Chapter 15 Market Logistics & Supply Chain Management SDM – Ch 15 Tata

Chapter 15 Market Logistics & Supply Chain Management SDM – Ch 15 Tata McGraw Hill Publishing 1

Learning Objectives Principles of materials management, logistics and supply chain management Logistics interface with other functions Inventory management principles and systems Warehousing management fundamentals Transportation management practices How IT enables the logistics function Understand about the performance measurement of the logistics function SDM – Ch 15 Tata McGraw Hill Publishing 2

Materials Management Materials forms the largest single cost item in most manufacturing companies – needs to be carefully managed Materials management function includes planning and control, purchasing and stores and inventory control Materials management is the precursor to logistics and supply chain management Logistics SDM – Ch 15 Tata McGraw Hill Publishing 3

Logistics Defined Logistics means having the right thing, at the right place, at the right time The procurement, maintenance, distribution and replacement of personnel and materials – Webster’s Dictionary The science of planning, organizing and managing activities that provide goods or services – Logistics World, 1997 SDM – Ch 15 Tata McGraw Hill Publishing 4

Logistics Functions: planning, procurement, transportation, supply and maintenance Processes: requirements determination, acquisition, distribution and conservation Business: science of planning, design and support of business operations of procurement, purchasing, inventory, warehousing, distribution, transportation, customer support, financial and human resources SDM – Ch 15 Tata McGraw Hill Publishing 5

Scope of Logistics Choice of markets Procurement Plant location and layout Inventory management Location and management of warehouses Choices of carriers, mode of transport Packaging decisions Relevant to all enterprises: manufacturing, Government, Institutions, service organisations SDM – Ch 15 Tata McGraw Hill Publishing 6

Components of LOG Management Input Natural Resources (land, facilities Equipment) HR Finance Information SDM – Ch 15 Logistics Activities Customer service Demand forecasting Distribution Communications Inventory control Materials handling Order processing Parts and service support Plants and warehouse selection Procurement Packaging Return goods handling Salvage and scrap disposal Traffic and transportation Warehouse and storage Tata McGraw Hill Publishing Output Marketing Orientation (competitive Advantage) Time and Place utility Efficient move to customer 7

Links and Flows General material flow/ service flow Information flow Information flow Customer’s customer Customer Lead Firm Supplier Supplier’s supplier General cash flow Outbound / Downstream logistics SDM – Ch 15 Inbound / Upstream logistics Tata McGraw Hill Publishing Source: ICFAI 8

Logistics and Marketing Interface on: – – – – – – Product design and pricing Customer service policies Sales forecasts and order processing Inventory policies and location of warehouses Channels of distribution and despatch planning Transportation to reach products to customers Production wants larger production runs to minimise time spent on set up changes on the machines. Marketing wants smaller runs of a variety of products. SDM – Ch 15 Tata McGraw Hill Publishing 9

Source: Michael Porter The Value Chain S U P P P O R T Company Infrastructure Organisation, people, methods margin Systems & technology Procurement Inbound Operations logistics Outbound Marketing logistics & sales Service margin SDM – Ch 15 Tata McGraw Hill Publishing Primary activities 10

Logistics Plan Outline Internal analysis (current position) – – – – – – Organisation Human resources Transportation Relations with internal customers Quality of product Quality of Service External / situation analysis – – – – – Competitor logistics performance Trends External environment / economy Public, private and contract warehouse Public, private and contract carriage SDM – Ch 15 Tata McGraw Hill Publishing 11

Principles of Logistics Excellence Strategic Operational Link logistics to corporate strategy Organise comprehensively Use the power of information Emphasise human resources Form strategic alliances Focus on financial performance Target optimum service levels Manage the details Leveraging logistics volumes Measure and react to performance SDM – Ch 15 Tata McGraw Hill Publishing 12 Alling & Tyndall

Logistics Focus Areas Customer service related Packaging Order processing Spare parts and service support After sales Customer service support Demand forecasting Distribution communications Return goods handling Operations related Plant and warehouse site location Procurement Inventory control Materials handling Salvage and scrap disposal Traffic and transportation Warehousing and storage ogistics may be confined to the company whereas SCM extends beyond SDM – Ch 15 Tata McGraw Hill Publishing 13

Supply Chain Management Business context: – – – – Globalization of the market place Advances in technology Increasingly demanding, informed customer base Purchase decisions on dimensions of quality, price and time Innovative supply chain: – – – – To meet customer driven challenges To reduce costs Improve service levels Enhance speed to market SDM – Ch 15 Tata McGraw Hill Publishing 14

Supply Chain Integration Optimising the supply chain requires supplier and customer involvement to integrate processes, policies, systems, database and strategies between diverse trading partners SDM – Ch 15 Tata McGraw Hill Publishing 15

Supply Chain Integration Customer Analysis Order Fulfillment Purchasing/Supplier Partnering Storage & Transportation Integrated Supply Chain Management Demand & Lead Time Management Manufacturing/ Re-manufacturing/ Assembly SDM – Ch 15 Inventory Management and control Materials Tata McGraw Hill Publishing Management Inventory management 16

Why Carry Inventory? Support production requirements Support operational requirements Maximize customer service – ensure availability when needed – protect against uncertainty Hedge against marketplace uncertainty Take advantage of order quantity discounts SDM – Ch 15 Tata McGraw Hill Publishing 17

Functions of Inventory Inventory serves as a buffer between: – Supply and demand – Customer demand and finished goods – Requirements for an operation and the output from the previous operation – Parts and materials to begin an operation and the suppliers of the materials The shock absorber of business ! SDM – Ch 15 Tata McGraw Hill Publishing 18

Factors Which Drive Inventory Target service level parameters Lot sizing practices Safety stock and safety time conventions Volume discounts and purchase arrangements Seasonal build up needs SDM – Ch 15 Tata McGraw Hill Publishing 19

Categories of Inventory Anticipation – built in anticipation of future demand – peak season, strike, promotion Fluctuation (safety) – to cover random, unpredictable fluctuations in supply and demand and lead time – to prevent disruption in operations, deliveries etc Lot-size – to take advantage of quantity discounts, reduce shipping, set up and clerical costs – also called cycle stock SDM – Ch 15 Tata McGraw Hill Publishing 20

Categories of Inventory Transportation – pipeline or movement inventories – to cover the time needed to move from one point to another – factory to distribution point for example Hedge – for materials where prices are volatile Maintenance, repair and operating supplies (MRO) – to support M and O – spare parts, lubricants, consumables etc SDM – Ch 15 Tata McGraw Hill Publishing 21

Types of Inventory Obvious . – Raw materials – Work-in-process – Finished goods – of primary concern to marketing – Maintenance, repair and operating (MRO) supplies – In-transit, pipeline Performance measures SDM – Ch 15 Tata McGraw Hill Publishing 22

Performance Measures Inventory turns Annual cost of goods sold /average inventory in value Days of sales inventory on hand / average daily sales SDM – Ch 15 Tata McGraw Hill Publishing 23

Types of Inventory Systems Pure Inventory – when and how much to order. RM procurement. Simple manufacturing operations Production Inventory – finite production rates. Demand fluctuation. Products compete for manufacturing capacity Production – distribution Inventory – compete for production capacity. Geographic placement of inventory for best service of demand SDM – Ch 15 Tata McGraw Hill Publishing 24

Types of Classification ABC category – most common for all HML - high, medium, low - similar FSND – fast moving, slow moving, non-moving, dead – spare parts / FG SDE – scarce, difficult, easy to obtain – procurement / Spares GOLF – govt, ordinary, local, foreign source – procurement / Spares VED – vital, essential, desirable – spare parts / FG SOS – seasonal, off-seasonal - commodity SDM – Ch 15 Tata McGraw Hill Publishing 25

ABC Inventory Analysis Based on Pareto’s law: – A – 20% items worth 80% of value – B – 30% items worth 15% of value – C – about 50% items account for 5% of the usage Classify items based on the above criteria Apply degree of control in proportion to the importance of the group SDM – Ch 15 Tata McGraw Hill Publishing 26

Inventory Related Costs Unit costs – basic value of the item carried Ordering costs – generating and sending a material release, transport, any other acquisition costs Carrying costs – capital, storage, obsolescence Stock-out costs Quality costs – non-conforming goods Other costs – duties, tooling, exchange rate differences etc SDM – Ch 15 Tata McGraw Hill Publishing 27

Approaches for Controlling Inventory Continuous review: – Safety stocks and forecasting methods – Excess and obsolete inventory Part simplification and re-design On-site supplier managed inventory Use of supply chain inventory management systems, Materials Requirement Planning, Distribution Requirement Planning etc Automated inventory tracking systems Supplier – buyer cycle-time reduction Warehouse managemen SDM – Ch 15 Tata McGraw Hill Publishing 28

Stores Management Objectives Providing efficient service to users Reduce cost of carrying goods Providing correct, updated stock figures Controlling inventory Preventing damage to or obsolescence of materials Achieve all of the above with good housekeeping SDM – Ch 15 Tata McGraw Hill Publishing 29

Functions Warehouses Material handling Customer service Information transfer Receive goods Identify goods Sort goods Despatch to storage Hold inventory Recall, select goods Marshal the shipment Despatch the shipment Prepare records and advices SDM – Ch 15 Storage function Temporary Tata McGraw Hill Publishing Permanent 30

Purpose of Warehousing To provide desired level of customer service at the lowest possible total cost It is that part of the firm’s logistics system that stores products (RM, Packing Materials, WIP, FG) at and between point of origin and point of consumption and provides info to management on the status, condition and disposition of items being stored Distribution warehousing relates mainly to FG SDM – Ch 15 Tata McGraw Hill Publishing 31

Reasons for Warehousing Service related Cost related Maintain source of supply Support customer service policies Meet changing market conditions Overcome time and space differentials Support JIT programs of suppliers and customers Provide customers with the right mix of products at all times Temporary storage of materials to be disposed or re-cycled Achieve production economies Achieve transportation economies Take advantage of Quantity Purchase discounts and forward buys Least Logistics cost for a desired level of customer service SDM – Ch 15 Tata McGraw Hill Publishing 32

Warehouses Support manufacturing Mix products from multiple facilities for shipment to a single customer Break-bulk Aggregate Used more as a ‘flow-thru’ point than as a ‘hoarding’ point SDM – Ch 15 Tata McGraw Hill Publishing 33

Distribution Warehousing The objective is to set up a network of warehouses closest to the customer locations to service markets better and minimise cost Could be C&FA s, depots or distribution centers Macro location strategies: – Market positioned – Production positioned – Intermediately positioned SDM – Ch 15 Tata McGraw Hill Publishing 34

Distribution Center Warehouse designed to speed the flow of goods and avoid unnecessary costs Speeds bulk-breaking to avoid inventory carrying costs Helps to centralise control and coordination of logistics activities Products can also be cross-docked (one vehicle to another) Market positioned. SDM – Ch 15 Tata McGraw Hill Publishing 35

Market Positioned Warehouses located nearest to the final customer Factors influencing are: – Order cycle time – Transportation costs – Sensitivity of the product – Order size – Levels of customer service offered Production positioned SDM – Ch 15 Tata McGraw Hill Publishing 36

In between Production Positioned Warehouses located close to the production facilities or supply sources Not the same level of customer service as the earlier one Serve as points of aggregation / collection for products made in a number of plants Factors influencing are: – – – – Perishability of raw materials Number of products in the product mix Assortments ordered by customers Transport consolidation rates ex; FTL SDM – Ch 15 Tata McGraw Hill Publishing 37

Intermediate Positioned Mid point locations between the final customer and the producer High customer service levels possible even if products made in number of units Other macro approaches look at cost minimisation or cost and demand elements to maximise profitability Transportation management SDM – Ch 15 Tata McGraw Hill Publishing 38

Transportation Very important in the Logistics function: – Movement across space or distance adds value to products – Transportation provides time and place utility Role of transportation includes: – Provides opportunity for growth under competitive conditions – Deeper penetration into markets – Wider distribution means greater demand – Can influence product prices favourably SDM – Ch 15 Tata McGraw Hill Publishing Principles . 39

Transportation Principles Continuous flow Optimise unit of cargo - stackability Maximum vehicle unit – capacity utilization Adaptation of vehicle unit to volume and nature of traffic Standardisation Compatibility of unit load equipment Minimum of dead weight to total weight Maximum utilization of capital, equipment and personnel SDM – Ch 15 Tata McGraw Hill Publishing Process . 40

The Selection Criteria Environmental analysis: shipper, carrier, government regulations, public influence Deciding objectives Selecting mode Select transport type within the mode Define functions of transport Evaluation and control – customer perception / satisfaction, best practice benchmarking SDM – Ch 15 Tata McGraw Hill Publishing 41

Cost Factors Can be product related or market related. Product related: density, stowability, ease or difficulty of handling and liability Market related: competition, location of markets, Government regulations, traffic in and out of the market, seasonality of movements and impact on customer service Five prominent modes: – Road, rail, air, water and pipeline. – Sixth one is use of Ropeways SDM – Ch 15 Tata McGraw Hill Publishing 42

Customer Service Factors Consistency, dependability Transit time Coverage – door-to-door for example Flexibility in handling a range of products Loss and damage performance Additional services provided SDM – Ch 15 Tata McGraw Hill Publishing Reverse logistics 43

Comparison of modes Reverse Logistics Movement of goods from the market or customer back to the company The need: – – – – Increased awareness of the environment Stringent legislation For some it is part of the business Profitability of dealing with scrap, surplus Surplus, obsolescence can result due to: – Over optimistic sales forecasts, change in product specs, errors in estimating material usage, losses in processing or overbuying based on incentives SDM – Ch 15 Tata McGraw Hill Publishing 44

Advantages of Rail Economy – more so for goods over long distances Efficiency of energy Reliability – not affected by weather conditions SDM – Ch 15 Tata McGraw Hill Publishing 45

Disadvantages Uneconomical for small shipments and short distances Not suitable for remote stations Costly terminal handling facilities Inflexible time schedules Road transport . SDM – Ch 15 Tata McGraw Hill Publishing 46

Road Freight Advantages Through movement – direct from consignor to consignee, no transshipment Flexibility – routes and loading routines can be easily altered, operate day and night Less capital costs – for own fleet immunity from industrial action Fast turn-around – if articulated units like tractors and trailers are used Minimum delays SDM – Ch 15 Tata McGraw Hill Publishing 47

Disadvantages Susceptibility to weather and road conditions – in spite of the best protection Unsuitability for heavy loads – rail transport more economical for bulk loads Unsuitability for long distances – again the rail telescopic rates are more favourable Air transport . SDM – Ch 15 Tata McGraw Hill Publishing 48

Air Transport Advantages Faster mode Reduction in cost particularly inventory Broad service range Increasing capabilities Disadvantages: – High cost – Weather affects flight conditions – Limitations on heavy consignments SDM – Ch 15 Tata McGraw Hill Publishing Water transport 49

Water Transport Advantages: – Mass movement of bulk – Lowest freight cost – Preferred for long haul of low value commodities Disadvantages: – Not for quick transit – Suitable for certain types on commodities only Pipeline . SDM – Ch 15 Tata McGraw Hill Publishing 50

Pipeline Movement Advantages: – – – – – – – – Reliable, continuous, all weather transport Low energy consumption – hence low cost Low maintenance and operating costs Underground, no space problem Can traverse difficult terrain Minimal transit losses Operation round the clock, safe Economies of scale – double the throughput for only 30% additional cost Disadvantage is in the investment cost SDM – Ch 15 Tata McGraw Hill Publishing Ropeways . 51

Ropeways Advantages: – In hilly or inaccessible areas – Long and circuitous routes with streams / deep valleys – For commodities capable of movement in ropeway buckets – Short haulages of less than 50 kms – Areas where other carriers are uneconomical Disadvantages: – Heavy investments – Limitations on size and quantity of haul How to decide on the right carr SDM – Ch 15 Tata McGraw Hill Publishing 52

Carrier Selection Traffic Related Shipper related Service related Length of haul Consignment weight Dimensions Value Urgency Regularity of shipment Fragility Toxicity Perishability Type of packing Special handling required Size of firm Investment priorities Marketing strategy Network of production and distribution Availability of rail sidings Stockholding policy Management structure System of carrier evaluation Speed (transit time) Reliability Cost Customer relationship Geographical coverage Accessibility Availability of special vehicles / equipment Monitoring of goods Unitisation Ancillary services – bulk breaking, storage SDM – Ch 15 Tata McGraw Hill Publishing 53

Chart of Relative Merits Parameter Weight age Rail Road Air Water Pipe line Rope way Speed 30 5 6 8 4 3 3 Versatility 10 6 8 5 6 3 2 Reliability 20 6 8 5 5 7 4 Availability 10 7 8 5 6 3 2 Continuity of service 10 6 7 5 5 8 3 Distribution cost 20 4 5 6 6 7 8 Total score 10 5.4 6.7 5.1 5.1 5.1 4.0 Overall ranking 10 2 1 4 5 5 6 SDM – Ch 15 Tata McGraw Hill Publishing 54

Key Learnings Support to customer service has evolved from materials management to logistics and to supply chain management Production and marketing are the two internal customers of Logistics Logistics also has a direct impact on the financials of a company Three important functions of logistics are inventory management, warehousing and transportation SDM – Ch 15 Tata McGraw Hill Publishing 55

Key Learnings Inventory directly supports customer service but also adds to the cost and has to be managed carefully Warehousing provides the place utility and works as a balance between production and meeting customer needs Transportation supports the place and time utility and uses different modes to reach the products to the consumer Modern day supply chains integrate the operations of a firm, its suppliers and customers SDM – Ch 15 Tata McGraw Hill Publishing 56