What is Logistics Management?

The objective is to plan and coordinate all the activities

necessary to achieve desired level of delivered service
and quality at lowest possible cost.
The scope of logistics include the entire gamut of
activities starting from the procurement and management
of raw materials through to delivery of final product to
the customer.
The ultimate purpose of any logistics system is to satisfy
the customer by establishing linkages of people at all
levels in the organization directly or indirectly to the
market place.
1

 As it is getting increasingly difficult to maintain a

competitive edge through product alone, customer
service has started to provide the distinctive
difference between one companys offer and that of
its competitors.
The underlying concept is The process of
strategically managing the procurement, movement
and storage of materials, parts and finished inventory
and the related information flows through the
organization and its marketing channels in such a
way that the current and future profitability are
maximized through the cost effective fulfillment of
orders.
2

Competitive Advantage
Customers seeking benefits at acceptable cost

Company A
(Asset utilization)

Cost differential

Company B
(Asset utilization)
3

Source of Competitive
Advantage
Competitive advantage is the ability of an
organization to differentiate itself in the eyes
of the customer, from its competition, and to
operate at a lower cost and hence greater
profit.
Competitive advantage helps organizations to
achieve commercial success which mainly
depends upon two factors cost advantage
and value advantage.
4

Commercial success

Cost advantage

Value advantage

 Cost advantage or Productivity advantage

- Characterized by low cost of production due to
greater sales volume, economies of scale enabling
fixed costs to be spread over a greater volume and
the impact of the experience curve.
Value advantage is in terms of product offering a
differential plus over competitive offerings.
- Based on marketing concept that customers that
customers don't buy products, they buy benefits.
- Benefits may be intangibles and may not relate to
specific product features.
- It can be an image or reputation or even some
functional aspects.
6

 Adding value through differentiation is

extremely powerful means of achieving
competitive edge in the market.
One of the significant method of adding
value is service.
Service helps in developing relationship with
the customers through provision of an
augmented offer.
Augmentation takes many forms such as
delivery services, after-sales services,
financial packages, technical support etc.
7

Productivity and Value Matrix

V
a
l
u
e
A
d
v

Service Leader
(3)

Cost and Service

Leader
(4)

Commodity Market
(1)

Cost Leader
(2)

Productivity Advantage
8

 For companies in quadrant (1), the market is

uncomfortable place as their products cannot be
differentiated from their competitors offerings as
they do not have any cost advantage. These are
commodity markets.
Companies in quadrant (2), adopt cost leadership
strategies. Traditionally, these are based on
economies of scale gained through volume.
Another route to achieving cost advantage is through
logistics management. As logistics constitutes a major
proportion of total costs, reengineering logistics
processes results into substantial cost reduction.
9

 Companies in quadrant (3), seek differentiation

through service excellence since markets are
becoming more and more service sensitive.
Customers expect greater responsiveness and
reliability from the suppliers, reduced lead times,
just-in-time delivery, and various other value added
services.
Services strategies can be developed through
enhanced logistics management.
Companies in quadrant (4) are distinctive in value
they deliver and are also cost competitive.
Competitors find it hard to attack these companies
which try to excel in all the value chain activities.
10

ValueValue
Chain
Activities
Chain Activities

Primary Activities
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Service

Secondary Activities
Infrastructure
Human Resource Management
Technology Development
Procurement
11

 Primary activities represent the functional

areas like arranging inputs for transforming
them into output, and managing distribution,
marketing, sales, and services.
The secondary activities facilitate the
integration of all the functions across the entire
organization.
The companies can achieve competitive
advantage and create differentiation by
organizing and performing these activities
more efficiently or in a unique manner than
their competitors.
12

Factors affecting value and

productivity advantage
Productivity advantage
Capacity utilization
Asset utilization
Inventory reduction
Integration with the suppliers.
B. Value advantage
- Customized services
- Reliability
- Responsiveness.
A.
-

13

Underlying Philosophy Behind

Logistics Concept
Materials Flow
Suppliers

Procurement

Operation

Distribution

Customers

Information Flow

14

 The objective of logistics is to link the market

place, distribution network, the manufacturing
process and procurement activity, so as to
provide higher levels of services to the
consumers yet at a lower cost.
Scope of logistics management encompasses
management of raw materials and other inputs
through the delivery of the final product.

15

How do we define logistics

management?
A process of satisfying customer needs through
coordination of materials and information flows that
extend from the market through the firms operation
and beyond that to the suppliers.
A shift to an integrated orientation from the
conventional
manufacturing
or
marketing
orientation.
Traditionally, manufacturing and marketing have
been considered as separate activities each having
different priorities.
16

 Manufacturing priorities and objectives are

concerned with achieving operating efficiencies
based on long production runs, minimized set ups
and changeovers, and product standardization.
Marketing priorities and objectives are concerned
with achieving competitive advantage based on
varieties, high service levels, and frequent product
changes.
Customer orientation and cost competitiveness has
been
integrated
by
introducing
flexible
manufacturing systems, practicing inventory
management policies based on manufacturing
requirement planning and just-in-time inventory
policy, laying sustained emphasis on quality and
integrating supply side issues in strategic plans.
17

How do we define supply chain?

A network of organizations that are having
linkages, both upstream and downstream in
different processes and activities that produce
and deliver value in the form of products and
services in the hands of ultimate consumer.
Customers

Retailers

Downstream

Shirt Manufacturer

Weavers
of Fabrics

Yarn/Fibre
mfrers

Upstream
18

 A shirt manufacturer is a part of supply chain

that extends upstream through the weavers
of fabrics to the spinners and the
manufacturers of fibres, and downstream
though distributors and retailers to the final
consumers.
Though each of these organizations are
dependent on each other yet traditionally do
not closely cooperate with one another.

19

Is Supply chain management

same as vertical integration?
SCM is not the same as vertical integration.
Vertical integration implies ownership of upstream
suppliers and downstream customers.
Earlier, vertical integration used to be the desirable
strategy but increasingly the companies are focusing
on their core business i.e. the activities that they do
really well and where they have a differential
advantage.
Everything else is outsourced.
20

Implementation of SCM through

Logistics Management
SCM raises the challenge of integrating and coordinating
the flow of materials from multitude of suppliers, including
offshore, and similarly managing the distribution of the
finished product by way of multitude intermediaries.
Transferring costs upstream or downstream leads to
logistics myopia as all costs ultimately will make way to
the final market place to be reflected in the price paid by
the end user.
The prime objective of SCM is to reduce or eliminate the
buffers of inventory that exists between the organizations
in a chain through sharing of information on demand and
current stock levels.
21

How does Logistics differ from

SCM?
Logistics management is primarily concerned with
optimizing flows within the organization.
Supply chain management deals with integration of
all partners in the value chain.
Logistics is essentially a framework that creates a
single plan for flow of products and information
through a business.
Supply chain builds upon this framework and seeks
to achieve linkage and coordination between
processes of other entities in the pipeline i.e.
suppliers and customers, and organization itself. 22

Impact of Logistics and

Customer Service on Marketing
Traditionally, marketing has focused on endcustomer or consumer, seeking to promote brand
values and to generate a demand pull in the market
place for companys products.
Due to shift in power in marketing channels,
companies are realizing to develop strong relations
with such intermediaries like large retail outlets to
create a customer franchise as well as consumer
franchise.
The impact of both strong consumer franchise and
customer franchise can be enhanced or diminished by
effectiveness of suppliers logistics system.
23

Consumer
Franchise
Brand values
Corporate image
Availability

Customer
Franchise
Customer
Services
Partnership
Quick
Response

Supply Chain
Efficiency
Flexibility
Reduced
Inventory
Low cost
supplier

Marketing
Effectiveness
Market
Share
Customer
Retention
Superior
ROI

24

Activities Included in Logistics

Logistics competency is achieved by
coordinating the following functional areas.
- Network design
- Information
- Transportation
- Inventory
- Warehousing,
material
handling
and
packaging.
25

Network Design
Network design is the prime responsibility of
logistics managers since a firm facilities and
structure is used to provide products and materials
to the customers.
Logistics facilities typically include manufacturing
plants, warehouses, cross-dock operations, and retail
stores.
Determining the number and type of facility
required, their geographic locations, and the work to
be performed at each is an important part of network
design.
In certain situations, some of the facility operations
may be outsourced to service specialists.
26

 Network design determines the type of the

inventory and the quantity to be stocked at
each facility, and the assigning of customer
orders for shipment.
Network of facilities also includes information
and transportation as a part of entire structure
from where logistical operations such as
processing of customer orders, maintaining
inventory and material handling are performed.
The
network
design
must
consider
geographical variations.
27


(a)
(b)
(c)
(d)

The factors influencing modifications of

network design are:
Change in demand and supply
Product assortments
Changes in suppliers source of supplies.
Manufacturing requirements.
The first step towards achieving competitive
advantage lies in superior network design,
as the real competition is not between two
companies but between efficiency and
effectiveness in managing their supply chain
network.
28

Information
Deficiencies in the quality of information

Incorrect information
with respect to trends may cause
Inventory
shortage
Over commitment

Incorrect information
relating to a specific
customers requirements
leads to
Processing of incorrect
orders creating additional
costs.
Reduced sales
29

Forecasting and order management are the

two areas of logistical work that depend on
information.
(a) Forecasting enables to decide on positioning
of inventory to satisfy anticipated customer
requirements.
(b) Order management involves handling of
specific customers requirements, both
external as well internal.
- External customers are those that consume
the product or service, or trading partners that
purchase the products or services for resale.
30

- Internal customers are organizational units

within a firm that require logistical support
to perform their designated work.
(c)The process of order management involves
- Receipt of an initial order
- Invoicing
- Delivery, and
- Collection.
Incorrect information and delays in order
processing can cripple the logistics
performance; thus quality and timeliness are
the key issues in logistical operations.
31

Transportation

Transportation is the operational area of

logistics that geographically positions the
inventory i.e. provides for place utility.
Companies accomplish transportation in
three different ways:
(a) A private fleet of vehicles may be operated.
(b) Contracts may be entered into with
transport companies.
(c) The service of different transport
companies may be engaged on an
32
individual shipment basis.

Factors affecting transportation

performance
Transportation performance

Cost

Speed

Consistency

33

A. Cost of transportation
- The payment for movement between two
geographical locations and expenses related to
administration and and maintaining in-transit
inventory.
B. Speed of transportation
- The time required to complete a specific
movement.
- Transport firms capable of providing faster
services normally charge higher rate.
- The faster the transportation services, shorter is
the time interval during which the inventory is in
transit and unvailable.
34

C. Consistency of transportation
- Refers to variations in time required to
perform a specific movement over a number
of shipments.
- Consistency is a measure of dependability of
transportation.
- Inconsistency in transportation leads to
inventory safety stocks required to protect
against unpredictable service breakdowns.
Speed and consistency combine to create
quality aspect of transportation.
35

Inventory
The objective is to achieve the desired
customer service with minimum inventory
commitment, consistent with lowest total cost.
Excessive inventories may be helpful in
compensating for deficiencies in network
design but ultimately result into higher total
logistics cost.
The best practice of inventory management is
to achieve maximum turnover while satisfying
customer commitments.
36

Warehousing, Material Handling,

And Packaging
Merchandise needs to be warehoused at selected
times, transport vehicles material handling for
efficient loading and unloading and goods are most
efficiently handled when packaged together into
shipping cartons or other type of containers.
The logistical activities carried out in warehouse are
sorting, sequencing, order selection, transport
consolidation and sometimes product modification
and assembly.
37

 Within the warehouse, products must be

received, moved, sorted, and assembled to
meet customer order requirements and for
these activities material handling becomes
significant.
Products packed in cans, bottles or boxes are
handled more efficiently when combined into
larger units such as Master Cartons.
Master units can further be consolidated into
large units such as pallets, containers etc.
38

Inventory Management Policy

The following factors are required to be
considered while formulating inventory
management policy.
- Customer segmentation
- Product requirements
- Transport integration
- Time-based requirements
- Competitive performance.
39

Customer Segmentation
The profitability of business depends upon the products
purchased by the customers, sales volumes, prices,
value-added services required and supplementary
activities to develop and maintain an ongoing
relationship.
Some customers are highly profitable and have growth
potential, while others do not.
Hence, highly profitable customers constitute the core
market for an enterprise and inventory strategies need to
be focused on meeting requirements of such core
customers.
Inventory priorities designed to support core customers
come out of effective segmented logistics.
40

Product Requirements
Applying Paretos principle, firms 20% of all
products marketed account for more than 80%
of total profits.
Offer high availability and consistent delivery
on more profitable products, though
sometimes high level support of less
profitable items becomes necessary to provide
full-line service to core customers.
Not advisable to provide high service
performance on less profitable products
purchased by non core customers.
41

 Thus, it may be desirable to hold slow-moving

or low profit items at a central distribution
warehouse whereas core customers may be
served by fast, reliable air services.
Orders to fringe customers may be delivered
by less expensive ground transportation.

42

Transport Integration
A sound inventory management strategy
would be to stock sufficient products at
warehouse to be able to arrange consolidated
shipments to a customer or a geographic area.
The corresponding savings in transportation
may more than offset the increased cost of
holding the inventory.

43

Time-Based Requirements
Time-based arrangements reduce the overall
inventories by developing the capability to respond
rapidly to exact to exact manufacturing or retail
customers.
If the products/materials can be delivered quickly, it
may not be necessary to maintain inventories at
manufacturing plants/ retail stores.
If replenishment can be achieved rapidly less safety
stock will be required and instead of stockpiling and
holding safety stock the requirement will be to
receive the exact quantity of inventory at the time
required.
44

 Time-based programmes tend to reduce

shipment sizes, which in turn increases the
number, frequency, cost of shipments and
hence higher transportation cost.
An effective logistical arrangement will be to
achieve a trade-off resulting into desired
customer service at the lowest total cost.

45

Competitive Performance
Sound inventory management policy is
designed to gain customer service advantage
or neutralize a strength that a competitor may
be enjoying currently.
As inventories exist across a logistical system
for various reasons, the policy should be
viewed from holistic cost perspective.

46

Integrated Logistics
Inventory Flow

Customers

Physical
distribution

Manufacturing
support

Procurement

Suppliers

Information Flow

47

 Information from and about customers flows

through the enterprise in the form of sales activity,
forecasts and orders.
Information is then translated into manufacturing
and purchasing plans.
The materials are then procured,value addition
takes place along with the inventory flow
ultimately resulting into transfer of ownership of
finished products to the customers.
The process of integration is not restricted to
manufacturing companies alone, the retailing and
wholesaling firms link physical distribution and
purchasing since manufacturing is not required.
48

 The entire process of integration can be

viewed in terms of two interrelated activities.
- Inventory flow, and
- Information flow
Inventory Flow

Physical
distribution

Manufacturing
support

Procurement

49

Physical Distribution
Establishes linkage of marketing channel with its
customers facilitating the movement of a finished
product to the final destination of a marketing
channel.
Would need a proper marketing effort resulting into
desired assortment being delivered when and where
needed.-Outbound logistics.
Fulfills objective of implementation of time and
space dimension of customer service as an integral
part of marketing.
50

Manufacturing Support
Concerned with managing work-in-process
inventory as it flows between the stages of
manufacturing.
Formulates a master production schedule that
subsequently facilitates arranging for timely
availability of materials, component parts,
and work-in-process inventory.
Is not concerned with how production
occurs but rather what, when, where
products will be manufactured.
51

Difference between Physical distribution

and Manufacturing Support
Physical distribution attempts to serve the
desires of the customers and therefore must
accommodate the uncertainties of consumer
and industrial demand.
Manufacturing support involves movement
requirements that are under the contol of
manufacturing enterprise.
52

Procurement
Concerned with purchasing and arranging inbound movement of materials, parts, and/or
finished inventory from suppliers to
manufacturing
or
assembly
plants
,
warehouses, or retail stores thereby ensuring
availability of materials/ assortments where
and when needed. -Inbound logistics.
In a given marketing situation, manufacturers
physical distribution is same as retailers
procurement operations.
53

Information Flow
A. Planning & Coordination Flows
- Nature & Location of customers
- Required products & services matching to needs of
customers.
- Limitations or bottlenecks within manufacturing
capabilities thus helping to decide outsourcing
requirements.
- Requirements of logistical facilities based upon
forecasting.
- MPS and MRP to support manufacturing
/procurement requirements.
54

B. Operational Flow
- Order management and processing
- Procurement
- Inventory management
- Transportation and shipping
Advantages of effective operational flows
- Allocates and assigns inventory/ assortments to
customers according to predetermined priorities.
- Use of information technology in deploying inventory
to ensure effective performance of logistical system.
- Consolidating orders to achieve freight economies and
making correct documentation.
- Facilitate purchase order preparation, amendments and
release to ensure overall supplier compliance.
55

Logistical Performance Cycles

The
logistical
integration
through
performance cycles provides interface and
link the suppliers, the firm and its customers
by
means
of
communication
and
transportation.
Performance Cycle

Transaction creating
activities

Physical fulfillment
activities

Advertising & Selling

Physical distribution
56

Physical distribution performance

cycle
Order processing

Order selection

Order transmission

Order transportation

Customer order

Order delivery
to the customer

57

Significance of physical
distribution performance cycle
As it links a firm with its customers, it helps create
marketing and manufacturing initiatives into an
integrated efforts.
It resolves conflicting interface between marketing &
manufacturing.
- As marketing is dedicated to delighting customers, it
would like to maintain broad product line with high
inventory regardless of each products profit
potential. By doing so, any customer's requirement,
no matter how small or large would be satisfied. 58

- Traditional mindset in manufacturing is to

control cost, which is achieved by long
production runs. Continuous manufacturing
processes maintain economies of scale and
reduce per unit cost. Therefore, a narrow line
of products is mass produced.
- Inventories are kept to resolve the inherent
conflict between these two philosophies.
- The above is achieved by forward deployment
of inventory throughout the logistical system
in anticipation of future sales on the basis of
forecasted information.
59

How to reduce physical

distribution operational variance
Improve accuracy of forecast
Improve
order
management
coordination with the customers.

and

Have responsive and flexible cycle.

60

Manufacture Support
Performance Cycle
It provides production logistics being positioned between
the physical distribution and procurement operations of a
firm.
Movement and storage of product, materials, and semifinished parts and components between enterprise
facilities represent the responsibility of manufacturing
support logistics.
In context of wholesale & retail trade, it implies selection
of assortment of inventory to be moved to the next level
of value chain.
Basically, supports what, where and when of the
production and not how.
61

Features of manufacturing
support performance cycle.
Initiates provision of materials and externally
manufactured components at a place and time
needed.
Operations are restricted to dock-to-dock movement
within the firm and where intermediate storage is
required.
After completion of manufacturing cycle the finished
goods inventory is allocated and deployed either
directly to the customers or to distribution
warehouses for further customer shipment.
62

Procurement Performance Cycles

Sourcing

Receiving

Order placement and

Expediting

Transportation

S
U
P
P
L
I
E
R
S

63

 The procurement operations are identified as inbound

logistics.
International procurement often requires large
shipments necessitating the use of barges, ocean
going vessels, trains and multiple truckloads for
transportation.
The lower value of materials and components as
compared to finished product implies greater tradeoff between higher cost of maintaining inventory in
transit and the use of low cost modes of transport.
As the cost of maintaining inventory in the pipeline
is less per day than the cost of maintaining finished
inventory, there is no benefit for paying higher
freight rates for faster inbound transport.
64

 Procurement
performance
cycles
are
invariably longer excepting in those cases
where the value of material or component may
justify paying higher freight rates for faster
inbound transport.
A critical issue in procurement is uncertainty
in respect of price change, and/or supply
discontinuity.

65

Reducing performance cycle

uncertainties

Use of electronic data interchange

Monitoring daily changes in workloads
Human resource availability
Availability of specialized unloading and
loading handling equipments
Establishing safety stock/ buffer inventory to
cover variances so as to avoid delays.
66

A few terms used in Inventory

Management
Buffer stock= {Average lead time}x{Average usage
rate}.
Safety stock= Average usage during the extension of
lead time.
Reserve stock= Excess usage requirement during the
average lead time.
Re-order level= B.S.+ S.S.+ R.S.
Minimum Inventory Level= S.S.+R.S.
Max. Inventory Level= {Minimum Level} + {Order
67
quantity}

 Average
Inventory
Level=
(Min.
level+Max.level)/ 2
In case of periodic review the buffer stock will
be modified to {Average consumption
rate}x{Average lead time+Review period}

68

Inventory Planning
Ideally, if the forecast is done accurately, there
will not be any need for an inventory.
Most warehousing would vanish, product
would move with less handling requirements
from warehouses to customers.
However, in real life situations, the thrust is on
reducing inventory and maintain proper
customer service and optimal inventory levels.
69

Inventory decisions-High risk &

high cost

Without the proper inventory assortment, marketing may

find that sales are lost and customer satisfaction
declining.
Overstocks increase cost and reduce profitability
through added warehousing, working capital
requirements,
deterioration,
insurance,
and
obsolescence.
As the significance percentage of assets are inventory
related, a reduction of firms inventory by a few
percentage points can lead to dramatic improvement in
profits.
ROI= (Profit/ Fixed assets +Current assets)
70

 Substantial improvement in the productivity of

inventory can be achieved by re-engineering
supply chain processes.
Poor inventory management may lead to stock
outs and hence cancellation of customers
orders, overstocking leading to insufficient
storage space and increase in the number and
rupee value of obsolete products.
Consequently, inventory management has a
large financial impact on the firm.
Investments blocked in inventory cannot be
used to obtain other goods or assets that could
improve the enterprise performance.
71

Types of Inventory

(a)
-

Broadly there are three types of inventory

Manufacturing inventory
Wholesale inventory
Retail inventory
Manufacturing inventory
Manufacturers inventory commitment starts with
raw material and component parts, including workin-process, and ends with finished goods.
Manufacturer needs to transfer the finished goods
inventory to warehouses in closer proximity to
wholesalers and retailers.
Manufacturers inventory commitment is relatively
deep and has long duration.
72

(b) Wholesale inventory

- Wholesaler purchases large quantities from
manufacturers and sells small quantities to retailers in
order to provide retail customers with assorted
merchandise from different manufacturers in smaller
quantities.
- Thus wholesaler risk exposure is narrower but deeper
and of longer duration than that of retailers.
- In case of seasonal goods, the wholesaler is forced to
commit inventory, far in advance of selling, thus
increasing the depth and duration of risk.
- The current trend of expansion of product lines has
increased the width of inventory risk.
73

(c) Retail inventory

- Retailer inventory risk is wide but not deep.
- The emphasis is more on inventory velocity.
- Inventory velocity is measured by inventory turnover.
- The risk is undertaken on variety of products but for a
given product the risk is not deep relatively. The
exception is specialty retailer where the depth and
duration will be longer as they handle narrower lines.
- For instance, retailers risk is spread across more than
10,000 SKUs, a general merchandise and food store
may carry around 25,000 SKUs and a full line
department store may have as many as 50,000 SKUs.
74

Functions underlying inventory

commitments
A. Geographical Specialization
- It allows for geographical specialization for
individual operating units.
- The need for geographical specialization arises
because various factors of production viz. power,
materials, water, labour, manufacturing facilities are
located at a considerable distance from the major
markets.
- For instance, tyres, batteries, transmission
equipments and springs for an automobile assembly.
The production facilities for each of the these are
traditionally located near the source of materials to
75
minimize transportation cost.

- This strategy leads to specialization of manufacturing

each automobile component and hence economically.
- This will also involve internal inventory transfer to
completely integrate various components into final
assembly.
- Thus, manufactured goods from various locations are
collected at a single warehouse and then combined as
a consolidated/ assorted shipment.
- P&G uses distribution centres to combine products
from its laundry, food, and healthcare divisions to
offer the customer a single integrated shipment.
- Economies
gained
through
geographical
specialization invariably offset increased inventory
and transportation cost.
76

B. Decoupling
- Provides for increasing operating efficiency within a
single manufacturing facility by stockpiling work-inprocess inventory between production operations.
- Decoupling enables manufacturing and distribution of
economic lot sizes in anticipation of sales thus
ensuring large sized shipments with minimum freight
cost.
- Decoupling permits products manufactured over a
period of time to be sold as an assortment.
- Decoupling increases the operating efficiency at a
single location while geographical specialization
includes multiple locations.
- However, JIT,DRP etc have reduced the economic
77
benefits of decoupling considerably.

C. Balancing Supply and Demand

- Balancing is concerned with elapsed time between
consumption and manufacturing as balancing inventory
reconciles supply availability with demand.
- Particularly useful in linking variations of consumption
with manufacturing in case of seasonal products.
- Balancing seasonal production and year round
consumption such as orange juice or year round
production and seasonal consumption of blankets or
knitting wool.
- In case of sort selling season, manufacturers,
wholesalers and retailers are forced to take an
inventory position far in advance of peak selling
season.
78

From retailers perspective, an inventory position is

planned six months prior to the peak selling period.
- The main function of balancing supply and demand
is to ensure that investment in stocks is liquidated
completely within the season.
D. Buffer Uncertainties
- Safety stock protects against two types of
uncertainties:
- (a) Demand in excess of forecast during the
performance cycle. For instance, customers request
of more or less units than planned.
- Delays in the performance-cycle length itself. For
instance, delay in order receipt, order processing, or
transportation.
79

Inventory Management Strategy

Companies can postpone positioning of inventory

by maintaining stock at the plants or they may
decide to place more products in local distribution
centres to have it closer to the market.
(a) Manage inventory at each distribution centre
independently.
(b) Consider inventory interdependence across
distribution sites by managing inventory centrally.
(c) Ensure more coordination and communication in
case of centralized inventory management.
80

Inventory Cost Consideration

1. Origin purchase consideration
2. Transportation cost.
(a) Origin purchase means the buyer is responsible for
freight cost and product risk when the product is in
transit.
(b) Depending on the delivery terms, the buyer assumes
full risk on inventory at the time of shipment.
(c) Depending on the payment terms, transit inventory
would be a part of enterprise's average inventory and
therefore subject to an appropriate charge.
(d) Transportation cost must be added to purchase price
to obtain an accurate assessment of the value of
goods tied up in inventory.
81

 After the inventory is received, the amount

invested in the product must be increased by
transportation expenses.
Thus, inventory carrying cost should be
assessed on the combined cost of the product
plus transportation.

82

Inventory Control Procedures

Perpetual Review

Periodic Review

83

Perpetual Review
Inventory status is reviewed to determine
replenishment needs.
Implemented through a reorder point and
order quantity.
ROP= D x T + SS, where
ROP= reorder point in units
D= average daily demand in units
T= average performance-cycle length in days
SS=safety or buffer stock in units.
84

 The following are considered in perpetual

review:
- On hand inventory represents quantity that is
physically present in the particular distribution
facility.
- On-order inventory represents quantities that
have been ordered from suppliers.
- If on-hand plus on-order quantity is less than
or equal to the established reorder point,
inventory control process will initiate another
replenishment order.
85

(a)
(b)
(c)
(d)

(a)

Mathematically, this can be stated as

If I+q ROP then order Q, where
I= inventory on hand
q= inventory on order from suppliers
ROP = re-order point in units
Q= order quantity in units.
Average inventory level for a perpetual review system is calculated as
I = Q/2 + SS, where
I= average inventory in units
Q= order quantity in units, and
SS= safety stock in units
The assumption is that P.O. will be placed when the reorder point is
reached and there is a continuous monitoring of inventory system.

86

Periodic Review
The inventory status is reviewed at regular intervals
such as weekly or monthly.
The re-order point is adjusted to consider the
extended intervals between reviews.
The formula for calculating the periodic review
reorder point is
ROP= D( T + P/2) +SS, where
- ROP= re-order point
- D=average daily demand
- T= average performance cycle length
- P=review period in days
87
- SS= safety stock

 Average inventory for periodic review is

represented as I= Q/2 + (P x D)/2 + SS,
- I= average inventory in units
- Q= order quantity in units
- P= review period in days
- D= average daily demand
- SS= safety stock.
Because of the time interval introduced by
periodic review, periodic control systems
generally require larger average inventories
than perpetual system.
88

Inventory Planning Methods

Fair Share
allocation

Distribution
Requirement
Planning

89

Fair Share Allocation

Plant Warehouse
Inventory- 600 units
Distribution
Centre-1

Distribution
Centre-2

Distribution
Centre-3

Inventory= 50 units
Daily use= 10 units

Inventory= 100 units

Daily use= 50 units

Inventory= 75 units
Daily use= 15 units

90

 Fair share allocation provides each

distribution facility with an equitable or fair
share of available inventory from a common
source such as a plant warehouse.
Assuming that from a total inventory units of
600 it is desirable to retain 100 units at plant
warehouse; 500 units are available for
allocation.
First we need to determine the number of
days supply.
91

DS = (A + Ij ) / Dj , where
- DS= no. of days supply for distribution
centre inventories.
- A= inventory units to be allocated from the
warehouse
- Ij= inventory in units for distribution centre j.
- Dj = daily demand for distribution centre j
In the above example,
DS = {500 + ( 50+100+75)} / (10+50+ 15)
DS= {500 + 225} /75 =725/75 = 9.67 days
92

 Thus, fair share allocation means that each distribution centre

should be brought up to 9.67 days stock.
The amount to be allocated to each distribution centre is
determined as under:
Aj = (DS Ij /Dj ) x Dj, where
- Aj = amount allocated to distribution centre j
- DS= number of days supply that each distribution centre is
brought upto.
- Ij = inventory in units for distribution centre j
- Dj= daily demand for distribution centre j
- Thus, the amount allocated to distribution centre 1 will be
A1= (9.67- 50/10) x 10 = (9.67- 5) x 10= 4.67x 10= 46.7 or 47
units.

93

A2= (9.67-100/50)x50=(9.67-2.00)x50=383.5
or 384.00
A3= (9.67-75/15)x15=(9.67-5.00)x15=70 units.
However, does not consider site specific factors.
- Difference in performance cycle.
- Economic order quantity.
- Safety stock requirements.

94

Distribution Requirement
Planning
Logical extension of manufacturing requirement
planning (MRP).
Operates in an independent environment where
uncertain customer demand determines inventory
requirements.
Requires forecast for each distribution centre and SKU
as well as adequate lead-time to allow product
movement.
Errors may creep in because of prediction of demand at
wrong location or at wrong time.
Requires consistent and reliable performance cycles for
movement between distribution facilities.
95

C USTOMERS
Distribution centre

Distribution
centre
Distribution
centre

Distribution Distribution
centre
centre

Regional warehouse

Distrib
ution
centre

Regional warehouse

Plant Warehouse

96

Plant Warehouse
Final Assembly (Manufacturing)
Sub-assembly A Sub assembly B Sub assembly C
Part A

Part B

Part C

Part D

Raw Materials Warehouse

Part E

97

 DRP/MRP system integrates finished goods, work-inprocess, and materials planning.

DRP provides a schedule for each SKU and each
distribution facility.
For each planning period, the schedule will report the
following:
- Gross requirements reflecting demand from customers
being catered to by different distribution facilities.
- Scheduled receipts i.e.replenishment shipments planned
for arrival at the distribution centre.
- Anticipated week ending total deliveries.
- Projected on-hand inventory i.e. prior weeks on-hand
inventory- current weeks gross requirement +
scheduled receipts.
98

Benefits of DRP
Improved service levels by increasing on time
deliveries and decreasing customer complaints.
Better planning of new product launches.
Improved ability to anticipate shortages so that
marketing efforts are not expended on products with
low stock.
Reduced distribution centre freight costs resulting
from coordinated shipments.
Improved inventory visibility and coordination
between logistics and manufacturing.
Reduced warehousing space requirements because of
inventory reductions.
99

Demand Forecasting

Forecasting process comprises of two

elements
(a) Nature of demand, and
(b) Forecast components
Nature of Demand
Dependent demand

Independent demand
100

Dependent versus Independent

Demand

Vertical dependent is characterized by

sequence of purchasing and manufacturing,
such as number of tyres used for assembly of
automobiles.
Horizontal dependent occurs in a situation
where an attachment, promotion item or
operators manual is included with each item
shipped.
(a) The demanded item may not be required to
complete the manufacturing process but101may
be needed to complete the marketing process.

(b) Once manufacturing plan for base item is

determined , requirements of components/
attachments can be calculated directly and no
separate forecasting is done.
Independent demands are ones that are not related
to the demand for another item.
For instance, demand for refrigerator is not related
to the demand for milk.
Independent demand items are forecasted
individually.

102

Forecast Components
1.
2.
3.
4.
5.
6.

Base demand
Seasonal factors
Trends
Cyclic factors
Promotions
Irregular quantities.
Mathematically forecast is expressed as
Ft+1= (Bt x St x Tt x Ct x Pt) + I, where
- Ft+1= forecast quantity for period t+1

103

Bt= base level sales demand (average sales level) for period
t+1
- St= seasonal factor for period t
- T= trend component (quantity increase or decrease per time
period)
- Ct= cyclic factor for period t
- Pt= promotional factor for period t
- I= irregular or random quantity.
All forecasts may not include all components.
A. Base demand is based on average demand over an extended
period of time.
(a) There is no seasonality, trend, cyclic or promotional
component.

104

B. Seasonal component is characterized by upward

and downward movement in demand pattern,
usually on annual basis e.g. emand for woollen
blankets is at peak during winter months and
lowest during summer.
(a) Seasonality at wholesale level precedes consumer
demand by approximately one quarter.
(b) An individual seasonality factor of 1.2 indicates
that sales are projected at 20% higher than an
average period.
C. Trend Component exhibits long range movement in
sales over an extended period of time.
(a) Trend may change number of times over the entire
product life cycle.
105

(b) For instance, a reduction in birth rate implies

reduction in demand of disposal diapers.
(c) Trend component influences base demand as
Bt+1 = Bt x T, where
- Bt+1 = base demand in period t+1
- Bt = base demand in period t, and
- T= periodic trend index.
D. Cyclic component are known as business
cycles.
(a) Economies swing from recession to
expansion every three to five years.
106

E.Promotions are initiated by the firms marketing activities

such as advertising, and various other schemes.
(a) Sales increase during promotion as the consumers take
advantage of promotional schemes thus leding to
liquidation of inventories.
(b) Promotion can either be the deals offered to the consumers
or deals offered to the trade (wholesalers/ retailers).
(c) Promotions if offered on regular basis at the same time
every year will resemble a seasonal component.
F. Irregular components include random or unpredictable
quantities that do not fit into any other category hence are
impossible to predict.
(a) By tracking and predicting other components the magnitude
of random component can be minimized.

107

Forecast Approaches
A. Top-Down Approach
Plant Distribution Centre
Field
Field
Field
Field
Distribution Distribution Distribution Distribution
Centre#2
Centre#3
Centre#4
Centre# 1
Forecast
Forecast
Forecast
Forecast
2000 units 1000 units
4000 units 3000 units
108

 Assume the firm has an aggregate monthly

forecast for the entire country as 10,000 units
and it use four distribution centres to service
the demand with a historical split of 40, 30, 20,
and 10 per cent respectively.
Forecasts for individual distribution centres will
be projected to be 4,000, 3000, 2,000 and 1,000
respectively.
In top-down approach a national level SKU
forecast is developed and then the forecasted
volume is spread across locations on the basis
of historical sales pattern.
109

B. Bottom-up Approach
Decentralized approach since each distribution
centre forecast is developed independently.
Results into more accurate forecast as it tracks
and considers demand fluctuations within
specific markets.
Requires more detailed record keeping and is
more difficult to incorporate demand factors
such as impact of promotion.
Trade-off the detail tracking of bottom-up
approach with data manipulation ease of top110
down approach.

Components of Forecasting
Process
Forecast
database

Forecast Process
Forecast Administration

Orders
History
Tactics

Forecast
Technique

Forecast
Support
System

Forecast
Users
Finance
Marketing
Sales
Production
Logistics

111

A.

Forecast data base keeps information about

Orders
Order history
Tactics used to obtain orders such as promotions,
schemes, special promotional programmes.
State of economy and competitive actions.
B. Forecast process integrates forecast techniques,
support system and administration.
Two prominently used forecasting techniques are
time series and correlation modelling.
Forecast support system is the capability to gather
and analyze data, evaluate impact of promotion,
develop forecast and communicate to the relevant
personnel.
112

Issues addressed by Forecast

Administration
Who is responsible for developing the forecast?
How is forecast accuracy and performance
measured?
How does forecast performance affect job
performance, evaluation and rewards?
Do the forecast analysts understand the impact
of forecasting on logistics operations?
Do they understand the differences in various
forecasting techniques?
113

Transportation
Transportation decisions are more strategic ones
closely linked with inventory decisions.
Decisions are based on trade-off between the cost of
using a particular mode of transport with the cost of
inventory associated with that mode.
For instance, air shipments may be fast, reliable , and
warrant less safety stocks; they are expensive
whereas shipping by sea or rail may be much cheaper
but they necessitate holding relatively large amount
of inventory to protect against the inherent
uncertainty associated with them.
114

 Customer service levels and geographic

locations are important aspects in transportation
decisions.
Transportation accounts for roughly 30% of the
logistics costs and therefore operating
efficiencies become important aspects .
Shipment sizes i.e. consolidated bulk shipments
versus smaller lot sizes; routing and scheduling
of vehicles become important part of
companys transport strategy.
Transportation is one of the most visible
elements in the logistics operation.
115

Transportation Functionality
Product Movement

Product Storage

116

A. Product Movement
- Primary function is the movement up and down the value
chain.
- As transportation uses temporal, financial and environmental
resources, the movement of materials should take place only
when it enhances the product value.
(a) Uses temporal resources because the product is inaccessible
while in transit.
- Due to JIT strategies transit inventories are becoming more
significant thereby reducing manufacturing and distribution
centre inventories.
(b) Expenses incurred internally for private fleet of vehicles or
externally for commercial or public transportation constitute
financial resources.

117

(c) Transportation consumes fuel and oil and also

creates environmental expenses through
congestion, air pollution and noise pollution.
Objectives of Transportation

Move product
from original
location to
prescribed
destination while
minimizing temporal,
financial and environmental
Costs.

Minimize
expenses
incurred
due to
loss and
damage.

Meet customer
demand regarding
delivery and
shipment
information
availability
118

B. Product Storage
- Temporary storage through vehicles becomes
expensive as in-transit storage is required to be
moved again in a short duration of time.
- Sometimes
temporary
storage
becomes
advantageous as the cost of unloading and
reloading the product in a warehouse may
exceed the daily charge of storage in
transportation vehicles.
- Many times where the warehouse space is
limited, utilizing transportation vehicles becomes
a viable option.
119

The options available to a transporter in case of

warehouse space constraints are
(a) Instruct driver to take a circuitous or indirect route
to its destination, as the transit time would be
greater as compared to direct route. Thus transport
vehicle is used as temporary storage option.
(b) Change the shipment destination i.e. temporary
storage is achieved through diversion.
- For instance, product that is, say, scheduled initially
from Mumbai to Hyderabad gets diverted mid way
to Vishakapatnam (Vizag) as Vizag warehouse may
be in greater need of product and has the storage
capacity.
120

- Traditionally, the telephone was used to direct

diversion
but
nowadays
satellite
communications between headquarters and
vehicle handle such tasks more efficiently.
- Though product storage in vehicles can be
costly, it can be justified from a total cost
perspective when loading, unloading costs,or
capacity constraints are considered.

121

Principles of Transportation

Economies of Scale

Economies of Distance

122

A. Economies of Scale
Transportation cost per unit of weight decreases
when the size of the shipment increases i.e.
shipments that utilize the entire vehicles
capacity like truck load (TL) cost less per kg
than less than truck load (LTL) shipments.
Fixed costs in transportation include
administrative costs of taking transportation
order, time to position the vehicle for loading or
unloading, invoicing and equipment cost.
It costs as much to administer a shipment of 1
123
kg as it does to administer a 1000 kg shipment.

B. Economies of Distance
Transportation cost per unit of distance
increases at a decreasing rate as distance
increases. Also called Tapering Principle
For instance, a shipment covering a distance of
800 kilometers will cost less than two
shipments of same combined weight covering
400 kms.
Fixed expenses incurred to load and unload the
vehicle get spread over more kilometers
resulting in lower overall per kilometer charges.
124

Tapering Principle
C
O
S
T

Distance
125

Participants in Transportation
decisions
Public
Government

Shipper

Carrier

Consignee
126

Role and Perspective of each

party
A. Shippers and Consignees Expectations
Move the goods from origin to destination
within a prescribed time at the lowest cost.
Specified pick up and delivery times,
predictable transit time, zero loss and damage,
accurate and timely exchange of information
and invoicing.
127

B. The Government Role

Stable and efficient transportation environment
to sustain economic growth.
Product availability throughout the country at a
reasonable cost.
Providing right-of-way such as road or railways
or air traffic control system.
C. The Public concerns
Accessibility, cost effectiveness and protection
of environmental and safety standards.
Development of transport infrastructure to have
goods from global sources.
128

Features of Different Modes of

Transportation
Modes of Transportation

Rail

Highway

Water

Pipeline

Air

129

A. Rail
- Capability to transport large shipments
economically with more frequency.
- High fixed costs because of expensive
equipment, right of way, switching yards, and
terminals.
- Variable cost per kg/km has been consierably
reduced by electrification.
- Bulk industries and heavy manufacturing use
railways more frequently.
- Can improve effectiveness of transportation by
130
having alliances with other modes.

B. Highway
- Growth of motor carrier industry has resulted
into door-to-door operating flexibility and
speed of inter-city movement.
- Compared to railways, motor carriers have
relatively small fixed investments in terminal
facilities and operate on publicly maintained
highways.
- Variable cost per kilometer is high because a
separate driver and cleaner are required for
each vehicle.
- Labour cost is also high because of the need
for substantial dock labour.
131

Cost Structure in respect of

Motor Transport

Fixed costs
such as
overheads
and vehicle
cost are
low relative
to railway

Variable costs
such as driver,
fuel, tyres and
repairs are
high relative
To railways.
132

 Motor carriers are best suited to handle small

shipments moving short distances.
Favour light manufacturing and distributive
traders, short distances and high value
products.
Have captured significant market share of
railways in medium and light manufacturing
industries.
Because of delivery flexibility, motor transport
has captured almost all freight moving from
wholesalers or warehouses to retail stores.
Higher cost in replacing equipment, higher
133
wages to driver and other dock labour.

C. Water
- Capacity to move extremely large shipments.
- Fixed costs are somewhere between rail and motor
carriers.
- Though water carriers have to develop and operate
their own terminals, the right-of-way is developed and
maintained by the government, resulting into
moderate fixed costs compared to rail and highways.
- Low variable cost makes this an attractive mode when
low freight rates are desired and speed is secondary
consideration.
- Typically bulk commodities such as mining ,
chemicals, cement, and certain selected agricultural
products are transported by ocean going vessel.
134

- Unless the point of origin and point of destination are

adjacent to a waterway, it needs to be supplemented by
rail or trucks.
D. Pipelines
- Used for transporting natural gas, manufactured
chemicals, pulverized dry bulk materials such as cement
and flour via hydraulic suspensions, sewage and water
within the cities and municipalities.
- Operate on 24x7 basis are limited only by commodity
changeover and maintenance.
- No empty container or vehicle that must be returned.
- Highest fixed cost an lowest variable cost.
- High fixed costs due to right-of-way, construction and
requirements for control station and pumping capacity.
135

- As pipelines are not labour intensive, variable operating

cost is extremely low once the pipeline is constructed.
- Inflexible and limited to products in the form of gas,
liquid or slurry.
E. Air
- Significant advantage lies in the speed with which a
shipment can be transported.
- Though the freight cost is very high, the same may be
trade-off with reduced warehousing or inventory.
- Characterized by load size constraints and aircraft
availability.
- Fixed cost associated with aircraft purchase and
requirements for specialized handling systems is low as
compared to rail, water and pipeline.
136
-

(a)
(b)
(c)
(d)

Airways and airports are generally

developed and maintained with public funds.
Airfreight variable cost is extremely high as
a result of fuel,maintenance and intensity of
in-flight and ground crew.
Airfreight is justified in following situations:
High value products
Perishables
Limited marketing period.
Emergency.
137

Nature of Traffic versus Mode of

Transportation
Mode

Nature of Traffic

Rail

Extracting industries,
agricultural commodities

Highway

Medium and light manufacturing, distribution

between wholesalers and retailers.

Water

Mining and basic bulk commodities, chemicals,

cement, agro-based products.

Pipeline

Petroleum, gases, slurry.

Air

Emergency, perishables, limited marketing period,

high value premium products.

heavy

manufacturing,

138

Cost Structure for Each Mode of

Transportation
Mode

Fixed Cost

Variable Cost

Rail

High- equipment terminals, tracks etc.

Low

Highway Low-highways provided by public funds

Medium- fuel, maintenance.

Water

Medium- ships and equipment

Low-capability to transport
large amount of tonnage.

Pipeline

Highest-rights-of-way, construction,
control stations, pumping capacity.

Lowest-no labour cost of

any significance.

Air

Low-aircraft and cargo handling system.

High-fuel, labour and

maintenance.
139

Transport Economies

Distance
Volume
Density
Stow ability
Handling
Liability
Market factors
140

A. Distance
- Cost curve increases at a decreasing rate as a function
of distance and is known as tapering principle.
- Cost curve does not begin at the origin because of the
fixed costs associated with shipment pick up and
delivery regardless of distance.
- Tapering effect comes into existence, as the longer
movements tend to have a higher percentage of intercity rather than urban kilometers.
- Frequent intermediate stops, typical of urban
kilometers, and additional loading and unloading add
to the costs.
- Inter-city miles are less expensive since more distance
is covered with same fuel as a result of higher speed.
141

B. Volume
- Transport cost per unit of weight decreases as load
volume increases.
- Fixed costs of pick up and delivery as well as
administrative costs get spread over additional
volumes.
- Smaller loads must be consolidated into larger loads.
C. Density
- Transportation cost per unit declines as product
density increases.
- In terms of weight and space, an individual vehicle is
constrained more by space than by weight. Once is
the vehicle is full, it is not possible to increase the
amount carried even if the product is lightweight.
142

- Higher density products allow fixed costs to be

spread across additional weight, as a result the
products are assessed at a lower transport cost per
unit.
- Attempts are made to increase product density so that
more can be loaded in a vehicle to utilize its capacity.
D. Stow ability
- Refers to product dimensions and impact of the same
on vehicle utilization.
- Odd sizes and shapes as well as excessive weights
and lengths do not stow well and typically waste
space.
- Though density and stow ability are similar, products
may have same density that stow differently.
143

- Items with regular shapes are easier to stow than odd

shaped items.
- While the steel blocks and rods have the same
density, rods are more difficult to stow because of
their length and shape.
E. Handling
- Special handling equipments may be required for
loading or unloading trucks, trains, or ships and the
unitization/ palletization affects the handling cost.
F. Liability
- Product characteristics such as susceptibility to
damage, perishability, susceptibility to to theft,
susceptibility to explosion affect the risks and hence
claims.
144

G. Market factors
(a) Back-haul i.e. vehicle returning back to the
point of origin with load.
(b) Dead head to be avoided because empty
returns incur labour, fuel, and maintenance
costs.
(c) Thus design of logistics system must add
back-haul movement wherever possible.

145

Multimodal Transport System

Multimodal or Intermodal transport refers to
journeys that involve two or more different
modes of transport.
For instance, if materials are moved from
Lanchow in central China to Warsaw in Poland
goods may be loaded on to trucks, transferring
them onto rails for a journey across China to
Shanghai, then ship to Rotterdam, back into
rails to cross Europe, then truck for local
delivery.
146

 For Logistics managers intermodal services become

necessary because of their characteristics and costs.
For example, limited accessibility of air transport
requires coordination with a land carrier to make the
pick ups and deliveries.
Similarly, inaccessibility applies to rail, water and
pipeline but not to the motor which has a definite
advantage here.
The intermodal services maximizes the primary
advantages inherent in the combined modes and
minimize their disadvantages.
The combined services will have both good and bad
aspects of the utilized modes.
147

 For instance, coordinate of rail and water will

have a lower total cost than an all-rail
movement but higher cost than that of all-water.
Likewise, combined system transit time will be
lower than all water movement but higher than
all-rail.
The decision to use multi-modal system must
consider the effect on total logistics costs.
The aim of intermodal transport is to combine
the benefits of several separate modes but avoid
the disadvantages of each, like, combining the
low cost of shipping with flexibility of the road,
or getting the speed of air with the cost of road.
148

 However, each transfer between modes causes

delays and adds costs of extra handling.
Intermodal transport works well when transfer
can be done efficiently.
Transfer of motor carrier trailer to another
transport mode is facilitated through
containerization.

149

Choice of Mode
Factors influencing the choice of mode are as under:
- Bulkiness of the materials; heavy items would be
shipped by ocean going vessels.
- Value of materials; expensive items raise inventory
costs and thus encourage faster modes.
- Criticality of materials; even low unit value items that
hold up the operations need fast and reliable transport.
- Susceptibility to market changes; operations that
respond quickly to changes cannot wait for critical
supplies using slower transport.
- Reliability with consistent delivery is important.
150

Cost and flexibility to negotiate rates.

Reputation and stability of carrier.
Susceptibility to loss, theft and pilferage
Schedule and frequency of delivery.
Special facilities available
Limitations of Multimodal system
Sometimes carriers are reluctant to participate.
Willingness to coordinate in respect of moving
the product is higher when any one carrier is
incapable to transport in its entirety.
151

Containerization
Container is large rectangular box into which a firm
places commodities to be shipped.
After initial loading, the commodities themselves are not
rehandled until they are unloaded at their final
destinations.
Throughout the movement, the carrier handles the
container, not the commodities.
The shipper can transfer the container from one mode to
another, eliminating the need to handle the commodities
each time thus reducing handling costs, damage costs,
theft, pilferage and the time required to complete the
152
modal transfer.

 Many firms that modify their material

handling systems to include cranes, forklift
trucks, and other equipment capable of
handling large, heavy containers have found
containerization to be desirable avenues for
increasing productivity and controlling
material handling costs, especially in periods
of continually increasing labour costs.
As the objective of intermodal transport
system is to provide virtually seamless
journey, the best way to achieve same is to use
modular or unitized loads.
153

Piggyback Trailer on Flat Car

TOFC is a specialized form of containerization
in which rail and motor transport coordinate.
Carrier places motor carrier trailer on a rail
flatcar, which moves the trailer by rail for long
distance.
A motor carrier then moves the trailer for short
distance pickups and deliveries.
This service combines the long-haul, low cost
advantage of rail with accessibility of motor.
Piggyback services mostly move under contract.
154

Material Handling
The primary material handling objective is to
efficiently move large quantities of inventory into
and specific customers orders out of the warehouse.
The functions performed in a warehouse are
classified as movement or Handling and storage.
Movement or handling is emphasized and storage is
secondary.
Handling is divided into
- Receiving
- In storage handling , and
155
- Shipping

An extremely important aspect of logistics is the

productivity potential that can be realized from
capital
investment
in
material-handling
equipment.
Specialized handling equipment is required for
unloading bulk materials such as for solids, fluids,
or gaseous materials.
The guidelines suggested in designing the material
handling systems are:
(a) Equipment for handling and storage should be as
standardized as possible.
(b) When in motion, the system should provide
maximum continuous flow.
(c) Investment should be made in handling rather
156
than stationery equipment.

(d) Handling equipment should be utilized to the

maximum extent possible.
(e) In selecting handling equipment, the ratio of
deadweight to payload should be minimized.
(f) Whenever possible, gravity flow should be
incorporated in the system design.
The handling systems can be classified as
under:
- Mechanized
- Semi automated
- Automated, and
- Information directed.
157

Mechanized Systems
A. Forklift Trucks
Forklift trucks can move loads of master
cartons both horizontally and vertically.
A pallet or slip sheet forms a platform upon
which master cartons are stacked.
A slip sheet is a thin sheet of solid fibre or
corrugated paper and are used for situations
when product is handled only a few times.
A forklift truck normally transports a
maximum of two unit loads i.e. two pallets at
158
a time

 High stacking trucks are capable of up to 40 feet of

vertical movement.
Even trucks capable of operating in aisles as narrow as
56 inches ar also found in warehouses.
The significance of narrow-aisle forklift trucks has
increased as warehouses seek to increase rack storage
density and overall storage capacity.
Forklift trucks are not economical for long distance
horizontal movements because of high ratio of labour
per unit of transfer.
Most effectively utilized in shipping and receiving
and placing merchandise in a predetermined storage
space.
Common sources of power are propane gas and
electricity.
159

 Many forklift operations are utilizing radio

frequency data communication to speed up
load put away and retrieval assignments.
Under the above system, workers receive their
assignments through either handheld or
vehicle mounted RF terminals.
RF
technology
provides
real-time
communication capability to central data
processing systems, and when combined with
bar code scanning of cartons and pallets,it
allows fork lift operators to receive and update
item status inquiry, material orders and
movement and inventory adjustments.
160

B. Walkie-Rider Pallet Trucks

Low cost, effective method of material
handling.
Highly versatile low-lift pallet and/or skid
handlers with load capabilities from 3,000 to
8,000 lbs.
Typical applications include loading and
unloading, order selection and shuttling over
longer distances throughout the warehouse.
Popular in grocery warehouses.
Electricity is the power source.
161

C. Towlines
Either in-floor or overhead mounted drag devices.
The major advantage is the continuous movement but
lacks flexibility of forklift trucks.
Most common application is for order selection within
the warehouse. Order selectors place merchandise on a
four wheel trailer, which is then towed to the shipping
dock.
D. Conveyors
Conveyors are classified according to power, gravity or
roller/belt movement.
Portable gravity style roller conveyors are often used
for loading and unloading.
In some cases these are transported on the over-the162
road trailers to assist in unloading at the destination.

Semi automated Handling

Semi automated system supplements a mechanized
system
by automating a specific handling
requirements.
Semi automated warehouse is a mixture of
mechanized and automated handling.
A. Automated-Guided Vehicle Systems
Performs similar kind of handling function as a
mechanized tow tractor with a trailer.
The essential difference is that an AGVS does not
require an operator and is automatically routed and
positioned at destination with intervention of the
163
operator.

 Typical AGVS equipment relies on an optical

or magnetic guidance system.
In the optical application, tape is placed on the
warehouse floor, and the equipment is guide by
a light beam that focuses on the guide path.
A magnetic AGVS follows an energized wire
installed in the floor.
The primary advantage is the elimination of a
driver and newer AGVS use video and
information technology to follow paths without
the need for fixed tracks.
164

B. Sortations
Typically used in combination with conveyors.
The products are selected in the warehouse, they are
sorted as per specific specific shipment docks and
taken onto the conveyors for moving out.
Master cartons have a distinguishing code, these are
read by optical scanning devices and automatically
routed to the desired locations.
The rate of flow is customized to meet changing
requirements.
The benefits are
(a) Reduction in labour, and
165
(b) Increase in speed and accuracy.

C. Robotics
Humanlike machine that can be programmed
by microprocessors to perform various
activities.
Robots are use in warehouses to break down
and build unit loads to accommodate exact
merchandise requirements of a customers
orders.
In break down process, the robot is
programmed to recognize stocking pattern and
place products in the desired position on a
conveyor belt.
Similarly, robots are used to build unit loads.
166

 Robots are used effectively in warehouses

where prevailing environments make it
difficult for humans to work such as high
noise areas and extreme temperatures like
cold storage freezers.
The capability to incorporate artificial
intelligence
in
addition
to
speed,
dependability, and accuracy makes robotics an
attractive alternative to traditional manual
handling systems.
167

Automated Handling
Substitutes capital investment in equipment for labour
required in mechanized handling systems.
Though operates faster and more accurately, requires
high degree of capital investment and complex to
operate.
Most automated systems are custom deigned and
constructed for each application.
Automated handling concentrates on order selection
system at the master carton level as well as on high
rise storage and retrieval system.
168

A. Order Selection System

The handling of fast moving products in master
cartons is fully automated from the point of
merchandise receipt to placement in over-the-road
trailers.
Such systems use an integrated network of power
and gravity conveyors linking the storage.
System is controlled by computer coupled with
inventory and order processing systems of
warehouse.
Upon arrival, merchandise is automatically routed to
storage position and inventory records are updated.
Upon order receipt, merchandise is unitized to
vehicle size and schedules made for selection.
169

 At an appropriate time, all merchandise is selected in

loading sequence and automatically transported by
conveyor to th loading dock.
The only manual handling of merchandise occurs
while stacking into transport vehicle.
B. Automatic Storage and Retrieval System (ASRS)
High rise handling systems are fully automated from
receiving to shipping.
The components of this system are storage racks,
storage and retrieval equipment and control systems.
The high rise are the vertical storage racks up to the
height of 120 feet.
170

The storage and retrieval machine travels

back and forth with the primary objective of
moving products in and out of storage.
Functions of storage & retrieval equipment
(1) To reach the desired position rapidly.
(2) To deposit or retract a load of merchandise.
(3) To ensure merchandise flowing from
production is automatically stacked to create
a unit load.
(4) To transport the unit load to the high rise
storage area by power conveyor.
171

C. Information-directed Systems
All material handling movements are directed
and monitored by the command of
microprocessors.
To begin with all required handling
movements are fed into the computer for
analysis and equipment assignment.
Analysis of handling requirements and
equipment assignment is done in such a way
that direct movements are emphasized and
deadhead movements are minimized.
Work assignments are provided to individual
forklifts by terminals located on the truck. 172

 Communication between the computer and the

truck uses radio frequency (RF) waves with
antennae located on the forklifts and high up
in the warehouse.
Information-directed systems can increase
productivity by tracking material handler
performance and allowing compensation to be
based on activity level.
A single handling equipment may be involved
in loading or unloading several vehicles,
selecting many orders, and completing several
handling assignments, thus increasing the
complexity of work direction.
173

Packaging
Packaging can be categorized into two types viz.
(a) Consumer packaging, which has a marketing
emphasis, and
(b) Industrial packaging, which has more of logistics
emphasis.
A. Consumer Packaging (Marketing Emphasis)
- Consumer packaging design focuses on customer
convenience, market appeal, retail shelf utilization,
and product protection.
- Large containers and odd sizes may increase the
consumer visibility but make poor logistical
174
packaging.

 For example, shipping products fully

assembled such as motorcycles results in
substantial reduction in density.
A low density package would mean higher
transportation costs and greater warehousing
requirements.
B. Industrial Packaging (Industrial emphasis)
- Individual products or parts are normally
grouped into cartons, bags, bins, or barrels for
handling efficiency.
- These containers are used to group individual
products and are referred to as master cartons.
175

 When master cartons are grouped into larger

units for handling, the combination is
referred to as containerization or unitization.
The master carton and the unitized load
provide the basic handling unit in the
logistics channel.
The weight, volume, and fragility of the
master carton in an overall product line
determines transportation and material
handing requirements.
If the package is not designed for efficient
logistical processing, overall performance of
the system would suffer.
176

Standardization of master carton facilitates

material handling and transportation.
Standardization of master carton is beneficial even
in context of retail backend operations.
(a) For instance, in case of shoe store as the contents
of each master carton are known, it is not
necessary to search through many cartons for a
particular style or size of shoe.
(b) Allows master cartons to be more efficiently
stacked, resulting in to less backroom congestion.
(c) Complete identification of master carton contents
facilitates completion of retail inventory and
merchandise reorder.
177

 Standardized cartons are selected to achieve

maximum conformity in increasing the density in the
trailer thereby eliminating dead space in stacking.
The end result of standardized master carton usage is
substantial reduction in total cost combined with an
effective material handling system at both
warehouse and the retail store.
In situations, when master cartons of more than one
size are required, extreme care should be taken to
arrive at an assortment of compatible units.
These different sizes of master cartons should result
into modular compatibility.
178

How to design an Ideal Package?

Invariably, logistical considerations alone
cannot fully dominate package design.
The ideal package for material handling and
transportation would be a perfect cube having
equal length, depth, and width with maximum
possible density but such a package does not
exist in practice.
Thus, logistical requirements should be
evaluated
along
with
manufacturing,
marketing, and product design considerations
when standardizing master cartons.
179

 Another critical issue to be considered in package

design is to determine the degree of protection
required to cope with the anticipated physical and
climatic environments.
The package design and material should combine to
achieve the desired level of protection without
incurring the expense of overprotection.
In most cases the cost of absolute protection will be
prohibitive and therefore the package construction
should be a proper blend of design and material.
Three broad functions of packaging are
- Damage protection, Utility/ efficiency, and
Communication.
180

A.Damage Protection
A major function of the master carton is to protect
products from damage while moving and being
stored in the logistical system.
Master carton also serve as a deterrent to pilferage.
Achieving desired degree of protection involves
tailoring the package to the product and selecting
proper material for package construction.
The determining factors are the value and fragility of
the product; higher the value, the greater is the
justification for nearly absolute protection.
If the product is fragile and has high value, then the
cost of absolute protection can be significant.
181

L
o
s
S
B
y
D
a
m
a
g
e

Cost of Packaging
182

 The susceptibility to damage of a given

package is directly related to the environment
in which it moves and is stored.
Product fragility can be measured by
product/package testing by means of shock
and vibration equipment.
If packaging requirements and cost are
prohibitive, alternative product designs can be
evaluated utilizing the same testing
equipment.
The end result is the determination of the
exact packaging required to protect the
product.
183

 During the logistical process, common causes

of
product
damage
are
vibrations,
impact,puncture, and compression.
Stacking failure can also result in damage
while the product is in storage.
The potential physical damage of poor
stacking ranges from surface scuffing and
marring to complete product crushing,
buckling and cracking.
Typical methods of securing the packages are
strapping, tie-downs, and use of various
dunnage materials that limit vibrations and
shock.
184

B. Efficiency/ Utilization
Logistical operations
are affected by
packaging utility i.e. from truck loading and
warehouse
picking
productivity
to
transportation and storage space utilization.
Logistical activity output can be described in
terms of packages, such as number of cartons
loaded per hour into a trailer, number of
cartons picked per hour in a warehouse or
distribution centre.
Material handling efficiency is also strongly
influenced by the unitization of packages. 185

 An important part of packaging relating to

storage and material handling is the concept of
unitization.
Unitization describes the physical grouping of
master cartons into one restrained load for
material handling or transport.
Concept of containerization includes all forms
of unitization, from taping two master cartons
together to the use of specialized transpotation
equipment.
All types of containerization have the basic
objective of increasing material handling
efficiency.
186

Benefits of Unit Loads

- Unloading time and congestion at destination
is minimized.
- Products shipped in unit load quantities
facilitate material handling and inventory can
be positioned rapidly for order selection.
- Damage in transit can be reduced by unit load
shipping and specialized transportation
equipment.
- All above factors lead to reduction in logistical
cost.
187

- A unit load can increase damage potential if it

is not properly restrained during handling or
transport.
- Standard method of imparting stability to unit
load include rope ties, steel strapping,
adhesives, wrapping- both shrink wrap as well
as stretch wrap.
C. Communication
Critical to content identification, tracking, and
handling as the these are becoming necessary
to total channel success.
188

(a) Content Identification

- A very obvious communication role is identifying
package contents for all channel members.
- The typical information includes manufacturer,
product, type of container i.e. can or bottle, count
and product code number.
- The carton information is used to identify product
for receiving, order selection, and shipment
verification.
- Visibility is the major consideration, and material
handlers should be able to see the label from
reasonable distances in all directions.
- High value products often have small labels to
minimize the temptation of theft.
189

(b) Tracking
- A well controlled material handling system
tracks product as it is received, stored,
retrieved, and shipped.
- A good control on movement reduces product
loss and pilferage and is useful for monitoring
employee productivity.
- Low cost scanning equipment, and
codification increases the tracking capabilities
and effectiveness.
190

(c) Handling Instructions

- Final role of logistics package is to provide
handling and damage instructions.
- The information should be provided about any
special product handling considerations such
as glass containers, temperature restrictions,
stacking
considerations,
or
potential
environments concerns.
- If the product is dangerous, such as an
explosive chemical , the packaging should
provide instructions for ealing with spills and
191
container damage.

Channel Integration-PCM
Packaging, Containerization, and Material handling
represent integral parts of the logistical operating system; as
all three areas influence each other.
For instance, automated handling cannot be efficiently
designed without a high degree of master carton
standardization, which in turn provide the opportunity to
containerize individual products.
The integration between material handling capability,
transportation, warehousing, inventory policy and
packaging communication into customers logistical system
leads to minimum handling during the exchange of
merchandise.
This type of integration is commonly found in physical
distribution.
192

Scrap/Waste Disposal
Material Input

Material
Processing

Recycle

Material
Output

Disposal
Scrap

193

A. Scrap
Scrap is a waste created while processing the
materials.
The process scrap is unavoidable extra material
removed from the stock of material while
generating a component.
For example, while making a machined component
some material has to be removed in the form of
chips.
Quite often, while manufacturing any component
some dimensions are not maintained and the lot is
scrapped as these cannot be used in the assembly of
the product.
194

B. Surplus
When the project or product needs a specific quantity
of the item, extra leftover cannot be used and this
quantity is called surplus.
The surplus quantity has to be disposed off.
C. Obsolete
When the item cannot be used in the product/ project
due to changes that might have taken place in respect
of dimensions, shape, colour etc, these are called
obsolete items.
Changes ay occur due to defect in product design, or
shelf life etc.
These components have to be scrapped/ disposed off.
195

Wastivity of a System
Wastivity of the system is defined as the ratio of the
waste to the input.
Wastivity= Waste / Input
Gross wastivity= Total waste generated/ Total input.
All waste is not the waste, some part of it can be
recycled.
Net waste={Total waste generated}-{Waste recycled
within the system}.
Net wasitivity= Waste which cannot be recycled/
Total input.
Wastivity assesses the productivity for each type of
input. Both wasitivity and productivity are
complementary to each other.
196

Issues to be addressed

Quick identification of the waste generated.

Separation of different types of waste.
Economic reduction.
Efficient collection and handling.
Recycling, and effective disposal without
affecting the environment.
Designing a suitable waste control
programme.
197

Recycling /reusing/ disposal of

waste/ surplus/ scrap.
- Recycling refers to the use of bad quality outputs
(rejects) or wastes as inputs to the same process or
system e.g. reusing plastic scrap.
- Use the scrap for producing by-products.
- Transfer the surplus from one department to another.
- Sell the scrap/surplus as raw materials to other user
factories, external agents, or even to the employees.
- Sell scrap through advertisement and auctioning.
- Return the surplus to the vendor, if possible.
- Donate rejected material to charitable organizations to
gain social respect.
198

Warehousing
The primary purpose of a warehouse management is to
control the movement and storage of materials within an
operation.
Warehousing can be viewed as a place to store inventory
as well as a facility for switching the inventory.
Warehousing is becoming significant to achieve the
following objectives:
- To reduce inventory
- To reduced labour costs
- To increase storage capacity
- To increase customer service
- To increase inventory accuracy.
199

 Typically, the warehouses received merchandise

by rail or road and the materials were moved
manually to a storage area within the warehouse
and piled up on the floor in stacks manually.
Due to above, though different products were
stored in the same warehouse it was difficult to
identify the merchandise with respect to a
particular order.
On the receipt of the customer orders, products
were handpicked and placed on the wagons and
these wagons were pushed out of shipping area.
200

 As the labour was inexpensive, human resources were

used extensively and no consideration was given to
efficiency utilization, work methods, or material
handling.
Inspite of poor efficiency, warehouses continued to
provide a necessary bridge between production and
marketing.
With the improved techniques of forecasting and
production scheduling the need to build up inventory
was considerably reduced.
Also, delays during manufacturing process reduced as
the production became more coordinated.
Seasonal products continue to require warehousing.
The overall need to store materials to support
201
manufacturing has been reduced.

 In context of retailing, the department stores

face the necessity of stocking an increased
variety of products and are unable to order in
sufficient quantities from a single supplier to
enjoy the benefits of consolidated shipment.
Direct ordering from manufacturers becomes
prohibitively expensive due to high cost of
transporting small shipments.
This necessitates the need for warehousing to
provide timely and economical inventory
assortments.
At wholesale level, the warehouse becomes a
support unit for retailing.
202

 In context of manufacturing, companies

producing products at multiple locations,
efficient warehousing becomes a method for
reducing material and parts storage and
handling costs while optimizing production.
For implementing JIT and stockless
production strategies warehousing becomes an
integral part of entire value chain.
As the basic objective of JIT is to reduce
work-in-process inventory, manufacturing
needs to supported by highly dependable
delivery.
203

 In a country as large as India, this is possible

only by having strategically located
warehouses.
The stocks can be held at a central warehouse
thereby reducing the need to maintain
inventory at each assembly plant.
Using consolidated shipments, materials are
purchased and transported to the supply
warehouse
and
then
distributed
to
manufacturing plants as and when needed.
A fully integrated warehouse is a vital
extension of manufacturing.
204

In context of outbound logistics, warehouses have

made possible the direct shipment of mixed/
assorted
products to the customers thereby
enhancing the service capabilities.
The direct assorted shipments have two advantages,
namely,
(a) Reduced logistical cost because the full product
assortment can be delivered while taking the
advantage of benefits obtained through consolidated
transportation.
(b) More competitive advantage for the manufacturers
due to speedier shipments and mixed lots.
Recently, warehouses have been able to increase
productivity due to effective use of Information
Technology.
205

Role of Warehousing in
Logistical System
Provision of strategic storage, though an effective
distribution system should not have the necessity of
inventory for an excessive length of time,
sometimes storage becomes inevitable.
Acting as a switching facility
Provision of economic and service benefits.

206

Economic Benefits

Consolidation

Break-bulk

Cross-docking Postponing

Stock
piling

207

Consolidation
Plant A

Plant B

Consolidation
warehouse

Customers
A

Plant C

208

 The benefits and features are

- Realization of lowest possible transportation
rate.
- Reduction of congestion at a customers
receiving dock.
- Manufacturing plants can use warehouse as a
forward stock location or as sorting and
assembly facility.
- Combines the logistical flow of small
shipments to a specific market area.
- A single firm may use consolidation
warehousing or a number of firms may join
together and hire the consolidation service.209

Break-bulk
Customer A

Plant A

Break-bulk warehouse

Customer B

Customer C

210

 Break-bulk operations receive combined

orders from manufactures and ships them to
individual customers.
Break-bulk warehouse splits individual orders
and arranges for local delivery.
Cross-dock facility is similar to break-bulk
except that it involves multiple manufacturers.
In transit-mixing and release as well as
manufacturing support are also included in
cross dock facility.
211

Cross-docking
Company A or Plant A

Company B or Plant B

Company C or Plant C

Customer A

Distribution
centre

Customer B

Customer C

212

In Transit mixing and release

Customer X
Plant A

Plant B

Warehousing
Transit
mixing
point

Customer Y

Customer Z
Plant C

Product D
Customer W

213

Manufacturing Support
Vendor A

Vendor B

Manufacturing
warehouse

Assembly
plant

Vendor C

214

 The features and benefits of cross-dock

facilities are:
- The full trailer loads of product arrive from
multiple manufacturers and as the product is
received it is sorted and allocated to
customers.
- The product is then moved across the dock to
be loaded onto the trucks destined for
appropriate customer.
- The trucks are then transported to retail outlets
once the same have been filled with the mixed
product from multiple manufacturer.
215

Processing/Postponement
Warehouses can also be used to postpone, or delay
production by performing processing and light
manufacturing activities.
A warehouse with packaging and labelling capability
allows postponement of final production until actual
demand is known.
For example, vegetables can be processed and canned at
the manufacturers end without pre-attached labels.No
pre-attached labels means the product does not have to
be committed to a specific customer.Once a specific
customer order is received, the warehouse can
complete final processing by adding label and
finalizing the packaging.
216

Stockpiling
Useful for seasonal storage such as:
- Blankets and Knitting wool are produced year round and
primarily sold during a very short marketing period.
- Agricultural products are harvested at specific times with
subsequent consumption throughout the year.
In both the above situations, stockpiling becomes necessary
to support the marketing efforts.
Stockpiling provides for a buffer inventory allowing for a
balance between the availability of materials and the
market demand.

217

Service Benefits

Spot Stock

Assortment

Mixing

Production
support

Market
presence

218

Spot Stock
Used often in physical distribution particularly in case of
seasonal products.
Selected amount of firms product line is placed or spot
stocked in a warehouse to fill customer orders during a
critical market period.
Spot stocking allows inventories to be placed in a variety
of markets adjacent to key customers just prior to a peak
selling period of season.
For examples, suppliers of agricultural products to
farmers often use spot stocking to position their products
closer to market during growing season and once the
sales season is over, the remaining inventory is
withdrawn to central warehouse.
219

Assortment
Assortment warehouse stocks product combinations in
anticipation of customer orders.
Assortment represents multiple products from different
manufacturers or special assortments as specified by
the customers.
For instance, a wholesaler of athletic clothing would
stock products from number of clothing suppliers so
that the customers can be offered assortments.
Wholesalers would create a specific uniform for the
team including shirts, pants, and shoes.
220

 Advantages of Assortment warehouses

- Improves services by reducing the number of
suppliers that customer must deal with.
- The combined assortments allow large
shipment quantities leading to reduced
transportation costs.

221

Mixing
Several shipments from different manufacturers are
involved. Quite similar to break-bulk process.
Truckloads of products are shipped from
manufacturing plants to warehouses and each large
shipment enjoys lowest possible transportation cost.
Upon arrival at the mixing warehouse, factory
shipments are unloaded and desired combination of
each product for each customer is selected.
An effective service benefit because inventory is
sorted to precise customer specification.
222

Production Support
Production support warehouses provides a
steady supply of components and materials to
assembly plants.
The safety stocks of items purchased from
outside vendors are justified because of long
lead time or variation in usage.
Production support warehousing is used to
supply processed materials, components, and
subassemblies into assembly plant in an
economic and timely manner.
223

Market Presence
Perceived by marketing managers as an
advantage of local warehouses.
Local warehouses and hence local inventory
can be more responsive to customer needs and
offer quicker delivery than more distnt
warehouses.
Local warehouse may enhance market share
and potentially increase the profitability.
224

Warehouse Design

1.
2.
3.
A.
(a)
(b)
(c)

Principles to be considered in warehousing

designing are:
Design criteria
Handling technology
Storage plan
Design criteria
Factors to be considered are:
Number of storeys in the facility
Height utilization, and
Product flow
225

(a) Number of storeys in the facility

Ideally, the warehouse design should be limited to a
single storey so that the product is not required to be
moved up and down.
Use of elevators to move product from one floor to
the next requires time and energy and hence cost.
Elevators can also become bottlenecks in product
flow since many material handlers usually compete
for a limited number of elevators.
Hence, as far as possible, warehouses should be
limited to a single storey unless it is situated in
Central Business District where land is restricted or
expensive.
226

(b) Height utilization

Maximum usage of available space by allowing
for the optimum utilization of height on each
floor
Maximum effective warehouse height is limited
by safe lifting capabilities of material-handling
equipment such as forklifts and fire safety
regulations.
(c) Product flow
Design should allow for straight product flow
i.e. product should be received at one end of the
building, stored in the middle, and then shipped
from the other end.
227

Design of a typical warehouse

Receiving area
Bulk storage
area

Rack storage
area
Order picking area

Packaging or unitizing area

Stacking area
Finished product flow

228

B. Handling Technology
Focuses on effectiveness and efficiency of material
handling technology and primarily takes into account
the following:
- Movement continuity, and
- Economies of scale in movement.
(a) Movement continuity
- It is better for a material handler or a handling
equipment to make a longer move than to have a
number of handlers make numerous, individual,
short length moves.
- Exchanging the product between handlers or moving
it from one equipment to another wastes time and
increases the potential for damage.
229

(b) Economies of scale in movement.

- Warehousing activities should be designed to move a group of cases
such as master cartons or containers, as grouping or batching reduces
the number of activities and hence the cost.
C. Storage plan
High sales volume or fast moving products should be stored in a
location that minimizes the distance it is moved such as low height
storage racks.
The objective is to minimize the travel distance and also the need for
extended lifting.
Low sales volume or slow moving product can be assigned locations
that are distant from the centre or higher up in the storage rack.

230

Storage plan based on product

movement
Storage space
for low volume
products
Storage space
for low volume
products
Storage space
for low volume
products

Storage
Space
For
High
Volume
products

Primary
gangway

Storage space
for low volume
products
Storage space
for low volume
products
Storage space
for low volume
products
231

Warehousing strategies

Private

Public

Contract

232

Private Warehouses
Operated by the firm owning the product i.e.
facility may either be owned or leased.
Quite often the warehouses requiring specific
material handling activities designed to fit exact
needs of the firm may not be available on hire.
Generally efficient warehouse should be
planned around a material handling system in
order to encourage maximum efficiency of
product flow.
Firms with specialized customers or products
often develop their own warehouse.
233

Public Warehouses

Classified on the basis of range of specialized

operations performed, as under
(a) General merchandise e.g. paper, small home
appliances and household maintenance goods.
(b) Refrigeration facilities
to preserve food
products, pharmaceutical medicines and
certain chemicals requiring specific ambient
temperature.
(c) Bulk commodities requiring specialized
material handling systems such as liquid
chemicals, tres, and textile fabrics.
234

(d) Bonded,licensed by the government to store

goods prior to payment of custom duties,
taxes etc.
(e) Furniture requiring special handling systems.
(f) Provide greater flexibility in operations since
warehousing becomes the core business.
(g) Due to high volume operations., fixed costs
get spread over and justify more efficient
handling operations.
(h) Transportation economies are leveraged by
delivery of loads representing various
235
customers.

(i) Public warehouses charge a client a basic fee

for handling and storage based on number of
cases or the weight handled.
(j) When economies of scale are nt posible in a
private warehouse, public warehousing may
be a low cost alternative.

236

Contract Warehouses

(1)
(2)
(3)
(4)
(5)

Contract warehouses provide all logistics

activities such as
Transportation
Inventory control
Order processing
Customer services, and
Returns
Assume total responsibility for enterprises
that desire only to manufacture and market.
237

How firm utilize warehousing

facilities?
A private or contract facility may be used to cover
regular year round requirements.
Public facilities are used to handle peak season.
In many cases central warehouse may be private, while
market or field warehouse are public warehouse.
Where the warehouse space is fully utilized at least 7580% of the time, private facility may be more efficient.
A firm may find private warehousing to be more
justified at certain locations on the basis of distribution
volume, while in other cases public warehousing may
238
be the least cost option.

 Some customer groups may be served better from a

private warehouse, while a public warehouse may be
appropriate for others.
Where the customers can be served better by local
presence of the products, private or contract facility
may be useful.
Public and contract warehousing increases the
potential for industry synergy.
For example, firms in grocery business share public
warehousing facilities with other suppliers serving the
same industry.
The benefit is the reduced transportation cost due to
joint use of same public warehouse allowing for
frequent delivery of consolidated loads from multiple
suppliers.
239

 Public and contract warehouses demonstrate more

responsiveness as they offer location flexibility.For
example, in-season demand for agricultural chemicals
require warehouses to be located near markets to serve
customers better. After growing season, local
warehouse become unnecessary.
Public and contract warehouses generally offer better
economies of scale, as they are able to design
operations and facilities to meet higher volumes of
multiple clients.
Contract warehousing facilities can provide complete
logistical support such as transportation, order
processing, inventory control, storage and other
administrative assistance in an integrated manner.240

Warehouse Functions

Movement

Receiving

Storage

In-storage
handling

Shipping

Planned
storage

Extended
storage

241

A. Movement: Receiving, In-storage handling

and shipping.
(a) Receiving-Activities involved are
- Unloading the transportation vehicle, which
in most cases is done manually.
- In Indian context, limited automated and
mechanized methods have been developed
that are suitable to varying product
characteristics.
- The product is hand-stacked on pallets to
form unit load for movement efficiency.
242

(b) In-storage handling

- On receipt of the product, the merchandise is transferred
within the warehouse to position for storage or order
selection.
- On receipt of order, the required products are
accumulated and transported to a shipping area.
- The entire operation helps in selection process for
grouping materials, parts, and products into customers
orders.
(c) Shipping
- Involves checking and loading orders onto transportation
vehicles.
- Shipping in unit loads leads to considerable saving of
time in loading the vehicle.
- Checking is important at a point when merchandise
changes ownership as a result of shipment.
243

B.Storage: can be either planned or extended.

(a) Planned storage
- Storage for basic inventory replenishment is referred
to as a planned storage.
- Duration varies depending on the performance cycle
length.
(b) Extended storage
- Sometimes storage may be required for several
months prior to customer shipment.
- Seasonal items require storage to wait for demand or
to spread supply across time.
- Erratic demand, product conditioning, speculative
purchases and discounts call for extended storage.244

Warehouse Site Selection Process

Traditionally, sales were key drivers in influencing
warehouse site selection.
Companies satisfied the needs of their sales force by
building warehouses with the hope to increase market
presence and hence revenue.
Many companies still believe that in order to succeed
in certain markets,they must have a warehouse
presence.
While this may be the case in for some industries such
as food where the warehouses must deliver the
products to customers in a timely manner; there are
245
alternatives to building warehouses.

Before making a site selection companies must

closely examine the current distribution network and
the impact of adding , subtracting or consolidating
facilities for the entire organization.
Many factors come into play when analyzing the
impact a new warehouse will have on the companys
distribution network. These are:
- Quantitative variables
(a) Cost drivers, tangible and relatively easy to define.
(b) Demand potential and trends, consumption pattern,
transportation requirements and costs, labou costs,
facility costs and utility cost.
246

Qualitative variables
(a) More difficult to understand and to measure.
(b) Customer service levels and top management
preferences.
Once all the data is collected, the actual
analysis is done depending on the number of
alternative location strategies.
The company should be able to select the best
site according to cost, operating factors, and
expected customer service levels.
The idea is to ensure the greatest return on
247
investment.

The Square Root Law

The square root law states that The total inventory in
a system is proportional to the Square Root of the
Number of Locations at which a product is stocked.
The significance of The square Root Law is that a
firm currently operating out of five warehouses which
centralizes to one warehouse can theoretically reduce
inventory carried in stock by 55 percent.
This will of course result in large savings in
inventory carrying cost which will be slightly offset by
more rapid transport to meet current delivery service
levels.
248

 It is recognized that the inventory tends to

increase as the number of locations increase.
While the reduction of inventory and number
of locations for keeping finished products are
desired, the companies must do so without
reducing service to customers.
The square root law determines the extent to
which inventory reduces by reducing the
number of locations.
An important assumption is the total customer
demand remains same.
249

 The Square Root Law states that the total

inventory in a future number of warehouses is
determined by multiplying the total inventory at
the existing warehouses by the square root of
number of future warehouses divided by
number
of
existing
warehouses.
Mathematically, it is represented as under:
L = [(L1) x { (W2 W1) }], where
L= Total inventory in future warehouses
L1= Total inventory in existing warehouses
W1= Number of existing warehouses
250
W2 = Number of future warehouses.

 For example, In a company there are 40

warehouses and the existing inventory is
2,00,000 units. If the number of warehouses
are reduced to 10 what will be impact on total
inventory.
L1= 2,00,000
W1= 40
W2= 10
L= [(2,00,000) x { (10 40 )}] = 1,00,000
Thus, inventory will consist of 1,00,000 units
giving a reduction of 50%.
Conversely, if the number of warehouses are
increased, the total inventory will increase.251


(1)
(2)
(3)
(4)

Assumptions are
Inventory transfer from one warehouse to
other is not done.
Lead time does not vary.
Customer service level does not change
from any warehouse.
Demand level is well distributed from all
warehouse.

252

Warehouses as Distribution
Centres
Distribution strategies can be of following types
Cross docking
Milk runs
Direct shipping
Hub and spoke model
Pool distribution

253

A. Cross Docking
- Cross-docking co-ordinates the supply and delivery so
that the goods arrive at the receiving area and
transferred straight away to the loading area, where
they are put into delivery vehicles.
- Cross docking is a flow-through concept as it is not
desirable to interrupt flow of products anywhere,
because space, brick and mortar is getting very
expensive these days.
- Cross docking shifts the focus from supply chain to
demand chain.
- The stock coming into cross docking centre has
already been pre-allocated against a replenishment
order generated by a retailer in the supply chain.
- Cross docking encourages electronic communications
between retailers and their suppliers.
254

There are two forms of cross docking

(1) Basic cross Dock
In this form packages are moved directly from the
arriving vehicles to the departing ones.
This form of cross docking does not need a
warehouse and a simple transfer point is enough.
(2) Flow though Cross Dock
In this case, when the materials arrive and they are
in large packages, these packages are opened and
broken
into
smaller
quantities,
sorted,
consolidated and transferred to vehicles for
delivering to different customers.
255

- Cross docking can be developed into a phase

where nothing actually moves through a
warehouse.
- The stock kept within the vehicles are referred
to as stock on wheels.
- Nowadays, wholesalers use the method of dropshipping, where they do not keep the stock
themselves, but coordinate the movement of
goods from the upstream suppliers to the
downstream buyers.
256

How Cross Docking Works?

Shipping

Sorting

Receiving
257

 On receiving the goods workers put them in

lanes corresponding to the receiving doors.
A second team of workers sort the goods into
shipping lanes from which a final team loads
them into outbound trailers.
Benefits of Cross Docking
Helps to improve the speed of flow of the
products from the supplier to the stores.
Helps to reduce the cost as the labour is
removed from the job of storage as well as by
eliminating warehousing/storage.
258

 Helps to reduce the amount of finished goods

inventory that is required to be maintained as
safety stock.
Constraints of Cross Docking
Requires a strong IT base and real time
information sharing facilities e.g. Bar codes on
cartons.
Appropriate for products with large, and
predictable demands.
Requires that distribution centres should be set
up such that the benefits of economies of scale
in transportation can be achieved on both the
inbound and outbound side.
259

 Requires a great degree of coordination and

synchronization between the incoming and outgoing
shipments which, in turn, relies on better information
and planning.
Product availability, accuracy and quality aspects are
critical.
B. Milk Runs
A milk run is a route in which a truck either delivers
product from a single to multiple retailers or goes from
multiple suppliers to a single retailer.
In other words, a supplier delivers directly to multiple
retail stores on a truck or a truck picks up deliveries
for many suppliers of the same retail store.
260

Milk runs from single supplier to

multiple retailers
Retail Store 1
Supplier

Retail Store 2
Retail Store 3
Retail Store 4

Retail Store 5
Retail Store 6

261

S1

Milk runs from multiple

suppliers to single retailer.
Retail Store

S2

S3

S4
S5
S6

262

Benefits/ Limitations of Milk Runs

Milk runs help to reduce the the transportation costs by
consolidating shipments to multiple stores on a single
truck .
Milk runs allow deliveries to multiple stores to be
consolidated on a single truck, resulting in a better
utilization of the truck and somewhat lower costs.
The use of milk run is helpful if very frequent, small
deliveries are needed on a regular basis and either a set
of suppliers or a set of retailers is in geographic
proximity.
Helps to reduce the amount of inventory to be kept as
a safety stock in the warehouses.
High degree of coordination and synchronization
required among the members of supply chain. 263

C. Direct Shipping
Direct shipping refer to the method of distribution in
which goods come directly from the suppliers to the
retail stores.
In this case, routing of each shipment is specified and
the supply chain manager needs to decide on the
quantity to ship and the mode of transportation to use.
This system eliminates the need for the intermediates
facilities such as warehouses and distribution centres.
Goods that are generally distributed through the
method of direct shipping are certain perishable items,
high volume goods, high bulk items and specialty
products.
264

Direct Shipment Network

S1

R1
R2

S2
R3
S3

S4

R4

R5
R6

265

Benefits/Limitations of Direct Shipment

The major advantage of direct shipment network is the
elimination of intermediate warehouses and the
simplicity of its operation and coordination.
Saves a lot of time as the time required for distribution
of goods from the supplier to the retail store would be
short because each shipment goes direct.
As goods move directly from the supplier to the retailer
there is less handling of the products as a result there is
less product damage.
Since the distribution is direct, the invoice match
receiving records resulting into ease of maintaining
store records.
266

 The direct shipment network is justified if the

retail stores are large enough because with the
small size of retail stores the direct shipment
network tends to have high costs.
Direct shipment from the supplier to the retailer
poses a lot of hassles for the store personnel e.g.
more deliveries, paperwork, loading and
unloading etc.
Due to uncertainties of shipments from
suppliers such as delay in transportation, wrong
goods supplied, transit damage make it
necessary to maintain safety stock.
267

D. Hub and Spoke Model

In this model, the distribution hub is the
location that holds inventory for a large
region, with each spoke leading to smaller
distribution centre, which houses inventory
for a smaller region.
The main driver of the hub and spoke model is
the proximity to the customer, with the goal
being to supply to a maximum numbers of
customers in minimum time.
Currently, Hub and Spoke model is restricted
to fulfilling the just-in-time needs of heavy
manufacturing industries.
268

 If a company expands its operations, its suppliers

may move to nearby areas so as to supply it more
efficiently. In this case, company that expands is the
hub and suppliers are its spokes.
The type of product to be distributed largely
necessitates a hub and spoke operation.
The products that cannot be air freighted are mostly
distributed through hub and spoke model.
E. Pool Distribution
Pool distribution is the distribution of product to
numerous destination points- customers, stores, stop
points within a particular geographic region.
269

 Pool distribution is is useful when high

frequency regular shipments in LTL quantities
are involved.
Pool distribution represents an excellent cost
effective alternative to the higher cost of
individual LTL shipments.
Instead of LTL direct, product is shipped to
regional terminals in truckload quantities.
There it is offloaded, then segregated and sorted
by delivery point then reloaded on local
delivery trucks for delivery to the individual
destinations.
270

Normal LTL and pool

distribution
S1

R1
R2

R3

R4

271

R1

R2
S1

W1
R3

R4

272

Benefits
When you have multiple shipments bound for
specific region, pool distribution is simple
cost effective alternative to LTL.
Merchandise reaches retail stores speedily.
Less handling than normal LTL service and
hence reduced claims.
Meet customer delivery requirements.Handle
peaks in business effectively.

273

Storehouse Operations
Storage Systems

The Receipt System

Physical Upkeep
and Maintenance System

Issue system

274

 System design should not only permit

matching of present requirements with the
existing supplies, but also must take care of
the future growth potential an demands.
Stores must act as a buffer between
procurement and various other consuming
departments to ensure timely receipts, storage,
upkeep, handling, accounting, issues and
disposals.
Primarily stores must render effective services
to all internal customers.
275

Regular Activities of Stores

To receive the materials, check them for quantity,
coordinate for inspection and quality checks and
prepare the goods receipt note.
To approve the accepted materials, prepare the
rejection notes, and complete the formalities for bill
payment.
To take into stock the accepted materials; store them
in respective locations as predetermined.
To prepare issue vouchers; make actual issues for
disposals and account for them.
To keep the purchasing people well informed through
276
systematic indents and other reports.

 To keep the storage place clean for facilitating

handling movements and observe all safety measures
and security regulations.
To ensure easy storage, minimum pilferage, proper
identification, and quick retreival with minimum waste
of time and efforts.
To establish, maintain and update rationalized system
of codification.
To analyze the consumption and issues from stock
records and establishing norms.
To highlight abnormal consumption, accumulation,
obsolescence and surpluses.
To arrange for periodic review, physical verification,
and ensure proper accounting.
277
To supervise for smooth functioning.

Choosing the most suitable

storage system
Any storage system is a compromise between
the use of space and the use of time. The basic
systems of storage are:
Fixed location
Random location
Zoned location
Fixed location means that stock can be found
immediately without a complex system of
recording but there can be a considerable
waste of space.
278

Random location means space is better utilized, but

accurate and elaborate records have to be kept about
where the materials are.
Zonal location means that goods of a particular group
are stored in a given area. They may be either
randomly stored in a zoned location or stored
according to fixed location.
A large mechanized stores is characterized by
grouping together the fast moving or high turnover
goods, and medium and slow moving items.
Fast moving materials are usually positioned near the
input and output end of a store with the objective of
reducing travel time and thus speeding the process
279
throughout.

Centralization and
Decentralization of Stores
Centralization helps to ensure economy, effect
better control, reduce manpower needs and is
suitable for small installations.
Centralization makes it difficult to provide
service to various work centres scattered in
different locations.
Decentralization on the other hand is
advantageous to workshops lying scattered in
wide areas so that the various stores may be
280
kept near production shop floors.

Variety Reduction
Many times purchases are made to meet urgent
requirements and these materials become slow moving
or even totally dead stock within a short period.
Quite often, purchases are not linked with stock
availability because of the fact that many items are not
properly identified and included in the stores catalog.
Variety reduction would require
- Periodic review of non-moving and slow moving
items.
- Eliminating non-moving and obsolete items.
- Deliberate elimination of duplicate and unnecessary
items held in the stock.
281

Standardization
Mass production techniques are based on the
principle of uniformity and interchangeability
of many parts, components and materials used
in production process.
Standard products can be manufactured on a
mass scale and their production cost can be
kept to minimum.
Standardization leads to cheaper and easier
procurement and the cost of replacement can
also be reduced.
282

 In India, Bureau of Indian Standards/ Indian Standards

Institution is the national body that deals with
standardization at national level.
The standardization can be done in respect of products,
processes, materials, parts, components etc.
With the help of frequency distribution, it is easy to
ascertain the sizes and types most frequently used and
which can be retained as standard sizes and types.
Standardization enables industry to have a better control
on inventory, achieves economy of materials and parts,
avoids wastages, plans for disposal of unwanted stock,
and overall reduction in stocks.
Through standardization and variety reduction,
rationalized codification becomes becomes easier. 283

Classification and Codification

Invariably, a large number of unnecessary items in
inventory can be traced to different and misleading
nomenclature, faulty numbering and use of trade or
brand names to describe the same items.
It is useful to classify the materials in relation to their
basic characteristics thereby bringing together all closely
similar materials and parts together irrespective of their
functions.
A standard numerical coding is used for the purpose of
purchase, stores and issue thus resulting in reduction of
long, and ambiguous descriptions.
284

Ways to classify and codify

The first step is to know the basic nature and

characteristics of all materials used in an
enterprise.
Classify the materials in broad categories and
then group and subgroup them in logical
progression of kinds, types and sizes etc. The
examples are:
(a) Raw materials
(b) Semi-processed materials
285
(c) Mechanical products and equipments

(c) Mechanical products and equipments

(d) Electrical products and equipments
(e) Chemicals, allied products, chemical
processing equipments
(f) Laboratory chemicals and supplies
(g) Office equipments and supplies
After classification as per the nature and use, a
code or symbol is allocated to each of them.
The code or symbol should be simple, flexible
and adaptable to changing situations.
286

Codification System
1.
2.
3.
4.

Alphabetic system
Numeric system
Decimal system
Alphanumeric system- a combination of
alphabetical and numeric system
5. Brisch system
6. Kodak system
287

Alphabetical system
Alphabets become the basis for allotting the
codes. The first alphabet of the name of the
material becomes the starting point of
codification.
This system is suitable when the numbers of
items are not very large and also availability of
codes is limited.

288

Class

Group

Code

Iron

Bars, M.S.

IR-BS-MS

Iron

Bars, Bright Steel IR-BA-BS

Iron

Melted

IR-MEL

Iron

Mould

IR-MLD

Iron

Ore

IR-OR

Iron

Pig

IR-PG

Iron

Sheets, M.S.

IR-SH-MS

Iron

Sheets, Bright
Steel

IR-SH-BS

Raw Materials

289

Numerical System

System is based on numbers-either simple numbers,

or block number or dash or stroke numbers.
(a) Simple numbers
- One number is alloted against each material, while
certain other numbers are kept as provision of other
items.
(b) Block number
- The numbers are designed so that materials of similar
nature or block come under one block e.g. raw
materials under one block of 1-1000; consumables
and lubricants under 1001-2000; packing materials
290
under 2001-3000.

Materials

Simple number

Raw materials

01

Iron ore

05

Iron. melted

07

Iron, bright

08

Iron, steel

09

Iron, pig

06

Iron sheets

10

Iron, bars

11

Iron, mould

12
291

Materials

Block numbers

Raw materials

1-1000

Iron ore

1-10

Iron, pig

11-20

Iron, melted

21-30

Iron, bright

31-40

Iron, steel

41-50

Iron, sheets

51-60

Iron, bars

61-70

Iron,mould

71-80
292

Codification according to
the Category of materials
Iron

1-100

Steel & allied products

101-200

Copper

201-300

Nickel

301-400

Alloy

401-500
293

(c) Dash/Stroke number

Materials
Raw materials
Iron ore
Iron, pig
Iron melted
Iron, bright
Iron, steel
Iron, sheets
Iron, bars
Iron, moulds

Dash/stroke number
15
15-1 or 15/1
15-2, or 15/2
15-3, or 15/3
15-4, or 15/4
15-5, or 15/5
15-6, 15/6
15-7, 15/7
15-8, 15/8
294

Decimal system
Within the range of ten numerals 0-9, some
significance is attached to every digit in the
code and whole range of items in stores can be
codified.
Generally 7 to 8 digits are found to be
sufficient for all practical purposes but it may
be extended up to 10 digits in order to
accommodate any other characteristics of the
material.
As a first step, the entire range is classified
under broad categories.
295

 Further, classification is done for type, size,

grade, shape, conditions, etc.
The first digit signifies the broad class, the
second digit signifies the group, the third digit
signifies the sub-group. fourth digit signifies
the type, the fifth digit signifies the size, sixth
digit signifies the grade, seventh digit signifies
the shape, the eighth digit signifies the
condition etc.
Generally the primary classification should
not be extended to more than 10 broad classes.
296

Materials

Code
Materials
Number

Code
Number

Raw Materials including

ferrous & non-ferrous
metals

Electrical equipment,
accessories and fittings

Steel sections-rolled, flat

and square

Capital machinery
6
including spares and parts

Casting and forgings

Jigs, tools and fixturesproduction stores

Mechanical assemblies,
sub-assemblies,
components and
accessories

Fuels, lubricants,
8
chemicals and allied items

Work in progress,
comprising of sub
assemblies, components
and semi finished goods.

Miscellaneous stores

10

297

Combined alphabetic and

numeric system
Main class

Sub group-

Subgroup-

Code

Carbon

CB

Carbonic acid

11

CB-11

Carbon Monoxide

12

CB-12

Carbon Dioxide

13

CB-13

Manganese Acetate

21

MN-21

Manganese Dioxide

22

MN-22

Manganese Oxalate

23

MN-23298

Manganese

MN

Main class

Subgroups-I

Subgroups-II

Code

Phosphorus

PH

Phosphoric Acid

51

PH-51

Phosphorus Pentoxide

52

PH-52

Phosphorus Trioxide

53

PH-53

Sulpherous Acid

81

SP-81

Sulphuric Acid

82

SP-82

Sulphur Oxide

83

SP-83

Sulphur

SP

299

Brisch System

(a)
(b)
(c)
(d)
(e)

Quite similar to numerical system in which 7-digit

numerical code assigned to each item.
The materials are grouped as under:
Primary materials
Over the shelf items purchased
Components according to companys own design.
Assemblies and subassemblies.
Tools, jigs and fixtures etc.
Materials are further subdivided according to their
class characteristics.
By establishing differences at various levels, thy are
300
again sub-divided at sill lower levels.

Kodak system
First step is to classify on the basis of purchase
category.
Class code

Materials

00-10

Raw and semi-processed materials

11-20

Machinery and mechanical equipment

21-30

Mechanical products and loose tools

31-40

Electrical products and equipments

41-50

Chemicals and chemical processing

equipments

51-60

Chemicals and allied products

61-70

Furniture and fixtures

301

71-80

Office, laboratory equipments

and stationeries

81-90

Fuels and lubricants

302

 In the second step, sub classification details of

the materials, say, class code 21-30 i.e.
mechanical products and loose tools is
provided.

303

Principals of Logistics
Information

Information flow is a key element of logistics information.

The common forms of logistics information are:
Customer and replenishment orders
Inventory requirements
Warehouse work orders
Transportation documentation
Invoices.
Traditional paper-based information flow results in slow,
unreliable, and error-prone information transfer thereby
increasing operating cost and decreasing customer
satisfaction.
304

 As technology costs are declining and usage is

easier, logistics managers are managing
information electronically at reduced logistics
expenses with increased coordination resulting in
enhanced services by offering better information
to customers.
The specific technologies include electronic data
interchange (EDI), personal computers, artificial
intelligence, wireless communications,bar coding
and scanning.
305

 For effective logistics information, timely and accurate

information flow is critical because of the following three
reasons.
(1) Customers perceive that information about order status,
product availability, delivery schedule and invoices is
necessary element of total customer service.
(2) Information can reduce inventory by minimizing demand
uncertainty.
(3) Information facilitates allocation of resources for
achieving strategic advantage.

306

Information Functionality

1.
2.
3.
4.

Logistics information system links logistics

activities into an integrated process that is built
on the following four levels of functionality.
Transaction system
Management control
Decision analysis
Strategic planning
307

Transaction system:
Initiates and records the individual logistics
activities in a sequence as given under:
1. Order entry
2. Inventory assignment
3. Order selection
4. Shipping
5. Pricing
6. Invoicing
7. Customer inquiry
308

Customer order
receipt

Inventory assigned
to the order

Printing of
invoice for
payment

Directing material
handlers to
select the order

Movement, loading
and delivery of order

309

Management control
Focuses on performance measurement and
reporting.The common performance measures
include:
1. Financial
2. Customer service
3. Productivity
4. Quality
A few examples are:
(a) Transportation and warehousing cost per kg.Cost measure
310
(b) Inventory turnover-Asset measure

(c) Case fill rate-Customer service measure

(d) Cases per labour hour-Productivity measure
(e) Customer perception-Quality measure.
Decision analysis
Vehicle routing and scheduling
Inventory management
Facility location
Operational trade-offs and arrangements e.g.
vertical integration versus third party
outsourcing.
311

Strategic planning
Strategic alliances with various value chain
members.
Development of firm capabilities and
scanning market opportunities.
Customer responsiveness to improved
services.

312

Principles of designing LIS

applications

1.
2.
3.
4.
5.
6.

The principles underlying the designing of

logistics information systems applications are:
Availability
Accuracy
Timeliness
Exception-based LIS
Flexibility
Appropriate format
313

1. Availability
- Rapid availability of information is extremely
necessary to respond to customers and improve
management decisions.
- Customers frequently need quick access to
inventory and order status information regardless of
managerial, customer, or product order location.
- Many times it warrants the need for decentralized
logistics operations so that information system is
capable of being accessed and information updated
from anywhere in the country or even the world.
- Information availability reduces substantially the
operating and planning uncertainty.
314

2. Accuracy
- Logistics information must accurately reflect
both current status and periodic activity for
customer orders and inventory levels.
- Accuracy is the degree to which LIS reports
match actual physical counts or status.
- In case of low consistency between physical and
information system inventory levels, buffer stock
becomes necessary to accommodate the
uncertainty.
- Increased
information
accuracy
reduces
inventory requirements.
315

3. Timeliness
- Timeliness refers to the delay between the occurrence
of an activity and the recognition of that activity in the
information system.
- Logistics information must be timely to provide quick
management feedback.
- Timely information reduces uncertainty and identifies
problems, thus reducing inventory requirements and
increases decision accuracy.
- When a continuous physical product flow may exist
such as work in process to finished goods,
information system providing inventory status may be
updated on an hourly, shift, or daily basis.
- Real time or immediate updates are timelier but result
316
in increased record-keeping efforts.

4. Exception-based LIS
- LIS should be strongly exception oriented and utilized
to identify decisions that require management
attention, particularly in respect of very large orders,
products with little or no inventory, delayed shipments,
and declining operating productivity.
5. Flexibility
- LIS must be able to provide data tailored to meet the
requirements of a specific customer.
- For example, some customers may want invoices
aggregated across certain geographic boundaries or
divisions or retailer.
- Retailer A may want individual invoices for each
store, while Retailer B may desire an aggregated
317
invoice that totals all stores.

6. Appropriate Format
- Logistics reports and screens must contain right
information in the right structure and sequence.
- For example, LIS showing a distribution centre
inventory status with one product and one
distribution centre listed per screen.
(a) This format will require customer service executive
check inventory status at each distribution centre
when attempting to locate inventory to satisfy a
specific customer order.
(b) This implies that if there are five distribution centres,
a review and comparison of five computer screens is
required.
318

(c) Appropriate format would provide a single screen

with inventory status for all fve-distribution centres.
(d) The combined screen makes it much easier for a
customer service executive to identify the best source
for the product.
(e) This can be considered as an appropriate format as
one single screen or report contains and effectively
presents all relevant information for a decision maker.
- An effective format should integrate past and future
information regarding on hand inventory, demand
forecast, and planned receipts for each single tem at a
distribution centre.
319

Logistics Information Systems

Operating Flows
Planning & Coordination
Flows
-Capacity Plan
-Logistics Plan
-Manufacturing Plan
-Procurement Plan

-Order management
-Order processing
-Distribution operations
-Transport & shipping
-Procurement

320

A. Planning & Coordination Flows

- Capacity Plan
Developed keeping in mind the internal and external
manufacturing , warehousing, and transportation
resources.
For each product, capacity plans determine the
where, when and how much for production,
storage, and movement.
Capacity problems can be resolved either by resource
acquisition or alliances i.e. contract manufacturing or
facility leasing.
Estimating production capacity requirements through
prior scheduling or contract manufacturing helps in
managing capacity constraints.
321

 Postponement of production or delivery i.e. by

delaying production and shipment until specific
requirements are known and capacity can be
allocated is another method of solving such
problems.
Sometimes, it may become necessary to offer
customer incentives such as discounts or
allowances in order to postpone delivery.
Capacity constraints have a major influence on
monthly or weekly production for each
manufacturing location.
322

- Logistics plan
The future logistics requirements are based on
forecasts, customer orders and sales promotions.
The forecasts are based on sales and marketing
inputs in conjunction with historical activity levels.
Customer orders include current orders, future
committed orders, and contracts.
Mathematically, logistics requirements can be
computed as
Forecasts(sales/marketing inputs, historical trends)
+ Customers orders(current orders, future committed
orders, contracts)+ Promotions(sales promotion,
advertising)= Period demand Inventory on handPlanned receipts = Period logistics requirements. 323

 Logistics requirements must be integrated with

both capacity constraints and manufacturing
requirements to achieve the best performance.
- Manufacturing Plan
Facilitate scheduling of production resources and
resolve day-to-day capacity bottlenecks within the
materials management system.
Primarily, bottlenecks may result from raw
materials shortages or daily capacity limitations.
Manufacturing requirements determine the master
production schedule (MPS), manufacturing
requirement plan and consequently material
requirement plan(MRP-I/II).
324

 MPS defines weekly or daily production and

machine schedules, whereas MRP coordinates
the purchase and arrival of materials and
components to support the manufacturing plan.
Both logistics requirements and manufacturing
requirements must operate in parallel.
- Procurement Plan
Procurement plan schedules material releases,
shipments, and receipts.
The requirement schedule is used for purchase
negotiations and contracting.
325

B. Operating Flows
Operating flows include the information
activities required to receive, process, and
ship customers orders and to coordinate the
receipt of purchase orders. These include:
1. Order management
2. Order processing
3. Distribution operations
4. Transportation and shipping
5. Procurement
326

- Order management
Involves entry and maintenance of customer
orders using communication technologies such
as mail, phone, fax, or EDI.
Offers information regarding inventory
availability and delivery dates to establish and
confirm customer expectations.
Order management in combination with
customer service representatives form the
basic interface between the customer and
enterprise LIS.
327

- Order processing
Involves assigning and allocating available inventory
to customer and replenishment orders.
Allocation may take place on a real time basis or
batch mode.
Batch mode means orders are grouped for periodic
processing, such as day or shift.
Order processing also includes selection of order
from distribution centre or warehouse and pack it for
shipment.
Order processing also includes selection of order
from distribution centres or warehouses and pack it
for shipment.
328

- Distribution operations
Distribution operations must have synergy with
inventory control and warehousing systems.
LIS in distribution operation would include product
receipt, material movement, and storage and order
selection.
In a batch environment, LIS guides tasks done by
each material handler handling forklifts, pallets etc in
the warehouse.
In a real-time time environments, the technologies
like bar coding, automated handling equipment are
used to reduce time elapsed between the decision and
action.
329

- Transport and shipping

The activities include shipment planning,
scheduling, shipment consolidation, transport
documentation generation, and carrier
management.
Historically, transportation and shipping
emphasizes generation of documentation and
rate generation.
Modern LIS in transportation and shipping
lays more stress upon auditing, routing and
scheduling,
invoicing,
reporting
and
330
performance monitoring.

- Procurement
Includes management of purchase order
preparation, amendment, release, vendor
evaluation and vendor rating.
Procurement LIS must be able to track and
coordinate material receipt, facility capacity,
inbound and outbound movements, and
performance measurement.

331

Application of Information
Technology
The specific technologies that have widespread
use in logistics are:
1. Electronic Data Interchange (EDI)
2. Personal Computers
3. Artificial intelligence
4. Communication technology
5. Bar coding and scanning
332

1. Electronic Data Interchange

Intercompany
computer-to-computer
exchange of business documents in standard
formats.
Determines capability of communicating
information between two organizations
electronically instead of traditional mail,
courier or even fax.
LIS would consist of real time data on
inbound material flows, production status,
product inventories, customers shipments and
333
incoming orders.


(a)
(b)

(a)
(b)
(c)
(d)

Can be visualized in two different perspectives viz.

external perspective and internal prospective.
External perspective includes need to communicate
order shipment and billing information with vendors,
financial institutions, transport carriers, and customers.
Internal perspective includes exchange of information
on production schedule and control data.
Benefits of EDI are:
Increased internal productivity though faster
information transmission as well as reduced
information redundancy.
Better accuracy by reducing the number of times and
individuals involved in data entry.
Improved channel relationship.
334
Increase ability to compete internationally.

(e) Reduced labour cost associated with

printing, mailing, and handling paper-based
transactions, telephone and other clerical
activities.
2. Personal computers
Low cost and high portability with a
capability of bringing accurate and timely
information to the decision maker whether in
office, at the warehouse, or on the road.
Responsiveness and flexibility offered by
decentralized PCs results in more focused
335
service capability.

The use of LAN , WAN and Client/server

architecture offers benefits of decentralization,
responsiveness and flexibility throughout the
enterprise.
The client/server network can globally track
inventory
in
motion,provide
shipment
information to the customers when desired and
also facilitate decisions regarding facility
location, inventory analysis, routing and
scheduling.
The decisions are invariably in respect of
(a) Which markets to serve?
(b) Which product to pick next in the warehouse?
336

(c) Driver reporting and deliver information.

(d) Reporting vehicle location
(e) Identifying lowest-cost fuel stop.
3. Artificial Intelligence
Aimed at making computers imitate human
reasoning and are more concerned about
rationalizing rather than numeric processing.
The applications are:
(a) Carrier selection
(b) International marketing & logistics
(c) Inventory management
337

4. Communication technology
Application of radio frequency, satellite
communications, and image processing
technologies can relate quickly to the product
movement and decentralization.
(a) Radio frequency:
- used within relatively smaller areas such as
distribution centres to facilitate two-way
information exchange
- Real-time communication with material
handlers such as fork lift drivers and order
338
selectors.

- Updating instructions and priorities to fork lift

drivers on real time basis.
(b) Satellite communication
- Useful for providing a fast and high volume
information around the globe.
- Communication dishes on the top of vehicles
allow communication between driver and
shippers.
- Provides up-to-date information regarding
location and delivery and allows dispatchers
to redirect trucks in response to need or traffic
339
congestion.

- Used by the retail chains to transmit quickly daily sales

to headquarters that helps in activating store
replenishment and also to provided input to marketing
regarding local sales pattern.
(c) Image processing
- Relies upon fax and optical scanning technology.
- Used in transmission of fright bill information
- Proof of delivery receipt
- Bills of lading.
As the consignment gets delivered to customers,
supporting documents are sent to image processing
locations where it is electronically scanned and logged
onto the system.
340

 Electronic images of documents are then

transmitted to main data centre where they are
stored on optical laser disk and customers can
access the documents through computer
linkages or phone call to the service
representatives.
As the customers experience the competitive
benefits of real time information transfer, there
will be increase demand for this communication
technology.
341

Information sharing though

geostationary satellite
Geostationary satellite

Retail
store

Head office

Transport
company
342

 Geostationary
satellite
communication
technology has facilitated real time
information transmission and sharing amongst
the company, its transporters, and retail
outlets.

343

5. Bar Coding and Scanning

Typical applications include tracking receipts at the
warehouse and sales at the retail stores.
Bar coding involves placement of readable codes on
the items, cartons, containers and even railcars.
These bar codes distinguish package size and flavours
and reduce errors when receiving, handling, or
shipping product.
While the requirements of retailers are individual
item, the shippers and carriers are concerned with
contents of pallets, containers or cartons.
It is important to include as much information as
possible in the smallest area.
344

The limitation, however, is smaller and more

compact codes increase the potential for scanning
errors.
A scanner optically collects the bar code data and
converts them to usable information.
The applications of bar code and scanning are:
(a) Point-of-sales (POS) in retail stores, receipts,
accurate inventory control, tracking of each stockkeeping unit (SKU) sold, replenishment, and
providing timely information beneficial to all
channel members.
(b) Facilitating material
handlers track product
movement, storage location, shipments and
345
receipts.

Impact of IT on Logistics
Logistics
+
requirements

Current
Information
Technology

= Competitive
edge

Continuous interaction between the logistics

requirements and the information technology
accelerates integrating complete logistics activities
in an organization and consequently giving company
a competitive edge.
346

Enterprise Resource Planning

(ERP)
ERP is an information technology industry
term for integrated, multi-module application
software packages designed to serve and
support several business functions across an
organization.
A strategic tool that helps the organization
improve operations by integrating business
processes and helping to optimize the
allocation of available resources.
347

 These systems are commercial software packages that

facilitate collection and integration of information
related to various areas of an organization such as
finance, accounting, human resources, inventory,
procurement, and customer services.
ERP acts as a core information centre of the
organization that leads to better understanding of its
business, direct resources, and plan for future.
The systems enable the organization to standardize
and improve its business processes to implement best
practices for their industry.
The popular ERP packages in the market are SAP,
Oracle Financials, BAAN, Peoplesoft, and JD
348
Edwards.

Lean Manufacturing

Lean manufacturing is a business initiative to

reduce waste in manufactured products.
The waste may be from the production
process or from any part of the organization.
The basic idea is to reduce the cost
systematically throughout the product and
production process.
Basic concepts an organization must have
before implementing lean manufacturing are:
(a) Continuous flow
(b) Standardized flow
349

(c) Value stream

(d) Value added activities
(e) Pull production
Continuous flow
- Refers to the flow of material from inventory i.e. raw
materials to the finished goods stage.
- Processing of the materials from raw material to the
finished good stage should be continuous and there
should not be any delays or waiting time in between as it
leaps up to the increase in cost of production for a
particular product.
- Waiting time can occur due to various reasons such as
change in set up, replacing a broken or damaged tool etc.
350

- Thus the aim of organization should be to reduce the

waiting time and to make manufacturing process a
continuous process without any stoppages in between
for the flow of materials from the raw material stage
to the finished goods stage.
Standardized work
- Refers to improved layout, work sequence, and work
methods.
- Involves training of people to develop efficient work
flows considering safety, quality, quantity and use of
resources.
- Standardized work would eliminate wastages thereby
improving work.
351

Value Stream
- All activities required to bring a physical product through
the manufacturing and other business processes starting
from acceptance of raw materials or components to
delivery of the finished product. These would include
(a) The delivery of the raw materials
(b) The quality procedure to be followed to accept the
material.
(c) The loading of the raw material on the poduction line.
(d) The manufacturing of tools for the production of the
finished product.
(e) The set up time required for manufacturing a particular
product.
(f) The removal of the finished product from the production
352
line and its packaging.

(g) The value stream is mapped to analyze all steps from

start to finish and redesign them to ensure that they
add value to the final product.
Value-added activities
- Activities in the value stream are identified as valueadded (VA) or non-value added (NVA).
- VA activities are those activities that add value to the
product and the value addition can be in any form like
the machine that converts the raw materials to the
finished products.
- NVA activities are those activities which do not add
any value to the finished product like the movement
of the semi-finished good from one machine to
another.
353

- These activities should be eliminated as much

as possible as instead of adding value to the
finished product they add more cost to the
product.
- Some NVA activities are unavoidable such as
quality checking procedures at various stages
of the manufacturing process.
- These quality procedures even though, do not
add any value to the final product, are required
as they are very much essential for the finished
product to be of the required quality.
- Once mapped, the value stream activities are
identified as VA or NVA.
354

Pull production
- Materials are supplied when needed, avoiding
unnecessary WIP and the flow of materials through
the system.
- This ensures that work is performed only when
required, there is no waiting time and leading to
reduced production cost and consequently the cost of
finished product.
- The main concern here is the availability of the right
material at the right time.
- This may be a problem for a company which does not
have a vendor relationship programme in place as the
vendors might delay the delivery of material resulting
in a delay in production which in turn leads to the
increase in the cost of the product.
355

 Lean manufacturing takes into account all the

concepts mentioned and tries to decrease the
the cost of production which in turn leads to
decrease in the cost of the finished product.
Lean addresses the waste of time during set up
by trying to minimize the set up time rather
than minimizing the number set ups.
Rather than reducing the number of products
or putting new machines on the shop floor, it
tries to minimize the set up time by analyzing
the requirements of different components for
all the set ups on a particular machine.
356

 Lean manufacturing coordinates with all the supply

lines-internal and external-and links all parts of value
stream thus saving time and minimizing production
delays
Internal supply line corresponds to the WIP material
being shifted from one machine to another or from
stores to a machine or raw materials from the
inventory to the production line.
The external supply line corresponds to the supply of
raw materials by vendors on time so that the
machines can be put into production as soon as the
production plan is complete.
The identification of VA and NVA activities at all
parts of value stream is carried out extensively and
focus is on how to minimize NVA activities.
357

 Emphasis is also on pull production so that the

waiting time for the materials before they are
loaded on to a machine for processing is
reduced as it helps in reducing the cost of
production.
Thus, the basic idea of lean manufacturing is
to reduce waste and Toyota is pioneer in
developing and implementing this system
popularly known as Toyota Production
System.
358

Misconceptions and Misgivings

of Lean Manufacturing
Some of the most frequent misconceptions and
misgivings of lean manufacturing are:
(1) Lean manufacturing should give results as soon as it is
implemented.
(2) It is confined to an internal implementation in an
organization and should not be extended to suppliers.
(3) Leads to retrenchment of personnel as the very idea of
going lean is to streamline the processes and remove
waste from the system.
359

 How it functions is the not the responsibility of

the employees of an organization but only of
those few who are implementing lean
manufacturing in the organization.
It can function only on the shop floor and
cannot be applied to the other activities of an
organization.
If one technique is successful in implementing
lean in one organization, it has to be successful;
in another organization as well.
It provides solutions to all the problems.
360

Lean Manufacturing and SCM

In world of lean, manufacturing companies try to
produce only what has been demanded by the
customer, and only when that product is required.
But why should it stop there? What about the rest of
the supply chain?
To optimize the benefits of lean throughout the
supply chain, it is essential for manufacturing
company to build a partnership with its suppliers, as
if they were departments within their own company.
The partnership works on the premise that
manufacturing company will pull only what it
consumes and nothing more.
361

 The suppliers replace what manufacturing

company has consumed and nothing more.
In this way inventories are maintained at their
minimum for both supplier and customer.
Achieving this level of trust and efficiency
with companys supplier will require frequent
communication and extensive sharing of
information.
Successful partnership would result from
inviting each other to strategic planning
sessions, attending each others events for
removing waste/ process improvements and
other joint activities.
362

 To create an effective supplier-customer

relationships, it is advantageous to develop a
two-way service level agreement (SLA).
SLA forces both parties to clarify the
relationship by establishing the type and level
of service to be provided by your supplier and
what types of quality inputs required from
you.

363

Key Approaches to make lean

successful throughout Supply Chain
Manufacturing companies must share information to the very
detailed level to help suppliers see the savings potential.
Manufacturing companies must be committed to long-term
implementation of lean strategies and not just a flavour of
the month.
Manufacturing companies must give support t its suppliers
support in terms of training and troubleshooting.
Manufacturing companies must demonstrate the potential
benefits of lean not only for their own company but also for
all their suppliers covering both bottom line and service
points of view.
364

Difference between mass production

& lean production
Attributes

Mass production

Lean production

Customer satisfaction Makes what

engineers want in
large quantities at
statistically
acceptable quality
levels.

Makes what
customers want with
zero defects and only
in quanities wanted
by the customers.

External relations

Based on price

Based on long-term
relationship building.

Information
management

Based on reports
generated by and for
managers.

Rich in information
based on control
systems maintained
by employees. 365

Culture

Obedience, loyalty
and subculture of
labour strife

Based on long-term
development

Production/
Purchases

Large inventories,
Massive purchases,
minimal skill,
assembly line,
batches

Cell type layout, zero

inventory, single
piece flow.

Engineering

Isolated genius model Team based model

Demand Management Forecasting

Customization

366

 The basic element are waste elimination,

continuous one piece workflow, and customer
pull.
Focus of above in the areas of cost, quality
and delivery forms the basis for a lean
production system.
Benefits of lean manufacturing
Waste reduction by 80%
Production cost reduction by 50%
Manufacturing cycle time decreased by 50%
Labour reduction by 50% while maintaining
or increasing throughput.
367

 Inventory reduction by 80% while increasing

customer service levels.
Capacity in current facilities increase by 50%.
Improved cash flow through increasing
shipping and billing frequencies.
Components of lean production system
Flexible manufacturing
Just-in-time
Outsourcing
Lean supply chain
ERP & CRM
E-business and EDI.
368

Integration of Lean manufacturing and

SCM.
1. Reduce the supply base
- Reduce the number of suppliers for each
commodity of purchases to a minimum, a
few or often only one.
2. Develop strategic long term partners
- Develop supplier partners, especially in the
commodities key to the companys growth
and future success.
- Plan and execute for a long term relationship
369
and exchange information.

3. Manage supplier with commodity teams

- Involve cross functional teams for strategic
issues with key suppliers.
- Above will help in considering total cost than
immediate price in purchase decisions.
4. Certify suppliers
- Create and use a certification process that
challenges suppliers and make them proud to
be certified.
- Ensue that the certification process contains
the criteria important to your company.
- Recognize certified suppliers publicly.
370

5. Connect to suppliers with Internet Technologies

- Exchange data pertaining to quality, schedules,
engineering change, prototypes and pilot runs, return
goods, order status, capacity planning, etc.
- Customize web page for key suppliers.
6. Collaborate with suppliers
- Make buying decisions based on total cost of
ownership.
- Inform suppliers as soon as new orders arrive.
- Eliminate incoming inspection.
- Buy complete, tested subassemblies.
- Let suppliers choose where to buy components from
an approved list.
371

- Give incentives to companies to locate their

plants nearby to reduce delivery time and
encourage frequent , small daily deliveries.
- Train and help suppliers to be compatible with
their production systems.
- Certify suppliers and eliminate incoming
inspection.
- Let
suppliers choose where to buy
components from an approved list.
7. Outsource for right reason
- Focus on ore competencies and outsource the
rest.
372

- Purchase completed assemblies, tested and

ready to go on the assembly line.
- Allow suppliers to participate in design and
subsequently build and test assemblies.
- Provide suppliers drawings, blue prints and
other information quickly.

373

Supply Chain Vulnerability &

Ethical Issues

The fundamental principles are:

Loyalty to your organization.
Justice to those with whom you deal.
Faith in your profession.
Demonstrate loyalty to the employer by diligently
following the lawful instructions of the employer,
using reasonable care in exercising granted authority.
Avoid any personal business or professional activity
that would create a conflict between personal
interests and the interests of the employer.
374

 Avoid soliciting or accepting money, loans, or

preferential discounts, gifts, entertainment,
favours or services from present or potential
suppliers that might influence, or appear to
influence, supply management decisions.
Handle confidential or proprietary information
with due care.
Promote positive supplier relationships
through courtesy and impartiality.
Avoid improper reciprocal agreements.
Conduct supply management activities in
accordance with national and international
375
laws, customs and practices.

Recommended guidelines
Situations may occur in which, through unanticipated
circumstances, a business relationship transpires with
a personal friend. The perception as well as potential
of a conflict of interest should be discussed with
management, and a reassignment of procurement
responsibility should be considered.
Business meeting locations should be carefully
chosen. Environments other than the office may be
perceived as inappropriate by the business
community or by co-workers.
Conversation that centres around excessively on
personal affairs should be avoided.
376

 Obtain the maximum value for monies expended as

agent for the employer.
Avoid using the employers purchasing power to
make purchases for specific individuals nonbusiness
use.
Conduct to be Avoided
Engaging in business or employment in an
organization that is a supplier to the employer
Lending money to, or borrowing money from any
customer or supplier.
Using the organizations name (unless authorized) to
lend weight or prestige to sponsorship of a political
party or cause, or endorsing the product or service of
377
another organization.

 Ownership of stocks in a supplier of goods or services

should be reported to the employer for review to avoid the
potential for impropriety. Interests by members of the
professionals immediate family are considered to be of the
same significance as direct ownership.
How to deal with issues of influence?
Exercise extreme caution in evaluating the acceptance of
gifts and the frequency of the same.
Establish nominal value in organization policy to address
suppliers offerings of nominal value as a gesture of
goodwill or for public relations purposes.
Refuse gifts exceeding nominal value, and return them with
a polite explanation.

378

 Seek direction of management if it appears that

business relationship may be impaired o appear to be
impaired by refusal of a gift or entertainment.
Occasionally, during the course of business, it may
be appropriate to conduct business during meals.
Such meals should be for a specific business purpose
and frequent meals with the same supplier should be
avoided.
The supply management professional should be in a
position to pay for meals as frequently as the
supplier. Budgeting is recommene for this business
activity.
379

International practices
In some cultures, business gifts, meals, entertainment
are normal and expected while in other cultures,
business is transacted at arms length and business gifts,
meals and entertainment are viewed as inappropriate.
Supply management professionals must understand
such variations and establish policies and procedures to
deal effectively with suppliers from different cultures.
Suppliers also should be informed of organizations
policies with respect to business gifts, meals, and
entertainment.
Supply management professionals should act
courteously to suppliers representatives who may
inadvertently act contrary to organization's policies.
380

Confidentiality & proprietary information

Confidential & proprietary information would
include quotation/ bids, cost sheets, financial
information, wage and salary scales, personal
information about employees, officers and directors,
product design, supply sources or supplier
information etc.
It is the responsibility of the individual sharing
confidential or proprietary information to ensure that
recipient understands his or her obligation to protect
such information.
Supply professionals are cautioned not to divulge
such information unless it is required to be shared.
381

Dealing with reciprocity

When supply management professionals or their
organizations give preference to suppliers because
they also customers or when organization influences
a supplier to become a customer, the professional or
the organization is engaging in a practice known as
reciprocity.
Dealing with a supplier that is also a customer may
not constitute a problem if, in fact, the supplier is one
of the best sources.
Supply professional should not get influenced by
sales or marketing professionals to engage in
reciprocity.
382

List of suppliers should not be provided to sales or

marketing department for their use in pursuing
improper reciprocal arrangement.
When
making
sourcing
decisions,
supply
professionals must be especially careful when
dealing with suppliers that are customers.
Applicable laws
Supply management professionals must be aware of
the following laws:
(a) Contract and commercial laws
(b) Trade regulations
(c) Government procurement regulations
(d) Patents, copyrights, trademark laws.
(e) Transportation and logistics laws and regulations
(f) Environmental laws.
383

Outsourcing

Organizations outsource to address specific

business issues and opportunities.
Typically, the issues and opportunities an
organization faces will fall in one or more of
three general categories
(a) Tactical
(b) Strategic, and
(c) Transformational
384

Tactical reasons for Short-term

Outsourcing
Reduce and control operating costs
- Most important tactical reason for outsourcing
is to reduce or control operating costs.
- Access to the outside providers lower cost
structure is one of the compelling short term
benefits of outsourcing.
- Certain research studies have found companies
reporting an average 9% reduction in costs due
to outsourcing.
385

 Freeing capital for investment

- Outsourcing reduces the need to invest capital funds in
non-core business functions.
- Thus, funds are available for investment in core areas.
- Improves financial measurements of the firm by
eliminating the need to show return on equity from
capital investments in non-core areas.
Cash infusion
- Outsourcing sometimes involves the transfer of assets
from the customer to the service provider.
- Equipments, facilities, vehicles, and licenses used in
current operations are sold to the service provider as a
part of transaction resulting in cash payment.
- This cash can be used in other parts of the operation.
386

 Unavailability of resources internally

- Companies outsource because they do not have access
to the required resources-human, capital or intellectual.
- For instance, if an organization is expanding its
operations, especially into new geographic area,
outsourcing is viable and important alternative to
building the needed capability from the ground-up.
Functions difficult to manage or out of control
- Introducing best in class management and business
processes a service provider offers can be quick way to
bring control to a situation.
387

Strategic Reasons for Long-term

Outsourcing

Improve business focus

- Allows the company focus on broader business
issues while having operational details assumed
by an outside expert.
Provides access to world-class capabilities
- Partnering with an organization with world class
capabilities can offer access to new technology,
tools,and techniques that the organization may
not currently possess.
388

 Frees resource for other purpose

- Outsourcing permits an organization to redirect
its resources from non-core activities towards
building knowledge base skills having long term
pay back and impact on innovation.

389

- Better career opportunities for personnel who switch to

the outsourcing provider.
- More
structured
methodologies,
procedures,
procedures, and documentation.
- Competitive advantage through expanded skills.
Provides acceleration to reengineering efforts.
- Outsourcing is a powerful tool for Business Process
Reengineering.
Shared risks & quick response
- When companies outsource they become more flexible,
more dynamic, and better able to adapt to changing
opportunities.
- Companies can respond quickly to customers to resolve
delivery and any other service related issue.
390

Transformational Reasons for

Outsourcing
Helps respond to shortening product life cycles
- Companies facing shortening of PLC are using
outsourcing to concentrate their time and efforts
to market.
Redefines relationships with suppliers and
business partners.
- Outsourcing transforms the entire supply chain
by shortening the chain and provides additional
services transforming the customer experience.
391

 Helps in surpassing the competitors

- Amazon.com changed retailing due to new technology,
and a cadre of outsourcing providers.
- Change was effected by partnering with the third party
providers who could manage call centres, process
orders, and fulfill orders.
Helps to enter new markets with reduced risks
- Firms move into new markets or new opportunities with
little experience, particularly in the areas of ecommerce.
- Service providers like IBM Global Services are helping
brick and mortar firms create entirely new customer
base on-line.
392

Concept of Outsourcing
When an enterprise identifies a need for a specific
product or service, it has to decide whether to make the
product and perform the service internally (make) or to
purchase the requirement from an external source
(buy).
Make-versus-buy decision centres around the economic
trade-off associated with each option.
Outsourcing decisions examine not only the firm that
has the lowest cost but also which one can produce or
market the product better or perform superior service.
Calls for assessment of strategic core competency. 393

 For instance, for a firm to evaluate whether to own a

private fleet of trucks or outsource by hiring carriers,
not only the current rates and costs are important but
also the long-term cost trends.
Specialization
Outsourcing decision is taken by considering the
specialized skills that differentiate the company from its
competitors.
For instance, a transport company can implement a
satellite tracking service capable of quickly pinpointing
the location of a truck so that it can provide customers
with accurate delivery status information.
This technology will provide the transport company a
unique competitive advantage for customers who value
the availability of instantaneous information tracking.
394

 Thus, the company will stand to gain by

outsourcing transportation by obtaining
specialized skills rather than develop the ame
capability internally.

395

Logistical Measurement
In order to optimize the performance of logistics system
it is essential to evaluate the same and control it.
To have a better track of logistical system we need to
divide the measurement into:
- Internal performance , and
- External performance.
Dimensions of Performance measurement
(1) For performance measurement, first step is to improve
the quality of information that must be obtained to
measure, compare and guide logistical performance.
396

(2) Secondly, the old reporting formats need to be

redesigned to take advantage of the new
computer-based control systems.
Objectives
Objectives for developing & implementing
performance measurement system.

Monitoring

Controlling

Directing

397

 Monitoring
- Measures and tracks the historical logistics performance for
reporting to management and customers.
- Typical monitoring includes service levels and logistics cost
components.
Controlling
- Measures and tracks ongoing performance and is used to review a
logistics process in order to bring into compliance when it exceeds
control standards.
- For example, transportation damage tracking.
- By having a system periodically reporting the product damage,
logistics management can identify the cause and modify the
packaging or loading process.
398

 Directing
- Refers to the methods designed to motivate
personnel.
- Typically, it would include pay for
performance practice used to encourage
warehouse or transportation personnel to
achieve higher levels of productivity.
An example:
- Consider the material handlers in the warehouse
or delivery boys who are paid for eight hours of
work based on standard production rate.
399

- When the material handlers/ delivery boys

complete the assigned tasks in less than the
allotted time, they are given bonus.
- If the employees require more than the
allotted time, the disincentive is that they are
compensated for the additional time.

400

Perspective of Performance
Measurement
Performance measurement perspective refers to activity
based measures as well as process based measures.
Focus is on individual tasks required to process and ship
orders, efficiency and effectiveness of work efforts.
A.Activity Based Measures
- Emphasize on the individual tasks required to process
and to ship orders such as:
Customers orders entered
Cases received from suppliers
Cases shipped to customers.
401

Objectives of Activity Based

Measures

To record the level of activity

Example: Number of cases
To record the level of productivity
Example: Cases per labour hour.
The typical activity-based measures are:
(1)Order entry time per order
(2)Deliver time per order
(3)Order selection time per order.
402

(4) Inquiry time per order

(5) Order entry time per customer
(6) Order selection time per customer
(7) Delivery time per customer
(8) Order selection time per product
(9) Delivery time per product.
B. Process based measures
The above stated activity based measures record the level
of activity/productivity but do not measure the
performance of overall process of satisfying the
customers.
403

 For instance, the order takers may be rated

high with respect to activity based
measurement on the basis of number of calls
per hour; they may fair poorly in overall
satisfaction process as they fail to listen
carefully to customers.
It is important that performance measures take
into account the overall process perspective.
Thus, process based measures refer to the
customer satisfaction delivered by the entire
supply chain.
404

Internal Performance Measurement

Internal performance measurement focuses on
activities required to serve customers.
Measurement of these activities and the
comparison thereof with the standards is
necessary to improve performance, motivate
and reward employees.
Also focuses on comparing activities and
processes to previous operations and/or
objectives in terms of cost, customer service
and productivity measures.
405

 Cost
- Reflects in percentage, the actual cost incurred to
accomplish a specific operating objective, by business
units like manufacturers, wholesalers, retailers etc.
- The typical cost performance measures are:
(a)Cost per unit
(b) Warehouse costs
( c) Inbound freight
(d) Order processing
(e) Cost as a percentage of sales

406

(f) Administrative costs

(g) Outbound freight
(h) Direct labour
Customer Service
- Focuses on the customer service provided by the
manufacturers, wholesalers, and retailers.
- Typically these services include
(a)Fill rate
(b)Stock outs
(c)Shipping errors
407

(d) On time delivery

(e) Back orders
(f) Cycle time
(g) Customer feedback
- These measures examine a firms relative
ability to satisfy customers.
Productivity measures
- Establishes a relationship (usually a ratio or an
index) between output (goods and/or services)
produced and quantities of inputs (resources)
utilized by the system to produce that output.408

- The typical logistics productivity performance

measures reported as used by manufacturers,
wholesalers and retailers are:
(a)Units shipped per employee
(b)Units per labour (Rs)
(c)Order per sales representative
(d)Comparison with historical data
(e)Comparison with standards set
(f)Productivity index
409

Types of Productivity Measures

There are three types of productivity measures- static, dynamic
and surrogate.
Static productivity measures
- When all the outputs and inputs in a given system for a specific
period are included, it is considered static as it is based on only
one measurement.
Dynamic productivity measures
- When outputs and inputs in a system for one period compare with
another period, the result is dynamic productivity index.

410

- For example: (Outputs 2008/Inputs 2008)

(Outputs 2007/Inputs 2007)
Surrogate productivity measure
- Represents factors that are not typically
included in the productivity but have high
impact on the same.
- Examples are customer satisfaction, profit,
effectiveness, and efficiency.

411

Asset Measurement
Focus is on how fast liquid assets such as inventory as well as
how well fixed assets generate return on investment.
Typical logistics asset measurement measures, (often reported
as percentage), used by manufacturers, wholesalers, and
retailers are:
(a)Inventory turnover
(b)Inventory carrying costs
(c)Inventory levels (no. of days)
(d)Obsolete inventory
(e)Return on net assets
(f) Return on investment
412

Quality Measurement
Refers to process oriented evaluation to
determine the effectiveness of a series of
activities rather than an individual activity.
The typical quality measures, reported as
percentage, used by manufacturers, wholesalers,
and retailers are:
- Frequency of damage
- Damage reported in rupees
- Number of customer
- Cost of returned goods
413

Perfect Order
Perfect order represents ideal performance.
It measures order entry, credit clearance, inventory
availability, accurate picking, on-time delivery,
correct invoicing, payment without deductions.
The perfect order represents the following
standards:
- Complete delivery of all items requested.
- Delivery as required by customer with one-day
tolerance.
414

- Complete
and
accurate
documentation
supporting the order, including packing lists,
bills of lading, invoices.
- Faultless installation, correct configuration, no
damage.
Perfect Order Busters
1.Order entry error
2.Missing information e.g. missing code
3.Non-availability of ordered item
4.Inability to meet shipment date
5.Picking error
415

6. Inaccurate packing list/ documentation

7. Late shipment
8.Late arrival
9.Early arrival
10.Damaged shipment
11.Invoicing error/ overcharging/deductions
12.Errors in payment processing
Best logistics organization report achieving a
55 to 60 per cent perfect order performance,
while most organizations report less than 20
per cent
416

External Performance Measurement

Done on the basis of customer perception
measurement and best practice benchmarking.
Customer Perception Measurement
- Refers to regular measurement of customer
perceptions that is obtained through company or
industry sponsored surveys or by systematic follow
up.
- The most important measurement of customer
perceptions are regarding:
(1)Availability
(2)Performance cycle length
417

3. Information availability
4. Product support services
Consultants and industry associations administer these
measurements.
Best Practices Benchmarking
- Benchmarking may be carried out in relation to operations of both
competitors and leading firms in related and non-related industries.
- Typically, organizations are using benchmarking in important
strategic areas to calibrate logistics operations.
- Benchmarking provides the foundation for customer satisfaction
and the perfect order.

418

The key areas of benchmarking are as under:

Asset management
Cost
Customer service
Productivity
Quality
Technology
Transportation
Warehousing
Order processing
Materials handling
419

The best practice benchmarking focuses on

practices and processes of a comparable
organization.
The areas of review include identifying key
performance measures and tracking historical
and current performance levels.
Methods of benchmarking
1. By taking help from published logistics data
available, periodicals, consultants, and
university researchers.
420

2.

By
benchmarking
privately
against
noncompetitive firms in ones own or a related
industry.
3. By creating a strategic alliance with the
organization(s) that systematically share
benchmark data on a regular basis.
- These alliances require more effort to maintain
but usually provide substantial information.

421

Benchmarking at Xerox
Stage 1
1. Identify what is to be benchmarked
2. Identify comparative companies
3. Determine data collection method and collect data
Stage 2
1. Determine current performance levels
2. Project future performance levels
3. Communicate benchmark findings and gain acceptance
422

 Stage 3
1. Establish functional goals
2. Develop action plans
Stage 4
1.Implement specific actions
progress
2.Re-calibrate benchmarks

and

monitor

423

Logistics Costing
Logistics related costs are dynamic and do not
readily fit with traditional accounting methods.
The accounting difficulties become more
pronounced when trying to determine costs for a
particular operation or a particular customer.
Activity-based costing can be used to help firms
manage and to benchmark logistics costs.
Based on this, one can evaluate their logistics
costs, in total or by function.
424

 Total logistical cost is the basic integrative

concept in logistical network design.
- For example, the use of expensive airfreight in
a situation wherein speed and dependability of
air delivery would reduce other costs such as
warehousing and inventory.
- In such situation, high cost premium
transportation would be justified
by
achievement of lower total cost.

425

Logistics Performance Evaluation

It is important to identify costs associated with
performing specific logistics tasks such as
warehousing expenses for specific SKU.
Though the cost of logistics function is given in
most accounting systems , allocation of logistics
costs broken down to individual activities is not
given.

426

Deficiencies of Traditional Accounting

System
1. Reporting of transportation expenditure
- In many purchasing situations the freight is
not reported at all as a specific costs as many
times products are purchased on delivered
basis, which includes transportation cost.
- Progressive procurement procedures require
expenses for all services including
transportation are identified separately from
purchase cost for evaluative purposes. 427

2. Failure to specify and assign inventory cost

- Insurance and taxes are not identified and
assigned resulting in ambiguity in reporting
inventory cost.
- The financial burden for assets committed to
materials, work-in-process and finished goods
inventory is not identified , measured, and
separated from other forms of capital expense
incurred by the enterprise.
- Brand Manager should be held responsible for
his brands inventory carrying cost.
428

Activity Based Costing

Relies on the concept that expenses need to be
assigned to that activity that consumes a
resource rather than to an organizational budget.
For example, assume that the two products,
produced in the same manufacturing facility,
require different assembly and handling
procedures.
- Out of the two products, one may need
additional equipment or labour for assembly or
packaging operations.
429

- If total labour and equipment costs are allocated to the

products on the basis of sales or the number of units
produced, then both the products will be charged for
additional assembly and packaging operations required
by only one of them.
- This will reduce the profitability of that product which
did not require additional equipment or labour because
this product will be paying for the operations it did not
need.
- In the context of manufacturing, the fair share of all
overheads and operating cost factors should be
identified and assigned to a specific product.
430

 Logistical activity based costing must provide the

managers detailed information about the profitability of
a specific customer, order, product, or service.
Cost Identification
The costs associated with the performance of a logistics
function are:
(1)Forecasting
(2)Order management
(3)Transportation
(4)Inventory
(5)Warehousing
(6)Packaging
431

Logistics Costs

Direct Costs

Indirect costs

Overheads

432

 Direct or operational costs

- Expenses incurred specifically by performance
of logistics work.
- Include cost of transportation, inventory costs,
warehousing costs, and material handling costs.
- For example, Transportation costs for an
individual truckload order can be directly
attributed to a specific order.
- Similarly, direct administrative cost of logistic
operation can be isolated.
433

 Indirect expenses
- For example, cost of capital invested in real estate, cost of
transportation equipment, prime rate of interest, an alternate use
of capital and expected rate of return..
- Indirect costs are attributed to logistical activities by managerial
judgment and are difficult to isolate.
- The question is how indirect cost such as equipment cost
associated with the warehouse should be allocated to the
customer order shipped from the warehouse?
- This can be answered by allocating the cost on the basis of the
average cost per unit.
- As a general rule, a specific cost is not assigned to logistical
factors unless it is under the managerial control of logistics
organization.
434

Cost Formatting
The typical way to format activity-based costs is to
assign expenses to the event being managed.
For instance, to analyze a customer order, all costs that
result from associated performance cycle contribute to
total activity cost.
The areas of analysis in logistics activity based costing
are
1. Customer orders
2. Channels
3. Products
4. Value-based services
435

 Three common ways of formatting are:

1. Functional grouping
2. Allocated grouping
3. Fixed-variance grouping.
Functional grouping
- All expenditures for direct and indirect logistical
services performed in a specified operating time are
formatted and reported under sub-accounts
classification.
- By doing so a total cost statement can be constructed
for comparison of one or more operating periods.
436

 Allocated cost formatting

- Overall logistical expenditure is assigned to a measure of
physical performance.
- This will generate logistical cost per tonne, per unit, per
product line, per order etc.
- This method becomes useful for comparative analysis of
operating results.
Fixed-variance grouping
- Consists of assigning costs either fixed or variable to the
operating expenditure that result from different volumes
of activity.
- The formatting will use use fixed and variable costs
437
separately.

- Fixed costs do not directly vary with volume

such as cost of delivery truck.
- These costs would remain as it is even if the
volume were reduced to zero.
- However, cost of diesel to operate the truck is
variable, as the total cost would depend on how
frequently the truck is driven.
- Use of fixed and variable cost formatting
provides a convenient way to control expenses
in logistical system design.
438

Total Cost Presentation

For the purpose of presenting logistical total cost
analysis, the focus remains on inventory and
transportation.
Both inventory and transportation expenses can
be represented in a format that includes both
activity and functional cost relationship.
For example, communication costs associated
with order processing, warehousing storage and
material handling can be classified under the
inventory umbrella.
439

 In terms of inventory, total cost includes all expenses

related to inventory carrying cost and customer
ordering.
- Inventory carrying cost includes taxes, storage, capital,
insurance, and obsolescence.
- Cost of ordering includes the full expense of inventory
control, order preparation, communications, updating
activities, and managerial supervision.
- The total cost of transportation includes hiring
expenses, accessorial charges, costs related to hazards
incurred in various modes of transport, and legal and
associated administrative expenses.
440

Logistical Operations

Spatial dimension

Temporal Dimension

441

 Transportation deals with spatial (geographical)

dimensions of logistical operation by positioning the
product where the customer wants.
Inventory involves the rate at which the capital assets
are used (temporal) to meet the customer requirements
by having the product available when customer wants
to purchase.
Classification of costs in terms of inventory or
transportation provides for the trade-off determining
the cost justification for logistical network design.
The basic purpose of activity based costing is to give
managers a better perspective of the total cost
associated with the performance of a specific activity.
442

Summary of Costs- Transportation and inventory

account for 80-90 per cent of total logistical expenses

Inventory carrying costs include

Expenses on tax, storage, capital insurance etc.
Costs incurred to avoid obsolescence.
Material handling and packaging
Cost on updating activities including data processing in
receiving, managing and controlling inventory.
Transportation related costs include
- Direct costs such as freight rate and accessorial charges.
- Indirect costs such as the cost incurred on liabilities not
protected by the carriers, and the managerial costs.
443

Mission Based Costing

The premises this system is based on are as under:
- It should mirror the materials flow i.e. it should be
capable of identifying the costs that result from
providing customer service in the market place.
- It should be capable of enabling separate cost and
revenue analysis to be made by customer type and
by market segment or distribution channel.

444

 This system overcomes dangers inherent in

dealing with the averages like average cost per
delivery since average cost can conceal
substantial variations either side of the mean.
A useful concept of mission emerges to address
above problems.
In context of logistics mission is a set of
customer service goals to be achieved within a
particular product/market.
Missions can be defined in terms of the type of
market served, by which products and within
what constraints of service and costs.
445

Marketing Transportation
Purchasing
Sales
Etc
Production
Distribution
mission A

Distribution
mission B

Distribution
mission C

446

 The successful achievement of defined mission goals

involves inputs from large number of functional areas
within the firm.
An effective mission based logistics costing system
would seek to determine total systems cost of meeting
desired logistic objective i.e. the output of the system
and the costs of the various inputs involved in meeting
these outputs.
The figure shown is indicative how three distribution
missions may make a differential impact upon
functional area costs.
In this system of costing the functional budget is
determined by the demands of the mission it serves.
447

Functional Functional Functional

Functional
area 1
area 2
area 3
area 4
Mission A
100

90

20

50

70

70

30

220

190

Total
mission
cost

80

290

200

20

340

50

70

220

170

850

Mission B

Mission C

Functional
area inputs

270

448

 The cost per mission is identified horizontally and from

this the functional budgets may be determined vertically.
How does this approach work?
Firstly, the functional areas associated with a particular
distribution mission is identified e,g. transport,
warehousing, inventory etc.
Secondly, incremental costs for each functional area
incurred as a result of undertaking that mission must be
isolated.
In incremental costs, the sunk costs are not included as
these would be still incurred even if the mission were
abandoned.
449

 In determining the costs of a functional area

e.g. transport , attributable to a specific mission,
the question should be asked:
- What costs would we avoid if this
customer/segment/channel were no longer
serviced?
- These avoidable costs are the true incremental
costs of servicing customer/ segment/channel.
- Often they will be substantially lower than the
average cost because so many distribution costs
are fixed and/or shared.
450

- For example, a vehicle leaves a Mumbai

Depot to make deliveries in Kalyan and
Nashik.
- If those customers in Kalyan abandoned but
those in Nashik retained, what would be the
difference in the total cost of transport?
- The answer would be not very much.
- However, if the customers in Nashik were
dropped, but not those in Kalyan, there would
be greater savings of costs because of the
reduction of kilometers travelled.
451

 This approach becomes powerful when combined with

a customer revenue analysis, because even customers
with low sales off take may still be profitable in
incremental cost terms, if not on average cost basis.
In other words the company would be worse off if
those customers were abandoned.
Mission based costing helps in determining
profitability analysis for customers, market segments
or distribution channels.
Customer profitability attempts to relate the revenue
produced by a customer/market segment/ distribution
channel to the costs of servicing that customer/market
segment/channel.
452