Ch1 Week 1

CHAPTER 1
INTRODUCTION TO LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Learning Objectives
Chapter 1 Introduction to Logistics and Supply Chain Management
After reading this chapter, you should be able to: Know what is a supply chain and what is supply chain management. Discuss the process view of a supply chain. Know what is logistics and what is logistics management. Understand what is meant by integrated supply chains. Describe the focus areas in supply chain management.
Himalaya Publishing House
Logistics and Supply Chain Management K. Shridhara Bhat
1.0 Definition
Supply chain management encompasses all activities associated with the flow and transportation of goods from raw materials to the end user, as well as the associated information flows. Materials and information must simultaneously flow both up and down the supply chain to leverage strategic positioning and to improve operating efficiency. Supply chain management is viewed today, as a critical business activity that is integrated with the business planning process itself. Both customers and suppliers today form the integral part of any supply chain management strategy. World wide what most of the companies are focusing on today is creation of a new effective value chain.
The supply chain can be analysed in multiple dimensions, of which the important or major dimensions are : (i) The knowledge dimension (ii) The information technology aspect and (ii) The human interface
(i) The Knowledge Dimension: The company must remain completely informed about itself, its suppliers and the customers. They need detailed information of the supplier industry from which they are sourcing. (ii) The Information Technology Aspect: Companies view Information Technology as strategically important to supply chain management. With the proliferation of Information Technology (IT), flow of information is no longer a bottle neck. Customised solution within ERP packages provide necessary critical leverage. ERP has already revolutionised the way, companies are doing business today. There are many third-party solution providers for supply chain management, for example, companies like CSX corp, Camelot IS-2, i2 Technologies etc.
Himalaya Publishing House Logistics and Supply Chain Management K. Shridhara Bhat
iii. The Human Interface: Because of the increased IT leverages, there is a gradual shift of the human interface with a low transactional level to a much higher decision making level.
1.1 What is a supply chain

A supply chain refers to the way that materials flow through different organisations, starting with raw materials and ending with finished products delivered to the ultimate consumer. A supply chain is a sequence of suppliers, transporters, warehouses, manufacturers, wholesalers/distributors, retail outlets and final customers. Exhibit 1.1a illustrates a typical supply chain for a manufacturing organisation and Exhibit 1.1b illustrates a typical supply chain for a service organisation.
Supply Chain for a Manufacturing Organisation
Supply Chain for a Service Organisation
1.2 Importance of Supply Chain Management
Of late, supply chain management is gaining growing importance because of the following reasons: i. The total time for materials to travels through the entire supply chain can be quite long (say 6 months to one year or more). ii. Many companies have drastically improved their internal operations and now find it necessary to consider relations with external customers and suppliers in the supply chain to gain further improvements in their operations. iii. Supply chain thinking is an application of systems thinking and provides a basis for understanding processes that cut across a companys internal department and processes that extend outside the company as well. iv. The goals of supply chain management are to reduce uncertainty and risks in the supply chain, thereby positively affecting inventory levels, cycle time, processes and ultimately end-customer service levels. The focus is on system optimisation.
1.3 Some definition of supply chain management

1. Supply chain management is the integration of the various activities encompassed by the supply chain through improved supply chain relationships to achieve a sustainable competitive advantage. 2. Supply chain management is defined as the systematic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across business within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole. 3. Supply chain management is the ability to get closer to the customer. 4. Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion and all logistics management activities. It also includes coordination and collaboration with channel partners, intermediaries, third party service providers and customers. In essence SCM integrates supply and demand management within and across companies.
What is Integrated Supply Chain Management?

Integrated supply chain management is a proven business strategy that has gained wide acceptance in recent year due to increasing customer demands for quality, delivery and speed. New and radical ways of communicating, coupled with cost reduction and more interdependent supplier, provider and customer relationships, have contributed to the emergence of an integrated supply chain approach. i. Supply-chain management has become a hot competitive advantage as companies struggle to get the right stuff to the right place at the right time. ii. Supply chain management builds a chain of suppliers that focus on both minimising waste and maximising value to the ultimate customer.
1.4 Overview of Supply Chain Management 1.4.1 How is Inventory Created? :A basic purpose of supply-chain management is to control inventory by managing the flow of materials. Inventory is a stock of materials used to satisfy customer demand or support the production of goods or services. Inventories may be held in the form of raw materials and bought out components, work-in-process (WIP) and finished goods. 1.4.2 Materials Management :One area of operations and logistics playing a major role in supply chain management is that of materials management, which is concerned with decisions about purchasing materials and services, inventories, production levels, staffing patterns, schedules and distribution, either directly or indirectly. Traditionally, organisations have divided the responsibility for materials management among three departments : purchasing, production control and distribution.
Many firms have restructured to centralise most materials management tasks in one department called materials management department, although the name logistics management is also used sometimes. This approach brings together all tasks related to flow of materials, from the purchase of raw materials to the distribution of finished products or services. 1.4.3 Supply Chains :A supply chain consists of all stages involved, directly or indirectly, in fulfilling a customers request. It not only includes the manufacturer and suppliers, but also transporters, warehouses, retailers and customers themselves. A supply chain is dynamic and involves the constant flow of information, product and funds between different stages. Each stage of the supply chain performs different processes and interacts with other stages of the supply chain.
A typical supply chain may involve the following stages : Customers Retailers Wholesalers/distributors Manufacturers and Component/raw material suppliers. 1.4.4 Objective of a Supply Chain :The objectives are : (i) To maximise the overall value generated. (ii) To achieve maximum supply chain profitability. (iii) To reduce the supply chain costs to the minimum possible level.
1.4. 5 Decision Phases in a Supply Chain The three decision phases in a supply chain are : (i) Supply chain strategy or design (ii) Supply chain planning and (iii) Supply chain operation. These three phases are briefly described in the following section. i. Supply Chain Strategy or Design : Strategic or long-range decisions made by companies include (i) The location and capacities of production and warehousing facilities, (ii) Products to be manufactured or stored at various locations, (iii) Modes of transportation to be made available along different shipping legs and (iv) Type of information system to be utilised. The companys strategic objectives must be supported by its supply chain configuration. ii. Supply Chain Planning : The planning phase starts with a forecast for the coming year of demand in different markets. Supply chain planning includes decisions regarding the following.
i. Which market to be served from which locations. ii. The planned build up of inventories. iii.The subcontracting of manufacturing. iv.The replenishment and inventory policies to be followed. v. Policies regarding back up locations in case of a stock out and vi.The timing and size of marketing promotions. iii. Supply Chain Operations : The supply chain operation aims at implementing the operating policies in the best possible manner. Various activities involved in this phase are : (i) Allocating individual orders to inventory or production, (ii) Setting dates for fulfilling orders, (iii) Generating pick lists at a ware house, (iv) Allocating an order to a particular shipping mode or shipment, (v) Getting delivery schedules of trucks and (vi) Placing replenishment orders.
The design, planning and operation of a supply chain stronglyaffect the overall profitability and success of a firm. 1.4.6 Process View of a Supply Chain Two different ways to view the process performed in a supply chain are. 1.Cycle view 2. The push-pull view 1.Cycle View : According to this view, the processes in a supply chain are divided into a series of cycles, each performed at the interface between two successive stages of a supply chain. All supply chain processes can be broken down into the following four process cycles: (a) Customer order cycle, (b) Replenishment cycle, (c) Manufacturing cycle and (d) Procurement cycle.
Exhibit 1.2 : Supply Chain Process Cycles
The four process cycles in the supply chain are briefly discussed in the following section :
Customer Order Cycle : This occurs at the customer/retailer interface and include customer arrival, customer order entry, customer order fulfillments and customer order receiving. (i) Replenishment Cycle : This occurs at the retailer/distributor interface and includes all processes involved in replenishing inventory of the retailer. The processes involved in the replenishment cycle include: Retail order trigger, Retailer order entry, Retail order fulfillment and Retailer order receiving. (ii) Manufacturing Cycle :This occurs at the distributor/manufacturer interface and includes all processes involved in replenishing distributor (or retailer) inventory. The process involved in the manufacturing cycle include (a) Order arrival from the distributor, retailer or customer (b) Production scheduling, (c) Manufacturing and shipping and (d) Receiving at the distributor, retailer or customer.
iv. Procurement Cycle : This occurs at the manufacturer/supplier interface and includes all processes necessary to ensure that materials are available for carrying out manufacturing as per the schedule. 2. Push/Pull View of Supply Chain Process :All processes in the supply chain fall into one of two categories: (i) Push processes and (ii) Pull processes. Pull processes may be regarded as reactive processes because they react to customer demand. Push processes may be regarded as speculative processes because they respond to forecast (speculative) demand rather than actual demand. The push/pull boundary in a supply chain helps to separate, push processes from pull processes.
1.3 Push/pull Processes for a Personal Computer Manufacturing Companys Supply Chain
1.5 Nature and Scope of Supply Chain Management

Three important activities involved in supply-chain management are (i) purchasing, (ii) logistics, (iii) warehousing and expediting. These activities form the framework for studying the nature and scope of supply chain management. 1.5.1 Purchasing Purchasing is responsible for obtaining the materials, parts and supplies needed to produce a product or provide a service. Purchasing Interfaces :Purchasing is the link between the organisation and its suppliers. Operating units constitute the main source of requests for purchased materials and close co-operation between these units and the purchasing department is vital if quality, quantity and delivery goals are to be met.
Accounting : is responsible for handling payments to suppliers, data processing is handled by the accounts departments which keeps inventory records, checks invoices and monitors vendor performance. Design and engineering : usually prepare material specifications which must be communicated to purchasing. Receiving : checks incoming shipments of purchased items to determine whether quality, quantity and timing objectives have been met and moves the goods to temporary storage. Suppliers or vendors work closely with purchasing to learn what materials will be purchased and what kinds of specifications will be required in terms of quality, quantity and deliveries.
The Purchasing Cycle : The main steps in the purchasing cycle are : i. Purchasing receives the requisition ii . Purchasing selects a supplier iii. Purchasing places the order with the vendor iv Monitoring orders and v Receiving orders. Value Analysis : Value analysis refers to an examination of the function of the purchased parts and materials in an effort to reduce the cost and/or improve the performance of those items. Outsourcing : Outsourcing refers to buying goods or services from outside sources instead of making the goods or providing the services within the firm. The reasons for outsourcing are :
i. Outside source can provide materials, parts or services better, cheaper or more efficiently (if they are large-scale producers having economy of scale). ii. Expertise and knowledge of outside sources. iii. A supplier may hold a patent on a necessary part/component. iv . To have the advantage of flexibility. When companies downsize and narrow their focus on core activities. JIT Purchasing : Just-in-time manufacturing techniques requires just-intime purchasing. The easy part of JIT purchasing include having to deal with fewer suppliers and forming long-term relationships with suppliers who emphasise co-operative spirit than low price. On-time delivery is usually the primary need of JIT manufacturers, followed by small lot sizes.
Suppliers :Good suppliers are a vital link in the supply chain. Choosing Suppliers : When choosing suppliers, the key considerations are: i Quality of the products or services and ii On-time delivery. Evaluating Sources of Supply (Vendor Analysis) Vendor analysis is the process of evaluating the sources of supply in terms of price, quality, reputation and service. The main factors a company takes into account when it selects a vendor are: (i) Price : (ii) Quality : (iii) Services : (iv) Location : (v) Inventory Policy of Supplier : (vi) Flexibility :
Supplier Audits : Periodic audits of suppliers are helpful in getting current information on suppliers production capabilities, quality and delivery problems and so on. Suppliers audits are also an important first step in the supplier certification program. Supplier Certification : Supplier certification is a detailed examination of the policies and capabilities of a supplier. Supplier Partnerships : Nowadays, companies have become increasingly aware of the importance of building good relationships with their suppliers. Keeping good relations with suppliers helps in maintaining a competitive edge. Many companies are adopting a view of suppliers as partners. Suppliers can be a source of ideas that contribute to the competitiveness of an organisation.
1.5.2 Logistics
Logistics refers to the movement of materials within a production facility, the shipment of incoming materials from suppliers and the shipment of outgoing products to customers. Movement Within a Facility :The activities involved in the movement of materials within a production facility are : (i) Removing materials from incoming vehicles and placing them on the receiving dock. (ii) Moving materials from the receiving dock to inspections. (iii) Moving materials from inspection to the warehouse and storing them until needed. (iv) Retrieving materials from the warehouses and delivering them to production operations when needed. (v) Moving materials between production operations.
(vi) Moving finished products from final assembly and storing them in the finished goods warehouse. (vii) Retrieving finished goods from the finished goods warehouse and delivering them to packaging and shipping departments. (viii) Moving packaged finished goods to the shipping dock and (ix) Loading finished goods into outgoing vehicles at the shipping dock. Incoming and Outgoing Shipments : Overseeing the shipment of incoming and outgoing goods comes under the heading of traffic management. This function handles schedules and decisions on shipping methods and times.
Evaluating Shipping Alternatives A situation that arises frequently in some businesses is making a choice between quicker (but more expensive) shipping alternatives such as overnight and slower but cheaper alternatives. In some instances, there is an overriding factor present that justifies sending a shipment by the quickest means possible, so there is little or no choice involved. However, in many instances, urgency is not the primary consideration, so there is a choice.
1.5.3 Warehousing and Expediting Warehousing is the management of materials while they are in storage. It includes storing, dispersing, ordering and accounting for all materials and finished goods from the beginning to the end of the production process. Contemporary Developments in Warehousing Bar Coding : Bar codes are patterns of alternating wide and narrow black lines and white spaces and numbers and symbols that are seen on everyday products at supermarkets and retail stores. The use of EDI linkages with other organisations can be part of a strategy to achieve a competitive advantage by leveraging logistics performance.
Distribution Requirements Planning : Distribution requirements planning (DRP) is a system for inventory management and distribution planning. JIT Deliveries : JIT systems often require frequent deliveries of small shipments that can make a tremendous burden on the delivery system in several respects: (i) The increased traffic that results. (ii) There is a likely increase in transportation costs per unit. (iii) Any strike of transport services or postal services affect the delivery schedules causing disruption of the JIT-based companies.
1.6 Managing the supply chain

Because supply chain management deals with the complete cycle of materials as they flow from suppliers to production to warehousing to distribution to the customer, there are many opportunities to enhance value. Some of these opportunities are: Postponement : Postponement means delaying any modification or customization to the product as long as possible in the production process. Channel Assembly : Channel assembly is a variation of postponement. It sends individual components and modules, rather than finished products to the distributor. The distributor then assembles, tests and ships the product to the customers.
Drop Shipping and Special Packaging : Drop shipping means the supplier will ship directly to the end consumer, rather than to the seller, saving both time and shipping costs. Blanket Orders : A blanket order is a contract to purchase certain items from a vendor. Invoiceless Purchasing : Invoiceless purchasing is an extension of good purchaser supplier relations. In an invoiceless purchasing environment, there is typically one supplier for all units of a particular product. Electronic Ordering and Funds Transfer : Transactions between firms are increasingly done via electronic data interchange (EDI) which is a standardised data transmittal format for computerised communications between organisations.
Stockless Purchasing : Stockless purchasing means that the suppliers maintain inventory that is delivered directly to the purchasers using department rather than to a store for stocking and using later. Standardisation : Standardisation means reducing the number of varieties in materials and components as an aid to cost reduction. Other Techniques : a) establishing lines of credit for suppliers b) reducing the time money is in transit, c) co-ordinating production and shipping schedules with suppliers and distributors, d) sharing market research information and e) making optimal use of warehouse space.
1.7 A model of supply chain management

Supply chain management is the systematic, strategic co-ordination of the traditional business functions and the tactics across these business functions within a particular firm and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual firms and the supply chain as a whole. Exhibit 1.4 shows the supply chain management model. Supply chain management coordinates the product flows across functions and across firms to achieve competitive advantage and
Exhibit 1.4 : A Model of Supply Chain
Chapter 1 Introduction to Logistics and Supply Chain Management Management
(SCM in short) whereas SCM considers additional issues beyond those of product flow. For example, SCM consider manufacturing quality and product pricing.
1.8 Business Logistics/Supply Chain Management Activities

Business logistics/supply chain management process comprises various activities (activity mix) that vary from firm to firm depending on a firms specific organisational structure.
1.1 : Activities Along the Supply Chain
1.9 What is Logistics?
Logistics is defined as the process of anticipating customer needs and wants, acquiring the capital, materials, people, technologies, and information necessary to meet those needs and wants, optimising the goods or service providing network to customer requests and utilising the network to fulfil customer requests in a timely manner.
1.9.1 Types of Logistics

Logistics should be viewed as a part of management and has four subdivisions : i. Business Logistics : ii. Military Logistics : iii. Event Logistics : iv. Service Logistics :
1.9.2 What is Logistics Management?
Logistics management is the process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements. The definition reflects the need for total movement from point of material procurement to location of finished product distribution. It also includes the flow of materials and services in both the manufacturing and service sectors (such as the government, hospitals, banks, wholesalers and retailers). Because of the various diverse functions coming under the purview of logistics management, it is also known by several other names such as the following: (i) Business logistics, (ii) Channel management, (iii) Distribution management, (iv) Industrial logistics, (v) Physical distribution management, (vi) Supply management, (vii) Materials management, (viii) Quick-response system, (ix) Logistical management and (x) Supply-chain management.
Additional Definitions of Logistics and Logistics Management Logistics is a function or activity concerned with getting products and services where they are needed and when they are needed or desired. Logistics involves the integration of information, transportation, inventory, warehousing, materials handling and packaging. Logistics integrates materials management with sales and distribution management. Logistics adds value by creating time utility and place utility. Logistics management is concerned with creation of value for customers, suppliers and stakeholders of the firm.
1.9.3 Scope and Importance of Logistics Management :
Some of the activities encompassed under logistics umbrella are illustrated in Exhibit 1.5
Logistics management adds value when inventory is correctly maintained to facilitate sales to meet the customer demand. Logistics typically accounts for one of the highest costs of doing business, next only to materials in manufacturing or cost of goods sold in wholesaling or retailing. Therefore, it may be inferred that Logistics while vital to business success, is quite expensive. Benefits gained by firms having good logistics management include: Capability to identify potential operational break downs and taking corrective action prior to failure of service to customers. Performance above industry average in terms of inventory availability as well as speed and consistency of delivery to customers. Capability to monitor logistical performance on a real-time basis through efficient information systems.
High delivery performance (near perfect orders). Commitment to continuous improvement. Firms having world-class logistical competency can become attractive suppliers and ideal business partners. 1.9.4 Logistical Competency Logistical competency is a relative assessment of a firms capability to offer competitively superior customer service at the lowest possible total cost. The characteristics of firms having superior logistics performance or competency are: (i) alternative logistical capabilities, (ii) emphasis on flexibility, (iii) time-based performance, (iv) operational control and (v) commitment to perfect customer service performance.
1.10 Competitiveness and Competitive Advantage
Competitiveness is a major factor that determines whether a company prospers, barely manages to survive or ceases to exist sooner or later. In a broader sense, competitiveness can be defined as the degree to which a nation can produce goods and services which meet the test of international markets while simultaneously maintaining or expanding the real incomes of its citizens. 1.10.1 Dimensions of Competitiveness Competitiveness refers how effectively an organisation meets the needs of customers relative to other firms which offer similar goods and services. The dimensions of competitiveness that measure the effectiveness of production function of a manufacturing firm are discussed briefly in the following paragraphs.
(i) Cost or Price : Price is the amount a customer must pay for the product or service. profitability is related to the difference between price and cost. Hence most firms focus on lowering cost of goods and services instead of accepting lower profits as a result of competing on price. (ii) Quality : Quality refers to the ability of the product or service to meet the requirements of customers and achieve customer satisfaction for the firm selling the goods and services. (iii) Product or Service Differentiation : This refers to any special features (such as design, cost, quality, availability, delivery speed, convenience of use, warranty etc.) that cause a product or service to be perceived by the customers as more suitable or attractive than the product or service offered by the competitors.
iv. Dependability as a Supplier : A supplier who has a reputation for dependability (i.e., keeping the promised delivery schedule) or who has the capability to meet customer demand through off-the-shelf availability of the product has a strong competitive advantage. v. Flexibility/Service : This refers to the ability of a firm to respond to changes demanded by the customers. A firm having higher flexibility is able to have a competitive advantage over other firms. vi.Time : Time to perform certain activities refers to several aspects of an organisations operations such as (a) how quickly a product or service is delivered to a customer (i.e., speed to market or minimum lead time to supply).
(b) how quickly new products or services are designed,

developed and launched to the market (speed to market of new products or services). (c) the rate at which improvements in products and processes are made. vii. Customer Service : Service might involve after-sales services that are perceived by customers as value-added, viii.Employee Productivity and Managerial Expertise : Managers and workers are the people at the heart and soul of any organisation. Competent and motivated employees including managerial personnel can provide a distinct competitive edge by their expertise, skills and creative ideas.
1.10.2 Strategy and Competition

To compete successfully in business, a firm requires a business strategy and several functional-area strategies. The business strategy of a firm includes: (i) the market in which the firm is to compete. (ii) the level of investment the firm has to make and (iii) the means of allocating resources and integrating various business units of the firm. The functional area strategies include (i) the marketing strategy (ii) the financial strategy (iii) the manufacturing strategy or the production and operations strategy and (iv) the logistics and supply chain strategy.
Three generic or business strategies classified by Michael Porter are: i. Overall cost leadership strategy, (ii) Differentiation strategy and (iii) Focus or market segmentation strategy. 1.10.3 Competitive Priorities There are five basic competitive priorities : They are (i) Cost : Providing low cost products. (ii) Quality : Providing high quality products. (iii) Delivery : Providing products quickly. (iv) Flexibility : Providing a wide variety of products. (v) Service : How products are delivered and supported.
1.10.4 Competitive Strategies
Competition is inevitable for all organisations, regardless of size, type or geographic location. Even not-for-profit organisations compete for resources and customers. Competitive advantage is defined as what sets an organisation apart - its competitive edge. Competitive strategies are the strategies that are concerned with how the organisation is going to compete in a specific business or industry. The choice of competitive strategy is based on the competitive advantage that the organisation is able to develop. The design of competitive strategy is all about-exploiting the organisations competitive advantage by finding ways to use its resources, capabilities and distinctive competencies to set itself apart from competitors.
1.10.5 Gaining Competitive Advantage Through Logistics
Logistics can provide the firm with a distinctive competitive advantage. Logistics services and activities have opportunities to give the firm an important advantage through (a) supply chain management, (b) quality of service, (c) outstanding information systems and (d) effective time-based competition. Effective logistics management can provide a major source of competitive advantage. The bases for success in the market place are (i) the customer, (ii) the competition and (iii) the company, popularly known as the three cs. Exhibit 1.6 illustrates the competitive advantage and the three cs. Logistics management can provide numerous ways of increasing efficiency and productivity and thereby contribute significantly to reduce unit cost of products. Logistics management provides a value advantage to the firm implementing the same.
Exhibit 1.6 : Competitive Advantage and the Three cs
Customer service is an equally powerful means of adding value to the product. Logistics management adds value when inventory is maintained correctly to facilitate sales to meet customer demand and achieve customer satisfaction.
1.10.6 The Concept of Value Chain

Supply chains are sometimes referred to as value chains, a term that reflects the concept that value is added as goods and services progress through the chain.
Exhibit 1.7 : Generic Value Chain
The value chain concept had been developed as a tool for competitive analysis and strategy by Michael Porter. The generic value chain conceptualised by Michael Porter is illustrated in Exhibit 1.7. Value chain activities can be categorised as (i) primary activities and (ii) support activities. The primary activities comprise of activities such as inbound logistics, operations, outbound logistics, marketing and sales and service. The support activity comprise of activities such as firms infrastructure (plant and equipments, machinery, buildings, warehouses, handling equipments etc.) human resource management, technology development and procurement). Logistics management integrates the planning and co-ordinating of the flow of materials and information from source to the user.
1.11 Integrated Supply Chains
Definition An integrated logistics/supply chain is a comprehensive system wide view of the entire supply chain as a single process, from raw materials supply through finished goods distribution. A typical supply chain may involve several stages. They are : (i) customers, (ii) retailers, (iii) wholesalers/distributors, (iv) manufacturers and (v) component/raw materials/parts suppliers. Each stage in a supply chain is connected through the flow of products, information and funds. These flows may often occur in both directions. Since the objective of every supply chain should be to maximise the overall value generated, it is necessary to integrate the activities of the various parties in the supply chain.
1.11.1Objective of integrated supply chain
The three major objectives of integrated supply chain are (i) Establishing integration of the supply chain process taking into consideration customer requirements,sales argets, product specifications and process speed. (ii) Improving customer order cycle time by increasing customer response, reducing requirement of assets, reducing set-up time for production, having flexible and short- cycle manufacturing processes and reducing bills receivables collection time. (iii) Developing information communication through efficient communication systems.
and
Successful supply chain management requires a change from managing individual functions to integrating activities into key supply chain processes. Shared information between supply chain partners can only be fully leveraged through process integration. Process integration means collaborative working between buyers and suppliers, joint product development, common systems and shared information
1.12 Supply Chain and Competitive Performance

Effective supply chain management depends on both the flow of information as well as the flow of raw materials and finished products. Even though only some activities in the supply chain add value, all add costs. The objective of the supply chain is to optimise performance of the entire chain to add as much value as possible for the least possible total cost.
Supply chain management efforts have been motivated most directly by two of the value attributes : cost and timeliness. Suppliers need to reduce their costs in order to lower the prices to customers. This creates a need to eliminate non-value adding steps throughout the production network. Inventory levels can be reduced by quicker and more reliable deliveries from suppliers. Also faster flow of information from customers to suppliers and vice versa also could be useful in reducing the costs and improving the timeliness of supply.
1.12.1The New Rules of Competition

The present era is the era of supply chain competition. An organisation can no longer compete as an isolated and independent entity with other similar stand-alone organistions. Instead, there is a need to create value delivery systems that are more responsive to fast-changing markets. Also, the system has to be much more consistent and reliable in delivering that value. This requires the entire supply chain (i.e., value delivery system) to be focused on the achievement of the needed objectives and goals to compete successfully.
Management of inbound and outbound logistics is one capacity now regarded by many firms as most basic to success in the market place. Excellence in logistics process performance is necessary to ensure higher product availability for a multitude of consumer products at a large number of retail outlets. The transition from volume-based growth to value-based growth will require a greater focus on the management of core processes. In the past the competitive model of a business firm was based on product innovation whereas, in the present, the competitive model will have to be based on process innovation. Hence, the basis for competing in the present era will be To gain competitive advantage through logistics, three key issues which are to be considered are : (i) Responsiveness, (ii) Reliability and (iii) Relationships.
i. Responsiveness means the ability of a firm to respond to its customers requirements. ii. Reliability means suppliers ability to meet delivery promises and/or meet the quality standards for the materials and components supplied by them. iii.Relationships : The current trend in sourcing is that customers are seeking to narrow down their supplier base, i.e., having a single source or as few sources as possible. Many firms develop long-term relationships with their suppliers to gain the benefits of partnerships. Supply chain management focuses on managing the relationships across complex networks of firms which are legally independent but interdependent in reality.
1.13 Evolution of Logistics Toward Supply Chain Management
A single firm generally is not able to control its entire product flow channel from raw material source to points of final consumption. The physical supply channel refers to the time and space gap between a firms immediate material sources and its processing points. Likewise, the physical distribution channel refers to the time and space gap between the firms processing points and its customers. Due to the similarities in the activities between the supply channel and distribution channel of a firm, physical supply management (commonly referred to us materials management) and physical distribution management (usually the responsibility of sales management department) are integrated into what is referred to as business logistics management which is now popularly referred to as supply-chain management. Exhibit 1.8 shows the evolution of the management of product flows (i.e., logistics) toward supply chain management. Exhibit 1.9 shows the activities to be managed that make up business logistics (Supply chain process).
Exhibit 1.8 : Evolution of Logistics Toward Supply Chain Management
Exhibit 1.9 : Logistics Activities in a Firms Immediate Supply Chain
Activity Mix
1. Physical Supply : Transportation, inventory maintenance, order processing, acquisition, protective packaging, warehousing, materials handling, information maintenance and supply scheduling. 2. Physical Distribution : Transportation, inventory maintenance, order processing, product scheduling, protective packaging, warehousing, materials handling and information maintenance.
1.13.1 Need for Logistics Management

Todays organisations worldwide need logistics management more than ever because of the following: 1. Competitive Pressures, 2. Information Technology, 3. Channel Power and 4. Profit Leverage. 1.Competitive Pressures : During the 1970s, logistics received more attention as a major cost driver to offset the effect of rising interest rates and increasing energy costs. In addition the logistics costs became more critical for many multinational companies because of globalisation of their business. 2.Information Technology : With the explosion of information technology, organisations gained the ability to better monitor transaction intensive activities such as ordering, transportation (movement) and storage of goods and materials. Computerised quantitative models along with information technology increased the ability to manage material flows and to optimise inventory levels and movements.
3. Channel Power : The channel power shifted from manufacturers to wholesalers, distributors and retailers. This has had a great impact on logistics. 4. Profit Leverage : Any amount of money saved in logistics costs has a greater impact on the organisations profitability than a similar increase in sales revenue. Any savings in logistics costs directly adds to the companys profit. 1.13.2 Value-Added Role of Logistics Logistics adds to product value by increasing (i) form utility, (ii) place utility, (iii) time utility and (iv) possession utility.
1.13.3 Logistical Activities

Logistics managers are responsible for the following activities: (i) Traffic and transportation, (ii) Materials handling, (iii) Warehousing and storage, (iv) Inventory control, (v) Industrial packaging, (vi) Order fulfillment, (vii) Demand forecasting, (viii) Plant and warehouse site location, (ix) Production planning, (x) Return goods handling, (xi) Purchasing, (xii) Parts and service support, (xiii) Customer service levels and (xiv) Salvage and scrap disposal. These activities are briefly discussed in the following paragraphs: (i) Transportation : In a logistics system, the major focus is upon the
physical movement or flow of goods or upon the network that moves the product.
ii Storage : It involves warehousing and inventory

iii
management which are
iii. iv. v. vi.
closely related activities. Packaging : The type of transportation selected affects the packaging requirements both for moving a finished product to the market and for the inbound materials. Materials Handling : Material handling is crucial for efficient warehouse operation. Order Fulfillment : Order fulfillment consists activities involved with completing customer orders. Order Fulfillment : Order fulfillment consists activities involved with completing customer orders. Inventory Forecasting : Accurate forecasting of inventory requirements and materials and parts are essential for effective inventory control, especially in firms using a just-in-time (JIT) or material requirement planning (MRP) approach to control inventory.
vii. Production Planning : It is closely related to forecasting in terms of effective inventory control. Once the forecast is developed and the current inventory on hand and usage rate are assessed, production planning managers can determine the units to be produced to meet market demand. Production planning is integrated into logistics. viii. Purchasing : Purchasing or procurement is included in logistics because the transportation cost relates directly to location of the supplier sources. ix. Customer Service : Customer service levels in many ways glue together other logistics areas. Decisions about inventory, transportation and warehousing relate to customer service requirements. x. Site Location : A change in the location of a manufacturing plant or a warehouse could alter time and place relationships between plants and markets or between supply points and plants
1.13.4 Objectives of Logistics Management
i.The primary or major objective is to efficiently and effectively move the inventory in the supply chain in order to extend the desired level of customer service at the least possible cost. ii The secondary objectives which facilitate achievement of the primary or major objective are: (a) To reduce inventory to the minimum possible level. (b) To achieve reliable and consistent delivery performance to enhance customer satisfaction and build long-term customer relationship. (c) To achieve maximum economy in freight costs. (d) To ensure minimum or no damage to products during transportation and storage. (e) To ensure quick response to customer requirements.
1.13.5 Role of Logistics in Supply Chain Management
Supply chain management may be viewed as a logical extension of logistics managementIt is also known as demand chain management, demand flow management, value chain management, value networks, and synchronisation management. The terms supply chain, demand chain, value chain or value network all used as synonyms. The generic value chain was illustrated earlier in Exhibit 1.10.
Exhibit 1.10 : Logistics Supply Chain
The outbound logistics involves physical distribution of finished goods (usually higher in value than raw materials). The inbound logistics involves transportation of raw materials and component parts from suppliers to the firm, inventory requirements, warehousing, packaging and materials handling. Logistics management added inbound logistics to the outbound logistics of physical distribution.
1.13.6 The Role of Logistics in the Economy

Logistics plays a key role in the economy in two ways: (i) Logistics is one of the major expenditures for businesses, thereby affecting and being affected by other economic activities, (ii) Logistics supports the movement and flow of many economic transactions and it is an important activity in facilitating the sale of virtually all goods and services.
1.13.7 The Role of Logistics in the Organisation
In recent years, effective logistics management has been recognised as a key opportunity for the improvement of both the profitability and competitiveness of organisations. The relationship between logistics and three critical elements of the marketing concept (customer satisfaction, integrated effort and adequate corporate profit) are shown in Exhibit 1.11.
Exhibit 1.11 : Logistics Supports Marketing
Exhibit 1.12 : Cost-trade Offs Required in Marketing and Logistics
1.14 Logistics Costs
Logistics costs are created by logistics activities such as customer service, transportation, warehousing, order processing and information, lot quantity and inventory carrying, which are discussed in the following paragraphs: i. Customer Service Level : The key cost trade-off resulting from varying levels of customer service is the cost of lost sales. Expenses for customer service support includes the costs of order fulfillment, parts and service support and costs of return goods handling. ii. Transportation Costs : These costs are determined by the activity of transporting goods. iii.Warehousing Costs : These costs are due to warehousing and storage activities and also due to warehouse and plant location selection process.
iv. Order Processing/Information Systems Costs : These costs are related to activities such as order processing, distribution communications and demand forecasting. v. Lot Quantity Costs : These costs are due to procurement and production lot quantities. Lot quantity costs are related to purchasing or production and these costs vary with changes in order size or frequency. vi. Inventory Carrying Costs : Logistics activities that cause inventory carrying costs include inventory control, packaging and salvage and scrap disposal. 1.14.1Total Cost Concept The total cost concept is the key to manage logistics process effectively. The organisation should have the goal of reducing the total cost of logistics activities rather than merely focusing on each activity in isolation.
Exhibit 1.13 shows six major cost categories with which management should be concerned while making decisions regarding logistics activities which drive these major cost categories. These six major cost categories comprise the fourteen key logistics activities listed below: (i) Customer service (ii) Demand forecasting (iii) Inventory management (iv) Logistics communications (v) Materials handling (vi) Order processing (vii) Packaging (viii) Parts and service support ix) Plant and warehouse site selection (x) Procurement
(xi) Return goods handling (xii) Reverse logistics (xiii) Traffic and transportation (xiv) Warehousing and storage
1.15 Evolution of supply chain management

Eventhough the reference to supply chain management can be traced to the 1980s, the supply chain management concept captured the attention of senior level management in many organisations only in the 1990s. The era of physical, distribution management started in the 1960s and the focus was on the outbound side of the firms logistics system.
Exhibit 1.13 : Total Cost Concept
During the early 1970s, the focus shifted on the systems concept and total systems cost. The systems relationship among transportation, inventory requirements, warehousing, exterior packaging and materials handling were recognised. In the 1980s, the logists or integrated logistics management concept began to be used in many organisations. Logistics, to start with added inbound logistics (i.e., raw materials transportation form supply points and raw materials storage) to outbound logistics of physical distribution. Because of global sourcing of materials and suppliers for inbound system, the need for coordination with the outbound logistics system became critical for success of logistics systems. During the 1990s, the concept of supply chain management came into vogue and has now become the focal point for improving the global market place.
Logistics management integrates materials management and sales and distribution management. Supply chain management integrates manufacturing management with logistics management. Exhibit 1.14 illustrates the above relations among materials management, sales and distribution management, manufacturing management, logistics management and supply chain management.
1.16 Importance of logistics/supply chain management

Logistics management is concerned with creation of value for customers, suppliers and stake holders of the firm. Logistics creates time and place utility or value for the customers by making available the products customers need at the time and place desired by the customers. Good logistics management views each activity in the supply chain as contributing to the process of adding value. The various reasons for increasing the importance of logistics as a value adding process are:
Exhibit 1.14 : Relationship between Supply Chain Management and Other Areas of Management
1. Significant Costs 2. Increase in Logistics Customer Service Expectations 3. Importance of Logistics/Supply Chain to Competitive Strategy of the Firm 4. Logistics/Supply Chain Adds Significant Customer Value 5. Customers Want Quick and Customised Response 1.16.1 Difference Between Logistics Management and Supply Chain Management Logistics management integrates materials management (inbound logistics) with sales and distribution management (outbound logistics) whereas supply chain management integrates logistics management with manufacturing management.
1.17 Focus areas in supply chain management
1.17.1Supply Chain Drivers The drivers of supply chain performance (i.e., supply chain drivers) are : (i) production, (ii) inventory, (iii) transportation, (iv) facility location,(v) information, (vi) sourcing and (vii) pricing. These drivers of supply chain are discussed in the following paragraphs: (i) Production : The performance of the supply chain is very much dependent on production i.e., what is produced, how it is produced (the manufacturing process used) and when it has to be produced. (ii) Inventory : All raw materials, work-in-progress and finished goods within a supply chain are referred to as inventory. Any change in inventory policies can greatly affect the efficiency and responsiveness of the supply chain.
(iii) Transportation : Inventory has be moved from point to point in the supply chain using transportation facilities taking the form of many combinations of modes (multimodal) and routes, each having its own performance characteristics. (iv) Facility Location : Facilities are the places in the supply chain network where inventory is stored, parts are fabricated and assembled into finished goods. Decisions regarding the location of the facilities (plant), their capacity and the flexibility of the facilities have a major impact on the performance of the supply chain. (v) Information : Information consists of data and analysis regarding inventory, facilities (location, capacities etc.) transportation and customers throughout the supply chain. Information affects each of the other driver and hence is the biggest driver of supply chain performance.
(vi) Sourcing : Sourcing is another important area in supply chain management. Sourcing is the activity of buying or procuring the right materials in right quantities of right quality, in right condition, in the right time, at the right price from the right supplier. (vii) Pricing : Pricing is the process by which a firm decides how much to charge customers for its goods and services.
Exhibit 1.15: Supply Chain Decision-Making Frame Work
Exhibit 1.15 illustrates the supply chain decision-making framework indicating the role of supply chain drivers. 1.17.2 A Framework for Structuring Supply Chain Drivers Supply chain strategy aims to strike a balance between responsiveness and efficiency that results in strategy fit with the competitive strategy of a business organisation. The role of the supply chain drivers in the supply chain and how they re used by supply chain managers to drive supply chain performance are discussed in the following section: (i) The Role of Facilities (Manufacturing and Warehousing) in the Supply Chain
The facilities are concerned with where of the supply chain, while inventory is what is being transported along the supply chain and transportation is how it is moved. Facilities are the locations to or from which the inventory is moved (facilities include manufacturing plants and warehouses). The supply chain performance in terms of responsiveness and efficiency is greatly influenced by facilities and their capacities to perform their functions. Decisions regarding number of facilities and their locations play a crucial role in the design of supply chain. The various components of facilities decisions a firm must analyse are (a) location, (b) capacity, (c) manufacturing processes, (d) warehousing methodology (stock-keeping unit storage, job lot storage and cross docking).
(ii) Role of Inventory in the Supply Chain
Inventory occurs in a supply chain because of the mismatch between supply and demand. Inventory plays an important role in the supply chain to increase the amount of demand that can be satisfied by having the product ready and available when the customer wants it. Also inventory plays a significant role in reducing the cost of the product by exploiting any economics of scale that may exist during both production and distribution. Inventory has a significant role in the ability of a supply chain to support a firms competitive strategy. The major inventory related decisions to be made by supply chain managers to create more responsive and more efficient supply chains effectively are: a. Cycle Inventory Decision b. Another inventory related decision is determining how much safety inventory to hold.
iii) Role of Transportation in the Supply Chain Transportation is concerned with the movement of the product between different stages in a supply chain. Like inventory, transportation too has a great impact on both responsiveness and efficiency of the supply chain. Transportation has a major role to play in a firms competitive strategy when the firm is considering the target customers needs it intends to satisfy. Both inventory and transportation may be used by a firm to increase its responsiveness or efficiency. The optimal decision would be to find the right balance between the two. The overall trade-off for transportation is between the cost of transportation of a given product (efficiency) and the speed with which that product is transported (responsiveness).
(iv) Role of Information in the Supply Chain Importance of information as a driver of supply chain performance has grown recently because of the developments in information technology. Firms have increased the use of information to become more responsive and efficient. However, information also has a level at which trade-off between efficiency and responsiveness must take place. Another key decision regarding information is what information is most valuable in reducing cost and improving responsiveness within a supply chain. The key components of information within a supply chain which a firm must analyse to increase efficiency and improve responsiveness within its supply chain are:
a) b) c) d)
Push Versus Pull Phase in the Supply Chain Co-ordination and Information Sharing Forecasting and Aggregate Planning Enabling Technologie
(v) Role of Sourcing in the Supply Chain Sourcing decisions play a crucial role in the competitive strategy of the
firm because they affect the level of efficiency and responsiveness that can be achieved by the supply chain. The key sourcing decisions that are made within the firm include (a) in-house or outsource to a third party, (b) supplier selection and (c) structure of procurement. Sourcing decisions should facilitate increase in the overall supply chain profits to be shared across the supply chain.
vi.Role of Pricing in the Supply Chain Pricing plays a significant role in the supply chain performance as it affects the level of responsiveness required as well as the demand profile served by the supply chain. Pricing decisions include the following key components: (i) Pricing and economies of scale, (ii) Everyday low pricing versus high-low pricing, (iii) Fixed price versus menu pricing. All pricing decisions should have the objective of increasing the profits of the firm and that of the supply chain partners.
1.17.3 Obstacles to Achieving Strategic Fit

To achieve strategic fit, a firm should be able to find a balance between responsiveness and efficiency of its supply chain along the responsiveness spectrum which best matches with the type of demand targeted by it. Over the years, the supply chain environment has changed considerably and the firms have been facing many obstacles that have created difficulty for the firms to achieve the ideal balance between responsiveness and efficiency.
These obstacles are: (a) Increasing Variety of Products (b) Decreasing Product Life Cycles (c) Highly Demanding Customers (d) Fragmentation of Supply Chain Ownership (e) Globalisation (f) Difficulty in Executing New Strategies All the obstacles discussed in this section are making it more difficult for the firms to achieve a proper balance between responsiveness and efficiency in their supply chain and therefore to achieve strategic fit. 1.17.4 Change Drivers Another way of understanding the drivers of supply chain management is through the understanding of the forces of change in the dynamic business environment.
These force of change are: i The empowerment of consumer. ii Shift of power in the supply chain. iii Liberalization of economic policies of the government. iv Globalization of business and v Technological developments or advancements. These forces of change (or drivers of supply chain management) are briefly discussed in the following paragraphs. i The Empowerment of Consumer : In todays market place, consumers are enlightened and more knowledgeable. They are empowered by the information available from the internet and from many other sources. Because they have enough opportunity to compare price, quality, and services of alternative products they are in a position to demand competitive price, high quality, customised products, convenience, flexibility and responsiveness. They do not tolerate products of poor quality.
ii. Shift of Power in the Supply Chain :Traditionally, for consumer products, manufacturers dominated the supply chain or distribution channels. Large manufacturers led vendors/suppliers and wholesalers, distributors and retailers. Product development, promotion and/or brand management were given more importance than distribution and logistic systems. large retailers exerted pressure back in the supply chain to force manufacturers to change their logistics and supply chain strategies to include tailored pallet packages, scheduled deliveries, continuous replenishment systems etc. iii.Liberalisation of Economic Policies of the Government :Transportation, communications, energy and financial systems are the four legs of business operations on which the infrastructure of many businesses is based. Revolution in communication industry introduced Internet, Email, Electronic Data Interchange (EDI) etc., which improved the efficiency and effectiveness of communication.
ii. This has led to dramatic improvements and opportunities in logistics and supply chains. iv Globalisation of Business : Probably globalisation is the most important of the five change drivers, which had the biggest impact on logistics and supply chain management. v Technological Development or Advancements : Technology facilitates changes at the micro level. But it can also be viewed as a change driver on a macro or external basis. The revolution that has occurred in technology-both hard ware and software has brought in major changes in the way companies do business. Advancements in information technology has ushered an era of Information Age. Information technology has changed how buyers and sellers interact in the market place, both business-to-business (B 2 B) and business-to-customer (B 2 C) and how business operates.
END OF CHAPTER 1

Ch1 Week 1

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ch1 Week 1

Uploaded by

Copyright:

Available Formats

CHAPTER 1

INTRODUCTION TO LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Chapter 1 Introduction to Logistics and Supply Chain Management

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 1 Introduction to Logistics and Supply Chain Management

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 1 Introduction to Logistics and Supply Chain Management

Chapter 1 Introduction to Logistics and Supply Chain Management

1.1 What is a supply chain

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Supply Chain for a Manufacturing Organisation

Chapter 1 Introduction to Logistics and Supply Chain Management

Supply Chain for a Service Organisation

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

1.2 Importance of Supply Chain Management

Chapter 1 Introduction to Logistics and Supply Chain Management

Himalaya Publishing House

Chapter 1 Introduction to Logistics and Supply Chain Management

1.3 Some definition of supply chain management

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 1 Introduction to Logistics and Supply Chain Management

What is Integrated Supply Chain Management?

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 1 Introduction to Logistics and Supply Chain Management

Himalaya Publishing House

Chapter 1 Introduction to Logistics and Supply Chain Management

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 1 Introduction to Logistics and Supply Chain Management

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 1 Introduction to Logistics and Supply Chain Management

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 1 Introduction to Logistics and Supply Chain Management

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 1 Introduction to Logistics and Supply Chain Management

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Exhibit 1.2 : Supply Chain Process Cycles

Chapter 1 Introduction to Logistics and Supply Chain Management

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 1 Introduction to Logistics and Supply Chain Management

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 1 Introduction to Logistics and Supply Chain Management

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 1 Introduction to Logistics and Supply Chain Management

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 1 Introduction to Logistics and Supply Chain Management

1.5 Nature and Scope of Supply Chain Management

Himalaya Publishing House

Logistics and Supply Chain Management K. Shridhara Bhat

Chapter 1 Introduction to Logistics and Supply Chain Management