Professional Documents
Culture Documents
Module 1
definition
A supply chain consists of all parties involved directly or indirectly in fulfilling a customer request. It includes manufacturer supplier, transporters, warehouses, retailers and customers.
Objectives
Objective 1: enhance the supply chain value Supply chain value is the difference between final worth of product to customer minus costs supply chain incurs in filling the customers request.
Objective 2: Increase the supply chain profitability. Supply chain profitability is the difference between the revenue generated from the customer and the overall cost across the value chain.
Objective 3: Maximize the customer satisfaction Objective 4: Have product replenishment at right time.
[Decision Phases of a Supply Chain ] Supply chain strategy or design Supply chain planning Supply chain operation
Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon
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Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
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PUSH PROCESSES
PULL PROCESSES
Supply chain processes discussed in the two views can be classified into:
Integration among the above three macro processes is critical for effective and successful supply chain management
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Competitive and Supply Chain Strategies Competitive strategy: defines the set of customer needs
a firm seeks to satisfy through its products and services Product development strategy: specifies the portfolio of new products that the company will try to develop
Marketing and sales strategy: specifies how the market will be segmented and product positioned, priced, and promoted Supply chain strategy:
determines the nature of material procurement, transportation of materials, manufacture of product or creation of service, distribution of product Consistency and support between supply chain strategy, competitive strategy, and other functional strategies is important
Distribution
Service
Identify the needs of the customer segment being served Quantity of product needed in each lot Response time customers will tolerate Variety of products needed Service level required Price of the product Desired rate of innovation in the product
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Overall attribute of customer demand Demand uncertainty: uncertainty of customer demand for a product Implied demand uncertainty: resulting uncertainty for the supply chain given the portion of the demand the supply chain must handle and attributes the customer desires
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Implied demand uncertainty also related to customer needs and product attributes First step to strategic fit is to understand customers by mapping their demand on the implied uncertainty spectrum
Variety of products required increases Demand per product becomes more disaggregated Number of channels increases Rate of innovation increases Required service level increases Total customer demand is now disaggregated over more channels New products tend to have more uncertain demand Firm now has to handle unusual surges in demand
Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Salt at a supermarket
Low
Cost
High
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Low
Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Responsiveness Spectrum
Highly efficient
Somewhat efficient
Somewhat responsive
Highly responsive
Hanes apparel
Dell
Uncertain demand
Responsive
Quick response Modularity to allow postponement Higher margins Capacity flexibility Buffer inventory Aggressively reduce even if costs are significant Speed, flexibility, quality Greater reliance on responsive (fast) modes
Five categories:
Intracompany intraoperation scope Intracompany intrafunctional scope Intracompany interfunctional scope Intercompany interfunctional scope Flexible interfunctional scope
Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Information data and analysis regarding inventory, transportation, facilities throughout the supply chain potentially the biggest driver of supply chain performance Sourcing functions a firm performs and functions that are outsourced Pricing Price associated with goods and services provided by a firm to the supply chain
Information
Pricing
Facilities
Role in the supply chain
the where of the supply chain manufacturing or storage (warehouses)
Inventory
Role in the supply chain Role in the competitive strategy Components of inventory decisions
Safety inventory
inventory held in case demand exceeds expectations costs of carrying too much inventory versus cost of losing sales
Seasonal inventory
inventory built up to counter predictable variability in demand cost of carrying additional inventory versus cost of flexible production
Transportation
Role in the supply chain Role in the competitive strategy Components of transportation decisions
Information
Role in the supply chain Role in the competitive strategy Components of information decisions
Sourcing
Role in the supply chain Role in the competitive strategy Components of sourcing decisions
Pricing
Role in the supply chain Role in the competitive strategy Components of pricing decisions
MODULE 2 Designing the supply chain network Designing the distribution network role of distribution factors influencing distribution design options e-business and its impact distribution networks in practice network design in the supply chain role of network factors affecting the network design decisions modeling for supply chain.
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Distribution network design options must therefore be compared according to their impact on customer service and the cost to provide this level of service
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Response Time
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Cost
Local WIP Central FG Central WIP Central Raw Material and Custom production Custom production with raw material at suppliers
Low
Low Response Time Hi
Number of facilities
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Number of facilities
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Number of facilities
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Total Costs
Facilities Inventory
Transportatio n
Number of Facilities
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Number of Facilities
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Customers
Retaile r
Distributor/Retailer Warehouse
Customers
Product Flow Information flow
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Retaile r
Cross Dock DC
COMPETITIVE ENVIRONMENT
REGIONAL DEMAND Size, growth, homogeneity, local specifications POLITICAL, EXCHANGE RATE AND DEMAND RISK
AVAILABLE INFRASTRUCTURE
Conventional Network
Vendor DC Materials DC
Finished Goods DC
Customer DC
Customer Store
Vendor DC
Customer Store
Plant Warehouse Customer DC
Customer Store
Customer Store
Finished Goods DC
Customer DC
Customer Store
dn : Distance to delivery
location n
Fn : Annual tonnage to
delivery location n
Min
d n Dn F n
Prof. Prasad Kulkarni, MBA department GIT Belgaum.
s.t.
x D , j 1,...,m
i 1 m ij j
x K , i 1,...,n
j 1 ij i
ij
Min
i 1
f y c x
i i i 1 j 1 ij
ij
s.t.
x D , j 1,...,m
i 1 n ij j
x K y , i 1,...,n
j 1 m ij i i
y k ; y {0,1}
i 1 i i
f y D j c x
i i i 1 j 1 ij
ij
s.t.
x
i 1 n j 1
ij
1, j 1,...,m
D j x K y , i 1,...,n
ij i i
xij, y {0,1}
i
MODULE 3 (5 Hours) Designing and Planning Transportation Networks. Role of transportation - modes and their performance - transportation infrastructure and policies - design options and their trade-offs - Tailored transportation
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Transportation Modes
Trucks
TL LTL
Truckload (TL)
Average revenue per ton mile (1996) = 9.13 cents Average haul = 274 miles Average Capacity = 42,000 - 50,000 lb. Low fixed and variable costs Major Issues
Utilization Consistent service Backhauls
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Rail
Average revenue / ton-mile (1996) = 2.5 cents Average haul = 720 miles Average load = 80 tons Key issues: Scheduling to minimize delays / improve service Off-track delays (at pickup and delivery end) Yard operations Variability of delivery times
Air
Key issues:
Location/number of hubs Location of fleet bases/crew bases Schedule optimization Fleet assignment Crew scheduling Yield management
Package Carriers
Companies like FedEx, UPS,, that carry small packages ranging from letters to shipments of about 150 pounds Expensive Rapid and reliable delivery Small and time-sensitive shipments Preferred mode for e-businesses Consolidation of shipments (especially important for package carriers that use air as a primary method of transport)
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Water
Limited to certain geographic areas Ocean, inland waterway system, coastal waters Very large loads at very low cost Slowest Dominant in global
Pipeline
High fixed cost Primarily for crude petroleum, refined petroleum products, natural gas Best for large and predictable demand Would be used for getting crude oil to a port or refinery, but not for getting refined gasoline to a gasoline station (why?)
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Intermodal
Use of more than one mode of transportation to move a shipment to its destination Most common example: rail/truck Also water/rail/truck or water/truck Grown considerably with increased use of containers Increased global trade has also increased use of intermodal transportation More convenient for shippers (one entity provides the complete service) Key issue involves the exchange of information to facilitate transfer between different transport modes
Inventory aggregation decreases supply chain costs if the product has a high value to weight ratio, high demand uncertainty, or customer orders are large Inventory aggregation may increase supply chain costs if the product has a low value to weight ratio, low demand uncertainty, or customer orders are small
Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Tailored Transportation
The use of different transportation networks and modes based on customer and product characteristics Factors affecting tailoring:
Customer distance and density Customer size Product demand and value
Role of IT in Transportation
The complexity of transportation decisions demands to use of IT systems IT software can assist in:
Identification of optimal routes by minimizing costs subject to delivery constraints Optimal fleet utilization GPS applications
MODULE 4 (6 Hours) Sourcing and Pricing. Sourcing In-house or Outsource 3rd and 4th PLs supplier scoring and assessment, selection design collaboration procurement process sourcing planning and analysis. Pricing and revenue management for multiple customers, perishable products, seasonal demand, bulk and spot contracts.
Contracts to Coordinate Supply Chain Costs Contracts to Increase Agent Effort Contracts to Induce Performance
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Contracts for Product Availability and Supply Chain Profits Many shortcomings in supply chain performance
occur because the buyer and supplier are separate organizations and each tries to optimize its own profit Total supply chain profits might therefore be lower than if the supply chain coordinated actions to have a common objective of maximizing total supply chain profits Recall Chapter 10: double marginalization results in suboptimal order quantity An approach to dealing with this problem is to design a contract that encourages a buyer to purchase more and increase the level of product availability The supplier must share in some of the buyers demand uncertainty, however
Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Contracts for Product Availability and Supply Chain Profits: Buyback Contracts
Allows a retailer to return unsold inventory up to a specified amount at an agreed upon price Increases the optimal order quantity for the retailer, resulting in higher product availability and higher profits for both the retailer and the supplier Most effective for products with low variable cost, such as music, software, books, magazines, and newspapers Downside is that buyback contract results in surplus inventory that must be disposed of, which increases supply chain costs Can also increase information distortion through the supply chain because the supply chain reacts to retail orders, not actual customer demand
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Contracts for Product Availability and Supply Chain Profits: Revenue Sharing Contracts
The buyer pays a minimal amount for each unit purchased from the supplier but shares a fraction of the revenue for each unit sold Decreases the cost per unit charged to the retailer, which effectively decreases the cost of overstocking Can result in supply chain information distortion, however, just as in the case of buyback contracts
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Contracts for Product Availability and Supply Chain Profits: Quantity Flexibility Contracts
Allows the buyer to modify the order (within limits) as demand visibility increases closer to the point of sale Better matching of supply and demand Increased overall supply chain profits if the supplier has flexible capacity Lower levels of information distortion than either buyback contracts or revenue sharing contracts
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Design Collaboration
50-70 percent of spending at a manufacturer is through procurement 80 percent of the cost of a purchased part is fixed in the design phase Design collaboration with suppliers can result in reduced cost, improved quality, and decreased time to market Important to employ design for logistics, design for manufacturability Manufacturers must become effective design coordinators throughout the supply chain
Criticality
General Items
Value/Cost
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Cheaper but lower performing suppliers should be used to supply base demand Higher performing but more expensive suppliers should be used to buffer against variation in demand and supply from the other source
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The Role of Revenue Management in the Supply Chain Revenue management is the use of pricing to increase the profit
generated from a limited supply of supply chain assets Supply assets exist in two forms: capacity and inventory Revenue management may also be defined as the use of differential pricing based on customer segment, time of use, and product or capacity availability to increase supply chain profits Most common example is probably in airline pricing
Example
Cost of wasted capacity = Cw = $10 per dress Cost of capacity shortage = Cs = $5 per dress s* = Cw / (Cw + Cs) = 10/(10+5) = 0.667 mc = 800; sc = 400 O* = NORMINV(s*, mc,sc) = NORMINV(0.667,800,400) = 973 If the mean is 15% of the booking level and the coefficient of variation is 0.5, then the optimal overbooking level is the solution of the following equation: O = NORMINV(0.667,0.15(5000+O),0.075(5000+O)) Using Excel Solver, O* = 1,115
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Example 15.6
Bulk contract cost = cB = $10,000 per million units Spot market cost = cS = $12,500 per million units m = 10 million units s = 4 million units p* = (cS cB) / cS = (12,500 10,000) / 12,500 = 0.2 Q* = NORMINV(p*,m,s) = NORMINV(0.2,10,4) = 6.63 The manufacturer should sign a long-term bulk contract for 6.63 million units per month and purchase any transportation capacity beyond that on the spot market
Effective use of IT in the supply chain can have a significant impact on supply chain performance
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Why Focus on the Macro Processes? Macro Processes Applied to the Evolution of Software
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Bullwhip Effect
Fluctuations in orders increase as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers Distorts demand information within the supply chain, where different stages have very different estimates of what demand looks like Results in a loss of supply chain coordination Examples: Proctor & Gamble
Incentive Obstacles
When incentives offered to different stages or participants in a supply chain lead to actions that increase variability and reduce total supply chain profits misalignment of total supply chain objectives and individual objectives Local optimization within functions or stages of a supply chain Sales force incentives
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Operational Obstacles
Actions taken in the course of placing and filling orders that lead to an increase in variability Ordering in large lots (much larger than dictated by demand) Large replenishment lead times Rationing and shortage gaming (common in the computer industry because of periodic cycles of component shortages and surpluses)
Pricing Obstacles
When pricing policies for a product lead to an increase in variability of orders placed Lot-size based quantity decisions Price fluctuations (resulting in forward buying) Figure 17.3
Behavioral Obstacles
Problems in learning, often related to communication in the supply chain and how the supply chain is structured Each stage of the supply chain views its actions locally and is unable to see the impact of its actions on other stages Different stages react to the current local situation rather than trying to identify the root causes Based on local analysis, different stages blame each other for the fluctuations, with successive stages becoming enemies rather than partners No stage learns from its actions over time because the most significant consequences of the actions of any one stage occur elsewhere, resulting in a vicious cycle of actions and blame Change Lack of otherwise trust change results in you opportunism, duplication of effort, Prof. Prasad Kulkarni, MBA department GIT Belgaum. to change will change
Reducing replenishment lead time Reduces uncertainty in demand EDI is useful Reducing lot sizes Computer-assisted ordering, B2B exchanges Shipping in LTL sizes by combining shipments Technology and other methods to simplify receiving Changing customer ordering behavior Rationing based on past sales and sharing information to limit gaming Turn-and-earn Information sharing
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Identify the mutual benefit provided Identify the criteria used to evaluate the relationship (equity is important) Important to share benefits equitably Clarify contribution of each party and the benefits each party will receive
Identifying Operational Roles and Decision Rights for Each Party Recognize interdependence between parties
Sequential interdependence: activities of one partner precede the other Reciprocal interdependence: the parties come together, exchange information and inputs in both directions Sequential interdependence is the traditional supply chain form Reciprocal interdependence is more difficult but can result in more benefits
Organizations Dependence
Low
High
Partners Dependence
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Characteristics of Forecasts
Forecasts are always wrong. Should include expected value and measure of error. Long-term forecasts are less accurate than short-term forecasts (forecast horizon is important) Aggregate forecasts are more accurate than disaggregate forecasts
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Forecasting Methods
Qualitative: primarily subjective; rely on judgment and opinion Time Series: use historical demand only Static Adaptive Causal: use the relationship between demand and some other factor to develop forecast Simulation Imitate consumer choices that give rise to demand Can combine time series and causal methods
Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Components of an Observation
Observed demand (O) = Systematic component (S) + Random component (R)
Level (current deseasonalized demand) Trend (growth or decline in demand) Seasonality (predictable seasonal fluctuation) Systematic component: Expected value of demand Random component: The part of the forecast that deviates from the systematic component Forecast error: difference between forecast and actual demand
97 ,2 97 ,3 97 ,4 98 ,1 98 ,2 98 ,3 98 ,4 99 ,1 99 ,2 99 ,3 99 ,4 00 ,1
Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Forecasting Methods
Static Adaptive
Moving average Simple exponential smoothing Holts model (with trend) Winters model (with trend and seasonality)
Static Methods
Assume a mixed model: Systematic component = (level + trend)(seasonal factor) Ft+l = [L + (t + l)T]St+l = forecast in period t for demand in period t + l L = estimate of level for period 0 T = estimate of trend St = estimate of seasonal factor for period t Dt = actual demand in period t Ft = forecast of demand in period t
Static Methods
Estimating level and trend Estimating seasonal factors
97 ,2 97 ,3 97 ,4 98 ,1 98 ,2 98 ,3 98 ,4 99 ,1 99 ,2 99 ,3 99 ,4 00 ,1
Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Deseasonalizing Demand
Dt =
S Di / p for p odd
(sum is from i = t-(p/2) to t+(p/2)), p/2 truncated to lower integer
Deseasonalizing Demand
For the example, p = 4 is even For t = 3: D3 = {D1 + D5 + Sum(i=2 to 4) [2Di]}/8 = {8000+10000+[(2)(13000)+(2)(23000)+(2)(34000)]}/8 = 19750 D4 = {D2 + D6 + Sum(i=3 to 5) [2Di]}/8 = {13000+18000+[(2)(23000)+(2)(34000)+(2)(10000)]/8 = 20625
Deseasonalizing Demand
Then include trend Dt = L + tT where Dt = deseasonalized demand in period t L = level (deseasonalized demand at period 0) T = trend (rate of growth of deseasonalized demand) Trend is determined by linear regression using deseasonalized demand as the dependent variable and period as the independent variable (can be done in Excel) In the example, L = 18,439 and T = 524
Demand
Dt Dt-bar
Adaptive Forecasting
The estimates of level, trend, and seasonality are adjusted after each demand observation General steps in adaptive forecasting Moving average Simple exponential smoothing Trend-corrected exponential smoothing (Holts model) Trend- and seasonality-corrected exponential smoothing (Winters model)
Moving Average
Used when demand has no observable trend or seasonality Systematic component of demand = level The level in period t is the average demand over the last N periods (the N-period moving average) Current forecast for all future periods is the same and is based on the current estimate of the level Lt = (Dt + Dt-1 + + Dt-N+1) / N Ft+1 = Lt and Ft+n = Lt After observing the demand for period t+1, revise the estimates as follows: Lt+1 = (Dt+1 + Dt + + Dt-N+2) / N Prof. Prasad Kulkarni, MBA department GIT Belgaum. Ft+2 = Lotherwise Change to change change will change you t+1
From Tahoe Salt data, forecast demand for period 1 using exponential smoothing L0 = average of all 12 periods of data = Sum(i=1 to 12)[Di]/12 = 22083 F1 = L0 = 22083 Observed demand for period 1 = D1 = 8000 Forecast error for period 1, E1, is as follows: E1 = F1 - D1 = 22083 - 8000 = 14083 Assuming a = 0.1, revised estimate of level for period 1: L1 = aD1 + (1-a)L0 = (0.1)(8000) + (0.9)(22083) = 20675 F2 = L1 = 20675 Note that the estimate of level for period 1 is lower than in Prof. Prasad Kulkarni, MBA department GIT Belgaum. Change to change period 0 otherwise change will change you
Trend- and Seasonality-Corrected Exponential Smoothing Appropriate when the systematic component of demand is assumed to have a level, trend, and seasonal factor Systematic component = (level+trend)(seasonal factor) Assume periodicity p Obtain initial estimates of level (L0), trend (T0), seasonal factors (S1,,Sp) using procedure for static forecasting In period t, the forecast for future periods is given by: Ft+1 = (Lt+Tt)(St+1) and Ft+n = (Lt + nTt)St+n
Trend- and Seasonality-Corrected Exponential Smoothing (continued) After observing demand for period t+1, revise estimates for level, trend, and seasonal factors as follows: Lt+1 = a(Dt+1/St+1) + (1-a)(Lt+Tt) Tt+1 = b(Lt+1 - Lt) + (1-b)Tt St+p+1 = g(Dt+1/Lt+1) + (1-g)St+1 a = smoothing constant for level b = smoothing constant for trend g = smoothing constant for seasonal factor Example: Tahoe Salt data. Forecast demand for period 1 using Winters model. Initial estimates of level, trend, and seasonal factors are obtained as in the static forecasting case
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Forecasting in Practice
Collaborate in building forecasts The value of data depends on where you are in the supply chain Be sure to distinguish between demand and sales
Development of CPFR came from an effort by Wal Mart and one of its suppliers, WarnerLambert Company, particularly with regard to its Listerine brand product. In addition to rationalizing inventories of specific line items and addressing out-of-stock occurrences, these two companies collaborated to increase their forecasting accuracy, so as to have just the right amount of inventory where it was needed, when it was needed. CPFR emphasizes a sharing of consumer purchasing data among and between trading partners for the purpose of helping to govern supply chain activities. In this manner, CPFR creates a significant, direct link between the consumer and the supply chain.
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The CPFR initiative begins with the sharing of marketing plans between trading partners. Once an agreement is reached on the timing and planned sales of specific products, and a commitment is made to follow that plan closely, the plan is then used to create a forecast, by stock-keeping unit, by week, and by quantity. The planning can be for thirteen, twenty-six, or fifty two weeks.
Collaborative Planning
Collaborative demand planning
Order processing
Order preparation
Order shipment
Order Placement Order-placement time can vary significantly, from taking days or weeks to being instantaneous. Company experiences indicate that improvements in order-placement systems and processes offer some of the greatest opportunities for significantly reducing the length and variability of the overall order. Significant increases were projected for Internet facilitated resources such as E-marketplace, Extranets and E-mail. Order Processing The order-processing function usually involves checking customer credit, transferring information to sales records, sending the order to the inventory and shipping areas, and preparing shipping documents. Order Preparation Depending on the commodity being handled and other factors, the order-preparation process sometimes may be very simple and performed manually or, perhaps, may be relatively complex and highly automated. Order Shipment Shipment time extends from the moment an order is placed upon the transport vehicle for movement, until the moment it is received and unloaded at the buyers location.
Customer Service
Having the right product, at the right time, in the right quantity, without damage or loss, to the right customer is an underlying principle of logistics systems that recognizes the importance of customer service. Another aspect of customer service that deserves mention is the growing consumer awareness of the price/quality ratio and the special needs of todays consumers, who are time conscious and who demand flexibility.
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Transportatio n costs
Warehousing costs
Examples of the various forms that customer service may take include the following: 1. Revamping a billing procedure to accommodate a customers request. 2. Providing financial and credit terms. 3. Guaranteeing delivery within specified time periods. 4. Providing prompt and congenial sales representatives. 5. Extending the option to sell on consignment. 6. Providing material to aid in a customers sales presentation. 7. Installing the product. 8. Maintaining satisfactory repair parts inventories.
Customer service as an activity This level treats customer service as a particular task that a firm must accomplish to satisfy the customers needs. Order processing, billing and invoicing, product returns and claims handling are all typical examples of this level of customer service. Customer service as performance measures This level emphasizes customer service in terms of specific performance measures, such as the percentage of orders delivered on time and complete and the number of orders processed within acceptable time limits. Customer service as a philosophy This level elevates customer service to a firm-wide commitment to providing customer satisfaction through superior customer service by laying emphasis on quality and quality management. Prof. Prasad Kulkarni, MBA department GIT Belgaum.
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1. Cycle time A seller who can assure the customer of a given level of lead time, plus some tolerance, distinctly differentiates its product from that of its competitor. The seller that provides a dependable lead time permits the buyer to minimize the total cost of inventory, stockouts, order processing and production scheduling. 2. Safe delivery If goods arrive damaged or are lost, the customer cannot use the goods as intended. A shipment containing damaged goods aggravates several customer cost centers inventory, production and marketing. 3. Correct orders An improperly filled order forces the customer to reorder, if the customer is not angry enough to buy from another supplier. If a customer who is an intermediary in the marketing channel experiences a stockout, the stockout cost also directly affects the seller.
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Communications The two logistics activities vital to order-filling are the communication of customer order information to the order-filling area and the actual process of picking out of inventory the items ordered. In the order information stage, the use of EDI or Internetenabled communications can reduce errors in transferring order information from the order to the warehouse receipt. Convenience Convenience is another way of saying that the logistics service level must be flexible. Basically, logistics requirements differ with regard to packaging, the mode and carrier the customer requires, routing and delivery times.
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Elapsed time from order placement to order receipt. Usually measured in time units and variation from standard or target order cycle Ability of system to respond to special and/or unexpected needs of customer.
Ability of firms information system to respond in timely and accurate manner to customers requests for information Efficiency of procedures and time required to recover from distribution system malfunction (i.e. errors in billing, shipping, damage , claims).
Efficiency in providing product support after delivery, including technical, information, spare parts, or equipment modification, as appropriate.
Effects of stockouts
A stockout occurs when desired quantities of finished goods are not available when and where a customer needs them. When a seller is unable to satisfy demand with available inventory, one of four possible events may occur: 1. The customer waits until the product is available 2. The customer back orders the product 3. The seller loses a sale 4. The seller loses a customer
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Back Order
A company having to back order an item that is out of stock will incur expenses for special order processing and transportation. The extra order processing traces the back orders movement , in addition to the normal processing for regular replenishments. The customer usually incurs extra transportation charges because a back order is typically a smaller shipment and often incurs higher rates.
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Lost sales
Most firms find that although some customers may prefer a back order, others will turn to alternative supply sources. Most companies have competitors who produce substitute products; and when one source does not have an item available, the customer will order that item from another source. In such cases, the stockout has caused a lost sale. The sellers direct loss is the loss of profit on the item that was unavailable when the customer wanted it. Thus, a seller can determine direct loss by calculating profit on one item and multiplying it by the number the customer ordered. For eg. If the order was for 100 units and the profit is Rs. 10 per unit, the loss is Rs 1000.
Lost Customer
The customer permanently switches to another supplier. A supplier who loses a customer loses a future stream of income.
The first step is to identify a stockouts potential consequences. These include a back order, a lost sale, and a lost customer. The second step is to calculate each results expense or loss of profit and then to estimate the cost of a single stockout. Assume : 70% of all stockouts result in a back order, and a back order requires extra handling costs of Rs. 6; 20% results in a lost sale for the item, and this loss equals Rs. 20 in lost profit margin; and 10% result in a lost customer, or a loss of Rs. 200. Overall impact : 70% of Rs 6 = Rs. 4.20 20% of Rs. 20 = Rs 4 10% of Rs. 200 = Rs 20 Total estimated cost per stockout = Rs 28.20 A firm should carry additional inventory to protect against stockouts only as long as carrying the additional inventory costs less than Rs. 28.20.
Change to change otherwise change will change you Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Channels of Distribution
A channel of distribution consists of one or more companies or individuals who participate in the flow of goods, services, information and finances from the producer to the final user or consumer. This encompasses a variety of intermediary firms, including those that we classify as wholesalers or retailers.
Types of Channels
Managing distribution channels requires firms to coordinate and integrate logistics and marketing activities in a manner consistent with overall corporate strategy. Logistical channel refers to the means by which products flow physically from where they are available to where they are needed. Marketing channels refers to the means by which necessary transactional elements are managed. (e.g. customer orders, billing, accounts receivable etc.)
Change to change otherwise change will change you Prof. Prasad Kulkarni, MBA department GIT Belgaum.
Marketing
E-Procurement
Wholesaler/ Distributor
Retail customer
Example of channels of distribution for the food products manufacturing industry Food Manufacturing firms
Food Service distributors Grocery wholesalers Food brokers Internet (direct)
Restaurant s
Retail groce rs
Retail chains
Interne t retailer