Supply Chain and Logistics Project

Supply Chain and Logistics Management
TITLE OF THE PROJECT
“SUPPLY CHAIN AND LOGISTICS MANAGEMENT”
NAME AND ADDRESS OF THE STUDENT:
KAMLESH I. PAREKH.
A/403, SHALIBHADRA PALACE,
OPP. SHIWAR GARDEN,
NEAR BHRAMADEV TEMPLE,
MIRA BHAYANDER ROAD,
MIRA ROAD (E),
THANE – 401 107.
NAME AND ADDRESS OF THE STUDENT’S COLLEGE
ANJUMAN – I – ISLAM’S
AKBAR PEERBHOY COLLEGE OF COMMERCE AND
ECONOMICS
MAULANA SHAUKATALI ROAD,
MUMBAI – 400 008.
DATE OF SUBMISSION:
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A project report is submitted in partial fulfillment of the requirement for
the Bachelor of Management Studies, University of Mumbai – 400 032
KAMLESH I Parekh
T.Y.BMS
ROLL NO. - 24
SEMESTER-V
2003 - 04
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DECLARATION
I Kamlesh I Parekh, a student of Akbar Peerbhoy College of Commerce and
Economics, TYBMS Vth
Semester, hereby declare that I have completed this
project report on “SUPPLY CHAIN AND LOGISTICS MANAGEMENT”
in the academic year 2003-04, the information submitted is true and
original to the best of my knowledge.
(KAMLESH I PAREKH)
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CERTIFICATE
I Principal S.A.M. Hashmi here by certify that Mr. Kamlesh I Parekh of
T.Y.BMS (Semester—V) of Akbar Peerbhoy College of Commerce and
Economics has completed the project on “SUPPLY CHAIN AND
LOGISTICS MANAGEMENT” in the academic year 2003-04. The
information submitted is true and original to the best of my knowledge.
(Prof. Vikram G. Shrotri) (Prof. S.A.M. Hashmi)
Project Co-ordinator. Principal
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ACKNOWLEDGEMENT
Entrance, hard work, gradual progress and an exciting year, that’s
how I have reached this level and now as I stand at the threshold of the aside
world, I take a look of the past year which I spent in this college. Our
performance with their devotion, have molded me in to confident and aspiring
student all through this year.
The project has been a rich learning experience and a thorough
understanding of the Supply Chain and Logistics concepts. It gave me a first
hand experience and enabled me to understand the difference between
Logistics and Supply Chain Management.
A real artist never displays his work until he has a
feel of it to his soul. My guide for the project Mr. Vikram Shrotri,
whose constant encouragement and guidance, belong to that
galaxy of artist those who have put their art into every part of
this project. Thanks are also due to Prof. R. Subramanian,
without whose constant guidance this project would have
remained uncomplete.
Also at the outset, I would like to express my cordial
thanks to our Principal Mr. S.A.M. Hashmi, and B.M.S
coordinator who guided, instructed and encouraged me for
compiling this project report.
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I would also like to acknowledge the assistance and
encouragement of my family, my friends, and all others for
supporting me throughout the completion of this project.
Kamlesh I. Parekh.
Executive Summary
Title of the Project: Supply Chain And Logistics Management.
About the Project: Today industry is the backbone of any economy. Every
economy has its own style of managing its regime. Doing
business is not the same as it was in the earlier. Due to the
changing behaviour and awareness of the customer, which lead
to intense level of competition. Businessman has evolved too
many new concept for facing competition and keeping them
self a step from the competitor. Among those concepts ‘supply
chain’ is one of the emerging and successful concepts, which is
used in the business.
Though ‘Supply Chain’ concept is very old, but with the help of up coming
technology and IT revolution supply chain concept has got a boost. Supply Chain is
not a concept alone but also is a methodology of doing business in today’s business
scenario. Effective control of the flow of components and materials to the
manufacturing or assembly line is a key to cost effective manufacturing. In an optimal
supply chain, materials and components are received just-in-time to enable lean
manufacturing, i.e., the right product, in the right place, at the right time, at the lowest
possible cost. In other words, the wrong product, in the wrong place or at the wrong
time, at higher than expected cost.
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Objective of the study:
• The main objective of this project is to enable me to know and understand the
various aspects of ‘Supply Chain and Logistics Management’.
• Gain practical as well as the theoretical knowledge about the subject.
• Problems faced in maintaining an efficient Supply Chain
Research Methodology:
The methodology used for carrying out this study was by means of secondary
data. The secondary data was collected from various articles, magazines, books and
websites. The research underlying this study that the Supply Chain and Logistics
Management concept have entered the mainstream and in some cases, are the leading
edge of the rapid changes transforming the business economy.
Constraints:
The major constraint faced during making the project was that
adequate information about the concept of Supply Chain and Logistics Management,
the technicality of its operations. Though the concept is very old but very few
companies have adopted it with complete efficiency, hence it was the part of the
difficulties I faced while collecting the data.
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Table of Contents
INTRODUCTION 1 - 2
Distinguish between Logistics and Supply Chain Management 3
The Evolution 3 - 7
Table 1 - Chronological Dates 6
Events in SCM Evolution 7
Definition And Explanation
11
Basics of Logistics
11
Outsourcing/Third party Logistics
12
Supply Chain Optimization To-Do List
15
Traditional Functional Performance Measures
15
Supply Chain Management - A Continuous Replenishment
16
Supply Chain Process 17 -
21
Process view of the Supply Chain
19
Push-Pull view of Supply Chain
21
Supply Chain Flows 22 -
24
Decision Phases in a Supply Chain
25
Supply chain strategy or design
26
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Supply chain planning 27 -
28
Supply Chain Obstacles/Challenges
29
Supply Chain Drivers 30 -
34
Inventory
30
Transportation
31
Facilities
33
a) Warehousing/Storage 33
b) Material Handling 34
c) Packaging 34
Information
35
Order Processing
35
Planning
35
Table of Contents (Contd.)
Achieving strategic fit in Supply Chain Management 37 -
38
Achieving Strategic Fit
37
Fit Between Competitive and Functional Strategies
38
The Bull Whip Effect 39 -
43
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Causes of the Bullwhip Effect
40
How to Counteract the Bullwhip Effect
43
How to Reduce the Bullwhip Effect
45
Supply Chain and IT 46 -
49
Enterprise Resource Planning (ERP)
47
EDI (Electronic Data Interchange)
48
The Postponement Strategy 49 -
54
Optimal Postponement Preconditions
50
Demand Preconditions: 50
Product/product line preconditions: 50
Production preconditions: 51
Postponement benefits:
52
The Postponement Strategy Examples
53
Paints – Insta Color 53
Hewlett Packard 53
The Integrated Supply Chain Strategy 55 -
56
Logistics Performance Measurement 57
Job Scope Available
58
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Going For Gold In The Supply Chain 59 -
61
(A case study on Marico Industries)
59
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Concepts and Relative Terms
The logistics professional of the new millennium must move well beyond the current
frontiers of supply chain management to meet the varied and complex distribution
channels of a global economy. Essentials in Supply Chain and Logistics Management
provides an opportunity to explore the latest developments in logistics strategy,
interact with industry leaders, and map out innovative business planning tactics that
will maximize your organization's profitability.
Glossary of Supply Chain Management Terms
Every field has its special language, and Supply Chain Management is no exception.
Hence, this glossary of Supply Chain & Logistics Management technical terms and
concepts are listed below:
ABC Analysis A form of Pareto analysis applied to a group of products in order to
apply selective inventory management controls. The inventory value for each item is
obtained by multiplying the annual demand by unit cost and the entire inventory is
then ranked in descending order of cost. However, the classification parameter can be
varied; for example, it is possible to use the velocity of turnover rather than annual
demand value.
Anticipation Stock: Inventory held in order to be able to:
Satisfy a demand with seasonal fluctuations with a production level that does not
fluctuate at all or that varies to a lesser extent than the demand. Cope with erratic
production or deficiencies in production capacity.
Available Stock: The stock available to service immediate demand.
Back-flushing: The deduction from inventory, after manufacture, of the component
parts used in a parent by exploding the bill of materials by the production total of
parents produced.
Backorder A: Customer demand for which no stock is available and where the
customer is prepared to wait for the item to arrive in stock.
Bar Code: See Linear Bar Code
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Batch Management:
In various industry sectors, particularly the process industry, you have to work with
homogeneous partial quantities of a material or product throughout the entire quantity
and value chain. In this system, a batch is the quantity or partial quantity of a
particular material or product that is manufactured according to the same recipe.
Buffer Stock: See Safety Stock
Build Stock: See Anticipation Stock
Build to Order: See Make to Order
Cycle Stock: See Working Stock
Distribution Requirement Planning DRPI: The function of determining the need to
replenish inventory at branch warehouses over a forward time period. A time-phased
order point approach is used where planned orders at branch warehouse level are
exploded via MRP logic to become gross requirements on the supplying source
enabling the translation of inventory plans into material flows. In the case of multi-
level distribution networks, this explosion process can continue down through the
various levels of regional warehouses, master warehouse, factory warehouse etc and
become input to the master production schedule.
Distribution Resource Planning DRPII: The extension of MRP into the planning of
the key resources contained in a distribution system.
Economic Order Interval (EOI): In fixed order interval systems, the interval
between orders that will minimize the total inventory cost, under a given set of
circumstances, obtained by trade off analysis between the cost of placing an order and
the cost of holding stock
Economic Order Quantity (EOQ): In fixed order quantity systems, the size of an
order that minimizes the total inventory cost, under a given set of circumstances,
obtained by trade off analysis between the cost of placing an order and the cost of
holding stock.
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Economic Stock: The sum of the physical stock and the goods ordered but not yet
received, minus the goods sold but not yet delivered for which a company carries risk
in respect of a drop in price and un-marketability
Electronic Data Interchange (EDI): The computer-to-computer exchange of
structured data for automatic processing.
Enterprise Requirement Planning (ERP): A further extension of MRP II whereby a
single system embraces and integrates all aspects of business operations into a single
database application.
Finished Goods: Inventory to which the final increments of value have been added
through manufacturing.
Finished Goods Stock: Stock that is available for supply to an external consumer,
including items that have been supplied but not invoiced to an external consumer.
Holding Cost: The cost associated with holding one unit of an item in stock for one
period of time incorporating elements to cover: Capital costs for stock, Taxes,
Insurance, Storage, Handling, Administration, Shrinkage, Obsolescence,
Deterioration.
Inventory: A term used to describe:
• all the goods and materials held by an organisation for future sale or use
• a list of items held in stock.
Inventory Control: Consists of all the activities and procedures used to control and
maintain the right amount of each item in stock or to provide the required level of
service at minimum cost.
Inventory Management:
Studying consignment stock, project stock, and so on). SAP Inventory Management
enables a summarized visibility of stocks in the supply chain. To fully utilize this
functionality, the following products should be evaluated.
Inbound/Outbound Material Flow:
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Warehouse Management allows you to manage your material flow, using advanced
put away and picking strategies. In the standard system, these strategies for put away
include random put away (next empty bin), bulk storage, fixed bin, or addition to
stock. The picking strategies include standard strategies first in first out (FIFO), last in
first out (LIFO), picking by shelf life expiration date (SLED), or partial quantities
first. With the Warehouse Management system, you can control the goods receipt and
goods issue processes at a physical level. Goods receipts are possible from purchase
orders, inbound deliveries (advanced shipping notice), stock transport orders, or from
production. The goods issue process in the Warehouse Management system includes
all physical activities for fulfilling an outbound delivery or shipment. This includes
rough workload estimates in advance of the actual process, picking waves to group
the activities efficiently, and pick & pack functions. Value-Added Services: SAP
Warehouse Management supports value-added services such as customer-specific
packing or labeling.
Item: See Stock-Keeping Unit (SKU)
Just-in-Time JIT: A dependent demand inventory control philosophy which views
production as a system in which all operations, including the delivery of materials
needed for production, occur just at the time they are needed. Thus, stocks of material
are virtually eliminated.
Kanban: A simple control system for coordinating the movement of material to feed
the production line. The method uses standard containers or lot sizes with a single
card attached to each. It is a pull system in which work centres signal with a card that
they wish to withdraw parts from feeding operations or vendors. Loosely translated
from Japanese, the word "Kanban' means literally means "billboard' or "sign". The
term is often used synonymously for the specific scheduling system developed and
used by Toyota Corporation in Japan.
Lead Time: See Purchasing Lead Time
Linear Bar Code: A method of automatic identification using a series of light spaces
and dark bars differing densities, in standard formats, to enable a computer to read
data and letters accurately without keyboard entry.
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Logistics: The time-related positioning of resources to meet user requirements.
Material Requirements Planning (MRP I): A system to support manufacturing and
fabrication organisations by the timely release of production and purchase orders
using the production plan for finished goods to determine the materials required to
make the product. Orders for dependent demand items are phased over time to ensure
that the flow of raw materials and in-process inventories matches the production
schedules for finished products. The 3 key inputs are:
• the master production schedule
• inventory status records
• product structure records
Manufacturing Resource Planning (MRP II): A method for the effective planning
of all the resources of a manufacturing company. Ideally it addresses operational
planning in units, financial planning in money, and has a simulation capability to
answer what if questions. It is made up of a variety of functions, each linked together:
business planning, master (or production) planning, master production scheduling,
material requirements planning, capacity requirements planning and the execution
systems for capacity and priority. Outputs from these systems would be integrated
with financial reports such as the business plan, purchase commitment report,
shipping budget, stock projections in money etc. Manufacturing resource planning is a
direct out-growth and extension of material requirements planning (MRP-1).
Make to Order: A manufacturing or assembly process established to satisfy
customer demand only after an order has been placed.
Materials Management: The planning, organisation and control of all aspects of
inventory embracing procurement, warehousing, work-in-progress, shipping, and
distribution of finished goods.
Matrix Bar Code: See Two Dimensional Bar Code
Maximum Stock: The upper limit, expressed in quantitative, financial or time-based
terms, to which the stock of an item should normally be allowed to rise.
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Maximum Order Quantity: An order quantity which, in principle, must not be
exceeded.
Minimum Order: The smallest order quantity which, in principle, is allowed.
Minimum Stock: A control limit within a stock control system which could indicate
the point at which an order should be placed, or indicate if stocks are too low, for a
specific item.
Obsolete Stock: Stock held within an organisation where there is no longer any
organizational reason for holding the stock.
Obsolescent Stock: Parts which have been replaced by an alternative but which may
still be used until stock is exhausted.
Opening Stock: The stock of an item at the beginning of an inventory accounting
period of time.
Order Lead Time: The total internal processing time necessary to transform a
replenishment quantity into an order and for the transmission of that order to the
recipient.
Production Planning: Production planning enables the planner to create feasible
production plans across the different production locations (also with subcontractors)
to fulfill the (customer) requirements in time and to the standard expected by the
customer. For the long and medium-term time horizon, rough-cut planning is based on
time buckets and determines requirements of resources (machines, humans,
production resource tools) and materials. Solvers, real-time data, and high supply
chain visibility (KPIs, alerts) support the planner's decision-making process.
Pull System: A system where orders for an end item are pulled through the facility to
satisfy demand for the end item. An examples of pull system is the JIT Kanban
process.
Push System: A system where orders are issued for completion by specified due
dates, based on estimated lead-times, or where the flow of material in a product
structure is controlled and determined by the lower levels.
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Radio Frequency Identification (RFID): The attachment of transponders (which
may be read only or read/write) to products, as an alternative to linear bar codes, to
enable product identification some distance from the scanner or when out of line of
sight.
Raw Material: Stock or items purchased from suppliers, to be input to a production
process, and which will subsequently modified or transformed into finished goods.
Re-Order Level (ROL) (or Re-Order Point - ROP): The calculated level of stock
within an inventory control system to which the quantity of a specific item is allowed
to fall before replenishment order action is generated.
Re-Order Quantity, Replenishment Order Quantity: The calculated order quantity
necessary to replenish stocks at a given point in time. The method of calculation, and
the timing of the order, will vary depending on the type of inventory control system in
use. Quantity based systems are checked continually to determine if an order should
be placed; time based systems only have a count of stock at predetermined intervals
and orders placed as required; a distribution system plans orders to meet distribution
needs; and production based systems only order stock to meet manufacturing
requirements.
Replenish to Demand: See Make to Order
Replenishment Lead-time: See Total Lead-time
Safety Stock: The stock held to protect against the differences between forecast and
actual consumption, and between expected and actual delivery times of procurement
orders, to protect against stock outs during the replenishment cycle. In calculating
safety stock, account is taken of such factors as service level, expected fluctuations of
demand and likely variations in lead-time.
Stock: See Anticipation Stock
Stock: Stock can be defined as:
All the goods and materials stored by an organisation and retained for future use.
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The quantity of goods between measuring points in a particular path, expressed in
quantitative and/or financial terms. For example, the goods can be in a pipeline, in a
warehouse or technical store, in reception, in production.
Stock Keeping Unit (SKU): A single type of product which is kept in stock; it is one
entry in the inventory.
Supply-Chain: The total sequence of business processes, within a single or multiple
enterprise environments, which enable customer demand for a product or service to be
satisfied.
Supply-Chain Management (SCM): Organisation of the overall business processes
to enable the profitable transformation of raw materials or products into finished
goods and their timely distribution to meet customer demand.
Total Lead-time: The total time between the decision to place a replenishment order
until its availability for use. That is, the sum of Order Lead-time, Purchasing Lead-
time, Transit Time and any Goods Inward Lead-time for that replenishment order.
Two Dimensional Bar Code (2D Bar Code): Codes in which information is placed
in two dimensions and read from side to side, and up and down, by special scanning
equipment and which can be read, even if partially damaged.
Unit: The standard size or quantity of a stock item.
Unit Cost: The cost to an organisation of acquiring one unit, including any freight
costs, if obtained from an external source or the total unit production cost, including
direct labour, direct material and factory overheads, if manufactured in-house.
Value-Added Services:
Value-adding activities in the warehouses have to be priced and invoiced. Support for
service activities on warehouse operations enable a company to decide on the type of
activities, retrieve the value of a group of activities around a warehouse process, and
invoice these activities to the warehouse customers (internally and externally). To
fully utilize this functionality, the following products should be evaluated.
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Zero Inventories: Part of the principles of just-in-time which relates the elimination
of waste by having only required materials when needed.
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BENEFITS/CONCLUSIONS
• Learn the advanced skills to initiate major improvements and innovations in
supply chain management.
• Broaden your understanding of current issues and trends in Inventory,
Transportation, Procurement and Outsourcing.
• Demonstrate how to create value through supply chain relationships, and set
up more productive supply chain relationships.
• Learn through first-hand case histories and discussion groups, supply chain
and logistics initiatives that have increased market share and profitability for
other organizations.
• Improve business results through integrated supply chain and logistics
management strategies and concepts.
• Enhance your organization's supply chain and logistics capabilities and its
ability to add sustainable value.
• Isolate key performance areas and related success factors; pinpoint operational
difficulties and develop practical improvement strategies and tactics.
INTRODUCTION
Since the early 1980's, supply chain management has developed rapidly as
companies have been seeking to improve their competitiveness in respect of cost
and service levels, and to attain sustainable growth.
Supply chain management has gained increasing recognition in business, both as
a function in its own right and as a cross-functional discipline. At the same time,
supply chain management has moved from operational level to broad level
within the corporate organization. Never before the supply chain management
played such an important role in the corporate strategy of many companies as it
is today. This development has led to a much broader scope in supply chain
management in the 1990's as compared to that of the 1970's.
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With the logistics industry becoming more crucial as its relevance ever
increasing it moved into new areas, involved in outsourcing projects and design
and implements supply chain management strategies and enable enormous
increase in output. Given the growing importance of supply chain and logistics
management, one has to determine how the calculation of transport and logistics
costs has changed over the last decades as a consequence of improved supply
chain management and the increasing significance of supply chain management.
The concept of Supply Chain Management has recently stepped into the limelight of
corporate professionals and academia. However, its roots can be traced with the
evolution of trade itself. Evidences show that supply chains were present right from
the time when mankind understood the need of merchandising and distribution.
In fact now one of the strategies is to choke all the supply feeder lines, which either
harbour or encourage terrorism of any variety. This is referred to as 'Operation
Endurance Freedom' in the recent times.
We can characterize the significant events that reflect the evolution of the
supply chain management in a chronological manner. However, it is to be
observed that the impact of each event on Supply Chain Management (SCM) is
varied. Change can be implemented easily when tough times reign. Companies in
India have been looking at ways of cutting costs and improving process efficiencies,
in their quest to become globally competitive. One such initiative is Supply Chain
Management (SCM). SCM recognizes that distinct functions like Purchases,
Inventory Management, Distribution and Production Planning work best when
integrated.
Supply Chain Management offers, at the least, reduction in costs across functions,
better planning for purchase and production, and much more efficient use of capital. It
also offers a 13% of India’s GDP-opportunity for a variety of services - trucking,
warehousing, IT, personnel, ancillaries and a host of others.
Today all the four key elements of SCM –materials, time, money and information- are
being tackled to squeeze out the maximum possible savings. Almost every leading
company in India now has an SCM drive in place. In HLL, chairman M. S. Banga
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considers SCM as one of the key factors contributing the bottom line and enabling
growth of the power brands.
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Distinguish between Logistics and Supply Chain Management
Logistics SCM
It is concerned with getting goods and
services where they are required and
when they are desired.
SCM encompasses of all those
activities associated with movement of
goods from raw material stage to the
end user.
No manufacturing or marketing can
accomplish without logistical support.
This includes sourcing, procurement,
production scheduling, order-
processing, inventory management,
transportation, warehousing and
customer service.
It involves the integration of
information, transportation, inventory
warehousing, material handling and
packaging.
SCM integrates and coordinates all the
above activities into a seamless
process. It embraces and links all the
partners in the chain.
Logistics add value when inventory is
correctly positioned to facilitate sales.
The best SCM practice is when it
excels in reducing operating costs,
improves asset productivity and
compressing order cycle time.
It is mainly concerned with optimising
flows within the organization.
It recognizes the internal integration
by itself.
It is essentially a planning orientation
and framework that seeks to create a
single plan for the flow of product and
information through a business.
It builds upon this framework and
seeks to achieve linkage and
coordination between processes of
other entities in the pipeline i.e.
suppliers and customers and the
organization.
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Definition And Explanation
Logistics Management is primarily concerned with optimizing flows within the
organisation while Supply Chain Management recognizes that internal integration by
itself is not sufficient and all the channel partners i.e. all stages of a supply chain need
to be integrated.
“Logistics” becomes a large portion of the tools that we use to operate and
analyze the supply chain.
Further, a Supply Chain is an interconnected system containing suppliers,
manufacturing, assembly, distribution, and logistics facilities. This manufacturing unit
procures raw materials from suppliers, built to produce materials and move them to
the customers, through distribution units. Logistics are responsible for transportation
of materials from one unit to other.
‘Risk Reduction as a Goal of SCM’
Supply Chain management (SCM), has now became a very vital part of management.
Good Supply Chain Management can result in
- Decreases Cycle Time
- Reduces the inventory level
- Decreases cost of production
- Let you decide strategy
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Following figure shows a typical Supply Chain:
Suppliers Manufacturers Distributors Retailers Customers
The goal of supply chain is to move material quickly while maintaining the lowest
possible levels of inventory.
What is a supply chain?
A supply chain is the link that moves products between suppliers, manufacturers,
wholesalers, distributors, retailers and finally consumers. For most of the last century,
the supply was an inflexible series of events that some-how managed to get products
out the door. A paper-heavy adventure, it often involved questionable inventory
forecasts, ironclad manufacturing plans and hypothetical shipping schedules.
What is supply chain management (SCM)?
Supply chain management is a way to supervise the flow of products and information
as they move along the supply chain. Supply chain management is the combination
of art and science that goes into improving the way your company finds the raw
components it needs to make a product or service, manufactures that product or
service and delivers it to customers. The following are five basic components
for supply chain management.
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1. Plan - This is the strategic portion of supply chain management. You need a
strategy for managing all the resources that go toward meeting customer demand
for your product or service. A big piece of planning is developing a set of
metrics to monitor the supply chain so that it is efficient, costs less and delivers
high quality and value to customers.
2. Source - Choose the suppliers that will deliver the goods and services you need to
create your product or service. Develop a set of pricing, delivery and payment
processes with suppliers and create metrics for monitoring and improving the
relationships. And put together processes for managing the inventory of goods and
services you receive from suppliers, including receiving shipments, verifying them,
transferring them to your manufacturing facilities and authorizing supplier payments.
3. Make - This is the manufacturing step. Schedule the activities necessary for
production, testing, packaging and preparation for delivery. As the most metric-
intensive portion of the supply chain, measure quality levels, production output and
worker productivity.
4. Deliver - This is the part that many insiders refer to as "logistics." Coordinate the
receipt of orders from customers, develop a network of warehouses, pick carriers to
get products to customers and set up an invoicing system to receive payments.
5. Return - The problem part of the supply chain. Create a network for receiving
defective and excess products back from customers and supporting customers who
have problems with delivered products.
The ultimate goal of SCM is to optimize the supply chain, which can not only reduce
inventories, but may also create a higher profit margin for finished goods by giving
customers exactly what they want (and of course charging for it).
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What can SCM do?
A good SCM initiative gives visibility to all the players in the supply chain so that
they are able to react to the order. The moment a retailer receives an order, the
retailer’s supplier also sees it. The supplier checks inventory. If inventory is low, a
manufacturer — also with access to the system — produces more products and ships
it to the supplier via a distributor that is also connected to the system.
Meanwhile the supplier has sent the product to the retail for shipment to the
customer. The customer, in turn, can track the shipment of the order and perhaps
even check inventory to make sure an item is in stock before ordering. With
Web technology, all the players in the chain simultaneously manage inventory,
control-manufacturing schedules and deliver an order on time to a customer.
Also, Supply chain management projects should also rethink the chain. Most
businesses establish their supply chains around product lines. But today,
customer orders touch multiple product lines and multiple channels of
distribution. Modern supply chains focus on the customer — and on delivering
one order at a time rather than moving one product line at a time. The focus has
to be on filling, delivering and managing inventory for every order that a
customer places. Every order should penetrate the same system that manages
inventory and connects to suppliers and distributors.
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Basics of Logistics
Logistics is unique. It never stops! Logistics is concerned with getting products and
services where they are needed and when they are desired. Most consumers in highly
developed nations take a high level of logistical competency for granted. When they
go to the store, they expect goods to be available and fresh. It is difficult to visualize
accomplishing any marketing or manufacturing without logistical support.
Logistics and distribution are being accorded high priority in Supply Chain
Management. The priority arises not only due to possible costs savings but also
because of their impact on responsiveness and services levels. In-fact, the latter would
be more important reasons since logistics’ costs per se are not very. Not all
organizations seem to share the view that Logistics and distribution is a strategic
function. Few companies seem to be adopting leading SCM practices in the area
though can be substantial.
‘Logistics and distribution are the nuts and bolts of SCM.’
A leading-edge supply chain program can create competitive advantage for your
company. The service and cost benefits can distinguish you from competitors.
Customers have strong requirements on how they want their orders and shipments
handled. Your compliance with those requirements can enhance your status as a
supplier. Whether for company-wide or selected portion, we will analyze the key
logistics elements-movement of product (inbound, outbound, intra-company),
movement of information, service/time, cost and integration-within your company,
with customers, and with your suppliers.
The scope of your supply chain organization can be complex- imports, exports,
diverse market requirements, differing customer expectation, shortened lead times,
and more. Organization, teamwork and information technology are among the issues
that impact supply chain effectiveness. It is no longer distribution, not shopping and
receiving; it is supply chain management.
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In the global market where competitors and suppliers are worldwide, firms want to
have supply chain operations. Asia is a key area for product sourcing, the start of the
logistics process-the suppliers. Today companies are also seeking out 3rd party
Logistics providers (3PLs), who handle not just physical distribution but also
functions like warehousing, billing, tracking and insurance. But outsourcing of
Inventory Management has not caught yet.
Outsourcing/Third party Logistics
Third-Party Logistics (3PL) is defined as the outsourcing of transportation,
warehousing, inventory management, distribution and other value-added services such
as pick-and-pack, assembly, repairs, and reconditioning, etc. It can be said that
outsourcing is, calling on external resources to provide distribution service to
maximize your efficiency and focus on your core competencies. As we approach the
21st
century, outsourcing activities have been a hot topic – often red hot. The practice
is no longer confined to transportation and warehousing activities.
“3PL - third party logistics represents the outsourcing of the logistics function.”
One of the most significant trends that continued to gain the attention of forward-
thinking firms is the option to outsource logistics activities. Outsourcing has grown
for many reasons and is now a major part of economy. Like all growth industries, the
provision of third party logistics services has diversified. Its offspring “4th
Party
Logistics” is an example of such diversification. Logistics providers are developing
competitive advantage by coordinating different customer’s logistics solutions. They
are presenting some of the basic factors that are taken into considerations for a 3PL
firm when coordinating its customers. The possibilities to coordinate are dependent
not only on activities of different customers, suppliers and customers’ customers but
also the attitudes and behaviour reflected from their strategies.
What is Outsourcing?
An important characteristic of the Supply Chain is “outsourcing”. This concept has its
route in both core competency and cost control. Core competency basically means do
what you are best at, and leave all other non-value-added activities to more suited
players. During 1990’s, phase with rising cost accelerated like the gulf war in 1991,
an increasing cost competition from cheaper countries around the world, companies
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undertook a serious bit of sole –searching. Thus originated for, “Third Party” services
providers. The business activity of farming out identified non –core activities to
external agencies came to be known as outsourcing. In Logistics and Supply Chain
Management too, companies have been outsourcing the activities of transportation,
warehousing, clearing and forwarding to different operator.
“The future shape of business is being redefined through outsourcing”
Benefits of Outsourcing
A key question that a company has to ask before considering the outsourcing option
is: What is it in there for us? Here we list some potential reasons that may argue in
favour of outsourcing.
• Improve company focus: More organizations are eliminating internal functions
that are not considered core competencies.
• Access to world-class capabilities and new technology: Often these third party
logistics company’s capabilities are the results of extensive investments in
technology, methodologies and people, over a considerable period of time.
Sometimes, these capabilities include specialized industry expertise gained
through working with many clients facing similar challenges. Therefore, this
expertise is translated into skills, processes, or technologies uniquely capable of
meeting these needs.
• Accelerate reengineering benefits: Outsourcing to a 3PL already reengineered to
world-class standards allows the company to realize those anticipated benefits
immediately.
• Share (pool) risks: There are tremendous risks associated with the capital
investments an organization makes. A 3PL can share these risks across the many
companies that it serves. This allows a 3PL to lower risk relative to a company
performing the function itself.
• Free-up resources: Outsourcing offers a way to conserve capital and allows a
company to redirect its resources from non-core activities toward activities, which
have the greater return in serving the customer.
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• Cash infusion: Sometimes, outsourcing involves the transfer of assets from the
company to the 3PL. These assets have a value, and in fact are sometimes sold to
the 3PL.
• Reduce and control operating costs: Outsourcing to a 3PL most likely will give
access to a lower cost structure, which may be the result of a greater economy of
scale or some other advantage based on specialization. When calculating the cost
benefits it is very important to consider total costs since coordination costs often
increase when all or part of a function is outsourced.
• Resources not available internally: Companies might simply not have access to
the required resources within the company.
• Eliminate labour problems: While companies are rarely willing to concede this
fact, many view outsourcing as a way to eliminate labour problems. This is a two
edged sword and one has to be extremely careful here. Perceived benefits do not
always materialize.
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Supply Chain Optimization To-Do List
• Migrate electronic data interchange (EDI) transactions to the Web. Many
companies have been using EDI since the 1980s to automate purchasing of
production materials. Third-party value-added network (VAN) providers
charge a premium to connect organizations with different equipment. Using
the Web for EDI can slash costs.
• Use Product Data Management (PDM) to manage product development data
from design through manufacturing and maintenance.
• Engage in Collaborative Planning, Forecasting and Replenishment (CPFR),
which involve sharing forecasts among suppliers to enable automatic product
replenishment.
• Take part in collaborative product design (CPD), the joint development of new
products by supply chain members.
Traditional Functional Performance Measures
Manufacturing Sales & Marketing Engineering / R&D
Unit cost
Labour cost
Labour productivity
Quality, scrap rate
Plant utilization
Plan vs. actual
production
Market share
Revenue
Sales growth
New "hot" products
Customer satisfaction
Functions/features
Labour & material cost
Time-to-market
Award-winning designs
Design for
manufacturability,
assembly, etc.
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Supply Chain Management - A Continuous Replenishment.
Supply chain management is a driving factor in today's business world. Supply chain
run from vendor's right through to customers' door. With international sourcing and
international sales, the scope and complexity of supply chains can be significant.
Customers, and their requirements, drive the process. They demand that their orders
be shipped, complete, accurate, on tine, and in the manner they require.
The purpose of SCM is to drive out excess inventory and unnecessary costs. We work
with companies to understand what is required and the impact, both financial and
operational. With this base we work to develop and implement SCM. We can work
with clients to evaluate their present supply chain and to identify what must be done
to gain the cost and service benefits of a quality SCM program. The SCM must work
at all levels, strategically and tactically to be effective.
If you have customer who have placed supply chain requirements on you that you
may not understand, we will work with you to understand each customer's needs.
Then we can evaluate your supply chain process to see if it meets your customers'
requirements. Each customer has different requirements that you must comply with.
Your supply chain program must be tailored to each customer's special requirements.
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The Evolution
The evolution of the SCM has moved from disparate functions of logistics,
transportation, purchasing and supplies and physical distribution to focus on
integration, visibility, cycle time reduction and streamlined channels. The new
integration has a variety of activities such as, Integrated Purchasing Strategy, Supplier
Integration, Buyer-Supplier Partnerships, Supply Base Management, Strategic
Supplier Alliances, Supply Chain Synchronization, and finally simply SUPPLY
CHAIN MANAGEMENT.
The activities of logistics are centuries old as discussed earlier. During World War II,
military forces made effective use of logistics models and forms of systems analysis
to ensure that the required material was at the right place on time every time. The
term logistics is widely used in military and military type applications even today.
Until about mid 1950's, the field of supply chain management was in a state of
dormancy. The piecemeal and isolated fragmented set of activities was rampant.
Production and manufacturing were given uppermost attention. The inventory was the
responsibility of the marketing, accounting and/or production areas and order
processing was an accounting or sales responsibility.
During the Ethiopian famine relief efforts of the 1980's, the term logistics was applied
to the food-supply activities. World Vision International, one of the many relief
organizations at work there, produced a manual entitled Getting It There- A Logistics
Handbook for Relief and Development.
SCM formerly known as logistics management now includes more aspects apart
from the logistics function. SCM is one of the most powerful engines of
business transformation that basically means delivering the right product to the
right place at the right time and at the right price. SCM is the one area wherein
much operational efficiency can be gained, thereby reducing organizations costs
and enhancing customer service. Gradually, the marketing people started giving
greater emphasis to distribution, giving rise to physical distribution management or in
today's parlance 'outbound transportation'.
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In 1991, the international Council of Logistics Management (CLM), defined logistics
as "the process of planning, implementing, and controlling the efficient, effective flow
and storage of goods, services, and related information from the point of origin to the
point of consumption for the purpose of conforming to customer requirements".
Some of the terms like logistics, inbound logistics, materials management, physical
distribution, supply chain management seem to be used interchangeably. Very briefly,
inbound logistics covers the movement of material, components and products
received from the suppliers. Materials management describes the material handling
part of the movement of the material and components within the factory or firm.
Logistics describes the entire process of material and products moving into, through,
and out of a firm. Finally as of today, it is the Supply Chain Management that is
conceptualized as something even larger than logistics, that links logistics more
directly with the user's total communications network and with the firm's engineering
staff. It is sufficient to know this much at the present juncture on supply chain
management, as in the chapter Process View of SCM where we will explore different
views on supply chain management.
A supply chain is, in fact, a network of facilities and distribution options that
necessarily performs the functions of procurement and acquisition of material,
processing and transformation of the material into intermediate and finished tangible
products and finally the physical distribution of the finished tangible products to the
customers, whether intermediate or final ones. As already indicated, supply chains
exist in both manufacturing as well as in service organizations.
Supply Chain Management is a set of approaches utilized to efficiently integrate
suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and
distributed at the right quantities, to the right locations, and at the right time, in order
to minimize system wide cost while satisfying service level requirements.
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Table 1 - Chronological Dates
Duration Events in SCM Evolution
Ancient
Times
The Barter System evolved as an answer to the trading requirements.
This was the first supply chain.
300 BC
Caesar made trading posts in East Asia to grow his trade. This was the
first retailer supplier relationship. Establishment of the silk route to
India.
1151 First known fire and plague insurance offered in Iceland.
1305
House of Taxis operated courier messenger service for the rich
European clients. (A kind of primitive Outsourcing)
1621
Dutch West India Co. formed to trade with America and West Africa.
(A pseudo third party logistics (3PL) by the Dutch Companies.)
1904
Charles S. Rolls became selling agent for cars made by F. Henry
Royce. (The first traces of outsourcing).
1956
Warren Buffet started investment partnership in Omaha with money
from family and friends and he went on to become a billionaire. (An
overseas 3PL)
1960-1975
The essence of SCM understood. This first phase is characterized as
an inventory 'push' era that focused primarily on physical distribution
of finished goods.
1975-1990
The earlier approach changed. Companies began migrating from an
inventory push to a customer pull channel as power began to move the
downstream to the customer.
1980
In the last phase, companies realized that the productivity could be
increased significantly by managing relationships; information and
material flow across enterprise borders. This resulted in the present
concept of supply chain management.
1981 IBM outsourced almost all of its activities and built a full computer.
1985
Wal-Mart introduced the concept of Cross Docking and replaced K-
Mart as the leader in retail stores.
1985-
Cisco removed itself from the supply chain by providing to the
customer directly from the vendor.
1990 Computer changed the way business is done.
1996-
Internet revolutionized the information pathway and the distribution
system of the business.
1998- The concept of e-commerce changed the definition of business itself.
2000-
Currently concepts like t-commerce and digital TV are beginning to
take shape.
Reasons for the Big Breakthrough in the Past 20 years
The breakthrough revolution in the past 20 years is due to the following differences in
the attitude of companies and customers alike.
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Earlier Today
Companies No two companies at the same
level of competition.
The main motive was to increase
production.
Production differentiation very
early and far from customer.
Reaction approach of industries.
Competition at all levels.
Main motive is customer service.
Product differentiated nearer the
customer.
Action approach of industries.
Customer Customer did not care about
specifications.
Less market moving powers
Customers demand exact
specifications.
More power devolved to the
customer.
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Supply Chain Process
The concept of supply chain management encompasses four main decision
areas: location, production, inventory, and distribution. Within these areas
decisions fall into two main categories: Strategic decisions deal with the long-
term future; and operational decisions deal with the short term running of the
company.
Location
In order to create a supply chain you must first decide on the geographic location of
the facilities that the organisation uses. These facilities include production plants,
warehouses and distribution points, suppliers, and buyers. A supply chain is
essentially the interaction between these facilities and the processes by which
products move between them.
Strategically the location of the above facilities must be determined by the location of
the target market for the organisation. It will have an effect on running costs, taxes,
local content, distribution costs, and service.
The decision to locate a facility commits the organisation to allocating resources and,
in some cases, very large amounts of capital. Therefore it is imperative that the
location is determined on a strategic level. Operationally the location of facilities may
affect the efficiency of the running of the business.
Production
A supply chain is useless unless it has a product to pass through it. The decision on
which product to produce is directly affected by the organisations target market and
therefore is a strategic decision. Other strategic issues include the allocation of
resources to the production plants (i.e. suppliers), and the capacity of the plants.
Operational issues include the day to day running of the plants. Examples of these are
production scheduling and quality control.
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Inventory
Decisions in this area affect all stages of the supply chain. The inventories through out
the chain will probably be at differing stages of development. For instance the
inventories at the beginning of the chain will be raw materials, at the end they will be
the finished products. These inventories, no matter what stage they are at have a value
that is not yet being realized. In order to minimize the unrealized value of the goods
efficient management of the inventories must take place.
Most of the issues involved with inventory are operational, for instance the
maintenance of stock levels within safety boundaries. On a strategic level
management set the goals that are to be achieved in this area and determine the
reorder strategies (i.e. JIT).
Distribution
The key decisions in the distribution area involve the trading-off of inventory levels
of buyers with the costs of freight. Another matter to be considered is the nature of the
product. It is no good sending a shipment of perishable goods via sea or rail to save
money if the goods are not in a suitable condition once they reach their destination.
On the other hand shipping by sea or rail is cheaper but necessitates higher inventory
levels to counter the uncertainty associated with these methods (i.e. bad weather when
shipping by sea).
Strategically, forecasts of the demand for the product allow for the co-ordination
between the distribution by various methods and the buyers inventory levels.
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Process view of the Supply Chain
Cycle view
1. Customer Order Cycle
Customer arrival
Customer order entry
Customer order fulfilment
Customer order receiving
2. Replenishment Cycle
Retail order trigger
Retail order entry
Retail order fulfilment
Retail order receiving
3. Manufacturing Cycle
Order arrival
Production scheduling
Manufacturing and Shipping
Receiving
4. Procurement Cycle
Supplier / Manufacturer interface
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Sources Converter
s
Retailers
Suppliers Distributors Consumers
Product and Service Flow
Information Flow
Funds Flow

42

Push-Pull view of Supply Chain
Pull Process:
Execution is initiated in response to a customer order
(increased responsiveness)
Push Process: Execution is initiated in anticipation to a customer
order (increased efficiency)
Push-Pull Boundary: Which processes are of each type
Push Systems MRP supported
Pull Systems Require fast information transmission and sharing
43
Customer
Order
Replenishmen
t
Manufacturi
ng
Procurement
Pull
Push
Customer arrival
Customer order entry
Customer order fulfilment
Customer order receiving
Retail order trigger
Retail order entry
Retail order fulfillment
Retail order receiving
Order arrival from distributors
Production scheduling
Manufacturing and Shipping
Receiving (distributors, retailers,
customers
Cycles

Supply Chain Flows
Information
Product
Funds
The industry is in the midst of a revolution, and Web technology is the firebrand
stirring up the masses. We can now order anything from home - from computers and
flowers to vacations on faraway tropical islands. The Internet is a merger of content
and commerce. We can shop, compare competitive offerings, review data sheets, get
pricing, and even order all in one session. The Internet takes inefficient channels and
makes them efficient, thus reducing the trivial activities we take for granted. So what
does it all have to do with logistics?
The efficiencies the Internet offers consumers are not going unnoticed by corporations
constantly looking to grow market share and reduce cost. Somewhere in your
company, people are gathered right now to design an e-business strategy. The strategy
may be driven by a senior manager at the request of a forward-thinking CEO seeking
to replicate performance gains he has seen in other companies. Perhaps it's a tiger
team assembled to respond to a competitive threat.
Either way, customer service will define it. Your company must be able to commit
product availability, price, and delivery date at time of order entry to the customer. If
the product is not immediately available to ship, your company must know when it
will be available and allocate it to the customer through a Capable-to-Promise (CTP)
transaction. Performance has to be close to flawless, because supplier-switching costs
for your customer on the Internet are next to zero.
It doesn't matter if you have a vertically integrated company, owning everything from
raw materials to finished goods, or a company depending on service providers and
contract manufacturers for execution. Nor does it matter whether the product is built
to order or built to inventory. Distribution channels will change. You will have to ship
directly to customers rather than send bulk orders to distributors. You may even find
it more efficient to ship directly from a supplier's dock to the end-customer. The e-
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business model requires that all members of the supply chain act as a part of one
seamless fulfillment process. So now we have our marching orders: Increase logistics
productivity while radically transforming the supply chain. Impossible tasks? You
don't really have a choice, since your competitor will be doing the same. Besides, the
two goals are compatible. As in e-commerce, the trivial is eliminated and channels are
made more efficient, adding up to less cost and better customer service.
Defining Web-based systems is controversial and there is no one right answer.
However, one point is clear: Systems built using Web technologies offer significant
advantages over the green-screened UNIX systems common with SCE vendors today.
Navigation is vastly improved, application integration is simplified, and with
component architectures, benefit realization should be much quicker with less
complex system installs. Reductions in the cost of ownership should come, as
functionality is more centralized on servers. Web-based technologies are generally
regarded as superior. The real question becomes, "What is my migration path and
what vendors should I be looking at?"
Stage One: Internet Presence Is Established
Four levels of system evolution exist for the Web-based supply chain. The vast
majority of today's users are in the first stage - Internet Presence Established - while a
growing percentage are moving to the second - Commerce Is Initiated. As trading
partner integration grows toward collaborative execution, performance is greatly
enhanced. The third stage - Demand-Centered E-Business - represents a very real
target for the near term. The fourth - Demand Web Fulfillment - is a conceptualised
view of how Web-based systems will work together across companies and enterprises,
given current technology direction.
Most companies start on the Internet at this stage. Establishing an Internet presence is
a one-way flow of information, generally providing product and service information
to customer inquiries; its value comes from informing the customer. Users can access
order, inventory, or transportation status. Third Party Logistics (3PL) has made it a
common service offering. Companies afraid of channel cannibalization caused by
selling directly on the Internet are often frozen here. SCE vendors extended their
applications out to the Web to satisfy the demand for the capability.
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Stage Two: Commerce Is Initiated
Buying and selling on the Web begins at the second stage. Customers can place orders
directly on the merchant's commerce server, configure them, authorize payment, and
be notified of expected delivery dates. SCE systems figure prominently, providing
inventory information, transportation routing and scheduling, and order management
to the customer-facing applications. The fulfillment process is from the Industrial
Age, and service failures are frequent. Systems are not integrated inside a company,
duplicate data entry is common, and no collaborative execution processes exist
between partners.
Stage Three: Demand-Centered E-Business
Customers buy from your company for one of three reasons: convenience, price, or
scarcity. Combine two or more reasons and you provide even greater value to the
customer and profits for yourself. How well you deliver to customer expectations
dictates how successful you will be. Execution becomes critical, and collaborative
execution between supply chain partners is essential. Acting as the demand center,
your company coordinates and makes sure the entire supply chain is focused on
serving the customer. An information backbone connects the community. You have
full visibility to supply chain inventories, purchase order status, transportation status,
and alert and workflow processes. Information is also pushed to the customer as
opposed to the pull-only model in the first two stages.
Stage Four: Demand Web Fulfillment
Supply Chain Management (SCM) moves from art to science. The fourth stage is a
conceptualised vision, but at least we can discuss a totally integrated supply chain,
confident that technology will be able to support the scalability, breadth of functions,
and communications required for such an aggressive undertaking. Completely event-
driven, information and data flow both ways throughout the entire trading community.
Systems automatically optimize for disruptions in supply and demand, with rules built
to manage fulfillment and automation of business decisions between systems and
enterprises.
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Decision Phases in a Supply Chain
SCM is an approach to manage the entire flow of information, materials and services
from raw material suppliers through factories and warehouses to the end customer.
SCM is a very complex problem in itself. It involves complex decision-making at
various nodes and can be of different level.
Supply Chain Decisions can be classified in three categories:
Strategic Decisions: as the term implies, strategic decisions are made typically over a
longer time horizon. These are closely linked to the corporate strategy (they
sometimes are the corporate strategy), and guide Supply Chain policies from a design
perspective. These are long-term decisions of a Supply Chain and are based on
planning. These are typical reviewed in several years. The strategic level defines the
supply chain network, i.e., selection of suppliers, transportation routes, manufacturing
facilities, production levels, warehouses, etc.
Tactical Decisions: These are decisions based on strategic decisions; these decisions
are made typically taken to implement them. These are typical reviewed in several
months. The tactical level plans and schedules the supply chain to meet actual
demand.
Operational decisions: These are short-term decisions and focuses on activities of
day-to-day basis. The efforts in these types of decisions are to effectively manage the
product flow and thus are taken based on circumstances and condition prevails. The
operational level executes plans.
Apart from this decisions are also classified based on functionality like location,
production, inventory and logistics decisions. In each of these areas there can be
strategic, tactical and operational decisions involved.
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Supply Chain Decision-Making Framework
48

Supply chain strategy or design
The real-world experience provides the capability to devise solutions that are
practical, as well as aggressive and future-oriented. The flexibility to work on any
aspect of Supply Chain decision and operation, in addition to the vision and
integration of an end-to-end design including ‘suppliers and customers’.
An effective Supply Chain development lies in: recognizing that any company should
be operating a number of Supply Chains, for different linkages of distinct sources,
customer, products, channels; leveraging the capabilities of all participants in the
chain, upstream and downstream, internal and third party; creating a demanding
vision for the future, and sequencing a series of interim, attainable, steps to reach it;
knowing the baseline starting point of Supply Chain performance, and measuring the
current state constantly. Understanding the human dimension of the significant
process, behavioral, and belief changes that are required for breakthrough in Supply
Chain performance; making operational improvements early and often, while
developing the Information Systems foundation for better transaction processing,
communications and decision support; and keeping the long-term vision, the end-state
objective, in view at all times. The scope of collective experiences a real advantage in
planning and executing a Supply Chain implementation, for sourcing and
procurement, through manufacturing integration, into Transportation and Network
Design, and Warehousing and Distribution operations.
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Supply Chain planning
From acquiring raw materials to delivering finished products to end users, logistics
operation include all activities along the supply chain process, or as commonly
referred to in logistics circles, from "the suppliers' supplier to the customer's
customer." this is the supply chain. In well-functioning supply chain, at every link,
each unit should treat the next units a customer, always focusing on service to the
ultimate customer, the end user or client.
Customers focus
A well-functioning supply chain staff consciously strives to anticipate and satisfy
customers' need. Supply chain managers, in addition to their primary customers, also
have important intermediate customers, each with special needs and expectations.
Service providers are the final link in the long supply chain that stretches from
manufacturers to customers. Because they directly link logistics operations to the
ultimate customer, service are the most important "intermediate customer." service
providers must be given the products they need. Their fundamental concern is quality
of care, and they understand the supply chain system's contribution to their ability to
provide quality care. Service providers need the logistics system to deliver a
dependable supply of quality products and other supplies for their client, which means
they need convenient and regular re-supply with minimal additional work.
Warehouses and stores in the distribution chain are also intermediate customers that
demand logistics systems resources (staff, storage space, and transport); regular and
predicable re-supply of all products from the next higher level, and technical support
and problem-solving assistance, when needed.
Policymakers and senior program managers, as representatives of the program, also
need to be treated as customers by the next highest level in the system: donors,
lenders, or other suppliers of products. They want the same thing as every other
customer along the supply chain: reliable availability of the right products at the right
time. They also need the supply chain system to provide accurate data on stocks levels
and strict accountability for materials, and to provide cost effective logistics
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operations. Policymakers are particularly important internal customers, because they
control the allocation of funds and other resources for the supply chain. International
donors are the customers of their own suppliers. But, they also have expectations from
the in-country logistics system: they want the system to ensure accountability for
donated products; and accurate and timely data on products consumed, quantities
needed. Above all, donors want the logistics system to ensure the availability of
products to all current and potential customers.
When developing a customer culture within a supply chain, it is essential to identify
all the system's customers and their respective needs and expectations. The primary
customer, however, is always the client. While a supply chain may be required to
satisfy a variety of internal or intermediate customers, the most successful supply
chain unswervingly focus on satisfying end users.
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Supply Chain Obstacles/Challenges
Increasing Variety of Products
Decreasing Product Life Cycles
Increasingly Demanding Customers
Fragmentation of Supply Chain Ownership
Globalization
Difficulty in Executing New Strategies
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Supply Chain Drivers
Inventory
This refers to means by which inventories are managed. Inventories exist at every
stage of the Supply Chain as either raw materials, semi-finished goods or finished
goods. They can also be in process between locations. Their primary purpose to buffer
against any uncertainty that might exist in the Supply Chain. Since, holding of
inventories can cost anywhere between 20 to 40 per cent of their value, their efficient
management is critical in Supply Chain operations. It is strategic in the sense that top
management sets goals. However, most researchers have approached the management
of inventory form an operational perspective. These include deployment strategies
(pull verses push), control policies – the determination of the optimal levels of order
quantities and reorder points, and setting safety stock levels, at each stocking location.
These levels are critical, since they are primary determinants of customer service
levels.
The keys to effective Inventory Management lie in shortening the lead-time
throughout your Supply Chain:
 Understanding how your order frequencies and quantities drive inventory –
and its consequent effect on warehouse sizing and slotting,
 Analyzing the trade-off of centralized vs. distributed inventory, in terms of
inventory investment, transportation costs, and customers service capabilities,
 Integrating and coordinating the silos in your organization, for optimum
inventory strategies across the entire Supply Chain,
 Being bold, and confident, enough to make inventory decisions for operational
improvements – in the face of negative accounting issues; and building a Supply
Chain and inventory strategy to evaluate your customers’ expectations – and
anticipate their genuine needs.
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Includes:
1. Raw Materials
2. Component parts
3. Work in process (WIP)
4. Finished goods
Transportation
The mode choice aspects of these decisions are the more strategic ones. These
are closely linked to the inventory decisions, since the best choice is often found
by trading off the costs of using the particular mode with the indirect cost of
inventory associated with that mode. While air shipments may be fast, reliable,
and want lesser safety stock, but they are expensive. Meanwhile shipping by sea
or rail may be much cheaper, but they necessitate holding relatively large
volumes of inventories to buffer against the inherent uncertainty associated with
them. Therefore, customer service levels, and geographic location play vital
roles in such decision. Since, transportation is more than 30% of the Logistics
costs, operating efficiency makes good economic sense. Shipment sizes
(consolidated bulk shipment versus lot-for-lot), routing and scheduling of
equipment are key in effective management of firm’s transport strategy.
The estimated Rs 65,000crore Indian trucking industry has been in existence
before SCM as a concept came into vogue. Trucking plays a vital role in SCM
in the flow of material. The success of the entire exercise of planning and
investing in ERP and Supply Chain software depends on whether goods reach
on time. “Timely movement of goods is primary concern of any Supply Chain”,
says Vishal Gupta, director Total Logistics. The traditional transport companies
are now transforming into a fleet manager offering value-added services like
track and trace, specialized trucks for certain goods, warehousing and other
facilities, and serving user specific industries.
The need to provide value-added services has also resulted in strategic tie-ups
by truckers, say with specialized operators to serve specific industries. For e.g.
TCI has tied-up with Mitsui to form trans-system that offers logistics services to
the auto industry.
54

Transportation includes the following:
i. Moving inventory from point-to-point
ii. Impact on
(1) Responsiveness
(2) Efficiency
The future of the Indian trucking industry depends on various factors like
economic growth and investments in infrastructure. At present a number of
organised transport operations are leveraging on their strength in trucking by
combining allied services like clearing and freight forwarding, warehousing and
customer relationship Management to become complete Logistics players. This
is taking the form of tie-ups, acquisition. The future will see similar
consolidation happening in this arena, especially in the organised segment that
makes about 15% of the market.
Commercial Vehicles and Logistics: The Movement Zones
Type of Movement Key Feature
Primary
Raw material to factory
Finished goods to
warehouses
Long distance, bulk
movement
Mechanical handling
Operational economy
Secondary
Warehouse to
wholesaler/retailer
Convenient batches
Safe transportation
Timely distribution
Optimum turnaround
Tertiary
Wholesaler / retailer to
consumer
Door delivery
Timely delivery
City Operations
Frequent start-stops
High manoeuvrability
55

The potential issues and opportunities in most transportation situations are:
 Is the internal fleet cost-and-service effective?
 Are you getting the most of your money from common carriers?
 When is 3PL solution is the right way to go?
 Are you paying what you have agreed to?
 Is the mix of modes and services you are using right for your changing
business?
 How much should I be charging my customers for delivery?
 Why can’t my fleet make money?
 How can transportation enable an integrated Supply Chain, instead of
getting in the way?
Facilities
a) Warehousing/Storage
Warehouse is the quiet key to effective service. Review whether the warehouses
are in the right locations to effectively serves the customers. With the speed that
is required to manage orders and inventory, companies must have timely,
accurate information of inventory on-hand. Warehouses must be located in the
proper areas to effectively meet customer’s delivery requirements.
i. Where inventory
(1) Stored
(2) Assembled
(3) Fabricated
ii. Types
(1) Storage
(2) Production
(3) Marketing
56

b) Material Handling
It is concerned with movement of product at the stocking point and it involves
decisions such as:
 Smoothening of raw material
 Selection of material handling equipment
 Maintenance of material handling equipment.
"The Mission of Materials Management Services
is the acquisition
of the RIGHT goods and services,
in the RIGHT quantity,
at the RIGHT time,
of the RIGHT quality,
at the RIGHT place,
from the RIGHT supplier
and at the RIGHT cost,
at a minimum inventory and operating investment."
c) Packaging
It is concerned with design of packaging of product that ensures damage free
movement of the product and is conductive to efficient handling and storage.
57

Information
A must for successful implementation of Logistics functions. Developing proper
Data Base, IT system, such as ERP and DI methods.
• Accurate forecasting
• Good order Management
• Just-in-time (JIT)
• Contingency Replenishment (CR)
• Quick Response (QR) to the customer
- are the bases for good information system to be developed.
Order Processing
The order processing system undergoes various checks to determine if:
(1) the desired product is available in inventory in the quantities ordered,
(2) the customer’s credit is satisfactory to accept the order, and
(3) the product is scheduled for production if not currently in inventory.
Management can also use the information on daily sales as an input to its sales
forecasting package. Order processing next provides information to accounting for
invoicing, acknowledgement of the order to send to the customer, picking and packing
instructions to enable warehouse withdrawal of product, and shipping documentation.
The primary function of the order processing system is to provide a communication
network that links the customer and the manufacturer.
58

Cost Trade-Offs Required in Marketing and Logistics
59
Product
Promotion
Price
Transportation costs
Place/
Customer service levels
Inventory
Carrying costs
Warehousing
costs
Order processing and information costs
Lot Quantity costs
LOGISTICS
MARKETING

Achieving strategic fit in Supply Chain Management
Achieving strategic fit: Matching S.C. to customer segment requirements
Understanding the
customer:
→ Quantity of product provided in each lot
→ Response time that customers are willing to
tolerate
→ Variety of products needed
→ Service level required
→ Price of the product
→ Desired rate of innovation
(Volumes, variety, response time, service level, price
innovation rates)
Understanding the
supply chain:
Responsiveness
→ Respond to wide range of quantities demanded
→ Meet short lead times
→ Handle a large variety of products
→ Build highly innovative products
→ Meet a very high service level
Efficiency
→ Economies of scale
→ Low capacity (excess costs)
→ Low cost transport
60

Achieving Strategic Fit
Finding the Zone of Strategic Fit
Fit Between Competitive and Functional Strategies
61
Competitive Strategy
Supply Chain Strategy
Manufacturing
Inventory
Lead Time
Purchasing
Transportation
Product
Development
Strategy
Marketing and Sales
Strategy
Information Technology Strategy
Finance Strategy
Customer Service
Responsive Supply Chain
Responsiveness
Spectrum
Efficient
Supply Chain
Certain
Demand
Implied
Uncertainty
Spectrum
Uncertain
Demand
Zone of
Strategic Fit

The Bull Whip Effect
What happens when a Supply Chain is plagued with a bullwhip effect that distorts its
demand information as it is transmitted up the chain? In the past, without being able
to see the sales of it products in the distribution channel stage. HP had so rely on sales
orders from the resellers to make product forecast, plan capacity, control inventory,
and schedule production. Big variations in demand were a major problem for HP’s
Management. The common symptoms of such variations could be excessive
inventory, poor product forecasts,
insufficient or excessive capacities,
poor customer service due to
unavailable products or long backlogs,
uncertain production planning (i.e.,
excessive revisions), and high costs of
corrections, such as for expedited
shipments and overtime. HP’s product
division was a victim of order swings
that were exaggerated by the resellers relative to their sales; it, in turn, created
additional exaggerations of orders swings to suppliers.
In the past few years, the Efficient Consumer Response (ECR) initiative has tried to
redefine how the grocery Supply Chain should work. One motivation for the initiative
was the excessive amount of inventory in the Supply Chain, from when products
leave the manufacturers’ production lines to when they arrive on the retailers’ selves,
has more than 100 days of inventory supply. Distorted information has led entity in
the Supply Chain – the plant warehouse, a manufacturer’s shuttle warehouse, a
manufacturer’s market warehouse, a distributor’s central warehouse, a distributor’s
regional warehouse, and the retail store’s storage space – to stockpile because of the
high degree of demand uncertainties and variabilities. It’s no wonder that the ECR
report estimated a potential of $30 billion from streamlining the efficiencies of the
grocery Supply Chain.
Others industries are in a similar position. Computer factory and manufacturers’
distribution centers, the distributors’ warehouses along the distribution channel have
62

inventory stockpiles. And in the pharmaceutical industry, there are duplicate
inventories in a Supply Chain of manufacturers such as Eli Lilly or Bristol-Myers
Squibb, distributors such as McKesson. Again information distortion can cause the
total inventory in this Supply Chain to exceed 100 days of supply. With inventories of
raw materials, such as integrated circuits ad printed circuits broads in the computer
industry and antibodies, the total chain may contain more than one year’s supply.
In a Supply Chain for typical consumer
product, even when consumer sales do
not seem to vary much, there is
pronounced variability in the retailers’
orders to the wholesalers. Orders to the
manufacturers’ and to the
manufacturers’ supplier spike even
more. To resolve the problem of
distorted information companies need to first understand what creates the bullwhip
effect so they can counteract it. Innovative companies in different industries have
found that they can control the bullwhip effect and improve their Supply Chain
performance be coordinating information and planning along the Supply Chain.
Causes of the Bullwhip Effect
The following four have been identified as the major causes of Bullwhip Effect:
1. Demand forecast updating.
2. Order batching.
3. Price fluctuation.
4. Rationing and shortage gaming.
Each of the four forces in concert with the chain’s infrastructure and the order
manager’s rationalize decision-making create the bullwhip effect. Understanding the
causes helps managers’ design and develops strategies to counter it.
63

Demand Forecast Updating
Every company in a Supply Chain usually forecasting for its production scheduling,
capacity planning, inventory control, and material requirements planning. Forecasting
is often based on the history from the company’s immediate customers. When a
downstream operation places an order, the upstream managers processes that the piece
of information as a signal about future product demand. Based on the signal, the
upstream manager readjusts his or her demand forecasts and, in turn, the orders placed
with the suppliers of upstream operation. We contend that demand signal processing
is a major contributor to the bullwhip effect.
For example if you are a manager who has to determine how much to order from a
supplier, you use a simple method to do demand forecasting, such as the new daily
demand data become available. The order you send to the supplier reflects the amount
you need to replenish the stocks to meet the requirements of future demands as well
as the necessary safety stocks. The future demands and the associated safety stocks
are updating using the smoothing technique. With long lead times, it is not uncommon
to have weeks of safety stocks. The result is that the fluctuations in the order
quantities over time can be much greater than those in the demand data.
Order Batching
In a Supply Chain, each company places orders with an upstream organization using
some inventory monitoring or control. Demands come in; depleting inventory but the
company may not immediately place an order with its supplier. It often batches or
accumulates demands before issuing an order. There are two forms of order batching:
periodic ordering and push ordering. Instead of ordering frequently, companies may
order weekly, biweekly, or even monthly. There are many common reasons for an
inventory system based on order cycles. Often the supplier cannot handle frequent
order processing because the time and cost of processing an order can be substantial.
Many manufacturers place purchase orders with suppliers when they run their
material requirements planning (MRP) systems. One common obstacle for a company
that wants to order frequently is the economies of transportation. There are substantial
differences between full truck-load (FTL) and less-than-truckload rates so companies
have a strong incentive to fill a truck-load when they order materials from a supplier.
64

In push ordering, a company experiences regular surges in demand. The
company has orders “pushed” in it from customers periodically because
salespeople are regularly measured, sometimes quarterly or annually, which
causes end-of-quarter or end-of-year order surges. Salespersons who need to fill
sales quota may borrow ahead and sign orders prematurely. When a company
faces such periodic ordering by its customers, the bullwhip effect results. If all
customers’ order cycles were spread out evenly throughout the week the
bullwhip effect would be minimal. The periodic surges in demand by some
customers would be insignificant because not all would be ordering at the same
time. Unfortunately, such an ideal situation rarely exists. Orders are more likely
to be randomly spread out or, worse, to overlap. When order cycles overlap,
more customers that order periodically do so at the same time. As a result, the
surge in demand is even more pronounced, and the variability from the bullwhip
effect is at its highest.
If majority of companies that do MRP or Distribution Requirement Planning
(DRP) to generate purchase orders do so at the beginning of the month (or end if
the month), order cycles overlap. Periodic execution of MRPs contributes to the
Bullwhip Effect, or “MRP jitters” or “DRP jitters.”
Price Fluctuation
Estimate indicate that 80 percent of transactions between manufacturers and
distributors in the grocery industry made in a “forward buy” arrangement in
which items were bought in advance of requirements, usually because of a
manufacturer’s attractive price offer. Forward buying results from price
fluctuations in the market place. Manufacturers and distributors periodically
have special promotions like price discounts, coupons, rebates, and so on. All
these promotions result in price fluctuations. When high-low price occurs,
forward buying may well be a rational decision. If the cost of holding inventory
is less than the price differential, buying in advance makes sense. In fact, the
high-low pricing phenomenon has induced a stream of research on how
companies should order optimally to take advantage of low price opportunities.
65

Rationing and Shortage Gaming
When product demand exceeds supply, a manufacturer often rations its product
to customers. In one scheme the manufacturer allocates the amount in
proportion to the amount ordered. For example, if the total supply is only 50
percent of the total demand, all customers receive 50 percent of what they order.
Knowing the manufacturer will ration when the product is in short supply,
customer exaggerate their real needs when they order. Later, when demand
cools, orders will suddenly disappear and cancellations pour in. this seeming
overreaction by customer anticipating shortages results when organizations and
individual makes sound, rational economic decisions and “game” the potential
rationing. This effect of “gaming” is that customers’ orders give the supplier
little information on product’s real demand, a particularly vexing problem for
manufacturers in a product’s early stages.
How to Counteract the Bullwhip Effect
Understanding the causes of bullwhip effect can help managers find to migrate
it. Indeed, many companies have begun to implement innovative programs that
partially address the effect. Next, examine how companies tackle each of the
four causes. Categorize the various initiatives coordination mechanism, namely
information sharing, demand information at a downstream site is transmitted
upstream in a timely fashion. Channel alignment is the coordination of pricing,
transportation, inventory planning, and ownership between the upstream and
downstream sites in a Supply Chain. Operational efficiency refers to activities
that improve performance, such as reduced costs and lead-time. We use this
topology to discuss ways to control the bullwhip effect. (See table 1).
 Avoid Multiple Demand Forecast Updates
 Break Order Batches
 Stabilize Prices
 Eliminate Gaming in Shortage Situations
66

We contend that the bullwhip effect results from rational decision making in the
Supply Chain. Companies can effectively counteract the effect by thoroughly
understanding its underlying causes. Industry leaders like Proctor & Gamble are
implementing innovative strategies that pose new challenges organizational
relationships, and implementing new incentive and measurement systems. The
choice of companies is clear: either let the bullwhip effect paralyse you or find a
way to conquer it.
67
Table 1: A Framework for Supply Chain Coordination Initiatives
Causes of
Bullwhip
Information Sharing
Channel
Alignment
Operational
Efficiency
Demand
Forecast
Update
 Understanding
system dynamics
 Use point-of-
scale (POSI data)
 Electronic data
 Interchange
(EDI)
 Internet
 Computer-
assisted ordering
(CAO)
 Vendor
managed
inventory
 Discount for
information
sharing
 Customer
direct
 Lead-time
reduction
 Echelon-based
inventory control
Order
Batching
 EDI
 Internet
ordering
 Discount for
truck-load
assortment
 Delivery
appointments.
 Consolidati
on
 Logistics
outsourcing.
 Reduction in
fixed costs of
ordering by EDI or
E-commerce.
 CAO
Price
fluctuation
 Continuous
replenishment
program (CRP)
 Everyday
low cost (EDLC)
 Everyday low
price (EDLP)
 Activity-based
costing (ABC)
Shortage
Gaming
 Sharing sales,
capacity, and
inventory data
 Allocation
based on past
sales.

How to Reduce the Bullwhip Effect
One way to reduce the bullwhip effect is through better information, either in the form
of improved communication along the supply chain or (presumably) better forecasts.
Because managers realize that end-user demand is more predictable than the demand
experienced by factories, they attempt to ignore signals being sent through the supply
chain and instead focus on the end-user demand. This approach ignores day-to-day
fluctuations in favour of running level.
Another solution is to reduce or eliminate the delays along the supply chain. In both
real supply chains and simulations of supply chains, cutting order-to-delivery time by
half can cut supply chain fluctuations by 80%. In addition to savings from reduced
inventory carry costs, operating costs also decline because less capacity is needed to
handle extreme demand fluctuations.
“The simplest way to control the bullwhip effect caused by forward buying and
diversions is to reduce both the frequency and the level of wholesale price
discounting.”
In addition to cycle time reductions throughout the supply chain, Haul Lee, V.
Padmanabhan, and Seungjin Whang recommend the following actions to reduce the
supply chain management bullwhip effect:
1. Focus on end-user demand through point-of-sale (POS) data collection,
electronic data interchange (EDI), and vendor-managed inventories (VMI) to
reduce distortions in downstream communication.
2. Work with vendors to create smaller order increments and reduce order
batching. Order batching exacerbates demand fluctuations.
3. Maintain stable prices for products. Price fluctuations encourage customers to
over-purchase when prices are low and cut back on orders when prices are
high, leading to large demand fluctuations.
4. Allocate demand among customers based on past orders, not present orders to
reduce hoarding behaviour when shortages occur.
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Supply Chain and IT
Information Technology is a prerequisite for successful Supply Chain
Management (SCM) today and will become even more so in the near future. The
e-Logistics field is developing very dynamically. Business-to business
transactions are made via the Internet and ERP systems manage the
transactional information within the enterprise. While IT systems are vital
components in supply chains, their successful management relies on intelligent
and coordinated decision making throughout the logistics network. Intelligent
Decision Support using advanced decision technologies is becoming
increasingly important in e-Logistics and SCM as well. Data Warehouses and
Data Mining can be used to store and analyze product, inventory, and sales
information. Simulation and optimization, which can be found in advanced
planning and scheduling systems, can be employed for, e.g., inventory,
production, procurement and distribution planning. Intelligent agents can, e.g.,
communicate with different partners in a supply chain, assist in collecting
information, share product information, negotiate prices, and distribute alerts
throughout the logistics networks and SCM as well is a very active field in
research, consulting, and software development. Many such technologies or
systems have been implemented recently or are currently in the stage of
implementation.
“IT is an inseparable part of SCM.”
Information technology (IT) is an essential element of the Supply Chain strategy
of an organization. SCM is, to a large extent, about managing information
flows. Unfortunately, lack of sophistication in the information system is still
one of the biggest roadblocks to Supply Chain integration today. IT investments
are still guided by technology, functional and internal considerations and not by
business strategy and needs. There is a lack of extended enterprise functionality,
lack of flexibility, lack of more advance functionality beyond transaction
management, and lack of open, modular, internet-like system architectures. The
human error element too is painful.
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In the absence of trust and partnership, organizations are not able to share
information. It sometimes doesn’t happen even within Supply Chain activities.
This leads to amplification of demand of the Supply Chain, leading to the
bullwhip effect. Firms are caught in a tricky situation: even when the total
demand variability is low, the variability in orders is very high. This increases
the Supply Chain cost, rendering these firms uncompetitive. The solution of this
problem is a centralised information system. A few organisations have taken the
initiative to integrate their distribution network by implementing enterprise
resource planning and electronic data interchange across branches networks.
However, their work is incomplete without their suppliers and channel partners.
These organisations do not have centralised information, which could lead to
large variability in orders due to smoothening at various levels of the Supply
Chain.
Enterprise Resource Planning (ERP)
Enterprise Resource Planning is a term coined in the early 1990s. It began as a group
of applications or software focused on combining multiple systems into one integrated
system where data could be shared across the enterprise, presumably reducing
redundant data entry and processes. It was originally proposed for manufacturing and
production planning.
In the mid 1990s, ERP solutions expanded to include ordering systems, financial and
accounting systems, asset management and human resource management systems.
Finally, in the late 1990s, the solutions were again broadened to include systems that
made it possible for entrepreneurs and governmental entities to consider these
solutions for their business processes.
The need to undergo an Enterprise Resource Planning project is seen as an
opportunity to not only integrate data systems, but to also redefine processes in the
interest of gaining efficiencies, as well as promote professional growth for employees
by introducing new skills and knowledge in the areas of data management and
procedures.
70

ERP systems have been widely spread. ERP is followed by Wear-House
Management systems, Customer Relationship Management (CRM) and
Transportation Management
“ERP systems integrate the key execution functions across the business”
EDI (ELECTRONIC DATA INTERCHANGE)
EDI allows the electronic transmission of orders, invoice and remittance
information between businesses. EDI has around since the late seventies and it
is used as a replacement for paper-based system has increased dramatically. The
concept involves defining a standard format for transmission of data between
two businesses, which allows the whole transaction process to be automated.
Thus, the actual applications at each end needn’t be identical.
Why EDI?
Simple. EDI saves money. It accomplishes this by making more efficient use of
valuable personnel who are released from time-consuming paper work. It also
moves business efficiency by increasing throughput and reducing the scope for
errors, and allows more sophisticated automated business processes to be
introduced.
How does EDI work?
EDI take information from a business process and delivers it to a “trading
partner” - a business that has agreed to participate in the electronic exchange of
data. The data is usually transmitted over a Value Added Network (VAN). The
VAN is essentially a giant virtual switchboard where data is shunted from one
participating company to another.
Alternative data can be transferred directly. Direct transmission occurs when a
company connects directly to the computer of its trading partner using a dial-up
connection or dedicated line. Once the trading partner receives the information,
the EDI system will translate the standardised EDI data into the local format for
use in the local IT systems.
71

Advantages
EDI is an automated method for exchanging data and therefore it eliminates
most of the errors and time delays associated when people are involved.
Disadvantages
The disadvantage of this is that it requires two companies to use compatible
hardware and communications software.
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