Receipt, Lorry Receipt, Consignment
Note, Airway Bills, etc.
)U
The receipt of stores is a follow-on activity to a purchase order.
It forms the basis for updating the financials and inventory records
and can trigger warehouse management and the quality
management processes. Traditionally, receiving and inspection
share facilities. As soon as material is received, it is documented
and passed on to quality control for inspection and then moved to
stores for inward distribution to manufacturing.
The materials that arrive from the supplier come with a challan.
From the original copy of challan, the receipt is entered in Daily
Receipts Register which is maintained in the receipt section. This
is done after verification with the specifications given in the
purchase order and physical counting.
The storekeeper then prepares a Goods Receipt Note (GRN), which
can be computerized or manual shown in Figure 14.3. The
(c
storekeeper then sends two copies of the GRN to quality control

department along with sample material for inspection an approval
of quality.
The goods received note is a temporary document to ensure that
the financial stock and physical products in stock are accurate
from the moment when the products are received until the moment 203
the purchase invoice is issued. It will: Notes
S
z Debit the stock asset account with the quantity and cost of the ___________________
products net of VAT ___________________
z Credit pending goods received notes account for the net amount ___________________
on the goods received note
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
Figure 14.3: Goods Receipt Note (GRN)
Even though the goods received note contains VAT amounts, no

VAT postings are made. It is not permitted to deduct VAT until a
proper VAT invoice is received from the supplier.
Supplier Payment
When the materials are accepted by the quality control
department, one copy of the GRN is sent to stores for recording in
the bin card, while the first copy is sent to accounts department as
a record of acceptance of materials ordered and supplied by the
vendor. Once this has happened and you have an invoice, it is time
(c
to complete a GRN. The GRN copy is matched with the invoice, for
payment. After it is checked and priced out by accounts
department with reference to purchase order, it is cleared for issue
of pay order.
When materials are rejected by the quality control department, the
purchase department informs the supplier for replacement free of
204 cost. The storekeeper shall keep the rejected material separately
Notes for return to supplier. If payment has already been made, the
S
___________________ accounts department shall raise a debit note on the supplier, when
rejected store is not replenished.
___________________
___________________ Recordkeeping
___________________ For planning and controlling operations, accurate information
___________________ regarding materials must be available to all the related
PE
departments. Information regarding description of all the
___________________
materials, quantity received and their locations is entered into the
___________________ organization's information system in receiving. This is done by
___________________ entering the data in a bin card. Each bin or location in the store
___________________
has a bin card which provides all the information on the material.
___________________
)U
Figure 14.4: Bin Card
A bin card is shown in Figure 14.4. It is a quantitative record of

(c
receipt, issue and closing balance of each item of stores. Separate

bin cards are maintained for each item. Each card is filled up with
physical movement of goods i.e. on receipt and issue. Whenever
you take out or put in your goods, it records the movement. This
makes it easy to work out the consumption for each article.
Without a bin card, you would have to go back to your issue orders
to determine the status of each item, which could be quite
laborious. Therefore, bin cards are an essential measure of internal 205

control, as well as a very helpful tool for position/consumption Notes
S
reports. ___________________
Normally, an account will be maintained for each item carried in ___________________
stores, which will be debited for the quantity and value of stores
___________________
purchased and credited for the quantity and value of stores issued.
This account is called the stores ledger shown in Figure 14.5. ___________________
Stores Ledger is a quantitative and value record of receipt, issue ___________________
PE
and closing balance of each item of stores. It is filled with the help ___________________
of goods received note and material issue requisitions.
___________________
___________________
___________________
___________________
)U
Figure 14.5: Stores Ledger
All transactions are entered into the Stores Ledger from copies of
vouchers received from the different sections.
Notes: Stores ledger, for both quantity and value, should be closed
at the end of each month and reconciled with the summaries of
purchase and indents.
Issue of Materials
Issue of materials from storage is controlled through Material
(c
Requisition Note and Material Transfer Note. The data required

for goods issue posting is copied from the Material Requisition
Note into the Material Transfer Note so that:
z Warehouse stock is reduced by the delivery quantity.
z Value changes are posted to the balance sheet account in
inventory accounting.
206
z Requirements are reduced by the delivery quantity.
Notes
S
z The serial number status is updated.
___________________
z The goods issue posting is automatically recorded in the
___________________
document flow.
___________________
z Stock determination is executed for the vendor's consignment
___________________ stock.
___________________ z A work list for the proof of delivery is generated.
PE
___________________ After goods issue is posted for an outbound delivery, the delivery
___________________ might be shipped to the customer directly from the fulfilling
locations (more than one delivery), or consolidation may occur at
___________________
one location before one complete shipment is transported to the
___________________ end customer.
___________________ When the materials are despatched for an outbound delivery, a
packing slip is prepared, which is added to other documents on
despatch. Its purpose is to identify the items packed at the
receiver's end. In case of any discrepancies, it facilitates the
consignee to check the contents and inform the consignor if there
are any discrepancies.
)U
Figure 14.6: Summary of Stores Procedures for Receipts and Issues
Figure 14.6 summarizes the procedures for receipts and issues in

(c
Stores. It provides a flow chart from the time the purchase order is
issued to the time that goods are issued. In brief, the basic
requirements of documentation related to receipt and issues in
store should be as follows:
Receipt of Stores has to put in place adequate physical safeguards
in the goods receipt procedure; properly document and account for
each goods receipt voucher; establish policies and procedures for 207
handling exceptional matters of goods receipt; and establish Notes
S
Activity
written procedures for lodging claims for supply and delivery ___________________
Throw some light on the
problems. general schematic of stores
___________________
activities.
Issue of Stores has to properly document and account for all
___________________
delivery vouchers; issue store items on a consistent basis; and
properly controls the issue of goods e.g. check the voucher ___________________
authorizations against a record of specimen authorized signatures. ___________________
PE
The ultimate requirement of stores documentation is to ensure ___________________
that goods are received, checked, stored, delivered and returned in ___________________
a consistent manner.
___________________
State whether the following statements are true or false: ___________________
1. Stores functions focus on the physical movement and

storage of goods and materials.
2. The procedures for receipt start after the time the
material reaches the plant.
)U
Ownership Arrangements
It is not necessary for the firm to own and operate its warehousing
requirements. The different options include owner operated,
private, and public warehousing.
An owner operated warehouse is owned or/and managed by the
same enterprise that owns the merchandise handled and stored at
the facility.
A private warehouse facility is warehousing on a contractual basis
by Third Party Logistics Providers (3PL), who provide unique and
specially tailored warehousing and logistics services to clients.
A public warehouse, in India, is a warehouse operated by the
Central Warehousing Corporation of India or by State
Warehousing Corporations.
(c
These definitions are often confusing; especially as terminology of

'private' and 'public' in many US learned papers are differently
used. Therefore, this clarity is important.
Owner-operated Warehouses
An owner-operated warehouse is operated by the firm owning the
product. The actual facility, however, may be owned or leased. The
208 decision to own or lease the facility is essentially a financial

Notes decision. The major benefits of owner operated warehousing are
S
___________________ that there is better control and flexibility. Control, especially,
facilitates the ability to integrate warehouse operations with the
___________________
rest of the firm's internal logistics processes. Where there is need
___________________
for flexibility, owner-operated facilities provide the freedom to
___________________ adjust operating policies and procedures to meet unique
___________________ requirements of the firm. In many cases, owner operated
PE
warehouse could be less costly than private warehousing because
___________________
the profit mark-up is eliminated. This benefit may be misleading
___________________ since private warehouses often are more efficient as they utilize
___________________ their resources more effectively.
___________________
Private Warehouses
___________________
Private warehouses charge clients a basic fee for handling and
storage. The handling charge is based on the number of cases or
weight handled. For storage, the charge is assessed on the number
of cases or weight in storage during the month. When economies of
scale are not possible in a private facility, public warehousing is a
low-cost alternative.
)U
A classification of private warehouses, on the basis of the range of
specialized operations performed, is as follows:
1. General merchandise,
2. Refrigerated,
3. Special commodity, and
4. Bonded warehouse.
Each warehouse type differs in its material handling and storage

technology as a result of the product and environmental
characteristics.
General Merchandise Warehouses

This is a warehouse that is used to store goods that are readily
(c
handled, are packaged, and do not require a controlled

environment, such as paper, small appliances, and household
supplies.
Traditional general warehousing companies receive and ship goods

on behalf of their customers, serving as middlemen in the
transportation process and a vital part of the logistics business.
The carrier is chosen either by the customer or by the warehouse 209

operator who then acts as the customer's agent. Notes
S
The increased reliance on warehouse operators for services other ___________________
than storage prompted some warehouses to diversify into different ___________________

transportation areas, such as operating private trucking fleets
___________________
used for distribution. Others became involved in combining small
___________________
shipments of freight from various shippers into truckload
shipments. These types of services were more typical of freight ___________________
PE
forwarders or transport companies than of general warehouse ___________________
operators. Such overlap in services resulted in the emergence of
___________________
the 3PL industry with many warehouse operators developing from
temporary caretakers of raw materials and finished goods into ___________________
logistics experts. ___________________
Just-in-Time (JIT) inventory management is being used by more ___________________

companies than ever before. The successful execution of JIT
requires constant monitoring of inventory levels and flexibility on
the part of shippers. JIT generally requires more frequent, but
smaller shipments of goods to and from warehouses. Private and
contract warehouses are often better equipped than in-house
warehouses to execute time-based inventory management. A
)U
critical advantage of private warehouses is their ability to create
economies of scale in distribution. With this volume, the
warehouses often have more leverage than small manufacturers
with suppliers and carriers and better meet JIT inventory
requirements.
General warehouses use EDI and other electronic devices such as
bar coding and radio frequency monitoring to enhance the
productivity and efficiency of warehouse operations and simplified
inventory tracking. As customer expectations have become more
stringent and competition in the general warehouse industry has
increased, more warehouses are investing in technology to remain
contenders in the market.
Refrigerated Warehouses (either Frozen or Chilled)

(c
These are specialist warehouses designed to handle and maintain

products that are perishable such as food, medical items, and
chemical products with special temperature requirements.
Beyond consistently meeting high standards for product quality
and safety, these warehouses must also possess the efficiency and
reliability. Energy is a major contributor to the cost of business,
210 and the prospect of power price hikes can heighten the pressure on
Notes the profit margin. There are also issues of environmental
S
___________________ regulation, equipment flexibility, and logistics management to deal
with. Even a minor change in consumer's eating habits such as the
___________________
advent of in-store take-out and heat-and-serve products can create
___________________
a ripple affecting the refrigerated food supply chain.
___________________
Unfortunately, the nature of refrigeration systems makes it
___________________ difficult to implement wholesale changes. The standard operating
PE
___________________ procedures and process hazard analyses need to be undertaken
regularly. Planning on a long-term basis and partnerships with
___________________
equipment manufacturers is increasing in importance. Many such
___________________
warehouses work with professional service providers for solutions
___________________ with regard to preventive maintenance, special lubrication systems
___________________ and filtration, consistent chemical water treatment, etc.
New technologies in refrigeration design are proving quite
successful in eliminating pathogens from processed foods.
Ammonia refrigeration systems are replacing systems based on
Freon, due to environmental concerns. Operators of private
refrigerated warehouses are increasingly using automation
technology to provide the efficient, cost-effective services
)U
demanded by today's food processors.
Commodity Warehouses
These are designed to handle bulk material such as wheat, rice,
sugar, lentils, cotton, edible beans, milk, etc. Non-food commodities
include jute, fertilizers, tires wood pulp, tobacco, etc. Some
commodities can also be in liquid form, this includes most
petroleum products as well as many chemicals.
Due to the diverse nature of commodities, many commodity items
require special handling or storage considerations, such as grain
storage warehouses may require elevators, liquid commodities may
require tank farms, and a commodity like tobacco requires a barn.
In India, most agricultural commodities are handled by the
(c
Central and State Warehousing Corporations. These are discussed

in the section on public warehouses.
Bonded Warehouses
These warehouses are licensed by the government to store goods
prior to payment of taxes or duties. The facility of warehousing of
imported goods in Customs Bonded Warehouses, without payment
of Customs duty otherwise leviable on import, is permitted under 211

the Customs Act, 1962. Basically, goods after landing are Notes
S
permitted to be removed to a warehouse without payment of duty ___________________
and duty is collected at the time of clearance from the warehouse.
___________________
The law lays down the time period up to which the goods may
remain in a warehouse, without incurring any interest liability and ___________________
with interest liability. ___________________
The warehouses are to be appointed/licensed at particular places ___________________
PE
only which have been so declared by Central Board of Excise and ___________________
Customs. The Board has delegated its power for declaring places to
___________________
be Warehousing Stations to the Chief Commissioners of Customs.
In respect of 100 per cent EOUs, the powers to declare places to be ___________________
Warehousing Stations have been delegated to the Commissioners ___________________
of Customs.
___________________
Licences are issued by Customs and are classified into two
categories viz., storage of sensitive goods such as liquor, cigarettes,
foodstuffs, consumables, etc. and other non-sensitive goods. All
warehoused goods are subject to the control of the Customs
officers. The owner of the warehoused goods may inspect, sort,
show for sale, and take samples etc. from the bonded goods with
)U
the permission of the proper officer. The owner of the bonded goods
has also to pay warehouse-keeper rent and warehouse charges at
the rates fixed under law.
In addition to bonded warehouses for imported items, bonded
warehouses are also used for items that are subject to excise.
Excise duty is a tax on manufacture or production of goods. Excise
duty on alcohol, alcoholic preparations, and narcotic substances is
collected by the State Government and is called "State Excise"
duty. The Excise duty on rest of goods is called "Central Excise"
duty. Manufacturers can have holding bonded warehouses for
storing non-duty paid goods. While different procedures have been
prescribed for levy and collection of Central Excise Duties keeping
in view the needs of different industries sectors, Self-Assessment
Procedure covers a major portion of excisable items. However, for
(c
state excise, each state has its own procedures.
Public Warehousing
The Central Warehousing Corporation (CWC) was set up in 1957
under the Agricultural Produce Development and Warehousing
212 Corporations Act, 1956. Functions of CWC under the provisions of

Notes the Act are:
S
___________________
(a) Acquire and build godowns and warehouses at such suitable
___________________ places in India as it thinks fit;
___________________ (b) Run warehouses for the storage of agricultural produce, seeds,
___________________ manures, fertilizers, agricultural implements and notified
commodities offered by individuals, cooperative societies and
___________________
PE
other institutions;
___________________
(c) Arrange facilities for the transport of agricultural produce,
___________________
seeds, manures, fertilizers, and agricultural implements and
___________________ notified commodities to and from warehouses;
___________________ (d) Subscribe to the share capital of a State Warehousing
___________________ Corporation;
(e) Act as agent of the government for the purposes of the
purchase, sale, storage and distribution of agricultural
produce, seeds, manures, fertilizers, agricultural implements
and notified commodities; and
(f) Carry out such other functions as may be prescribed.
)U
The Central Warehousing Corporations Act of 1962 had twin
objectives, that is, to provide scientific storage for agricultural
produce and also to provide market finances. CWC plays an
important role in the chain of marketing for agricultural produce.
It serves not only as a time and space value but also adds place
value to the goods.
There are three agencies in the public sector which are engaged in
building large scale storage/warehousing capacity namely, Food
Corporation of India (FCI) Central warehousing Corporation
(CWC) and 17 State Warehousing Corporation (SWCs). The total
capacity of public warehousing as of October, 2006 was 56.50
million tonnes.
The Central Warehousing Corporation (CWC) was set up in 1957
(c
and is the largest public warehousing organization. It had a

turnover of ` 6,190 million during the year 2005-06 with a net
profit of ` 1060 million. The CWC has two types of warehouses:
Owned Capacity and Hired Capacity. CWC holds 4,564 warehouses
in India with a capacity of 8.00 million MTs, under the owned
capacity category. The hired capacity is around 2.40 million
tonnes.
213
Apart from storage, CWC also offers services in the area of clearing
Notes
S
and forwarding, handling and transportation, distribution,
disinfestation, fumigation and other ancillary services like safety ___________________
and security, insurance, standardization and documentation. The ___________________
CWC has also introduced a scheme, called the Farmers' Extension
___________________
Service at selected centres to educate farmers about the benefits of
a scientific storage. ___________________
___________________
PE
The CWC is also operating custom bonded warehouses. These
bonded warehouses are constructed at a seaport or airport and ___________________
accept imported commodities for storage till the payment of ___________________
customs duties by the importer of the commodities. Though the
___________________
primary focus of CWC is on trade and commerce in and supply and
distribution of food grains, the most lucrative and profitable ___________________
segment of CWC is custom-bonded warehouses. ___________________
In addition, seventeen states also have State Warehousing

Corporations (SWCs) that supplement the capacity of CWC. If any
state provides 50 per cent of the initial capital for state
warehouses, CWC is obligated to invest the remaining 50 per cent
of the equity capital of the SWCs, though CWC may have no
representation on the Boards.
)U
State Warehousing Corporations have a warehousing capacity of
19.40 million tonnes. These state warehouses are primarily for the
storage of agricultural produce, seeds, manures, fertilizers, etc.
The Warehousing Corporations (Amendment) Bill, 2001 is being
introduced that facilitates the Central Warehousing Corporation to
diversify and widen its activities further to strengthen the service
sector. This also allows it to place its members on the boards of the
SWCs.
Check Your Progress

Fill in the blanks:
1. A ………………. facility is warehousing on a contractual
basis by Third Party Logistics Providers.
(c
2. A ………………. in India, is a warehouse operated by the

Central Warehousing Corporation of India or by State
Warehousing Corporations.
214
Summary
Notes
S
Economic benefits of warehousing materialise when overall
___________________
logistical costs are directly reduced by utilizing one or more
___________________ facilities. Shipment consolidation is an economic benefit of
___________________ warehousing. A break bulk operation receives combined customer
___________________
orders from manufacturers and ships them to individual
customers.
___________________
PE
A cross-dock facility is similar except that it involves multiple
___________________
manufacturers. A warehouse with packaging or labelling capability
___________________ allows postponement of final production until actual demand is
___________________ known. The direct economic benefit of this warehousing service is
___________________
secondary to the fact that seasonal storage is essential to select
businesses. Warehouse mixing is similar to the break bulk process
___________________
except that several different manufacturer shipments may be
involved.
Lesson End Activity

Find out the relationship between the size and shape of a
distribution warehouse and the materials handling system. Why
)U
do some warehouses have square design while others are
rectangular?
Keywords
Inventory: Stocking of raw materials, in-process, finished,
packaging, tools and equipments, spares and others in order to
meet an expected demand or distribution in future.
Distribution Centre: Warehouses where product storage is
considered a very temporary activity.
Warehouse: A large building where raw materials or
manufactured goods may be stored before their export or
distribution for sale.
(c
Break Bulk: Packaged but non-containerized cargo.

Loose cement, grains, ores, etc., are termed bulk cargo, whereas
cargo shipped as a unit (bags, bales, barrels, boxes, cartons, drums,
pallets, sacks, vehicles, etc.) is termed break bulk.
Cross Dock: Cross-docking is a practice in logistics of unloading
materials from an incoming semi-trailer truck or railroad car and
loading these materials directly into outbound trucks, trailers, or 215

rail cars, with little or no storage in between. Notes
S
Stockpiling: A stockpile is a pile or storage location for bulk ___________________
materials, forming part of the bulk material handling process. ___________________
___________________
___________________
1. Define Economic Benefits. ___________________
PE
2. What are Break Bulk and Cross Dock? ___________________
3. Write brief note on Goods Receipt Note (GRN). ___________________
4. What do you understand by Stores Material Requisition Note ___________________

(SMRN)? ___________________
5. Distinguish between private and public warehouse. ___________________
6. Highlight the classification of private warehouses.
Further Readings
Books
)U
Reprint Ed., McGraw Hill, 1998.
Tompkins, J.A. and D.A. Harmelink (Editors), The Distribution
Management Handbook, McGraw Hill, 1993.
Donald Waters. Logistics-An Introduction to SCM, Palgrave, 2003.
Bowersox, D.J. and D.J. Closs, Logistical Management: The
Integrated Supply Chain Process, McGraw Hill, 1996.
Web Readings
http://www.scmr.com/article/warehousing_efficiency_and_effective
ness_in_the_supply_chain_process
http://cewacor.nic.in/Docs/IFWLA_PRESENTATIONS.pdf
(c
http://abilityone.org/supply_chain.html
(c
)U
PE
S
UNIT 5: Case Study
Unit 15
217
Notes
S
Case Study
___________________
___________________
___________________
Objectives
___________________
PE
___________________
Case Study: Deutsche Post
___________________
Deutsche Post has integrated traditional air and ocean
forwarding, express parcel delivery, and mail services in a 2-year ___________________
buying spree. Germany will eliminate Deutsche Post's monopoly
on mail delivery in 2003, which will inevitably lead to a loss of ___________________
significant revenue. It hopes to replace lost sales with
___________________
international transport business. Customer demand, more than
postal deregulation, is driving Deutsche Post's vision. "More and
more customers are seeing the advantage of directly working with
their suppliers," says Klaus Zumwinkel, CEO of Deutsche Post.
'They will not use only one supplier, but they will choose from a
few suppliers. To be one of those suppliers, one has to be global.
One cannot say, 'Well, in Africa business is so complicated.
Please, mister customer, we would love to have United States and
Europe, but in Africa we do not have any facilities.’ To some
)U
extent, Deutsche Post is creating a consolidation trend more than
following one. More than just reacting to competition, the largest
transport firms want to position themselves as premium
providers of global logistics services to multinational clients.
Deutsche Post and Lufthansa have merged their respective 25 per
cent voting stakes in DHL International into a joint venture
called Aerologic, which will seek out areas of cooperation for the
three partners.
Deutsche Post will take management control over Aerologic
because DHL sits closer to the German post office's core interest-
pickup and delivery. DHL is a key part of Deutsche Post's
international expansion plans. DHL offers a world mail delivery
product of which Deutsche Post is a heavy supporter. Deutsche
Post's Global Mail division has been expanding aggressively,
particularly in South America. DHL provides cross-border express
transport services, but also offers Deutsche Post a valuable global
pickup and delivery network. "All of the global shippers-and also
more and more of the local and smaller ones-are demanding
(c
transparency," said Jean-Peter Jansen, the new chairman of

Lufthansa Cargo. "They want to have a continuous flow of
information and a continuous flow of the goods themselves."
Lufthansa's core deliverable product will always be international
air freight capacity.
Lufthansa wants to strengthen its leading position through
alliances with other freight carriers. Lufthansa describes its
alliance strategy geometrically. It will partner with airlines in
Contd…
218 horizontal alliances and with forwarders in vertical industry

Notes partnerships. 'Through its deal with Deutsche Post, the airline
S
added a diagonal line to its chart, representing new initiatives in
___________________ electronic commerce. Deutsche Post and Lufthansa have formed a
joint venture called e-logic to pursue mutual interests in e-
___________________
commerce logistics. The new company will make investments in
___________________ new technology and start up ventures and also work to develop
joint fulfilment solutions for e-commerce shippers. Jansen states,
___________________ "We believe that putting us more closely together, not in a way
that we integrate, but in a way that we support each other, will
___________________
make a lot of difference for the future. What we are looking for
PE
___________________ really is growth and stabilization of our market position."
Question
___________________
Critically analyse the case.
___________________
Source: Gordan Forsyth, 'The New Integrators," American Shipper, July 2000, pp. 284.5.
___________________
___________________
)U
(c
UNIT 16: Packaging and Material Handling
219
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
BLOCK-IV
)U
(c
220
Notes
S
UNIT 16: PACKAGING AND MATERIAL
___________________ UNIT 18: SELECTING AND MEASURING
HANDLING STRATEGIC PERFORMANCE
z ___________________
Introduction z Introduction
z ___________________
Packaging Perspectives z Selecting the Proper Channel Strategy
z Measurement and Improvement of LSCM Service
z Kinds of Packaging
___________________
Quality and Performance
z Materials Handling
___________________
PE
UNIT 19: PERFORMANCE MEASURES
___________________
UNIT 17: NETWORK INTEGRATION z Introduction
z ___________________
Introduction z Purchasing Metrics
z ___________________
Enterprise Facility Network z Quality of Service
z Total Cost Integration

___________________
UNIT 20: CASE STUDY
___________________
)U
(c
Unit 16
221
Notes
S
Packaging and Material Handling
___________________
___________________
___________________
Objectives
___________________
topics: ___________________
PE
\ Packaging Perspective ___________________
\ Kinds of Packaging ___________________
\ Material Handling
___________________
___________________
Introduction
___________________
If produce is packed for ease of handling, heavily waxed cartons,
wooden crates or rigid plastic containers are preferable to bags or
open baskets, since bags and baskets provide no protection to the
produce when stacked. Sometimes locally constructed containers
can be strengthened or lined to provide added protection to
produce. Waxed cartons, wooden crates and plastic containers,
)U
while more expensive, are reusable and can stand up to the high
relative humidity found in the storage environment. Containers
should not be filled either too loosely or too tightly for best results.
Loose products may vibrate against others and cause bruising,
while over packing results in compression bruising. Shredded
newspaper is inexpensive and lightweight filler for shipping
containers.
For small-scale handlers interested in constructing their own
cartons from corrugated fibreboard, provide detailed information.
Many types of agricultural fibres are suitable for paper making,
and handlers may find it economically sensible to include these
operations in their post-harvest system.
Throughout the entire handling system, packaging can be both an
(c
aid and a hindrance to obtaining maximum storage life and

quality. Packages need to be vented yet be sturdy enough to
prevent collapse. Collapsed packages provide tattle or no
protection, requiring the commodity inside to support all of the
weight of the overhead load. Packing is meant to protect the
commodity by immobilizing and cushioning it, but temperature
management can be made more difficult if packing materials block
222 ventilation holes. Packing materials can act as vapour barriers and
Notes can help maintain higher relative humidities within the package.
S
Activity
___________________
Highlight the factors involved
In addition to protection, packaging allows quick handling
in the selection of the throughout distribution and marketing and can minimize impacts
___________________
packaging materials.
of rough handling.
___________________
___________________
Packaging Perspectives
___________________
PE
Packaging refers to a container in which the product reaches the
___________________
end use consumer. It is a part of the presentation of the product
___________________ and stays right till the customer takes it from the retail store. It
___________________ should not be confused with packing. Packing refers to the external
protective covering used for the safe transportation of the goods to
___________________
the importer.
___________________
For example, plastic box used to pack a set of embroidered
handkerchiefs is an example of packaging.
On the other hand, the corrugated fireboard boxes, which are used
for packing the plastic boxes for their safe transportation to the
importer in the foreign country, would represent packing.
Packaging plays a very important role in the marketing of a

)U
product; it is a part of the augmented product. The augmented
product is that part of the product which deals with adding new
features to the basic product in order to exceed the customer
expectations. These features take the form of packaging, delivery
arrangements, warehousing, customer advice etc., in order to add
value to the product. As a matter of fact, the competition between
the exporters at the foreign market place is not in relation to the
core product or its basic tangible features but it is about the
augmented product. For instance, an expensive chessboard offered
to a customer wrapped in the old newspaper is very likely to lose
out to an identical chessboard set neatly presented in a nice
matching box. In the latter case, the packaging makes it a more
valuable product and offers more ‘value’ to the customer.
(c
Exporters should formulate value rich offers to be made to the

prospective buyers in the foreign markets. The exporters can gain
an edge over their competitors and secure business if their offer is
better than the best. This requires creativity in the formulation of
the offer. The famous four P’s (product, price, place and promotion)
of marketing provide the framework of various decisions to
formulate the value rich offer. In relation to the product, creativity
is not only in regard to the basic product design, finish, use of 223
various materials, quality specifications, etc. but also in terms of Notes
S
labelling and packaging of the product. Besides, the exporter can ___________________
turn the growing awareness with regard to protection of
___________________
environment from pollution into a very effective promotional tool
in the foreign markets. The issues relating to environment ___________________
protection, use of eco-labels and environment friendly packaging ___________________

has occupied the central place in the area of international business
___________________
PE
during the later half of the decade of 90’s. Packing of the export
___________________
cargo and proper marking on the export boxes are equally
important. ___________________
The logistics of execution of the export order suggests that once the ___________________
goods have been procured and processed or manufactured for the ___________________
purpose of export, then the exporter should turn to the issues
___________________
relating to labelling and packaging. The decision-making processes
involved in procurement of materials/goods and mobilization of
adequate amount of financial resources.
Packaging for Material Handling Efficiency

There are various types of materials available for packaging of the
goods. These materials are paper, plastics, wood, cardboard etc.
)U
Selection of the packaging materials should be made keeping in
view primarily the specifications given by the importer because he
has to plan further for consumer packaging of the goods. Broadly,
the selection of the packaging materials would depend upon the
following factors:
z Product characteristics
z Transportation and storage methods
z Climate and culture
z Standards and environmental considerations
z Market position
(c
The type and quality of the packaging is specific to the given

product.
For example, certain products such as garments, shoes, textiles

etc. are sold to the consumers without any packaging.
They are usually displayed without any packaging at the retail

stores. Such goods do not require very expensive packaging.
224
Card board boxes are used for the packaging of items such as sets
Notes
S
of glasses or tableware, decoration with several delicate parts,
___________________
pairs of candle holders, glass vases, delicate statuettes etc., to
___________________ ensure that they are not damaged and their appearance is not
___________________ spoiled during handling and display.
___________________ Expensive products and gift items such as jewellery require a high
standard of packaging. In fact, the more expensive or exclusive the
___________________
PE
product, the more justified high quality and more expensive the
___________________ packaging is.
___________________
___________________ Kinds of Packaging

___________________ Depending on the use of packaging materials, the packaging for
___________________ export products can be classified into the following categories:
Plastic Packaging
The various kinds of plastic materials are used for packaging of the
export products. The most common plastic materials used for
packaging are polyethylene (PE) and polypropylene (PP).
Polyethylene film has two main varieties of consumer packaging
)U
namely, low density polyethylene (PE-LD) film and high-density
polyethylene (PE-HD).
PE-LD film is used for making plastic bags, shrink wrapping and
stretch wrapping. This film is very useful to provide protection
against moisture and dirt. It does not however, provide any
mechanical protection. The exporters can use the plastic bags
made of PE-LD films for wrapping articles to package products like
T-shirts, table cloths, napkins, leather hand bags etc. These
products are placed inside the plastic bags, which are transparent
and are suited for retail display.
In shrink-wrapping, a specially treated film is loosely wrapped

around the product(s) and then shrunk with heat to form a tight
package. This kind of wrapping is suitable for solid products like
(c
sets of drinking glasses, a group of egg-cups, sets of table mates

and so on.
In stretch wrapping, a thin film is tightly wound around the

product, often in several layers. When the wrap is completed, the
stretched film tries to return to its original size, thereby holding
the product or group of products tightly in place.
225
PE-HD is also used for making plastic bags because it provides
Notes
S
better resistance against moisture and fats than PE-LD. PE-HD is
more expensive than the PE-LD. Both the forms of plastic films are ___________________
environment friendly as they are easy to recycle. ___________________
The PP films are stronger than the PE films. It is better to use ___________________
bags made of PP films for packaging textiles and garments as
___________________
these can be printed or can be used in plain form as well. PP films
___________________
PE
are better than PE films in terms of providing better moisture
protection but these films are more expensive. Another alternative ___________________
to PP films is polyvinyl chloride (PVC) material. ___________________
Plastic boxes can be used especially as retail packages for jewellery ___________________
and other small, precious products. They are also well-suited to
___________________
add appeal to products such as embroidered handkerchiefs or
___________________
tablecloths, souvenir dolls, etc. They come in square, oval or round
shapes; printed or plain.
Paper-based Packaging
Paper-based materials are used as wrapping, as paperboard
cartons or corrugated fibreboard boxes. The various types of paper
can be coated with plastics, waxed or treated with anti-corrosion
)U
agents. Paper is either produced from virgin wood fibres or
recycled fibres. The former is stronger than the latter.
Paper wrappings provide protection against dust and light, but do

not provide mechanical protection.
Paper absorbs moisture when the surrounding air is more humid

than the paper, and it gives up, moisture when the surroundings
are drier. Thus, paper wrappings can be used to some extent as
moisture protection inside the packages as well to slow down the
harmful effect of moisture in the air.
Paperboard Folding Cartons

Folding cartons made of different paperboard qualities can be used
(c
as retail packaging for variety of reasons. Folding cartons are

economical; they can be shaped in almost unlimited number of
ways; they can be printed very decoratively; properly designed
cartons provide mechanical protection to products; they protect
products against dust and light, and are easy to handle in retail
shops. The most important property of such cartons is their
stiffness.
226
Paper Board Cans
Notes
The paperboard can is a form of paper based retail packaging,
S
___________________ which is quite inexpensive and is used to pack different types of
___________________ products. These cans can be lined inside with aluminium foil or
plastic films to provide additional protection against humidity.
___________________
Such cans are used for packaging toys, puzzles, games, tennis-balls
___________________
and other sports goods.
___________________
PE
Combined Plastic and Card Board Packaging
___________________
___________________ There are three main types of packaging that combine paperboard
and plastic materials. These are as follows:
___________________
1. Skin Packaging
___________________
2. Blister Packaging and
___________________
3. Plastic Bags with a Paperboard Card
These packages are used mainly for retail packaging of pens, small
toys, gift items lightweight souvenir articles. This type of
packaging has several advantages: the product is visible through
the plastic; the paperboard card can be printed to provide
information and to add sales appeal; especially small products are
)U
not lost or stolen easily.
1. Skin Packaging: Skin packaging is a form of packaging
where the product is first placed on a paperboard card with
heat seal coating. It is suitable for products, which need
protection against moisture and are not very heavy or
expensive. It is however, not suitable for products which are
sensitive to heat.
2. Blister Packaging: In this form of packaging, the product is
first placed into a pre-formed plastic blister. Then a
paperboard card is attached to it. Blister packaging can be
used for a variety of products such as toys, pens, textile
articles and decorations, etc.
3. Plastic bag with Paperboard Card: In this form of
(c
packaging, a paperboard card is attached to the plastic bags

through a hole in the bag. This adds sales appeal to plain
plastic bags and is always very cost effective. The paperboard
card can be printed on adding information and attraction. The
plastic bags can be made of any materials but PP film should
be preferred in the interest of better product presentation.
227
4. Miscellaneous Packaging: Exporter can make use of wood,
Notes
S
textiles, straw, leaves or any other locally available materials Activity
for packaging of the goods. Specially made wooden boxes can ___________________
Make a research on the
be used to package traditional ceramics, woodcarvings, various activities involved in handling
___________________
requirements.
gift items, pieces of jewellery, etc. If wooden packaging is used
___________________
as a gift or retail package, it has to be made with as much care
as the product itself. This means that it should be smooth, ___________________
clean, and dry, with any hinges or locks well-made and ___________________
PE
functioning. It is also important to pack the product with ___________________
sufficient cushioning material into a wooden package, so that
___________________
the product is not damaged during transport. Before using
wood as packaging material, one should always check, whether ___________________
there are any regulations concerning the treatment or ___________________
certification of wooden materials.
___________________
Check Your Progress

State whether the following statements are true or false:
1. Market position is used for the packaging of items.
2. Expensive products and gift items such as jewellery
require a low standard of packaging.
)U
Materials Handling
The handling of products is a key to warehouse productivity for
several important reasons.
First, the relative number of labour hours required to perform
material handling creates a vulnerability to any reduction in the
output rate per labour hour. Warehousing is typically more
sensitive to labour productivity than manufacturing since material
handling is highly labour-intensive.
Second, the nature of warehouse material handling is limited in
terms of direct benefits gained by improved information
technology. While computerization has introduced new
(c
technologies and capabilities, the preponderance of material

handling requires significant manual input.
Third, until recently, warehouse material handling has not been
managed on an integrated basis with other logistical activities, nor
has it received a great deal of top management concern. Finally,
automation technology capable of reducing material-handling
labour is only now beginning to reach its full potential.
228
Within the warehouse system, material handling is the prime
Notes
S
consumer of labour. The application of labour to product selection
___________________
and handling represents one of logistics highest personnel cost
___________________ components. The opportunity to reduce this labour intensity and
___________________ improve productivity lies with emerging handling technologies. In
___________________ logistics, the primary emphasis is placed on material and product
___________________
inbound and outbound flows rather than inventory storage.
PE
___________________ Therefore, warehouse design is an integral aspect of overall
handling efficiency and is also of vital concern in obtaining
___________________
increased labour productivity.
___________________
___________________ Handling Requirements

___________________ The primary handling objective in a warehouse is to sort inbound
shipments according to precise customer requirements. The three
handling activities are receiving, in storage handling, and
shipping.
Receiving
Merchandise and materials typically arrive at the warehouse in
)U
larger quantities than when they depart. The first handling
activity required is unloading the transportation vehicle. In most
warehouses, unloading is manual. Limited automated and
mechanized methods have been developed that are capable of
adapting to varying product characteristics. Generally, one or two
people unload a shipment. The product is hand-stacked on pallets
or slip sheets to form a unit load for movement efficiency. In some
cases, conveyors are employed to unload vehicles more rapidly.
Larger types of merchandise may be unloaded directly from the car
or truck to be moved into the warehouse. Containerized or unit-
load shipments dramatically reduce unloading time.
In Storage Handling
Storage handling consists of all movement within a warehouse
(c
facility. Following product receipt, it is necessary to transfer

merchandise within the warehouse to position it for storage or
order selection. Finally, when an order is received, it is necessary
to accumulate the required products and to transport them to a
shipping area. The two types of in storage handling are transfer
and selection.
229
There is at least two and sometimes three transfer movements
Notes
S
required within a typical warehouse. The merchandise is first
moved into the building and placed at a designated storage ___________________
location. The inbound movement is handled by forklift trucks when ___________________

pallets or slip-sheets are used or other mechanical traction for ___________________
larger unit loads. A second internal movement may be required
___________________
prior to order assembly depending on the operating procedures of
the warehouse. When products are required for order selection, ___________________
PE
they are transferred to an order selection or picking area. When ___________________
the merchandise is physically large or bulky, such as a stove or ___________________
washing machine, this second movement may be omitted. In the
___________________
final transfer, the assortment of products required for a customer
___________________
shipment is moved from the warehouse to the shipping dock
___________________
Selection is the primary function of the warehouse. The selection
process groups materials, parts, and products into customer orders.
It is typical for one section of the warehouse to be established as a
selection area to minimize travel distance. The typical selection
process is coordinated by a computerized control system. The
primary focus for warehouse automation is the selection process.
)U
Shipping
Shipping consists of checking and loading orders onto
transportation vehicles. As in receiving, shipping is manually
performed in most systems. Shipping with units loads is becoming
increasing popular because considerable time can be saved in
vehicle loading. A unit load consists of grouped products, while a
dead-stack or floor-stack load consists of boxes loaded directly from
the floor. A checking operation is required when merchandise
changes ownership as a result of shipment.
One extremely encouraging aspect of contemporary logistics is the

productivity potential that can be realized from capital investment
in material-handling equipment. Material handling cannot be
(c
avoided in the performance of logistics. It should, however, be

minimized. The technical segment of material handling is
extensive and beyond the scope of this text. However, the following
section will discuss handling methods and efficiency. Then the
discussion will focus on recent developments in automated
handling.
230
Basic Handling Considerations
Notes
Material handling in the logistics system is concentrated in and
S
___________________ around the warehouse facility. A basic difference exists in the
___________________ handling of bulk materials and master cartons. Bulk handling is a
situation where protective packaging at the master carton level is
___________________
unnecessary. Specialized handling equipment is required for bulk
___________________
unloading, such as for solids, fluids, or gaseous materials. The
___________________ following discussion focuses on master carton handling within the
PE
___________________ logistical system.
___________________ Over the years a variety of guidelines have been suggested to

assist management in the design of material-handling systems.
___________________
These are representative:
___________________
1. Equipment for handling and storage should be as standardized
___________________
as possible.
2. When in motion, the system should be designed to provide
maximum continuous product flow.
3. Investment should be in handling rather than stationary
equipment.
4. Handling equipment should be utilized to the maximum extent
)U
possible.
5. In handling equipment selection, the ratio of deadweight to
payload should be minimized.
6. Whenever practical, gravity flow should be incorporated in
system design.
Handling systems are classified as:
1. Mechanized
2. Semi-automated
3. Automated
4. Information-directed.
A combination of labour and handling equipment is utilized in
(c
mechanized systems to facilitate receiving, processing, and/or

shipping. Generally, labour constitutes a high percentage of overall
cost in mechanized handling.
An automated handling system may be applied to any of the basic
handling requirements depending on the situation. When selected
handling requirements are performed, using automated equipment
and the remainder of the handling is completed on a mechanized 231

basis; the system is referred to as semi-automated. Notes
S
An information-directed system uses computers to maximize ___________________
control over mechanized handling equipment. Mechanized ___________________
handling systems are the most common. However, the use of semi-
___________________
automated and an automated system are rapidly increasing. As
noted earlier, one factor contributing to low logistical productivity ___________________
is that information-directed handling has yet to achieve its full ___________________
PE
potential. This situation is predicted to dramatically change during ___________________
the 1990s.
___________________
Handling Equipments ___________________
Mechanized systems employ a wide range of handling equipment. ___________________

The types of equipment most commonly used are:
___________________
Forklift Trucks
Forklift trucks can move loads of master cartons both horizontally
and vertically. A pallet or slip sheet forms a platform upon which
master cartons are stacked. A slip sheet consists of a thin sheet of
material such as solid fibre or corrugated paper. Slip sheets are an
)U
inexpensive alternative to pallets and are ideal for situations when
product is handled only a few times. A forklift truck normally
transports a maximum of two unit loads (two pallets) at a time.
However, forklifts are not limited to unit-load handling. Skids or
boxes may also be transported depending on the nature of the
product.
Many types of forklift trucks are available. For example, High-

stacking trucks capable of up to 40 feet of vertical movement,
palletless side-clamp versions, and trucks capable of operating in
aisles as narrow as 56 inches can be found in logistical
warehouses. Particular attention to narrow-aisle forklift trucks has
increased in recent years, as warehouses seek to increase rack
storage density and overall storage capacity. The forklift truck is
not economical for long-distance horizontal movement because of
(c
the high ratio of labour per unit of transfer. Therefore, forklifts are
most effectively utilized in shipping and receiving, and to place
merchandise in high cube storage. The two most common power
sources for forklifts are propane gas and electricity. Many forklift
operations are utilizing new forms of communication technology to
increase their productivity.
232
Instead of following handwritten or pre-printed instructions,
Notes
S
workers receive their assignments through either handheld or
___________________
vehicle-mounted RF terminals. Use of RF technology provides real-
___________________ time communication capability to central data processing systems,
___________________ and when combined with bar code scanning of cartons and pallets,
it allows forklift truck operators to receive and update item status
___________________
inquiries, material orders and movements, and inventory
___________________ adjustments. The Pioneer Hi-Bred International Company exhibits
PE
___________________ this application of technology to forklift operations.
___________________
Walkie-Rider, Pallet Trucks
___________________
Walkie-rider pallet trucks provide a low-cost, effective method of
___________________ general material-handling utility. Typical applications include
___________________ loading and unloading, order selection and accumulation, and
shuttling loads over longer transportation distances throughout
the warehouse. Electricity is the typical power source.
Towlines
Towlines consist of either in-floor or overhead-mounted drag
devices. They are utilized in combination with four-wheel trailers
)U
on a continuous power basis. The main advantage of a towline is
continuous movement. However, such handling devices do not have
the flexibility of forklift trucks. The most common application of
towlines is for order selection within the warehouse. Order
selectors place merchandise on a four-wheel trailer, which is then
towed to the shipping dock. A number of automated decoupling
devices have been perfected that route trailers from the main line
to selected shipping docks.
A point of debate involves the relative merits of in-floor and
overhead towline installation. In-floor installation is costly to
modify and difficult to maintain from a housekeeping viewpoint.
Overhead installation is more flexible, but unless the warehouse
floor is absolutely level, the line may jerk the front wheels of the
trailers off the ground and risk product damage.
(c
Tow Tractor with Trailers

A tow tractor with trailer consists of a driver guided power unit
towing a number of individual four-wheel "trailers" that hold
several palletized loads. The typical size of the trailers is 4 by 8
feet. The tow tractor with trailer, like the towline, is typically used
to support order selection. The main advantage of tow tractor with 233
trailers is flexibility. It is not as economical as the towline because Notes
S
it requires greater labour participation and is often idle. ___________________
Considerable advancements have been made in automated-guided
___________________
vehicle systems (AGVS). These are discussed under semi-
automated material handling. ___________________
___________________
Conveyors
___________________
PE
Conveyors are used widely in shipping and receiving operations
___________________
and form the basic handling device for a number of order selection
systems. ___________________
___________________
Conveyors are classified according to:
___________________
1. Power
___________________
2. Gravity
3. Roller or belt movement
In power systems, the conveyor uses a drive chain from either
above or below. Considerable conveyor flexibility is sacrificed in
such power configuration installations.
Portable gravity-style roller conveyors are often used at the
)U
warehouse for loading and unloading and, in some cases, are
transported on over-the-road trailers to assist in unloading at the
destination.
Carousels
A carousel operates on a different concept than most other
mechanized handling equipment. It delivers the desired item to the
order selector by using a series of bins mounted on an oval track.
The entire carousel rotates and brings the desired bin to the
operator. A wide variety of carousels are available. The typical
application involves selection of individual packages in pack-and
repacks and service parts operations. The rationale behind
carousel systems is to shrink order selection labour requirements
(c
by reducing walking length/paths and time. Carousels, particularly

modern stackable or multi-tiered systems, also significantly reduce
storage floor requirements.
Pick-to-Light Systems
Technology has also been applied to carousel systems in an
application known as "pick to light." In these systems, order
234 selectors pick designated items and put them directly into cartons
Notes from carousel bins or conveyors. A series of lights or a "light tree"
S
___________________ in front of each pick location indicates the number of items to pick
from each location. The light system may also be used to indicate
___________________
when a carton is ready to move on. In systems where an item is
___________________
picked to fill multiple orders, "soft bars" show the order selector
___________________ how many items are needed in a carton, since each carton typically
___________________ represents a separate order. Some carousel systems also utilize
PE
computer-generated pick lists and computer-directed carousel
___________________
rotation to further increase selection productivity. These systems
___________________ are referred to as "paperless picking" because no paperwork exists
___________________ to slow down employee efforts.
___________________ The types of mechanized material-handling equipment discussed
___________________ are basic samples of the wide range available for use. Most systems
combine different types of handling devices.
Semi-automated Handling
The semi-automated system supplements a mechanized system by
automating specific handling requirements. Thus, the semi-
automated warehouse is a mixture of mechanized and automated
)U
handling. Typical equipment utilized in semi-automated
warehouses is automated-guided vehicle systems, computerized
sortation, robotics, and various forms of live racks.
Automated-guided Vehicle Systems (AGVS)

The automated-guided vehicle system performs the same type of
handling function as a mechanized tow tractor with trailer or rider
pallet truck. The essential difference is that an AGVS does not
require an operator. It is automatically routed and positioned at
the destination without operator intervention.
Typical AGVS equipment relies on an optical or magnetic guidance
system. In the optical application, tape is placed on the warehouse
floor, and the equipment is guided by a light beam that focuses on
the guide path. A magnetic AGVS follows an energized wire
(c
installed in the floor. The primary advantage is the elimination of

a driver. Newer AGVs use video and information technology to
follow paths without the need of fixed tracks. Contemporary AGVs
are smaller, simpler and more flexible than their predecessor
systems of the 1980s. AGVs have declined in popularity in recent
years’ industry orders have dropped by 40 per cent (in dollar
volume) since 1985. It is possible that the new, more flexible 235
systems may reverse this trend. Notes
S
___________________
Sortation
___________________
Automated sortation devices are typically used in combination
___________________
with conveyors. As products are selected in warehouse and
conveyorized out, they must be sorted to specific shipment docks. ___________________
In order for automated sortation systems to operate, the master ___________________
PE
carten must have a distinguishing code. These codes are read by
___________________
optical scanning devices and automatically routed to the desired
location. Most controllers are able to be programmed to permit a ___________________
customized rate of flow through the system to meet changing ___________________

requirements. ___________________
Automated sortation provides primary benefits. The first is an ___________________
obvious reduction in labour, while the second benefit is a
significant increase in speed and accuracy.
High speed sortation systems can divert and align packages at rate
exceeding one package per second. In this system, packages are
diverted to the desired destination and can be positioned to
accommodate unit loading.
)U
Robotics
The robot is a humanlike machine that can be programmed by
microprocessors to perform one or a series of activities. The appeal
of robotics lies in the ability to program the robot to function as an
expert system capable of implementing decision logic in the
handling process. The popularity of robotics resulted from their
widespread adoption in the automotive industry during the early
1980s to replace selected manual tasks. However, a warehouse
provides a different type of challenge than a typical manufacturing
plant. In warehousing, the goal is to accommodate the exact
merchandise requirements of a customer's order. Thus, warehouse
specification can vary extensively from one customer order to the
next and results in far less routine activities than typically found
(c
in manufacturing.
The primary use of robotics in warehousing is to break down and
build unit loads. In the breakdown process, the robot is
programmed to recognize stocking patterns and place products in
the desired position on a conveyor belt. The use of robots to build
unit loads is essentially the reverse operation.
236
Another prime potential use of robotics in warehousing occurs in
Notes
S
environments where humans find it difficult to function.
___________________
Examples include high noise areas and extreme temperature
___________________
environments like cold-storage freezers.
___________________
Significant potential exists to use robots in a mechanized
___________________ warehouse to perform selected functions. It is the capability to
___________________ incorporate artificial intelligence-in addition to their speed,
PE
dependability, and accuracy-makes robotics an attractive
___________________
alternative to traditional manual handling methods.
___________________
___________________ Live Racks

___________________ Live Racks Storage rack design, in which product flows forward to
___________________ the desired selection position, is a commonly used device to reduce
manual labour in warehouses. The typical live rack contains roller
conveyors and is constructed for rear loading. To complete the
installation, the rear of the rack is elevated higher than the front,
causing a gravity flow forward. When unit loads are removed from
the front, all other loads in that specific rack automatically move
forward.
)U
Example: Live racks are a prime example of incorporating gravity
flow into material-handling system design.
The use of the live rack replaces the need to use fork trucks to
reposition unit loads. A significant advantage of this form of
storage is the automatic rotation of product that results from rear
loading of a live rack. Rear loading facilitates "first-in, first-out"
management of inventory. Applications of gravity flow racks are
extremely diverse.
For example, such racks are utilized to "stage," or store and
position, fresh biscuits or bread for bakery manufacturers on
individual pallet loads in preparation for shipping.
Flow-rack staging is also typically utilized for automotive seats in
JIT systems.
(c
Automated Material Handling

For several decades, the concept of automated handling has been
long on potential and short on accomplishment. Initial efforts
directed toward automated handling concentrated on order
selection systems at the master carton level. Recently, emphasis
has switched to automated high-rise storage and retrieval systems
(ASRS). Each is discussed in turn after a brief review of automated 237

handling concepts. Notes
S
___________________
Potential of Automation
___________________
The appeal of automation is that it substitutes capital investment
___________________
in equipment for labour required in mechanized handling systems.
In addition to using less direct labour, an automated system ___________________
operates faster and more accurately. Its shortcomings are the high ___________________
PE
degree of required capital investment and the complex nature of
___________________
development and application.
___________________
To date, most automated systems have been custom-designed and
___________________
constructed for each application. The six guidelines previously
noted for selection of mechanized handling systems are not ___________________
applicable to automated systems. ___________________
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.
The ratio of deadweight to payload has little relevance in an
automated handling application. Although computers play an
important part in all handling systems, they are essential to
)U
automated systems. The computer provides programming of the
automated selection equipment and is used to interface the
warehouse with the remainder of the logistical system. The
warehouse control system is vastly different in automated
handling. One factor that prohibited rapid development of
automated systems was the high cost of minicomputers.
Breakthroughs in microprocessors have eliminated this barrier.
Check Your Progress

Fill in the blanks:
1. Within the warehouse system, ……………. is the prime
consumer of labour.
2. ……………. handling consists of all movement within a
(c
warehouse facility.
Summary
Packaging refers to a container in which the product reaches the
end use consumer. Packaging plays a very important role in the
marketing of a product; it is a part of the augmented product.
238
The logistics of execution of the export order suggests that once the
Notes
S
goods have been procured and processed or manufactured for the
___________________
purpose of export, then the exporter should turn to the issues
___________________ relating to labelling and packaging.
___________________ There are various types of materials available for packaging of the
___________________ goods which are paper, plastics, wood, cardboard etc. Polyethylene
film has two main varieties of consumer packaging namely, low
___________________
PE
density polyethylene (PE-LD) film and high-density polyethylene
___________________ (PE-HD).
___________________
Paper based materials are used as wrapping, as paperboard
___________________ cartons or corrugated fibreboard boxes. There are three main types
___________________ of packaging that combine paperboard and plastic materials - Skin
Packaging, Blister Packaging and Plastic Bags with a Paperboard
___________________
Card.
The primary handling objective in a warehouse is to sort inbound
shipments according to precise customer requirements. Storage
handling consists of all movement within a warehouse facility.
Material handling in the logistics system is concentrated in and
around the warehouse facility.
)U
Lesson End Activity
Prepare a project on the various type of packaging available for
different products.
Keywords
Packaging: It refers to a container in which the product reaches
the end use consumer.
Card Board Boxes: These are used for the packaging of items
such as sets of glasses or tableware, decoration with several
delicate parts, pairs of candle holders, glass vases, delicate
statuettes etc., to ensure that they are not damaged and their
(c
appearance is not spoiled during handling and display.

Polyethylene Film: Polyethylene film is a resinous material often
used to make plastic wrap, protective covers, and grocery bags.
Paper Board Cans: The paperboard can is a form of paper based
retail packaging, which is quite inexpensive and is used to pack
different types of products.
239
Skin Packaging: Skin packaging is a form of packaging where
Notes
S
the product is first placed on a paperboard card with heat seal
coating. ___________________
Blister Packaging: In this form of packaging, the product is first ___________________
placed into a pre-formed plastic blister. ___________________
Materials Handling: Material Handling refers to activities, ___________________

equipment, and procedures related to the moving, storing, ___________________
PE
protecting and controlling of materials in a system.
___________________
___________________
___________________
1. Define Packaging.
___________________
2. “Packaging plays a very important role in the marketing of a
___________________
product.” Elucidate.
3. Highlight the factors involved in the selection of the packaging
materials.
4. What are the various kinds of Packaging?
5. Explain the three main types of packaging that combine
paperboard and plastic materials.
)U
6. Compare and contrast order selection and unit load
automation.
7. Explain the types of handling equipment.
8. Describe automated material handling.
Further Readings
Books
(c

Donald Waters. Logistics-An Introduction to SCM , Palgrave, 2003.
240
Web Readings
Notes
http://my.safaribooksonline.com/book/-/9780123852021/chapter-9-
S
___________________ packaging-and-material-handling/92_packaging
___________________
http://el.gdcc.edu.cn/upload/3skjy/Note07.pdf
___________________
http://www.iems.co.kr/CPL/lecture/part4/5.%20Material%20Handli
___________________ ng%20&%20Packaging.pdf
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
UNIT 17: Network Integration
Unit 17
241
Notes
S
Activity
Network Integration
___________________
Conduct a research and
prepare a brief report on the
___________________
selection of individual
locations, as well as the
___________________
overall locational network.
Objectives
___________________
topics: ___________________
PE
\ Enterprise Facility Network ___________________
\ Total Cost Integration ___________________
___________________
Introduction ___________________
For the most part, managers confront a new and challenging ___________________
assignment when they are asked to participate in a logistical
system reengineering. Because of the rapid rate of change in
almost every facet of logistical operations, managers can expect
considerable discontinuity when they try to use previous
experience to guide the creation and integration of new logistical
competencies. Therefore, success or failure may depend on how
)U
well the planning team is able to quantify the forces at work and
rationalize them into a logical and believable action plan. Having a
comprehensive understanding of the theoretical constructs that
serve as the foundation of logistical integration provides an
important step toward conceptualizing an integrated strategy.
Enterprise Facility Network

Prior to the availability of low-cost dependable surface
transportation, most of the world's commerce relied on movement
by water. During this early period, commercial activity
concentrated around port cities. Overland transport of goods was
costly and slow.
(c
For example, the lead time to order custom clothing from across
the continental United States could exceed 9 months.
Although the need for fast and efficient transport existed, it was
not until the invention of the steam locomotive in 1829 that the
transportation technology revolution began in the United States.
Today, the transportation system in this country is a highly
242 developed network of rail, water, and air, highway, and pipeline
Notes services. Each transport alternative provides a different type of
S
___________________ service for use within a logistical system. This availability of
___________________ economical transportation creates the opportunity to establish a
competitively superior facility network to service customers.
___________________
The importance of location network analysis has been recognized
___________________
since the middle of the 19th century, when the German economist
___________________
Joachim von Thunen wrote The Isolated State. For von Thunen,
PE
___________________ the primary determinant of economic development was the price of
___________________ land and the cost to transport products from farm to market. The
___________________ value of land was viewed as being directly related to the cost of
transportation and the ability of a product to command an
___________________
adequate price to cover all cost and result in profitable operation.
___________________
Von Thunen's basic principle was that the value of specific produce
at the growing location decreases with distance from the primary
selling market.
Spectrum of Location Decisions

In terms of logistical planning, transportation offers the potential
to link geographically dispersed manufacturing, warehousing, and
)U
market locations into an integrated system. Logistical system
facilities include all locations at which materials, work-in-process,
or finished inventories are handled or stored. Thus, all retail
stores, finished goods warehouses, manufacturing plants, and
material storage warehouses are logistical network locations.
It follows that selection of individual locations, as well as the
overall locational network, represents important competitive and
cost-related logistical decisions.
A manufacturing plant location may require several years to fully

implement.
In contrast, some warehouse arrangements are sufficiently flexible

to be used only at specified times during a year. The selection of
(c
retail locations is a specialized decision influenced by marketing

and competitive conditions. The discussion that follows
concentrates on warehouse location. Among all the location
decisions faced by logistical managers, those involving warehouse
networks are most frequently reviewed.
Local Presence: An Obsolete Paradigm 243

Notes
S
A long-standing belief in business is that a firm must have
___________________
facilities in local markets to successfully conduct business. During
economic development of North America, erratic transportation ___________________
services created serious doubt about a firm's ability to promise ___________________

delivery in a timely and consistent manner. In short, customers
___________________
felt that unless a supplier maintained inventory in local market
___________________
PE
areas it would be difficult, if not impossible, to provide consistent
delivery. This perception, commonly referred to as the local ___________________
presence paradigm, resulted in logistical strategies committed to ___________________

forward deployment of inventory. As recently as the early 1960s it
___________________
was not uncommon for manufacturers to operate 20 or more
___________________
distribution warehouses to service mainland United States. Some
firms went so far as to have full line inventory warehouses located ___________________
near all major sales offices.
When a tradition is part of a successful strategy, it is difficult to

change. However, for the past several decades inventory cost and
risk associated with local presence have driven re-examination.
Transportation services have dramatically expanded, and
reliability has increased to the point where arrival times are
)U
dependable and predictable. Rapid advances in information
technology have reduced the time required to identify and
communicate customer requirements. Technology is available to
track transportation vehicles, thereby providing accurate delivery
information. Next-day delivery from a warehouse facility located as
far away as 800 to 1000 miles is common practice.
Transportation, information technology, and inventory economics

all favour the use of fewer rather than greater numbers of
distribution warehouses to service customers within a geographical
area.
Warehouse Requirements
Warehouses are established in a logistical system to lower total
(c
cost or to improve customer service. In some situations, the

benefits of lower cost and improved service can be achieved
simultaneously. Warehouses create value for the processes they
support. Manufacturing requires warehouses to store, sort, and
sequence materials and components. Facilities used for inbound
materials and components are often referred to as supply facing
244 warehouses. Warehouses are also used to store, sequence, and

Notes combine inventory for consolidated shipment to next level
S
___________________ customers in the supply chain. Warehouses used support market
___________________
distribution is often referred to as demand facing warehouses.
___________________ 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
PE
___________________ factories they support; in contrast, warehouses dedicated to
___________________ marketing distribution are typically strategically located
throughout the geographical market area serviced.
___________________
___________________
The combinations of information technology, e-procurement
fulfilment, and response-based business strategies have combined
___________________
to radically alter how and why warehouses are used. The economic
justification and desired functionality of a warehouse can be
distinctly different for facilities dedicated to procurement,
manufacturing, or market distribution.
Procurement Drivers
Procurement drivers centre on using warehouses to help purchase
)U
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.
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
(c
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 debundled from the purchase
price. Such debundling facilitates functional absorption and spin- 245

off between manufacturers and their suppliers. There is also a Notes
S
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 ___________________
PE
rapidly accommodate manufacturing spikes continue to make
___________________
selected warehousing of materials a sound business decision.
___________________
As a result, the role of supply facing warehouses continues to
___________________
change. Warehouses were traditionally used to stockpile raw
materials and component parts. Today such facilities place greater ___________________
emphasis on sorting and sequencing materials as they flow into ___________________

manufacturing. In many organizations the unbundling of services
from the price of materials has facilitated outsourcing of
warehouse requirements. Warehouse services required to most
efficiently support manufacturing are increasingly being provided
by lead suppliers or integrated logistics service providers. The goal
is to streamline the flow of materials and components by
)U
eliminating duplicate handling and storage of identical inventories
at multiple locations throughout the material supply network.
Manufacturing Drivers
Warehouses that support manufacturing are used to combine
finished product for customer shipment. The capability to
consolidate differs to individual order shipment. A primary
advantage of a manufacturing demand facing warehouse is the
ability to offer customers full line product assortment on a single
invoice at truckload transportation rates. In fact, a manufacturer's
capability to provide such consolidation may be the primary reason
for its selection as a preferred supplier.
The primary determinant of the warehousing required to support

(c
manufacturing is the specific production strategy being

implemented. Three basic manufacturing strategies – Make to
Plan (MTP), Make to Order (MTO), and Assemble to Order (ATO).
The extent of demand faced warehousing can be directly linked to
the support requirements of each manufacturing strategy. In a
general sense, MTO manufacturing strategies require supply
facing warehousing support but little, if any, demand facing
246 storage. Conversely, MTP manufacturing strategies, which focus

Notes resources to achieve maximum manufacturing economy of scale,
S
___________________ require substantial demand facing warehouse capacity.
___________________
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
PE
___________________ transportation cost by maximizing consolidation and length of haul
from manufacturing plants followed by relatively short outbound
___________________
movement to final destination customers. 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.
Rapid Replenishment
)U
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
(c
geographical proximity. Large retail stores may receive multiple

truckloads from the warehouse on a daily basis.
Market-based ATO
The design of a market distribution warehouse network is directly
related to inventory deployment strategy. The establishment of
market distribution warehouses is a result of forward inventory
deployment in anticipation of future market requirements. This 247

assumption means that a manufacturing firm utilizing such a Notes
S
distributive network is to some degree depending upon ___________________
anticipatory inventory deployment to offset response time to meet
___________________
customer requirements. Based on the preceding discussion,
inventories deployed forward after manufacturing are typical in ___________________
situations where firms are manufacturing to plan and when they ___________________
are engaged in decentralized assembly to order. In ATO situations, ___________________
PE
common or undifferentiated components are stocked in warehouse
___________________
inventory in anticipation of performing customized manufacturing
or assembly at the warehouse upon receipt of customer orders. ___________________
___________________
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.
Warehouse Justification
Warehouses are justified in a logistical system when a service or
cost advantage results from their positioning between suppliers,
)U
manufacturers, and customers. Competitive advantage generated
by establishing a warehouse network can result from lower total
cost or faster to-destination service. From the viewpoint of
transportation economies, cost advantage results from using the
warehouse to achieve freight consolidation. However, freight
consolidation typically requires inventory to support assembly of
customized orders. Alternatively, consolidation or assortment may
be achieved by establishing flow-through facilities or cross-dock
sortation that operates without pre-established inventories.
Such continuous movement effectively converts warehouses from

inventory storage to mixing facilities. Of course some business
situations will justify a combination of inventory storage and
continuous flow-through too effectively and economically service
(c
customers. From the perspective of integrative management, the

key logistics system design questions become: How many and what
kinds of warehouses should a firm establish? Where should they be
located? What services should they provide? What inventories
should they stock? And which customers should they service? This
sequence of interrelated questions represents the classical logistics
network design challenge. For manufacturing firms, network
248 design begins with marketing strategy and continues into

Notes manufacturing and procurement planning. In retailing and
S
Activity
___________________
Prepare a chart to show the wholesaling enterprises the framework spans from purchasing to
Economic justification of a
___________________
market distribution strategies.
warehouse facility based on
transportation cost.
___________________
1. Warehouses used support market distribution is often
PE
___________________ referred to as ………………… warehouses.
___________________ 2. A primary advantage of a manufacturing demand facing
___________________ ………………… is the ability to offer customers full line
___________________
product assortment on a single invoice at truckload
transportation rates.
___________________
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
)U
facility network.
Transportation Economics
The key to achieving economical transportation is summarized in
two basic principles. The first, often called the quantity principle,
is that individual shipments should be as large as the involved
carrier can legally transport in the equipment being used. The
second, often called the tapering principle, is that large shipments
should be transported distances as long as possible. Both of these
principles serve to spread the fixed cost related to transportation
over as many pounds and as many miles as possible.
Cost-based Warehouse Justification

(c
The basic economic principle justifying establishment of a

warehouse is transportation consolidation. Manufacturers typically
sell products over a broad geographical market area. If customer
orders tend to be small, then the potential cost savings of consoli-
dated transportation may provide economic justification for
establishing a warehouse.
249
To illustrate, assume a manufacturer's average shipment size is
Notes
S
500 pounds and the applicable freight rate to a customer is $7.28
per hundredweight. Each shipment made direct from the ___________________
manufacturing location to the market would have a transportation ___________________

cost of $36.40. The quantity or volume transportation rate for
___________________
shipments 20,000 pounds or greater is $2.40 per hundredweight.
___________________
Finally, local delivery within the market area is $1.35 per
hundredweight. Under these conditions, products shipped to the ___________________
PE
market via quantity rates and distributed locally would cost $3.75 ___________________
per hundredweight, or $18.75 per 500-pound shipment. If a
___________________
warehouse could be established, stocked with inventory, and
___________________
operated for a total cost of less than $17.65 per 500-pound
shipment ($36.40 – $18.75) or $3.53 per hundredweight, the overall ___________________
cost of distributing to the market using a warehouse would be ___________________

lower. Given these economic relationships, establishment of a
warehouse offers the potential to reduce total logistics cost.
)U
PL Ma WL Ma'
Source: Donald J. Bowersox David J. Closs, M. Bixby Cooper. “Supply Chain Logistics
Management”. Michigan State University.
Figure 17.1: Economic Justification of a Warehouse Facility Based on

(c
Transportation Cost
Figure 17.1 illustrates the basic economic principle of warehouse

justification. PL is identified as the manufacturing location, and
WL is the warehouse location within a given market area. The
vertical line at point PL labelled P reflects the handling and
shipping cost associated with preparation of a 500-pound LTL
250 shipment (C) and a 20,000-pound truckload shipment (A). The

Notes slope of line AB reflects the truckload freight rate from the plant to
S
___________________ WL, the warehouse, which is assumed for this example to be linear
___________________
with distance. The vertical line labelled WC at point WL
represents the cost of operating the warehouse and maintaining
___________________
inventory. The lines labelled D reflect delivery cost from the
___________________ warehouse to customers within the market area Ma to Ma'. The
___________________ slope of line CD reflects the LTL rate from the plant to customers
PE
___________________
located between the plant and the boundary Ma'. The shaded area
represents the locations to which the total cost of a 500-pound
___________________
customer shipment using a consolidation warehouse would be
___________________ lower than direct shipment from the manufacturing plant.
___________________
From the perspective of cost alone, it would make no difference
___________________ whether customers located exactly at points Ma and Ma' were
serviced from the manufacturing plant or the warehouse.
Inventory Economics
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
)U
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.
Notes: Such deployment also increases overall system inventory,

resulting in greater cost and risk.
Service-based Warehouse Justification

The use of warehouses can be a vital part of the logistics strategy
of a firm engaged in national distribution. The inventory related to
a warehouse network consists of base, transit and safety stock. For
the total logistical network, average inventory commitment is
(c
where = Average inventory in the total network;
n = Number of performance cycles in the network;
Qs = Order quantity for a given performance cycle identified by

the appropriate subscript; and
251
SSi = safety stock, for a given performance cycle identified by the
Notes
S
appropriate subscript.
___________________
As warehouses are added to a logistics system, the number of
performance cycles increases. This added complexity directly ___________________
relates to the quantity of inventory required across the network. ___________________
Base Inventory: The impact on base stock by adding inventory is ___________________
not significant. The base stock level within a logistical system is ___________________
PE
determined by manufacturing and transportation lot sizes, which
___________________
do not change as a function of the number of warehouses. The
___________________
combination of maintenance and ordering cost, adjusted to take
into consideration volume transportation rates and purchase ___________________
discounts, determines the replenishment EOQ and the resultant ___________________

base stock. In just-in-time procurement situations, base stock is
___________________
determined by the discrete order quantity required to support the
planned manufacturing run or assembly.
Transit Inventor: Transit stock is inventory captive in

transportation vehicles. While in transit, this inventory is
available to promise but it cannot be physically accessed. Available
to promise means it can be committed to customers by use of a
)U
reservation or inventory mortgaging capability in the order
management system. As more performance cycles are added to a
logistical network, the anticipated impact is that existing cycles
will experience a reduction in transit inventory.
Notes: This reduction occurs because the total network transit days
are reduced.
Safety Stock Inventory: Safety stock is added to base and transit

stock to provide protection against sales and performance cycle
uncertainty. Both aspects of uncertainty are time-related. Sales
uncertainty is concerned with customer demand that exceeds
forecasted sales during the replenishment time. Performance cycle
uncertainty is concerned with variation in the total days required
to replenish the inventory of a warehouse. From the viewpoint of
(c
safety stock, the expected result of adding warehouses will be an

increase in average system inventory. The purpose of safety stock
is to protect against unplanned stockouts during inventory
replenishment. Thus, if safety stock increases as a function of
adding warehouses, then the overall network uncertainty must
also be increasing.
252
Total Cost Network
Notes
Total cost related to average inventory commitment increases with
S
___________________ each additional warehouse. For the overall system, the lowest total
___________________ cost network is 6 locations. The point of lowest inventory cost
___________________
would be a single warehouse.
___________________
___________________
Trade-off Relationships
PE
___________________ The minimal total cost point for the system is not at the point of
least cost for either transportation or inventory. This is the
___________________
hallmark of integrated logistical analysis.
___________________
In actual practice, it is difficult to identify and measure all aspects
___________________
of total logistical cost. Many assumptions are required to
___________________ operationalize logistical network analysis.
Critical Assumptions and Limitations

Transportation requirements are represented by a single average
size shipment. In actual operations, it is likely that neither of these
simplifying assumptions will be valid. First, the nature of logistical
network design is not a short-term planning problem. When
)U
facility decisions are involved, the planning horizon extends across
several years and must accommodate a range of different annual
sales projections. Second, actual shipment and order sizes will vary
substantially around an average.
A realistic approach to planning must incorporate a range of

shipment sizes supported by alternative logistical methods to
satisfy customer service requirements. In actual operation,
alternative modes of transportation are employed, as necessary, to
upgrade the speed of delivery.
Significant cost trade-offs exist between inventory and

transportation. Inventory cost as a function of the number of
warehouses is directly related to the desired level of inventory
availability. If no safety stock is maintained in the system, total
(c
inventory requirement is limited to base and transit stock. Under a

no safety stock situation, the total least cost for the system would
be at or near the point of lowest transportation cost. Thus,
assumptions made with respect to the desired inventory
availability and fill rate are essential to trade-off analysis and
have a significant impact on the least total cost design solution.
Formulating Logistical Strategy 253

Notes
To finalize logistical strategy, it is necessary to evaluate the
S
relationships between alternative customer service levels and ___________________
associated cost. While substantial difficulties exist in the ___________________
measurement of revenue, the comparative evaluation of marginal
___________________
service performance and related cost offers a way to approximate
an ideal logistical system design. The general approach consists of ___________________
(1) determining a least total cost network, (2) measuring threshold ___________________
PE
service availability and capability associated with the least total ___________________
cost system design, (3) conducting sensitivity analysis related to
___________________
incremental service and cost directly with revenue generation, and
(4) finalizing the plan. ___________________
___________________
Cost Minimization
___________________
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 labour and essential services occur in large metropolitan
areas. However, because of demand concentration, least total
logistics cost resulting from transportation and inventory
)U
consolidation benefits is often minimized in metropolitan areas.
A strategy of least total cost seeks a logistical system network with

the lowest fixed and variable costs. 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.
Threshold Service
To establish a threshold service level it is necessary to initiate
network reengineering with policies regarding desired inventory
availability and capability. It is common practice to have the
customer service capability based on the existing order entry and
(c
processing system, warehouse operations based on standard order

fulfilment time at existing facilities, and transportation delivery
time-based on capabilities of least cost transportation methods.
Given these assumptions, existing performance is the starting
point for evaluating potential service improvement.
254
The typical starting point for customer service availability analysis
Notes
S
is to assume performance at a generally acceptable fill rate. Often
___________________
the prevailing industry standard is used as a first approximation.
___________________
Service Sensitivity Analysis
___________________
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
PE
___________________ 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.
___________________
___________________ Locational Modification

___________________ The warehouse structure of the logistical system establishes the
service that can be realized without changing the performance
cycle or safety stock policy. To illustrate the relationship between
number of warehouses and resultant service time, assume an
important measure is the percentage of demand fulfilled within a
specified time interval.
First, incremental service is a diminishing function.

)U
For example, the first five warehouse locations provided 24-hour
performance to 42 per cent of all customers. To double the
percentage of 24-hour service from 42 to 84 per cent, 9 additional
warehouses, or a total of 14, are required.
Second, high degrees of service are achieved much faster for longer
performance intervals than for the shorter intervals.
For example, four warehouse locations provide 85 per cent

performance within the 96-hour performance cycle. Increasing the
total locations from 4 to 14 improved the 96-hour performance by
only 9 per cent. In contrast, a total of 14 warehouses cannot
achieve 85 per cent given a 24-hour performance cycle.
(c
Finally, the total cost associated with each location added to the
logistical network increases dramatically. Thus, while the
incremental service resulting from additional locations diminishes,
the incremental cost associated with each new location increases:
the service payoff for each new facility is incrementally less.
255
Logistics managers are often asked to estimate the inventory
Notes
S
impact of adding or deleting warehouses. This relationship
between uncertainty and required inventory is called the portfolio ___________________
effect. 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 ___________________
PE
number of existing locations. ___________________
___________________
Performance Cycle Modification
___________________
Speed and consistency of service can be varied to a specific market
___________________
or customer by a modification of some aspect of the performance
cycle. To improve service, electronic ordering and premium ___________________
transportation can be used. Therefore, geographical proximity and

the number of warehouses do not equate directly to fast or
consistent delivery. The decision to increase service by adopting a
faster performance cycle arrangement will typically increase
variable cost. In contrast, service improvement, by virtue of added
warehouses, involves a high degree of fixed cost and could result in
)U
less overall system flexibility.
No generalizations can be offered regarding the cost/service

improvement ratio attainable from performance cycle modification.
The typical relationship of premium to lowest cost transportation
results in a significant incentive in favour of large shipments.
Thus, if order volume is substantial, the economics of logistics can
be expected to favour use of a warehouse or consolidation point to
service a market area.
The impact of using premium transportation will increase total

cost. Adjustments from the least total cost logistical system can
typically be justified if the improved service results in increased
revenue.
(c
Safety Stock Modification

A direct way to change service is to increase or decrease the
amount of safety stock held at one or more warehouses. The impact
of increasing the safety stock across a total system will shift the
average inventory cost curve upward. A goal of increasing
customer service availability will result in increased safety stocks
at each warehouse.
256
Notes Finalizing Strategy
S
___________________ Management often falls into the trap of being overly optimistic in
___________________ terms of service commitments to customers. The result may be
excessively high customer expectations followed by erratic
___________________
performance. In part, such over commitment results from lack of
___________________
understanding of the total cost required to support high, zero-
___________________ defect service.
PE
___________________ The final step in establishing a strategy is to evaluate the cost of
___________________ incremental service in terms of generating offsetting revenue.
___________________ To illustrate, assume that the current system is geared to service
at least 90 per cent of all customers at 95 per cent inventory
___________________
availability within 60 hours of order receipt. Furthermore, assume
___________________ that the current logistical system is meeting these objectives at
lowest total cost by utilizing a network of five warehouses.
Marketing, however, is not satisfied and believes that service
capability should be increased to the point where 90 per cent of all
customers would receive 97 per cent inventory availability
delivered within 24 hours. Logistical management needs to
estimate the cost of this strategic commitment.
)U
Maximum Service
A maximum service strategy is rarely implemented. A system
designed to provide maximum service shifts design emphasis from
cost to availability and delivery performance. Maximum service
areas can be developed similar to the least cost service areas. The
limits of each facility service area are determined by the capability
to provide the required delivery. As with cost-oriented service
areas, time-oriented areas will be irregular because of transport-
route configurations. Total cost variation from a least cost to a
maximum service system to service the same customers will be
substantial. Servicing the total U.S. market on an overnight basis
could require from 30 to 40 warehouses and the use of highly
(c
dependable transportation. The number of warehouses could be

reduced by the use of premium transportation.
Maximum Profit
Most enterprises aspire to maximize profit in the design of
logistical systems. Theoretically, the service area of each
warehouse should be determined by establishing a minimum profit
contribution for customers located at varying distances from 257

the facility. Because warehouses are normally located near Notes
S
high-volume markets, the greater the distance a customer is ___________________
located from the service area centre, generally the higher the cost
___________________
of logistics. This cost increase occurs not only because of distance
but also because of lower customer density at the periphery of the ___________________
warehouse service area. ___________________
___________________
PE
Maximum Competitive Advantage
___________________
Under special situations, the most desirable strategy to guide
logistical system design may be to seek maximum competitive ___________________
advantage. Although there are many ways in which systems can be ___________________
modified to gain competitive advantage, two are presented to ___________________
illustrate strategic considerations.
___________________
Segmental Service: A common modification in least cost design
consists of improving service to protect major customers from
competitive inroads. Management needs to be concerned with how
expectations of key customers are being satisfied. If the existing
service policy is only capable of providing 42 per cent of the
customers with 24-hour delivery at 95 per cent inventory
)U
availability, care must be taken to be sure that the most profitable
customers are getting the best service possible.
Justified High-Cost Warehouse: An additional application of

design modification to capitalize on competitive situations is an
economically justified high-cost warehouse. This situation is
pertinent especially to smaller or niche businesses. Because of the
rigidities inherent in large firms, pricing policies are likely to be
inflexible. Antitrust legislation reinforces such rigidities. The
result is that large firms selling in broad geographical markets
tend to disregard unique cost and demand situations in localized
markets or find it nearly impossible to adjust marketing and
logistical systems to accommodate such unique opportunities. This
inflexibility creates opportunities for smaller firms, enabling them
(c
to make significant investment in logistical capability to attract

the localized market segment.
Minimal Asset Deployment

A final logistical strategy may be motivated by a desire to
minimize assets committed to the logistical system. A firm that
desires to maintain maximum flexibility may use variable cost
258 logistical components such as public warehouses and for-hire

Notes transportation. Such a strategy might result in higher total
S
___________________ logistical costs than could be realized by asset commitment to
___________________
obtain economies of scale. However, risk would be less and the
strategy would increase overall flexibility.
___________________
Integration of logistical strategy to support overall enterprise
___________________
operations requires precise customer service commitment. From
___________________
the viewpoint of designing a logistical system, total least cost and
PE
___________________ associated threshold service offer an ideal platform for undertaking
___________________ cost/service sensitivity analysis.
___________________
Check Your Progress
___________________
___________________
1. A strategy of least total cost seeks a logistical system
network with the lowest fixed and variable costs.
2. The typical starting point for customer service

availability analysis is to assume performance at a
generally acceptable fill rate.
)U
Summary
The primary determinants of logistics network design are
requirements established by integrated procurement,
manufacturing, and market distribution strategies. Within the
framework of these interlocking strategies, logistics requirements
are satisfied by blending transportation and inventory capabilities.
These capabilities play out across a network of enterprise facilities.
Important in the performance of logistics requirements are

warehouse facilities. Such facilities are justified by logistical
system design in terms of their contribution to cost reduction,
service improvement, or a combination of both.
Transportation and inventory economics are critical network

(c
design considerations. When seeking least cost logistics,

transportation deals with the spatial aspects of logistics. The
ability to consolidate transportation is a primary justification for
including warehouses in a network design. Inventory introduces
the temporal dimension of logistics.
Average inventory increases as the number of warehouses in a

system increase given a constant demand situation. Total cost
integration provides a framework for simultaneous integration of 259

logistics, manufacturing, and procurement costs. Thus, total cost Notes
S
analysis provides the methodology for integration across the ___________________
network.
___________________
Accurate total cost analysis is not without practical problems.
___________________
Foremost is the fact that a great many important costs are not
___________________
specifically measured or reported by standard accounting systems.
___________________
PE
A second problem involved in total cost analysis is the need to
consider a wide variety of network design alternatives. To develop ___________________
complete analysis of a planning situation, alternative shipment ___________________

sizes, modes of shipment, and range of available warehouse ___________________
locations must be considered.
___________________
___________________
Lesson End Activity
In what ways can customer service performance be improved by
incorporating flexible distribution operations into a logistical
system design'?
Keywords
)U
Quantity Principle: This means individual shipments should be
as large as the involved carrier can legally transport in the
equipment being used.
Tapering Principle: This means large shipments should be

transported distances as long as possible.
Transit Inventor: Transit stock is inventory captive in

transportation vehicles.
Safety Stock: Safety stock (also called buffer stock) is a term used
by logisticians to describe a level of extra stock that is maintained
to mitigate risk of stockouts (shortfall in raw material or
packaging) due to uncertainties in supply and demand.
(c
Warehouse: A warehouse is a commercial building for storage of

goods. Warehouses are used by manufacturers, importers,
exporters, wholesalers, transport businesses, customs, etc.
Procurement: Procurement is the acquisition of goods, services or

works from an external source.
260
Notes
S
1. Describe in your words the meaning of spatial/temporal
___________________
integration in logistical system integration.
___________________
2. What justification of logic can be presented to support the
___________________
placement of a warehouse in a logistical system?
___________________
3. Why do transportation costs decrease as the number of
___________________
warehouses in a system increases? Why do inventory costs
PE
___________________ increase as the number of warehouses in a system increases?
___________________ 4. Briefly explain the market distribution drivers.
___________________
5. In your words, what is the locational impact of inventory? How
___________________ does it differ for transit inventories and safety stocks?
___________________ 6. What is meant by the level of threshold service of a least cost
system?
7. Why does customer service not increase proportionately to

increases in total cost when a logistical system is being
designed?
8. Why does customer service speed of performance increase

)U
faster for customer’s located greater distances from a
warehouse facility? What is the implication of this relationship
for system design?
9. Discuss the differences between improving customer service

through faster and more consistent transportation, higher
inventory levels, and/or expanded numbers of warehouses.
10. What is the difference between minimum total cost and short-
range profit maximization policies in system design?
Further Readings
Books
(c

Donald Waters. Logistics – An Introduction to SCM, Palgrave,

2003.
261
Notes
S
___________________
Web Readings ___________________
http://www.manh.com/solutions/distribution-
___________________
management/warehouse-management
___________________
http://www.astera.com/about/total-cost-of-ownership
___________________
PE
http://www.wdlc.net/category-integration-theory.html
___________________
___________________
___________________
___________________
___________________
)U
(c
(c
)U
PE
S
UNIT 18: Selecting and Measuring Strategic Performance
Unit 18
263
Notes
S
Activity
Selecting and Measuring Strategic

___________________
Make a research on the
channel management of
___________________
Mumbai dabbawala that made
Performance them successful.
___________________
___________________
Objectives ___________________
PE
___________________
topics:
___________________
\ Selecting the Proper Channel Strategy
\ Measurement and Improvement of LSCM Service Quality and ___________________
Performance
___________________
___________________
Introduction
In today's world, it is not the strongest or biggest companies that
win. It is the most adaptable companies equipped with the best
technology that do well. Many companies assume that competitive
advantage will come from economies of scale, fixed supply chains,
predictable consumer markets and static operations optimized for
)U
efficiency and asset utilization. This is no longer true for the
future.
The twenty-first century has changed the way companies operate.
With the coming of the information age, firms are being
increasingly forced to transform their domestic and international
supply chains at a rapid pace, driven by both the suppliers and the
customers, both expecting that companies will provide standards
acceptable in this globalized world.
With such changes in the air, logistics will ultimately yield a
sustainable advantage in the market when implemented through
changes in the corporate infrastructure – people, technology,
facilities and/or strategic corporate relationships. These impacts of
these changes are visible in the trends projected for the logistic
(c
industry worldwide – and are described in the remaining part of

this section.
Selecting the Proper Channel Strategy

Managers face two sets of decisions when considering channels.
The first set leads to a selection of one or more channels. The
264 second set deals with the selection criteria and examines the three
Notes levels of distribution. The final step is plan finalisation.
S
___________________
Channel Selection Criteria
___________________
Selecting channels can be a complicated process, particularly if
___________________
part of the channel is outside the producer’s direct control.
___________________ In addition, there is no endless supply of available intermediaries
___________________ sitting around waiting for producers to give them a call.
PE
___________________ The elements that managers examine as they define channel
___________________
strategies can be grouped into market factors, product factors and
producer factors.
___________________
___________________ Market Factors

___________________ Analysing and understanding the target market is the first step in
selecting channels. There are several factors that an analysis of
the market should explore, ranging from customers to the types of
competitors:
z Customer preference: The channel which is most preferred by

customers.
)U
z Organisational customers: Organisational customers
frequently have buying habits that are different from those of
other consumers.
z Geography: Customer location is another important factor

determining the type of channel to be used.
Competitors
Often a good channel choice is one that has been overlooked or
avoided by competitors. In some cases, the entrepreneur may try to
duplicate his competitors’ channel in order to have his products
replace that of a competitors’.
Nature and Availability of Intermediaries

(c
A question that arises very often in the channel decision is “Are

there enough of the right kinds of intermediaries to build the
desired channel?” We need to find intermediaries that can handle
the products capably and provide adequate service to final
customers. For new entrants, it is better to find the best available
intermediaries in the market.
Product Factors 265

Notes
S
Even products that end up at the same retail location may need
different intermediaries earlier in the channel. ___________________
Life Cycle: A product category’s stage in the life cycle can be an ___________________
important factor in selecting a channel and channels may have to ___________________

be adjusted over time. Customers require less support once the ___________________
product has established itself.
___________________
PE
Complexity: Some products are so complicated and require so
___________________
much support that producers need to stay closely involved. This
indicates either a direct sales force or a limited number of highly ___________________
qualified intermediaries. Scientific equipments, jet aircrafts, ___________________

nuclear reactors, pharmaceuticals and computers are products ___________________
whose complexity affects the way in which they are marketed.
___________________
Value: The value of the product also affects its distribution
channel choices. Items with low cost and high volume are usually
distributed through large, well-established distribution networks
such as grocery wholesalers.
Size and Weight: A product with significant size and weight can
face restricted distribution channel options, particularly if it is also
)U
of low value.
Consumer Perceptions: The perceptions customers have of
products and producers also play a role in channel decision
making.
Other Product Factors: Depending on the product in question,
other factors may enter into the decision as well. Some of these
include whether a product is fragile or perishable and whether or
not it requires significant customer satisfaction.
Key Issues in Determining Channel Requirement

While a manufacturer faces an agenda of issues related to finance,
marketing and industrial relations, attention is focused on selected
topics that directly impact channel arrangements. The key issues
(c
related to this are:
z Product proliferation and dynamics; and
z Total-quality initiatives.
These two issues are significant drives for a typical firm in

determining how channel requirements will be delineated.
266 Product Proliferation and Dynamics

Notes
S
A major concern throughout industry is the rapid expansion that
___________________
firms are experiencing in the number of stock keeping units that
___________________ they maintain in their product list. Fully understanding basic
___________________ customer needs through research is viewed as a key to a successful
new product launch. In practice, few firms have a highly successful
___________________
new product track record. A large number of new products fail
___________________ resulting in conflict within the distribution process and the need to
PE
___________________ remove obsolete inventory. The product life cycle is useful for
___________________
planning a marketing and distribution strategy.
___________________ Numerous examples are available from the food industry to

illustrate the product proliferation dilemma. The industry is
___________________
characterised by a constant effort on the part of manufacturers to
___________________ introduce new products for distribution. Retailers and wholesalers
want to enter into an agreement with manufacturers in which they
agree to buy all unsold inventory back at the retail price if a
product fails. Independent of the fairness of such agreements, the
fact is that the inventory mistakes must be cleared from the
channel.
)U
Total Quality Initiatives
Total quality initiatives represent the primary focus of the
revitalisation drive. The concept of total quality is “do it right the
first time”. The general concept of total quality is to focus
managerial attention on the three key concepts of manufacturing:
People, Process and Design.
Measuring Strategy Performance

Each stage of the supply chain trying to maximize its own profits,
disregarding the benefits of the SC as a whole (local instead of
global optimization), does not necessarily result in the
maximization of supply chain surplus. The maximum efficiency of
each chain also does not necessarily lead to global optimization.
Supply chain surplus is maximized only when all supply chain
(c
stages coordinate strategy together.

Another problem is more and more companies are succeeding
because they are able to respond quickly to market needs and get
the right product to the right customer at the right time. This shift
toward speed has forced companies to ask what creates the level of
speed that customers are demanding. The answer for most
companies is that the most significant delays, however, are created 267
at the interface between the boundaries of different stages of a Notes
S
supply chain. Thus, managing these interfaces becomes a key to ___________________
providing speed to customers.
___________________
In addition, one should consider human factors. Decision-makers
___________________
at various points along the SC do not usually make perfect
decisions. This may be due to the lack of information, their ___________________
personal hindrances, or sometimes, the decision may be influenced ___________________
PE
by employee reward systems. ___________________
Regardless of the number of difficulties and problems, the core ___________________
concept for the success in SCM, is efficient information
___________________
transfer/information sharing. Taking this view requires that each
company evaluate its actions in the context of the entire supply ___________________
chain. This means treating stages in the supply chain that a ___________________
company does not own as belonging 'to the company. This creates a
problem in performance measures. An example is the inventory
reduction effort of many companies. Many companies strive to
reduce their own inventories by changing ownership of inventory
to downstream stages in the supply chain. Do they achieve any
real reduction in overall inventory? Firms may feel they will not
)U
have to finance this inventory and therefore, their costs will go
down. But they forget that holding this inventory increases the
suppliers' costs, and the supplier is charging higher prices so in the
end, there is no real reduction in total cost because the supply
chain merely shifts costs back and forth between its links.
As the example above shows, measurements of performance in a
supply chain do not follow historic and traditional conventions
used till now. In measuring performance in the supply chain,
where control is no longer based on ownership only, but rather on
networking across interfaces, the measurement system may reflect
a system of measuring the immeasurable.
Companies are discovering new ways of working together to
achieve the ultimate supply chain goal: the ability to fill customer
(c
orders faster and more efficiently than the competition. This is

changing traditional company boundaries. To achieve that goal,
organizations need performance measures, or 'metrics', which are
formal, well-defined processes that can be documented and
measured to facilitate supply chain improvements.
Activities not under the direct control of an individual company
have to be measured and controlled by the firm and its supply
268 chain partners. This requires making the supply chain transparent
Notes to a level not experienced before. For example, if the cost of
S
___________________ transportation and the cost of inventory in a firm are managed
separately instead of jointly, we would not be able to discuss the
___________________
trade-off between the two cost components. The entity “total cost’’
___________________
encompassing both components would not exist unless there is
___________________ total transparency. An important opportunity for improvement will
___________________ be lost.
PE
___________________ Developing and maintaining a supply chain performance
measurement system represents one of the more significant
___________________
challenges faced in supply chains. Thus, performance
___________________
improvements require different measurements. The supply chain
___________________ generally consists of a number of departments each; perhaps,
___________________ reporting to different supervisors or a number of firms each having
its own top management. Given the cross-functional and cross-
organizational nature of many supply chain improvements, metrics
must be based on transparency that assists supply chain
performance, as shown schematically in Figure 18.1.
)U
(c
Figure 18.1: Traditional and Supply Chain Performance Measurements
The use of financial accounting information is another problem in

measuring supply chain performance, as it promotes a functional
perspective within an organization. This is because resources are
allocated from the top down, in contrast to goods and services
which flow horizontally through the firm. Matching top-down flow
to horizontal flow becomes a challenging problem.
269
Top management is often affected by external stakeholders to
Notes
S
assess the performance of the firm using financial information.
Though the top management uses this information, people on the ___________________
shop floor prefer other kinds of information. Therefore, what ___________________
follows is that the concept of performance clearly varies between
___________________
different levels in an organization. This often becomes a major
cause of difficulties in integrating measurements across the ___________________
operational, tactical and strategic levels. ___________________
PE
As the success of an SCM initiative largely rests on performance, ___________________
one consequence of these arguments is that a supply chain must be ___________________
viewed as one entity. The structure of the measurement system
___________________
should span the entire supply chain. Figure below presents the
structural view of the measurement system applicable to supply ___________________
chains. What is important is that, each of the components outlined ___________________

in the figure, must be considered throughout the entirety of the
supply chain, if relevant measurement criteria are to be obtained.
)U
Figure 18.2: A Structural View of the Measurement System
Cash Flows
(c
The eventual goal of any business is the creation of value for the
owners of that business, whether that business is privately held by
one owner or is publicly held with a multitude of
owners/shareholders. Cash Flow (CF) is a cost-effectively valid
business performance measurement tool that can help view value
creation within a company. This will provide the organization with
an effective understanding of how appropriately and effectively
270 business performance is being measured using CF, thereby

Notes providing the organisation with tools to make better business
S
___________________ decisions.
___________________ The cash flow as a measurement of performance is able to:
___________________ 1. Address the deficiency of net income and some of the more
___________________ widely used cash flow metrics as measures of business
performance.
___________________
PE
2. Describe the employ of cash flow (CF) as an economically valid
___________________
business performance measurement tool and how it can help
___________________
view value creation within a company.
___________________
3. Recast the income and balance sheet statements in order to
___________________ generate a statement that reflects the economic operating
___________________ inflows and outflows and an invested capital statement that
represents the economic investment made by the capital
contributors.
Return on Investment
Return on Investment is a performance measure used to evaluate
the efficiency of an investment or to compare the efficiency of a
)U
number of different investments. To compute ROI, the benefit
(return) of an investment is divided by the cost of the investment;
the result is expressed as a percentage or a ratio.
The return on investment formula:
(Gain from Investment – Cost of Investment)
ROI =
Cost of Investment
In the above formula "gains from investment", refers to the

earnings obtained from selling the investment of interest. Return
on investment is a very popular metric because of its versatility
and simplicity. That is, if an investment does not have a positive
ROI, or if there are other opportunities with a higher ROI, then the
investment should not be undertaken.
(c
Product Outsourcing
Product outsourcing services is for reducing the total cost of
ownership. Offshore development and delivery centres provide you
better flexibility, scalability and help you to focus on your core
business area. Outsourcing organizations must adhere to stringent
service level agreements to serve in a better way.
271
Product Development service covers the complete Software
Notes
S
Development Life Cycle (SDLC) to take a product from concept to
final product. Outsourcing organisations fully involve in process of ___________________
product development right from prototyping of requirement to ___________________
devise and deliver a scalable product.
___________________
Factors that must be considered at the time of taking outsourcing
___________________
decision include:
___________________
PE
Product Maintenance and Release Management: The
___________________
outsourcing organisation helps you to reduce the time and cost you
spend on maintaining application and improvements to the ___________________
organization. The product maintenance initiates from corrective ___________________

maintenance and over a period of time evolves to the most
___________________
advanced level – Preventive maintenance.
___________________
Release Management: Release management and Version
management will be finished professionally. It is significant
activity in product life cycle.
The following points are to be further well thought-out:
1. Considerate company goals and objectives: Outsourcing
judgment has to be taken within the framework of a company’s
)U
goals and objectives. Both the short-term goals and long-term
strategies have to be considered, recognized and acted upon.
Outsourcing suppliers also have to appreciate these goals and
functions accordingly.
2. A strategic vision and plan: Outlining an outsourcing vision
and plan is the next important step. Once again, this plan has
to be both long-term and short-term. Long-term plan can
include the overall company’s policy towards outsourcing in
general, clarity on the functions, activities to be outsourced,
etc., while the short-term plan contains an instant plan of
action.
3. Selecting the right dealer: This is one of the most vital and
significant activities. It is also a long-drawn out activity which
(c
should involve activities such as collecting supplier

intelligence, collecting supplier background information,
assessment of this information, etc. Vendor’s attitude, his
growth potential, past performance, etc., need to be evaluated.
4. Management of the relationships: Relationship
management is an enormously important task in outsourcing.
272 The more one indulges in outsourcing, the more relationships

Notes one has to manage. Hence, it is indispensable to have a
S
___________________ structured method of managing the relationships.
___________________ 5. A properly structured contract: Structuring an outsourcing
___________________ contract is together an art and a science. This contract needs
to have all the necessary clauses, scope for growth, scope for
___________________
incentives and all additional clauses built into it. This contract
___________________ will be the main document that will govern the relationship.
PE
___________________ 6. Open communication: When the corporation takes
___________________ outsourcing-related decisions for the first time, it is always one
___________________
of the activity/function initially done internally. This either
causes closure of an internal function/activity or shortening it
___________________
substantially. Hence this action displaces an internal group
___________________ and can cause a lot of unrest within the company. Therefore,
handling this situation successfully is also a part of an
outsourcing process. This is applicable even for situations
where the company decides to increase outsourcing or
outsource some supplementary activity/function.
7. Section executive support: This is necessary initially to
garner support for outsourcing. Also inputs from these senior
)U
executives can be supportive for drafting the contract.
8. Use of outside expertise: It is sometimes crucial to involve an
outside consultant to help the company through the process,
especially when the company is doing it for the first time. This
person should be a specialist in outsourcing and should have
adequate experience in drafting the outsourcing contract.
Benchmarking Supply Chain

Successful companies in every industry engage in a variety of
practices, which lead to achievement of high level performance.
Benchmarking has become one of the most popular tools of
business management in corporate attempts to gain and maintain
competitive advantage. The central essence of benchmarking is
(c
about learning how to improve business activity, processes and

management. However, benchmarking as a term has been used
widely to refer to many different activities. There is a wide
variation in definitions used to describe 'benchmarking'. Some
definitions are given below to highlight the diversity:
"A continuous systematic process for evaluating the products,
services and work of organizations that are recognized as
representing best practices for the purpose of organizational 273

improvement" (Spendolini, 1992). Notes
S
"A continuous search for and application of, significantly better ___________________
practices that lead to superior competitive performance." (Watson, ___________________
1993)
___________________
"Benchmarking is systematic and continuous measurement
___________________
process: a process of continuously measuring and comparing
___________________
PE
organizations business processes against process leaders anywhere
in the world to gain information which will help the organization to ___________________
take action to improve its performance." ___________________
___________________
Benchmarking Process
___________________
Benchmarking involves looking outside a particular business,
organization, industry, region or country to examine how others ___________________
achieve their performance levels and to understand the processes

they use. In this way, benchmarking helps explain the processes
behind excellent performance. When the lessons learnt from a
benchmarking exercise are applied appropriately, they facilitate
improved performance in critical functions within an organization
or in key areas of the business environment.
)U
Application of benchmarking involves four key steps:
1. Understand in detail existing business processes,
2. Analyse the business processes of others,
3. Compare own business performance with that of others
analysed,
4. Implement the steps necessary to close the performance gap.
Benchmarking should not be considered a one-off exercise. To be
effective, it must be an ongoing, integral part of an ongoing
improvement process with the goal of keeping abreast of
ever-improving best practices.
Types of Benchmarking
(c
There are a number of different types of benchmarking, as

summarized in Table 18.1.
274
Table 18.1: Benchmarking
Notes
S
___________________ Type Description Most Appropriate for
___________________ Strategic Comparing with long-term Realigning business strategies

Benchmarking strategies and general that have become inappropriate.
___________________ approaches of high-
___________________ performers to improve overall
performance.
___________________
PE
Performance Businesses consider their Assessing relative level of
___________________ or Competitive position in relation to performance in key areas or
___________________ Benchmarking performance characteristics activities in comparison with
of key products and services. others in the same sector and
___________________ Benchmarking partners are finding ways of closing gaps in
drawn from the same sector. performance.
___________________
___________________ Process Focuses on improving specific Achieving improvements in key

Benchmarking critical processes and processes to obtain quick benefits.
operations.
Functional Businesses look to Improving activities or services

Benchmarking benchmark with partners for which counterparts do not
drawn from different exist.
business sectors or areas of
activity to find ways of
)U
improving similar functions
or work processes.
Internal Involves benchmarking Several business units within the

Benchmarking businesses or operations from same organization exemplify good
within the same organization practice and management want to
(e.g. business units in spread this expertise quickly,
different countries). throughout the organization.
External Involves analyzing outside Where examples of good practices

Benchmarking organizations that are known can be found in other
to be best in class. organizations and there is a lack
of good practices within internal
business units.
International Best practitioners are Where the aim is to achieve world

Benchmarking identified and analyzed class status or simply because
elsewhere in the world. there are insufficient ’national’
(c
businesses against which to

benchmark.
Benchmarking Helps
In the early eighties, the Mexican government expanded the
capacity of steel mill based on the DRI process, Imexsa, at Lazoro
Cardenas, to 2 million tonnes. Three years after expansion and
after having absorbed significant losses, the government then 275

decided to privatize the facility. Ispat International N.V. is owned Notes
S
Activity
by the Mittals, registered in Holland and headquartered in ___________________
Study the performance
London. It is one of the most successful Indian-led enterprises. evaluation criteria of the
___________________
Ispat was invited and successfully won the bid for the ownership of employees on your company
and prepare a report on it.
the facilities in January 1992. ___________________
The new management began to benchmark the operating ___________________
processes. Team members looked at the best practices within the ___________________
PE
Ispat network, the steel industry as a whole, and also identified ___________________
and studied related processes at global leaders such as Ericsson
___________________
and General Electric. They collected and analysed detailed volume,
cost, quality and productivity data for each step in the production ___________________
process on a daily basis. Ispat started implementing the ___________________
recommendations. By 1998, the annual steel shipments had
___________________
increased to over 3 million tonnes; productivity had improved from
2.62 to 0.97 man-hours per tonne. J.P. Morgan and Credit Suisse
First Boston reported Imexsa as the lowest cost slab producer in
the world.
Check Your Progress

Fill in the blanks:
)U
1. …………………….. involves looking outside a particular
business, organization, industry, region or country to
examine how others achieve their performance levels
and to understand the processes they use.
2. Product …………………….. services is for reducing the
total cost of ownership.
Measurement and Improvement of LSCM Service

Quality and Performance
Companies offering a powerful combination of low prices and high
quality are capturing the hearts and wallets of consumers. Today,
as value driven companies are growing in number, they are moving
(c
from competing on price to providing quality, service and

convenience. As value players gain share, at varying speeds, across
economies, they change the nature of competition by transforming
consumer attitudes about trade-offs between price and quality.
Today, quality is considered an 'order qualifying' and not an 'order
winning' attribute of the product or service.
276
Quality has become necessary for promoting business growth and
Notes
S
has also become a key economic factor in terms of staying
___________________
competitive on a global basis. In order to be competitive, work
___________________ needs to get done, customers need to get served, and day-to-day
___________________ problems need to get addressed. These are some of the challenges
of quality management. Actions of the leadership team set the pace
___________________
and guide the direction of change. This is why the Toyota Motor
___________________ Company has done so well year after year. That is what, Viltech is
PE
___________________ trying to do.
___________________ How do you, as a consumer, evaluate quality? One approach by

___________________
which customers use to evaluate quality is to cite attributes of the
product or its product delivery process. For example, if someone
___________________
were to ask you to judge the quality of a personal computer, you
___________________ might reply by citing such things as: the way it looks, how long it
took to setup, how long it takes to boot-up, and whether or not it
has Intel Inside.
If the product is a service, such as a meal, the determinants of
quality might include: the meal itself, its presentation, the manner
in which it was delivered, and quite possibly the behaviour of the
people at the next table.
)U
Identification of LSCM Activities for Measurement
The LSCM activities identified for measurement are discussed
below. Work related to these functional activities is combined to
create the capabilities needed to achieve logistical requirements.
Attention is required to measure each facet of supply chain and
logistical activity and how they interact in a typical business.
Network Design
Classical economics neglected the importance of facility location
and overall network design. When economists originally discussed
supply-and-demand relationships, facility location and
transportation cost differentials were assumed to be either non-
(c
existent or equal among competitors. However, the number, size,

and geographical relationship of facilities used to perform logistical
operations directly affect customer service capabilities and cost.
Network design is a primary responsibility of logistical
management since a firm's facility structure is used to provide
products and materials to customers. So it must be measured
carefully.
Information 277
Notes
S
The importance of information to logistical performance has
historically not been highlighted. This neglect resulted from the ___________________
lack of suitable technology to generate desired information. ___________________

Managements also lacked full appreciation and in-depth
___________________
understanding of how fast and accurate communication could
___________________
improve logistical performance. Both these historical deficiencies
have been eliminated. Current technology is capable of handling ___________________
PE
the most demanding information requirements. If desired, ___________________
information can be obtained on a real-time basis. Managers are
___________________
learning how to use such information technology measurement to
devise new and unique logistical solutions. ___________________
___________________
Transportation
___________________
Given a facility network and information capability, transportation
is the operational area of logistics that geographically positions
inventory. Because of its fundamental importance and visible cost,
transportation has received considerable managerial attention over
the years. Almost all enterprises, big and small, have managers
responsible for transportation.
)U
Transportation requirements can be accomplished in three basic
ways. First of all, a private fleet of equipment may be operated.
Second, contracts may be arranged with transport specialists.
Third, an enterprise may engage the services of a wide variety of
carriers that provide different transportation services on an
individual shipment basis. These three forms of transport are
typically referred to as private, contract, and common carriage.
From the measurement system viewpoint, three factors are
fundamental to transportation performance: cost, speed, and
consistency.
The cost of transport is the payment for movement between two
geographical locations and expenses related to administration and
maintaining in-transit inventory. Logistical systems should be
(c
designed to utilize transportation that minimizes total system cost.

This means that the least expensive transportation does not
always result in the lowest total cost of movement.
Speed of transportation is the time required to complete a specific
movement. Speed and cost of transportation are related in two
ways. First, transport firms, capable of providing faster service,
typically charge higher rates. Second, the faster the transportation
278 service, the shorter the time interval during which inventory is in
Notes transit and is unavailable. Thus, a critical aspect of selecting the
S
___________________ most desirable method of transportation is to balance speed and
cost of service.
___________________
___________________ Consistency of transportation refers to variations in time required

to perform a specific movement over a number of shipments.
___________________
___________________ Inventory
PE
___________________ The inventory requirements of a firm depend on the network
___________________ structure and the desired level of customer service. Theoretically, a
firm could stock every item sold in a facility dedicated to service
___________________
each customer. Few business operations could afford such a
___________________ luxurious inventory commitment because the risk and total cost
___________________ would be prohibitive. The objective is to achieve the desired
customer service with the minimum inventory commitment,
consistent with lowest total cost. Excessive inventories may
compensate for deficiencies in basic design of a logistics network
and to some degree, inferior management. However, excessive
inventory used as a crutch will ultimately result in higher than
necessary total logistics cost. So inventory measurement is a
)U
crucial activity for effective overall SCM performance.
Warehousing, Material Handling and Packaging

Four of the functional activities of logistics and SCM – network
design, information, transportation and inventory – can be
engineered into a variety of different operational arrangements.
Each arrangement will have the potential to achieve a level of
customer service at an associated total cost. In essence, these four
functions combine to create a system solution for integrated
logistics. The final function of logistics – warehousing, material
handling, and packaging – also represents an integral part of an
operating solution. However, these functions do not have the
independent status of the four. Warehousing, material handling,
and packaging are an integral part of other logistics areas. For
(c
example, merchandise typically needs to be warehoused at selected

times during the logistics process. Transportation vehicles require
material handling for efficient loading and unloading. Finally, the
individual products are most efficiently handled when packaged
together into shipping cartons or other types of containers. The
performances of these activities are to be measured by assessing
the final contribution of these to total SCM.
Evaluation of Managerial Performance 279

Notes
Evaluation of managerial performance could be taken either for
S
evaluating the performance of managers or for developing them. ___________________
The evaluation is of two types: telling the employee where he ___________________
stands and using the data for personnel decisions concerning pay,
___________________
promotions, etc. The developmental objectives focus on finding
individual and organisational strengths and weaknesses; ___________________
developing healthy superior-subordinate relations; and offering ___________________
PE
appropriate counselling/coaching to the employee with a view to
___________________
develop his potential in future.
___________________
Evaluation of managers serves several useful purposes:
___________________
1. Compensation decisions: It can serve as a basis for pay
___________________
raises. Managers need performance appraisal to identify
employees who are performing at or above expected levels. ___________________
This approach to compensation is at the heart of the idea that

raises should be given for merit rather than for seniority.
Under merit systems, employee receives raises based on
performance.
2. Promotion decisions: It can serve as a useful basis for job
change or promotion. When merit is the basis for reward, the
)U
person doing the best job receives the promotion. If relevant
work aspects are measured properly, it helps in minimizing
feelings of frustration of those who are not promoted.
3. Training and development programmes: It can serve as a
guide for formulating a suitable training and development
programme. Performance appraisal can inform employees
about their progress and tell them what skills they need to
develop to become eligible for pay raises or promotions or both.
4. Feedback: Performance appraisal enables the employee to
know how well he is doing on the job. It tells him what he can
do to improve his present performance and go up the
‘organisational ladder’.
(c
5. Personal development: Performance appraisal can help

reveal the causes of good and poor employee performance.
Through discussions with individual employees, a line
manager can find out why they perform as they do and what
steps can be initiated to improve their performance.
Companies such as Best Buy and EDS have redesigned their
performance appraisal systems to focus more on employee
280 development and training. The Career Resource System that is

Notes being used at EDS, for example, includes a detailed job
S
___________________ description, a performance review, and a career planner to
track long-term goals, as well as access to the company’s
___________________
automated career library. This system is ultimately matched
___________________
to the company’s succession policies. By incorporating this
___________________ overall system, EDS hopes to shift the role of manager from
___________________ that of judge to one of coach! In India, Larsen and Toubro Ltd
PE
is the first company to incorporate development-oriented
___________________
appraisal systems for evaluating employee performance.
___________________
The benefits of evaluation of managerial performance:
___________________
1. Employer perspective (Administrative uses): Despite
___________________
imperfect measurement techniques, individual differences in
___________________ performance can make a difference to company performance.
Documentation of performance appraisal and feedback may be
required for legal defence.
Appraisal offers a rational basis for constructing a bonus or
merit system.
Appraisal dimensions and standards can help to implement
)U
strategic goals and clarify performance expectations.
2. Employee perspective (Developmental purposes):
Individual feedback helps people to rectify their mistakes and
get ahead, focusing more on their unique strengths.
Assessment and reorganisation of performance levels can
motivate managers to improve their performance.
What do We Evaluate?
The three most popular sets of criteria are individual task
outcomes, behaviours and traits.
Individual task outcomes: Here the focus is on the results of
work behaviour. This approach deals with bottom line issues such
as how many cars an employee sold or how much profit the
(c
employee brought into the organisation during the month, etc. A

sales person, for example, could be assessed on overall sales
volume in his territory, rupee increase in sales and number of new
accounts achieved, etc. (performance appraisals such as MBO,
balanced score card).
281
Behaviours: Here the focus is on behaviours exhibited by
Notes
S
employee while executing the job. For example, a sales person
should greet customers as they enter the store, help them find ___________________
what they are looking for, take their payment promptly and thank ___________________
them for their business. It is quite likely that a sales person who
___________________
did not respond to customer’s requests promptly might also
possibly complete sales, but this individual would not be leaving a ___________________
positive impression on the minds of customers the way managers ___________________
PE
preferred. A sound behaviour-based evaluation would uncover the ___________________
sales person’s inability to follow the preferred route. (Behavioural
___________________
appraisals such as critical incident, behavioural check list,
Behaviourally Anchored Rating Scale, etc.) ___________________
Traits: Here the focus is on the personal characteristics of ___________________
employees such as their ability to arrive at decisions, loyalty to the ___________________

company, communication skills or level of initiative shown, etc.
This type of assessment probes a lot about what a person is but
relatively little about what he actually does. Since the link
between personal traits and actual behaviour is weak, trait-based
appraisals are potentially more susceptible to charges of
unfairness by minorities, women and other protected groups (trait
)U
appraisals).
Qualitative Measurement
The qualitative measurement involves the usage of following
techniques for the purpose of evaluation:
1. Confidential report: It is mostly used in government
organisations. It is a descriptive report prepared, generally at
the end of every year, by the employee’s immediate superior.
The report highlights the strengths and weaknesses of the
subordinate. The report is not data based. The impressions of
the superior about the subordinate are merely recorded there.
It does not offer any feedback to the appraisee. The appraisee
is not very sure about why his ratings have fallen despite his
best efforts, why others are rated high when compared to him,
(c
how to rectify his mistakes, if any; on what basis he is going to

be evaluated next year, etc. Since the report is generally not
made public, no feedback is available; the subjective analysis
of the superior is likely to be hotly contested. In recent years,
due to pressure from courts and trade unions, the details of a
negative confidential report are given to the appraisee.
282
2. Critical incident technique: Under this method, the
Notes
S
manager prepares lists of statements of every effective and
___________________
ineffective behaviour of an employee. These critical incidents
___________________ or events represent the outstanding or poor behaviour of
___________________ employees on the job. The manager maintains logs on each
employee, whereby he periodically records critical incidents of
___________________
the workers’ behaviour. At the end of the rating period, these
___________________ recorded critical incidents are used in the evaluation of the
PE
___________________ workers’ performance. An example of a good critical incident of
a sales assistant is as follows:
___________________
___________________
July 20: The sales clerk patiently attended to the
customer’s complaint. He is polite, prompt, and
___________________
enthusiastic in solving the customer’s problem.
___________________
On the other hand, the bad critical incident may appear as
under:
July 20: The sales assistant stayed 45 minutes over on his
break during the busiest part of the day. He failed to
answer the store manager’s call thrice. He is lazy,
negligent, stubborn and uninterested in work.
)U
This method provides an objective basis for conducting a
thorough discussion of an employee’s performance. This
method avoids recently bias (most recent incidents get too
much emphasis). This method suffers, however, from the
following limitations:
(i) Negative incidents may be more noticeable than positive
incidents.
(ii) The supervisors have a tendency to unload a series of
complaints about incidents during an annual performance
review session.
(iii) It results in very close supervision which may not be liked
by the employee.
(c
(iv) The recording of incidents may be a chore for the manager

concerned, who may be too busy or forget to do it.
Most frequently, the critical incidents method is applied to
evaluate the performance of superiors.
3. Management by Objectives (MBO): MBO requires the
management to set specific, measurable goals with each
employee and then periodically discuss the latter’s progress 283

towards these goals. This technique emphasises participatively Notes
S
set goals (that are agreed upon by the superior and the ___________________
employee) that are tangible, verifiable and measurable. MBO
___________________
focuses attention on what must be accomplished (goals) rather
___________________
than how it is to be accomplished. It is, thus, a kind of goal
setting and appraisal programme involving six steps: ___________________
(i) Set the Organisation’s Goals: Establish an organisation ___________________
PE
wide plan for next year and set company goals. ___________________
(ii) Set Departmental Goals: Departmental heads at this stage ___________________
take the broader company goals (such as improving profits ___________________

by 20 per cent, increasing market share by 10 per cent ___________________
etc.) and, with their superiors, jointly set goals for their
___________________
departments.
(iii) Discuss Departmental Goals: The departmental goals are

now put to discussion in a departmental meeting with
subordinates. The departmental heads would require the
subordinates to set their own preliminary individual
goals, focusing mostly on what they can do to achieve the
)U
department’s goals.
(iv) Define Expected Results: In the next step, the

departmental heads and their subordinates agree on a set
of participatively set short-term and individual
performance targets.
(v) Performance Reviews: Departmental heads compare each

employee’s actual and targeted performance, either
periodically or annually. While periodic review is intended
to identify and solve specific performance problems, the
annual review is conducted to assess and reward one’s
overall contribution to the organisation. Because
employees are evaluated on their performance results,
MBO is often called a result-based performance appraisal
(c
system.
(vi) Provide Feedback: Both parties now discuss and evaluate

the actual progress made in achieving goals, where things
have gone off the track, how best to rectify the mistakes
made in the past, and how the employee could meet the
targets next time, focusing attention on his strengths.
284
However, setting clearly measurable goals is not an easy task.
Notes
S
MBO demands a great deal of time to set verifiable goals at all
___________________
levels of an organisation. In the race to define everything
___________________ rigidly, some of the qualitative aspects might be ignored (such
___________________ as employee attitudes, job satisfaction, etc.). Often the superior
may set goals at a frustratingly high level, whereas the
___________________
subordinate may wish to have it at a comfortable level.
___________________
At times, the short-term goals may take precedence over long-
PE
___________________ term goal. The only way to overcome these problems is to allow
___________________ managers at all levels to explain, coordinate and guide the
___________________ programme in a persuasive, democratic way. The jointly set
targets must be fair and attainable. Both the superiors and the
___________________
subordinates must be taught how to set realistic goals and be
___________________
familiarised with the results for which they are finally held
responsible.
4. Multiple-person Evaluation Techniques: The above

discussed methods are used to evaluate employees one at a
time. In this section, let us discuss some techniques of
evaluating one employee in comparison to another. Three such
)U
frequently used methods in organisations are – ranking,
paired comparison and forced distribution.
Effectiveness and Efficiency

For effectiveness and efficiency, the evaluation techniques must
have the following characteristics:
z Reliability and validity: System should provide consistent,

reliable and valid information and data, which can be used to
defend the organisation – even in legal challenges. The
technique used demonstrably satisfies the conditions of inter-
rater reliability. System must also satisfy the condition of
validity, by measuring what they are supposed to measure.
z Relatedness: The appraisal technique should measure the

(c
performance and provide information in job related

activities/areas.
z Standardisation: Appraisal forms, procedures,

administration of techniques, ratings, etc., should be
standardised as appraisal decisions affect all employees of the
group.
285
z Practical viability: The techniques should be practically
Notes
S
viable to administer, possible to implement and economical to
undertake continuously. ___________________
z Legal sanction: Systems must meet the laws of the land. ___________________
They must comply with provisions of various statutes relating ___________________

to standard.
___________________
PE
1. …………………… technique emphasises participatively ___________________
set goals that are tangible, verifiable and measurable. ___________________
2. Under …………………….. method, the manager ___________________

prepares lists of statements of every effective and ___________________
ineffective behaviour of an employee.
Summary
Companies are discovering new ways of working together to
achieve the ultimate supply chain goal – the ability to fill customer
orders faster and more efficiently than the competition. This is
)U
changing traditional company boundaries. To achieve that goal,
organizations need performance measures, or 'metrics', which are
formal, well-defined processes that can be documented and
measured to facilitate supply chain improvements.
Product outsourcing services is for reducing the total cost of
ownership. Offshore development and delivery centres provide you
better flexibility, scalability and help you to focus on your core
business area. Outsourcing organizations must adhere to stringent
Service Level Agreements to serve in a better way.
Benchmarking has become one of the most popular tools of
business management in corporate attempts to gain and maintain
competitive advantage. The central essence of benchmarking is
about learning how to improve business activity, processes and
(c
management. However, benchmarking as a term has been used

widely to refer to many different activities.
The LSCM activities identified for measurement are Network
design, Information, Transportation, Inventory, Warehousing,
Material handling and Packaging. Work related to these functional
activities is combined to create the capabilities needed to achieve
286 logistical requirements. Attention is required to measure each

Notes facet of supply chain and logistical activity and how they interact
S
___________________ in a typical business.
___________________
___________________
Lesson End Activity
___________________ Compare the quality management system of Hitachi and LG and
find out the basic differences in the system of both the companies.
___________________
PE
___________________
Keywords
___________________
Management by Objectives (MBO): MBO requires the
___________________
management to set specific, measurable goals with each employee
___________________ and then periodically discuss the latter’s progress towards these
___________________ goals.
Critical Incident Technique: Under this method, the manager
prepares lists of statements of every effective and ineffective
behaviour of an employee.
Confidential Report: It is mostly used in government
organisations. It is a descriptive report prepared, generally at the
end of every year, by the employee’s immediate superior.
)U
Cost of Transport: It is the payment for movement between two
maintaining in-transit inventory.

1. Define channel strategies.
2. What are the key issues in determining channel requirement?
3. Write a brief note on measuring strategy performance.
4. What is traditional and supply chain performance
measurements?
5. What do you mean by benchmarking supply chain?
(c
6. Discuss the qualitative measurement for the purpose of

evaluation.
Further Readings 287

Notes
S
Books ___________________
Jones, J.V., Integrated Logistics Support Handbook, Special ___________________
___________________
___________________
___________________
PE
Donald Waters. Logistics-An Introduction to SCM, Palgrave, 2003.
___________________
___________________
___________________
Web Readings ___________________
http://faculty-gsb.stanford.edu/larcker/PDF/49%20Performance%2 ___________________
0Implications.pdf
http://ftp.gunadarma.ac.id/idkf/idkf-wireless/aplikasi/e-
commerce/lapide.pdf
http://deliver.jsi.com/dlvr_content/resources/allpubs/guidelines/Mea
sSCPerf.pdf
)U
(c
(c
)U
PE
S
UNIT 19: Performance Measures
Unit 19
289
Notes
S
Activity
Performance Measures
___________________
Prepare an assignment on the
model of balance scorecard
for ___________________
the performance of high
level executives.
___________________
Objectives
___________________
topics: ___________________
PE
\ Purchasing Metrics ___________________
\ Quality of Service ___________________
___________________
Introduction ___________________
Measurement systems that measure inter-firm and inter- ___________________

functional performance are already in force in the area of logistics
and have been used for quite some time. These have to be extended
in supply chain management also. Based on this experience, some
functional performance measures are discussed in this section.
Purchasing Metrics
)U
Measuring performance of the purchasing function continues to be
a vexing problem. The performance metrics in purchasing and
supply are not necessarily tied directly to economic value add.
Some of the strategic areas that encompass the measures in
purchasing and supply:
1. Purchase cost savings/avoidance
2. Managing supplier base. This includes time to market,

supplier satisfaction, partnerships, supplier health (financial
and/or management stability)
3. Internal customer satisfaction
4. Purchasing cost
(c
5. Resource utilization
Each organization is unique and requires measures tailored to its

current environment and people. However, in addition, some other
areas of focus can be:
z Savings versus Purchase Expenditure Plan (PEP): The cost

savings goal is in addition to the yearly PEP cost saving goal.
290
z Design for Cost (DFC) Savings: Cost savings initiated by
Notes
S
purchasing/supply in the product design stages.
___________________
z Return on Enabling: Getting value from suppliers beyond
___________________
cost reduction.
___________________
z Cost of Inventory: The cost of inventory holding and
___________________ obsolescence.
___________________
z Indirect Spend Reduction: The measures in the
PE
___________________ organization, managing supplier base, and overall performance
___________________ evaluation areas simply are not receiving the same relative
attention as those in developing supplier base, cost
___________________
effectiveness, and systems utilization.
___________________
___________________
Logistics Metrics
The objective of logistics performance measurement is to determine
whether or not the organization has improved customer service at
lower logistics costs and a reduction in the cost of services. Some of
the common measures are:
z Overhead as % of Total Costs
z Overhead to Cost of Goods Sold Ratio
)U
z Order Fulfilment Costs
z Order Fulfilment Costs as a % of Order Management Costs
z Process Costs
z Total Supply Chain Costs as a % of Revenue
z Total Supply Chain Costs as a % of Total Costs
The basic business goals in logistics are to improve customer
service and provide better service levels that reflect in improved
quality and with increased accuracy. In addition, volatile consumer
demand situation requires increased speed and efficiency. Many
organizations are automating processes to eliminate errors due to
manual processes. They are also increasing collaboration
(c
(internally and externally) to reducing operating costs and increase

efficiency.
Collaborating on performance measurements is only possible when
partner firms in the supply chain are getting closer to each other.
It means that the borders are becoming less distinct. This is a
great achievement because trust and cooperation are required to
get access information beyond a single firm. Obtaining access 291

makes it possible for firms to develop and act in accordance with Notes
S
wider objectives e.g. that of an integrated supply chain. ___________________
Programmes to Improve Quality and Productivity in LSCM ___________________
Some LSCM programmes, commonly used for continual ___________________
improvement in quality and productivity are discussed below: ___________________
___________________
PE
Kaizen
___________________
Continuous improvement as practiced by Japanese firms is called
___________________
Kaizen. Kaizen seeks continual improvement of machinery,
materials, labour utilization, and production methods through ___________________
applications of suggestions and ideas of company teams. Like Six ___________________
Sigma, it also emphasizes the scientific method, particularly
___________________
hypothesis testing about the relationship between process inputs
(X's) and outputs (Y's) using design of experiments (DOE) methods.
Kaizen signifies small improvements as a result of coordinated
continuous efforts by all employees. Kaizen focuses on two
functions, (a) the maintenance function, and (b) the improvement
function.
)U
Under the maintenance function, Kaizen requires the management
to first establish policies, rules, directives and Standard Operating
Procedures (SOPs) and then work towards ensuring that
everybody follows the SOP. This is achieved through a combination
of discipline and motivational measures. Under the improvement
function, Kaizen works continuously towards revising the current
standards, once they have been mastered, higher standards are
established.
A suggestion system is an integral part of an established
management system that aims at involving employees in Kaizen.
The number of worker's suggestions is regarded as important
criteria in reviewing the performance of the worker's supervisor
and the manager of the supervisor.
(c
The Japanese management encourages employees to generate a

great number of suggestions and works hard to consider and
implement these suggestions, incorporating them into the overall
Kaizen strategy. 'Quality Circles' is also part of the Kaizen system.
This has been discussed earlier. Management also gives due
recognition to employee's efforts for improvement. An important
292 aspect of the suggestion system is that each suggestion, once

Notes implemented, leads to an upgraded standard.
S
___________________
Kaizen requires on-the-job training of workers. It ensures that
___________________ every worker has a thorough understanding of:
___________________ 1. The needs of those who use and/or pay for the product or
___________________ services;
___________________ 2. How to meet those needs; and
PE
___________________ 3. How to improve the system's ability to meet those needs.
___________________ The availability of modern statistical software has made analysing
___________________ and displaying data easier. These techniques are used in Kaizen to
encourage employees.
___________________
___________________ The Shingo System

The Shingo system has developed in parallel and in many ways in
conflict with the statistically based approach to quality control.
This system is named after the co-developer of the Toyota just-in-
time system, Shigeo Shingo. Two aspects of the Shingo system in
particular have received great attention:
1. One is how to accomplish drastic cuts in equipment set up
)U
times by single-minute exchange of die (SMED) procedures.
2. The other is the use of source inspection and the poke-yoke
system to achieve zero defects.
Shingo argues that as Statistical Quality Control (SQC) methods
do not prevent defects and they provide information to tell us
probabilistically when a defect will occur, they are inadequate to
improve quality. Control charts, according to Shingo are nothing
but a mirror reflecting current conditions. The way to prevent
defects is not control charts but to introduce controls within the
process. Shingo's approach is that defects arise because people
make errors. Even though errors are inevitable, defects can be
prevented if feedback leading to corrective action takes place
immediately after the errors are made.
(c
Such feedback and action require inspection, which should be done

on 100 per cent of the items produced. This inspection can be one of
three types: successive check, self-check, and source inspection.
1. Successive check inspection is performed by the next person in
the process or by an objective evaluator such as a group leader.
Information on defects is immediately fed back to the worker 293

who produced the product, who then takes the repair. Notes
S
2. Self-check is done by the individual worker. Such a check is ___________________
appropriate for most errors except those items that require ___________________
sensory judgment (such as existence or severity of scratches, or
___________________
correct matching of shades of paint). These require successive
checks. ___________________
___________________
PE
3. Source inspection is also performed by the individual worker.
In this case, the worker checks for the errors that cause ___________________
defects. This prevents the defects from occurring. ___________________
All three types of inspection rely on controls consisting of fail-safe ___________________

procedures or devices called poka-yoke. Poka-yoke includes
___________________
checklists or special tooling that:
___________________
1. Prevents the worker from making an error that leads to a
defect before starting a process.
2. Gives rapid feedback of abnormalities in the process to the
worker in time to correct them.
There is a wide variety of poka-yokes, including sophisticated
detection and electronic signalling devices.
)U
Value Stream Mapping (VSM)
Value Stream Mapping is a paper and pencil tool that helps you to
see and understand the flow of material and information as a
product or service makes its way through the value stream. VSM is
typically used in lean production. There are eight steps to drawing
the VSM:
Step 1: Calculate task (the time required to complete one unit)

time.
Step 2: Walk the process front to back.
Step 3: Draw in the customer box/details.

(c
Step 4: Go to the end!
Step 5: Focus on the material flow first.
Step 6: Add the Inventory/Wait Times.
Step 7: Draw in the information flow.
Step 8: Add in the timeline.

294
Notes
S
O rd e r
___________________
Free Is su e
___________________ M a te ria l P ro d u ctio n
C o n tro l
___________________
D A ILY
___________________ E XP E D ITE W e e kly
___________________
PE
___________________ L e n g thy D e sp a tc h
S e t-u p s? P ro ce s s
___________________
PAR T S AW
SLOT S H IPP IN G
M AR K CNG
___________________
___________________ 90m 2 2 d a ys
35d 3 .1 2 5 d 0 .6 2 5 d 6 .2 5 d 3 .1 2 5 d 3 .1 2 5 d 5 .6 2 5 d
2 .5 m 15m 45m 6m 7m
___________________ 1 6 5 .5 ....
Figure 19.1: VSM Current State Map
The end result should be map similar to the one shown in Figure
19.1. The saw tooth looking line, at the bottom of the figure, helps
us separate the value added cycle time (taken from data boxes)
from the non-value added time (days' or hours' supply
)U
information).
The last step in the process is to sum up all the "value-add" cycle
times and note them at the end of the timeline. Likewise, we also
sum up the "inventory" times and note that on the timeline.
We call the total inventory time the Production Lead Time (PLT).
To calculate the Process Cycle Efficiency (PCE), we divide the
value-add time by the PLT.
A value stream map takes into account not only the activity of the
product, but the management and information systems that
support the basic process. This is especially helpful when working
to reduce cycle time, because you gain insight into the decision
making flow in addition to the process flow.
(c
Manufacturing Critical-path Time (MCT)

Quick response manufacturing is based on the theory and practice
of Manufacturing Critical-path Time (MCT). MCT is the typical
amount of calendar time from when an order is created, through
the critical path of designing, engineering, fabricating, assembling,
packing and shipping, until the first product is delivered to the 295
customer. Notes
S
It focuses on relentlessly reducing lead times in all aspects of a ___________________
company's operations. The longer the MCT, the greater is the ___________________
probability that the amount of waste is greater.
___________________
The key to cutting waste is to measure each step of the
___________________
manufacturing critical-path time to determine when people are
___________________
PE
actually working on the product and when it is laying idle,
awaiting the next phase of production. You conduct 'job tagging,' in ___________________
which you attach tagging sheets to individual jobs, in order to ___________________
determine the manufacturing lead times and individual processing
___________________
times associated with each operation. Simultaneously, you also
conduct "multi-observational studies" of what workers are doing at ___________________
any given time to identify non-value-added activities, such as ___________________

walking around looking for tools or parts or waiting for tools or
parts to be delivered. By eliminating idle periods in manufacturing
critical-path times, companies can remove waste and unnecessary
costs and can bring products to market more quickly.
John Deere Worldwide Commercial and Consumer Equipment
Division, have embraced the concepts of QRM, and even have built
)U
QRM concepts into its supplier relationships. The results of this
enterprise-wide effort have been astounding. Manufacturing
critical-path times were reduced by 94 per cent for wiring, by 93
per cent for hydraulic valves and by 87 per cent for consumer
garden tractor blades.
Viltech, who we have discussed in the beginning of the unit, used
the last two techniques mentioned; VSM and MCT, to bring down
its costs and improve quality.
Measurement of Performance of Higher Executives

The balance scorecard approach is used for measuring the
performance of higher executives concerned with the strategies
related to supply chain and logistics as well as other activities of
(c
organisation.
The Balanced Score Card (BSC) can be used to appraise higher
executives, teams, business units and the corporation itself. BSC is
a framework developed by Robert Kaplan and David Norton that
helps managers translate strategic goals into operational
objectives. The model is built around four related cells: financial,
296 customer, processes and learning. Internal processes such as

Notes product development, service and the like are essential for creating
S
Activity
___________________ customer satisfaction and loyalty. They are also important for
Juran's Model of Optimum ensuring productivity to contain costs for better financial
___________________
Quality Costs.
performance. Customer value creation, in turn, boosts up revenues,
___________________
which enhances profitability. At the outset, a company’s objectives
___________________ are spelled on the scorecard. The various targets for divisions are
___________________ added followed by specific objectives outlined for teams and
PE
individuals working therein. The value of this integrated approach
___________________
is that each employee can see more clearly how his performance
___________________ ties into the overall performance of the firm. Like MBO, the
___________________ balanced scorecard approach helps higher executives to translate
___________________
overall corporate objectives into divisional, departmental and team
goals in a cascading manner.
___________________
Check Your Progress

Fill in the blanks:
1. Quick response manufacturing is based on the theory
and practice of ………………………….
2. ………………….. is a paper and pencil tool that helps
)U
you to see and understand the flow of material and
information as a product or service makes its way
through the value stream.
Quality of Service
Concepts of what constitutes quality have changed over the last
decade. Traditional definitions focused on conformance to
standards. Such definitions were based on the customer's
perception of quality. The new definition of quality that has
emerged focuses on achieving value entitlement.
Quality is a state in which value entitlement is realized for the
customer and provider in every aspect of the business relationship.
'Value' represents economic worth, practical utility and availability
(c
for both the customer and the company that creates the product or
service. This definition accepts the fact that the quality of products
or services rarely consist of a single element. 'Value entitlement'
means:
1. For the customer: A rightful level of expectation to buy high-
quality products at the lowest possible cost.
297
2. For the provider: A rightful level of expectation to produce
Notes
S
quality products at the highest possible profits.
___________________
The philosophical leaders of the quality movement, notably Phillip
Crosby, W. Edward Deming and Joseph S. Juran provide different ___________________
perceptions to the concept of quality. This is because they use ___________________

different frameworks for defining quality. Eight quality
___________________
management principles related to quality of service have been
___________________
PE
enunciated by the International Standards Institute (ISO) on
which the quality management system standards are based. The ___________________
principles that have been derived by the ISO, the Technical ___________________
Committee on quality management are based on hearings of the
___________________
committee and from the collective experience and knowledge of
international experts. These are given below: ___________________
___________________
z Customer focus: Organizations depend on their customers
and therefore should understand current and future customer
needs, should meet customer requirements and strive to
exceed customer expectations.
z Leadership: Leaders establish unity of purpose and direction
of the organization. They should create and maintain the
internal environment in which people can become fully
)U
involved in achieving the organization's objectives.
z Involvement of People: People at all levels are the essence of
an organization and their full involvement enables their
abilities to be used for the organizations' benefit.
z Process Approach: A desired result is achieved more
efficiently when activities and related resources are managed
as a process.
z System Approach to Management: Identifying,
understanding and managing interrelated processes as a
system contributes to the organization's effectiveness and
efficiency in achieving its objectives.
z Continual Improvement: Continual improvement of the
(c
organization's overall performance should be a permanent

objective of the organization.
z Factual Approach to Decision Making: Effective decisions
are based on the analysis of data and information.
z Mutually Beneficial Supplier Relationships: An
organization and its suppliers are interdependent and a
298 mutually beneficial relationship enhances the ability of both to

Notes create value.
S
___________________
These principles give an overview of total quality management and
___________________ show how, collectively, they can form a basis for performance
___________________ improvement and organizational excellence. There are many
different ways of applying these quality management principles.
___________________
The nature of the organization and the specific challenges it faces
___________________ will determine how to implement them. We will discuss many of
PE
___________________ these aspects in the succeeding sections.
___________________
Cost of LSCM
___________________
Normally, a company could expect as much as seven per cent of the
___________________ goods it received and an equal percentage of products it shipped
___________________ out to be defective. This type of company when asked what poor
quality costs them, their guess would be about 3-5 per cent of sales.
But expert opinions actually calculate the costs of poor quality
more like 20-30 per cent.
Can such companies compete with today's value-driven companies?
They would find it very difficult to compete. Today, the best
companies do not count their defects per hundred but they count
)U
the number of defects per million. Philip Cosby states that the
correct cost for a well-run quality management program should be
under 2.5 per cent. This is happening with a large number of
professionally run quality conscious firms, as the following
example will show.
When Matsushita bought over the TV plant run by Motorola at
Quasar, the plant had been running at a rate of 150-180 defects
per 100 sets. Three years later, under the new management,
Matsushita was running the plant at a rate of 3-4 defects per 100
sets. The cost of poor quality dropped from $ 22 million to less than
$ 4 million annually, making the loss making plant profitable. All
this did not cost much. Quality improvement was achieved through
marginal investments but primarily by innovative employee
relations and workplace reorganization.
(c
Costs of poor quality in LSCM are generally classified into four

broad categories. The costs include:
1. Internal Failure Costs
2. External Failure Costs
3. Appraisal Costs
4. Prevention Costs
299
Table 19.1: Cost of LSCM
Notes
S
Prevention Appraisal Internal External
___________________
Costs Costs Failure Costs Failure Costs
___________________
QC administration Quality audits Scrap, at full Complaints and
and systems shop cost loss of customer ___________________
In-process testing
planning goodwill
Rework, at full ___________________
Checking labour
Quality training shop cost Warranty costs
___________________
PE
Laboratory or
Quality planning Scrap and Field
other ___________________
rework. Fault of maintenance
Special processes measurement
vendor and product ___________________
planning services
service
Material
Quality data Calibration and ___________________
procurement Returned
analysis Setup for test and
material ___________________
inspection Factor contact
Procurement processing and
engineering ___________________
planning Test and repair
inspection QC
Vendor surveys Replacement
material investigations
inventories
Reliability studies (of failures)
Outside
Strained
Quality endorsements Material review
distributor
measurement and activity
Maintenance and relations
control equipment
calibration Repair and
Trade
)U
Qualification of troubleshooting
Field testing concessions
material
Incoming, in
New product
process, final
review
inspection
Process control
Juran has stipulated a model for optimum quality costs. Juran

defines three quality zones relative to the point of minimum total
quality costs. The "zone of improvement projects" lies below the
optimum quality level, while the "zone of perfectionism" lies above
it. Between them, and in the area of the minimum, lies the "zone of
indifference."
Juran's model is shown in Figure 19.2. As the Figure shows, the
costs of improvement continue to rise whilst the costs of failure
(c
continue to fall with improvement of quality levels. He identifies

the boundary of the zone of perfectionism as lying, typically, at a
quality level where failure costs amount to 40 per cent of the total
quality cost.
Using the principle of diminishing marginal returns, moving up to
the line 'AB' in the figure both benefits and effort suggest will
bring in the profit of the firm, but when the quality level goes
300 beyond 'AB', the profit from increase in quality is less than zero.
Notes Beyond this point, it is preferable to decrease efforts rather than
S
___________________ continue. Juran, therefore, suggests relaxing prevention efforts
and allowing (even encouraging) increased defect rates in the zone
___________________
of perfectionism.
___________________
___________________ A
C ost per G ood U nit of P roduct

c Total
___________________ Failure Q uality
PE
To C osts C osts
___________________
Q.
___________________
___________________
C osts of A ppraisal
___________________ Plus Prevention A
___________________
0 100%
(100% defective) Q uality Level B
(100% good)
Figure 19.2: Juran's Model of Optimum Quality Costs
Though customers consider quality a trade-off, the companies that

offer low prices with high quality, do not see the trade-off. This is
)U
because they do not attribute cost to quality. The consensus is that
quality, in totality, increases profits and reduces costs.
Expert opinions calculate the costs of poor quality in LSCM more
like 20-30 per cent. The costs include: (a) Internal Failure Costs;
(b) External Failure Costs; (c) Appraisal Costs; and (d) Prevention
Costs.
A quality management system under LSCM is a network of
processes. A process is made up of people, work, activities, tasks,
records, documents, forms, resources, rules, regulations, reports,
materials, supplies, tools, equipment, and so on–all the things that
are needed to transform inputs into outputs. In order to design a
good system, we need to know: What are the parts of the business
that interact with the customer and what do they do? What are the
(c
processes that support those parts? Are processes under control?

Are costs of poor quality controlled in line with expectations? What
external constraints are there on the business? And what internal
constraints are there?
301
Check Your Progress Notes
S
1. ………………………. is a state in which value ___________________

entitlement is realized for the customer and provider in
___________________
every aspect of the business relationship.
___________________
2. ……………………… represents economic worth, practical
___________________
PE
utility and availability for both the customer and the
company that creates the product or service. ___________________
___________________
Summary ___________________
Evaluation of managerial performance could be taken either for ___________________

evaluating the performance of managers or for developing them. ___________________
The evaluation is of two types: telling the employee where he
stands and using the data for personnel decisions concerning pay,
promotions, etc. The developmental objectives focus on finding
individual and organisational strengths and weaknesses;
developing healthy superior-subordinate relations; and offering
appropriate counselling/coaching to the employee with a view to
develop his potential in future.
)U
Measurement systems that measure inter-firm and inter-
functional performance are already in force in the area of logistics
and have been used for quite some time. These have to be extended
in supply chain management also.
Kaizen signifies small improvements as a result of coordinated
continuous efforts by all employees. Kaizen focuses on two
functions, (a) the maintenance function, and (b) the improvement
function.
Concepts of what constitutes quality have changed over the last
decade. Traditional definitions focused on conformance to
standards. Such definitions were based on the customer's
perception of quality. The new definition of quality that has
emerged focuses on achieving value entitlement. Quality is a state
(c
in which value entitlement is realized for the customer and

provider in every aspect of the business relationship.
Lesson End Activity

The benchmarking process helps the Toyota to maintain effective
quality standards. What are the various benchmarking strategies
302 to be followed by the Indian automobile industry to achieve the

Notes international quality standards?
S
___________________
___________________ Keywords
___________________ Quality: It is a state in which value entitlement is realized for the
___________________ customer and provider in every aspect of the business relationship.
___________________ Logistics: Design and operation of the physical, managerial and
PE
___________________
informational systems needed to allow goods to overcome time and
space.
___________________
Total Cost: It includes all expenditures necessary to perform
___________________
logistical requirement considering the interrelationship between
___________________ the different logistical activities.
___________________
Kaizen: Continuous improvement as practiced by Japanese firms.
Return on Investment: It is a performance measure used to
evaluate the efficiency of an investment or to compare the
efficiency of a number of different investments.

)U
1. Explain Juran's model of optimum quality costs.
2. Discuss classification of costs of poor quality in LSCM quality
of service.
3. Discuss the steps to drawing the VSM.
Further Readings
Books
(c
Donald Waters, Logistics-An Introduction to SCM, Palgrave, 2003.

Web Readings 303

Notes
http://ftp.gunadarma.ac.id/idkf/idkf-wireless/aplikasi/e-
S
commerce/lapide.pdf ___________________
http://www.carecprogram.org/uploads/events/2010/1st-CFCFA- ___________________
Logistics-Training/Ch5-Supply-Chain-Performance- ___________________
Measurement.pdf
___________________
http://www.tompkinsinc.com/benchmarking-and-best-practices/
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
(c
)U
PE
S
UNIT 5: Case Study
Unit 20
305
Notes
S
Case Study
___________________
___________________
___________________
Objectives
___________________
After analyzing this case, the student will have an appreciation of the
PE
___________________
Case Study: ASRS at IBM's Charlotte
___________________
After more than 16 years of continuous service, the ASRS at
IBM's Charlotte, North Carolina, manufacturing facility was ___________________
showing extensive wear and tear. Much of the existing control
system was quickly becoming obsolete. Parts were either ___________________
proprietary or very difficult to find. Plus, there were Y2K
___________________
problems. Safety was also an issue, as cracks had appeared in the
rails used to guide the system's Storage and Retrieval Machines
(SRMs). IBM faced either the purchase of a new system or a total
upgrade to its existing ASRS, which serves as the primary
warehousing system for raw materials used in production of PCs
and point-of-sale terminals. About one-fifth of the ASIRS capacity
is also used for finished goods. After investigating the
alternatives, it was determined that a true systems upgrade
would provide substantial savings-about one-tenth the estimated
)U
cost of a new system.
Since completing the upgrade, the ASRS' operating costs have
been greatly reduced. Productivity has increased, storage density
is higher, and better tracking systems have been implemented.
The system can now handle 50 per cent more throughput at 220
moves an hour, and uptime is now 98 per cent. Today, the ASRS
houses more than 28,000 SKUs in its 10–80-foot high, 500-foot
long aisles. An S/RM is dedicated to each aisle, handling both
receiving and picking functions. The entire ASRS system is
controlled by a series of PCs networked to an RSl6000 computer.
The mainframe decides which products are needed for the day's
manufacturing and builds a list of materials. An SIRM is
instructed to travel to an individual location where parts are
stored. Photo eyes direct the S/RM to the exact location of the
desired SKU, and an extractor removes the load. The SRM then
delivers the part to a pickup deposit station at the front of the
aisle, placing the pallet on a slip-sheet. A conveyor delivers the
unit to the manufacturing workstation. Previously, controllers for
(c
the conveyor that replenishes the front of the ASIRS and the
conveyor that outputs to production worked independently and
required separate control rooms.
After the upgrade, both operate from the same PLCs, eliminating
one control room and the need for operators in two locations.
Monitoring and reporting functions have also been greatly
improved. Installing the new ASIRS system was not an easy task.
Contd…
306 As an essential component of the plant's production process, the

Notes ASRS needed to continue to store and retrieve inventory
S
throughout the entire retrofit process. The crew had to meet a
___________________ tight schedule to perform that day's installation work, do required
testing and verification, and then be ready to switch it all back
___________________
over for full production the next day. The upgrade on the S/RM
___________________ was performed aisle by aisle, with the first aisle taking 7 days for
its upgrade and 3 days each for the remaining nine aisles.
___________________
All 4800 feet of floor rails that guide the SRMs were also replaced
___________________ with new thermite welded epoxy-grouted rails designed to prevent
PE
deterioration. The original safety concerns have now vanished.
___________________ Gone too are obsolete and proprietary parts, as all components
are state-of-the-art and Y2K compliant and readily available from
___________________
a variety of suppliers.
___________________ Question
___________________ Analyse the case and write down the case facts.
Source: David Maloney, "ASIRS Upgrade Puts Big Blue in the Black," Modern Modelling
___________________
handling. 54, no. 4 (April 1999).pp. 40-41.
)U
(c
UNIT 21: Customer Accommodation
307
Notes
S
___________________
___________________
___________________
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
BLOCK-V
)U
(c
308
Notes
S
UNIT 21: CUSTOMER ACCOMMODATION
___________________ UNIT 23: INFORMATION TECHNOLOGY
FRAMEWORK
z Introduction
___________________ z Introduction
z Customer-focused Marketing
___________________ z Information Functionality – The Supply Chain
z Customer Satisfaction
z Comprehensive Information System Integration
___________________
UNIT 22: MANAGEMENT OF RELATIONSHIP AND
___________________ UNIT 24: SUPPLY CHAIN LOGISTICS
PE
DEVELOPING TRUST
ADMINISTRATION
___________________
z ___________________
Relationship Management z Operational Performance
z ___________________
Performance Feedback
UNIT 25: CASE STUDY
___________________
___________________
)U
(c
Unit 21
309
Notes
S
Activity
Customer Accommodation
___________________
Compare and contrast speed,
consistency, and flexibility as
___________________
operational performance
activities. In some situations,
___________________
is one activity more critical
Objectives than others?
___________________
topics: ___________________
PE
\ Customer Focused Marketing ___________________
\ Customer Satisfaction ___________________
\ Customer Success
___________________
___________________
Introduction
___________________
Logistics contributes to an organization's success by providing
customers with timely and accurate product delivery. The key
question is who is the customer? For logistics, the customer is any
delivery destination. Typical destinations range from consumers'
homes to retail and wholesale businesses to the receiving docks of
a firm's manufacturing plants and warehouses. In some cases, the
)U
customer is a different organization or individual who is taking
ownership of the product or service being delivered. In many other
situations, the customer is a different facility of the same firm or a
business partner at some other location in the supply chain.
Regardless of the motivation and delivery purpose, the customer

being serviced is the focal point and driving force in establishing
logistical performance requirements. It is important to fully
understand customer service deliverables when establishing
logistical strategy. This unit details the nature of customer service
and the development of facilitating strategies.
For a logistician, a customer is any delivery location. Typical

destinations range from consumers' homes to retail and wholesale
(c
businesses to the receiving docks of manufacturing plants and

distribution centres. In some cases the customer is a different
organization or individual who is taking ownership of the product
or service being delivered. In many other situations the customer
is a different facility of the same firm or a business partner at
some other location in the supply chain. It is common for the
310 logistics manager of a retail distribution centre to think of the

Notes individual stores to be serviced as customers of the distribution
S
___________________ centre, even though the stores are part of the same organization.
___________________ Regardless of the motivation and delivery purpose, the customer
___________________ being serviced is the focal point and driving force in establishing
___________________ logistical performance requirements. It is critical to fully
___________________
understand customer needs that must be accommodated in
PE
establishing logistical strategy. This unit details the nature of
___________________
various approaches to accommodating customer requirements.
___________________
___________________
Customer-focused Marketing
___________________
The logical starting point is to understand how logistical
___________________
competency contributes to marketing performance. Firms guided
by market opportunity, view satisfying customer requirements as
the motivation behind all activities. The objective of marketing
initiatives is to penetrate specific markets and generate profitable
transactions. This posture, often referred to as the marketing
concept, emerged as part of the post-World War II shift from seller-
to buyer-dominated markets. In this section, attention is directed
)U
to three fundamental concepts. First, the essence of a marketing
orientation to business planning is developed. Next, the increased
attention to developing logistics as a core competency is discussed.
This notion of treating logistical competency as a strategic resource
is critical to customer service planning. Finally, the changing
nature of most desired logistics practice is examined in terms of
product life-cycle requirements. It is important to understand that
logistical performance should be modified over time to
accommodate changing marketing requirements.
Managing Consumer Waiting Periods

Most good customer service benchmarks include the length of the
waiting time - in airlines, banking, health service, shopping, etc.
(c
Customers tend to lose patience, and the service firm has to

agonize in choosing speed over security. But the world over,
delayed service is perceived as inefficiency. Waiting time
management is a challenge but can be creatively handled. Doctors
in their clinics have ergonomically designed lounges, magazines
and softly played televisions. Hairdressers too have magazines and
extra chairs while airlines are splurging on exclusive lounges. 311

Some examples of customer wait management: Notes
S
1. Keep the customer occupied - reading magazines, listening to ___________________
music or viewing TV. ___________________
2. Convey to the customer that the service process has begun; it ___________________
will make less fidgety. Bankers start the preliminary ___________________

paperwork processes, while doctors shift patients to different ___________________
PE
examining rooms.
___________________
3. Make attempts to reassure the customers as anxiety makes ___________________
waiting feel longer.
___________________
4. Share all the information possible with the customers, as this ___________________
will reduce the anxiety level and give them cues for getting
___________________
occupied.
5. Do not make it evident that some customers are more equal

than others; discrimination will make customers indignant
and restive.
6. Try to encourage customers to interact with each other as this

)U
will keep them occupied and engaged. If they are alone, the
wait might seem interminable.
Dealing with difficult Customers

The quality of service transactions, surprisingly, depends to a
great extent also on the characteristics and traits of the customers:
Education and background - like profession, skills, experience,
family background, social circle, etc.
A customer who is a professional, like a chartered accountant, will
be in a better position to understand the savings account opening
norms in a bank than an illiterate farmer. The latter would most
probably require detailed explanations, in his mother tongue, and
assistance in filling up all the forms. These would undoubtedly
make the service transaction more time-consuming. In addition,
(c
the service delivery would suffer, if the provider was not

conversant with the language of the customer or was incapable of
coming down to the comprehension level of the customer.
For example, an educated housewife could be helpless inside an
ATM kiosk, if there was a "system fault" and would have to resort
to 'manned' banking procedures.
312
The mood, attitude and personality of the customer might prevent
Notes
S
a smooth service transaction.
___________________
In a popular restaurant positioned for the family, when some
___________________
rowdy non-family group disturbs the peaceful atmosphere, the
___________________ service provider fails in delivering the promise.
___________________ The demeanour of the ill-mannered group is markedly different
___________________ from the orderly behaviour of the rest of the family-type customers,
PE
and although they are smaller in number, they manage to ruin the
___________________
experience of all other customers. This is also an uncontrollable
___________________
factor for the service marketer.
___________________
Service transactions and the quality of service delivery depend a
___________________ lot on both the provider and the customers carrying out their roles
___________________ seamlessly as designed by the blueprints of operations. While it
can to a great extent be possible to manage the quality of the
performance of the internal customers, it becomes a challenge to
extract compliant behaviour from the customers.
The customers of the same service firm and offer are different from
each other due to the following:
z Differing backgrounds of education, family, occupation,
)U
income;
z Differing skills, attitude and aptitude;
z Differing moods, involvement, experience, awareness and
perception.
If the service has to be delivered with consistent quality — and
customers' participation is taken as mandatory for the service
delivery – then the differences in the characteristics of the
customers have to be taken into account by the service marketer.
The customer has to be managed, which can be attempted in the
following ways:
Choosing the appropriate segment of the customers are desirable

and manageable by the service marketer.
(c
Training and education of the customer: As mentioned before,

airline staff pantomime and give verbal instructions on flight
safety procedures before take-off to the passengers. Package tour
operators give detailed instruction booklets and other information
brochures to their customers and make them sign many clauses of
conduct and disclaimers.
313
Targeting the chosen segment: Citibank took the lead followed
Notes
S
by other foreign banks and then later by most private banks, to
keep a high minimum-balance-maintaining clause for its account ___________________
holders. In the process they got to avoid the vast mass-banking ___________________
crowd who were not only unprofitable (from their point of view) but
___________________
also greatly differed in their quality of service participation.
___________________
Customer retention strategies: The service marketer should
___________________
PE
stress on retaining customers, as they are less expensive than
customer acquisition. A retained customer will also contribute ___________________
handsomely to the bottom line through positive referrals and ___________________
repeat purchases over an entire lifetime. The service marketer can
___________________
attempt four types of bonding with customers (see Figure):
___________________
z Financial bonds - through favourable pricing and incentives;
___________________
z Social bonds - by way of personal and enduring relationships;
z Customization bonds - through mass customization, feed
forward and anticipation;
z Structural bonds - joint involvement and integrated systems.
)U
Stable
Integrated Pricing
Info System Bundling
Joint and cross
Invmt selling
Shared IV. Structural I. Financial

Processes Bonds Bonds Volume
and and
Equipmnt frequency
rewards
Excellent
service
Anticipation/ Quality and
Innovation Value Continuous
III. II. Social
Bonds Relationships
Customisation
Bonds
Customer
intimacy
Personal
Social bonds Relationships
Mass among
Customisation customers
(c
Source: David E. Bowen and Benjamin Schneider, “Boundary Spanning Role Employees
and the Service Encounter: Some Guidelines for Management and Research in the Service
Encounter”, ed. J A Czepiel, M R Solomon and C F Surprenant (Lexington, Mass: Lexington
Books, 1985) pp. 127-148.
Figure 21.1: Levels of Retention Strategies

314
Customer Service
Notes
Marketing identifies the appropriate logistical performance. The
S
___________________ critical strategic issue is to determine the combination of services
___________________ and their desired format that will support and stimulate profitable
transactions.
___________________
___________________
Although most senior managers agree that customer service is
important, they find it difficult to explain exactly what it is and
___________________
does. Two interpretations commonly expressed are easy to do
PE
___________________ business with and sensitive to customer needs. While such
___________________ generalizations have appeal from a qualitative perspective, it is
difficult to interpret what "easy to do business with" means for
___________________
firms that deal with numerous customers on a daily basis.
___________________ To develop a customer service strategy, it is necessary to develop a
___________________ working definition of customer service.
LaLonde and Zinszer have researched various ways that customer
service can be viewed: (1) as an activity, (2) in terms of
performance levels, and (3) as a philosophy of management.
Viewing customer service as an activity suggests that it is capable
of being managed. Thinking of customer service in terms of
performance levels has relevancy providing it can be accurately
)U
measured. The notion of customer service as a philosophy of
management exemplifies the importance of customer-focused
marketing. All three dimensions are important to understand what
is involved in successful customer service.
A broad definition of customer service should embody elements
from all three perspectives.
Customer service is a process for providing significant value-added
benefits to the supply chain in a cost-effective way.
It is clear that excellent customer service performance seems to
add value for all members of the supply chain. Thus, a customer
service program must identify and prioritize all activities
important to accomplish operating objectives. A customer service
program also needs to incorporate measures for evaluating
(c
performance. Performance needs to be measured in terms of goal

attainment and relevancy. The critical question in planning a
customer service strategy remains, Does the cost associated with
achieving the specified service goals represent a sound investment
and, if so, for what customers? Finally, it is possible to offer key
customers something more than high-level basic service. Extra
service beyond the basics is typically referred to as value-added. 315

Value-added services, by definition, are unique to specific Notes
S
customers and represent extensions over and above a firm's basic ___________________
service program.
___________________
Basic Service Capability ___________________
Three fundamental dimensions of customer service are identified: ___________________
availability, performance and reliability. These attributes are now ___________________
PE
'discussed in greater detail. Numerous research studies have ___________________
examined the relative importance of the three service attributes in
___________________
different business situations. The general conclusion is that all
three aspects of service are important. However, a given service ___________________
attribute may be more or less important depending on the specific ___________________
marketing situation.
___________________
Availability
Availability is the capacity to have inventory when it is desired by
a customer. Availability can be achieved in a variety of ways. The
most common practice is to stock inventory in anticipation of
customer orders. The appropriate number, location, and stocking
)U
policy of warehouses are one of the basic issues in logistical system
design. Typically an inventory stocking plan is based on forecasted
requirements and may incorporate differential stocking strategies
for specific items as a result of sales popularity, importance of the
specific item to the overall product line, profitability, and the value
of the merchandise.
Stockout Frequency
Stockout frequency is the probability that a stockout will occur.
In other words, this measure indicates if a product is available to
ship to customers. A stockout occurs when demand exceeds product
availability. The stockout frequency is a measure of how many
times demand for a specific product exceeds availability. The
(c
aggregation of all stockouts across all products is an indication of

how well a firm is positioned to provide basic service commitments.
This measure does not consider the fact that some products may be
more critical in terms of availability than others. However,
stockout frequency is a starting point in measuring inventory
availability.
316 Fill Rate

Notes
S
Fill rate measures the magnitude or impact of stockouts over time.
___________________
Just because a product is out of stock does not necessarily mean
___________________ that a customer requirement is going unsatisfied. Before a stockout
___________________ affects service performance, it is necessary to confront a customer
requirement. Then it becomes important to identify that the
___________________
product is not available and to determine how many units the
___________________ customer wanted. Fill rate performance is typically specified in
PE
___________________ customer service objectives. By measuring the magnitude of
___________________
stockouts, a firm's track record in meeting customer requirements
can be deter mined.
___________________
For example, if a customer orders 50 units and only 47 units are
___________________
available, the order fill rate is 94 per cent (47/50).
___________________
To effectively measure fill rate, the typical procedure is to evaluate
performance over a specified time that includes multiple customer
orders. Thus, fill rate performance can be calculated for a specific
customer or for any combination of customers or business segment
desired.
Orders Shipped Complete

)U
Orders shipped complete are a measure of the times that a firm
has the entire inventory ordered by a customer. It is the strictest
measure since it views full availability as the standard of
acceptable performance. Orders shipped complete establishes the
potential times that customers will receive perfect orders,
providing all other aspects of performance have zero defects.
These three availability measures combine to identify the extent to
which a firm's inventory strategy is meeting customer
expectations. They also form the basis to evaluate the appropriate
level of availability to incorporate in a firm's basic service platform.
Operational Performance
The performance cycle was positioned as the operational structure
(c
of logistics. Mission, type of customer being serviced, differentiated

performance cycles and the degree of operational variance
experienced over time. Operational measures specify the expected
performance cycle in terms of (1) speed, (2) consistency,
(3) flexibility and (4) malfunction/recovery. Operational
performance involves logistical commitment to expected
performance time and acceptable variance.
Speed 317
Notes
S
Performance-cycle speed is the elapsed time from when an order is
placed until shipment arrival. Such commitment must be viewed ___________________
from a customer's perspective. The time required for performance- ___________________

cycle completion can be very different depending on logistical ___________________
system design. Given today's high level of communication and
___________________
transportation technology, order cycles can be as short as a few
___________________
hours or as long as several weeks or months.
PE
___________________
Of course, the highest commitment to both inventory availability
and operational speed is customer inventory consignment. ___________________
In consignment arrangements, the product is inventoried at a ___________________

customer's business establishment in anticipation of need. While ___________________
consignment may be ideal from a customer's perspective, it can be
___________________
an expensive way for a supplier to do business. Consignment
arrangements are typically limited to critical items that can result
in significant loss in efficiency or effectiveness if they are not
available exactly when required, such as machine parts and
emergency medical supplies. Typical consignment situations are
found in business-to-business marketing and the healthcare
)U
industry.
Consistency
While speed of service is critical, most logistical managers place
greater emphasis on consistency. Consistency refers to a firm's
ability to perform at the expected delivery time over a large
number of performance cycles. Failure to be consistent translates
directly into customers needing to carry extra safety stock to
protect against possible late delivery. Whereas availability is
concerned with the ability to ship products when required and
performance-cycle speed is concerned with the commitment to
complete all work requirements necessary to deliver specific orders
at a prescribed time, consistency deals with compliance to delivery
commitments over time. The issue of consistency is fundamental to
(c
logistical operations.
Flexibility
Operational flexibility refers to a firm's ability to handle
extraordinary customer service requests. A firm's logistical
competency is directly related to how well unexpected
318 circumstances are handled. Typical events requiring flexible

Notes operations are
S
___________________
z Modifications in basic service arrangements such as onetime
___________________ changes in ship-to destinations
___________________ z Support of unique sales and marketing programs
___________________ z New-product introductions
___________________
z Product phase out
PE
___________________
z Disruption in supply
___________________
z Product recall
___________________
z Customization of service levels for specific markets or
___________________
customers
___________________
Product modification or customization performed while in the
logistics system, such as pricing, mixing; or packaging. In many
ways the essence of logistical excellence rests in the ability to be
flexible. As a rule, a firm's overall logistical competency depends on
the capability to "go the extra yard" when appropriate to satisfy a
key customer requirement.
)U
Malfunction/Recovery
Regardless of how fine-tuned a firm's logistical operation is,
malfunctions will occur. The continuous performance of service
requirements under all types of operational situations is a difficult
task. Sometimes, programs can be established to prevent or
accommodate special situations, thereby preventing malfunction.
Such extraordinary commitments must be reserved for justifiable
situations. In terms of the basic service program, the key is to
anticipate that malfunctions or service breakdowns will occur and
to have in place contingency plans to accomplish recovery. Thus,
the basic service program guarantees a high level of service with
the realization that no program is fail-safe. When service failures
occur, the customer service program should have contingency plans
that identify expected recovery and measure compliance.
(c
Logistics quality is all about reliability. A fundamental quality

issue in logistics is the ability to comply with levels of planned
inventory availability and operational performance. Beyond service
standards, quality compliance involves a capability and willingness
to rapidly provide accurate customer information regarding
logistical operations and order status. Research indicates that the
ability of a firm to provide accurate information is one of the most 319

significant measures of customer service competency. Increasingly, Notes
S
customers indicate that advanced information concerning the ___________________
contents and timing of an order is more critical than complete
___________________
order fulfilment. Customers detest surprises! More often than not,
customers can adjust to a stockout or late delivery situation if they ___________________
receive advanced notification. ___________________
In addition to service reliance, a major part of service quality is ___________________
PE
continuous improvement. Logistical managers, similar to other ___________________
managers within the firm, are concerned with meeting operational
___________________
objectives with as few malfunctions as possible.
___________________
Service Reliability ___________________
Service reliability involves the combined attributes of logistics and ___________________
concerns a firm's ability to perform all order-related activities, as
well as provide customers with critical information regarding
logistical operations and status. Beyond availability and
operational performance, attributes of reliability may mean that
shipments arrive damage-free; invoices are correct and error-free;
shipments are made to the correct locations; and the exact amount
)U
of product ordered is included in the shipment. While these and
numerous other aspects of overall reliability are difficult to
enumerate, the point is that customers demand that a wide variety
of business details be handled routinely by suppliers. Additionally,
service reliability involves a capability and a willingness to provide
accurate information to customers regarding operations and order
status. Research indicates that the ability of a firm to provide
accurate information is one of the most significant attributes of a
good service program? Increasingly, customers indicate that
advanced notification of problems such as incomplete orders is
more critical than the complete order itself. Customers hate
surprises! More often than not, customers can adjust to an
incomplete or late delivery, if they have advanced notification.
The Perfect Order

(c
The ultimate in logistics service is to do everything right and to do

it right the first time. It is not sufficient to deliver a complete order
but to deliver it late. Nor is it sufficient to deliver a complete order
on time but to have an incorrect invoice or product damage
incurred during the handling and transportation process. In the
320 past, most logistics managers evaluated customer service

Notes performance in terms of several independent measures: fill rates
S
Activity
___________________
Prepare a presentation on were evaluated against a standard for fill; on-time delivery was
Model of Customer evaluated in terms of a percentage of deliveries made on time
___________________
Satisfaction.
___________________
relative to a standard; damage rates were evaluated relative to a
standard for damage; etc. When each of these separate measures
___________________
was acceptable relative to standard, overall service performance
___________________
was considered acceptable.
PE
___________________
Recently, however, logistics and supply chain executives have
___________________
begun to focus attention on zero-defect or six-sigma performance.
___________________ As an extension of Total Quality Management (TQM) efforts
___________________ within organizations, logistics processes have been subjected to the
___________________ same scrutiny as manufacturing and other processes in the firm. It
was realized that if standards are established independently for
customer service components, even if performance met standard on
each independent measure, a substantial number of customers
may have order-related failures.
Check Your Progress

)U
1. Fill rate cannot also be used to differentiate the level of

service to be offered on specific products.
2. Safety stock exists to accommodate forecast error and

cushion delivery delays during base stock
replenishment.
Customer Satisfaction
Customer satisfaction is the degree to which customer expectations
of a product or service are met or exceeded. Logistics exists to
satisfy customer requirements by facilitating important
(c
manufacturing and marketing operations. The most demanding

service commitment is to focus on facilitating customer success.
By definition, a success program and its related commitments
focus on long-term business relationships that have growth
potential and offer high probability of achieving the desired
results.
Measurement of Customer Satisfaction 321

Notes
There are a lot of challenges that service marketers face due to the
S
basic difference that prevails between service and goods. Some of ___________________
the challenges that they constantly face are: ___________________
z Understanding customer needs and their expectations from ___________________
service;
___________________
z Tangibilizing the service offering;
___________________
PE
z Dealing with different types and varieties of people – internal ___________________
as well as external customers – as also the delivery issues;
___________________
z Keeping promises made to customers.
___________________
But the most intriguing challenge is the measurement and
___________________
monitoring of quality.
___________________
Some questions regarding quality of service still elude any
definitive answers:
z How can service quality be defined and improved when the
product is intangible and non-standardized?
z How can new services be designed and tested effectively when
the service is essentially an intangible process?
)U
z How can the service firm be certain that its communication
has been effective, consistent and relevant, especially when its
other marketing mixes are also communicating? This
apprehension is especially true with respect to the role played
by the providers in the service transaction.
The various operational objectives which logistics help in achieving
and hence maximizing customer satisfaction and success are:
z Rapid Response: 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
(c
result is elimination of excessive inventories traditionally

stocked in anticipation of customer requirements. Rapid
response capability shifts operational 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
322 are known and performance is committed, little tolerance

Notes exists for operational deficiencies.
S
___________________
z Minimum Variance: Variance is an unexpected event that
___________________ disrupts performance of the system. 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. These result in a
PE
___________________ 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 accommodate
___________________ variance was to establish safety stock inventory or use
___________________ high-cost premium transportation. These practices, given their
expense and associated risk, have been replaced by using
information technology to achieve positive logistics control.
To the extent, variances are minimized; logistical productivity
improves as a result of economical operations. Hence a basic
objective of overall logistical performance is to minimize
variance.
)U
z Minimum Inventory: The aim of minimum variance involves
assets, 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 a period of time. High turn rates,
coupled with inventory availability, means that assets devoted
to inventory are being utilized effectively. The aim is to reduce
inventory deployment to the least level consistent with
customer service goals to achieve the least overall total
logistics cost. Zero inventories have become increasingly
important as managers seek to reduce inventory storage. The
reality of reengineering a system is that operational defects do
not become apparent until inventories are reduced to their
least possible level.
(c
Inventories can provide improved return on investment when

they result in economies of scale in manufacturing or
procurement. The aim is to reduce and manage inventory to
the lowest possible level while simultaneously achieving
desired operating aim. To achieve the aim of minimum
inventory, the logistical system design should control
commitment and turn velocity for the entire firm, not only for 323
each business location. Notes
S
z Consolidated Movement: The most important logistical costs ___________________
are transportation. Transportation cost is directly proportional ___________________
to the type of product, size of shipment, and distance.
___________________
Logistical systems that feature premium service depend on
high-speed, small-shipment transportation. Premium ___________________
transportation is typically high-cost. To decrease ___________________
PE
transportation cost, it is desirable to achieve movement ___________________
consolidation. The larger the overall shipment and the longer
___________________
the distance it is transported, the lower is the transportation
cost per unit. To achieve this, it requires innovative ___________________
programmes to group small shipments for consolidated ___________________
movement. These kinds of programmes must be facilitated by
___________________
working arrangements that transcend the overall supply
chain.
z Improvement in Quality: Another logistical aim is to seek
continuous improvement in quality. Total Quality
Management (TQM) has become a major commitment in all
departments of industry. Total commitment to TQM is one of
)U
the major forces which contribute to the logistics. In case a
product becomes defective or if service promises are not kept,
value is added by the logistics. Logistical costs, once increased,
cannot be reversed. When quality fails, the logistical
performance typically needs to be reversed and then repeated.
Logistics itself must perform to the required quality standards.
The challenge of achieving zero defect logistical performance is
illustrated by the fact that logistical operations typically must
be performed across a wide geographical area at all times of
the day and night. The quality challenge is illustrated by the
fact that most logistical work is performed due to supervisor's
vision. Reworking a customer's order due to incorrect shipment
or due to in-transit damage is more costly than performing it
right the first time. Logistics is a main part of developing and
(c
maintaining continuous TQM improvement.

z Life-cycle Support: The final logistical aim is life-cycle
support. Very few items are sold without some guarantee that
the product will perform as advertised over a period. The
normal value-added inventory flow toward customers must be
reversed. Product recall is an important competency that
324 results from increasing rigid quality standards, product

Notes expiration dating and responsibility for hazardous
S
___________________ 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 important aspect of reverse logistical
___________________ operations is the need for maximum control when a potential
___________________ health liability exists. A recall programme is similar to a
PE
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 importance of service support logistics changes directly with

the product and buyer. This applies especially to firms marketing
consumer durables or industrial equipment. The commitment to
life-cycle support constitutes a 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. Reverse logistical competency, as a result of worldwide
attention to environmental concerns, requires the capacity to
)U
recycle ingredients and packaging materials.
Logistical service is measured in terms of:
z Availability: Availability denotes having inventoried to
consistently meet the need of the customer material or product
requirements.
z Operational Performance: Operational performance means
the elapsed time from order receipt to delivery. Operational
performance involves delivery speed and consistency. A firm's
operational performance can be measured in terms of how
flexible it is in accommodating unusual and unexpected
request of customer.
z Service Reliability: Service reliability pertains to the quality
(c
attributes of logistics. For logistics performance to

continuously meet customer expectations, it is necessary that
management should be committed to continuous improvement.
A Model of Customer Satisfaction

This model can help a firm desirous of improving service quality to
focus better on its strategies and service processes. This model can
not only be used to find and identify areas in service delivery and 325
designs (which might lack quality), but also measure and monitor Notes
S
quality in service.
___________________
Quality in service is as perceived by the customer. There is no
___________________
other way to either comprehend or administer. As service is
___________________
intangible; the only way to measure quality in service is to
measure the expectation of the customer before the receipt of ___________________
service and measure his perception after the experience, that is, ___________________
PE
the service encounter. The gap between the two is a measure of the
___________________
service quality. The larger the gap, the worse is the service quality;
the narrower the gap, better the service quality of the firm; i.e., the ___________________
firm is successful in meeting the customer's expectations so far! ___________________
Since consumer expectations keep inching upward constantly, so
___________________
must the quality of service:
___________________
z the measurement of the expectation of the customers (in this
case, students) before the service delivery (before admission),
and
z the measurement of perception of the experience, after the
service encounter (after admission, during the 2-year course
and after the convocation);
)U
z thus measuring the gap between the two.
The model professes two types of gaps:
z The Customer Gap: The gap between customer expectations
and customer perceptions. This, in other words, is the service
quality shortfall as seen by the customers. Customers develop
expectations from receipt of external stimuli from many
sources – ranging from those that are company-controlled to
social influences. These form the bases of his reference-to-come
for the service experience. The customer’s perceptions indicate
the service as actually received, for all practical purposes,
since what we perceive is what is real to us. Perceptions are
everything.
Company-controlled external stimuli are: service product/offer,
price, advertising, promotions, displays, outlets etc.
(c
Social influences as external stimuli are: word of mouth

communications and reference groups. Other influencers of
expectations are: personal needs and past experience of the
customer.
The customer gap indicates the difference between actual
performance and the customer's perception of the service.
326 There are a lot of subjective judgments made by customers.

Notes Last experiences may prejudice them and change their
S
___________________ estimation of quality.
___________________ For example, a customer is satisfied with a certain restaurant;
___________________ but his last experience there (it could be because of a new
waiter) could leave him embittered, washing away years of
___________________
happy experiences at one go.
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
Figure 21.2: Gaps Model of Service Quality
Service quality is all about the responsiveness of an

organization to meet the customer's expectations. The service
performance is measured by the perceived service quality. The
quality of a service has two components:
Technical quality: This is the end result of the service
operations process.
Functional quality: This is about the process, especially
concerning the interaction between the customer and
(c
service provider.
These two factors inject a heavy dose of subjectivity into the
service process.
Any service organization would be desirous of closing the gap
between what is expected and what the customer has received.
To them, this would be absolutely necessary to build a long-
term relationship with the customer, to retain him. But in 327

order to close the Customer Gap, another type of gap has to be Notes
S
closed – the Provider Gap. ___________________
z The Provider Gap: There are four provider gaps and these in ___________________
sum total are the cause of the Customer Gap. They are the ___________________
shortfalls within the service firm. To close the customer gap, ___________________
the provider gap (or, as also known, Company Gap) has to be
___________________
PE
bridged. The four provider gaps are:
___________________
Gap 1: Customer expectation – management perception gap.
___________________
It is the inability of top management to perceive what the
___________________
customer wants, and is the main reason why a firm cannot
___________________
meet a customer's expectations. The company is blinded by a
___________________
perceptual veil of ignorance, arrogance or criminal neglect.
Some of the reasons why Gap-1 can occur are:
Inadequate marketing research;
Lack of upward communication in the organization;
Insufficient focus on relationship building (‘don't care’

)U
attitude), etc.
Gap 2: Management perception – service quality expectation

gap
This gap is created in the design process of the service product

and lying down of specifications for service quality during
service transactions. In the design process, this gap arises
during the translation of management's perception of
customer-expectation into design specifications. Managers
would set specifications for service quality on the basis of what
they believe the customer requires — a very dangerous
presumption. The implications of this gap are that even if the
firm has crystal-clear knowledge and understanding of the
(c
customer's expectations, there would be scope for

misunderstanding this, leading to setting the wrong
specifications, service designs and standards.
For example, a bank would believe that customer friendly

interaction is what the customers prefer but the standard
would be set on computerization — which is impersonal and
328 neutral. There is no human contact to support the concept of

Notes ‘friendliness’. Some reasons for Gap-2 to occur are:
S
___________________
Failure to connect service design to service positioning
___________________
Unsystematic new-service development process
___________________
Lack of customer-defined service standards
___________________
___________________
Absence of a formal process of setting service quality goals
PE
etc.
___________________
___________________ Gap 3: Service quality specifications – service delivery gap.
___________________ This occurs at the service provider level when there is

___________________ deviation from service standards specified and actually
delivered to the customers. This probably is the bane of all
___________________
public sector institutions, be they banks, insurance companies,
hotels, travel agencies, hospitals or any such. The
management's perception and service design standards might
be accurate and perfect. But if the interacting service provider
during service delivery falls short of the standards specified,
the customer will get an impression of a poorly performing
)U
firm. This becomes especially important for that firm that is
heavily dependent on people in performing the last
transaction. Public sector banks might have the best of design
specifications set by Reserve Bank of India; yet late-coming
staff, corrupt employees (the Harshad Mehta scam of misuse of
Portfolio Management Funds and the internal document mess-
up in State Bank of India) would bring large gaps in quality to
put it mildly! Some of the reasons for Gap-3 to occur are:
Ineffective recruitment, role ambiguity;
Role conflict;
Lack of empowerment, control and poor teamwork

(c
Failure to match supply and demand (in a retail store there

would be peak crowds during the evenings and slack demand
during the afternoons, but the employee strengths would be
the same), customers not co-operating or failing to live up to
their roles (lack of knowledge and responsibilities); Channel
conflicts, etc.
329
Gap 4: Service delivery – external communications to customer
Notes
S
This is essentially a communication gap. The gap is the ___________________
difference between service delivery intention and capability
___________________
and what is being communicated to the customers. An over-
___________________
hyped communication raises the expectations of the customer -
and his benchmark of service quality and his expectations ___________________
from the service delivery sky-rocket. It will be difficult then for ___________________
PE
the firm to meet the expectation and there would inevitably be ___________________
a shortfall. The tragedy is the customers would have been
___________________
satisfied without the hype. But now they go back with
___________________
memories of disappointment and are actually dissatisfied. This
results from inadequate communication from the firm. For ___________________
instance, Doordarshan, the much-maligned state TV ___________________
broadcaster, would announce a certain programme, say an

interview with Mr. Amitabh Bachchan, to be broadcast at
7 p.m. and they would fail to do so at that hour - creating huge
disappointment. The viewers would curse and would not
forgive DD despite an apology - even if one were forthcoming.
The causes of Gap-4 are:
)U
Lack of cohesiveness in marketing communications;
Absence of strong internal marketing programme, not

being able to meet customers' expectations through
communications;
Over-promising in advertising and personal selling;

Inadequate horizontal communication between sales and
operations;
Differences in policies and procedures across branches,
etc.
After examining ways and means of measuring service quality,
what is more important is to establish any relationship, linear
(c
or otherwise, between service quality and marketing. This

would go a long way to underscore the importance and
relevance of measuring quality for services. We have
established the following relationships:
Customer retention and reduced costs (the 'leaking bucket
theory')
330
Customer satisfaction and customer loyalty, and
Notes
S
___________________
Customer loyalty and profitability (the 'service-profit
chain')
___________________
Customer retention and customer net present value.
___________________
What remains to be established then are relationships
___________________
between
___________________
PE
Service quality and profits
___________________
Service quality and service marketing, and
___________________
Service quality and customer service.
___________________
___________________
If the hypothesis is established that there are evidences of any
linear relationships between the variables then customer service
___________________
should become one of the most important tools for service
marketing.
Customer Success
In recent years, some firms have discovered that there is another
commitment that can be made to gain true competitive advantage
through logistical performance. This commitment is based on
)U
recognition that a firm's ability to grow and expand market share
depends on its ability to attract and hold the industry's most
successful customers. The real key, then, to customer-focused
marketing lies in the organization's using its performance
capabilities to enhance the success of those customers. This focus
on customer success represents major commitment toward
accommodating customers.
Notes: A customer service focus is oriented toward establishment
of internal standards for basic service performance.
Firms typically assess their customer service performance relative
to how well these internal standards are accomplished. The
customer satisfaction platform is built on the recognition that
customers have expectations regarding performance and the only
(c
way to ensure that customers are satisfied is to assess their

perceptions of performance relative to those expectations.
Customer success shifts the focus from expectations to the
customers' real requirements. Customer requirements, while
forming the basis for expectations, are not the same as
expectations. Requirements are frequently downgraded into
expectations due to perceptions of previous performance, word-of- 331

mouth, or communications from the firm itself. This explains why Notes
S
simply meeting expectations may not result in happy customers. ___________________
Achieving Customer Success ___________________
___________________
Clearly, a customer success program involves a thorough
understanding of individual customer requirements and a ___________________
commitment to focus on long-term business relationships having ___________________
PE
high potential for growth and profitability. Such commitment most
___________________
likely cannot be made to all potential customers. It requires that
firms work intensively with customers to understand ___________________
requirements, internal processes, competitive environment, and ___________________

whatever else it takes for the customer to be successful in its own ___________________
competitive arena. Further, it requires that an organization
___________________
develop an understanding of how it can utilize its own capabilities
to enhance customer performance.
Value-added Services
The notion of value-added service is a significant development in
the evolution to customer success. By definition, value-added
services refer to unique or specific activities that firms can jointly
)U
develop to enhance their efficiency and/or effectiveness. Value-
added services help foster customer success. Because they tend to
be customer specific, it is difficult to generalize all possible value-
added services. When a firm becomes committed to value-added
solutions for major customers, it rapidly becomes involved in
customized or tailored logistics. It is doing unique things to enable
specific customers to achieve their objectives.
IBM's ability to produce and deliver customized personal

computers and networks to individual customers is one example of
adding value to a rather standard product. In a logistical context,
firms can provide unique product packages, create customized unit
loads, place prices on products, offer unique information services
(c
provide vendor-managed inventory service, make special shipping

arrangements, and so forth, to enhance customer success. In
reality, some of the value-added services that buyers and sellers
agree to involve integrated service providers who are positioned to
provide such services. Transportation carriers, warehouse firms,
and other specialists may become intimately involved in the supply
chain to make such value-adding activities a reality. At this point,
332 a few specific examples of how they may work within a specific
Notes supply chain to provide value-added services are sufficient.
S
___________________
Warehouses, whether private or third-party, can be utilized to
___________________ perform a number of customization activities.
___________________ Each store requires different quantities of specific product to
___________________ maintain in-stock performance with minimum inventory
commitment. In another situation, first-aid kits consisting of many
___________________
PE
different items are actually assembled in the warehouse as orders
___________________
are received to meet the unique configuration of kit desired by
___________________ specific customers. It is also common for warehouses to provide
___________________ pick price repack services for manufacturers to accommodate the
unique product configurations required by different customers.
___________________
___________________
Check Your Progress

1. Firms typically assess their customer service
performance relative to how well these internal
standards are accomplished.
)U
2. A supply chain perspective and a customer success
program do not recognize that logistics executives must
alter this focus.
Summary
A customer who is a professional, like a chartered accountant, will
be in a better position to understand the savings account opening
norms in a bank than an illiterate farmer.
Service transactions and the quality of service delivery depend a
lot on both the provider and the customers carrying out their roles
seamlessly as designed by the blueprints of operations. The service
marketer should stress on retaining customers, as they are less
expensive than customer acquisition.
(c
Marketing identifies the appropriate logistical performance.

Customer service is a process for providing significant value-added
Three fundamental dimensions of customer service are identified:
availability, performance, and reliability. The performance cycle
was positioned as the operational structure of logistics. Customer
satisfaction is the degree to which customer expectations of a 333

product or service are met or exceeded. Notes
S
Logistics exists to satisfy customer requirements by facilitating ___________________
important manufacturing and marketing operations. Quality in ___________________
service is as perceived by the customer. There is no other way to
___________________
either comprehend or administer. Customer success shifts the
focus from expectations to the customers' real requirements. ___________________
___________________
PE
Lesson End Activity ___________________
Which of the gaps in do you think represents the major problem for ___________________
most firms? How can a company attempt to eliminate the ___________________

knowledge gap?
___________________
___________________
Keywords
Rapid Response: Rapid response is concerned with a firm's ability
to satisfy customer service requirements in a timely manner.
Variance: Variance is an unexpected event that disrupts

performance of the system.
)U
Customer: A person, company, or other entity which buys goods
and services produced by another person, company, or other entity.
Marketing: Marketing is the process of communicating the value

of a product or service to customers.
Customer Service: It is a process for providing significant value-

added benefits to the supply chain in a cost-effective way.
Availability: It is the capacity to have inventory when it is

desired by a customer.
Stockout Frequency: It is the probability that a stockout will

occur.
Fill Rate: It measures the magnitude or impact of stockouts over

(c
time.
Operational Flexibility: It refers to a firm's ability to handle

extraordinary customer service requests.
Service Reliability: It involves the combined attributes of

logistics and concerns a firm's ability to perform all order-related
334 activities, as well as provide customers with critical information

Notes regarding logistical operations and status.
S
___________________
Customer Satisfaction: It is the degree to which customer
___________________ expectations of a product or service are met or exceeded.
___________________
___________________ Questions for Discussion

___________________ 1. How does logistics help in improving customer satisfaction?
PE
___________________
2. How can the level of logistical service be measured?
___________________
3. What is meant by availability in logistics customer service?
___________________
Provide examples of the different ways to monitor a firm's
___________________ performance in availability.
___________________
4. What is meant by value-added services? Why these services are
considered essential in a customer success program?
5. “Marketing identifies the appropriate logistical performance.”

Elucidate.
6. Discuss the operational measures specify the expected

performance cycle.
)U
7. How will you measure the Customer Satisfaction?
8. How will you achieve Customer Success?
Further Readings
Books
(c
Education.
Web Readings
http://www.london.edu/programmes/executiveeducation/customerfo
cusedmarketingthekeytounlockingprofits.html
335
http://www.tutor2u.net/business/gcse/marketing_customer_focus.ht
Notes
S
ml
___________________
http://www.jimnovo.com/tips.htm
___________________
http://smartdatacollective.com/juliehunt/107546/customer-focused-
___________________
marketing-automation-easy-part
___________________
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
(c
)U
PE
S
UNIT 22: Management of Relationship and Developing Trust
Unit 22
337
Notes
S
Activity
Management of Relationship and Make___________________

a group discussion on
the characteristics and
___________________
advantages of initial
Developing Trust relationship.
___________________
___________________
Objectives ___________________
PE
___________________
topics:
___________________
\ Relationship Management
\ Performance Feedback ___________________
\ Performance Measurement ___________________
___________________
Introduction
The strategic role of Supplier–Buyer Relationship is discussed in
this unit. It describes the management of such relationships.
It also discusses why firms enter into inter-firm collaborative
arrangements through the supply chain and how they share risks
and rewards. Finally, the unit looks at the issue of strategic
)U
considerations of supplier relationships.
Relationship Management
Relationships have traditionally been considered as intangible. For
more than half a century, there has been a debate about the value
of tangible and intangible assets to organizations. Of late, many
have come to believe that intangible assets play a very important
part in today's competitive environment and can be sources of
competitive advantage and above normal financial returns.
When we talk of intangible assets, we are principally talking of two
related types of intangible assets:
z Relational: Relational market-based assets are outcomes of
(c
the relationship between a firm and key external stakeholders,

including distributors, retailers, end-customers, other strategic
partners, community groups, and even governmental agencies.
z Intellectual: Intellectual market-based assets are the types of
knowledge a firm possesses about the environment, such as the
emerging and potential state of market conditions, and the
338 entities in it such as competitors, customers, channels,

Notes suppliers and social and activist groups.
S
___________________
Relational assets have become increasingly important to
___________________ organizations as one of the impacts of the internet has been to
___________________ move the market and its value drivers into the desires and
ambitions of the stakeholders. Organizations have become
___________________
increasingly aware that they have to make relationship
___________________ management work, as it is a source of competitive advantage.
PE
___________________ Trust is developed by doing things jointly and in an aligned fashion
___________________ over a period of time. There should be no major surprises.
___________________
Surprises create a poor relationship. If this happens within any
link of the supply chain, it can be disastrous for all other supply
___________________
chain members. With the stakes so high, failure is unacceptable.
___________________ This is reflected with the progressive increase in the number of
companies putting an emphasis on relationship management.
In order to create an efficient and successful supply chain,
organizations have to manage the relationships on all fronts - with
their upstream suppliers, their internal suppliers, as well as their
downstream customers. The buyer and seller, in each of these
relationships, need to see each other as partners, each helping the
)U
other as much as possible.
Within a firm, all supply chain activities can be related to one of
three macro processes, the customer, the internal supply chain
processes, and/or the supplier processes. This, in turn, can be
translated into three types of 'focuses' - Customer focus, Internal
Supply focus, and/or Supplier focus.
Based on the focus of the processes, the supply chain relationship
management processes can be classified into the following:
1. Customer Relationship Management (CRM): All processes
that focus on the interface between the firm and its customers.
2. Internal Supply Chain Management (ISCM): All processes
that is internal to the firm.
(c
3. Supplier Relationship Management (SRM): All processes

that focus on the interface between the firm and its suppliers.
The three macro processes manage the flow of information,
product, and funds required to generate, receive, and fulfil a
customer request. Table 22.1 gives an overview of the three
processes.
339
Table 22.1: Supply Chain Macro Processes
Notes
S
SRM (Supplier Focus) ISCM (Firm Focus) CRM (Customer Focus)
___________________
Source Strategic Planning Market Trends
___________________
Negotiate Demand Planning Sales and Marketing
___________________
Buy Supply Planning Information on
___________________
Customers
___________________
PE
Design Collaboration Fulfilment Order Management
Supply Collaboration Field Service Call Centre Management ___________________
___________________
Developing Collaborative Relationship
___________________
The awareness of the interdependence and necessity of cooperation
___________________
is the key difference between collaborative relationships and
transactional ones. Organizations perform a series of value-adding ___________________
activities working together by recognizing the interdependency and
need of cooperation, to provide benefits to both parties. These
include cost reduction, improved quality, reduced time to market,
and the leveraging of supplier technology.
The three most important factors required for a successful
collaborative relationship between a buyer and suppliers are:
)U
z Two-way communication,
z Responsiveness to supply management's needs, and
z Clear product specifications.
Collaboration happens because both parties are aware that money
enters their supply chain (or supply network) only if the chain's
end products are cost competitive. When collaborative relations
replace the market forces employed by transactional procurement,
there is overall improvement in many areas. There is controlled
competition, benchmarking, and advanced supply management
pricing practices. The end results are lower total costs, higher
quality, reduced time to market, and reduced risk of supply
disruptions.
(c
An example of a collaborative relationship is between Tata Motors

and Mahindra Ugine. Tata Motors has a large requirement of alloy
steel billets for its Forge Division at Jamshedpur. Of the large
number of possible suppliers, Tata Motors chose Mahindra Ugine
as one of the three suppliers with whom they negotiate prices and
quantities for their different requirements, based on quality, R&D,
340 timeliness of supply, process capability, and after sales service

Notes ability. The criterion was not price, but the value delivery of the
S
___________________ seller. Based on their past performance, Tata Motors would reward
___________________ its strategic partners with a larger proportion of the total orders.
This acts as an incentive to perform better than the others.
___________________
As both parties recognize their relationship is long-term, their
___________________
interdependence and the need for cooperation, this is reflected in
___________________
their continual effort to mutually work together towards cost
PE
___________________ reduction and improved quality. For example, Mahindra Ugine
___________________ offers new alloy developments to Tata Motors to develop
___________________ components with improved specifications and lower costs. Such
acts extend the relationship between the two parties.
___________________
___________________ Advantages of Collaborative Relationships

Continuous improvement is far easier to implement and manage
with recognized interdependence and cooperation. The end
objective with continuous improvement is a reduction in total
costs.
With improved quality and timeliness, the likelihood of supply

)U
disruptions is greatly reduced. With a high level of certainty and
continuity of demand, sellers are prone to explore improving
processes and adopting technical innovations. They are also willing
to work with their buyers on new ideas. This often results in cost
reduction for both the buying and supplying organizations.
Cost reductions resulting from Value Engineering and Value

Analysis (VENA) are much more likely with collaborative
relationships. Suppliers are more likely to take the initiative to
reduce costs through VENA when they are involved in long-term
relations. As was discussed earlier, Maruti Udyog were able to
reduce component costs on the Alto alone, from 2001 to 2005, by
29 per cent.
Disadvantages of Collaborative Relationships

(c
The major disadvantage of collaborative relationships is the

amount of human resources and thought that is required to
develop and manage such relationships.
It takes a lot of time and energy, judgment and managerial

expertise to make collaborative relationships successful.
Initial Relationships 341

Notes
The most common and most basic type of relationship is "Initial
S
Relationship." Virtually, all buying firms will have Initial ___________________
relationships. For example, Directorate General of Supplies ___________________
and Disposal (DGS&D) is a government organization
___________________
under the Ministry of Commerce. The organization provides
procurement services to Central & State Government ___________________
Departments/Organizations, Public Sector Undertakings and ___________________
PE
Autonomous Bodies, by placing Rate Contracts for common
___________________
user items and contracts against their ad-hoc demands. This is a
___________________
typical initial relationship. This type of relationship simply means
that neither party is especially concerned with the well-being of ___________________
the other. It is neither good nor bad. Initial purchases lend ___________________
themselves to e-procurement and in some cases, reverse auctions.
___________________
Characteristics of Initial Relationships

Initial relationships have several characteristics. To start with, the
relationship is formal. It is characterized by an absence of concern
by both the buyer and the seller about the other party's well-being.
They see the relationship as a zero sum game i.e. what one party
wins, the other loses.
)U
The transactions are also seen as a series of independent deals.
Each transaction is entered into on its own merits. Therefore,
there is limited contact between the buyer and the seller. There is
also little or no basis for collaboration and learning from each
other.
Basic data relating to technical data, special features, costs, and
forecasts, etc. are not shared. As these are arm's-length
transactions, the focus is on price. For example, DGS&D uses open
tenders for each transaction. Both the buyer and the seller try to
get the best price. There is no openness in such a relationship.
Advantages of Initial Relationships

(c
Though initial relationships are formal and inflexible, in certain

cases, they are advantageous to the firm. The major advantage is
that initial purchases lend themselves to e-procurement and, in
some cases, reverse auctions.
In the case of conventional procurement transactions, there is
relatively less purchasing time and effort required to establish
price, as these are established primarily by market forces. With
342 the vast majority of transactional procurements, judgment and

Notes managerial expertise are seldom required. This is advantageous
S
___________________ for commodity items as little purchasing time and efforts are
required to establish price. The transactions are mechanical and
___________________
hence, lower skill levels of procurement personnel are required.
___________________
___________________ Disadvantages of Initial Relationships

___________________ The disadvantages of such relationships stem from the fact that
PE
___________________ the supplier recognizes the initial and price nature of the
relationship and is not motivated to invest time and energy in the
___________________
development of the potential buyer's products.
___________________
Initial procurements tend to provide for products where quality is
___________________ only as good as required. It often results in more problems. As
___________________ there are many unknowns about the seller's capabilities,
considerable investment in expediting and the monitoring of
incoming quality is required to ensure timely delivery of the right
quality. There is little incentive and opportunity to improve quality
and delivery in this type of relationship.
Initial relationships are generally inflexible. Very often, flexibility
may be required in supplier-buyer relationships due to changing
)U
technology or changing market conditions. It is generally not
possible in initial purchases.
Initial suppliers tend to provide the minimum service required.
There is little communication between the buyer and the seller.
Initial suppliers have little to lose from a dissatisfied customer, if
they can meet with the contractual requirements of the buyers.
Multi Determination of Goal

Supplier relationship management is a wide-ranging approach to
managing an enterprise's interactions with the organizations that
supply the goods and services it uses, and thus, include multi
determination of goal. The goal of Supplier Relationship
Management (SRM) is to streamline and make further effective
(c
the processes between an enterprise and its suppliers just as

Customer Relationship Management (CRM) is intended to
streamline and make more effective the processes among an
enterprise and its customers.
SRM includes in cooperation business practices and software and
is part of the information flow component of supply chain
management (SCM). SRM practices include multi determination of
goals that create a common frame of reference to facilitate effective 343

communication between an enterprise and suppliers who may use Notes
S
quite different business practices and terminology. As a result, ___________________
SRM increases the efficiency of processes associated in the
___________________
company of acquiring goods and services, managing inventory, and
processing materials. ___________________
The ability to position multi determination of goals is essential to ___________________
effective problem solving; and by default, is essential to self- ___________________
PE
management, and self-determination. A goal is a statement of ___________________
general purpose or intent.
___________________
Multi determination of goal is also supposed to be a statement of
___________________
desired outcomes to which effort is directed with the involvement
of multi-channel partners. As such, goals can be achieved only to ___________________
the degree that their meaning is understood. This requirement ___________________

points to the necessity for goal analysis.
Goal analysis of multi determined goals will help organisation to
answer questions such as:
z How can an organisation help by understanding its needs?
z How can an organization motivate its channel partners to be
)U
more responsive to its needs?
z How can supply chain partners increase their appreciation of
the difficulties of organisational situation?
Once an organisation has identified the problem, set the multi
determined goals and its major components; the next question that
confronts is what to do about it and why? If problem solving is to
be victorious there must be a connection between the problem and
the solution. That is, one must carefully analyse the situation that
is hoped to change before selecting a remedy; otherwise, the efforts
could be wasted. In that case the question becomes: what is the
difference between the observed performance and the ideal
performance?
(c
Additionally, the organisation must analyse its target audience

and carefully assess their instructional requirements. Time
constraints, learning styles, motivation, disposition, proximity, and
attitude towards learning are significant considerations in multi
determination of goals. In other words, know your partners and
respect their needs and plan accordingly is the basic requirement
in multi determination of goals.
344
In this regard, it is vital to cultivate an environment that is
Notes
S
conducive to learning. That is, one that allows for mistakes,
___________________
provides interesting, and novel opportunities for learning, and
___________________ feeds them useable information in palatable chunks. Classically
___________________ human beings are reluctant to move outside of their "comfort"
zone. That is, over the course of time they have learned certain
___________________
"comfortable" behaviours, notions and actions. In this regard,
___________________
patience and sensitivity is a key to success in determining goals as
PE
___________________ per the requirement of different linked partners of logistics and
___________________ supply chain. Some important statements are as follows:
___________________ z A goal can be a statement of general direction or intent.
___________________ z An objective is a statement of desired outcomes or observable,
___________________ behavioural changes that stand for the achievement of the goal.
z An outcome is statement that describes the product, the
consequence of the desired multi determined goal.
z Level of achievement is a statement that describes the quality
of the performance.
z ‘Conditions of performance’ is a statement describing conditions
)U
under which the outcome will be performed. This might include
limitations of time and other constraints.
To summarize, a good multi-determined goal answers the following
questions:
z What will be different?
z How will members know it when they see it?
z What is the optimum performance level?
z What constraints, if any might affect performance?
z Translation of Goal to Specific Practice.
While strategic planning involves the formulation of organisational

goals by top management, the attainment of those goals involves at
(c
least two other distinct management planning and control

processes. First, the wide-range organisational goals have to be
translated into specific targets of accomplishment; and secondly,
functional tasks have to be specified for attaining the specific
organisational targets. The effectiveness of such a process of
transformation depends essentially on a number of factors.
345
The explicit formation of specific organisational practices by top
Notes
S
management based on viable analyses of the external situation: Activity
___________________
Analyse the role of
(i) The designing of budget formats to make certain that in target communication of building
development all relevant bases are touched; trust___________________
in respect of any financial
company dealing in hard cash
___________________
(ii) The target assessment process; and transactions with its security
agency.
___________________
(iii) The monitoring process, recycling information into future
planning. ___________________
PE
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. Level of ………………………… is a statement that
___________________
describes the quality of the performance.
___________________
2. An ……………………. is a statement of desired outcomes
or observable, behavioural changes that stand for the
achievement of the goal.
Performance Feedback
Performance feedback is the on-going process between various
)U
levels of an organisation departmental structure and its partners,
where information is exchanged concerning the performance
expected, and the performance exhibited. Constructive feedback
can admire good performance or correct poor performance and
should always be tied to the performance standards.
Characteristics of constructive feedback are:
Specific instead of general, to be told that one is "dominating" will

not be as useful as being told that, "In the meeting that just took
place,
(i) You switched topics without asking if there were additional

comments,
(ii) You cut people off mid-sentence, and

(c
(iii) You interrupted others."
It is focused on conduct rather than on the person. It is important

that we refer to what a person does. Thus, we might describe a
person as having "talked more than anyone else in this meeting"
instead of saying the person is "a loudmouth." The former allows
for the option of change; the latter implies a fixed personality trait.
346
Performance Measurement
Notes
Performance measurement is a crucial part of evaluation and
S
___________________ control and provides base to performance feedback. To achieve the
___________________ organization’s goals, managers must identify measures that are
___________________
controlled or influenced by employees’ actions. For example,
operational goals could include activities such as cycle time,
___________________
quality, productivity and costs, etc. Strategic initiatives of the firm
___________________ need to be mapped clearly to the process owners and
PE
___________________ responsibilities defined. The metrics of the activities that have to
___________________
be measured determine the quality of the measurements and the
ability of the organization to exercise control. A performance
___________________
measurement system must provide timely information for
___________________ management decisions to be a unifying component.
___________________
The concept of performance management is based on certain
principles which are explained below:
1. All significant work activity must be measured and

unmeasured work should be minimized or eliminated. Work
that is not measured or assessed cannot be managed because
there is no objective information to determine its value.
Therefore, it is assumed that the work is inherently not
)U
valuable regardless of its outcomes. The best that can be
accomplished with this type of activity is to supervise a level of
effort. Work measurement must include the resources
(manpower, expenses, and investment) required to accomplish
the desired results.
2. Desired performance outcomes must be established for all

measured work. Outcomes provide the basis for establishing
accountability for results rather than just the level of effort.
They are considered necessary for work evaluation and
meaningful performance appraisal. Also, defining performance
in terms of desired results is how managers and supervisors
make their work assignments operational.
(c
3. A time phased performance baseline must be developed to

evaluate total organizational performance. This baseline must
incorporate all organizational activity. For example, these
performance baselines include operating performance
outcomes (manpower, material, assemblies, etc.) required to
achieve these results, financial performance outcomes and
schedule performance. This baseline provides the standard for
evaluating organizational results, determining variances from 347

the plan, and implementing corrective action. Notes
S
4. Operating and financial performance reporting must be ___________________
synchronized with the same reporting periods and reporting ___________________

frequency. The reporting periods and frequency must be
___________________
consistent with the time phasing of the performance baseline.
___________________
Performance reporting and variance analyses must be
accomplished frequently. ___________________
PE
Frequent reporting enables timely corrective action. ___________________
Timely corrective action is needed for effective management ___________________
control. ___________________
There are some negative impacts of performance measurements, ___________________

which need to be kept in mind. The most important of these is goal ___________________
displacement. Goal Displacement refers to the relationship
between means with ends. It occurs when activities intended to
help achieve corporative objectives become ends in themselves.
Or alternatively, managers adapt means to meet ends other than
those for which they are intended. Goal displacements can be of
two types:
)U
1. Behaviour Substitution: It refers to a phenomenon where
activities that do not lead to goal accomplishment are
substituted for activities that do lead to goal accomplishment.
In this case, “quantifiable measures drive out non-quantifiable
measures”.
2. Sub-optimization: It is a situation where one part of the
organization optimizes its activities to the detriment of the
organization as a whole. This occurs when different
responsibility centres have no positive coordination between
them. For example, one division’s objective of achieving higher
profits can result in its refusal to share new technology or
process improvements with other divisions. A special case of
sub-optimization is the phenomenon of ‘strategic drift’.
(c
Finally, in exercising focus on the metrics, the organization is

expected to analyse the long-term implications of present operation
on the strategy.
Performance Baseline
The performance baseline is developed through work planning
exercises and monitored through variance analysis. Work Planning
348 is best carried out at the organizational level that is accountable

Notes for the results of that work and supported by variance analysis to
S
___________________ determine if any corrective action is needed to accomplish the
desired results.
___________________
___________________ Work planning establishes accountability for variance analysis and

corrective action. Work planning includes identifying the desired
___________________
results from the work activity and estimating the physical and
___________________ financial resources needed to accomplish these results. Work
PE
___________________ planning may include breaking down the work into lower level
results and resource requirements. Examples:
___________________
___________________
z Subdividing marketing expense requirements into advertising,
promotion, administrative, etc.
___________________
z Subdividing production manpower requirements into direct
___________________
manpower, indirect manpower, and overhead manpower.
z Subdividing sales expectations into product A sales, product B
sales, etc.
The lower the level of work planning and reporting, the more
accurate will be the variance analysis. However, meaningful work
planning cannot go lower than the organization’s management
)U
reporting capability. The effectiveness of work planning is provided
by variance analysis. Variance analysis effectiveness is directly
proportional to the level of detail used to develop the performance
measurement baseline. It is used to:
1. Compare and estimate relationships used to develop the
baseline with current measured values to provide advance
notice of the accuracy of the baseline estimates.
2. Compare the baseline to an estimate using these updated
relationships to show how current results impact final
performance.
Primary Measures of Performance

Traditional financial measures of performance are very effective
(c
when direct labour accounts for most of the costs, and when there
are a limited number of products produced from the same
processes. In a modern, multi-product, multi-unit business world,
its usefulness as a strategic management is limited, often to
statutory requirements alone. Basically, financial measures need
to be reinforced by other measures that will reflect the true state of
affairs of the organization.
349
Return on Investment (ROI) is the most commonly used measure
Notes
S
of corporate performance. It is a measure of profit and is obtained
by simply dividing net income before taxes by total assets. ___________________
Although ROI gives the impression of objectivity and precision, it ___________________

can be easily manipulated. Nevertheless using ROI as a measure of ___________________
performance has several advantages. It also has several distinct
___________________
limitations. These have been discussed earlier.
___________________
PE
Earnings per Share (EPS) are another measure of performance.
___________________
It is obtained by dividing net earnings by the amount of common
stock. It also has several deficiencies as an evaluation of past and ___________________
future performance. Firstly, because alternative accounting ___________________

principles are available, EPS can have several different but equally ___________________
acceptable values, depending on the principle selected for its
___________________
computation. Secondly, EPS does not consider the time value of
money, therefore it reports on accrual income, and the conversion
of income to cash can be near term or delayed.
Return on Equity (ROE), is yet another popular measure. It is

obtained by dividing net income by total equity. It has its share of
limitations because it is also derived from accounting based data.
)U
In addition, they may not provide the right data to the stockholder
or owner on the organization’s worth. Both EPS and ROE are often
unrelated to a company’s stock price.
Developing Trust
Trusted partnerships are relationships that go beyond any one
individual professional, issue, or project. They endure for many
years, providing a stable revenue stream to the service provider
and great worth for all the channel partners. Some firms call them
“Key Clients” or “Office of the Chairman Accounts.” Invariably, the
work conducted for budding trust focuses on critical strategic and
operational issues. Trusted partnerships, in short, are the lifeblood
of most service businesses.
(c
Many factors have to come together for a relationship to progress

to a trusted partnership. The most important thing is that your
main partner has to be truly ambitious and view the work you are
doing as forming part of an extensive agenda he or she is trying to
achieve at the company. The partner also has to see value in
forming long-term relationships.
350
Each partner in organization has an exclusive set of benefits that
Notes
S
it seeks from a service provider. So the first step in creating trust
___________________
understands what the partner really values. One partner may look
___________________ for quantifiable cost reduction; another, risk reduction; and yet a
___________________ third, innovation. Trust value is created along two distinct points
viz., institutional versus personal, and tangible versus intangible.
___________________
At the commencement of a relationship, the benefits sought are
___________________ usually tangible and institutional in nature. Later, personal value
PE
___________________ also becomes significant. Finally, elusive value becomes part of the
bequest of an advisor’s work.
___________________
___________________
The lack of adequate trust is the main barrier to outsourcing
knowledge work. Since trust is at the core of all relationship
___________________
formation and effectiveness, it is a strategic concern as the
___________________ business atmosphere speeds up.
The impediments are not one-sided. Many of the customer-
perceived reasons are self-fulfilling prefigure. Insufficient trust,
the biggest barrier, is a prime example.
Trust develops among two parties because they understand each
other fairly deeply. The trust issue that inhibits relationship
management as a consideration generally stems from a superficial
)U
and one-sided point-of-view, relatively than real knowledge.
The formation and maintenance of trust-based relationships is
indication by many as a new and necessary strategy for combining
cooperation and competition in today's business environment.
In certainty, trust-based relationships are the only kinds of
working relationships there are. Always have been, always will be.
Trust is not a latest concept, but rather one with a new importance
that now requires more explicit knowledge and more concentration
to management skills. Research suggests that there are three
types of trust i.e., calculus-based, knowledge-based, and
identification-based; and that they build up sequentially, one
building on the other.
(c
The level of real trust between two parties is directly related to

how fine they know each other. That it typically takes years to
build stage three trust is not based on immutable law, only on the
emblematic serendipitous way things have been done.
Cultivating trust should be a mindful relationship development
strategy – with managed objectives, performance metrics, and
progression monitoring. If trust has to be developed first, then that 351

is the first job at hand not the sheltered (if you are a supplier) of a Notes
S
sensitive development contract. ___________________
Trust reduces transaction costs as there is a smaller amount ___________________
necessity to set up expensive control mechanisms. Lower costs in
___________________
turn increase the probability to continue the relationship in future
and therefore, augment the commitment to the relationship. ___________________
___________________
PE
Building Trust in Relationships
___________________
In the global competitive environment, enterprises can only live on
___________________
in the long-term by permanently improving their business. They
___________________
have limited resources and they face very harsh conditions,
therefore, they can notably improve their business results, if they ___________________
improve the organization of their work. The central element of ___________________
organizing (especially all relations in the organizations) is trust
between all organizational members in their work and activities in
all important areas and fields of business. This is especially
important for supply chain management, as an area of integrated
work in the frame of organizations. Supply chain management can
be defined as “managing the entire chain from raw material
)U
supply, manufacture, assembly and distribution to the end
customer”. One of the main attention based dilemmas in supply
chain management is how much of the supply chain should be
owned by each business. This is called the extent of vertical
integration. But in the contemporary business environment
vertical integrations alone is not enough.
Assuring trust in SC/SCM is rational (and needed) to be
researched from the professional and political viewpoint – they
define to a high extent the characteristics and possible level of
reaching trust in an organization. The professional perspective is
focused on the needs for a requisitely holistic definition of the basic
characteristics of trust from the perspective of content and
methodology. The political perspective arises from the need for
understanding interests, which reflect the starting points and
(c
assure circumstances for implementation of trust in the

organization.
The following are some of the steps of building trust in
relationship:
1. Be open: It is very important in a relationship to be as open
and honest as possible.
352
2. Communication: Communication forms the centre – an
Notes
S
integral part of building trust and sustaining a relationship.
___________________
Communication does not involve one person doing the entire
___________________ talking – that too only surface talk about trends and gossip.
___________________ Communicating successfully involves both partners
contributing their fair share to the conversation and listening
___________________
when the other talks. It involves laying your cards on the desk
___________________ and telling it like it is, talking about your deeper strategic
PE
___________________ actions. It means being clear-cut about your needs and
expectations.
___________________
___________________
3. Forgiveness: Building trust in a relationship too involves
being able to forgive your partner for the hurt he/she may have
___________________
caused you in the past. If one can’t do that and insist on
___________________ clinging to petty problems or keep raking up old issues, the
relationship will not exist successfully. If you decide to carry
on in a relationship despite the hurt your partner may have
inflicted on you in the past and would like to work on
rebuilding the trust, you have to be willing to swab the slate
clean and start over.
4. Empathize: When problems come up or complicated
)U
situations arise, as they are bound to, it is important to show
concern for your partner’s feelings and be responsive to their
needs. Even if you didn’t agree with the course of action and
he/she didn’t take your advice, support him in his time of
despair. If you recognize his deepest desires and identify with
his interests, he is more inclined to trust you with his feelings.
If you throw them reverse in his face, ridicule him or rub it in
when he’s stumbled and fallen, he will not be disposed to trust
you.
5. Maintain positive feelings: If your channel partner has
never given you reason to doubt him, then doesn’t. What’s that
line about someone not being guilty if not proven otherwise? If
you’re always mistrustful and doubting his motives, jealous
(c
and quick to jump to conclusions (often the wrong ones), it will

be very difficult to build trust. Treat your partner just the way
you would want to be treated – with respect.
Building trust in a relationship doesn’t approach with a snap of the
fingers. It takes hard work and commitment, but once you have it
and work to keep it alive, you will harvest the fruits of it.
353
Check Your Progress Notes
S
1. Performance ………………… is the on-going process ___________________

between various levels of an organisation departmental
___________________
structure and its partners, where information is
___________________
exchanged concerning the performance expected, and
the performance exhibited. ___________________
PE
2. Performance ……………… is a crucial part of evaluation ___________________
and control and provides base to performance feedback. ___________________
___________________
Summary ___________________
The Relationship management focuses on improving operations ___________________
and supply chain performance by eliciting the cooperation of other
firms. Underlying the challenge is the question; how best can trust
between buyer and supplier be institutionalized, especially as trust
is most susceptible to break down.
Trust is developed by doing things jointly and in an aligned fashion
over a period of time. There should be no major surprises.
)U
Surprises create a poor relationship. If this happens within any
link of the supply chain, it can be disastrous for all other supply
chain members. With the stakes so high, failure is unacceptable.
This is reflected with the progressive increase in the number of
companies putting an emphasis on relationship management.
Organizations perform a series of value-adding activities working
together by recognizing the interdependency and need of
cooperation, to provide benefits to both parties. These include cost
reduction, improved quality, reduced time to market, and the
leveraging of supplier technology.
The most common and most basic type of relationship is "Initial
Relationship." Virtually, all buying firms will have Initial
relationships.
(c
Supplier relationship management is a wide-ranging approach to

managing an enterprise's interactions with the organizations that
supply the goods and services it uses, thus, include multi
determination of goals. The goal of Supplier Relationship
Management (SRM) is to streamline and make further effective
the processes between an enterprise and its suppliers just as
354 Customer Relationship Management (CRM) is intended to

Notes streamline and make more effective the processes among an
S
___________________ enterprise and its customers.
___________________ Performance feedback is the on-going process between various
___________________ levels of an organisation departmental structure and its partners,
where information is exchanged concerning the performance
___________________
expected and the performance exhibited. Constructive feedback
___________________ can admire good performance or correct poor performance and
PE
___________________ should always be tied to the performance standards.
___________________ Cultivating trust should be a mindful relationship development

___________________
strategy – with managed objectives, performance metrics, and
progression monitoring. Trust in SC/SCM is rational to be
___________________
researched from the professional and political viewpoint – they
___________________ define to a high extent the characteristics and possible level of
reaching trusts in an organization. The professional perspective is
focused on the needs for a requisitely holistic definition of the basic
characteristics of trust from the perspective of content and
methodology. The political perspective arises from the need for
understanding interests, which reflect the starting points and
assure circumstances for implementation of trust in the
)U
organization.
Lesson End Activity

“Relationship management focuses on improving operations and
supply chain performance by eliciting the cooperation of other
firms.” Explain the statement with some practical example related
to consumer durable industry.
Keywords
Trust: An essential antecedent of commitment that diminishes the
perceived risk and vulnerability in a relationship and thus, leads
to a superior commitment to the relationship.
(c
Relational Assets: Relational market-based assets are outcomes

of the relationship between a firm and its key external
stakeholders, including distributors, retailers, end-customers,
other strategic partners, community groups, and even
governmental agencies.
355
Intellectual Assets: Intellectual market-based assets are the
Notes
S
types of knowledge a firm possesses about the environment, such
as the emerging and potential state of market conditions, and the ___________________
entities in it such as competitors, customers, channels and ___________________
suppliers.
___________________
Behaviour Substitution: It refers to a phenomenon where
___________________
activities that do not lead to goal accomplishment are substituted
___________________
PE
for activities that do lead to goal accomplishment.
___________________
Internal Supply Chain Management (ISCM): All processes
that is internal to the firm. ___________________
Supplier Relationship Management (SRM): All processes that ___________________
focus on the interface between the firm and its suppliers. ___________________
___________________
1. Describe the importance of developing trust in Supply Chain
Management Relationship.
2. What is the classification of SCM processes based on the focus
of the processes?
)U
3. Explain how multidimensional goals help the organisation.
4. What are the advantages of collaborative relations?
5. Why there is need for evaluating the managerial performance?
Further Readings
Books
Coyle, Bardi and Langley, The Management of Business Logistics,
A Supply Chain Perspective, Thomson South-Western, 2003.
Gattorna, J., Gower, Handbook of Supply Chain Management,
2003.
Lambert, D. and Stock, J., Strategic Logistics Management, Irwin,
(c
1993.
Upendra Kachru, Exploring the Supply Chain – Theory and
Practice, Excel Books, New Delhi.
Regi Ismail, Logistics Management, Excel Books, New Delhi, 2003.
356
Web Readings
Notes
http://www.psiplanner.com/supply-chain-trust.html
S
___________________
http://scm.ncsu.edu/scm-articles/article/managing-relationships-in-
___________________
the-supply-chain
___________________
http://supplyperformance.wordpress.com/2011/01/11/supply-chain-
___________________ relationships/
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
UNIT 23: Information Technology Framework
Unit 23
357
Notes
S
Information Technology
___________________
___________________
Framework ___________________
___________________
Objectives ___________________
PE
___________________
topics:
___________________
\ Information Functionality – The Supply Chain
\ Comprehensive Information System Integration ___________________
\ Communication Technology ___________________
___________________
Introduction
The information technology wave has created new ways to conduct
business in this millennium. Typewriters have largely been
replaced by word processors. Electronic mail has made it easy to
transmit textual messages (possibly containing embedded picture
)U
and sound files) worldwide, using computers, cellular telephones,
and specially equipped televisions via telephone, satellite, and
cable television networks. Office automation has made the concept
of a "paperless office" become a reality. Workstations, printers,
database systems, and other tools are now linked by means of a
Local Area Network (LAN).
While today's Web is significantly more compelling than it was just

a decade ago, yet in many ways, we're still in the "horse and
buggy" era of the Internet. In 2004, $184 billion worth of retail
spending was conducted on the Web.
The Internet Generation – those born since 1994 – will become

tomorrow's knowledge workers and leaders of industry and
government – the first generation for whom the Internet is as
(c
ubiquitous as the television was for baby boomers. Technology will

enrich their learning experiences, and create connected learning
communities where teachers, parents, students, public libraries
and organizations can work together. We'll also see a generation
for whom the Internet is an everyday means of communicating,
making new friends, shopping and being entertained.
358
Information Functionality – The Supply Chain
Notes
S
Activity
Information is one of the greatest facilitators in supply chain
___________________
Conduct a research and
discuss a case where management. Supply Chain information is a critical component of
___________________
“Logistics system a firm's ability to respond rapidly to the end consumer demand in
planning/coordination
___________________
components form the today's highly competitive marketplace. Timely and accurate
information system backbone
for
___________________
manufacturers and information is also critical for three reasons:
merchandisers.”
___________________
Information on order status, product availability, delivery
PE
z
___________________ schedule, and invoices is perceived by customers as a
___________________ necessary element of total customer service;
___________________ z Information can reduce inventory by minimizing demand
___________________ uncertainty; and
___________________ z Information increases flexibility with regard to how, when,
and where resources may be utilized for strategic advantage.
Information integrates supply chain activities by building on four

levels of functionality:
z Transaction,
)U
z Management control,
z Decision analysis, and
z Strategic planning systems.
The schematic arrangement, shown as Figure 23.1, identifies the

level and identifies major decision areas associated at each level.
Strategic Planning
D evelopm e nt of C apabilitie s
S cann ing for O pportun ities
C ustom er Service A nalysis
Decision Analysis
Vehicle R ou tin g and Sc hedu ling

Inv ento ry Le vels & M a nage m ent M a na gem ent Ce ntral
N etw o rk /fac ility Lo ca tion pla nning
C us tom er Serv ic e M ea su rem ent
Prod uctivity M ea surem ent
Q uality M ea surem ent
Exc eption R e porting
(c
Transaction Syste m s
O rd er Entry
Inv ento ry A ssignm e nt
O rd er Selection
Sh ipp ing
Pricing & in voicing
C ustom er R esp ons e/Se rvice
Source: Upendra Kachru (2010). “Exploring the Supply Chain”. Excel Books.
Figure 23.1: Information Functionality

Transaction 359
Notes
S
Transaction activities include order entry, inventory assignment,
order selection, shipping, pricing, invoicing and customer inquiry. ___________________
The customer order performance cycle order starts with an entry ___________________
transaction on the receipt customer order. This initiates the next
___________________
transaction i.e. assign inventory to the order. A third transaction is
___________________
then generated to direct the material handlers to select the order.
This is followed by a transaction directing the movement, loading, ___________________
PE
and delivery of the order. The final transaction prints or transmits ___________________
the invoice for payment. Thus, the customer order performance
___________________
cycle is completed through a series of information system
transactions. The process also enables order status information to ___________________
be available to customers as and when they desire such ___________________

information.
___________________
The transaction system is characterized by formalized rules, inter-
functional communications, a large volume of transactions, and an
operational day-to-day focus. Because of the large number of
system users, heavy communication demands, high transaction
volume, and significant software complexity transaction system
costs can be relatively high. In the transactions system, the major
)U
emphasis is on information system efficiency. However, as the
processes are highly structured, the system costs are relatively
well-defined and benefits or returns can be easily computed.
Management Control
Management Control is characterized by an evaluative, tactical,
intermediate-term focus that evaluates past performance and
identifies alternatives. Information on common performance
measures includes financial, customer service, productivity, and
quality indicators.
For example, some measures could be: transportation and
warehousing cost per kilogram (cost measure), inventory turnover
(asset measure), order fill rate (customer service measure), cases
(c
per labour hour (productivity measure), and customer perception

(quality measure). While some management control measures,
such as cost, are very well-defined, other measures such as
customer service are less specific.
The Supply Chain Information System (SCIS) should be proactive
and capable of predicting future issues that need management
attention.
360
It should have the capability for measurement of competitive
Notes
S
capability and addition of potential improvement areas. This is
___________________
accomplished through exception reporting as information is being
___________________ processed. Information provided through exception reporting is
___________________ often useful to identify potential customer or order problems,
inventory shortages on the basis of forecasted requirements and
___________________
anticipated receipts, or a firm's ability to leverage price etc.
___________________
PE
___________________
Decision Analysis
___________________ This focuses on decision applications to identify, evaluate, and

compare logistics strategic and tactical alternatives for managerial
___________________
decisions. There are a number of analytical tools that are
___________________ commonly available in most supply chain application packages.
___________________ Some of the common ones include inventory planning and
management, forecasting, vendor scheduling, vehicle routing, and
cost-benefit analysis of operational trade-offs and arrangements.
Similar to the management control, decision analysis is
characterized by a tactical, evaluative focus. However, unlike
management control, decision analysis focuses on evaluating
future tactical alternatives.
)U
Decision analysis SCIS emphasis shifts more to effectiveness
(identifying profitable versus unprofitable accounts) rather than
efficiency (faster processing or increased transaction volume while
utilizing fewer staff resources). To do so effectively, the SCIS needs
to be relatively unstructured and flexible to allow consideration of
a wide range of options.
Newer SCIS applications show great potential in providing
competitive advantage: using these applications enterprises are
re-engineering their supply chain procedures to reduce the number
of cycles and sequential activities.
Strategic Planning
As is apparent from the title, the focus is on information that
(c
supports the ability of the organization to develop and refine

supply chain strategy. These decisions are less structured than the
other areas, but have a long-term focus.
The SCIS strategic planning level information must reflect lower-
level data collection and convert this into a wide range of business
planning and decision-making information. This information can
then be used in models that assist in evaluating the probabilities
and payoffs of various strategies. Strategic planning ability to 361

assess customer/product profitability, segment contribution, or Notes
S
alliance synergies can have a major impact on enterprise ___________________
profitability and competitiveness.
___________________
Traditionally, information flow was used to improve transaction
___________________
system efficiency. While this has offered returns in terms of speed
and lower operating costs, expected benefits in terms of cost ___________________
reductions are diminishing as competitors develop their ___________________
PE
competencies. With increasing competitiveness, the area in SCIS ___________________
applications that has the maximum potential for providing major
___________________
savings is shifting focus on the management control, decision
analysis, and strategic planning components. ___________________
___________________
Logistics Information System Architecture
___________________
Logistics information systems combine hardware and software to
manage, control, and measure the logistics activities. Hardware
includes computers, input/output devices, and storage media.
Software includes system and application programs used for
processing transactions, management control, decision analysis,
and strategic planning. The architecture includes both the
)U
information base to maintain the data warehouse and the
execution components. The information base contains purchase
orders, inventory status, and customer orders. The data warehouse
contains information describing the past activity levels and the
current status, and is the basis for planning future requirements.
Planning and coordination include the activities necessary to

schedule procurement, production, and logistics resource allocation
throughout the enterprise. Specific components include definition
of strategic objectives, rationalization of capacity constraints, and
determination of logistics, manufacturing, and procurement
requirements.
Operations include the transaction activities necessary to manage

and process orders, operate distribution facilities, schedule
(c
transportation, and integrate procurement resources. This process

is completed for both customer and enterprise replenishment
orders.
Customer orders reflect demands placed by enterprise customers.

Replenishment orders control finished good movement between
manufacturing and distribution facilities.
362 Planning and Coordination

Notes
S
Logistics system planning/coordination components form the
___________________
information system backbone for manufacturers and
___________________ merchandisers. These components define core activities that guide
___________________ enterprise resource allocation and performance from procurement
to product delivery. The specific components are:
___________________
1. Strategic Objectives: Primary information drivers for many
___________________
PE
enterprises are strategic objectives that define marketing and
___________________ financial goals. These strategic objectives are typically
___________________ developed for a multiyear planning horizon that often includes
quarterly updates. Marketing's strategic objectives define
___________________
target markets, products, marketing mix plans, and the role of
___________________ logistics value-added activities such as service levels or
___________________ capabilities. The objectives include customer base, breadth of
products and services, planned promotions, and desired
performance levels. Marketing goals are the customer service
policies and objectives that define logistics activity and
performance targets. The performance targets include service
availability, capability, and the quality elements. Financial
strategic objectives define revenue, sales and production
levels, and corresponding expense, as well as capital and
)U
human resource constraints.
The combination of marketing and financial objectives defines
the markets, products, services, and activity levels that
logistics managers must accommodate during the planning
horizon. Specific goals include projected annual or quarterly
activity levels such as shipments, dollar volume, and total
cases. Specific events that must be considered include product
promotions, new-product introductions, market rollouts, and
acquisitions. Ideally, the marketing and financial plans should
be integrated and consistent. Inconsistencies will result in
poor service, excess inventory, or failure to meet financial
goals.
The combination of marketing and financial strategic
(c
objectives provides direction for other enterprise plans. While

the process of establishing strategic objectives is, by nature,
unstructured and wide ranging, it must develop and
communicate a plan detailed enough to be operationalized.
2. Capacity Constraints: Capacity constraints and logistics,
manufacturing, and procurement requirements evolve from
the strategic objectives. Internal and external manufacturing,
warehousing, and transportation resources determine capacity 363

constraints. Using activity levels defined by the strategic Notes
S
objectives, capacity constraints identify material bottlenecks ___________________
and effectively manage resources to meet market demands.
___________________
For each product, capacity constraints determine the "where,"
"when," and "how much" for production, storage, and ___________________
movement. The constraints consider aggregate production and ___________________

throughput limitations such as annual or monthly capacity.
___________________
PE
Capacity problems can be resolved by resource acquisition, ___________________
speculation, or postponement of production or delivery.
___________________
Capacity adjustments can be made by acquisition or alliances
such as contract manufacturing or facility leasing. Speculation ___________________
reduces bottlenecks by anticipating production capacity ___________________
requirements through prior scheduling or contract
___________________
manufacturing. Postponement delays production and shipment
until specific requirements are known and capacity can be
allocated. It may be necessary to offer customer incentives
such as discounts or allowances in order to postpone delivery.
The capacity constraints introduce the time dimension into the
enterprise's strategic objectives by considering facility,
financial, and human resource limitations. These constraints
)U
have a major influence on logistics, manufacturing, and
procurement schedules.
3. Logistics Requirements: Logistics requirements coordinate
the facility, equipment, labour, and inventory resources
necessary to accomplish the logistics mission.
For example, the logistics requirement component schedules
shipments of finished product from manufacturing plants to
distribution centres and retailers.
The shipment quantity is calculated as the difference between
customer requirements and inventory level. Logistics
requirements are often implemented using Distribution
Requirements Planning (DRP) as an inventory management
and process control tool. Future requirements are based on
(c
forecasts, customer orders, and promotions. Forecasts are

based on sales and marketing input in conjunction with
historical activity levels. Customer orders include current
orders, future committed orders, and contracts. Promotional
activity is particularly important when planning logistics
requirements, since it often represents a large percentage of
total volume and has a large impact on capacity.
364
Current inventory status is product available to ship.
Notes
S
Specifically, for each planning period (e.g., weekly or monthly),
___________________
the sum of forecast plus future customer orders plus
___________________ promotional volume represents period demand. It is not easy
___________________ to determine the percentage of the forecasted volume that is
accounted for by the known customer orders, so some
___________________
judgment must be made. Typically, period demand is actually
___________________ a combination of the three, since current forecasts may
PE
___________________ incorporate some future orders and promotional volume. When
determining period demand, it is important that the overlap
___________________
between forecast, future customer orders, and promotions be
___________________
considered. Period logistics requirements then equal period
___________________ demand less inventory-on-hand less planned receipts. Using
___________________ this form, each period would ideally end with zero inventories
available so that planned receipts would exactly equal period
demand. While perfect coordination of demand and supply is
ideal from an inventory management perspective, it may not
be the best strategy for the firm.
4. Manufacturing Requirements: Manufacturing
requirements schedule production resources and attempt to
)U
resolve day-to-day capacity bottlenecks within the materials
management system. Primary bottlenecks result from raw
material shortages or daily capacity limitations.
Manufacturing requirements determine the Master Production
Schedule (MPS) and Manufacturing Requirements Plan
(MRP). The MPS defines weekly or daily production and
machine schedules. Given the MPS, the MRP coordinates the
purchase and arrival of materials and components to support
the desired manufacturing plan. Although this discussion
presents logistics requirements and manufacturing
requirements serially, they actually must operate in parallel.
This is particularly true for enterprises utilizing demand flow
or market paced manufacturing strategies. These strategies
coordinate production schedules directly with market demands
(c
or orders and reduce the need to forecast or plan. In a sense,

demand flow or market-paced manufacturing strategies design
all production as "make to order" and thus totally integrate
logistics and manufacturing requirements.
5. Procurement Requirements: Procurement requirements
schedule material releases, shipments, and receipts.
Procurement requirements build on capacity constraints, 365

logistics requirements, and manufacturing requirements to Notes
S
Activity
demonstrate long-term material requirements and release Make___________________
a research on the usage
schedules. The requirement and release schedule is then used of Radio Frequency Data
___________________
Communication (RFDC)
for purchasing negotiation and contracting. technology.
___________________
Fill in the blanks:
___________________
PE
1. The ………………. includes both the information base to ___________________
maintain the data warehouse and the execution
___________________
components.
___________________
2. ………………. orders control finished good movement
between manufacturing and distribution facilities. ___________________
___________________
Comprehensive Information System Integration

A comprehensive information system initiates, monitors, assists in
decision making, and reports on activities required to complete
logistics operations and planning. There are many components
that must be combined to form an integrated information system,
)U
and there are many ways to organize and illustrate the combined
components. The major system components include: (1) Enterprise
Resource Planning (ERP) or legacy systems, (2) communication
systems, (3) execution systems, and (4) planning systems.
ERP or Legacy Systems

The ERP or legacy systems are the backbone of most firms' supply
chain information systems. This backbone maintains current and
historical data and processes transactions to initiate and track
performance. Legacy systems refer to the mainframe applications
that were developed prior to 1990 to automate transactions such as
order entry, order processing, warehouse operations, inventory
management, transportation, and related financial transactions.
For example, systems related to customer orders were often

(c
labelled Order Management Systems (OMS) since they managed

the order fulfilment process. In addition to order information,
legacy systems typically maintain information regarding
customers, products, inventory status, and facility operations.
In many cases, these legacy systems represent independently
developed software modules that lack integration and consistency;
366 consequently, problems with data reliability and integrity abound.

Notes These problems are further complicated by the fact that
S
___________________ multidivisional firms often use different legacy systems for each
___________________
division or country.
___________________ Communication Systems

___________________
The communication module facilitates information flow between
___________________ functional areas within the firm and between supply chain
PE
___________________ partners. The major communication components required for
supply chain operations. Logistics information consists of real time
___________________
data on company operations inbound material flows, production
___________________ status, product inventories, customer shipments and incoming
___________________ orders.
___________________ From an external perspective, firms need to make order, shipment,
and billing information available to suppliers, financial
institutions, transportation carriers and customers. Internal
operating units must be able to share and exchange information on
production schedule and status. Typical supply chain
communication technologies include bar coding, scanning,
Electronic Data Interchange (EDI), satellite communication, radio
)U
frequency and the Internet.
Execution Systems
Enterprise execution systems work in conjunction with the firm's
ERP to provide specific functionality to support logistics
operations. While some ERP systems include reasonable logistics
functionality, many lack the capabilities to facilitate contemporary
warehouse and transportation operations. Most execution systems
are "bolted-on" or integrated into the ERP system to facilitate data
exchange. In addition to facilitating standard warehouse
management functionality such as receiving, storage, shipping,
and warehouse automation, Warehouse Management Systems
(WMS) typically include management reporting, support for
value-added services, and decision support capability.
(c
Planning Systems
While the ERP system processes transactions to execute specific
logistics activities, transaction systems in general don't evaluate
alternative strategies or assist with decision making. Supply chain
planning systems, now being termed Advanced Planning and
Scheduling (APS) systems, are designed to assist in evaluating 367

supply chain alternatives and advise in supply chain decision Notes
S
making. Sophisticated supply chain planning systems are ___________________
becoming increasingly common to allow for consideration of
___________________
complex alternatives under tight decision time constraints. Typical
supply chain planning applications include production scheduling, ___________________
inventory resource planning and transportation planning. Using ___________________

the historical and current data maintained in the data warehouse,
___________________
PE
APS software systematically identifies and evaluates alternative
___________________
courses of action and recommends a near optimal solution within
the constraints imposed. Typical constraints involve production, ___________________
facility, transportation, inventory, or raw material limitations. ___________________
Planning systems can generally be grouped into two categories, ___________________
strategic and tactical. Strategic planning systems are designed to
___________________
assist in analyses where there is a large number of alternatives
and data outside the range of current history is required.
Examples of strategic planning applications include supply chain
network design and structural analyses such as which combination
of supplier, production, and distribution facilities should be used
and how product should flow between existing or potential
facilities.
)U
Tactical planning focuses on operational issues as constrained by
short-term resource constraints such as production, facility, or
vehicle capacity. The information support for tactical planning is
typically available from a firm's data warehouse. Tactical planning
processes evaluate customer requirements and identify an
operational combination of production, inventory, facilities, and
equipment utilization that can be applied within capacity
constraints. The result is an action plan to guide short-term
operations.
Communication Technology
Information technology is also critical for information sharing to
facilitate logistics and supply chain planning and operations.
(c
Historically, coordination of logistics has been difficult since

logistics activities are often performed at locations distant from
information technology hardware. As a result, information was not
available at the location of essential work in terms of both time
and content. The past decade has witnessed remarkable advances
in logistical communication systems capability. EDI, the Internet,
368 Extensible Markup Language (XML), and satellite technology exist

Notes to facilitate communication between firms and facilities.
S
___________________
Electronic Data Interchange
___________________
While the phone, fax, and direct computer connection have enabled
___________________
information exchange in the past, EDI and the Internet are quickly
___________________
becoming the standards for effective, accurate, and low-cost
___________________ information exchange. EDI is defined as intercompany computer-
PE
___________________ to-computer exchange of business documents in standard formats
to facilitate high-volume transactions. It involves both the
___________________
capability and practice of communicating information between two
___________________ organizations electronically instead of via the traditional forms of
___________________ mail, courier, or even fax.
___________________ Direct EDI benefits include increased internal productivity,

improved channel relationships, increased external productivity,
increased ability to compete internationally, and decreased
operating cost. EDI improves productivity through faster
information transmission and reduced redundancy. Accuracy is
improved by reducing repetitive data entry and interpretation.
EDI impacts logistics operating cost through (I) reduced labour and
)U
material cost associated with printing, mailing, and handling
paper-based transactions; (2) reduced telephone, fax, and Telex;
and (3) reduced clerical cost. The graphics industry has found that
EDI can eliminate up to 90 per cent of paper-based systems, can
reduce receipt processing time by 50 per cent, and can save $8.00
per invoice document.
In another example, Texas Instruments reports EDI has reduced
shipping errors by 95 per cent, field inquiries by 60 per cent, data
entry resource requirements by 70 per cent, and global
procurement cycle time by 57 per cent.
Communication Standards
The most generally accepted communication standards are ANS
X.I 2 (American National Standards Committee X.12) and
(c
UN/EDIFACT (United Nations/Electronic Data Interchange for

Administration, Commerce and Transport). X.12 is promoted as
the U.S. standard; while EDIFACT is promoted by the United
Nations as more of a global standard. Each organization has
defined a structure for exchanging common data between supply
chain partners. Experts indicate that the most likely migration
path is to EDIFACT standards. The National Institute of 369

Standards and Technology (NIST) and automotive experts are Notes
S
further driving information integration by experimenting with ___________________
approaches to exchanging data for the entire business cycle. The
___________________
program, known as STEP (Standard for the Exchange of Product
Model Data), was designed for exchanging design and engineering ___________________
data between supply chain partners. STEP should allow users to ___________________
integrate business and technical systems data involving all
___________________
PE
elements of the business cycle including design, analysis,
___________________
manufacturing, sales, and service?
___________________
EDI Transaction Sets
___________________
Communication standards are implemented via transaction sets. ___________________
A transaction set provides a single common standard to facilitate
___________________
information interchange between partners in any industry and
country. For each industry, the transaction set defines the types of
document that can be transmitted. Documents cover common
logistics activities such as ordering, warehouse operations, and
transportation. The transaction set consists of a transaction code
(or ID) and is followed by the required data. The transaction code
indicates whether the electronic communication is a warehouse
)U
shipping order (code 940) or a warehouse stock transfer receipt
(code 944), for example. In addition to the transaction code, a
warehouse transaction contains warehouse number, item number,
and quantity.
Internet
The widespread availability of the Internet and standardized
interfaces offered through Internet browsers such as Netscape and
Internet Explorer has substantially expanded the opportunities
and capability to exchange information between firms of all sizes.
The Internet is quickly becoming the supply chain information
transmission tool of choice for forecasted requirements, orders,
inventory status, product updates, and shipment information.
(c
In conjunction with a PC and an Internet browser, the Internet of-

fers a standard approach for order entry, order status inquiry, and
shipment tracking. The Ohio State University survey predicts the
Internet will carry 20 per cent of customer orders by the year 2010.
The increasing availability of the Internet has also enabled the
development of the exchange portal, a communication medium that
has significant supply chain implications. An exchange portal is an
370 infomediary that facilitates horizontal and vertical information

Notes exchange between supply chain partners. An exchange portal of a
S
___________________ firm designed to facilitate communication between the firm's
___________________ customers and suppliers. The firm can provide information
regarding raw material requirements, product availability, or price
___________________
changes and allow the marketplace to react by placing bids or
___________________
orders based on the timeliest information. It is projected that
___________________ 60 per cent of Fortune 500 firms will have exchange portals by
PE
___________________ 2003 to facilitate communication with key customers and
suppliers. While a single firm site might provide good Internet
___________________
advertising, it does increase complexity, as all the partners have to
___________________
contend with multiple, unique interfaces resulting in high
___________________ transaction cost.
___________________
A second type of exchange portal is industry-based. It facilitates
communication between all supply chain partners within an
industry and can substantially reduce transaction costs. While the
information can be made available to all interested parties, it is
also possible to restrict information availability. There is
increasing fear that industry portal collaborations might increase
the potential of monopolistic practices and trade restraints. The
)U
Federal Trade Commission (FTC) can be expected to play an
increasing role in the evolution of the exchange portals,
particularly for B2B activities.
Extensible Markup Language

Extensible Markup Language (XML) is a flexible computer
language that facilitates information transfer between wide ranges
of applications and is readily interpretable by humans. It was
published in 1998 by the World Wide Web Consortium to facilitate
information transfer between systems, databases, and Web
browsers. Since EDI is very structured, the setup cost and required
expertise are relatively high, limiting applications to situations
involving high transaction volumes. XML is emerging as the
(c
information transfer medium between firms and service providers

that do not have transaction volumes to justify EDI. XML is
facilitating communication by breaking down many information
technology barriers that have constrained EDI adoption.
A basic XML message consists of three components: the actual

information being transmitted, data tags, and a DTD (Document
Type Definition) or schema. The data tag is a key feature as it 371

defines the data being transmitted. Notes
S
For example, in a shipment XML, the tag for address would be ___________________
"address" and might appear <address>123 Main St.</address>. ___________________
The tags tell computers what the data between the brackets are ___________________
and where the data should go in a database or Web page. The use ___________________
of common terms and the lack of sequencing requirements make
___________________
PE
XML transactions much easier to use than EDI. The XML DTD or
schema tells the computer what document format to refer to when ___________________
decoding a message. A DTD is essentially a template that maps out ___________________
a standard form, its tags, and their relation to a database.
___________________
In situations characterized by low volume, XML is superior to EDI
___________________
for three reasons. First, it is not expensive to install. It is easy to
___________________
design an application and requires much less time to implement.
Second, XML is easy to maintain because it can be easily converted
to HTML (HyperText Markup Language), the language of Web
browsers. This makes it much easier to modify and share data
between applications. Finally, XML is more flexible, allowing for
broad applications and quick definition and extension of standards.
One of the major challenges for the growth of XML is the definition
)U
of industry standards. Launched in 1998, Rosettanet, a consortium
of over 60 companies, has begun developing common definitions for
business practices and products as well as standards for using
XML to transmit information through the supply chain. Such a
common vocabulary is necessary to enable supply chain partic-
ipants to communicate with each other and have the confidence
that the information exchange is secure.
Satellite Technology
Satellite technology allows communication across a wide
geographic area such as a region or even the world. The technology
is similar to microwave dishes used for home television in areas
outside the reach of cable. Satellite communication provides a fast
(c
and high-volume channel for information movement around the

globe. Schneider National, a nationwide truckload carrier, uses
communication dishes mounted on its trucks to enable two-way
communication between drivers and their dispatchers. Such real
time interaction provides up-to-date information regarding location
and delivery information and allows dispatchers to redirect trucks
based on need or congestion. Retail chains also use satellite
372 communication to quickly transmit sales information back to

Notes headquarters. Wal Mart uses daily sales figures to drive store
S
___________________ replenishment and to provide input to marketing regarding local
sales patterns.
___________________
___________________ Radio Frequency Exchange

___________________
Radio Frequency Data Communication (RFDC) technology is used
___________________ within relatively small areas, such as distribution centres, to
PE
___________________ facilitate two-way information exchange. A major application is
real time communication with mobile operators such as forklift
___________________
drivers and order selectors. RFDC allows drivers to have
___________________ instructions and priorities updated on a real time basis rather than
___________________ using a hard copy of instructions printed hours earlier. Real time
instructions to guide work flow offer increased flexibility and
___________________
responsiveness and have the potential to improve service using
fewer resources.
Image Processing
Image processing applications rely upon facsimile (fax) and optical-
scanning technology to transmit and store freight bill information,
as well as other supporting documents such as proof of delivery
)U
receipts or bills of lading. The rationale for this new service is that
timely shipment information is almost as important to the
customer as delivering the goods on time. As freight is delivered to
customers, support documentation is sent to image processing
locations, electronically scanned, and logged into the system.
Bar Coding and Scanning

Auto Identification (ID) systems such as bar coding and electronic
scanning were developed to facilitate logistics information
collection and exchange. Typical applications include tracking
receipts at warehouses and retail sales. These ID systems require
significant capital investment for users, but necessarily replace
former paper-based information collection and exchange processes
(c
that were error-prone and time-consuming. In fact, increased

domestic and international competition is driving shippers,
carriers, warehouses, wholesalers, and retailers to develop and
utilize Auto ED capability to compete in today's marketplace.
Auto ID allows supply chain members to quickly track and
communicate movement details with a low probability of error, so
it is fast becoming a fundamental service requirement for freight 373

tracking by carriers. Both consumers and B2B customers expect to Notes
S
be able to track the progress of their shipment using the Web- ___________________
based system offered by carriers such as United Parcel Service and
___________________
FedEx.
___________________
Enterprise Resource Planning (ERP) ___________________
Enterprise Resource Planning (ERP) and enterprise execution ___________________
PE
systems are the major software components of logistics information
___________________
systems. ERP provides the database and the transaction capability
to initiate, track, monitor, and report on customer and ___________________
replenishment orders. ERP systems provide firms with information ___________________

consistency, economies of scale, and integration. ERP system ___________________
design includes the central database and application modules to
___________________
facilitate supply chain, financial and human resource
management. Supply chain system design includes components for
planning/coordination, operations and inventory deployment. The
planning/coordination component manages firm and supply chain
resources including production, storage, and transportation
resources. The operations component controls transaction
processing to initiate, manage, fulfil, and ship both customer and
)U
replenishment orders. Inventory deployment manages firm and
increasingly supply chain inventory resources.
Enterprise execution systems provide the interface between the
ERP and the day-to-day operations with the customer,
transportation, and the warehouse. Customer relationship
management systems offer insight regarding the firm's activity
level and performance with key customers. Transportation
management systems initiate shipments and record movements to
monitor the firm's transportation performance and cost.
Warehouse management systems initiate warehouse activities,
control material handling equipment, monitor labour performance,
and report warehouse performance levels and cost.
Check Your Progress

(c

1. The supply chain information system is not the
backbone of modem logistics operations.
2. Customer orders reflect demands placed by enterprise
customers.
374
Summary
Notes
S
Supply Chain information is a critical component of a firm's ability
___________________
to respond rapidly to the end consumer demand in today's highly
___________________ competitive marketplace. The transaction system is characterized
___________________ by formalized rules, inter-functional communications, a large
___________________
volume of transactions, and an operational day-to-day focus.
___________________ Management Control is characterized by an evaluative, tactical,
PE
intermediate-term focus that evaluates past performance and
___________________
identifies alternatives. Logistics information systems combine
___________________ hardware and software to manage, control, and measure the
___________________ logistics activities.
___________________ Planning and coordination include the activities necessary to
___________________ schedule procurement, production, and logistics resource allocation
throughout the enterprise. A comprehensive information system
initiates, monitors, assists in decision making, and reports on
activities required to complete logistics operations and planning.
Lesson End Activity

Prepare a project on “Information integrates supply chain
)U
activities by building on four levels of functionality.”
Keywords
Information: Information is stimuli that have meaning in some
context for its receiver.
Transaction Activities: It includes order entry, inventory
assignment, order selection, shipping, pricing, invoicing, and
customer inquiry.
Management Control: It is characterized by an evaluative,
tactical, intermediate-term focus that evaluates past performance
and identifies alternatives.
Decision Analysis: This focuses on decision applications to
(c
identify, evaluate, and compare logistics strategic and tactical

alternatives for managerial decisions.
Strategic Planning: Strategic planning is an organization's
process of defining its strategy, or direction, and making decisions
on allocating its resources to pursue this strategy.
375
Logistics Information Systems: Logistic information system is
Notes
S
nothing but a part of Management Information System to manage,
control and measure the logistical activities. ___________________
___________________
Questions for Discussion ___________________
1. Highlight the principles of Logistics Information. ___________________
2. Define ERP or Legacy Systems. ___________________
PE
3. What is Execution Systems? ___________________
___________________
4. Throw some light on the Planning Systems.
___________________
5. What do you understand by Electronic Data Interchange?
___________________
6. Write brief note on Internet.
___________________
7. Define Extensible Markup Language (XML).
Further Readings
Books
)U
Education.
Web Readings
http://www.sde.ct.gov/sde/lib/sde/pdf/Curriculum/itf.pdf
http://ideas.repec.org/a/osi/bulimm/v8y2008p141-151.html
http://el.gdcc.edu.cn/upload/3skjy/Note03LogisticsInformationSystem
s.pdf
(c
(c
)U
PE
S
UNIT 24: Supply Chain Logistics Administration
Unit 24
377
Notes
S
Supply Chain Logistics
___________________
___________________
Administration ___________________
___________________
Objectives ___________________
PE
___________________
topics:
___________________
\ Operational Performance
\ Financial Performance ___________________
\ Social Performance ___________________
___________________
Introduction
Logistics Function plays a very strategic role in achieving the twin
objectives of any firm i.e., Superior Customer Service and Cost
Reduction. The aim of Logistics Strategy should be to play a
proactive role for sustainable competitive advantage in a dynamic
business environment. The new competitive framework of Logistics
)U
as a service function includes: Responsiveness, Reliability,
Relationship and Rationalization. The basic driver of the Supply
Chain is the concept that for a single company to successfully
compete in a market where there is increasing demand from
customers, escalating competition, etc. – it has to seek partners
who are willing to share risks and rewards. It has to enter into
collaborative activities and work, on a reciprocal basis, so that it
may be able to show superior performance. Firms enter into inter-
firm integrative and collaborative arrangements through the
supply chain. The strategic role of the supply chain is in securing
higher performance through the linkages that would not be
possible by firms operating individually.
This means aligning the operational processes of a large number of
(c
firms into a single integrated supply chain system. It permits each

of the firms to compensate for their individual weaknesses and/or
resource constraints. They can do this by linking with other firms
that have offsetting strengths. Collectively, this allows all firms to
apply their resources toward areas that they see as important and
where they can contribute the most. These types of processes are
fostered through relationships management.
378
Operational Performance
Notes
S
Activity
Supply chain management views the operative dimensions such as
___________________
Study any case of supply
chain security with reference purchasing/supply organization as the integrating mechanism in
to ___________________
social performance of the the internal and external exchanges of the firm. Operations
organisation and prepare a
___________________
brief report on it. managers have to respond creatively to internal customers' need
___________________ on the one hand and maintain a mutually profitable relationship
with suppliers on the other. The internal exchange function of
___________________
PE
purchasing emphasizes the interlocking relationship between
___________________
input, throughput and output of an organization.
___________________
The external exchange relationship between purchasing and
___________________
supplier organizations is interactive in nature. In business
___________________ markets, both buyers and sellers are active in performing similar
___________________ tasks such as:
z To prepare specifications to requirement,
z Locate counterparts,
z Negotiate, and
z Attempt to control transactions.

)U
Marketing strategies of suppliers shape purchasing strategies of
buyers and vice-versa. Within the context of interactive buyer-
seller relationship, purchasing is more than buying as marketing is
more than selling.
Operative activities involve management and integration of

internal/external and upstream/downstream supply chain. If the
operational function is to contribute effectively to organizational
goals and strategies, its practitioners will have to become fully
integrated into the customer-employer-supplier chain, there are
three primary operative dimensions of SCM:
z Strategic procurement, i.e. aligning procurement tasks and

suppliers' performance with the corporate and business
strategies of the firm.
(c
z Supplier-base management, i.e. managing the structure and

culture of supplier relationship that is denominated in strategic
purchasing.
z Develop a lean supply organization by energizing

organizational teams through flexible structures and
responsive information systems.
379
Typically organizations operative dimensions include the following
Notes
S
activities:
___________________
z Get the basics right: Getting the basics right reduces the
time spent on intervening on an exception basis in day-to-day ___________________
activities. It also defuses complaints about efficiency and ___________________

responsiveness. If the everyday processes work well,
___________________
purchasing will have the time to take a more strategic
___________________
PE
approach.
___________________
z Use short-term cross-functional project teams: These
short-term initiatives can be effective in unfreezing existing ___________________
attitudes about how activity is carried out. A cross-functional ___________________

approach encourages thinking about issues further upstream,
___________________
such as material specification, strategic make/buy analysis,
___________________
etc.
z Develop the supporting organizational infrastructure:
Companies usually focus on five elements of organizational
support for strategic operations: leadership, organizational
structure, people development, performance measurement,
and information systems. Organizational changes typically
include the establishment of a corporate-wide purchasing
)U
leadership group. The organizational structure and decision
making are usually modified to permit them to build an
effective network. Other changes include the upgrading of the
skills of the organization, the establishment of relevant
performance measures, and the development of a centre-led
structure that includes regular cross-functional project teams.
Financial Performance
Evaluation of the financial performance, including the creation of
profit and loss statements, could be considered the overriding
measure of the appropriateness of supply chain configuration.
Financial evaluation should take into account the operational and
dynamic aspects in order to capture the detailed financial drivers
(c
and take account of the real-world operation of the supply chain.

Prominently the evaluation would be holistic rather than of partial
performance
Financial evaluation by assessing the impact on the profit and loss
account is far more influential as it captures the overall effect
rather than immediate local effects. Measuring financial impacts
can be difficult due to the need to capture a sufficient number of
380 the financial drivers within an enterprise. Measurement of

Notes financial impact at an enterprise level is uncommon and those
S
___________________ reported instances have been found of such measurement in a
supply chain context are at a more abstract level.
___________________
___________________ A comprehensive supply chain design methodology needs the

appropriate scope and detail to be meaningful for implementation
___________________
across the supply chain as well as evaluation to assess the
___________________ performance of the design. Even as there are a number of supply
PE
___________________ chain metrics that can be used, the financial performance is the
most powerful; financial measures take a global, all inclusive view
___________________
of the business rather than selective, localised measurement.
___________________
Balanced scorecards can be employed to provide assessment
___________________ through finance, customers, processes and learning and growth
___________________ areas. However, taking a hierarchical perspective the finance is at
the top resulting from market performance facilitated by the
business processes and sustained by learning and growth. It is
argued here that whilst operational/business process measures are
vital they should be complemented by financial assessment.
The financial perspective answers the question: "To succeed
financially, how should we appear to our shareholders?" and is
)U
typically related to profitability. Some measures are, for example,
the Return on Investment (ROI), Return on Capital Employed
(ROCE), and Economic Value Added (EVA), etc.
Asset Utilization
Related to collaboration is the concept of asset utilization. With
increasing financial, customer service and environmental
demands, many transportation companies have started gathering
equipment asset information through web portals, community
systems and location-tracking technologies. This search, though at
its early stages, is an effort to connect and run their equipment
networks more effectively. This focus has validity and is now being
practiced by some transportation companies.
(c
The future seems to indicate the successful implementation of this

concept. With increasing financial, customer service and
environmental demands, this has the potential to become an
enabler to manage the supply and demand of equipment. By
interchanging equipment with any transportation provider, on
demand, anywhere in the world, there will be optimization in the
use of enterprise resources while improving customer satisfaction.
As this fructifies, transport providers will offer higher value 381

end-to-end services, increase their appeal to customers and enjoy Notes
S
the multi-fold economic benefits from greater asset utilization. ___________________
___________________
Social Performance
___________________
Because of numerous instances of financial mismanagement
by major corporations, in 2002 the U.S. Congress passed the ___________________
Sattanes-Oxley Act (SOX). Although the focus of the law is on ___________________
PE
financial reporting by corporations to their shareholders, it became
___________________
apparent soon after its enactment that it also has important impli-
cations for logistics and supply chain management, especially with ___________________
respect to how performance is measured and reported. ___________________
___________________
Supply Chain Security
___________________
Supply chain security refers to efforts to enhance the security of
the supply chain, the transport and logistics system for the world's
cargo. It combines traditional practices of supply chain
management with the security requirements driven by threats
such as terrorism, piracy and theft. Some analysts have raised
concerns about supply chain security overreach.
)U
Typical supply chain security activities include:
z Credentialing of participants in the supply chain
z Screening and validating of the contents of cargo being

shipped
z Advance notification of the contents to the destination country
z Ensuring the security of cargo while in-transit via the use of

locks and tamper-proof seals
z Inspecting cargo on entry
International trade is one of the key drivers of global economic

growth. In today's globalised world, the cargo supply chains are
complex and involve a great number and variety of parties.
(c
Unfortunately, these supply chains are also vulnerable to

exploitations such as theft, pilferage and in the worst case
scenario, exploitation by terrorists to further their own ends.
Guarding against such scenarios is thus of vital importance as the
global trading system cannot afford the consequences of a
destructive attack.
382
To guard against such exploitations, the supply chain has to be
Notes
S
secured. Supply chain security can only be achieved by looking at
___________________
supply chains in total, and not by focusing on individual nodes and
___________________
links in isolation.
___________________
It is often said that a chain is only as strong as its weakest link.
___________________
Securing the supply chain involves the securing of every node and
___________________ link along the chain, creating a chain of responsibility that extends
PE
___________________ beyond that of each individual node and its links. The securing of
___________________ the supply chain must start with the safe and secure packing of
shipment and include measures that deter or provide alerts of any
___________________
tampering of the shipment as it progressively moves from the point
___________________
of packing to the final point of deconsolidation.
___________________
Several countries and international organisations have developed
or are developing programmes that encompass guidelines and best
practices for ensuring the security of the cargo, processes, and
personnel involved in every movement through the supply chain.
The following are some examples of supply chain security
programmes:
)U
z United States’ Customs-Trade Partnership Against Terrorism
(C-TPAT)
z European Union Authorised Economic Operator (AEO)

programme
z New Zealand's Secure Exports Scheme
z WCO Framework Of Standards To Secure And Facilitate

Global Trade
z ISO/PAS 28000, 28001
Check Your Progress

Fill in the blanks:
(c
1. ……………. refers to efforts to enhance the security of

the supply chain, the transport and logistics system for
the world's cargo.
2. ……………. is one of the key drivers of global economic
growth.
Summary 383
Notes
S
SRM reflects the need to integrate the entire supply chain - and to
___________________
do so in a way that preserves flexibility, opens its enterprise
infrastructure to the inventions, expertise and networks of others, ___________________
and lets them shed the bits of the supply chain that can be better ___________________
run by partners.
___________________
Supply chain management views the operative dimensions such as
___________________
PE
purchasing/supply organization as the integrating mechanism in
___________________
the internal and external exchanges of the firm. A comprehensive
supply chain design methodology needs the appropriate scope and ___________________
detail to be meaningful for implementation across the supply chain ___________________
as well as evaluation to assess the performance of the design.
___________________
Supply chain security refers to efforts to enhance the security of
the supply chain, the transport and logistics system for the world's ___________________
cargo.
Lesson End Activity

What is the basic inventory management techniques used in Fast
Moving Consumer Goods (FMCG) industry firms in Indian economy?
)U
Keywords
Financial Evaluation: Financial evaluation mainly focuses into
Money aspects of the project, and Rewards and financial
profitability to the investors.
Asset: A resource with economic value that an individual,
corporation or country owns or controls with the expectation that it
will provide future benefit.
Supply Chain Security: It refers to efforts to enhance the
security of the supply chain, the transport and logistics system for
the world's cargo.
(c

1. Discuss the operative dimensions of organisations.
2. Highlight the three primary operative dimensions of SCM.
3. Elucidate Asset Utilization.
4. What do you understand by Supply chain security?
384
Further Readings
Notes
S
___________________ Books
___________________ Jones, J.V. (1998). “Integrated Logistics Support Handbook.”
___________________
Special Reprint Ed., McGraw Hill.
___________________ Tompkins, J.A. and D.A. Harmelink (Editors) (1993). “The

Distribution Management Handbook.” McGraw Hill.
___________________
PE
Donald Waters (2003). “Logistics-An Introduction to SCM.”
___________________
Palgrave.
___________________
Bowersox, D.J. and D.J. Closs (1996). “Logistical Management: The
___________________
Integrated Supply Chain Process.” McGraw Hill.
___________________
Web Readings
___________________
http://www.adam-
europe.eu/prj/7095/prj/CourieL_WP2_Chapter2_final.pdf
http://www.freepatentsonline.com/article/Transportation-
Journal/112085360.html
http://www.scribd.com/doc/70832979/Hill-Supply-chain-logistics-
management
)U
http://www.iibms.org/pdf/Ebooks/Logistics%20and%20Retail.pdf
(c
UNIT 25: Case Study
Unit 25
385
Notes
S
Case Study
___________________
___________________
___________________
Objectives
___________________
PE
___________________
Case Study: Achieving Integration through Decentralisation
___________________
Since its founding in 1984, Cisco has always seemed to be able to
look a bit further over the horizon than its competitors. ___________________
It concentrated on networking when the rest of the world was
point-to-point. It specialized in the enhanced functionality of ___________________
routing when most people thought switches were all they'd ever
___________________
need. And it moved rapidly to put a large portion of its sales
operations online before most people thought this was practical.
As a result, Cisco now manages 75 per cent of its revenues
through its website: $25 million per day, $8 billion per year. This
is believed by many industry observers to be the largest electronic
commerce site in the world. Despite Cisco's indisputable record of
success, the journey hasn't always been an easy one. Growth was
one reason. By 1994, Cisco had rapidly outgrown its application
systems. "We were experiencing growth rates of more than 70 per
)U
cent per year," says Andy Starr, IS Manager.
Revenues had reached nearly $1 billion, but Cisco was still
operating on applications meant to support a company half that
size. To remedy the situation, Cisco embarked on an aggressive
ERP implementation using an Oracle database and applications.
In 1995, after only 9 months the company went live with a big
bang implementation-a complete switch of all worldwide
transactions systems. Five thousand orders in backlog were
converted in just one weekend. Peter Solvik, Cisco's CIO, says,
"The applications provided the architecture on which we could
very, very rapidly grow, adapt, and scale the company."
Acquisitions were another reason. In 5 years Cisco has acquired
27 companies. When acquiring a company, systems integration is
critical to support the 60 to 90-day closing period applied by Cisco.
The goal is to take orders for that company's products on Cisco's
information system the day the deal is closed. The acquired firm's
legacy systems are then replaced quickly. creating a common
(c
worldwide ordering environment. "We wouldn't have acquired

these companies if we didn't have the ability to integrate them
fluidly. They wouldn't provide value to our customers or our
shareholders," says Solvik. Cisco's ERP framework has grown
from a single server into three U.S.-based servers and one in the
Netherlands. This network of servers coordinates Cisco's
manufacturing and order fulfilment processes, providing
immediate response to requests and better availability of products
Contd…
386 to its customers. For example, an order loaded into the

Notes Amsterdam server is scheduled for delivery using the U.S.
S
Available-to-Promise (ATP) server. The ATP server schedules
___________________ according to the supply was said to be available by the U.S.
manufacturing server.
___________________
The customer order is then built and shipped from one of five
___________________ manufacturing sites and invoiced from the Amsterdam server. All
of these servers combined provide Cisco with four benefits:
___________________
increased reliability, reduced risk of server failure, enhanced
___________________ flexibility and scalability of the ERP system, and a reduction in
PE
lead times from 4 weeks to 1. Solvik states that Cisco's entire
___________________ Internet commerce initiative is based on a simple truth:
"customers prefer self-service." To achieve a higher degree of self-
___________________
service, Cisco was the first company to integrate its website with
___________________ an Oracle Applications ERP infrastructure. The Cisco Connection
Online (CCO) Internet site offers customers and suppliers global
___________________ communications with 49 pages of country- or region-specific
support services and product and contact information translated
___________________ into 14 different languages. It operates with dedicated server
links located in Australia, China, France, Hong Kong, Japan, the
Netherlands, and South Korea that support 200 offices in 54
countries around the world.
Within the CCO is the "internet Product Centre" where customers
can configure and place orders; look up pricing, lead times, and
order status; and access invoicing information. This has reduced
order entry cycle time from 1 week to less than 3 days. It has also
reduced order acknowledgment cycle time from 12 hours to 2
)U
hours, with the goal of achieving real time acknowledgment in the
next 6 months. Cisco has the unique ability to process billing in
multiple currencies and manage tax and regulatory issues in
every country where it conducts business, yet consolidate
financial performance based upon U.S. currency. "The CCO allows
the salesperson to focus on the strategic aspect of the
relationship," says Solvik, "and improves responsiveness to the
customer through automation of mundane tasks."
Thanks to the capabilities of its Oracle ERP infrastructure, Cisco
has been able to add outsourced manufacturing to its operations
over the last 4 years. "Over 50 per cent of the units shipped are
untouched by a Cisco factory or a Cisco employee," Solvik says.
"We run our worldwide outsource factory across almost 50
suppliers entirely on Oracle Manufacturing Applications."
Cisco has also extended its communications throughout the
supply chain to about 100 suppliers. "Now our component
suppliers can bid against each other on a new product over the
(c
Internet," says Solvik. Changes in Bills of Materials are broadcast

to suppliers through the CCO site. "We've reduced the
engineering change order cycle time from 25 to 10 days within the
last four years.
This improves quality significantly and reduces inventory write-
offs," says Solvik. Most important, Solvik can appreciate the
benefits of a good relationship in dollars and cents. "By adding
Contd…
UNIT 25: Case Study
387
together the benefits of electronic commerce, electronic self- Notes
S
service, manufacturing initiatives, and a few [benefits] offered by
the Internet, the annual contribution to the company amounts to ___________________
over $550 million from these top areas alone." ___________________
Question
___________________
Analyse the case and write down the case facts.
___________________
Source: http:llwww.oracle.com/customers /sia/cisco.html.
___________________
PE
___________________
___________________
___________________
___________________
___________________
)U
(c
(c
)U
PE
S
Glossary
Glossary
389
Notes
S
___________________
Asset: A resource with economic value that an individual, corporation or ___________________
country owns or controls with the expectation that it will provide future
___________________
benefit.
___________________
Availability: It is the capacity to have inventory when it is desired by a
customer. ___________________
PE
Average Inventory: It is defined as half the batch size plus safety stock. ___________________
Behaviour Substitution: It refers to a phenomenon where activities ___________________

that do not lead to goal accomplishment are substituted for activities that
___________________
do lead to goal accomplishment.
___________________
Blister Packaging: In this form of packaging, the product is first placed
into a pre-formed plastic blister. ___________________
Break Bulk: Packaged but non-containerized cargo.

Loose cement, grains, ores, etc., are termed bulk cargo, whereas cargo
shipped as a unit (bags, bales, barrels, boxes, cartons, drums, pallets,
sacks, vehicles, etc.) is termed break bulk.
Card Board Boxes: These are used for the packaging of items such as
sets of glasses or tableware, decoration with several delicate parts, pairs
)U
of candle holders, glass vases, delicate statuettes etc., to ensure that they
are not damaged and their appearance is not spoiled during handling and
display.
Causal: Causal forecasting is used when there is a visible correlation

between one or more variables to the demand for the product.
Chase Strategy: It is a strategy aimed at adjusting capacity in

anticipation of requirement.
Collaborative Forecasting: Collaborative forecasting enables

companies to transition from periodic, disparate and isolated forecasting
activities to a single, real-time enterprise forecasting process.
Collaborative Planning Forecasting and Replenishment (CPFR):

Collaborative Planning, Forecasting and Replenishment, is a concept that
aims to enhance supply chain integration by supporting and assisting
(c
joint practices.
Confidential Report: It is mostly used in government organisations. It

is a descriptive report prepared, generally at the end of every year, by the
employee’s immediate superior.
Corporate Strategy: It is a critical approach which forms the framework

that enables the organization to cope with the external and internal
environments.
390
Cost of Transport: It is the payment for movement between two
Notes
S
___________________ maintaining in-transit inventory
___________________ Critical incident technique: Under this method, the manager prepares
lists of statements of every effective and ineffective behaviour of an
___________________
employee.
___________________
Cross Dock: Cross-docking is a practice in logistics of unloading
___________________ materials from an incoming semi-trailer truck or railroad car and loading
PE
___________________ these materials directly into outbound trucks, trailers, or rail cars, with
little or no storage in between.
___________________
Customer: A person, company, or other entity which buys goods and
___________________
services produced by another person, company, or other entity.
___________________
Customer Satisfaction: It is the degree to which customer expectations
___________________ of a product or service are met or exceeded.
Customer Service: It is a process for providing significant value-added

Decision Analysis: This focuses on decision applications to identify,

evaluate, and compare logistics strategic and tactical alternatives for
managerial decisions.
Decoupling Processes: It permit each product to be manufactured and

)U
distributed in economical lot sizes that are greater than market demands.
Demand Forecasting: Demand forecasting is a method of projecting the

demand for goods and services over a specific period of time.
Distribution Centre: Warehouses where product storage is considered a

very temporary activity.
Economy of Distance: It refers to the characteristic that transportation

cost per unit of distance decreases as distance increases.
Economy of Scale: It refers to the characteristic that transportation cost

per unit of weight decreases when the size of the shipment increases.
Environmental Analysis: It is the process of monitoring the

organisational environment to identify both present and future threats
and opportunities that may influence the firm’s ability to reach its goals.
(c
Excess Inventory: It is a cost burden to industry in terms of capital tied

up, the cost of obsolescence and the cost of servicing product in the supply
chain.
Fill Rate: It measures the magnitude or impact of stockouts over time.
Financial Evaluation: Financial evaluation mainly focuses into –

money aspects of the project, and rewards and financial profitability to
the investors.
Glossary
391
Fixed Cost: A cost that does not change with an increase or decrease in
the amount of goods or services produced. Notes
S
Forecast: A forecast is an estimate of a future event achieved by ___________________
systematically combining and casting forward in a predetermined way ___________________

data about the past.
___________________
Inbound Logistics: It means the movement of materials received from
___________________
suppliers.
___________________
Information: Information is stimuli that have meaning in some context
PE
for its receiver. ___________________
Intellectual Assets: Intellectual market-based assets are the types of ___________________

knowledge a firm possesses about the environment, such as the emerging
___________________
and potential state of market conditions, and the entities in it such as
competitors, customers, channels and suppliers. ___________________
Inter-modal Logistics Scheduling: It consists of multi-modal freight ___________________

logistics optimization; maximising throughput in hubs and terminals
while minimising transport costs.
Inter-modal Transport: It refers to transportation of goods across more
than one mode in an integrated and seamless, manner from the origin to
the destination.
Deleted: that are
Internal Supply Chain Management (ISCM): All processes that is
)U
internal to the firm.
Inventory Costs: Costs associated with the maintenance of inventory.
Inventory Ordering Costs: These are those costs that are incurred in
the purchase cycle are called procurement costs or inventory ordering
costs.
Inventory: Stocking of raw materials, in-process, finished, packaging,

tools and equipments, spares and others in order to meet an expected
demand or distribution in future.
Level Strategy: In a level strategy, an organization maintains a constant

capacity over a period of time, irrespective of fluctuations in demand.
Logistical Environment: It involves the integration of various sub

environments focusing on information, transportation, inventory,
warehousing, material handling, and packaging.
(c
Logistics Information Systems: Logistic information system is nothing

but a part of Management Information System to manage, control and
measure the logistical activities.
Logistics: Logistics is the process of planning, implementing and

controlling the efficient, effective flow and storage of goods, services and
related information from the point of origin to the point of consumption
for the purpose of conforming the customer requirement.
392
Long-range Planning: Planning that covers a relatively long period of
Notes
time (anything over a five-year period), and affects many
S
___________________ departments/divisions of the organisation.
___________________ Management by Objectives (MBO): MBO requires the management to
___________________
set specific, measurable goals with each employee and then periodically
discuss the latter’s progress towards these goals.
___________________
Management Control: It is characterized by an evaluative, tactical,
___________________ intermediate-term focus that evaluates past performance and identifies
PE
___________________ alternatives.
___________________ Marketing: Marketing is the process of communicating the value of a

product or service to customers.
___________________
Material Management: It means the movement of material &
___________________
___________________
Materials Handling: Material Handling refers to activities, equipment,
and procedures related to the moving, storing, protecting and controlling
of materials in a system.
Operational Flexibility: It refers to a firm's ability to handle

extraordinary customer service requests.
Operations Strategy: It is the recognition of the important role of

operations in organisational success and the involvement of operations
)U
managers in the organisations’ strategic planning.
Order Management: It includes understand various specifications and

design order requirements with each suppliers, which will help in
identifying ways of reducing cost and also help in reducing price
structure.
Ordering Costs: These are incurred in the purchase cycle, while set-up
costs are incurred in the manufacturing cycle.
Organisational Planning Process: This is the process of identifying an
organization's immediate and long-term objectives, and formulating and
monitoring specific strategies to achieve them.
Organisational Planning: A plan that involves an extended time-
frame for the deployment of a large percentage of the resources of an
organization and a wide spectrum of activities having a major eventual
impact.
(c
Packaging: It refers to a container in which the product reaches the end

use consumer.
Paper Board Cans: The paperboard can is a form of paper based retail
packaging, which is quite inexpensive and is used to pack different types
of products.
Glossary
393
Physical Distribution: Physical distribution is the set of activities
concerned with efficient movement of finished goods from the end of the Notes
S
production operation to the consumer. ___________________
Polyethylene Film: Polyethylene film is a resinous material often used ___________________

to make plastic wrap, protective covers, and grocery bags.
___________________
Procurement: It is concerned with purchasing and arranging inbound
___________________
movement of materials, parts, and/or finished inventory from suppliers to
manufacturing or assembly plants, warehouses, or retail stores. ___________________
PE
Quality: It is a state in which value entitlement is realized for the ___________________
customer and provider in every aspect of the business relationship.
___________________
Quantity Principle: This means individual shipments should be as
___________________
large as the involved carrier can legally transport in the equipment being
used. ___________________
Rapid Response: Rapid response is concerned with a firm's ability to ___________________

satisfy customer service requirements in a timely manner.
Relational Assets: Relational market-based assets are outcomes of the

relationship between a firm and its key external stakeholders, including
distributors, retailers, end-customers, other strategic partners,
community groups, and even governmental agencies.
Return on Investment: It is a performance measure used to evaluate the

)U
efficiency of an investment or to compare the efficiency of a number of
different investments.
Safety Stock: Safety stock (also called buffer stock) is a term used by
logisticians to describe a level of extra stock that is maintained to
mitigate risk of stockouts (shortfall in raw material or packaging) due to
uncertainties in supply and demand.
Service Reliability: It involves the combined attributes of logistics and

concerns a firm's ability to perform all order-related activities, as well as
provide customers with critical information regarding logistical
operations and status.
Simulation: This method is highly sophisticated and is mainly used

where the organization needs to generate multiple 'what-if' scenarios.
Skin Packaging: Skin packaging is a form of packaging where the

(c
product is first placed on a paperboard card with heat seal coating.
Stockout Frequency: It is the probability that a stockout will occur.
Stockpiling: A stockpile is a pile or storage location for bulk materials,

forming part of the bulk material handling process.
Strategic Modelling Tool: It comprises of analytical tools such as what-
if scenarios, analysis of new networks, strategic business optimization
and long-term planning.
394
Strategic Planning Process: It is a systematic approach to logistics and
Notes
supply chain strategy based on the organisational planning pyramid.
S
___________________
Strategic Planning: It is a constant and systematic process where
___________________ people make decisions about intended future outcomes, how outcomes are
to be accomplished, and how success is considered and evaluated.
___________________
Strategic Supply Chain Optimization: It calculates assignment of
___________________
products to manufacturing and distribution centres; optimizes allocation
___________________ of volumes to suppliers.
PE
___________________ Strategy: The broad framework for the allocation of a firm's scarce
resources, over time, to reach identified goals.
___________________
Supplier Relationship Management (SRM): All processes that focus
___________________
on the interface between the firm and its suppliers.
___________________
Supply Chain Forecasting: It concerns the spatial as well as variation
___________________ of demand with time, the extent of its variability, and its degree of
randomness.
Supply Chain Security: It refers to efforts to enhance the security of the

supply chain, the transport and logistics system for the world's cargo.
Tapering Principle: This means large shipments should be transported

distances as long as possible.
Time Series: Time series forecasts rely on historical demand in order to

)U
predict the future demand.
Total Cost: It includes all expenditures necessary to perform logistical

requirement considering the interrelationship between the different
logistical activities.
Transaction Activities: It includes order entry, inventory assignment,

order selection, shipping, pricing, invoicing, and customer inquiry.
Transit Inventor: Transit stock is inventory captive in transportation

vehicles.
Transportation Infrastructure: Transportation infrastructure consists

of the rights-of-way, vehicles, and carrier organizations that offer
transportation services on a for-hire or internal basis.
Transportation: It is the operational area of logistics that

(c
Trust: An essential antecedent of commitment that diminishes the

perceived risk and vulnerability in a relationship and thus, leads to a
superior commitment to the relationship.
Validation Assessments: Assessment validation refers to a process

where assessors compare and evaluate against the relevant competency
Glossary
standard/s to ensure, validity, reliability, fairness, flexibility and 395

effectiveness. Notes
S
Variance: Variance is an unexpected event that disrupts performance of ___________________
the system.
___________________
Warehouse: A warehouse is a commercial building for storage of goods.
___________________
Warehouses are used by manufacturers, importers, exporters,
wholesalers, transport businesses, customs, etc. ___________________
Warehousing: A warehouse is a commercial building for storage ___________________
PE
of goods. Warehouses are used by manufacturers, importers, exporters,
___________________
wholesalers, transport businesses, customs, etc.
___________________
___________________
___________________
___________________
)U
(c

Planning For Logistics

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Planning For Logistics

Transféré par

Droits d'auteur :

Formats disponibles

Planning for Logistics

Dr S R Das Dr Sanjay Mittal Prof V K Nangia

SLM Development Team

Mr Kapil Mehra Mr A N Sinha

Course Code: MDSL-832D

Course Name: Planning for Logistics

Version: July 2013

© MPower Applied Learning Enterprise

Unit 1 Introduction to Logistics ................................................................................................ 3

Unit 6 Organisational Planning Process................................................................................. 59

Unit 11 Demand Planning and Forecasting ........................................................................... 135

Unit 16 Packaging and Material Handling............................................................................. 221

Unit 22 Management of Relationship and Developing Trust ................................................ 337

Unit 23 Information Technology Framework ......................................................................... 357

Unit 24 Supply Chain Logistics Administration .................................................................... 377

Unit 25 Case Study .................................................................................................................. 385

Definition and Concept of Logistics

___________________ 1. Inbound logistics means the movement of materials received

point of origin and the point of consumption, in order to meet the

8. Plant and warehouse side selection ___________________

10. Packaging ___________________

11. Return goods handling ___________________

12. Salvage and scrap disposal ___________________

Supply Chain Management is the systematic, strategic

___________________ Logistics is involved at various stages of a supply chain; from

Figure 1.1: Complexity of a Typical Global Supply Chain

Logistics is the process of movement of materials and products

Check Your Progress

Logistics Value Proposition

Thus far it has been established that logistics should be managed

processing, dedicated communications can be maintained on a real ___________________

Source: Reji Ismail (2008), “Logistics Management”, Excel Books.

Figure 1.2: Total Cost Warehousing Network

Step 2 Computing current logistics costs

Developing lowest cost methods and implementing

Source: Reji Ismail (2008), “Logistics Management”, Excel Books.

Figure 1.3: Steps for Lowering Logistics Cost

The percentage of logistics cost to the total value added signifies

the importance of logistics related activities from the cost

logistics costs account from 5% to 50% of a product’s total cost, 9

z Optimal vehicle routing and scheduling can reduce the

10 quantities of inventory, in order to create a bigger quantity for

___________________ To build up inventory sufficient capital has to be tied up for a

Logistics Value Generation

made in the development of tools to aid management in the

well-operated logistical system can help achieve competitive 11

Check Your Progress ___________________

State whether the following statements are True or False: ___________________

1. The least-total-cost system design includes only the ___________________

Failure to fully comprehend this importance resulted from not fully

transportation services as needed on a per shipment basis.

transportation that minimizes total system cost. This may mean 13

Warehousing, Materials Handling and Packaging ___________________

The first three functional areas of logistics – order processing,

Facility Network Design

economists originally discussed supply-and-demand relationships,

14 management, since a firm’s facility structure is used to ship

___________________ Check Your Progress

___________________ 2. …………….. is the operational area of logistics that

Lesson End Activity

Questions for Discussion ___________________

2. Discuss and elaborate on the following statement: "The ___________________

Logistics is viewed as the competency that links an enterprise with ___________________