26619608 Notes Logistics Supply Chain Management

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Indira Gandhi National Open University

School of Management Studies

1Logistics and SCM : An Overview

MS-55

LOGISTICS AND SUPPLYCHAIN MANAGEMENT


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3IT Enabled SCM

MS-55



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Cost and Performance

Measurement in SCM



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5Distribution Network Planning

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Emerging Trends



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MS-55: LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Course Components

BLOCK 1 LOGISTICS AND SCM : AN OVERVIEW

Unit 1 : Logistics and SCM : An Introduction

Unit 2 : Principles of Supply Chain Management

Unit 3 : Customer Focus in Supply Chain Management

BLOCK 2 DESIGN AND MANAGEMENT OF SCM

Unit 4 : Logistics : Inbound and Outbound

Unit 5 : Models for SCM Integration

Unit 6 : Strategic Supply Chain Management

Unit 7 : Organizing for Global Markets

BLOCK 3 IT ENABLED SCM

Unit 8 : Information Technology : A Key Enabler of SCM

Unit 9 : Intelligence Information System

Unit 10 : IT Packages in SCM

BLOCK 4 COST AND PERFORMANCE MEASUREMENT IN SCM

Unit 11 : Cost Analyses and Measurement

Unit 12 : Best Prictices and Benchmarkin for SCM

Unit 13 : Performance Measurement and Evaluation of SCM

BLOCK 5 DISTRIBUTION NETWORK PLANNING

Unit 14 : Transportation Mix

Unit 15 : Locational Strategy

Unit 16 : Logistics and SCM Environment

BLOCK 6 EMERGING TRENDS

Unit 17 : Future Trends and Issues

Unit 18 : Design for SCM and Greening the Supply Chain

Unit 19 : SCM in Service Organization/Non-Manufacturing Sector


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MS-92 : MANAGEMENT OF PUBLIC ENTERPRISES

Course Components

BLOCK 1 PUBLIC ENTERPRISE: AN OVERVIEW

Unit 1 : Public Enterprise: Concept and Policy

Unit 2 : Public Enterprise Scenario National and International

Unit 3 : Nature and Scope of Public Enterprise

Unit 4 : Forms of Public Enterprises

BLOCK 2 PUBLIC ENTERPRISE: ACCOUNTABILITY AND GOVERNANCE

Unit 5 : Concept and Policy of Accountability and Autonomy

Unit 6 : Government - Public Enterprise : Interface

Unit 7 : Accountability to Legislature

Unit 8 : Relationship with other Agencies

Unit 9 : Corporate Governance and Corporate Social Responsibility

BLOCK 3 PUBLIC ENTERPRISE: PERFORMANCE AND EVALUATION

Unit 10 : Appraisal of Public Enterprise Performance-I

Unit 11 : Appraisal of Public Enterprise Performance-II

Unit 12 : Sickness and Public Enterprise and Turnaround Strategies

Unit 13 : Dimensions and Methods of Evaluating Enterprise Performance

BLOCK 4 ORGANISATION AND MANAGEMENT

Unit 14 : Board of Directors: Constitution and Functioning

Unit 15 : Personnel Management Issues in Public Enterprises

Unit 16 : Project Management

Unit 17 : Management of Finance, Marketing and Production, Issues

BLOCK 5 PRIVATISATION AND DISINVESTMENT

Unit 18 : Concept, Policy and Dimensions

Unit 19 : Privatisation: International Experience

Unit 20 : Disinvestment : Experience and Strategies

Unit 21 : Implications of Disinvestment

BLOCK 6 CASE STUDIES

Case 1 : State Bank of India, 19981

Case 2 : Corporate Planning at SAIL, 198993

Case 3 : Gloom to Glory: The Successful Turnaround of the Singareni ColleriesCompany Limited

Case 4 : HR Initiatives for Turnaround of Visakhapatnam Steel Plant


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LOGISTICS AND SCM : AN OVERVIEW

Unit 1Logistics and SCM : An Introduction 5

Unit 2

Principles of Supply Chain Management 18

Unit 3

Customer Focus in Supply Chain Management 27

1Block

Indira Gandhi

National Open University


MS-55

Logistics and SupplyChain Management


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Expert Committee (as on 24th March, 2000)

Prof. D.K. Banwet

Dept of Management studies,

IIT, Delhi

Prof. B.S.Sahay,

Management Development

Institute, Gurgaon

Prof. Amarlal H. Kalro

IIM Kozhikode

Calicut

Prof. J.L.Batra

FORE School of Management

New Delhi

Prof. N. Sambandam

NITIE,

Mumbai

Dr. Sanjay S. Gaur

Shailesh J. Mehta School of

Management, IIT Bombay, Mumbai

Prof N. V. Narasimhan

Director, SOMS,

IGNOU

New Delhi

Dr. Himanshu Kumar Shee,

(Coordinator)

School of Management Studies,

IGNOU

Prof Sadananda Sahu

Dept. of Industrial Engineering

& Management, IIT, Kharagpur

Prof. Atanu Ghosh


Management, IIT Bombay,

Mumbai

Mr. Satish Kumar

Director (Movement),

Dept of Fertilizers, Ministry

of Chemical & Fertilizers,

Krishi Bhawan, New Delhi

Mr. Deepak Jakate,General Manager - Logistics,

United Phosphorus Limited,

Mumbai

Dr. Kaushik Sahu

Xavier Institute of

Management, Bhubaneswar

Print Production: Tilak Raj, S.O.(P), SOMS, IGNOU

December, 2004

Indira Gandhi National Open University, 2004ISBN-81-

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 the Indira Gandhi National Open University.

Further information on the Indira Gandhi National Open University courses may be obtained from the

University's Office at Maidan Garhi, New Delhi-110068.

Printed and published on behalf of Indira Gandhi National Open University, New Delhi by Director,

School of Management Studies, IGNOU.

Cover Design by M/s. King Kraft, Karol Bagh, New Delhi

Laser Composed By : M/s. Tessa Media & Computers, Sarai Jullena, New Delhi

Paper Used : Agrobased Environment Friendly.

Course Preparation Team (2004)

Prof. Sushil (Course Editor)

Dept. of Management Studies

Indian Institute of Technology

New Delhi

Prof. N. Sambandam

NITIE,

Mumbai

Prof Sadananda Sahu

Dept. of Industrial Engineering

and Management

IIT, Kharagpur

Prof. Atanu Ghosh


Management, Indian Institute

of Technology Bombay,

Mumbai

Dr. Anurag Saxena

(Course Co-ordinator)


IGNOU, New Delhi

Dr. Ravi Shankar (Course Editor)

Dept. of Management Studies

Indian Institute of Technology,

New Delhi

Prof .Karuna Jain


Management, Indian Institute of

Technology Bombay, Mumbai

Mr. D N Srivastava

Advisor ( Training & Safety) &

Head of Distribution Deptt. )

(Retd.) in Cement Group

M/S Larsen & Toubro Ltd,

Jharsuguda

Mr. Deepak Jakate

General Manager - Logistics,United Phosphorus Limited,

Mumbai

Dr. Himanshu Kumar Shee

(Course Co-ordinator)-On leave

School of Management Studies,

IGNOU, New Delhi

Dr. Biplab Dutta

Vinod Gupta School of

Management

IIT, Kharagpur

Lt Col. Kaushik Sircar

Assistant Quarter Master

General Operations & Logistics,

Headquarter 4 Corps

Mr. Sandeep Biswas

Institute for Integrated

Learning in Management

(IILM), New Delhi

Prof. B. B. Khanna

Director,

IGNOU, New Delhi


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BLOCK 1 LOGISTICS AND SCM : AN

OVERVIEW

Unit 1:Logistics and SCM - An Introduction discusses about definition of Logistics

& Supply Chain Management It discusses the process of development of logistics

and its role in the economy. It also converse about Physical Distribution Management

(PDM) and its components.

Unit 2:Principles of SCMdefines how the supply chain works. It highlights the key

processes required to integrate the supply chain. It further examines the critical areas

of Logistics-Marketing Interface and critical areas of Logistics-Manufacturing

Interface

Unit 3:Customer focus in SCMcomprehends the key processes required to

enhance customer focus in the supply chain. It delineates with the concept of

Efficient Customer Response (ECR), Quick Response (QR) and Accurate Response

(AR). It further scrutinizes chain relationship within and beyond organization


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4

Logistics and SCM : An

Overview


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IntroductionUNIT 1 LOGISTICS AND SCM : AN

INTRODUCTION

Objectives

After going through this unit, you should be able to:

define Logistics and Supply Chain Management (SCM);

understand the development of logistics and its role in the economy; and

discuss Physical Distribution Management (PDM) and its components.

Structure

1.1 Introduction

1.2 Logistics and SCM

1.3 Development of Logistics

1.4 The Role of Logistics in the Economy

1.5 Logistics and Competitive Performance

1.6 Physical Distribution Management (PDM)

1.6.1 Components of PDM

1.6.2 The Systems or Total Approach to PDM

1.7 Summary

1.8 Self Assessment Exercises1.9 References and Suggested Further Readings

1.1 INTRODUCTION

There is a great deal of material that is moved in any organization. Organizations

collect raw materials from suppliers and deliver finished goods to the customers. It is

logistics that executes this function. In other words, logistics is the function that

moves both tangible materials (e.g. raw materials) and intangible material (e.g.

information) through the operations to the customers (as a finished product). In

continuation to this explanation, we would introduce what a supply chain means. Asupply chain consists of a series of activities involving many organizations through

which the materials move from initial suppliers to final customers. There may be

different supply chain for each product. The chain of activities and organizations is

named differently as per the situation. If the emphasis is on operations then it is called

process; if the emphasis is on marketing then it is called logistics; if the emphasis is

on value-addition then it is called value-chain; if the emphasis is on meeting customer

demand then it is called demand chain; if the emphasis is on movement of material

then we use the most general term i.e., supply chain. This unit will introduce you with

the concept of a supply chain.

1.2 LOGISTICS AND SCM

A supply chain may be considered as a group of organizations, connected by a

series of trading relationships. This group covers the logistics and manufacturing

activities from raw materials to the final consumer. Each organization in the chain

procures and then transforms materials into intermediate/final products, and

distributes these to customers.


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OverviewThe supply chain can be defined as the integral management (within the company

and through other companies) of the companys various logistical stages such as

materials procurement, production, storage, distribution and customer service. The

Supply Chain concept should be seen as a whole, that is, the entire system from the

origin of procurement to the final consumption of goods or services.

In supply chain network we must include all the organizations involved in the

production of certain goods or services (from the origin of procurement to final

consumption), and each of the logistical stages within these organizations. Thus, the

supply chain is a network linking and interweaving different supply chains of all the

companies involved in a production process. A diagram depicting the typical supply

chain is shown in Figure 1.1.

Figure1.1: Typical Supply chain

The supply chain activity therefore constitutes complex objects, as it involves

decision-makers from many different companies, who sometimes have no direct

relationship and are place in very different geographical locations; yet the decisions

they make are mutually dependent upon each other. Hence, there is a need for an

information system capable of linking together the different members of the chain so

that there is an open communication between them.

The concept of supply chain is not new. Historically we have moved from physical

distribution to logistics management and then to supply chain management. This major

difference seems to be that supply chain management is the preferred name for the

actualization of integrated logistics, with it acting as an enabler, it is now possible to

have an integrated process view about the logistics and all allied processes related to

business. Ideally the supply chain should be a seamless chain as shown in Figure 1.2.

Figure 1. 2: Seamless Supply Chain

Source: Sahay B.S., 1998

Semi-FinishedProductsRawMaterial FinishedProducts Distributors EndConsumer

Raw Material

Seamless SupplyChain

Product OrderingChannel

MaterialFlow channel End Customer


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IntroductionThe importance of logistics can be gained from the fact that logistics and supply chain

management costs are in range of 10 to 15 of the GDP for developing countries while

it is around 18 to 20 per cent for developed countries. The concept of integrated

logistics consists of two interrelated efforts:

Logistics operation: Logistic operation can be basically clubbed into

physical distribution management, materials management and internal inventory

transfer.

Logistic coordination: Logistic coordination pertains to forecasting, order

processing, operational planning and product procurement or MRP. This

integration is effected through effective information flows.

Definitions

Forrester (1961) suggested that the five flows of any economic activity money,

orders, materials,personnel and equipmentare interrelated by an information

network, which gives the system, which is now called as supply chain due to its

own character.

According to Christopher (1992) supply chain is network of organizations that are

involved, through upstream and downstream linkages, in the different processes and

activities that produce value in the form of products and services in the hands of the

ultimate consumer. Managing these linkages and delivering the product/service to the

customer in a cost effective way is SCM. Supply chain management encompasses

materials/supply management from the supply of basic raw materials to final product

(and possible recycling and re-use). Supply chain management focuses on how firmsutilize their suppliers processes, technology and capability to enhance competitive

advantage. It is a management philosophy that extends traditional intra-enterprise

activities by bringing trading partners together with the common goal of optimization

and efficiency.

Supply Chain Management is a set of approaches utilized to efficiently integrate

supplier, manufacturer, warehouse and stores so that merchandise is produced and

distributed at the right quantities, to the right location and at the right time, in order to

minimize system under costs while satisfying service level requirements (Levi

(2000)).

The common thread in these definitions is that supply chain management seeks tointegrate performance measures over multiple firms or processes, rather than taking

the perspective of a single firm or process.

Supply chain management has provided the next logical stage in the evolution of

competitiveness for the manufacturing organization and added, importantly, a concern

for the flow of materials to and from the organization. Supply chain management

integrated suppliers to the end consumers and emphasized the need for collaboration

to optimize the whole system. As such, supply chain management is the process of

designing, planning and implementing change in the structure and performance of the

total material flow in order to generate increased value, lower costs, enhanced

customer service and yield a competitive advantage. In effect, the addition of supply

chain management to the marketing model created a truly systems approach to theorganization and its direct and indirect trading relationships

The content of supply chain management with in a firm varies considerably with the

type of business. Figure 1.3 shows the different components of logistics

management.


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Overview

Figure 1.3: Components of Logistic Management

(Source: Douglas M. Lambert, 1998, Pg-5)

A representative list of logistic element for a firm is given in Table 1.1.

Table 1.1: Logistic Element

Facility Location Determining location, number and size of facilities needed,

Allocation demand to facilitiesTransportation Mode and service selection

Carrier routing

Vehicle scheduling

Inventories Finished goods stocking policies

Record keeping

Supply scheduling

Short term sales forecasting

Customer Service Cooperate with marketing in:

determining customer needs and wants for service

determining customer response to service

Order Processing and Information Sales order procedure

Flows Information collection, storage and manipulationData analysis

Warehousing and Material Handling Space determination

Stock layout

Material handling equipment selection

Stock storage and retrieval

Equipment replacement policies

Protection Packaging Design for: handling, storage, protection

Product Scheduling Co-operate with production in :

specifying aggregate production quantities

sequencing and timing of production

MANAGEMENT ACTIONS

Planning Implementation Control

OUTPUT OFLOGISTICS

INPUT INTOLOGISTICS

Human Resources

Financial Resources

Information Resources

RawMaterial

In processInventory

FinishedGoods

Natural Resources (Land,Facilities and Equipment)

Time, Place, Utility

Marketing Orientation(Competitive Advantage)

Efficient movement toCustomer

Proprietary Asset

S

UPPLIERS

CUSTOME

RS

Customer Service

Demand Forecasting

Distribution Communication

Inventory Control

Material Handling Order Processing

Parts & Service Support

Plant and Warehouse Site

Selection

Procurement

Packaging

Return Goods Handling Salvage and Scrap Disposal

Traffic and Transportation

LOGISTICS ACTIVITIES


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Introduction1.3 DEVELOPMENT OF LOGISTICS

Logistic activity is literally thousand of years old, dating back to the earliest form of

organized trade. As this area of study however it first began to gain attention in the

early 1990s. More emphasis has been given to logistics after the Gulf war in 1990-91

when the efficient and effective distribution of store supplies and person were the

key factors for success. With rising interest rates and increasing energy cost logistics

received more attention as a major cost driver. Logistics cost became a more critical

issue for many organization because of globalization of industry. This has affected

logistics in two primary ways. First, the growth of world-class competitors from other

nations has caused organization to look for new way to differentiate their

organizations and product offerings. Second, as organizations increasingly buy and

sell offshore, the supply chain between the organizations becomes longer, more costlyand more complex. Excellent logistics management is needed to fully leverage global

opportunities. Information technology input has given a next boom to logistics

management. This gave organization the ability to better monitor transaction

intensive activities such as ordering movement and storage of goods and materials.

Combine with the availability of computerized quantitative models; this information

increased the ability to manage flows and to optimize inventory levels and movement.

Other factor contributing to the growing interest in logistics include advances in

information technology, increased emphasis on customer service, growing

reorganization of the system approach and total cost concept. The profit leverage

from logistics and realization that logistics can be used as a strategic weapon in

competing the market place.The system approach is a critical concept in logistics. Logistics is in itself a system.

It is a network of related activities with the purpose of managing the orderly flow of

material and personal with in the logistic channel. The system approach simply states

that all functions or activities need to be understood in terms of how they effect and

are affected by other elements and activities with which they interact. The idea is

that if one looks at action in isolation, he or she will not understand the big picture or

how such action affects or are affected by other activities. In essence the sum or

outcome of a series of activities is greater than its individual parts.

Activity 1

Every organization has to move materials to support its operations. What do servicecompanies like Internet Service Providers move? Is the concept of supply chain

relevant for these companies?

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1.4 THE ROLE OF LOGISTICS IN THE ECONOMY

Logistics play a key role in the economy in two significant ways. First, logistics is of

the major expenditures for business. Logistics expenditure accounts for around

15-20% of GDP. Thus by improving the efficiency, logistics make an important

contribution to the economy as a whole.


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OverviewSecond, logistics support the movement and flow of many economic transactions; it is

an important activity in facilitating the sale of virtually all goods and services. To

understand this role from a system perspective, consider that if goods do not arrive on

time, customer can not buy them. If goods do not arrive at the proper place or in the

proper condition, no sale can be made. Thus all economic activities throughout the

supply chain will suffer.

One of the fundamental ways that logistics add value is by creating utility. From an

economic stand point utility represent the value or usefulness that an item or service

has in fulfilling a want or need. There are four types of utilities namely; Form,

Possession, Time and Place. Form utility is the process of creating the good or

service or putting them in proper form for the customer to use. Possession utility is

value added to a product or service because the customer is able to take actual

possession like credit arrangement and loans. These two utility are not directly related

to logistics but these are not possible without getting the right item needed forconsumption or production to the right place at the right time and in the right condition

at the right cost. The time and place utility are directly related to logistics. Time utility

is the value added by having an item when it is needed. Place utility is the item or

service available where it is needed. The five rights of logistics are the essence of the

two utilities provided by logistics time and place utility.

1.5 LOGISTICS AND COMPETITIVE

PERFORMANCE

Today logistics department appears on the organization charts of many large

organizations. Linking logistics activities directly to organization strategic plan can

work effectively to support their organization for achieving competitive advantage.

Porter user a tool called the value chain as shown in the Figure 1.4 to separate

buyers, supplier and a firm into the discrete but interrelated activities from which

value stems. The value chain concept may be used to identify and understand the

specific source of competitive advantage and how they related to buyer value. Value

is the amount a customer is willing to pay for the products, services provided by an

organization. Value added is the difference between what the customer pays and the

cost to the organization in providing that product or service. Porter defines the five

categories of primary activity involved in competing in any industry.

Inbound logistics: Activities associated with receiving, storing and disseminatinginput to the product.

Operation: Activity associated with transforming input into the final product form.

Outbound logistics: Activity associated with collecting storing and physical

distribution of the product to buyers.

Figure 1.4: Porter Value Chain

Source: Porter, Michael E., Competitive Advantage. 1985, the Free Press. New York)

SupportActivity

Company Infrastructure

Organization, People

System & Technology

Procurement

InboundLogistics

Operation OutboundLogistics

Marketing& Sales Service

Primary Activity


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IntroductionMarketing and Sales: Activities associated with providing a means by which

buyers can purchase the product and inducing them to do so such as advertising,

promotion etc.

Service: Activity associated with providing service to enhancer maintain the value of

the product such as installation, repair etc.

The effective logistics management can provide a major source of competitive

advantage. The source of competitive advantage is found firstly in the ability of the

organization to differentiate itself in the eyes of the customer from its competitor and

secondly by operating at a lower cost and hence at greater profit. There are two

bases of success in any competitive context. One is the cost advantage and second is

the value advantage. Cost advantage is achieved through greater productivity and

value advantage is pursued through a different plus over competitive offerings.

Figure 1.5: Competitive Matrix

Source : Christopher, M., 1992, Logistics and Supply Chain Management

From the matrix shown in Figure 1.5 it is clear that successful companies will often

seek to achieve a position based upon both a productivity advantage and a value

advantage. Logistics management can play a critical role to gain both advantages. In

many industries logistics cost represents such a significant proportion of total cost that

it is possible to make major cost reduction through fundamentally reengineering

logistics process. In term of value advantage, companies can gain through service

differentiation. Today markets have become more service sensitive. Customer in all

industries are seeking greater responsiveness and reliability from suppliers, they are

looking for reduced lead time, just in time delivery and value added services thatenable them to do better job of serving their customers.

Traditionally most organizations have viewed themselves as entities that exist

independently from others and indeed need to compete with them in order to survive.

However such a philosophy can be self-defeating if it leads to an unwillingness to

cooperate in order to compete. Behind this seemingly paradoxical concept is the idea

of supply chain integration. Supply chain integration links a firm with its customers,

suppliers and other channel members. As such it integrates their relationships,

activities, functions, processes and locations. The purpose is to improve the

effectiveness and efficiency of SC for ultimate consumers.

A model of the evolution of supply chain is shown in Figure 1.6 Integration starts withthe baseline organization (Stage 1) with a reasonably informal approach to

management by departments. This level of evolution involves the processing of

material requirements and planning routines that are short term in nature. The

material inventories simply arise in response to reactive management practices. The

key requirement of employees is to react to failure and manage as best that they can.

The Stage 2 organization reflects the traditional form of supplier management. The

business departments tend to operate autonomously. The Stage 2 organization is

Cost and ServiceLeader

Service Leader

CommodityMarket

Lo P r o d u c t i v i t y A d v a n t a g e

Lo

Hi

Hi

Cost LeaderValue

A

dvantage


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Introductionalso developed a capability in terms of product design that includes customer and

supplier involvement. To enhance the nature of collaboration the organization

rewards supplier partnerships with sole sourcing agreements in return for a greater

level of support to the business and a commitment to on-going improvement of

material flow and relationship management. The model provides a useful means of

analyzing the current state of the organization and understanding where the

next interventions would be needed in order to improve performance.

Activity 2

Describe the Supply Chain for a paper manufacturing organization.

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1.6 PHYSICAL DISTRIBUTION MANAGEMENT (PDM)

There are many decisions that must be taken, when a company organizes a channel

or network of intermediaries, who take responsibility for the management of goods as

they move from the producer to the consumer. Each channel member must be

carefully selected and the company must decide what type of relationship it seeks

with each of its intermediate partners. Having established such a network, theorganisation must next consider how these goods can be efficiently transferred, in the

physical sense, from the place of manufacture to the place of consumption. Physical

distribution management (PDM) is concerned with ensuring the product is in the right

place at the right time.

It is now recognised that PDM is a critical area of overall supply chain management.

Business logistical techniques can be applied to PDM so that costs and customer

satisfaction are optimised. There is little point in making large savings in the cost of

distribution if in the long run, sales are lost because of customer dissatisfaction.

Similarly, it does not make economic sense to provide a level of service that is not

required by the customer but leads to an erosion of profits. This cost/service balanceis a basic dilemma that physical distribution managers face.

The reason for the growing importance of PDM is the increasingly demanding nature

of the business environment. In the past it was not uncommon for companies to hold

large inventories of raw materials and components. Although industries and individual

firms differ widely in their stockholding policies, nowadays, stock levels are kept to a

minimum wherever possible. Holding stock is wasting working capital for it is not

earning money for the company. To think of the logistical process merely in terms of

transportation is much too narrow a view. Physical distribution management (PDM)

is concerned with the flow of goods from the receipt of an order until the goods are

delivered to the customer. In addition to transportation, PDM involves close liaison

with production planning, purchasing, order processing, material control andwarehousing. All these areas must be managed so that they interact efficiently with

each other to provide the level of service that the customer demands and at a cost

that the company can afford.

1.6.1 Components of PDM

There are four principal components of PDM namely; Order processing, Stock levels

or inventory, Warehousing and Transportation.


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OverviewOrder processing

Order processing is the first of the four stages in the logistical process. Theefficiency of order processing has a direct effect on lead times. Orders are received

from the sales team through the sales department. Many companies establish regular

supply routes that remain relatively stable over a period of time ensuring that the

supplier performs satisfactorily. Very often contracts are drawn up and repeat orders

(forming part of the initial contract) are made at regular intervals during the contract

period. Taken to its logical conclusion this effectively does away with ordering and

leads to what is called partnership sourcing. This is an agreement between the

buyer and seller to supply a particular product or commodity as and when required

without the necessity of negotiating a new contract every time an order is placed.

Order-processing systems should function quickly and accurately. Other departments

in the company need to know as quickly as possible that an order has been placed

and the customer must have rapid confirmation of the orders receipt and the precise

delivery time. Even before products are manufactured and sold the level of office

efficiency is a major contributor to a companys image. Incorrect paperwork and

slow reactions by the sales office are often the unrecognised source of ill will

between buyers and sellers. When buyers review their suppliers, efficiency of order

processing is an important factor in their evaluation. A good computer system for

order processing allows stock levels and delivery schedules to be automatically

updated so management can rapidly obtain an accurate view of the sales position.

Accuracy is an important objective of order processing, as are procedures that are

designed to shorten the order processing cycle.

InventoryInventory, or stock management, is a critical area of PDM because stock levels have

a direct effect on levels of service and customer satisfaction. The optimum stock

level is a function of the type of market in which the company operates. Few

companies can say that they never run out of stock, but if stock-outs happen regularly

then market share will be lost to more efficient competitors. The key lies in

ascertaining the re-order point. Carrying stock at levels below the re-order point

might ultimately mean a stock-out, whereas too high stock levels are unnecessary and

expensive to maintain. Stocks represent opportunity costs that occur because of

constant competition for the companys limited resources. If the companys

marketing strategy requires that high stock levels be maintained, this should be

justified by a profit contribution that will exceed the extra stock carrying costs.Warehousing

Many companies function adequately with their own on-site warehouses from where

goods are dispatched direct to customers. When a firm markets goods that are

ordered regularly, but in small quantities, it becomes more logical to locate

warehouses strategically around the country. Transportation can be carried out in bulk

from the place of manufacture to respective warehouses where stocks wait ready for

further distribution to the customers. This system is used by large retail chains, except

that the warehouses and transportation are owned and operated for them by logistics

experts. Levels of service will of course increase when number of warehouse

locations increases, but cost will increase accordingly. Again, an optimum strategy

must be established that reflects the desired level of service.

Transportation

Transportation usually represents the bulk of distribution cost. It is usually easy to

calculate because it can be related directly to weight or numbers of units. Costs must

be carefully controlled through the mode of transport selected amongst alternatives,

and these must be constantly reviewed.

The patterns of retailing that have developed, and the pressure caused by low stock

holding and short lead times, have made road transport indispensable. When the


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Introductionvolume of goods being transported reaches a certain level some companies purchase

their own vehicles, rather than using the services of haulage contractors. However,

some large retail chains have now entrusted all their warehousing and transport to

specialist logistics companies.

For some types of goods, transport by rail still has advantages. When lead-time is a

less critical element of marketing effort, or when lowering transport costs is a major

objective, this mode of transport becomes viable. Similarly, when goods are hazardous

or bulky in relation to value, and produced in large volumes then rail transport is

advantageous. Rail transport is also suitable for light goods that require speedy

delivery (e.g. letter and parcel post). Except where goods are highly perishable or

valuable in relation to their weight, air transport is not usually an attractive transport

alternative. For long-distance overseas routes air transport is popular. Here, it has the

advantage of quick delivery compared to sea transport, and without the cost of bulky

and expensive packaging needed for sea transportation, as well as higher insurance

costs.

The chosen transportation mode should adequately protect goods from damage in

transit (a factor just mentioned makes air freight popular over longer routes as less

packaging is needed than for long sea voyages). Not only do damaged goods erode

profits, but frequent claims increase insurance premiums and inconvenience to

customers, endangering future business.

1.6.2 The Systems or Total Approach to PDM

PDM has been neglected in the past; this function has been late in adopting anintegrated approach towards it activities. Managers have now become more

conscious of the potential of PDM, and recognize that logistical systems should be

designed with the total function in mind. A fragmented or disjointed approach to

PDM is a principal cause of failure to provide satisfactory service, and causes

excessive costs.

PDM is concerned with ensuring that the individual efforts that go to make up the

distributive function are optimised so that a common objective is realised. This is

called the systems approach to distribution management and a major feature of

PDM is that these functions be integrated.

To plan an efficient logistics structure it is necessary to be aware of the interactionbetween the different distribution costs and how they vary with respect to the

different depot alternatives (number, size, type and location).

Figure 1.7 demonstrates how the individual distribution and logistics cost elements can

build up the total logistics cost.

Storage Cost: Storage cost will increase as the number of depots will increase

because there will be a need for more stock coverage, more storage space, more

management etc.

Delivery cost: This will concern with the secondary transportation cost i.e. cost

of delivery from the depot to the consumer. The greater the number of depots,the lesser is the secondary mileage and the delivery cost.

Trunking Cost: This is the primary transport cost in the supply of products in

bulk to the depots from the central finished good warehouses or production

points. As the number of depots increases this cost will also increases.

Inventory Cost: The main elements of inventory holding costs are:

Capital Cost: The cost of physical stock. This is the financing charge, which is

the current cost of capital to a company.


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Overview Service Cost: That is stock management and insurance cost

Risk Cost: Which occur through pilferage, deterioration of stock, damage andstock obsolescence.

System Cost: These costs represent a variety of information or communication

requirements ranging from the order processing to load assembly lists.

Figure 1.7: Total Logistics Cost

Source: Croucher Phil et al, The handbook of Logistics and distribution Management Page No .123

The top line on the graph shows the overall distribution cost in relation to the

number of depots in the network. The minimum point on this curve represents the

lowest cost solution. The result will depend on a number of factors product

type, geographical area of demand, service level requirements etc.

1.7 SUMMARY

Supply chain is network of organizations that are involved, through upstream and

downstream linkages, in the different processes and activities that produce value in

the form of products and services in the hands of the ultimate consumer. Logisticsexpenditure accounts for around 15-20% of GDP. Thus by improving the efficiency

of logistics operations, logistics can make an important contribution to the economy as

a whole. Factors contributing to the growing interest in logistics include advances in

information system technology, an increased emphasis on customer service, growing

reorganization of the system approach and total cost concept. Supply chain

management seeks to integrate performance measures over multiple firms or

processes, rather than taking the perspective of a single firm or process. Supply chain

integration links a firm with its customers, suppliers and other channel members. As

Total Distribution Cost

Trunking Cost

Inventory Cost

Storage Cost

System Cost

Local DeliveryCost

No. of Depots

Cost


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Introductionsuch it integrates their relationships, activities, functions, processes and locations.

Physical distribution management (PDM) is concerned with ensuring the right

item needed for consumption or production to the right place at the right time and

in the right condition at the right cost

1.8 SELF ASSESSMENT QUESTIONS

1) Logistics is the function that is responsible for the flow of materials into,

through and out of an organisation. Elaborate?

2) These are many possible structures for SC, but the simplest view has

materials converging on an organising through tiers of suppliers and products

diverging through tiers of customers. Elaborate.3) It is said that the overall aim for logistics is to achieve high customer

satisfaction or perceived product value. This must be achieved with

acceptable costs. How would you find the best balance?

4) What is Physical Distribution Management? Describe its components? Also,

elucidate the total approach to PDM.

5) Describe the evolution of Supply Chain concept. What in your opinion is the

most important stage?

1.9 REFERENCES AND SUGGESTED FURTHER

READINGS

1) Simchi Levi (2000), Designing and Managing the Supply Chain, Irwin/

McGraw-Hill, IL.

2) Christopher, M., 1992, Logistics and Supply Chain Management:

Strategies for Reducing Costs and Improving Services, Pitman, London.

3) Croucher Phil, Rushton Alan and Oxley John, The handbook of Logistics

and distribution Management

4) Douglas M. Lambert, 1998, Fundamental of logistics management,

McGraw Hill.5) Sahay B S, 1998, Supply Chain Management for Global competitiveness

(Macmillan)

6) Chopra Sunil and Meindl P, 2001, Supply Chain Management: Strategy,

Planning, and Operation, Prentice Hall.

7) Forrester J W 1961, Industrial dynamics, Cambridge, Massachusetts,

The MIT press.

8) Waters Donald, 2003, Logistics:An Introduction to SCM, Palgrave

McMillan (Indian Edition), NY


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Overview UNIT 2 PRINCIPLES OF SUPPLY CHAIN

MANAGEMENT

Objectives

After reading this unit, you would be able to:

define how the supply chain works;

understand the key processes required to integrate the supply chain;

examine critical areas of Logistics-Marketing Interface; and

examine critical areas of Logistics-Manufacturing Interface.

Structure

2.1 Introduction

2.2 How does SCM Work?

2.3 The Logistics-Marketing Interface

2.3.1 Logistics and Product Life Cycle

2.3.2 Areas of Logistics and Marketing Interaction

2.4 The Logistics-Manufacturing Interface

2.4.1 Customer Service Issues at the Logistics-Manufacturing Interface

2.5 Summary

2.6 Self Assessment Questions

2.7 References and Suggested Further Readings

2.1 INTRODUCTION

Now you are aware of what Logistics and SCM mean. You have appreciated the

role of Logistics and SCM in the economy. SCM is basically a system that connects

an organization with its customers and suppliers. SCM is the management of all key

business processes across a number of supply chains. It is important to know about

different supply chain processes for having an integrated SCM.

Also there is a strong relation between Logistics group and Marketing group in anorganization. Similarly, Manufacturing and Logistics are also interrelated. This unit

will take you through to these concepts.

2.2 HOW DOES SCM WORK?

The supply chain management (SCM) is viewed as a system that links an enterprise

with its customer and suppliers. As shown in Figure 2.1 information flows from

customer in the form of forecast and orders to both the enterprise and suppliers. This

information is refined through planning into specific manufacturing and purchasing

objectives. As materials and products are purchased, a value added inventory flow isinitiated which ultimately results in ownership transfer of finished product to

customers.

SCM is an integrated approach that is highly interactive and complex and requires

simultaneous consideration of many trade-offs. SCM is the management of all key

business process across a number of the supply chains. Successful SCM requires a

change from managing individual function to integrating activities into key supply

chain processes. Operating an integrated supply chain requires continuous

information flows, which in turn helps to create the best product flows.


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Introduction

Figure 2.1: Supply Chain System

Source: Logistics Management, Bowersox et al., 1986

The customer remains the primary focus of the process. However, improved

linkages with supplies are necessary because controlling uncertainty in customer

demand, manufacturing processes and supplier performances are critical for effective

SCM. The key processes for the integrated SCM (Figure 2.2) are as follows:

Customer Relationship Management

This is the process to identify the key customers. With customer moving to centre

stage, more companies have begun to treat a customer as a value independent entity.

The companies no longer view sales as selling of their products, but as selling of

relationships, solutions, support and care. Customer relationship teams develop and

implement partnering program with key customer. Product and service agreements

specifying the level of performance are established with these key customers.

Figure 2.2: Supply Chain Process for Integrated SCM

Source: Lambert 1998

Demand Management

Customer Service Management

Order Fulfillment

Manufacturing Flow Management

Procurement

Product Development and Commercialization

Return Channel

Performance Metrics

VALUE ADDED

INVENTORY FLOW

Enterprise

CustomersPhysical

Distribution

REQUIREMENT

INFORMATION FLOW

SuppliersPurchasingManufacturing

Support


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OverviewCustomer Service Management

Increased and intense competitions all around have made customer service as thekey differentiator in a marketing system. Customer service provides the single

source of customer information. It provides the customer with real time information

on promised shipping dates and product availability. Customer service is a valuable

business activity governing both resources and top management attention. Customer

service is being offered in many forms such as post warranty support, fast repairs,

speedy response to service calls from customers, easy availability of spares, qualified,

competent and customer friendly technicians.

Demand Management

Customer demand in the form of irregular order pattern is the largest source of

variability. Given this variability in customer ordering, demand management is a keyto an effective SCM process. Manufacturers are moving from a push system to

make to order mode, in such case predicting or forecasting demand is the key driver

on which all of the supply related decision will depend. The demand management

process must balance the customers requirement with the firms supply capabilities.

A good demand management system uses point of sales and key customer data to

reduce uncertainty and provide efficient information flows through out the supply

chain.

Customer Order Fulfillment

The key to effective SCM is to achieve high order fill rate. Order fill rate can be

defined as % of order fulfilled before or on the due date set by the customer.

Performing the order fulfillment process effectively requires integration of firmsmanufacturing, distribution and transportation plans.

Manufacturing Flow Management

This functional area decides how production should be organized and managed.

Traditionally production system uses push strategy but in a customer focus

environment pull strategy is more effective. To implement pull system, manufacturing

process must be flexible to respond to market changes. This requires the flexibility to

perform rapid change over to accommodate mass customization; orders are

processed on a just in time basis in minimum lot size. In a customer focused business

world, production process has to optimize balance between customer satisfaction and

efficiency.Procurement

Procurement is concerned with buying and movement of materials, parts or finished

inventory from supplier location to manufacturing or assembly plants, warehouse or

retail stores. Traditionally procurement is carried out on the basis of bid and buys

system whereas in new integrated concept long-term partnerships are developed with

core group of suppliers. Suppliers are involved at the early design stage which can

lead to reduction in product development cycle times. For quick response to

customer demand purchasing activities are carried out with rapid communication

mechanism such as EDI and interest linkages. This reduces the cost and time on the

transaction portion of the purchase.

Product Development and Commercialization

In todays fast changing environment new products are life bloods of a company. For

the firm to remain competitive it has to sharpen its product development times. This

requires that customer and suppliers must be integrated into product development

process.

Return Channel

Managing the return channel as a business process offers the same opportunity to

achieve a sustainable competitive advantage as managing the supply chain from an


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Introductionout-bound perspective. Effective process management of return channel enables the

identification of productivity improvement opportunities and break through projects.

Focusing effort on improvement in key business process is the foundation of SCM

philosophy. Thus the goals of these processes are to:

a) Develop customer focused teams that provide beneficial product and service

agreement to strategically significant customers

b) Provide a permit of contact for all customers, which efficiently handle their

inquiries.

c) Continually gather, compile and update customer demand to match requirement

with supply.

d) Develop flexible manufacturing system that responds quickly to changing marketconditions.

e) Manage supplier partnership that allows for quick response and continuous

improvement.

f) Fill 100% of customer order accurately and on time

g) Enhance profitability by managing the return channel (reverse logistics)

Activity 1

Take the case of an organization where you are working or about which you know of

and identify the key processes within that organization vis--vis those proposed by

Lambert.

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2.3 LOGISTICS-MARKETING INTERFACE

Traditionally logistics group assumed primary responsibility for warehousing, inventory

and transportation within many organizations while marketing group is responsible for

negotiation, promotion and selling. As neither group had responsibility for over all

channel management, conflicts arose at the expense of overall organization goal. The

organizations had realized that functional interdependence, not internecine conflicts, is

the key to satisfy customer needs. Despite the realization by logistics and marketingmanager that cooperation is essential marketers often criticize logistics department

for being cost minimizers having no concern for customer needs while logistics

department accuses marketers of chasing sale at any cost. Therefore it is essential

that organizations identify area of agreement and potential conflict. Senior

management must be keen to actively support cooperation between the two groups.

This can be assisted by performance measurement that rewards cooperation and a

spirit of interdependence that actively discourages parochial behaviour.


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Overview2.3.1 Logistics and Product Life Cycle

Product life cycle (PLC) is a key marketing concept that affects the relationship

between logistics and marketing. For different stages of PLC i.e., introduction,

growth, maturity and decline, different level of logistics support is required by

marketing. In the introduction and growth stage timely cost effective fulfillment of

order is a major requirement in ensuring initial acceptance of the product. Later as

sales slow down and the product moves into the maturity and decline stages, the

company changes to trimming cost as the product faces stiff price competition and

consequent pressure on margins. Hence there is need for a logistics manager to

understand what marketing is trying to achieve with each product and what

appropriate level of logistics support is required accordingly.

2.3.2 Areas of Logistics and Marketing Interaction

In todays competitive environment organizations are utilizing the benefits of their

established logistics/marketing interface to be competitive not in terms of product

and price but also logistics services tailored to meet individual customer needs.

These organizations are able to differentiate themselves from their competitors by

offering a total service with logistics forming an essential part of the total value

chain.

The major area of interaction between logistics and marketing includes (Gattorna

1995):

Product Design: This can have a major effect on warehouse and transportation

utilization (and therefore costs).

Pricing: This is the means by which logistics services customer demand

affects the overall cost of the product and in turn the organizations pricing

policies.

Market and Sales Forecasts: Marketing forecasts will largely dictate the level

of logistics resources needed to move products to customers.

Customer Service Policies: If marketing opts to offer a very responsive level

of service to customer, logistics resources, in the form of facilities and inventory,

will need to be very considerable.

Number and Location of Warehouses: This is one of the greatest areas of

contention and can only be satisfactorily resolved if marketing and logistics

develop the policy jointly.

Inventory Policies: This is another area of contention, as these decisions have

a significant bearing on operational costs and the extent to which desired levels

of customer service are achieved. It is another key area where policy should be

developed jointly.

Order Processing: Responsibility for who receives customers orders and the

speed and efficiency with which they are processed has a major impact on

operational costs and customers perceptions of service levels. This is anotherarea where joint policy-making is preferable.

Channels of Distribution: Decisions to deliver direct to the customer or

through intermediaries will greatly influence the level of logistics resources

required. As channels change, so will the resources required. Marketing should

definitely consult with logistics when making channel decisions.


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Introduction2.4 THE LOGISTICS-MANUFACTURING INTERFACE

Manufacturing and logistics are interrelated so no one can be considered in isolation.

Decisions made in these two areas commit the organization to relatively long-lasting

cost structures and also determine the manner in which the business competes in its

chosen markets.

To maintain its competitive position in a dynamic industry, the manufacturing and

logistics functions must respond positively by considering the manufacturing/logistics

network as whole and continuous improvement programmes coordinated across the

various activities like delivery service, production priority control and purchasing to

exploit the synergy available.

There are two fundamental competitive strategies, which every organization has to

decide to remain unbeaten in the competitive environment. Cost leadership i.e., be the

lowest-cost producer in the industry or meaningful differentiation i.e., to differ by

competitor in some form, that can be in terms of service like delivery time, delivery

reliability etc. or in terms of technical advantages like superior features, superior

product etc. In new environment, where integration is the driver to achieve

competitive advantage, organizations have evolved new approaches to develop

interface between two functions. The differences in these perspectives are shown in

Tables 2.1 and Table 2.2 when organizations decide to compete on the basis of cost

leadership and differentiation respectively.

Table 2.1: Manufacturing / logistics approach when the basis for competing is cost leadership

(Source: Gattorna 1995)

Basis for Competing: Lowest Cost Competitor

Old Approach New Approach

Cost-reduction programmes Eliminate all non-value adding activities/procedures/

tasks etc

Reduce inventory Reduce the need to buy capacity by shortening

internal lead times

Trim 10% all budget allocations Reduce the material conversion cost by simplifying

processes through integration and technology

Defer capital expenditure Emphasize product and process quality so as to

reduce costs associated with rework, breakdowns

etc.

Emphasize control on expenses Reduce need for inventory through superior planning

particularly direct labour systems, shortened internal lead times; linking

processes etc

Which also results in: Which also results in:

Inadequate support Improved product performance

Poor product quality Reduced product variability

Ageing equipment/processes Improved flexibility

Poor customer service Improved responsiveness to market

An image of being unreliable

Poor product availability

Poor delivery service


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Overview

Table 2.2: Manufacturing / logistics approach when the basis for competing is differentiation

(Source: Gattorna 1995)

Basis for Competing: Product Availability and delivery time

Old Approach New Approach

Increase inventory to act as a buffer Shorten internal lead times to improve responsiveness

to market

Increase number of branch warehouses Emphasize schedule performance to ensure reliable

supply

Increases capacity to provide flexibility Emphasize product and process quality so as to

reduce delays caused by rework, breakdowns etc.

Release orders early to production Utilize express transport and centralized distribution

to prevent misallocation of stockEmphasize production output Initial superior customer service and order entry

systems to enhance customer communication

Which also results in: Which also results in:

Higher costs Lower costs

Negatives cause by the complexity of Improved product performance

the system and poor product quality Reduced product variability

caused by emphasis on getting the

product out

Long internal lead times caused by An image of reliability

early release of works orders to give

the plant plenty of time

Stock-outs due to work order overload, Improved flexibility in volume and product mix

confused priorities and difficulty in

allocating stock to many warehouses

Logistics link the manufacturing both from characteristics of inputs i.e., suppliers of

raw materials and characteristics of market i.e., customers. For a given

manufacturing organization there is a production/branch warehouse configuration,

which satisfies most constraints or pressures imposed by the inputs or the markets.

For effective operation of manufacturing/logistic interface there are two primary

determinants i.e., Capacity and Location.

Capacity is related to location and logistics in the following way. First, production

capacity must be matching in some sensible way to the market demand then in

accordance with the production capacity matching is required for the logistics

network i.e., procurement, storage, order entry and processing, outbound transport,

branch warehouse and final customer delivery.

The capacity issues are very crucial decision and are required to change as per the

market demand and demand locations. Short-term solutions can be capacity

enhancement by overtime, second and third shifts, third party contracting, extension

of the existing facility and long-term solution are additional facility in a new location

or extensive capacity in new location. Short term decisions possess the least risk, and

impact on the logistics network only in terms of the additional capacity requirementwhere as long term solution demand a re-evaluation of the manufacturing/logistics

network not only in terms of the capacity of each component but also the strategic

necessity and location of each facility (factory, warehouse) in terms of its contribution

to the effectiveness of the total network. In other words, a change in location and

capacity of any one facility requires a review of the location and capacities of all

other facilities. Clearly, the issues involved in location, capacity and logistics are

inextricably linked.


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Introduction2.4.1 Customer Service Issues at the Logistics-Manufacturing

InterfaceCustomer service strategy is an on-going process of increasing both the quality and

number of links between the manufacturing organization and the customer. The

whole emphasis in todays service intensified businesses are to increase a series of

both human and information based technological relationships between customer and

the organization so that better customer services and satisfaction to the customer can

be realized. The issues at the manufacturing/logistics interface for better customer

service are as follows:

Demand Forecasting

The general function of product forecasting in the short to mid term is to contribute to

the process of ensuring the availability of stock for customers. This includes the useof distribution requirements planning (DRP) wherever appropriate. For the longer

term, forecasting at the product group level is crucial for manufacturing capacity and

flexibility decisions.

Customer and Supplier Oriented System

Organizational systems will need to be directly related to the issues of how to bind the

customer more tightly to the organization and how effectively integrate suppliers into

the overall supply chain with the objective of enhancing customer service.

The systems installed by organizations will need the capability to formally link the

customer in a form that benefits both parties. Systems will also be required to linkwith suppliers in a manner that gives meaning to the concept of strategic alliances. In

a strategic alliance the supplier and the manufacturer agree to a relationship that goes

beyond the normal commercial relationship such that each obtains synergistic benefits

similar to that obtained by forward/backward integration but with least associated

risks and negative attributes.

Plant Configurations

The location, nature and operating performance of manufacturing facilities, central

warehouses and branch warehouses impact heavily on both cost structure and

service levels. In the longer term, and in conjunction with other factors (systems,

supplies), the plant/branch configuration is a major structural input to reducing overall

supply chain costs. When the links between manufacturer and customer and

manufacturer and supplier are complete, a rethink of the logistics (supply chain)

network from supplier through to customer will be required, for two reasons:

Available technology, particularly information technology, will allow certain

plant/branch configurations, previously ruled out, to be feasible.

There will be an on-going need to reduce (in real terms) the cost of the network.

A key feature of this process will be the requirement of involving in an appropriate

manner both customers and suppliers. This will be new ground for many

organizations and will force a re-evaluation of values and mission in some

circumstances.Master Production scheduling

The master production schedule (MPS) is an area where a number of parties

(manufacturing, logistics, marketing, finance) have a vested interest. Often as not,

though, it is done by one group in isolation from the others. In the operational sense

the MPS is primarily concerned with stock availability within a set of constraints such

as capacity. As such, it is the single instrument, which demonstrates the plan for:

a) Finished goods inventory levels


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Overviewb) Customer service in terms of stock availability

c) Machine utilizationd) Capacity utilization

e) Labor productivity

f) Output

g) Need for overtime/casual employees and so on.

The real power of the MPS, however, is its potential to involve all interested parties.

In practice, when people from marketing, logistics and manufacturing get together

and agree on a schedule, the result is a superior schedule. Clearly the MPS may be

used as a vehicle to integrate a number of parties into the planning and decision-

making process with the result being a superior plan which, when executed, results in

superior customer service.

2.5 SUMMARY

In this unit, we have discussed how the supply chain works and what are the key

processes required to integrate the supply chain. We have also examined the critical

areas of logistics-marketing interface and logistics-manufacturing interface. These

interfaces are critical for enhancing supply chain performance. Finally we have

discussed how manufacturing-logistics interface could provide better customer

service.

2.6 SELF-ASSESSMENT QUESTIONS

1) Explain various supply chain processes for an integrated SCM. Are there any

other processes that you can think of?

2) What are the primary responsibilities of logistics group and marketing group

within an organization? Why there is a conflict between the two? What

measures can be taken to enhance cooperation?

3) What are the differences between manufacturing/logistics approach when the

basis for competing is

i) Cost leadership

ii) Differentiation

2.7 REFERENCES AND SUGGESTED FURTHER

READINGS

1) Bowersox D. J., Closs D. J. and Helferich O K, 1986,Logistical Management,

Macmillan.

2) Chopra S. and Meindl P, 2001, Supply Chain Management: Strategy,

Planning, and Operation, Pearson Education Inc.

3) Christopher M., 1992, Logistics and Supply Chain Management: Strategies

for Reducing Costs and Improving Services, Pitman.

4) Lambert D. M., 1998, Fundamental of Logistics Management, McGraw Hill.

5) Gattorna J, 1995,Handbook of Logistics and Distribution Management,

Ashgate Publishing Company.

6) Gattorna, J. L. & Walter P. W., 1996, Managing the Supply Chain : A strategic

Perspective, Plagrave Macmillan Indian Reprinted Ed., 2004


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IntroductionUNIT 3 CUSTOMER FOCUS IN SUPPLY CHAIN

MANAGEMENT

Objectives

After reading this unit, you would be able to:

understand the key processes required to enhance customer focus in the supply

chain;

define Efficient Customer Response (ECR);

define Quick Response (QR) and Accurate Response (AR); and

examine chain relationship within and beyond organization.

Structure

3.1 Introduction

3.2 Customer Service

3.3 Functional vs. Innovative Products: SCM Issues

3.4 Efficient Consumer Response

3.5 Quick Response and Accurate Response

3.6 Chain Relationship within and Beyond the Organization

3.7 SCM as a Core Strategic Competency

3.8 Summary3.9 Self Assessment Questions

3.10 References and Suggested Further Readings

3.1 INTRODUCTION

Management of a supply chain means managing all the different processes and

activities that produce value in the hands of the ultimate consumer. A supply chain

can be viewed as the network of entities through which the material and information

flow. Those entities may include suppliers, carriers, manufacturing sites, distribution

centers, retailers and customers. [1]. Effective streamlining of the supply chain canimprove the customer service levels dramatically, reduce excess inventory in the

system, and cut excess costs from the network of the organization. [2]

Supply Chain Management competency contributes to an organizations success by

providing customers with timely and accurate product delivery. The customer is any

delivery destination from consumers homes to retail and wholesale businesses to

the receiving docks of a firms manufacturing plants and warehouses. The customer

being serviced is the focal point and driving force in establishing Supply Chain

Management performance requirements. It is important to clearly understand

customer service deliverables when establishing Supply Chain Management

strategies.

The customer-focused marketing is built on three fundamental concepts.

The essence of a marketing orientation to business policy

Developing Supply Chain Management competency as strategic resource to

customer service planning

The changing nature of most desired Supply Chain Management practice to

accommodate product life-cycle requirements.

This unit will discuss the customer focus in Supply Chain Management.


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Overview

Table 3.2: Physically Efficient Versus Market-Responsive Supply Chains

Physically Efficient Process Market-Responsive Process

Primary Purpose Supply predictable demand Respond quickly to

efficiently at the lowest unpredictable demand in order

possible cost to minimize stock outs, forced

markdowns and obsolete

inventory

Manufacturing focus Maintain high average Deploy excess buffer capacity

utilization rate

Inventory Strategy Generate high turns and Deploy significant buffer

minimize inventory stocks of parts or finished

throughout the chain goods

Lead-time focus Shorten lead time as long as Invest aggressively in ways to

it doesnt increase cost reduce lead time

Approach to choosing suppliers Select primarily for cost Select primarily for speed,

and quality flexibility, and quality

Product Design Strategy Maximize performance and Use modular design in order to

minimize cost postpone product

differentiation for as long as

possible

A global brand can be greatly benefited by having gathered knowledge of customers

and their choices, through channel partners; and can create global products, which

may need to be adapted as per local preferences.

Activity 1

Define Customer Service for two organizations one offering a product (Colour

Television) and another one offering a service (Personal Banking). What are the

targets you will set for these organizations for achieving a high image on customer

service and evaluating the performance level?

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3.4 EFFICIENT CONSUMER RESPONSE

Since 1980s, many organizations have been going through, the job of reengineering

their business process and it involved revisiting their supply chain. One Efficient

Consumer Response study estimated that 42 days could be removed from the typical

grocery supply chain, freeing up $30 bn in current costs and reducing inventory by

41% in USA. A study by A.T.Kearney estimated that supply chain costs represent

more than 80% of the cost structure in a typical manufacturing company. For

retailers, this figure is 70 to 80 %. These numbers indicate that even slight

improvements in the process can translate into millions of dollars on the bottom line.

Some of the critical success drivers to achieve improvements have been suggested

and these are:

Well-defined processes with well-defined guidelines for decision making;

Removal of the organizational and functional barriers;


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Introduction Early visibility to changes in demand all along the supply chain;

A single set of plans that drives the supply chain operations and integratesinformation across the supply chain.

Some of the learning from case studies on SCM

a) ABC Foods Company:

Materials common across businesses are purchased centrally to take advantage

of economies of scale, other items exclusive to a given business unit are

purchased by the unit,

Supply strategy includes four key practices:

i) Consolidation of the supplier base,ii) Development of supplier partnership,

iii) Penetration into supplier performance,

iv) Commitment to Quality.

Manufacturing plants are strategically located throughout the US, based on

supplier or customer base,

Distribution network includes facilities strategically located based on customer

demographics, as well as transportation efficiencies. Some of these facilities are

self owned and third parties operate others.

Main focus in distribution was to establish customer partnerships, which wasbased on ECR concepts including continuous replenishment.

The ECR includes the following strategies:

1) Widespread implementation of EDI (Electronic Data Interchange), up and down

the supply chain; both between Supplier and Manufacturer, Manufacturer and

Distributor, Distributor and Customer.

2) Greater use of POS (Point of Sales) data obtained by greater and more

accurate use of bar coding.

3) Co-operative Relationship between Manufacturer, Distributor, Suppliers, and

customers.

4) Continuous Replenishment of inventory and flow through distribution.

(Like JIT (Just-in-time), Cross Docking)

5) Improved Product Management and Promotions.

6) Could be the best source of Competitive Advantage.

One of the most beneficial aspects from ECR could be building relationship with the

Customers:

Customer satisfaction improves, as customer gets what he wants

Capturing database of customer through a smart card device and link it to his

purchase patterns in terms of item, quantity, size and time-offering volume or

value bases incentive scheme.

Make use of such database to forecast future demand and thereby achieving

better customer service and less stock out situations.

Inform customers of new arrivals through direct mailers.


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OverviewSince the ECR is a strategic option for an organization, we first need to understand

what factors have driven a firm to re-look at their current strategy and what are the

options an organization has to respond to such factors, keeping in mind past

performance and internal capabilities and resources.

Once a strategic option has been chosen after evaluating possible alternatives, firm is

required to go through the process of implementation, which includes structure and

systems, people, skills, values and culture, resources and leadership.

The Efficient Consumer Response concept popularly known as ECR is a strategic

choice for many organizations to survive/grow in the current business environment,

which is driven by competition, speed, technology, customer satisfaction and ever

changing customer preferences. ECR provides a competitive advantage to

differentiate from other players.

ECR movement, which followed another movement called Quick Response in textile/

apparel industry, initially started in grocery industry to respond to the following

customer service expectations, most efficiently and effectively.

They get what they want, when they want it, and as much quantity as they

need.

They get it at the most competitive price

They achieve satisfaction or delight, through customer value addition.

They feel good of having received attention.

They feel happy being cared for.

They enjoy being listened to and being served quickly.

In order to fulfill these expectations organizations will be required to re-orient and

review the areas like structure and systems; people, skills, values and culture;

resources and leadership.

Structure and Systems

ECR has a long-term impact on the effectiveness of the value delivery system to the

customers, by way of a collaborative relationship between manufacturers,

wholesalers, retailers, brokers, and transporters through application of advancement

in Information and Communication Technologies (ICT). Therefore, the structural

changes may be necessary to enhance and focus on proper co-ordination and

collaboration among channel partners. Many organizations have switched over from

product focus to customer focus.

Application of technology for data capturing and processing to help quick and

accurate decision-making is a must. EDI and Bar Coding technology can only enable

transfer of POS data to the channel partners and avoid losses due to over/under

stocking of products throughout the channel. Through integrated EDI; purchase order,

delivery order, Invoice, Shipping bill, Stock Information, Truck Movement Information

can be exchanged between channel partners.

Earlier firms used to produce goods as per their capacity and convenience to achieve

economy of scale and profitability. Now the manufacturing plans are customer driven

and there is major dependence on POS data at SKU level (stock keeping unit) for

forecasting, in many organizations. New product introduction system will be required

to draw major inputs from customer feedback or customer survey. It has to be done

at a faster speed than the competitors and frequency has to be improved due to

shortening of PLC. Even an innovation cant assure a very long-term stay and

benefits. Moreover, failure rates are also to be reduced.


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IntroductionAnother important system change necessary for more meaningful decisions, is to

introduce Activity Based Costing (ABC) instead of using full cost allocation systems.

The Internet revolution will create a new dimension in achieving ECR. Channel

partners can share data through common sites and consolidate/ process the same, for

useful decision making and information sharing, in a most cost effective

26619608 Notes Logistics Supply Chain Management

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