LSCM Mod1 Introduction

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Module 1Introduction


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will not be between organizations

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I 1980s were about ualit 1990s

were about re-engineering, then the2000s will be about velocit

.

-Bill Gates

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og s cs an upp y a n anagemen

Su l ChainSu l Chain encom asses allencom asses all

Organizations and activities associatedOrganizations and activities associated

of goods, from the raw materialsof goods, from the raw materialss age,s age,

through to the end user,through to the end user,

as well as the associated informationas well as the associated informationflows.flows.

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Supply Chain ManagementSupply Chain Management is theis then egra on an managemen on egra on an managemen osupply chain organizations andsupply chain organizations and

ac v es roug coopera veac v es roug coopera veorganizational relationships,organizational relationships,e ec ve us ness processes, ane ec ve us ness processes, an

high levels of information sharinghigh levels of information sharingo crea e go crea e g -- per orm ng va ueper orm ng va uesystems that provide membersystems that provide member

organ za ons a sus a na eorgan za ons a sus a na ecompetitive advantage.competitive advantage.

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When a Computer is not a Computer?

When it is in New Delhi where as it is

expected to be in Bangalore at thatpar cu ar momen

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Business Organizations have come torecogn ze t e mpact t at og st cs

Management can have in achievingcompetitive advantage!

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Lo istics & Related Services

Quality AssuranceQuality Assurance

Warehousing & DistributionWarehousing & Distribution

Pick & PackPick & Pack

Customs ClearanceCustoms Clearance

Vendor ManagementVendor Management TransportationTransportation

Credit Management &Credit Management &InvoicingInvoicing

Forwarding.Forwarding.

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Bar codingBar coding


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LOGISTICS:LOGISTICS:

Definition:Definition: Logistics is the process ofLogistics is the process of

strategically managingstrategically managingthe procurement,the procurement,movement and storage of materials, partsmovement and storage of materials, partsand finished inventory (and the relatedand finished inventory (and the related

information flows throu h theinformation flows throu h theorganizationorganizationand itsand itsmarketing channelsmarketing channels

profitabilityprofitabilityarearemaximizedmaximizedthrough thethrough the

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-- ..


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LOGISTICS is planning, implementing andLOGISTICS is planning, implementing and

con ro ng e c en e ec ve ow ancon ro ng e c en e ec ve ow anstorage of goods, services, information fromstorage of goods, services, information from

point of origin to point of use /point of origin to point of use /consumptions to meet customer needs.consumptions to meet customer needs.

FORM Utility

Logistics

PLACE,TIME

utilityMarketingPOSESSION

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Utility


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Logistics Activities

Transportation Production planning

Packaging Customer serviceater a s an ng

Order fulfillment

S te ocat on

Other related

Forecasting activities

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Traces of outsourcing was seen when Charles S. Rollsbecame selling agent for cars made by F. Henry Royce

1904

characterized as an inventory push era that focusedprimarily on physical distribution of finished goods

1960-1975

1975-1990 Companies began migrating from an inventory push to

1980- Emergence of SCM

a cus omer pu c anne

1985- a art ntro uce t e concept o ross oc ngInternet revolutionized the distribution system ofthe business1996-

Concept of e-commerce changed the def in ition ofbusiness

1998-

Collaborative SC2008-


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RawMaterials Refine /Prepare Produce Transport


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i i

Brakes

TiresCarLot

Bumpers

Upholstery Manuf.

Car

Lot

Engine

Transmission

CarLot.


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Oil

WellRefinery

ChemicalPlant

ClothMill

DressFactory

Customer

Oil

Refinery Chemical Cloth Dress Customer

Well Refinery Plant Mill ressFactory Customer


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Independent

Business

ComponentSupplier Client

Transactions Transactions

Purchase

Receive

Check

Pa

Internal

Processing

Sell

Deliver

Invoice

=


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Customer could be an internalcustomer or an external customer

Next, we see the processes performed in a supply chain as a CYCLE view


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Manufacturer

Customer

DistributorRetailer

Cycle II I


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SCM takes longer to react to the changing market place

Push View of SCM

Production decisions are usually based on long-term forecasts

SCM experiences increased transportation costs, high inventorylevels and hi h manufacturin costs

Pull View of SCM

anu ac ur ng s eman r ven so a s coor na ew ith actual external customer demand rather than a forecast

Lead-time reduction occurs as the variabilities are better

monitored.

Are often difficult to implement when lead times are so longthat it is impractical to react to demand information


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The bullwhip effectis a phenomenon observed in supply chainswherein the demand variability increases as one movesups ream rom re a ers o s r u ors o manu ac urers

RetailersWarehouses/

Distributors

20Manufacturers


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Bullwhip EffectBullwhip Effect

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It distorts the order information & am lifies order variabilit .

Impact of Bullwhip Effect:

-- Inventory: More safety stock needed

-- Transportation: Lower utilization of transportation

Higher

-- Manufacturing: Lower capacity utilization

-- are ousing: ore ware ouse capacity nee e

-- Customer Service: Lower service eve , more ike y to causestockouts and lost sales

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Causes of Bullwhi Effect

1. Demand forecast updating

2. Rationing and shortage gaming

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Information Sharing to

Use of point-of-sale (POS) data1. Demand Si nal

n t at vesause o u w p

Electronic data interchange (EDI)

Vendor-managed inventory

Lead-time reduction

Processing

Sharing sales and inventory data

Allocation based on past sales

2. Shortage Gaming

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Competitive Advantage:

Bases for success in the Marketplace

The Customer

The Com etition

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CustomersSeekbenefits at

Acceptable prices

Value Value

Assets&

Utilization

Assets&

UtilizationCostdifferentials

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Company CompetitorSource: Logistics and Supply Chain Management Mr. M. Christopher


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Competitive Advantage achieved

- By being competitive in Quality & Service.

- y opera ng a ower cos .

- By making greater profit.

Customer is not willing to compromise onQua ity or Service a ter sa es .

t s, t ere ore, t e respons ty o everySCM / Logistics Manager to contain costs

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an a so to prov e more va ue.


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Success ul Com anies have:

OrValue Advantage

Or

Both!

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Productivity Advantage:

Improving the bottom-line must be a passion!!

Key Steps involved in building a proper Costanagemen rogramme are:

- Structure

-

- Negotiating costs with zero-base pricing.

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Use the Tool AIM & DRIVE

Agreeing on the need to manage costs.ent y ng cr t ca costs.

Measuring secondary & tertiary costs.e n ng e ey cos r vers eve op ng

strategic options.

,cause costs.

Im lementin an action lan.

Verifying the plan with cost monitors.Eternall im rovin & modif in the rocess.

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UseofLearningCurve:

Costper

Unit

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Cumulativevolume


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Value Advantage:

There are 4 types of values:

- Use

- Esteem- . .,

- Exchange

Value Ratio = Function

Cost

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,


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o Customers do not bu roducts the bubenefits.

, .

o Benefits may relate not to the products,

Reputation.

o eren cus omers a ac erenimportance to different benefits.

o Markets are becoming more servicesensitive.

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Brand Image.

,

market status. us, ere s a nee o see eren a on

through other means other than technology. Thus, service has gained more importance!

As a result one has to build ood

relationships with the Customers throughro er service!!

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such as:

- e very erv ce

- After Sales Services

- Financial Packages.

-- Training etc.

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Successful Companies often tend to

types of advantages.

High Leader Service

Valuevan ages ommo y osLow Market Leader

Low High

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Productivity Advantage


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Basic Ob ective should be to et out ofthe I Quadrant i.e. from the CommodityMarket.

The immediate aim should be to move toII uadrant i.e. Cost Leader.

Ideally, this should be done through

,this is a major cost component today in

.

This can be achieved through re-

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.


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First,letusunderstandwhatarethe majorFirst,letusunderstandwhatarethe major

StockinTrade.StockinTrade.RawmaterialRawmaterial

Finished

goodsFinished

goods

FACILITIESFACILITIES ForStoring,Assembling,FabricatingForStoring,Assembling,Fabricating

a aan na ys sa aan na ys s

WAREHOUSING&PACKAGING

RESPONSIVENESSRESPONSIVENESS

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The Chan in Lo istics Environment

A] The Customer Service Explosion

B Time Com ressionC] Globalization of Industry

.

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A] The Customer Service Integration:

- ,

with regard to quality as well as service.,

through value addition and the primary .

- Customer Service may be defined as

e co e rov o o me aceutility.

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- Products do not have value till they are

required time & place.

- ompan es w o ave accor e gpriority to Logistics have done well. Forexamp e, erox, , ene on, e

Computers, Asian Paints etc.- Companies like Mcdonalds, BritishAirways etc. have succeeded since they

strongly believed that managing thelogistics of service delivery consistently

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is crucial to gain the edge.


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B]Time Compression:

- Product Life Cycles have becomeshorter

- Users / Customers need JIT deliveries-

an alternate, if their first choice is not

.- There is a need to improve the quality

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- The main issue here is the problem of

ex en e og s cs ea - mes.- This could be the result of a Just-in-

ca e a u e.

- What is essential is the integration ofmar e ng manu ac ur ng ann ng.

- Very often, purchasing & manufacturingave re r c e v ew o e nademand, normally due to extended

.- Hence, a new approach to the

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.


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C] Globalization of Industry:

- In the global business, materials &com onents are sourced worldwide,

manufactured offshore and sold indifferent countries erha s with localcustomization.

-dominated by MNCs

,become the main concern.

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- They seek to achieve the competitive

edge by identifying world markets fortheir product and then developing amanu acturing & ogistics strategy tosupport their marketing strategy.

- Where required or possible, they use

the service of a third art for thispurpose.

- i i

cost advantage through standardization

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D] Organizational Integration:


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D] Organizational Integration

- upon strict functional divisions & hierarchies.

- ,

customer-focused materials flow under such.

- Broad based integrators are required toac eve mar e p ace success ase uponmanaging processes & people that deliver

erv ce.- The new Managers will be market-oriented

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wit a s arp ocus on customer service


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The new Rules of Com etition- An Organization can no longer act as an

isolated and inde endent entit .

- Organizations need to create valuedeliver s stems that are moreresponsive to the fast changing markets.

- The also need to be more consistent &reliable in the delivery of these values.- A com an can not totall rel on its

Branded products anymore. Instead, ithas to compete through its capabilities

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an compe enc es.


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- Com anies have to focus on their corecompetencies and outsource the rest, to becost com etitive.

- Since Quality is taken for granted, thecusto er looks ore at deliver lead-ti esand flexibility.

- ,the Point Of Purchase (POP)

- , -service based rather than product based.

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F h C i h d d i


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- Further, Companies have started reducing

e r supp y ase. e ren s owar ssingle source and also long term

.

- Similarly, Companies have started seeking

key accounts.

horizontal i.e., the Companies will want to

i i

than looking for more customers to whomto sell the same roduct.

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- The basis for com etin in the new era willbe:Com etitive advanta e =

Product excellence x Process excellence- ,cycles have complicated the entire issue.

E. ., Com uters.- In many cases, the life of a product on the

market is less than the time taken for

designing, procurement, manufacturing anddistribution of the same product!

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- , ,

of achieving success is to accelerate

the entire Logistics System far more

.

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Th k i h h b i


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Three key issues that have bearing on

effective Logistics are:

Responsiveness

Reliability

Relationshi s

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1) R i


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1) Responsiveness

- Response to Customers needs have to

-

- Customers are also looking out for

problems.

- e om an e ave o e, ere ore,very agile.

- In uture, Organizations wi e moreDemand driven than Forecast driven!

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2 Reliabilit

- Significant improvements in reliability can-

processes that impact the performance.-

processes is better than Quality Control..

- A key to improving reliability in Logistics

process s o mprovep pe ne v s y.

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3 Relationshi s- First Step is to reduce supplier base.-

improved quality, innovation sharing,reduced costs, and inte rated schedulinof production and deliveries.

- Com anies are lookin more & more atPartnerships.- Successful SCs are those which are

governed by a constant search for win-win solutions based upon mutuality & trust

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Logistics related Costs


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Log st cs related osts

The major categories are:

1. Customer Service2. Transportation

3. Warehousin4. Order processing and information

.

6. Inventory Carrying

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Customer Service Levels


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-- Impact of negative publicity on prospective

customers

(Every disgruntled customer tells on anaverage nine others about his / her

dissatisfaction)Transportation Costs

- , ,distance, points of origin / destination and

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.

Warehousing costs


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Warehousing costs

- These are created by the warehousing &storage activities and by the plant &ware ou e e e ec on.

Order Processing / Information systemsco

- Includes costs related to activities sucha or er roce ng, r u oncommunications and forecasting demand.

- ve me e e area ex reme yimportant to support good customer

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.

Lot Quantity Costs


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Lot Quant ty osts

ese are ue o procuremen or pro uc onCosts and vary with the changes in ordersize or frequency. These include:

- Set-u costs

- Capacity lost

- ,- Price differentials due to procurement in

eren quan es.- Order costs associated with order

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placement & handling.

Inventory Carrying costs


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Inventory Carrying costs

- Includes inventory control, packaging,salva e and scra dis osal.

- The Inventory Costs include

o Inventory Service Cost (i.e., insurance &axe on nven ory

o Storage Space Cost

o Inventory Risk Cost (i.e., obsolescence,ilfera e, relocation within the

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information system and damage)

What is Customer Service?


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What is Customer Service?

- We have already seen that Service isdirectl related to availabilit .

- Availability is impacted by factors like, ,levels, order cycle time etc.

under three areas:

a re- ra ac o e emeb) Transaction elements

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c) Post-transaction elements.

Pre-transaction elements relate tot li i


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cor orate olicies or ro ra es e. .Written statements of service policy,adequacy of organizational structure,system flexibility etc.

Transaction elements are those customerservice variables directly involved inperforming the physical distributionunc on e.g., pro uc e very re a y.

Post-transaction elements are generally

suppor ve o e pro uc w e n use e.g.,product warranty, parts & repairs service,

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product replacement.

Pre-transaction elements:


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Pre transaction elements:

communicated to Customer?

Customer.

o rgan za on ruc ure ere aCustomer service structure in place?)

o System exi i ity Can we a apt ourservice delivery system to meet

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particu ar nee s?

Transaction Elements:


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Transaction Elements:

the reliability / variation?

Order Fill Rate (What is the successra e

Order status information ( How long does

it ta e to respon to a query? o weinform the customer of problems or do

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t ey contact us?

Post-transaction elements:


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Availability of Spares-

engineer to arrive & what is the first call fix Product tracing / warranty (Can the location

identified? Can we maintain / extend thewarrant to customers ex ected service

levels? Customer Com laints Claims etc. Prom tl

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dealt? Customer Satisfaction surveyed?)


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u omer erv ce ay a v a ro e ndeveloping new Customers.

However, it is more im ortant to retainthe existing Customers.

Thus, the prime objective of any

enhance customer retention.

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should be so high that they do not

alternates.

An Organization should consciouslys r ve o ma n a n s reng encustomer loyalty. e.g., Frequent Flier

programmes

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- e concep o er ec r er ePerfect order is achieved when thecu omer requ reme are me

fully.

- The measure of service is ex ressedas the percentage of occasions inwhich the customers requirements

are met in full.

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- ,any levels. e.g., segment, country or by.

- One frequently encountered measure of theperfect order is on-time, in-full (OTIF).

- ,

documentation, labeling, packaging etc.).

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- Example: Actual performance across


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p p

a or ers or t e ast mont s wasas follows >

On-time: 90%,- ,Error-free: 90%.

us, e ac ua per ec or erachievement would be :

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Setting Customer service priorities


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- Paretos 80/20 rule can provide the basisfor developing a more cost-effectiveerv ce ra egy.

- This rule helps in providing the highesterv ce o ey cu omer ey ro uc .

- This rule is extended as ABC Analysisan u omer are c a e a , orCategories and serviced accordingly.

- e cou e , arespectively and can be modified from

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.

However, care should be taken to ensure


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and not sales revenue or volume, as these.

In addition, the customer-wise profitability.

Apart from this, the ABC Analysis can alsoe use to ec e t e stoc - o ng po cy.

For example: Product Category Stock Availability

A 99%B 97%

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C 90%

Alternatively, A items may be stocked as


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close as possible, to the customerswhereas, B & C class items may bestocked urt er back up t e SC.

The savings in stock-holding costs

fewer places would normally cover thei i i i

customer by means of a faster means ofi i i

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Managing product service levels:


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High

1 See CostReduction

2 Pro uct igavailability

o ume

(by SKU)

Low

(3) Review (4) JIT delivery

Low High

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ro on r u on y

Actions to be taken:


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Quadrant 1- Re-examine the Product &

Quadrant 2 Offer highest levels of service y o ng em c o e o e cu omer .

Quadrant 3 Probably, there is a strong case

for dropping these items due to their low

i i

Quadrant 4 Practice JIT deliveries in order

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o re uce o a ve me ve or e .

Transportation MajorDecisions


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ModeofTransportationthemannerinwhichaModeofTransportationthemannerinwhicha

, , , , . , , , , .

RoutesRoutes Pathsalon which roductscanbePathsalon which roductscanbe

shipped.shipped.

InInhouseorOutsourcehouseorOutsource thetransportationthetransportation

function[Manycompaniesusethirdpartylogisticsfunction[Manycompaniesusethirdpartylogistics

(3PL)

providers

for

some

or

all

transportation

(3

PL)

providers

for

some

or

all

transportation

activitiesactivities

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TRANSPORTATIONPROCESS


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Involves:

- Selection of mode- Routing

- Com liance with Re ulations- Selection of Carrier

Is frequently, the single largest Cost

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amo g og c ac v e .


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MOTOR:ADVANTAGES


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- These are cost effective- Delivery is quite quick

- This mode is ideal for any short distance- A refrigerated van can be used to

transport perishables- Monitoring of the location of goods is easy- Mass movement of oods is ossible

- Point-to-point service and-

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MOTOR:DISADVANTAGES


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- Delays due to traffic jams

- Problems due to vehicle breakdowns /accidents

- - -- Unfavorable weather resulting in a

.

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RAIL:ADVANTAGES


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The advantages are:

- This mode is Faster & quicker- Has high carrying capacity

-- Most of all, is safe and reliable.

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AIR:CHARACTERISTICS


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Air - The important Characteristics are:

- This mode is the fastest- orma y use o carry g va ue ems

- Generally carries light weight material

- an e ex e ut cou e expens ve

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AIR:ADVANTAGES


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- Fast delivery (usually between 24 & 48

hours)- Faster fulfillment of customer orders

- with short life

- Lesser inventory and

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- Improve service eve s.

AIR:DISADVANTAGES


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- Flight delays / cancellations

- Lack of direct connections in some cases

- Delays due to customs / excise

- High cost and customers / suppliers may

result collection / delivery may be costly

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WATER:CHARACTERISTICS


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Water- The im ortantCharacteristics are:

- Can carry bulky materials

- s o ow va ue w en compare toother modes

- Movement is slow

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WATER:ADVANTAGES


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- u a e or pro uc w ong ea - me .

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WATER: DISADVANTAGES


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- Longer lead-times / delivery times

- Problems arising due to bad weather

- Difficult to monitor exact location ofgoods in transit

-- High cost and suppliers / customers may

,

collection / delivery may be costly & time

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PIPELINE:CHARACTERISTICS


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Pipeline - The importantarac er s cs are:

- Liquids and near liquids are

trans orted usin this mode- However, the mode is inflexible and

-

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- The mode has limited a licabilit

- Is certainly not widespread.

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LOGISTICS SERVICE PROVIDERS

u ourc ng o ran por a on unc on


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u ourc ng o ran por a on unc on Main reasons for opting for Outsourcing are:

- Financial (Asset release, Cost reduction andConsolidation)

- Strategic (Non-core activity, access to the

i i i i imanufacturing systems and greater controlon SC

- Service related (Flexibility, more focus on

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responsive)

THIRD PARTY LOGISTICS PROVIDER3PL


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defined asthe services offered by a middleman in

the Logistics Channel that hasspecia ize in provi ing, y contract, ora given period, all or a considerable

u er o e og c ac v e or other firms.

A middleman could be a broker, a freight

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, .

TYPES OF 3PL PROVIDERS


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-

Warehouse/Distribution-Based

orwar er- ase Financial-Based

Information-Based

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ran or a on a e


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ran or a on- a eServices extend beyond transportation

to o er a compre ensive set o

logistics offerings.Leveraged3PLs use assets of other

firms.

Non-leveraged3PLs use assetsbelon in solel to the arent ir .

Ryder, Schneider Logistics, FedEx

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,examples of 3PLs


are ouse s r u on ase


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are ouse s r u on- aseMany, but not all, have former

ware ouse an or s r u on

experience. rans on o n egra e og s cs as

been less complex than for the

.DSC Logistics, USCO, Excel,

,

examples of warehouse/distribution-

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orwar er- ase


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orwar er- aseEssentially very independent

middlemen extending forwarder roles.

Non-asset owners that ca ablprovide a wide range of logistics

services.AEI, Kuehne & Nagle, Fritz, Circle, C.

. ,

examples of forwarder-based 3PLs

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Financial-BasedProvide freight payment and auditing,

cost accounting and control, and toolsor monitoring, boo ing, trac ing,

tracing, and managing inventory.

Cass In ormation Systems, CTC,Information Services, and Fleet

-

based 3PLs

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In ormat on- ase


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In ormat on ase

Significant growth and development inthis alternative cate or o Internet-based, business-to-business,

electronic markets or trans ortationand logistics services.

Transplaceand Nistevoare examples

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- .

CHARACTERISTICS OF 3PL


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Perform outsourced logistics activities

rocess managemen u p e ac v es

More customized services

Mutually beneficial and risk-sharing

Long-term commitments (1~ 3 years)

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ADVANTAGES OF OUTSOURCING TO 3PL


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Reduction in workforce

e uction in Cyc e Time

Improved Responsiveness

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OUTSOURCING LOGISTICS ACTIVITIES -

- :


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o mpac on n- ouse wor orce

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REPORTED PROBLEM AREAS


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Service level commitments not realized.

Strate ic mana ement skills lackin .

Cost reduction goals not realized.

Cost creep and price increasesoccurr ng.

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mprovemen s an ac evemen s ac ng.

REPORTED PROBLEM AREAS

ontro o outsource unct onsdiminished


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n u u un ndiminished.

Consultative, knowledge-based skillsac ng.

ec no ogy capa es no e ngdelivered.

Time and effort spent on logistics not

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.

LSCM Mod1 Introduction

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