What is Logistics Management

1. 1
What is Logistics Management?
•Theobjectiveistoplanandcoordinatealltheactivities
necessarytoachievedesiredlevelofdeliveredservice
andqualityatlowestpossiblecost.
•Thescopeoflogisticsincludetheentiregamutof
activitiesstartingfromtheprocurementandmanagement
ofrawmaterialsthroughtodeliveryoffinalproductto
thecustomer.
•Theultimatepurposeofanylogisticssystemistosatisfy
thecustomerbyestablishinglinkagesofpeopleatall
levelsintheorganizationdirectlyorindirectlytothe
marketplace.
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2. 2
•Asitisgettingincreasinglydifficulttomaintaina
competitiveedgethroughproductalone,customer
servicehasstartedtoprovidethedistinctive
differencebetweenonecompany‟sofferandthatof
itscompetitors.
•Theunderlyingconceptis“Theprocessof
strategicallymanagingtheprocurement,movement
andstorageofmaterials,partsandfinishedinventory
andtherelatedinformationflowsthroughthe
organizationanditsmarketingchannelsinsucha
waythatthecurrentandfutureprofitabilityare
maximizedthroughthecosteffectivefulfillmentof
orders.”
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3. 3
Competitive Advantage
Customers seeking benefits at acceptable cost
Company A
(Asset utilization)
Company B
(Asset utilization)Cost differential
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4. 4
Source of Competitive
Advantage
•Competitiveadvantageistheabilityofan
organizationtodifferentiateitselfintheeyes
ofthecustomer,fromitscompetition,andto
operateatalowercostandhencegreater
profit.
•Competitiveadvantagehelpsorganizationsto
achievecommercialsuccesswhichmainly
dependsupontwofactors–costadvantage
andvalueadvantage.
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5. 5
Commercial success
Cost advantage Value advantage
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6. 6
•CostadvantageorProductivityadvantage
-Characterizedbylowcostofproductiondueto
greatersalesvolume,economiesofscaleenabling
fixedcoststobespreadoveragreatervolumeand
theimpactofthe„experiencecurve‟.
•Valueadvantageisintermsofproductofferinga
differential„plus‟overcompetitiveofferings.
-Basedonmarketingconceptthatcustomersthat
„customersdon'tbuyproducts,theybuybenefits‟.
-Benefitsmaybeintangiblesandmaynotrelateto
specificproductfeatures.
-Itcanbeanimageorreputationorevensome
functionalaspects.
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7. 7
•Addingvaluethroughdifferentiationis
extremelypowerfulmeansofachieving
competitiveedgeinthemarket.
•Oneofthesignificantmethodofadding
valueisservice.
•Servicehelpsindevelopingrelationshipwith
thecustomersthroughprovisionofan
augmentedoffer.
•Augmentationtakesmanyformssuchas
delivery services, after-sales
services,financialpackages,technical
supportetc.
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8. 8
Productivity and Value Matrix
Commodity Market
(1)
Cost Leader
(2)
Service Leader
(3)
Cost and Service
Leader
(4)
Productivity Advantage
V
a
l
u
e
A
d
v
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9. 9
•Forcompaniesinquadrant(1),themarketis
uncomfortableplaceastheirproductscannotbe
differentiatedfromtheircompetitors‟offeringsas
theydonothaveanycostadvantage.Theseare
commoditymarkets.
•Companiesinquadrant(2),adoptcostleadership
strategies.Traditionally,thesearebasedon
economiesofscalegainedthroughvolume.
•Anotherroutetoachievingcostadvantageisthrough
logisticsmanagement.Aslogisticsconstitutesamajor
proportionoftotalcosts,reengineeringlogistics
processesresultsintosubstantialcostreduction.
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10. 10
•Companiesinquadrant(3),seekdifferentiation
throughserviceexcellencesincemarketsare
becomingmoreandmoreservicesensitive.
•Customersexpectgreaterresponsivenessand
reliabilityfromthesuppliers,reducedlead
times,just-in-timedelivery,andvariousothervalue
addedservices.
•Servicesstrategiescanbedevelopedthrough
enhancedlogisticsmanagement.
•Companiesinquadrant(4)aredistinctiveinvalue
theydeliverandarealsocostcompetitive.
•Competitorsfindithardtoattackthesecompanies
whichtrytoexcelinallthevaluechainactivities.
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11. 11
Value Chain ActivitiesValue Chain Activities
Primary Activities
•Inbound Logistics
•Operations
•Outbound Logistics
•Marketing & Sales
•Service
Secondary Activities
•Infrastructure
•Human Resource Management
•Technology Development
•Procurement
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12. 12
•Primaryactivitiesrepresentthefunctional
areaslikearranginginputsfortransforming
themintooutput,andmanagingdistribution,
marketing,sales,andservices.
•Thesecondaryactivitiesfacilitatethe
integrationofallthefunctionsacrossthe
entireorganization.
•Thecompaniescanachievecompetitive
advantageandcreatedifferentiationby
organizingandperformingtheseactivities
moreefficientlyorinauniquemannerthan
theircompetitors.
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13. 13
Factors affecting value and
productivity advantage
A.Productivity advantage
-Capacity utilization
-Asset utilization
-Inventory reduction
-Integration with the suppliers.
B. Value advantage
-Customized services
-Reliability
-Responsiveness.Zubin Poonawalla

14. 14
Underlying Philosophy Behind
Logistics Concept
SuppliersProcurement Operation DistributionCustomers
Materials Flow
Information Flow
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15. 15
•Theobjectiveoflogisticsistolinkthemarket
place,distributionnetwork,themanufacturing
processandprocurementactivity,soasto
providehigherlevelsofservicestothe
consumersyetatalowercost.
•Scopeoflogisticsmanagementencompasses
managementofrawmaterialsandotherinputs
throughthedeliveryofthefinalproduct.
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16. 16
How do we define logistics
management?
•Aprocessofsatisfyingcustomerneedsthrough
coordinationofmaterialsandinformationflowsthat
extendfromthemarketthroughthefirm‟soperation
andbeyondthattothesuppliers.
•Ashifttoanintegratedorientationfromthe
conventionalmanufacturingormarketing
orientation.
•Traditionally,manufacturingandmarketinghave
beenconsideredasseparateactivitieseachhaving
differentpriorities.
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17. 17
•Manufacturingprioritiesandobjectivesare
concernedwithachievingoperatingefficiencies
basedonlongproductionruns,minimizedsetups
andchangeovers,andproductstandardization.
•Marketingprioritiesandobjectivesareconcerned
withachievingcompetitiveadvantagebasedon
varieties,highservicelevels,andfrequentproduct
changes.
•Customerorientationandcostcompetitivenesshas
beenintegratedbyintroducingflexible
manufacturingsystems,practicinginventory
managementpoliciesbasedonmanufacturing
requirementplanningandjust-in-timeinventory
policy,layingsustainedemphasisonqualityand
integratingsupplysideissuesinstrategicplans.
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18. 18
How do we define supply chain?
•Anetworkoforganizationsthatarehaving
linkages,bothupstreamanddownstreamin
differentprocessesandactivitiesthatproduce
anddelivervalueintheformofproductsand
servicesinthehandsofultimateconsumer.
Customers RetailersShirt Manufacturer
Weavers
of Fabrics
Yarn/Fibre
mfrers
Downstream Upstream
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•Ashirtmanufacturerisapartofsupplychain
thatextendsupstreamthroughtheweaversof
fabricstothespinnersandthemanufacturers
offibres,anddownstreamthough
distributorsandretailerstothefinal
consumers.
•Thougheachoftheseorganizationsare
dependentoneachotheryettraditionallydo
notcloselycooperatewithoneanother.
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20. 20
Is Supply chain management
same as vertical integration?
•SCMisnotthesameasverticalintegration.
•Verticalintegrationimpliesownershipofupstream
suppliersanddownstreamcustomers.
•Earlier,verticalintegrationusedtobethedesirable
strategybutincreasinglythecompaniesarefocusing
ontheircorebusinessi.e.theactivitiesthattheydo
reallywellandwheretheyhaveadifferential
advantage.
•Everythingelseisoutsourced.
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21. 21
Implementation of SCM through
Logistics Management
•SCMraisesthechallengeofintegratingand
coordinatingtheflowofmaterialsfrommultitudeof
suppliers,includingoffshore,andsimilarlymanaging
thedistributionofthefinishedproductbywayof
multitudeintermediaries.
•Transferringcostsupstreamordownstreamleadsto
logisticsmyopiaasallcostsultimatelywillmake
waytothefinalmarketplacetobereflectedinthe
pricepaidbytheenduser.
•TheprimeobjectiveofSCMistoreduceoreliminate
thebuffersofinventorythatexistsbetweenthe
organizationsinachainthroughsharingof
informationondemandandcurrentstocklevels.Zubin Poonawalla

22. 22
How does Logistics differ from
SCM?
•Logisticsmanagementisprimarilyconcernedwith
optimizingflowswithintheorganization.
•Supplychainmanagementdealswithintegrationof
allpartnersinthevaluechain.
•Logisticsisessentiallyaframeworkthatcreatesa
singleplanforflowofproductsandinformation
throughabusiness.
•Supplychainbuildsuponthisframeworkandseeks
toachievelinkageandcoordinationbetween
processesofotherentitiesinthepipelinei.e.
suppliersandcustomers,andorganizationitself.Zubin Poonawalla

23. 23
Impact of Logistics and
Customer Service on Marketing
•Traditionally,marketinghasfocusedon
end-customerorconsumer,seekingtopromotebrand
valuesandtogeneratea„demandpull‟inthemarket
placeforcompany‟sproducts.
•Duetoshiftinpowerinmarketing
channels,companiesarerealizingtodevelopstrong
relationswithsuchintermediarieslikelargeretail
outletstocreateacustomerfranchiseaswellas
consumerfranchise.
•Theimpactofbothstrongconsumerfranchiseand
customerfranchisecanbeenhancedordiminishedby
effectivenessofsuppliers‟logisticssystem.
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24. 24
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
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25. 25
Activities Included in Logistics
•Logisticscompetencyisachievedby
coordinatingthefollowingfunctionalareas.
-Networkdesign
-Information
-Transportation
-Inventory
-Warehousing,materialhandlingand
packaging.
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26. 26
Network Design
•Networkdesignistheprimeresponsibilityof
logisticsmanagerssinceafirm‟facilitiesand
structureisusedtoprovideproductsandmaterials
tothecustomers.
•Logisticsfacilitiestypicallyincludemanufacturing
plants,warehouses,cross-dockoperations,andretail
stores.
•Determiningthenumberandtypeoffacility
required,theirgeographiclocations,andtheworkto
beperformedateachisanimportantpartofnetwork
design.
•Incertainsituations,someofthefacilityoperations
maybeoutsourcedtoservicespecialists.
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•Networkdesigndeterminesthetypeofthe
inventoryandthequantitytobestockedateach
facility,andtheassigningofcustomerorders
forshipment.
•Networkoffacilitiesalsoincludesinformation
andtransportationasapartofentirestructure
fromwherelogisticaloperationssuchas
processingofcustomerorders,maintaining
inventoryandmaterialhandlingareperformed.
•Thenetworkdesignmustconsider
geographicalvariations.
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•Thefactorsinfluencingmodificationsof
networkdesignare:
(a)Changeindemandandsupply
(b)Productassortments
(c)Changesinsuppliers‟sourceofsupplies.
(d)Manufacturingrequirements.
•Thefirststeptowardsachievingcompetitive
advantageliesinsuperiornetwork
design,astherealcompetitionisnot
betweentwocompaniesbutbetween
efficiencyandeffectivenessinmanaging
theirsupplychainnetwork.
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29. 29
Information
Deficiencies in the quality of information
Incorrectinformation
withrespecttotrendsmaycause
•Inventory
shortage
•Overcommitment
Incorrectinformation
relatingtoaspecific
customer‟srequirements
leadsto
•Processingofincorrect
orderscreatingadditional
costs.
•Reducedsales
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30. 30
•Forecastingandordermanagementarethe
twoareasoflogisticalworkthatdependon
information.
(a)Forecastingenablestodecideonpositioning
ofinventorytosatisfyanticipatedcustomer
requirements.
(b)Ordermanagementinvolveshandlingof
specificcustomer‟srequirements,both
externalaswellinternal.
-Externalcustomersarethosethatconsume
theproductorservice,ortradingpartners
thatpurchasetheproductsorservicesfor
resale.
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-Internalcustomersareorganizationalunits
withinafirmthatrequirelogisticalsupport
toperformtheirdesignatedwork.
(c)Theprocessofordermanagementinvolves
-Receiptofaninitialorder
-Invoicing
-Delivery,and
-Collection.
•Incorrectinformationanddelaysinorder
processingcancripplethelogistics
performance;thusqualityandtimelinessare
thekeyissuesinlogisticaloperations.
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32. 32
Transportation
•Transportationistheoperationalareaof
logisticsthatgeographicallypositionsthe
inventoryi.e.providesforplaceutility.
•Companiesaccomplishtransportationin
threedifferentways:
(a)Aprivatefleetofvehiclesmaybeoperated.
(b)Contractsmaybeenteredintowith
transportcompanies.
(c)Theserviceofdifferenttransport
companiesmaybeengagedonan
individualshipmentbasis.
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Factors affecting transportation
performance
Transportation performance
Cost Speed Consistency
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A.Cost of transportation
-Thepaymentformovementbetweentwo
geographicallocationsandexpensesrelatedto
administrationandandmaintainingin-transit
inventory.
B.Speedoftransportation
-Thetimerequiredtocompleteaspecific
movement.
-Transportfirmscapableofprovidingfaster
servicesnormallychargehigherrate.
-Thefasterthetransportationservices,shorteris
thetimeintervalduringwhichtheinventoryisin
transitandunvailable.
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C.Consistencyoftransportation
-Referstovariationsintimerequiredto
performaspecificmovementoveranumber
ofshipments.
-Consistencyisameasureofdependabilityof
transportation.
-Inconsistencyintransportationleadsto
inventorysafetystocksrequiredtoprotect
againstunpredictableservicebreakdowns.
Speedandconsistencycombinetocreate
qualityaspectoftransportation.
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36. 36
Inventory
•Theobjectiveistoachievethedesired
customerservicewithminimuminventory
commitment,consistentwithlowesttotalcost.
•Excessiveinventoriesmaybehelpfulin
compensatingfordeficienciesinnetwork
designbutultimatelyresultintohighertotal
logisticscost.
•Thebestpracticeofinventorymanagementis
toachievemaximumturnoverwhilesatisfying
customercommitments.
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37. 37
Warehousing, Material
Handling, And Packaging
•Merchandiseneedstobewarehousedatselected
times,transportvehiclesmaterialhandlingfor
efficientloadingandunloadingandgoodsaremost
efficientlyhandledwhenpackagedtogetherinto
shippingcartonsorothertypeofcontainers.
•Thelogisticalactivitiescarriedoutinwarehouseare
sorting,sequencing,orderselection,transport
consolidationandsometimesproductmodification
andassembly.
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•Withinthewarehouse,productsmustbe
received,moved,sorted,andassembledto
meetcustomerorderrequirementsandfor
theseactivitiesmaterialhandlingbecomes
significant.
•Productspackedincans,bottlesorboxesare
handledmoreefficientlywhencombinedinto
largerunitssuchasMasterCartons.
•Masterunitscanfurtherbeconsolidatedinto
largeunitssuchaspallets,containersetc.
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Inventory Management Policy
•Thefollowingfactorsarerequiredtobe
consideredwhileformulatinginventory
managementpolicy.
-Customersegmentation
-Productrequirements
-Transportintegration
-Time-basedrequirements
-Competitiveperformance.
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Customer Segmentation
•Theprofitabilityofbusinessdependsuponthe
productspurchasedbythecustomers,sales
volumes,prices,value-addedservicesrequiredand
supplementaryactivitiestodevelopandmaintainan
ongoingrelationship.
•Somecustomersarehighlyprofitableandhave
growthpotential,whileothersdonot.
•Hence,highlyprofitablecustomersconstitutethe
coremarketforanenterpriseandinventorystrategies
needtobefocusedonmeetingrequirementsofsuch
corecustomers.
•Inventoryprioritiesdesignedtosupportcore
customerscomeoutofeffectivesegmentedlogistics.
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Product Requirements
•ApplyingPareto‟sprinciple,firm‟s20%of
allproductsmarketedaccountformorethan
80%oftotalprofits.
•Offerhighavailabilityandconsistentdelivery
onmoreprofitableproducts,thoughsometimes
high–levelsupportoflessprofitableitems
becomesnecessarytoprovidefull-lineservice
tocorecustomers.
•Notadvisabletoprovidehighservice
performanceonlessprofitableproducts
purchasedbynoncorecustomers.
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•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.
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Transport Integration
•Asoundinventorymanagementstrategy
wouldbetostocksufficientproductsat
warehousetobeabletoarrangeconsolidated
shipmentstoacustomerorageographicarea.
•Thecorrespondingsavingsintransportation
maymorethanoffsettheincreasedcostof
holdingtheinventory.
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44. 44
Time-Based Requirements
•Time-basedarrangementsreducetheoverall
inventoriesbydevelopingthecapabilitytorespond
rapidlytoexacttoexactmanufacturingorretail
customers.
•Iftheproducts/materialscanbedeliveredquickly,it
maynotbenecessarytomaintaininventoriesat
manufacturingplants/retailstores.
•Ifreplenishmentcanbeachievedrapidlylesssafety
stockwillberequiredandinsteadofstockpilingand
holdingsafetystocktherequirementwillbeto
receivetheexactquantityofinventoryatthetime
required.
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45. 45
•Time-basedprogrammestendtoreduce
shipmentsizes,whichinturnincreasesthe
number,frequency,costofshipmentsand
hencehighertransportationcost.
•Aneffectivelogisticalarrangementwillbeto
achieveatrade-offresultingintodesired
customerserviceatthelowesttotalcost.
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46. 46
Competitive Performance
•Soundinventorymanagementpolicyis
designedtogaincustomerserviceadvantage
orneutralizeastrengththatacompetitormay
beenjoyingcurrently.
•Asinventoriesexistacrossalogisticalsystem
forvariousreasons,thepolicyshouldbe
viewedfromholisticcostperspective.
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47. 47
Integrated Logistics
Customers
Physical
distribution
Manufacturing
support
Procurement Suppliers
Inventory Flow
Information Flow
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48. 48
•Informationfromandaboutcustomersflows
throughtheenterpriseintheformofsales
activity,forecastsandorders.
•Informationisthentranslatedintomanufacturing
andpurchasingplans.
•Thematerialsarethenprocured,valueaddition
takesplacealongwiththeinventoryflow
ultimatelyresultingintotransferofownershipof
finishedproductstothecustomers.
•Theprocessofintegrationisnotrestrictedto
manufacturingcompaniesalone,theretailingand
wholesalingfirmslinkphysicaldistributionand
purchasingsincemanufacturingisnotrequired.
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49. 49
•Theentireprocessofintegrationcanbe
viewedintermsoftwointerrelatedactivities.
-Inventoryflow,and
-Informationflow
Inventory Flow
Physical
distribution
Manufacturing
support
Procurement
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50. 50
Physical Distribution
•Establisheslinkageofmarketingchannelwithits
customersfacilitatingthemovementofafinished
producttothefinaldestinationofamarketing
channel.
•Wouldneedapropermarketingeffortresultinginto
desiredassortmentbeingdeliveredwhenandwhere
needed.-Outboundlogistics.
•Fulfillsobjectiveofimplementationoftimeand
spacedimensionofcustomerserviceasanintegral
partofmarketing.
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Manufacturing Support
•Concernedwithmanagingwork-in-process
inventoryasitflowsbetweenthestagesof
manufacturing.
•Formulatesamasterproductionschedulethat
subsequentlyfacilitatesarrangingfortimely
availabilityofmaterials,componentparts,
andwork-in-processinventory.
•Isnotconcernedwith‘how’production
occursbutrather‘what,’‘when’,‘where’
productswillbemanufactured.
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Difference between Physical distribution
and Manufacturing Support
•Physicaldistributionattemptstoservethe
desiresofthecustomersandthereforemust
accommodatetheuncertaintiesofconsumer
andindustrialdemand.
•Manufacturingsupportinvolvesmovement
requirementsthatareunderthecontolof
manufacturingenterprise.
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53. 53
Procurement
•Concernedwithpurchasingandarrangingin-
boundmovementofmaterials,parts,and/or
finishedinventoryfromsuppliersto
manufacturingorassemblyplants
,warehouses,orretailstorestherebyensuring
availabilityofmaterials/assortmentswhere
andwhenneeded.-Inboundlogistics.
•Inagivenmarketingsituation,manufacturers‟
physicaldistributionissameasretailers‟
procurementoperations.
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54. 54
Information Flow
A.Planning&CoordinationFlows
-Nature&Locationofcustomers
-Requiredproducts&servicesmatchingtoneedsof
customers.
-Limitationsorbottleneckswithinmanufacturing
capabilitiesthushelpingtodecideoutsourcing
requirements.
-Requirementsoflogisticalfacilitiesbasedupon
forecasting.
-MPSandMRPtosupportmanufacturing
/procurementrequirements.
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B.OperationalFlow
-Ordermanagementandprocessing
-Procurement
-Inventorymanagement
-Transportationandshipping
Advantagesofeffectiveoperationalflows
-Allocatesandassignsinventory/assortmentsto
customersaccordingtopredeterminedpriorities.
-Useofinformationtechnologyindeploying
inventorytoensureeffectiveperformanceof
logisticalsystem.
-Consolidatingorderstoachievefreighteconomies
andmakingcorrectdocumentation.
-Facilitatepurchaseorderpreparation,amendments
andreleasetoensureoverallsuppliercompliance.Zubin Poonawalla

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Logistical Performance Cycles
•Thelogisticalintegrationthroughperformance
cyclesprovidesinterfaceandlinkthe
suppliers,thefirmanditscustomersbymeans
ofcommunicationandtransportation.
Performance Cycle
Transaction creating
activities
Physical fulfillment
activities
Advertising & Selling Physical distribution
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57. 57
Physical distribution performance
cycle
Customer orderOrder transmissionOrder processing
Order selectionOrder transportation
Order delivery
to the customer
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Significance of physical
distribution performance cycle
•Asitlinksafirmwithitscustomers,ithelpscreate
marketingandmanufacturinginitiativesintoan
integratedefforts.
•Itresolvesconflictinginterfacebetweenmarketing&
manufacturing.
-Asmarketingisdedicatedtodelightingcustomers,it
wouldliketomaintainbroadproductlinewithhigh
inventoryregardlessofeachproduct‟sprofit
potential.Bydoingso,anycustomer's
requirement,nomatterhowsmallorlargewouldbe
satisfied.
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59. 59
-Traditionalmindsetinmanufacturingisto
controlcost,whichisachievedbylong
productionruns.Continuousmanufacturing
processesmaintaineconomiesofscaleand
reduceperunitcost.Therefore,anarrowline
ofproductsismassproduced.
-Inventoriesarekepttoresolvetheinherent
conflictbetweenthesetwophilosophies.
-Theaboveisachievedbyforwarddeployment
ofinventorythroughoutthelogisticalsystem
inanticipationoffuturesalesonthebasisof
forecastedinformation.Zubin Poonawalla

60. 60
How to reduce physical
distribution operational variance
•Improveaccuracyofforecast
•Improveordermanagement and
coordinationwiththecustomers.
•Haveresponsiveandflexiblecycle.
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61. 61
Manufacture Support
Performance Cycle
•Itprovidesproductionlogisticsbeingpositioned
betweenthephysicaldistributionandprocurement
operationsofafirm.
•Movementandstorageofproduct,materials,and
semi-finishedpartsandcomponentsbetween
enterprisefacilitiesrepresenttheresponsibilityof
manufacturingsupportlogistics.
•Incontextofwholesale&retailtrade,itimplies
selectionofassortmentofinventorytobemovedto
thenextlevelofvaluechain.
•Basically,supportswhat,whereandwhenofthe
productionandnothow.Zubin Poonawalla

62. 62
Features of manufacturing
support performance cycle.
•Initiatesprovisionofmaterialsandexternally
manufacturedcomponentsataplaceandtime
needed.
•Operationsarerestrictedtodock-to-dockmovement
withinthefirmandwhereintermediatestorageis
required.
•Aftercompletionofmanufacturingcyclethefinished
goodsinventoryisallocatedanddeployedeither
directlytothecustomersortodistribution
warehousesforfurthercustomershipment.
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63. 63
Procurement Performance Cycles
Sourcing
Order placement and
Expediting
S
U
P
P
L
I
E
R
S
TransportationReceiving
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•Theprocurementoperationsareidentifiedasinbound
logistics.
•Internationalprocurementoftenrequireslarge
shipmentsnecessitatingtheuseofbarges,ocean
goingvessels,trainsandmultipletruckloadsfor
transportation.
•Thelowervalueofmaterialsandcomponentsas
comparedtofinishedproductimpliesgreater
trade-offbetweenhighercostofmaintaining
inventoryintransitandtheuseoflowcostmodesof
transport.
•Asthecostofmaintaininginventoryinthepipeline
islessperdaythanthecostofmaintainingfinished
inventory,thereisnobenefitforpayinghigher
freightratesforfasterinboundtransport.Zubin Poonawalla

65. 65
•Procurementperformancecyclesare
invariablylongerexceptinginthosecases
wherethevalueofmaterialorcomponentmay
justifypayinghigherfreightratesforfaster
inboundtransport.
•Acriticalissueinprocurementisuncertainty
inrespectofpricechange,and/orsupply
discontinuity.
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66. 66
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.
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67. 67
A few terms used in Inventory
Management
•Bufferstock={Averageleadtime}x{Averageusage
rate}.
•Safetystock=Averageusageduringtheextensionof
leadtime.
•Reservestock=Excessusagerequirementduringthe
averageleadtime.
•Re-orderlevel=B.S.+S.S.+R.S.
•MinimumInventoryLevel=S.S.+R.S.
•Max.InventoryLevel={MinimumLevel}+{Order
quantity}
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68. 68
•Average InventoryLevel= (Min.
level+Max.level)/2
•Incaseofperiodicreviewthebufferstockwill
bemodifiedto{Averageconsumption
rate}x{Averageleadtime+Reviewperiod}
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69. 69
Inventory Planning
•Ideally,iftheforecastisdoneaccurately,there
willnotbeanyneedforaninventory.
•Mostwarehousingwouldvanish,product
wouldmovewithlesshandlingrequirements
fromwarehousestocustomers.
•However,inreallifesituations,thethrustison
reducinginventoryandmaintainproper
customerserviceandoptimalinventorylevels.
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70. 70
Inventory decisions-High risk &
high cost
•Withouttheproperinventoryassortment,marketing
mayfindthatsalesarelostandcustomersatisfaction
declining.
•Overstocksincreasecostandreduceprofitability
throughaddedwarehousing,workingcapital
requirements,deterioration,insurance,and
obsolescence.
•Asthesignificancepercentageofassetsareinventory
related,areductionoffirm‟sinventorybyafew
percentagepointscanleadtodramaticimprovement
inprofits.
•ROI=(Profit/Fixedassets+Currentassets)
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71. 71
•Substantialimprovementintheproductivityof
inventorycanbeachievedbyre-engineering
supplychainprocesses.
•Poorinventorymanagementmayleadtostock
outsandhencecancellationofcustomers
orders,overstockingleadingtoinsufficient
storagespaceandincreaseinthenumberand
rupeevalueofobsoleteproducts.
•Consequently,inventorymanagementhasa
largefinancialimpactonthefirm.
•Investmentsblockedininventorycannotbe
usedtoobtainothergoodsorassetsthatcould
improvetheenterpriseperformance.
Zubin Poonawalla

72. 72
Types of Inventory
•Broadlytherearethreetypesofinventory
-Manufacturinginventory
-Wholesaleinventory
-Retailinventory
(a)Manufacturinginventory
-Manufacturer‟sinventorycommitmentstartswith
rawmaterialandcomponentparts,includingwork-
in-process,andendswithfinishedgoods.
-Manufacturerneedstotransferthefinishedgoods
inventorytowarehousesincloserproximityto
wholesalersandretailers.
-Manufacturer‟sinventorycommitmentisrelatively
deepandhaslongduration.
Zubin Poonawalla

73. 73
(b) Wholesale inventory
-Wholesalerpurchaseslargequantitiesfrom
manufacturersandsellssmallquantitiestoretailersin
ordertoprovideretailcustomerswithassorted
merchandisefromdifferentmanufacturersinsmaller
quantities.
-Thuswholesalerriskexposureisnarrowerbutdeeper
andoflongerdurationthanthatofretailers.
-Incaseofseasonalgoods,thewholesalerisforcedto
commitinventory,farinadvanceofselling,thus
increasingthedepthanddurationofrisk.
-Thecurrenttrendofexpansionofproductlineshas
increasedthewidthofinventoryrisk.
Zubin Poonawalla

74. 74
(c) Retail inventory
-Retailerinventoryriskiswidebutnotdeep.
-Theemphasisismoreoninventoryvelocity.
-Inventoryvelocityismeasuredbyinventoryturnover.
-Theriskisundertakenonvarietyofproductsbutfora
givenproducttheriskisnotdeeprelatively.The
exceptionisspecialtyretailerwherethedepthand
durationwillbelongerastheyhandlenarrowerlines.
-Forinstance,retailers‟riskisspreadacrossmorethan
10,000SKUs,ageneralmerchandiseandfoodstore
maycarryaround25,000SKUsandafullline
departmentstoremayhaveasmanyas50,000SKUs.
Zubin Poonawalla

75. 75
Functions underlying inventory
commitments
A.GeographicalSpecialization
-Itallowsforgeographicalspecializationfor
individualoperatingunits.
-Theneedforgeographicalspecializationarises
becausevariousfactorsofproductionviz.
power,materials,water,labour,manufacturing
facilitiesarelocatedataconsiderabledistancefrom
themajormarkets.
-Forinstance,tyres,batteries,transmission
equipmentsandspringsforanautomobile
assembly.Theproductionfacilitiesforeachofthe
thesearetraditionallylocatednearthesourceof
materialstominimizetransportationcost.
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76. 76
-Thisstrategyleadstospecializationofmanufacturing
eachautomobilecomponentandhenceeconomically.
-Thiswillalsoinvolveinternalinventorytransferto
completelyintegratevariouscomponentsintofinal
assembly.
-Thus,manufacturedgoodsfromvariouslocationsare
collectedatasinglewarehouseandthencombinedas
aconsolidated/assortedshipment.
-P&Gusesdistributioncentrestocombineproducts
fromitslaundry,food,andhealthcaredivisionsto
offerthecustomerasingleintegratedshipment.
-Economies gainedthroughgeographical
specializationinvariablyoffsetincreasedinventory
andtransportationcost.
Zubin Poonawalla

77. 77
B. Decoupling
-Providesforincreasingoperatingefficiencywithina
singlemanufacturingfacilitybystockpilingwork-in-
processinventorybetweenproductionoperations.
-Decouplingenablesmanufacturinganddistributionof
economiclotsizesinanticipationofsalesthus
ensuringlargesizedshipmentswithminimumfreight
cost.
-Decouplingpermitsproductsmanufacturedovera
periodoftimetobesoldasanassortment.
-Decouplingincreasestheoperatingefficiencyata
singlelocationwhilegeographicalspecialization
includesmultiplelocations.
-However,JIT,DRPetchavereducedtheeconomic
benefitsofdecouplingconsiderably.Zubin Poonawalla

78. 78
C.BalancingSupplyandDemand
-Balancingisconcernedwithelapsedtimebetween
consumptionandmanufacturingasbalancing
inventoryreconcilessupplyavailabilitywithdemand.
-Particularlyusefulinlinkingvariationsof
consumptionwithmanufacturingincaseofseasonal
products.
-Balancingseasonalproductionandyearround
consumptionsuchasorangejuiceoryearround
productionandseasonalconsumptionofblanketsor
knittingwool.
-In case of sort selling
season,manufacturers,wholesalersandretailersare
forcedtotakeaninventorypositionfarinadvanceof
peaksellingseason.Zubin Poonawalla

79. 79
-Fromretailers‟perspective,aninventorypositionis
plannedsixmonthspriortothepeaksellingperiod.
-Themainfunctionofbalancingsupplyanddemand
istoensurethatinvestmentinstocksisliquidated
completelywithintheseason.
D.BufferUncertainties
-Safetystockprotectsagainsttwotypesof
uncertainties:
-(a)Demandinexcessofforecastduringthe
performancecycle.Forinstance,customers‟request
ofmoreorlessunitsthanplanned.
-Delaysintheperformance-cyclelengthitself.For
instance,delayinorderreceipt,orderprocessing,or
transportation.
Zubin Poonawalla

80. 80
Inventory Management Strategy
•Companiescanpostponepositioningofinventory
bymaintainingstockattheplantsortheymay
decidetoplacemoreproductsinlocaldistribution
centrestohaveitclosertothemarket.
(a)Manageinventoryateachdistributioncentre
independently.
(b)Considerinventoryinterdependenceacross
distributionsitesbymanaginginventorycentrally.
(c)Ensuremorecoordinationandcommunicationin
caseofcentralizedinventorymanagement.
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81. 81
Inventory Cost Consideration
1.Originpurchaseconsideration
2.Transportationcost.
(a)Originpurchasemeansthebuyerisresponsiblefor
freightcostandproductriskwhentheproductisin
transit.
(b)Dependingonthedeliveryterms,thebuyer
assumesfullriskoninventoryatthetimeof
shipment.
(c)Dependingonthepaymentterms,transitinventory
wouldbeapartofenterprise'saverageinventory
andthereforesubjecttoanappropriatecharge.
(d)Transportationcostmustbeaddedtopurchase
pricetoobtainanaccurateassessmentofthevalue
ofgoodstiedupininventory.
Zubin Poonawalla

82. 82
•Aftertheinventoryisreceived,theamount
investedintheproductmustbeincreasedby
transportationexpenses.
•Thus,inventorycarryingcostshouldbe
assessedonthecombinedcostoftheproduct
plustransportation.
Zubin Poonawalla

83. 83
Inventory Control Procedures
Perpetual Review Periodic Review
Zubin Poonawalla

84. 84
Perpetual Review
•Inventorystatusisreviewedtodetermine
replenishmentneeds.
•Implementedthroughareorderpointand
orderquantity.
ROP=DxT+SS,where
•ROP=reorderpointinunits
•D=averagedailydemandinunits
•T=averageperformance-cyclelengthindays
•SS=safetyorbufferstockinunits.
Zubin Poonawalla

85. 85
•Thefollowingareconsideredinperpetual
review:
-Onhandinventoryrepresentsquantitythatis
physicallypresentintheparticulardistribution
facility.
-On-orderinventoryrepresentsquantitiesthat
havebeenorderedfromsuppliers.
-Ifon-handpluson-orderquantityislessthan
orequaltotheestablishedreorder
point,inventorycontrolprocesswillinitiate
anotherreplenishmentorder.
Zubin Poonawalla

86. 86
-Mathematically,thiscanbestatedas
-IfI+qROPthenorderQ,where
(a)I=inventoryonhand
(b)q=inventoryonorderfromsuppliers
(c)ROP=re-orderpointinunits
(d)Q=orderquantityinunits.
•Averageinventorylevelforaperpetualreview
systemiscalculatedas
(a)I=Q/2+SS,where
-I=averageinventoryinunits
-Q=orderquantityinunits,and
-SS=safetystockinunits
•TheassumptionisthatP.O.willbeplacedwhenthe
reorderpointisreachedandthereisacontinuous
monitoringofinventorysystem.
•
Zubin Poonawalla

87. 87
Periodic Review
•Theinventorystatusisreviewedatregularintervals
suchasweeklyormonthly.
•There-orderpointisadjustedtoconsiderthe
extendedintervalsbetweenreviews.
•Theformulaforcalculatingtheperiodicreview
reorderpointis
ROP=D(T+P/2)+SS,where
-ROP=re-orderpoint
-D=averagedailydemand
-T=averageperformancecyclelength
-P=reviewperiodindays
-SS=safetystockZubin Poonawalla

88. 88
•Averageinventoryforperiodicreviewis
representedasI=Q/2+(PxD)/2+SS,
-I=averageinventoryinunits
-Q=orderquantityinunits
-P=reviewperiodindays
-D=averagedailydemand
-SS=safetystock.
•Becauseofthetimeintervalintroducedby
periodicreview,periodiccontrolsystems
generallyrequirelargeraverageinventories
thanperpetualsystem.
Zubin Poonawalla

89. 89
Inventory Planning Methods
Fair Share
allocation
Distribution
Requirement
Planning
Zubin Poonawalla

90. 90
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
Zubin Poonawalla

91. 91
•Fairshareallocationprovideseach
distributionfacilitywithanequitableorfair
shareofavailableinventoryfromacommon
sourcesuchasaplantwarehouse.
•Assumingthatfromatotalinventoryunitsof
600itisdesirabletoretain100unitsatplant
warehouse;500unitsareavailablefor
allocation.
•Firstweneedtodeterminethenumberof
days‟supply.
Zubin Poonawalla

92. 92
DS=(A+Ij)/Dj,where
-DS=no.ofdayssupplyfordistribution
centreinventories.
-A=inventoryunitstobeallocatedfromthe
warehouse
-Ij=inventoryinunitsfordistributioncentrej.
-Dj=dailydemandfordistributioncentrej
Intheaboveexample,
•DS={500+(50+100+75)}/(10+50+15)
•DS={500+225}/75=725/75=9.67days
Zubin Poonawalla

93. 93
•Thus,fairshareallocationmeansthateach
distributioncentreshouldbebroughtupto9.67days
stock.
•Theamounttobeallocatedtoeachdistribution
centreisdeterminedasunder:
Aj=(DS–Ij/Dj)xDj,where
-Aj=amountallocatedtodistributioncentrej
-DS=numberofdayssupplythateachdistribution
centreisbroughtupto.
-Ij=inventoryinunitsfordistributioncentrej
-Dj=dailydemandfordistributioncentrej
-Thus,theamountallocatedtodistributioncentre1
willbe
A1=(9.67-50/10)x10=(9.67-5)x10=4.67x10=
46.7or47units.
Zubin Poonawalla

94. 94
A2=(9.67-100/50)x50=(9.67-2.00)x50=383.5or
384.00
A3=(9.67-75/15)x15=(9.67-5.00)x15=70units.
•However,doesnotconsidersitespecificfactors.
-Differenceinperformancecycle.
-Economicorderquantity.
-Safetystockrequirements.
Zubin Poonawalla

95. 95
Distribution Requirement
Planning
•Logicalextensionofmanufacturingrequirement
planning(MRP).
•Operatesinanindependentenvironmentwhere
uncertaincustomerdemanddeterminesinventory
requirements.
•Requiresforecastforeachdistributioncentreand
SKUaswellasadequatelead-timetoallowproduct
movement.
•Errorsmaycreepinbecauseofpredictionofdemand
atwronglocationoratwrongtime.
•Requiresconsistentandreliableperformancecycles
formovementbetweendistributionfacilities.
Zubin Poonawalla

96. 96Plant Warehouse
Regional warehouse Regional warehouse
Distribution
centre
Distribution
centre
Distribution
centre
Distribution
centre
Distrib
ution
centre
Distribution centre
C U S T O M E R S
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97. 97
Raw Materials Warehouse
Part APart B
Sub-assembly A
Part CPart DPart E
Sub assembly BSub assembly C
Final Assembly (Manufacturing)
Plant Warehouse
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98. 98
•DRP/MRPsystemintegratesfinishedgoods,work-in-
process,andmaterialsplanning.
•DRPprovidesascheduleforeachSKUandeach
distributionfacility.
•Foreachplanningperiod,theschedulewillreportthe
following:
-Grossrequirementsreflectingdemandfromcustomers
beingcateredtobydifferentdistributionfacilities.
-Scheduledreceiptsi.e.replenishmentshipments
plannedforarrivalatthedistributioncentre.
-Anticipatedweekendingtotaldeliveries.
-Projectedon-handinventoryi.e.priorweek‟son-hand
inventory-currentweek‟sgrossrequirement+
scheduledreceipts.
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99. 99
Benefits of DRP
•Improvedservicelevelsbyincreasingon–time
deliveriesanddecreasingcustomercomplaints.
•Betterplanningofnewproductlaunches.
•Improvedabilitytoanticipateshortagessothat
marketingeffortsarenotexpendedonproductswith
lowstock.
•Reduceddistributioncentrefreightcostsresulting
fromcoordinatedshipments.
•Improvedinventoryvisibilityandcoordination
betweenlogisticsandmanufacturing.
•Reducedwarehousingspacerequirementsbecauseof
inventoryreductions.
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100. 100
Demand Forecasting
•Forecasting process comprises of two
elements
(a)Nature of demand, and
(b)Forecast components
Nature of Demand
Dependent demand Independent demand
Zubin Poonawalla

101. 101
Dependent versus Independent
Demand
•Verticaldependentischaracterizedby
sequenceofpurchasingandmanufacturing,
suchasnumberoftyresusedforassembly
ofautomobiles.
•Horizontaldependentoccursinasituation
whereanattachment,promotionitemor
operator‟smanualisincludedwitheachitem
shipped.
(a)Thedemandeditemmaynotberequiredto
completethemanufacturingprocessbutmay
beneededtocompletethemarketingprocess.
Zubin Poonawalla

102. 102
(b)Oncemanufacturingplanforbaseitemis
determined,requirementsofcomponents/
attachmentscanbecalculateddirectlyandno
separateforecastingisdone.
•Independentdemandsareonesthatarenotrelated
tothedemandforanotheritem.
•Forinstance,demandforrefrigeratorisnotrelated
tothedemandformilk.
•Independentdemanditemsareforecasted
individually.
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103. 103
Forecast Components
1.Base demand
2.Seasonal factors
3.Trends
4.Cyclic factors
5.Promotions
6.Irregular quantities.
•Mathematically forecast is expressed as
Ft+1= (Btx Stx Ttx Ctx Pt) + I, where
-Ft+1= forecast quantity for period t+1
Zubin Poonawalla

104. 104
-Bt=baselevelsalesdemand(averagesaleslevel)
forperiodt+1
-St=seasonalfactorforperiodt
-T=trendcomponent(quantityincreaseordecrease
pertimeperiod)
-Ct=cyclicfactorforperiodt
-Pt=promotionalfactorforperiodt
-I=irregularorrandomquantity.
Allforecastsmaynotincludeallcomponents.
A.Basedemandisbasedonaveragedemandoveran
extendedperiodoftime.
(a)Thereisnoseasonality,trend,cyclicor
promotionalcomponent.
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105. 105
B.Seasonalcomponentischaracterizedbyupward
anddownwardmovementindemand
pattern,usuallyonannualbasise.g.emandfor
woollenblanketsisatpeakduringwintermonths
andlowestduringsummer.
(a)Seasonalityatwholesalelevelprecedesconsumer
demandbyapproximatelyonequarter.
(b)Anindividualseasonalityfactorof1.2indicates
thatsalesareprojectedat20%higherthanan
averageperiod.
C.TrendComponentexhibitslongrangemovementin
salesoveranextendedperiodoftime.
(a)Trendmaychangenumberoftimesovertheentire
productlifecycle.
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106. 106
(b)Forinstance,areductioninbirthrateimplies
reductionindemandofdisposaldiapers.
(c)Trendcomponentinfluencesbasedemandas
Bt+1=BtxT,where
-Bt+1=basedemandinperiodt+1
-Bt=basedemandinperiodt,and
-T=periodictrendindex.
D.Cycliccomponentareknownasbusiness
cycles.
(a)Economiesswingfromrecessionto
expansioneverythreetofiveyears.
Zubin Poonawalla

107. 107
E.Promotionsareinitiatedbythefirm‟smarketing
activitiessuchasadvertising,andvariousother
schemes.
(a)Salesincreaseduringpromotionastheconsumers
takeadvantageofpromotionalschemesthusleding
toliquidationofinventories.
(b)Promotioncaneitherbethedealsofferedtothe
consumersordealsofferedtothetrade(wholesalers/
retailers).
(c)Promotionsifofferedonregularbasisatthesame
timeeveryyearwillresembleaseasonalcomponent.
F.Irregularcomponentsincluderandomor
unpredictablequantitiesthatdonotfitintoanyother
categoryhenceareimpossibletopredict.
(a)Bytrackingandpredictingothercomponentsthe
magnitudeofrandomcomponentcanbeminimized.
Zubin Poonawalla

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

109. 109
•Assumethefirmhasanaggregatemonthly
forecastfortheentirecountryas10,000units
anditusefourdistributioncentrestoservicethe
demandwithahistoricalsplitof40,30,20,and
10percentrespectively.
•Forecastsforindividualdistributioncentreswill
beprojectedtobe4,000,3000,2,000and1,000
respectively.
•Intop-downapproachanationallevelSKU
forecastisdevelopedandthentheforecasted
volumeisspreadacrosslocationsonthebasis
ofhistoricalsalespattern.
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110. 110
B.Bottom-upApproach
•Decentralizedapproachsinceeachdistribution
centreforecastisdevelopedindependently.
•Resultsintomoreaccurateforecastasittracks
andconsidersdemandfluctuationswithin
specificmarkets.
•Requiresmoredetailedrecordkeepingandis
moredifficulttoincorporatedemandfactors
suchasimpactofpromotion.
Trade-offthedetailtrackingofbottom-up
approachwithdatamanipulationeaseof
top-downapproach.
Zubin Poonawalla

111. 111
Components of Forecasting
Process
Orders
History
Tactics
Forecast
database
Forecast Administration
Forecast
Technique
Forecast
Support
System
Forecast Process
Forecast
Users
Finance
Marketing
Sales
Production
Logistics
Zubin Poonawalla

112. 112
A.Forecastdatabasekeepsinformationabout
•Orders
•Orderhistory
•Tacticsusedtoobtainorderssuchas
promotions,schemes,specialpromotional
programmes.
•Stateofeconomyandcompetitiveactions.
B.Forecastprocessintegratesforecast
techniques,supportsystemandadministration.
•Twoprominentlyusedforecastingtechniquesare
timeseriesandcorrelationmodelling.
•Forecastsupportsystemisthecapabilitytogather
andanalyzedata,evaluateimpactof
promotion,developforecastandcommunicateto
therelevantpersonnel.
Zubin Poonawalla

113. 113
Issues addressed by Forecast
Administration
•Whoisresponsiblefordevelopingtheforecast?
•Howisforecastaccuracyandperformance
measured?
•Howdoesforecastperformanceaffectjob
performance,evaluationandrewards?
•Dotheforecastanalystsunderstandtheimpact
offorecastingonlogisticsoperations?
•Dotheyunderstandthedifferencesinvarious
forecastingtechniques?
Zubin Poonawalla

114. 114
Transportation
•Transportationdecisionsaremorestrategicones
closelylinkedwithinventorydecisions.
•Decisionsarebasedontrade-offbetweenthecostof
usingaparticularmodeoftransportwiththecostof
inventoryassociatedwiththatmode.
•Forinstance,airshipmentsmaybefast,reliable,and
warrantlesssafetystocks;theyareexpensivewhereas
shippingbyseaorrailmaybemuchcheaperbutthey
necessitateholdingrelativelylargeamountof
inventorytoprotectagainsttheinherentuncertainty
associatedwiththem.Zubin Poonawalla

115. 115
•Customerservicelevelsandgeographic
locationsareimportantaspectsintransportation
decisions.
•Transportationaccountsforroughly30%ofthe
logisticscostsandthereforeoperating
efficienciesbecomeimportantaspects.
•Shipmentsizesi.e.consolidatedbulkshipments
versussmallerlotsizes;routingandscheduling
ofvehiclesbecomeimportantpartof
company‟stransportstrategy.
•Transportationisoneofthemostvisible
elementsinthelogisticsoperation.
Zubin Poonawalla

116. 116
Transportation Functionality
Product Movement Product Storage
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117. 117
A.ProductMovement
-Primaryfunctionisthemovementupanddownthe
valuechain.
-Astransportationusestemporal,financialand
environmentalresources,themovementofmaterials
shouldtakeplaceonlywhenitenhancestheproduct
value.
(a)Usestemporalresourcesbecausetheproductis
inaccessiblewhileintransit.
-DuetoJITstrategiestransitinventoriesare
becomingmoresignificanttherebyreducing
manufacturinganddistributioncentreinventories.
(b)Expensesincurredinternallyforprivatefleetof
vehiclesorexternallyforcommercialorpublic
transportationconstitutefinancialresources.
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118. 118
(c)Transportationconsumesfuelandoilandalso
createsenvironmentalexpensesthrough
congestion,airpollutionandnoisepollution.
Objectives of Transportation
Moveproduct
fromoriginal
locationto
prescribed
destinationwhile
minimizingtemporal,
financialandenvironmental
Costs.
Minimize
expenses
incurred
dueto
lossand
damage.
Meetcustomer
demandregarding
deliveryand
shipment
information
availability
Zubin Poonawalla

119. 119
B. Product Storage
-Temporarystoragethroughvehiclesbecomes
expensiveasin-transitstorageisrequiredtobe
movedagaininashortdurationoftime.
-Sometimestemporarystoragebecomes
advantageousasthecostofunloadingand
reloadingtheproductinawarehousemay
exceedthedailychargeofstoragein
transportationvehicles.
-Manytimeswherethewarehousespaceis
limited,utilizingtransportationvehicles
becomesaviableoption.Zubin Poonawalla

120. 120
•Theoptionsavailabletoatransporterincaseof
warehousespaceconstraintsare
(a)Instructdrivertotakeacircuitousorindirectroute
toitsdestination,asthetransittimewouldbe
greaterascomparedtodirectroute.Thustransport
vehicleisusedastemporarystorageoption.
(b)Changetheshipmentdestinationi.e.temporary
storageisachievedthroughdiversion.
-Forinstance,productthatis,say,scheduledinitially
fromMumbaitoHyderabadgetsdivertedmidway
toVishakapatnam(Vizag)asVizagwarehousemay
beingreaterneedofproductandhasthestorage
capacity.
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121. 121
-Traditionally,thetelephonewasusedtodirect
diversionbut nowadays satellite
communicationsbetweenheadquartersand
vehiclehandlesuchtasksmoreefficiently.
-Thoughproductstorageinvehiclescanbe
costly,itcanbejustifiedfromatotalcost
perspectivewhenloading,unloadingcosts,or
capacityconstraintsareconsidered.
Zubin Poonawalla

122. 122
Principles of Transportation
Economies of ScaleEconomies of Distance
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123. 123
A.EconomiesofScale
•Transportationcostperunitofweightdecreases
whenthesizeoftheshipmentincreasesi.e.
shipmentsthatutilizetheentirevehicle‟s
capacityliketruckload(TL)costlessperkg
thanlessthantruckload(LTL)shipments.
•Fixedcostsintransportationinclude
administrativecostsoftakingtransportation
order,timetopositionthevehicleforloadingor
unloading,invoicingandequipmentcost.
•Itcostsasmuchtoadministerashipmentof1
kgasitdoestoadministera1000kgshipment.Zubin Poonawalla

124. 124
B. Economies of Distance
•Transportationcostperunitofdistance
increasesatadecreasingrateasdistance
increases.Alsocalled“TaperingPrinciple”
•Forinstance,ashipmentcoveringadistanceof
800kilometerswillcostlessthantwo
shipmentsofsamecombinedweightcovering
400kms.
•Fixedexpensesincurredtoloadandunloadthe
vehiclegetspreadovermorekilometers
resultinginloweroverallperkilometercharges.
Zubin Poonawalla

125. 125
Tapering Principle
Distance
C
O
S
T
Zubin Poonawalla

126. 126
Participants in Transportation
decisions
Government
Shipper Carrier Consignee
Public
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127. 127
Role and Perspective of each
party
A.ShippersandConsignees‟Expectations
•Movethegoodsfromorigintodestination
withinaprescribedtimeatthelowestcost.
•Specifiedpickupanddeliverytimes,
predictabletransittime,zerolossanddamage,
accurateandtimelyexchangeofinformation
andinvoicing.
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128. 128
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.
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129. 129
Features of Different Modes of
Transportation
Modes of Transportation
RailHighwayWaterPipelineAir
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130. 130
A.Rail
-Capabilitytotransportlargeshipments
economicallywithmorefrequency.
-Highfixedcostsbecauseofexpensive
equipment,rightofway,switchingyards,and
terminals.
-Variablecostperkg/kmhasbeenconsierably
reducedbyelectrification.
-Bulkindustriesandheavymanufacturinguse
railwaysmorefrequently.
-Canimproveeffectivenessoftransportation
byhavingallianceswithothermodes.
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131. 131
B. Highway
-Growthofmotorcarrierindustryhasresulted
intodoor-to-dooroperatingflexibilityand
speedofinter-citymovement.
-Comparedtorailways,motorcarriershave
relativelysmallfixedinvestmentsinterminal
facilitiesandoperateonpubliclymaintained
highways.
-Variablecostperkilometerishighbecausea
separatedriverandcleanerarerequiredfor
eachvehicle.
-Labourcostisalsohighbecauseoftheneed
forsubstantialdocklabour.
Zubin Poonawalla

132. 132
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.
Zubin Poonawalla

133. 133
•Motorcarriersarebestsuitedtohandlesmall
shipmentsmovingshortdistances.
•Favourlightmanufacturinganddistributive
traders,shortdistancesandhighvalue
products.
•Havecapturedsignificantmarketshareof
railwaysinmediumandlightmanufacturing
industries.
•Becauseofdeliveryflexibility,motortransport
hascapturedalmostallfreightmovingfrom
wholesalersorwarehousestoretailstores.
•Highercostinreplacingequipment,higher
wagestodriverandotherdocklabour.Zubin Poonawalla

134. 134
C.Water
-Capacitytomoveextremelylargeshipments.
-Fixedcostsaresomewherebetweenrailandmotor
carriers.
-Thoughwatercarriershavetodevelopandoperate
theirownterminals,theright-of-wayisdevelopedand
maintainedbythegovernment,resultinginto
moderatefixedcostscomparedtorailandhighways.
-Lowvariablecostmakesthisanattractivemodewhen
lowfreightratesaredesiredandspeedissecondary
consideration.
-Typicallybulkcommoditiessuchasmining
,chemicals,cement,andcertainselectedagricultural
productsaretransportedbyoceangoingvessel.
Zubin Poonawalla

135. 135
-Unlessthepointoforiginandpointofdestinationare
adjacenttoawaterway,itneedstobesupplemented
byrailortrucks.
D.Pipelines
-Usedfortransportingnaturalgas,manufactured
chemicals,pulverizeddrybulkmaterialssuchas
cementandflourviahydraulicsuspensions,sewage
andwaterwithinthecitiesandmunicipalities.
-Operateon24x7basisarelimitedonlybycommodity
changeoverandmaintenance.
-Noemptycontainerorvehiclethatmustbereturned.
-Highestfixedcostanlowestvariablecost.
-Highfixedcostsduetoright-of-way,constructionand
requirementsforcontrolstationandpumping
capacity.
-
Zubin Poonawalla

136. 136
-Aspipelinesarenotlabourintensive,variable
operatingcostisextremelylowoncethepipelineis
constructed.
-Inflexibleandlimitedtoproductsintheformofgas,
liquidorslurry.
E.Air
-Significantadvantageliesinthespeedwithwhicha
shipmentcanbetransported.
-Thoughthefreightcostisveryhigh,thesamemaybe
trade-offwithreducedwarehousingorinventory.
-Characterizedbyloadsizeconstraintsandaircraft
availability.
-Fixedcostassociatedwithaircraftpurchaseand
requirementsforspecializedhandlingsystemsislow
ascomparedtorail,waterandpipeline.
-
Zubin Poonawalla

137. 137
-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:
(a)High value products
(b)Perishables
(c)Limited marketing period.
(d)Emergency.
Zubin Poonawalla

138. 138
Nature of Traffic versus Mode of
Transportation
Mode Nature of Traffic
Rail Extractingindustries,heavymanufacturing,
agriculturalcommodities
HighwayMediumandlightmanufacturing,distribution
betweenwholesalersandretailers.
Water Mining and basic bulk commodities, chemicals,
cement, agro-based products.
PipelinePetroleum, gases, slurry.
Air Emergency, perishables, limited marketing period,
high value premium products.
Zubin Poonawalla

139. 139
Cost Structure for Each Mode of
Transportation
Mode Fixed Cost Variable Cost
Rail High-equipment terminals, tracks etc.Low
HighwayLow-highways provided by public fundsMedium-fuel, maintenance.
WaterMedium-ships and equipment Low-capability to transport
large amount of tonnage.
PipelineHighest-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.
Zubin Poonawalla

140. 140
Transport Economies
•Distance
•Volume
•Density
•Stow ability
•Handling
•Liability
•Market factors
Zubin Poonawalla

141. 141
A.Distance
-Costcurveincreasesatadecreasingrateasa
functionofdistanceandisknownastapering
principle.
-Costcurvedoesnotbeginattheoriginbecauseof
thefixedcostsassociatedwithshipmentpickupand
deliveryregardlessofdistance.
-Taperingeffectcomesintoexistence,asthelonger
movementstendtohaveahigherpercentageofinter-
cityratherthanurbankilometers.
-Frequentintermediatestops,typicalofurban
kilometers,andadditionalloadingandunloadingadd
tothecosts.
-Inter-citymilesarelessexpensivesincemore
distanceiscoveredwithsamefuelasaresultof
higherspeed.
Zubin Poonawalla

142. 142
B.Volume
-Transportcostperunitofweightdecreasesasload
volumeincreases.
-Fixedcostsofpickupanddeliveryaswellas
administrativecostsgetspreadoveradditional
volumes.
-Smallerloadsmustbeconsolidatedintolargerloads.
C.Density
-Transportationcostperunitdeclinesasproduct
densityincreases.
-Intermsofweightandspace,anindividualvehicleis
constrainedmorebyspacethanbyweight.Onceis
thevehicleisfull,itisnotpossibletoincreasethe
amountcarriedeveniftheproductislightweight.
Zubin Poonawalla

143. 143
-Higherdensityproductsallowfixedcoststobe
spreadacrossadditionalweight,asaresultthe
productsareassessedatalowertransportcostper
unit.
-Attemptsaremadetoincreaseproductdensitysothat
morecanbeloadedinavehicletoutilizeitscapacity.
D.Stowability
-Referstoproductdimensionsandimpactofthesame
onvehicleutilization.
-Oddsizesandshapesaswellasexcessiveweights
andlengthsdonotstowwellandtypicallywaste
space.
-Thoughdensityandstowabilityaresimilar,products
mayhavesamedensitythatstowdifferently.
Zubin Poonawalla

144. 144
-Itemswithregularshapesareeasiertostowthanodd
shapeditems.
-Whilethesteelblocksandrodshavethesame
density,rodsaremoredifficulttostowbecauseof
theirlengthandshape.
E.Handling
-Specialhandlingequipmentsmayberequiredfor
loadingorunloadingtrucks,trains,orshipsandthe
unitization/palletizationaffectsthehandlingcost.
F.Liability
-Productcharacteristicssuchassusceptibilityto
damage,perishability,susceptibilitytoto
theft,susceptibilitytoexplosionaffecttherisksand
henceclaims.
Zubin Poonawalla

145. 145
G.Marketfactors
(a)Back-hauli.e.vehiclereturningbacktothe
pointoforiginwithload.
(b)Deadheadtobeavoidedbecauseempty
returnsincurlabour,fuel,andmaintenance
costs.
(c)Thusdesignoflogisticssystemmustadd
back-haulmovementwhereverpossible.
Zubin Poonawalla

146. 146
Multimodal Transport System
•MultimodalorIntermodaltransportrefersto
journeysthatinvolvetwoormoredifferent
modesoftransport.
•Forinstance,ifmaterialsaremovedfrom
LanchowincentralChinatoWarsawinPoland
goodsmaybeloadedontotrucks,transferring
themontorailsforajourneyacrossChinato
Shanghai,thenshiptoRotterdam,backinto
railstocrossEurope,thentruckforlocal
delivery.
Zubin Poonawalla

147. 147
•ForLogisticsmanagersintermodalservicesbecome
necessarybecauseoftheircharacteristicsandcosts.
•Forexample,limitedaccessibilityofairtransport
requirescoordinationwithalandcarriertomakethe
pickupsanddeliveries.
•Similarly,inaccessibilityappliestorail,waterand
pipelinebutnottothemotorwhichhasadefinite
advantagehere.
•Theintermodalservicesmaximizestheprimary
advantagesinherentinthecombinedmodesand
minimizetheirdisadvantages.
•Thecombinedserviceswillhavebothgoodandbad
aspectsoftheutilizedmodes.
Zubin Poonawalla

148. 148
•Forinstance,coordinateofrailandwaterwill
havealowertotalcostthananall-rail
movementbuthighercostthanthatofall-water.
•Likewise,combinedsystemtransittimewillbe
lowerthanallwatermovementbuthigherthan
all-rail.
•Thedecisiontousemulti-modalsystemmust
considertheeffectontotallogisticscosts.
•Theaimofintermodaltransportistocombine
thebenefitsofseveralseparatemodesbutavoid
thedisadvantagesofeach,like,combiningthe
lowcostofshippingwithflexibilityoftheroad,
orgettingthespeedofairwiththecostofroad.
Zubin Poonawalla

149. 149
•However,eachtransferbetweenmodescauses
delaysandaddscostsofextrahandling.
•Intermodaltransportworkswellwhentransfer
canbedoneefficiently.
•Transferofmotorcarriertrailertoanother
transportmodeisfacilitatedthrough
containerization.
Zubin Poonawalla

150. 150
Choice of Mode
•Factorsinfluencingthechoiceofmodeareasunder:
-Bulkinessofthematerials;heavyitemswouldbe
shippedbyoceangoingvessels.
-Valueofmaterials;expensiveitemsraiseinventory
costsandthusencouragefastermodes.
-Criticalityofmaterials;evenlowunitvalueitemsthat
holduptheoperationsneedfastandreliabletransport.
-Susceptibilitytomarketchanges;operationsthat
respondquicklytochangescannotwaitforcritical
suppliesusingslowertransport.
-Reliabilitywithconsistentdeliveryisimportant.
Zubin Poonawalla

151. 151
-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.
Zubin Poonawalla

152. 152
Containerization
•Containerislargerectangularboxintowhichafirm
placescommoditiestobeshipped.
•Afterinitialloading,thecommoditiesthemselvesarenot
rehandleduntiltheyareunloadedattheirfinal
destinations.
•Throughoutthemovement,thecarrierhandlesthe
container,notthecommodities.
•Theshippercantransferthecontainerfromonemodeto
another,eliminatingtheneedtohandlethecommodities
eachtimethusreducinghandlingcosts,damage
costs,theft,pilferageandthetimerequiredtocomplete
themodaltransfer.
Zubin Poonawalla

153. 153
•Manyfirmsthatmodifytheirmaterial
handlingsystemstoincludecranes,forklift
trucks,andotherequipmentcapableof
handlinglarge,heavycontainershavefound
containerizationtobedesirableavenuesfor
increasingproductivityandcontrolling
materialhandlingcosts,especiallyinperiods
ofcontinuallyincreasinglabourcosts.
•Astheobjectiveofintermodaltransport
systemistoprovidevirtuallyseamless
journey,thebestwaytoachievesameistouse
modularorunitizedloads.
Zubin Poonawalla

154. 154
Piggyback –Trailer on Flat Car
•TOFCisaspecializedformofcontainerization
inwhichrailandmotortransportcoordinate.
•Carrierplacesmotorcarriertraileronarail
flatcar,whichmovesthetrailerbyrailforlong
distance.
•Amotorcarrierthenmovesthetrailerforshort
distancepickupsanddeliveries.
•Thisservicecombinesthelong-haul,lowcost
advantageofrailwithaccessibilityofmotor.
•Piggybackservicesmostlymoveundercontract.
Zubin Poonawalla

155. 155
Material Handling
•Theprimarymaterialhandlingobjectiveisto
efficientlymovelargequantitiesofinventoryinto
andspecificcustomersordersoutofthewarehouse.
•Thefunctionsperformedinawarehouseare
classifiedasmovementorHandlingandstorage.
•Movementorhandlingisemphasizedandstorageis
secondary.
•Handlingisdividedinto
-Receiving
-Instoragehandling,and
-Shipping Zubin Poonawalla

156. 156
•Anextremelyimportantaspectoflogisticsisthe
productivitypotentialthatcanberealizedfrom
capitalinvestmentinmaterial-handling
equipment.
•Specializedhandlingequipmentisrequiredfor
unloadingbulkmaterialssuchasfor
solids,fluids,orgaseousmaterials.
•Theguidelinessuggestedindesigningthematerial
handlingsystemsare:
(a)Equipmentforhandlingandstorageshouldbeas
standardizedaspossible.
(b)Wheninmotion,thesystemshouldprovide
maximumcontinuousflow.
(c)Investmentshouldbemadeinhandlingrather
thanstationeryequipment.
Zubin Poonawalla

157. 157
(d)Handlingequipmentshouldbeutilizedtothe
maximumextentpossible.
(e)Inselectinghandlingequipment,theratioof
deadweighttopayloadshouldbeminimized.
(f)Wheneverpossible,gravityflowshouldbe
incorporatedinthesystemdesign.
•Thehandlingsystemscanbeclassifiedas
under:
-Mechanized
-Semiautomated
-Automated,and
-Informationdirected.
Zubin Poonawalla

158. 158
Mechanized Systems
A.ForkliftTrucks
•Forklifttruckscanmoveloadsofmaster
cartonsbothhorizontallyandvertically.
•Apalletorslipsheetformsaplatformupon
whichmastercartonsarestacked.
•Aslipsheetisathinsheetofsolidfibreor
corrugatedpaperandareusedforsituations
whenproductishandledonlyafewtimes.
•Aforklifttrucknormallytransportsa
maximumoftwounitloadsi.e.twopalletsat
atime Zubin Poonawalla

159. 159
•Highstackingtrucksarecapableofupto40feetof
verticalmovement.
•Eventruckscapableofoperatinginaislesasnarrowas
56inchesaralsofoundinwarehouses.
•Thesignificanceofnarrow-aisleforklifttruckshas
increasedaswarehousesseektoincreaserackstorage
densityandoverallstoragecapacity.
•Forklifttrucksarenoteconomicalforlongdistance
horizontalmovementsbecauseofhighratiooflabour
perunitoftransfer.
•Mosteffectivelyutilizedinshippingandreceiving
andplacingmerchandiseinapredeterminedstorage
space.
•Commonsourcesofpowerarepropanegasand
electricity.
Zubin Poonawalla

160. 160
•Manyforkliftoperationsareutilizingradio
frequencydatacommunicationtospeedup
loadputawayandretrievalassignments.
•Undertheabovesystem,workersreceivetheir
assignmentsthrougheitherhandheldorvehicle
–mountedRFterminals.
•RF technologyprovidesreal-time
communicationcapabilitytocentraldata
processingsystems,andwhencombinedwith
barcodescanningofcartonsandpallets,it
allowsforkliftoperatorstoreceiveandupdate
itemstatusinquiry,materialordersand
movementandinventoryadjustments.
Zubin Poonawalla

161. 161
B.Walkie-RiderPalletTrucks
•Lowcost,effectivemethodofmaterial
handling.
•Highlyversatilelow-liftpalletand/orskid
handlerswithloadcapabilitiesfrom3,000to
8,000lbs.
•Typicalapplicationsincludeloadingand
unloading,orderselectionandshuttlingover
longerdistancesthroughoutthewarehouse.
•Popularingrocerywarehouses.
•Electricityisthepowersource.
Zubin Poonawalla

162. 162
C.Towlines
•Eitherin-floororoverheadmounteddragdevices.
•Themajoradvantageisthecontinuousmovementbut
lacksflexibilityofforklifttrucks.
•Mostcommonapplicationisfororderselectionwithin
thewarehouse.Orderselectorsplacemerchandiseona
fourwheeltrailer,whichisthentowedtotheshipping
dock.
D.Conveyors
•Conveyorsareclassifiedaccordingtopower,gravity
orroller/beltmovement.
•Portablegravitystylerollerconveyorsareoftenused
forloadingandunloading.
•Insomecasesthesearetransportedontheover-the-
roadtrailerstoassistinunloadingatthedestination.
Zubin Poonawalla

163. 163
Semi automated Handling
Semiautomatedsystemsupplementsamechanized
systembyautomatingaspecifichandling
requirements.
Semiautomatedwarehouseisamixtureof
mechanizedandautomatedhandling.
A.Automated-GuidedVehicleSystems
•Performssimilarkindofhandlingfunctionasa
mechanizedtowtractorwithatrailer.
•TheessentialdifferenceisthatanAGVSdoesnot
requireanoperatorandisautomaticallyroutedand
positionedatdestinationwithinterventionofthe
operator.
Zubin Poonawalla

164. 164
•TypicalAGVSequipmentreliesonanoptical
ormagneticguidancesystem.
•Intheopticalapplication,tapeisplacedonthe
warehousefloor,andtheequipmentisguideby
alightbeamthatfocusesontheguidepath.
•AmagneticAGVSfollowsanenergizedwire
installedinthefloor.
•Theprimaryadvantageistheeliminationofa
driverandnewerAGVSusevideoand
informationtechnologytofollowpathswithout
theneedforfixedtracks.
Zubin Poonawalla

165. 165
B. Sortations
•Typicallyusedincombinationwithconveyors.
•Theproductsareselectedinthewarehouse,theyare
sortedasperspecificspecificshipmentdocksand
takenontotheconveyorsformovingout.
•Mastercartonshaveadistinguishingcode,theseare
readbyopticalscanningdevicesandautomatically
routedtothedesiredlocations.
•Therateofflowiscustomizedtomeetchanging
requirements.
•Thebenefitsare
(a)Reductioninlabour,and
(b)Increaseinspeedandaccuracy.Zubin Poonawalla

166. 166
C. Robotics
•Humanlikemachinethatcanbeprogrammed
bymicroprocessorstoperformvarious
activities.
•Robotsareuseinwarehousestobreakdown
andbuildunitloadstoaccommodateexact
merchandiserequirementsofacustomer‟s
orders.
•Inbreakdownprocess,therobotis
programmedtorecognizestockingpatternand
placeproductsinthedesiredpositionona
conveyorbelt.
•Similarly,robotsareusedtobuildunitloads.
Zubin Poonawalla

167. 167
•Robotsareusedeffectivelyinwarehouses
whereprevailingenvironmentsmakeit
difficultforhumanstoworksuchashigh
noiseareasandextremetemperatureslikecold
storagefreezers.
•Thecapabilitytoincorporateartificial
intelligenceinadditiontospeed,
dependability,andaccuracymakesroboticsan
attractivealternativetotraditionalmanual
handlingsystems.
Zubin Poonawalla

168. 168
Automated Handling
•Substitutescapitalinvestmentinequipmentforlabour
requiredinmechanizedhandlingsystems.
•Thoughoperatesfasterandmoreaccurately,requires
highdegreeofcapitalinvestmentandcomplexto
operate.
•Mostautomatedsystemsarecustomdeignedand
constructedforeachapplication.
•Automatedhandlingconcentratesonorderselection
systematthemastercartonlevelaswellasonhigh
risestorageandretrievalsystem.
Zubin Poonawalla

169. 169
A.Order Selection System
•Thehandlingoffastmovingproductsinmaster
cartonsisfullyautomatedfromthepointof
merchandisereceipttoplacementinover-the-road
trailers.
•Suchsystemsuseanintegratednetworkofpower
andgravityconveyorslinkingthestorage.
•Systemiscontrolledbycomputercoupledwith
inventoryandorderprocessingsystemsof
warehouse.
•Uponarrival,merchandiseisautomaticallyroutedto
storagepositionandinventoryrecordsareupdated.
•Uponorderreceipt,merchandiseisunitizedto
vehiclesizeandschedulesmadeforselection.
Zubin Poonawalla

170. 170
•Atanappropriatetime,allmerchandiseisselectedin
loadingsequenceandautomaticallytransportedby
conveyortothloadingdock.
•Theonlymanualhandlingofmerchandiseoccurs
whilestackingintotransportvehicle.
B.AutomaticStorageandRetrievalSystem(ASRS)
•Highrisehandlingsystemsarefullyautomatedfrom
receivingtoshipping.
•Thecomponentsofthissystemarestorage
racks,storageandretrievalequipmentandcontrol
systems.
•Thehighrisearetheverticalstorageracksuptothe
heightof120feet.
Zubin Poonawalla

171. 171
•Thestorageandretrievalmachinetravels
backandforthwiththeprimaryobjectiveof
movingproductsinandoutofstorage.
Functionsofstorage&retrievalequipment
(1)Toreachthedesiredpositionrapidly.
(2)Todepositorretractaloadofmerchandise.
(3)Toensuremerchandiseflowingfrom
productionisautomaticallystackedtocreate
aunitload.
(4)Totransporttheunitloadtothehighrise
storageareabypowerconveyor.
Zubin Poonawalla

172. 172
C.Information-directedSystems
•Allmaterialhandlingmovementsaredirected
andmonitoredbythecommandof
microprocessors.
•Tobeginwithallrequiredhandling
movementsarefedintothecomputerfor
analysisandequipmentassignment.
•Analysisofhandlingrequirementsand
equipmentassignmentisdoneinsuchaway
thatdirectmovementsareemphasizedand
deadheadmovementsareminimized.
•Workassignmentsareprovidedtoindividual
forkliftsbyterminalslocatedonthetruck.Zubin Poonawalla

173. 173
•Communicationbetweenthecomputerandthe
truckusesradiofrequency(RF)waveswith
antennaelocatedontheforkliftsandhighup
inthewarehouse.
•Information-directedsystemscanincrease
productivitybytrackingmaterialhandler
performanceandallowingcompensationtobe
basedonactivitylevel.
•Asinglehandlingequipmentmaybeinvolved
inloadingorunloadingseveral
vehicles,selectingmanyorders,and
completingseveralhandlingassignments,thus
increasingthecomplexityofworkdirection.
Zubin Poonawalla

174. 174
Packaging
•Packagingcanbecategorizedintotwotypesviz.
(a)Consumerpackaging,whichhasamarketing
emphasis,and
(b)Industrialpackaging,whichhasmoreoflogistics
emphasis.
A.ConsumerPackaging(MarketingEmphasis)
-Consumerpackagingdesignfocusesoncustomer
convenience,marketappeal,retailshelf
utilization,andproductprotection.
-Largecontainersandoddsizesmayincreasethe
consumervisibilitybutmakepoorlogistical
packaging.
Zubin Poonawalla

175. 175
•Forexample,shippingproductsfully
assembledsuchasmotorcyclesresultsin
substantialreductionindensity.
•Alowdensitypackagewouldmeanhigher
transportationcostsandgreaterwarehousing
requirements.
B.IndustrialPackaging(Industrialemphasis)
-Individualproductsorpartsarenormally
groupedintocartons,bags,bins,orbarrelsfor
handlingefficiency.
-Thesecontainersareusedtogroupindividual
productsandarereferredtoasmaster
cartons. Zubin Poonawalla

176. 176
•Whenmastercartonsaregroupedintolarger
unitsforhandling,thecombinationis
referredtoascontainerizationorunitization.
•Themastercartonandtheunitizedload
providethebasichandlingunitinthe
logisticschannel.
•Theweight,volume,andfragilityofthe
mastercartoninanoverallproductline
determinestransportationandmaterial
handingrequirements.
•Ifthepackageisnotdesignedforefficient
logisticalprocessing,overallperformanceof
thesystemwouldsuffer.
Zubin Poonawalla

177. 177
•Standardizationofmastercartonfacilitates
materialhandlingandtransportation.
•Standardizationofmastercartonisbeneficialeven
incontextofretailbackendoperations.
(a)Forinstance,incaseofshoestoreasthecontents
ofeachmastercartonareknown,itisnot
necessarytosearchthroughmanycartonsfora
particularstyleorsizeofshoe.
(b)Allowsmastercartonstobemoreefficiently
stacked,resultingintolessbackroomcongestion.
(c)Completeidentificationofmastercartoncontents
facilitatescompletionofretailinventoryand
merchandisereorder.
Zubin Poonawalla

178. 178
•Standardizedcartonsareselectedtoachieve
maximumconformityinincreasingthedensityinthe
trailertherebyeliminatingdeadspaceinstacking.
•Theendresultofstandardizedmastercartonusageis
substantialreductionintotalcostcombinedwithan
effectivematerialhandlingsystematboth
warehouseandtheretailstore.
•Insituations,whenmastercartonsofmorethanone
sizearerequired,extremecareshouldbetakento
arriveatanassortmentofcompatibleunits.
•Thesedifferentsizesofmastercartonsshouldresult
intomodularcompatibility.
Zubin Poonawalla

179. 179
How to design an Ideal Package?
•Invariably,logisticalconsiderationsalone
cannotfullydominatepackagedesign.
•Theidealpackageformaterialhandlingand
transportationwouldbeaperfectcubehaving
equallength,depth,andwidthwith
maximumpossibledensitybutsucha
packagedoesnotexistinpractice.
•Thus,logisticalrequirementsshouldbe
evaluated along with
manufacturing,marketing,andproduct
designconsiderationswhenstandardizing
mastercartons.
Zubin Poonawalla

180. 180
•Anothercriticalissuetobeconsideredinpackage
designistodeterminethedegreeofprotection
requiredtocopewiththeanticipatedphysicaland
climaticenvironments.
•Thepackagedesignandmaterialshouldcombineto
achievethedesiredlevelofprotectionwithout
incurringtheexpenseofoverprotection.
•Inmostcasesthecostofabsoluteprotectionwillbe
prohibitiveandthereforethepackageconstruction
shouldbeaproperblendofdesignandmaterial.
•Threebroadfunctionsofpackagingare
-Damageprotection,Utility/efficiency,and
Communication.
Zubin Poonawalla

181. 181
A.Damage Protection
•Amajorfunctionofthemastercartonistoprotect
productsfromdamagewhilemovingandbeing
storedinthelogisticalsystem.
•Mastercartonalsoserveasadeterrenttopilferage.
•Achievingdesireddegreeofprotectioninvolves
tailoringthepackagetotheproductandselecting
propermaterialforpackageconstruction.
•Thedeterminingfactorsarethevalueandfragilityof
theproduct;higherthevalue,thegreateristhe
justificationfornearlyabsoluteprotection.
•Iftheproductisfragileandhashighvalue,thenthe
costofabsoluteprotectioncanbesignificant.
Zubin Poonawalla

182. 182
Cost of Packaging
L
o
s
S
B
y
D
a
m
a
g
e
Zubin Poonawalla

183. 183
•Thesusceptibilitytodamageofagiven
packageisdirectlyrelatedtotheenvironment
inwhichitmovesandisstored.
•Productfragilitycanbemeasuredby
product/packagetestingbymeansofshock
andvibrationequipment.
•Ifpackagingrequirementsandcostare
prohibitive,alternativeproductdesignscanbe
evaluatedutilizingthesametesting
equipment.
•Theendresultisthedeterminationofthe
exactpackagingrequiredtoprotectthe
product.
Zubin Poonawalla

184. 184
•Duringthelogisticalprocess,commoncauses
of product damage are
vibrations,impact,puncture,andcompression.
•Stackingfailurecanalsoresultindamage
whiletheproductisinstorage.
•Thepotentialphysicaldamageofpoor
stackingrangesfromsurfacescuffingand
marring to complete product
crushing,bucklingandcracking.
•Typicalmethodsofsecuringthepackagesare
strapping,tie-downs,anduseofvarious
dunnagematerialsthatlimitvibrationsand
shock.
Zubin Poonawalla

185. 185
B. Efficiency/ Utilization
•Logisticaloperationsareaffectedby
packagingutilityi.e.fromtruckloadingand
warehousepickingproductivityto
transportationandstoragespaceutilization.
•Logisticalactivityoutputcanbedescribedin
termsofpackages,suchasnumberofcartons
loadedperhourintoatrailer,numberof
cartonspickedperhourinawarehouseor
distributioncentre.
•Materialhandlingefficiencyisalsostrongly
influencedbytheunitizationofpackages.
Zubin Poonawalla

186. 186
•Animportantpartofpackagingrelatingto
storageandmaterialhandlingistheconceptof
unitization.
•Unitizationdescribesthephysicalgroupingof
mastercartonsintoonerestrainedloadfor
materialhandlingortransport.
•Conceptofcontainerizationincludesallforms
ofunitization,fromtapingtwomastercartons
togethertotheuseofspecializedtranspotation
equipment.
•Alltypesofcontainerizationhavethebasic
objectiveofincreasingmaterialhandling
efficiency.
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187. 187
Benefits of Unit Loads
-Unloadingtimeandcongestionatdestination
isminimized.
-Productsshippedinunitloadquantities
facilitatematerialhandlingandinventorycan
bepositionedrapidlyfororderselection.
-Damageintransitcanbereducedbyunitload
shippingandspecializedtransportation
equipment.
-Allabovefactorsleadtoreductioninlogistical
cost.
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188. 188
-Aunitloadcanincreasedamagepotentialifit
isnotproperlyrestrainedduringhandlingor
transport.
-Standardmethodofimpartingstabilitytounit
loadincluderopeties,steelstrapping,
adhesives,wrapping-bothshrinkwrapaswell
asstretchwrap.
C.Communication
•Criticaltocontentidentification,tracking,and
handlingasthethesearebecomingnecessary
tototalchannelsuccess.
Zubin Poonawalla

189. 189
(a)Content Identification
-Averyobviouscommunicationroleisidentifying
packagecontentsforallchannelmembers.
-The typical information includes
manufacturer,product,typeofcontaineri.e.canor
bottle,countandproductcodenumber.
-Thecartoninformationisusedtoidentifyproduct
forreceiving,orderselection,andshipment
verification.
-Visibilityisthemajorconsideration,andmaterial
handlersshouldbeabletoseethelabelfrom
reasonabledistancesinalldirections.
-Highvalueproductsoftenhavesmalllabelsto
minimizethetemptationoftheft.
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190. 190
(b) Tracking
-Awellcontrolledmaterialhandlingsystem
tracks product as it is
received,stored,retrieved,andshipped.
-Agoodcontrolonmovementreducesproduct
lossandpilferageandisusefulformonitoring
employeeproductivity.
-Lowcostscanningequipment,and
codificationincreasesthetrackingcapabilities
andeffectiveness.
Zubin Poonawalla

191. 191
(c) Handling Instructions
-Finalroleoflogisticspackageistoprovide
handlinganddamageinstructions.
-Theinformationshouldbeprovidedaboutany
specialproducthandlingconsiderationssuch
asglasscontainers,temperaturerestrictions,
stackingconsiderations,orpotential
environmentsconcerns.
-Iftheproductisdangerous,suchasan
explosivechemical,thepackagingshould
provideinstructionsforealingwithspillsand
containerdamage.Zubin Poonawalla

192. 192
Channel Integration-PCM
•Packaging,Containerization,andMaterialhandling
representintegralpartsofthelogisticaloperating
system;asallthreeareasinfluenceeachother.
•Forinstance,automatedhandlingcannotbe
efficientlydesignedwithoutahighdegreeofmaster
cartonstandardization,whichinturnprovidethe
opportunitytocontainerizeindividualproducts.
•Theintegrationbetweenmaterialhandling
capability,transportation,warehousing,inventory
policyandpackagingcommunicationintocustomer‟s
logisticalsystemleadstominimumhandlingduring
theexchangeofmerchandise.
•Thistypeofintegrationiscommonlyfoundin
physicaldistribution.Zubin Poonawalla

193. 193
Scrap/Waste Disposal
Scrap
Material Input
Material
Processing
Material
Output
Recycle Disposal
Zubin Poonawalla

194. 194
A.Scrap
•Scrapisawastecreatedwhileprocessingthe
materials.
•Theprocessscrapisunavoidableextramaterial
removedfromthestockofmaterialwhile
generatingacomponent.
•Forexample,whilemakingamachinedcomponent
somematerialhastoberemovedintheformof
chips.
•Quiteoften,whilemanufacturinganycomponent
somedimensionsarenotmaintainedandthelotis
scrappedasthesecannotbeusedintheassemblyof
theproduct.
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195. 195
B. Surplus
•Whentheprojectorproductneedsaspecificquantity
oftheitem,extraleftovercannotbeusedandthis
quantityiscalledsurplus.
•Thesurplusquantityhastobedisposedoff.
C.Obsolete
•Whentheitemcannotbeusedintheproduct/project
duetochangesthatmighthavetakenplaceinrespect
ofdimensions,shape,colouretc,thesearecalled
obsoleteitems.
•Changesayoccurduetodefectinproductdesign,or
shelflifeetc.
•Thesecomponentshavetobescrapped/disposedoff.
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196. 196
Wastivity of a System
•Wastivityofthesystemisdefinedastheratioofthe
wastetotheinput.
•Wastivity=Waste/Input
•Grosswastivity=Totalwastegenerated/Totalinput.
•Allwasteisnotthewaste,somepartofitcanbe
recycled.
•Netwaste={Totalwastegenerated}-{Wasterecycled
withinthesystem}.
•Netwasitivity=Wastewhichcannotberecycled/
Totalinput.
•Wastivityassessestheproductivityforeachtypeof
input.Bothwasitivityandproductivityare
complementarytoeachother.Zubin Poonawalla

197. 197
Issues to be addressed
•Quickidentificationofthewastegenerated.
•Separationofdifferenttypesofwaste.
•Economicreduction.
•Efficientcollectionandhandling.
•Recycling,andeffectivedisposalwithout
affectingtheenvironment.
•Designingasuitable„wastecontrol
programme‟.
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198. 198
Recycling /reusing/ disposal of
waste/ surplus/ scrap.
-Recyclingreferstotheuseofbadqualityoutputs
(rejects)orwastesasinputstothesameprocessor
systeme.g.reusingplasticscrap.
-Usethescrapforproducingby-products.
-Transferthesurplusfromonedepartmenttoanother.
-Sellthescrap/surplusasrawmaterialstootheruser
factories,externalagents,oreventotheemployees.
-Sellscrapthroughadvertisementandauctioning.
-Returnthesurplustothevendor,ifpossible.
-Donaterejectedmaterialtocharitableorganizationsto
gainsocialrespect.
Zubin Poonawalla

199. 199
Warehousing
•Theprimarypurposeofawarehousemanagementisto
controlthemovementandstorageofmaterialswithin
anoperation.
•Warehousingcanbeviewedasaplacetostore
inventoryaswellasafacilityforswitchingthe
inventory.
•Warehousingisbecomingsignificanttoachievethe
followingobjectives:
-Toreduceinventory
-Toreducedlabourcosts
-Toincreasestoragecapacity
-Toincreasecustomerservice
-Toincreaseinventoryaccuracy.
Zubin Poonawalla

200. 200
•Typically,thewarehousesreceived
merchandisebyrailorroadandthematerials
weremovedmanuallytoastorageareawithin
thewarehouseandpileduponthefloorin
stacksmanually.
•Duetoabove,thoughdifferentproductswere
storedinthesamewarehouseitwasdifficultto
identifythemerchandisewithrespecttoa
particularorder.
•Onthereceiptofthecustomerorders,products
werehandpickedandplacedonthewagonsand
thesewagonswerepushedoutofshippingarea.
Zubin Poonawalla

201. 201
•Asthelabourwasinexpensive,humanresourceswere
usedextensivelyandnoconsiderationwasgivento
efficiencyutilization,workmethods,ormaterial
handling.
•Inspiteofpoorefficiency,warehousescontinuedto
provideanecessarybridgebetweenproductionand
marketing.
•Withtheimprovedtechniquesofforecastingand
productionschedulingtheneedtobuildupinventory
wasconsiderablyreduced.
•Also,delaysduringmanufacturingprocessreducedas
theproductionbecamemorecoordinated.
•Seasonalproductscontinuetorequirewarehousing.
•Theoverallneedtostorematerialstosupport
manufacturinghasbeenreduced.Zubin Poonawalla

202. 202
•Incontextofretailing,thedepartmentstores
facethenecessityofstockinganincreased
varietyofproductsandareunabletoorderin
sufficientquantitiesfromasinglesupplierto
enjoythebenefitsofconsolidatedshipment.
•Directorderingfrommanufacturersbecomes
prohibitivelyexpensiveduetohighcostof
transportingsmallshipments.
•Thisnecessitatestheneedforwarehousingto
providetimelyandeconomicalinventory
assortments.
•Atwholesalelevel,thewarehousebecomesa
supportunitforretailing.
Zubin Poonawalla

203. 203
•Incontextofmanufacturing,companies
producingproductsat multiple
locations,efficientwarehousingbecomesa
methodforreducingmaterialandpartsstorage
andhandlingcostswhileoptimizing
production.
•ForimplementingJITandstockless
productionstrategieswarehousingbecomesan
integralpartofentirevaluechain.
•AsthebasicobjectiveofJITistoreduce
work-in-processinventory,manufacturing
needstosupportedbyhighlydependable
delivery.
Zubin Poonawalla

204. 204
•InacountryaslargeasIndia,thisispossible
onlybyhavingstrategicallylocated
warehouses.
•Thestockscanbeheldatacentralwarehouse
therebyreducingtheneedtomaintain
inventoryateachassemblyplant.
•Usingconsolidatedshipments,materialsare
purchasedandtransportedtothesupply
warehouseandthendistributedto
manufacturingplantsasandwhenneeded.
•Afullyintegratedwarehouseisavital
extensionofmanufacturing.
Zubin Poonawalla

205. 205
•Incontextofoutboundlogistics,warehouseshave
madepossiblethedirectshipmentofmixed/
assortedproductstothecustomersthereby
enhancingtheservicecapabilities.
•Thedirectassortedshipmentshavetwo
advantages,namely,
(a)Reducedlogisticalcostbecausethefullproduct
assortmentcanbedeliveredwhiletakingthe
advantageofbenefitsobtainedthroughconsolidated
transportation.
(b)Morecompetitiveadvantageforthemanufacturers
duetospeediershipmentsandmixedlots.
•Recently,warehouseshavebeenabletoincrease
productivityduetoeffectiveuseofInformation
Technology.
Zubin Poonawalla

206. 206
Role of Warehousing in
Logistical System
•Provisionofstrategicstorage,thoughaneffective
distributionsystemshouldnothavethenecessityof
inventoryforanexcessivelengthof
time,sometimesstoragebecomesinevitable.
•Actingasaswitchingfacility
•Provisionofeconomicandservicebenefits.
Zubin Poonawalla

207. 207
Economic Benefits
ConsolidationBreak-bulkCross-dockingPostponing
Stock
piling
Zubin Poonawalla

208. 208
Consolidation
Plant A
Plant B
Plant C
Consolidation
warehouse
Customers
A BC
Zubin Poonawalla

209. 209
•Thebenefitsandfeaturesare
-Realizationoflowestpossibletransportation
rate.
-Reductionofcongestionatacustomer‟s
receivingdock.
-Manufacturingplantscanusewarehouseasa
forwardstocklocationorassortingand
assemblyfacility.
-Combinesthelogisticalflowofsmall
shipmentstoaspecificmarketarea.
-Asinglefirmmayuseconsolidation
warehousingoranumberoffirmsmayjoin
togetherandhiretheconsolidationservice.
Zubin Poonawalla

210. 210
Break-bulk
Plant A
Break-bulk warehouse
Customer A
Customer B
Customer C
Zubin Poonawalla

211. 211
•Break-bulkoperationsreceivecombined
ordersfrommanufacturesandshipsthemto
individualcustomers.
•Break-bulkwarehousesplitsindividualorders
andarrangesforlocaldelivery.
•Cross-dockfacilityissimilartobreak-bulk
exceptthatitinvolvesmultiplemanufacturers.
•Intransit-mixingandreleaseaswellas
manufacturingsupportarealsoincludedin
crossdockfacility.
Zubin Poonawalla

212. 212
Cross-docking
Company A or Plant A
Company B or Plant B
Company C or Plant C
Distribution
centre
Customer A
Customer B
Customer C
Zubin Poonawalla

213. 213
In Transit mixing and release
Plant A
Plant B
Plant C
Warehousing
Transit
mixing
point
Product D
Customer X
Customer Y
Customer Z
Customer W
Zubin Poonawalla

214. 214
Manufacturing Support
Vendor A
Vendor B
Vendor C
Manufacturing
warehouse
Assembly
plant
Zubin Poonawalla

215. 215
•Thefeaturesandbenefitsofcross-dock
facilitiesare:
-Thefulltrailerloadsofproductarrivefrom
multiplemanufacturersandastheproductis
receiveditissortedandallocatedtocustomers.
-Theproductisthenmovedacrossthedockto
beloadedontothetrucksdestinedfor
appropriatecustomer.
-Thetrucksarethentransportedtoretailoutlets
oncethesamehavebeenfilledwiththemixed
productfrommultiplemanufacturer.
Zubin Poonawalla

216. 216
Processing/Postponement
•Warehousescanalsobeusedtopostpone,ordelay
productionbyperformingprocessingandlight
manufacturingactivities.
•Awarehousewithpackagingandlabellingcapability
allowspostponementoffinalproductionuntilactual
demandisknown.
Forexample,vegetablescanbeprocessedandcannedat
themanufacturer‟sendwithoutpre-attachedlabels.No
pre-attachedlabelsmeanstheproductdoesnothaveto
becommittedtoaspecificcustomer.Onceaspecific
customerorderisreceived,thewarehousecan
completefinalprocessingbyaddinglabeland
finalizingthepackaging.
Zubin Poonawalla

217. 217
Stockpiling
•Usefulforseasonalstoragesuchas:
-BlanketsandKnittingwoolareproducedyearround
andprimarilysoldduringaveryshortmarketing
period.
-Agriculturalproductsareharvestedatspecifictimes
withsubsequentconsumptionthroughouttheyear.
•Inboththeabovesituations,stockpilingbecomes
necessarytosupportthemarketingefforts.
•Stockpilingprovidesforabufferinventoryallowing
forabalancebetweentheavailabilityofmaterials
andthemarketdemand.
Zubin Poonawalla

218. 218
Service Benefits
Spot StockAssortmentMixing
Production
support
Market
presence
Zubin Poonawalla

219. 219
Spot Stock
•Usedofteninphysicaldistributionparticularlyincase
ofseasonalproducts.
•Selectedamountoffirm‟sproductlineisplacedor
spotstockedinawarehousetofillcustomerorders
duringacriticalmarketperiod.
•Spotstockingallowsinventoriestobeplacedina
varietyofmarketsadjacenttokeycustomersjustprior
toapeaksellingperiodofseason.
•Forexamples,suppliersofagriculturalproductsto
farmersoftenusespotstockingtopositiontheir
productsclosertomarketduringgrowingseasonand
oncethesalesseasonisover,theremaininginventory
iswithdrawntocentralwarehouse.
Zubin Poonawalla

220. 220
Assortment
•Assortmentwarehousestocksproductcombinationsin
anticipationofcustomerorders.
•Assortmentrepresentsmultipleproductsfromdifferent
manufacturersorspecialassortmentsasspecifiedby
thecustomers.
Forinstance,awholesalerofathleticclothingwould
stockproductsfromnumberofclothingsuppliersso
thatthecustomerscanbeofferedassortments.
Wholesalerswouldcreateaspecificuniformforthe
teamincludingshirts,pants,andshoes.
Zubin Poonawalla

221. 221
•AdvantagesofAssortmentwarehouses
-Improvesservicesbyreducingthenumberof
suppliersthatcustomermustdealwith.
-Thecombinedassortmentsallowlarge
shipmentquantitiesleadingtoreduced
transportationcosts.
Zubin Poonawalla

222. 222
Mixing
•Severalshipmentsfromdifferentmanufacturersare
involved.Quitesimilartobreak-bulkprocess.
•Truckloadsofproductsareshippedfrom
manufacturingplantstowarehousesandeachlarge
shipmentenjoyslowestpossibletransportationcost.
•Uponarrivalatthemixingwarehouse,factory
shipmentsareunloadedanddesiredcombinationof
eachproductforeachcustomerisselected.
•Aneffectiveservicebenefitbecauseinventoryis
sortedtoprecisecustomerspecification.
Zubin Poonawalla

223. 223
Production Support
•Productionsupportwarehousesprovidesa
steadysupplyofcomponentsandmaterialsto
assemblyplants.
•Thesafetystocksofitemspurchasedfrom
outsidevendorsarejustifiedbecauseoflong
leadtimeorvariationinusage.
•Productionsupportwarehousingisusedto
supplyprocessedmaterials,components,and
subassembliesintoassemblyplantinan
economicandtimelymanner.
Zubin Poonawalla

224. 224
Market Presence
•Perceivedbymarketingmanagersasan
advantageoflocalwarehouses.
•Localwarehousesandhencelocalinventory
canbemoreresponsivetocustomerneedsand
offerquickerdeliverythanmoredistnt
warehouses.
•Localwarehousemayenhancemarketshare
andpotentiallyincreasetheprofitability.
Zubin Poonawalla

225. 225
Warehouse Design
•Principlestobeconsideredinwarehousing
designingare:
1.Designcriteria
2.Handlingtechnology
3.Storageplan
A.Designcriteria
-Factorstobeconsideredare:
(a)Numberofstoreysinthefacility
(b)Heightutilization,and
(c)Productflow
Zubin Poonawalla

226. 226
(a)Numberofstoreysinthefacility
•Ideally,thewarehousedesignshouldbelimitedtoa
singlestoreysothattheproductisnotrequiredtobe
movedupanddown.
•Useofelevatorstomoveproductfromonefloorto
thenextrequirestimeandenergyandhencecost.
•Elevatorscanalsobecomebottlenecksinproduct
flowsincemanymaterialhandlersusuallycompete
foralimitednumberofelevators.
•Hence,asfaraspossible,warehousesshouldbe
limitedtoasinglestoreyunlessitissituatedin
CentralBusinessDistrictwherelandisrestrictedor
expensive.
Zubin Poonawalla

227. 227
(b)Heightutilization
•Maximumusageofavailablespacebyallowing
fortheoptimumutilizationofheightoneach
floor
•Maximumeffectivewarehouseheightislimited
bysafeliftingcapabilitiesofmaterial-handling
equipmentsuchasforkliftsandfiresafety
regulations.
(c)Productflow
•Designshouldallowforstraightproductflow
i.e.productshouldbereceivedatoneendofthe
building,storedinthemiddle,andthenshipped
fromtheotherend.
Zubin Poonawalla

228. 228
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
Zubin Poonawalla

229. 229
B.HandlingTechnology
•Focusesoneffectivenessandefficiencyofmaterial
handlingtechnologyandprimarilytakesintoaccount
thefollowing:
-Movementcontinuity,and
-Economiesofscaleinmovement.
(a)Movementcontinuity
-Itisbetterforamaterialhandlerorahandling
equipmenttomakealongermovethantohavea
numberofhandlersmakenumerous,individual,
shortlengthmoves.
-Exchangingtheproductbetweenhandlersormoving
itfromoneequipmenttoanotherwastestimeand
increasesthepotentialfordamage.
Zubin Poonawalla

230. 230
(b)Economiesofscaleinmovement.
-Warehousingactivitiesshouldbedesignedtomovea
groupofcasessuchasmastercartonsorcontainers,as
groupingorbatchingreducesthenumberofactivities
andhencethecost.
C.Storageplan
•Highsalesvolumeorfastmovingproductsshouldbe
storedinalocationthatminimizesthedistanceitis
movedsuchaslowheightstorageracks.
•Theobjectiveistominimizethetraveldistanceand
alsotheneedforextendedlifting.
•Lowsalesvolumeorslowmovingproductcanbe
assignedlocationsthataredistantfromthecentreor
higherupinthestoragerack.
Zubin Poonawalla

231. 231
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 low volume
products
Storage space
for low volume
products
Storage space
for low volume
products
Storage
Space
For
High
Volume
products
Primary
gangway
Zubin Poonawalla

232. 232
Warehousing strategies
Private Public Contract
Zubin Poonawalla

233. 233
Private Warehouses
•Operatedbythefirmowningtheproducti.e.
facilitymayeitherbeownedorleased.
•Quiteoftenthewarehousesrequiringspecific
materialhandlingactivitiesdesignedtofitexact
needsofthefirmmaynotbeavailableonhire.
•Generallyefficientwarehouseshouldbe
plannedaroundamaterialhandlingsystemin
ordertoencouragemaximumefficiencyof
productflow.
•Firmswithspecializedcustomersorproducts
oftendeveloptheirownwarehouse.
Zubin Poonawalla

234. 234
Public Warehouses
•Classifiedonthebasisofrangeofspecialized
operationsperformed,asunder
(a)Generalmerchandisee.g.paper,smallhome
appliancesandhouseholdmaintenancegoods.
(b)Refrigerationfacilitiestopreservefood
products,pharmaceuticalmedicinesand
certainchemicalsrequiringspecificambient
temperature.
(c)Bulkcommoditiesrequiringspecialized
materialhandlingsystemssuchasliquid
chemicals,tres,andtextilefabrics.
Zubin Poonawalla

235. 235
(d)Bonded,licensedbythegovernmenttostore
goodspriortopaymentofcustomduties,taxes
etc.
(e)Furniturerequiringspecialhandlingsystems.
(f)Providegreaterflexibilityinoperationssince
warehousingbecomesthecorebusiness.
(g)Duetohighvolumeoperations.,fixedcosts
getspreadoverandjustifymoreefficient
handlingoperations.
(h)Transportationeconomiesareleveragedby
deliveryofloadsrepresentingvarious
customers. Zubin Poonawalla

236. 236
(i)Publicwarehouseschargeaclientabasicfee
forhandlingandstoragebasedonnumberof
casesortheweighthandled.
(j)Wheneconomiesofscalearentposibleina
privatewarehouse,publicwarehousingmay
bealowcostalternative.
Zubin Poonawalla

237. 237
Contract Warehouses
•Contractwarehousesprovidealllogistics
activitiessuchas
(1)Transportation
(2)Inventorycontrol
(3)Orderprocessing
(4)Customerservices,and
(5)Returns
•Assumetotalresponsibilityforenterprises
thatdesireonlytomanufactureandmarket.
Zubin Poonawalla

238. 238
How firm utilize warehousing
facilities?
•Aprivateorcontractfacilitymaybeusedtocover
regularyearroundrequirements.
•Publicfacilitiesareusedtohandlepeakseason.
•Inmanycasescentralwarehousemaybeprivate,while
marketorfieldwarehousearepublicwarehouse.
•Wherethewarehousespaceisfullyutilizedatleast75-
80%ofthetime,privatefacilitymaybemoreefficient.
•Afirmmayfindprivatewarehousingtobemore
justifiedatcertainlocationsonthebasisofdistribution
volume,whileinothercasespublicwarehousingmay
betheleastcostoption.Zubin Poonawalla

239. 239
•Somecustomergroupsmaybeservedbetterfroma
privatewarehouse,whileapublicwarehousemaybe
appropriateforothers.
•Wherethecustomerscanbeservedbetterbylocal
presenceoftheproducts,privateorcontractfacility
maybeuseful.
•Publicandcontractwarehousingincreasesthe
potentialforindustrysynergy.
Forexample,firmsingrocerybusinesssharepublic
warehousingfacilitieswithothersuppliersservingthe
sameindustry.
Thebenefitisthereducedtransportationcostdueto
jointuseofsamepublicwarehouseallowingfor
frequentdeliveryofconsolidatedloadsfrommultiple
suppliers.
Zubin Poonawalla

240. 240
•Publicandcontractwarehousesdemonstratemore
responsivenessastheyofferlocationflexibility.For
example,in-seasondemandforagriculturalchemicals
requirewarehousestobelocatednearmarketstoserve
customersbetter.Aftergrowingseason,local
warehousebecomeunnecessary.
•Publicandcontractwarehousesgenerallyofferbetter
economiesofscale,astheyareabletodesign
operationsandfacilitiestomeethighervolumesof
multipleclients.
•Contractwarehousingfacilitiescanprovidecomplete
logisticalsupportsuchastransportation,order
processing,inventorycontrol,storageandother
administrativeassistanceinanintegratedmanner.
Zubin Poonawalla

241. 241
Warehouse Functions
Movement Storage
Receiving In-storage
handling
Shipping
Planned
storage
Extended
storage
Zubin Poonawalla

242. 242
A.Movement:Receiving,In-storagehandling
andshipping.
(a)Receiving-Activitiesinvolvedare
-Unloadingthetransportationvehicle,which
inmostcasesisdonemanually.
-InIndiancontext,limitedautomatedand
mechanizedmethodshavebeendeveloped
thataresuitabletovaryingproduct
characteristics.
-Theproductishand-stackedonpalletsto
formunitloadformovementefficiency.
Zubin Poonawalla

243. 243
(b)In-storagehandling
-Onreceiptoftheproduct,themerchandiseis
transferredwithinthewarehousetopositionfor
storageororderselection.
-Onreceiptoforder,therequiredproductsare
accumulatedandtransportedtoashippingarea.
-Theentireoperationhelpsinselectionprocessfor
groupingmaterials,parts,andproductsinto
customers‟orders.
(c)Shipping
-Involvescheckingandloadingordersonto
transportationvehicles.
-Shippinginunitloadsleadstoconsiderablesavingof
timeinloadingthevehicle.
-Checkingisimportantatapointwhenmerchandise
changesownershipasaresultofshipment.
Zubin Poonawalla

244. 244
B.Storage:canbeeitherplannedorextended.
(a)Plannedstorage
-Storageforbasicinventoryreplenishmentisreferred
toasaplannedstorage.
-Durationvariesdependingontheperformancecycle
length.
(b)Extendedstorage
-Sometimesstoragemayberequiredforseveral
monthspriortocustomershipment.
-Seasonalitemsrequirestoragetowaitfordemandor
tospreadsupplyacrosstime.
-Erraticdemand,productconditioning,speculative
purchasesanddiscountscallforextendedstorage.
Zubin Poonawalla

245. 245
Warehouse Site Selection Process
•Traditionally,saleswerekeydriversininfluencing
warehousesiteselection.
•Companiessatisfiedtheneedsoftheirsalesforceby
buildingwarehouseswiththehopetoincreasemarket
presenceandhencerevenue.
•Manycompaniesstillbelievethatinordertosucceed
incertainmarkets,theymusthaveawarehouse
presence.
•Whilethismaybethecaseinforsomeindustriessuch
asfoodwherethewarehousesmustdeliverthe
productstocustomersinatimelymanner;thereare
alternativestobuildingwarehouses.Zubin Poonawalla

246. 246
•Beforemakingasiteselectioncompaniesmust
closelyexaminethecurrentdistributionnetworkand
theimpactofadding,subtractingorconsolidating
facilitiesfortheentireorganization.
•Manyfactorscomeintoplaywhenanalyzingthe
impactanewwarehousewillhaveonthe
company‟sdistributionnetwork.Theseare:
-Quantitativevariables
(a)Costdrivers,tangibleandrelativelyeasytodefine.
(b)Demandpotentialandtrends,consumption
pattern,transportationrequirementsandcosts,labou
costs,facilitycostsandutilitycost.
Zubin Poonawalla

247. 247
-Qualitativevariables
(a)Moredifficulttounderstandandtomeasure.
(b)Customerservicelevelsandtopmanagement
preferences.
•Onceallthedataiscollected,theactualanalysis
isdonedependingonthenumberofalternative
locationstrategies.
•Thecompanyshouldbeabletoselectthebest
siteaccordingtocost,operatingfactors,and
expectedcustomerservicelevels.
•Theideaistoensurethegreatestreturnon
investment.
Zubin Poonawalla

248. 248
The Square Root Law
•Thesquarerootlawstatesthat“Thetotalinventoryin
asystemisproportionaltotheSquareRootofthe
NumberofLocationsatwhichaproductisstocked.”
•ThesignificanceofThesquareRootLawisthata
firmcurrentlyoperatingoutoffivewarehouseswhich
centralizestoonewarehousecantheoreticallyreduce
inventorycarriedinstockby55percent.
•Thiswillofcourseresultinlargesavingsin
inventorycarryingcostwhichwillbeslightlyoffsetby
morerapidtransporttomeetcurrentdeliveryservice
levels.
Zubin Poonawalla

249. 249
•Itisrecognizedthattheinventorytendsto
increaseasthenumberoflocationsincrease.
•Whilethereductionofinventoryandnumber
oflocationsforkeepingfinishedproductsare
desired,thecompaniesmustdosowithout
reducingservicetocustomers.
•Thesquarerootlawdeterminestheextentto
whichinventoryreducesbyreducingthe
numberoflocations.
•Animportantassumptionisthetotalcustomer
demandremainssame.
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250. 250
•TheSquareRootLawstatesthatthetotal
inventoryinafuturenumberofwarehousesis
determinedbymultiplyingthetotalinventoryat
theexistingwarehousesbythesquarerootof
numberoffuturewarehousesdividedby
number of existingwarehouses.
Mathematically,itisrepresentedasunder:
•L=[(L
1)x{(W
2W
1)}],where
•L=Totalinventoryinfuturewarehouses
•L
1=Totalinventoryinexistingwarehouses
•W
1=Numberofexistingwarehouses
•W
2=Numberoffuturewarehouses.
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251. 251
•Forexample,Inacompanythereare40
warehousesandtheexistinginventoryis
2,00,000units.Ifthenumberofwarehouses
arereducedto10whatwillbeimpactontotal
inventory.
•L
1=2,00,000
•W
1=40
•W
2=10
L=[(2,00,000)x{(1040)}]=1,00,000
•Thus,inventorywillconsistof1,00,000units
givingareductionof50%.
•Conversely,ifthenumberofwarehousesare
increased,thetotalinventorywillincrease.Zubin Poonawalla

252. 252
•Assumptionsare
(1)Inventorytransferfromonewarehouseto
otherisnotdone.
(2)Leadtimedoesnotvary.
(3)Customerserviceleveldoesnotchange
fromanywarehouse.
(4)Demandleveliswelldistributedfromall
warehouse.
Zubin Poonawalla

253. 253
Warehouses as Distribution
Centres
Distribution strategies can be of following types
•Cross docking
•Milk runs
•Direct shipping
•Hub and spoke model
•Pool distribution
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254. 254
A.Cross Docking
-Cross-dockingco-ordinatesthesupplyanddelivery
sothatthegoodsarriveatthereceivingareaand
transferredstraightawaytotheloadingarea,where
theyareputintodeliveryvehicles.
-Crossdockingisaflow-throughconceptasitisnot
desirabletointerruptflowofproductsanywhere,
becausespace,brickandmortarisgettingvery
expensivethesedays.
-Crossdockingshiftsthefocusfrom“supplychain”to
demandchain”.
-Thestockcomingintocrossdockingcentrehas
alreadybeenpre-allocatedagainstareplenishment
ordergeneratedbyaretailerinthesupplychain.
-Crossdockingencourageselectroniccommunications
betweenretailersandtheirsuppliers.
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-Therearetwoformsofcrossdocking
(1)BasiccrossDock
•Inthisformpackagesaremoveddirectlyfromthe
arrivingvehiclestothedepartingones.
•Thisformofcrossdockingdoesnotneeda
warehouseandasimpletransferpointisenough.
(2)FlowthoughCrossDock
•Inthiscase,whenthematerialsarriveandtheyare
inlargepackages,thesepackagesareopenedand
broken into smaller
quantities,sorted,consolidatedandtransferredto
vehiclesfordeliveringtodifferentcustomers.
Zubin Poonawalla

256. 256
-Crossdockingcanbedevelopedintoaphase
wherenothingactuallymovesthrougha
warehouse.
-Thestockkeptwithinthevehiclesarereferred
toas“stockonwheels”.
-Nowadays,wholesalersusethemethodofdrop-
shipping,wheretheydonotkeepthestock
themselves,butcoordinatethemovementof
goodsfromtheupstreamsupplierstothe
downstreambuyers.
Zubin Poonawalla

257. 257
How Cross Docking Works?
Receiving
Sorting
Shipping
Zubin Poonawalla

258. 258
•Onreceivingthegoodsworkersputthemin
lanescorrespondingtothereceivingdoors.
•Asecondteamofworkerssortthegoodsinto
shippinglanesfromwhichafinalteamloads
themintooutboundtrailers.
BenefitsofCrossDocking
•Helpstoimprovethespeedofflowofthe
productsfromthesuppliertothestores.
•Helpstoreducethecostasthelabouris
removedfromthejobofstorageaswellasby
eliminatingwarehousing/storage.
Zubin Poonawalla

259. 259
•Helpstoreducetheamountoffinishedgoods
inventorythatisrequiredtobemaintainedas
safetystock.
ConstraintsofCrossDocking
•RequiresastrongITbaseandrealtime
informationsharingfacilitiese.g.Barcodeson
cartons.
•Appropriateforproductswithlarge,and
predictabledemands.
•Requiresthatdistributioncentresshouldbeset
upsuchthatthebenefitsofeconomiesofscale
intransportationcanbeachievedonboththe
inboundandoutboundside.
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260. 260
•Requiresagreatdegreeofcoordinationand
synchronizationbetweentheincomingandoutgoing
shipmentswhich,inturn,reliesonbetterinformation
andplanning.
•Productavailability,accuracyandqualityaspectsare
critical.
B.MilkRuns
•Amilkrunisarouteinwhichatruckeitherdelivers
productfromasingletomultipleretailersorgoesfrom
multiplesupplierstoasingleretailer.
•Inotherwords,asupplierdeliversdirectlytomultiple
retailstoresonatruckoratruckpicksupdeliveries
formanysuppliersofthesameretailstore.
Zubin Poonawalla

261. 261
Milk runs from single supplier to
multiple retailers
Retail Store 1
Retail Store 2
Retail Store 3
Retail Store 4
Retail Store 5
Supplier
Retail Store 6
Zubin Poonawalla

262. 262
Milk runs from multiple suppliers
to single retailer.
S 1
S 2
S 3
S 4
S 5
S 6
Retail Store
Zubin Poonawalla

263. 263
Benefits/LimitationsofMilkRuns
•Milkrunshelptoreducethethetransportationcostsby
consolidatingshipmentstomultiplestoresonasingle
truck.
•Milkrunsallowdeliveriestomultiplestorestobe
consolidatedonasingletruck,resultinginabetter
utilizationofthetruckandsomewhatlowercosts.
•Theuseofmilkrunishelpfulifveryfrequent,small
deliveriesareneededonaregularbasisandeitheraset
ofsuppliersorasetofretailersisingeographic
proximity.
•Helpstoreducetheamountofinventorytobekeptas
asafetystockinthewarehouses.
•Highdegreeofcoordinationandsynchronization
requiredamongthemembersofsupplychain.Zubin Poonawalla

264. 264
C.DirectShipping
•Directshippingrefertothemethodofdistributionin
whichgoodscomedirectlyfromthesupplierstothe
retailstores.
•Inthiscase,routingofeachshipmentisspecifiedand
thesupplychainmanagerneedstodecideonthe
quantitytoshipandthemodeoftransportationtouse.
•Thissystemeliminatestheneedfortheintermediates
facilitiessuchaswarehousesanddistributioncentres.
•Goodsthataregenerallydistributedthroughthe
methodofdirectshippingarecertainperishableitems,
highvolumegoods,highbulkitemsandspecialty
products.
Zubin Poonawalla

265. 265
Direct Shipment Network
S 1
S 2
S 3
S 4
R 1
R 2
R 3
R 4
R 5
R 6
Zubin Poonawalla

266. 266
Benefits/LimitationsofDirectShipment
•Themajoradvantageofdirectshipmentnetworkisthe
eliminationofintermediatewarehousesandthe
simplicityofitsoperationandcoordination.
•Savesalotoftimeasthetimerequiredfordistribution
ofgoodsfromthesuppliertotheretailstorewouldbe
shortbecauseeachshipmentgoesdirect.
•Asgoodsmovedirectlyfromthesuppliertotheretailer
thereislesshandlingoftheproductsasaresultthereis
lessproductdamage.
•Sincethedistributionisdirect,theinvoicematch
receivingrecordsresultingintoeaseofmaintaining
storerecords.
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267. 267
•Thedirectshipmentnetworkisjustifiedifthe
retailstoresarelargeenoughbecausewiththe
smallsizeofretailstoresthedirectshipment
networktendstohavehighcosts.
•Directshipmentfromthesuppliertotheretailer
posesalotofhasslesforthestorepersonnele.g.
moredeliveries,paperwork,loadingand
unloadingetc.
•Duetouncertaintiesofshipmentsfromsuppliers
suchasdelayintransportation,wronggoods
supplied,transitdamagemakeitnecessaryto
maintainsafetystock.
Zubin Poonawalla

268. 268
D.HubandSpokeModel
•Inthismodel,thedistributionhubisthe
locationthatholdsinventoryforalarge
region,witheachspokeleadingtosmaller
distributioncentre,whichhousesinventoryfor
asmallerregion.
•Themaindriverofthehubandspokemodelis
theproximitytothecustomer,withthegoal
beingtosupplytoamaximumnumbersof
customersinminimumtime.
•Currently,HubandSpokemodelisrestricted
tofulfillingthejust-in-timeneedsofheavy
manufacturingindustries.
Zubin Poonawalla

269. 269
•Ifacompanyexpandsitsoperations,itssuppliers
maymovetonearbyareassoastosupplyitmore
efficiently.Inthiscase,companythatexpandsisthe
hubandsuppliersareitsspokes.
•Thetypeofproducttobedistributedlargely
necessitatesahubandspokeoperation.
•Theproductsthatcannotbeairfreightedaremostly
distributedthroughhubandspokemodel.
E.PoolDistribution
•Pooldistributionisthedistributionofproductto
numerousdestinationpoints-customers,stores,stop
pointswithinaparticulargeographicregion.
Zubin Poonawalla

270. 270
•Pooldistributionisisusefulwhenhigh
frequencyregularshipmentsinLTLquantities
areinvolved.
•Pooldistributionrepresentsanexcellentcost
effectivealternativetothehighercostof
individualLTLshipments.
•InsteadofLTLdirect,productisshippedto
regionalterminalsintruckloadquantities.
•Thereitisoffloaded,thensegregatedandsorted
bydeliverypointthenreloadedonlocaldelivery
trucksfordeliverytotheindividualdestinations.
Zubin Poonawalla

271. 271
Normal LTL and pool
distribution
S 1
R 1
R 2
R 3
R 4
Zubin Poonawalla

272. 272
S 1 W 1
R 2
R 1
R 3
R 4
Zubin Poonawalla

273. 273
Benefits
•Whenyouhavemultipleshipmentsboundfor
specificregion,pooldistributionissimplecost
effectivealternativetoLTL.
•Merchandisereachesretailstoresspeedily.
•LesshandlingthannormalLTLserviceand
hencereducedclaims.
•Meetcustomerdeliveryrequirements.Handle
peaksinbusinesseffectively.
Zubin Poonawalla

274. 274
Storehouse Operations
Storage Systems
The Receipt System
Physical Upkeep
and Maintenance System
Issue system
Zubin Poonawalla

275. 275
•Systemdesignshouldnotonlypermit
matchingofpresentrequirementswiththe
existingsupplies,butalsomusttakecareof
thefuturegrowthpotentialandemands.
•Storesmustactasabufferbetween
procurementandvariousotherconsuming
departments to ensure timely
receipts,storage,upkeep,handling,accountin
g,issuesanddisposals.
•Primarilystoresmustrendereffectiveservices
toallinternalcustomers.
Zubin Poonawalla

276. 276
Regular Activities of Stores
•Toreceivethematerials,checkthemfor
quantity,coordinateforinspectionandqualitychecks
andpreparethegoodsreceiptnote.
•Toapprovetheacceptedmaterials,preparethe
rejectionnotes,andcompletetheformalitiesforbill
payment.
•Totakeintostocktheacceptedmaterials;storethem
inrespectivelocationsaspredetermined.
•Toprepareissuevouchers;makeactualissuesfor
disposalsandaccountforthem.
•Tokeepthepurchasingpeoplewellinformedthrough
systematicindentsandotherreports.
Zubin Poonawalla

277. 277
•Tokeepthestorageplacecleanforfacilitating
handlingmovementsandobserveallsafetymeasures
andsecurityregulations.
•Toensureeasystorage,minimumpilferage,proper
identification,andquickretreivalwithminimumwaste
oftimeandefforts.
•Toestablish,maintainandupdaterationalizedsystem
ofcodification.
•Toanalyzetheconsumptionandissuesfromstock
recordsandestablishingnorms.
•To highlight abnormal
consumption,accumulation,obsolescenceand
surpluses.
•Toarrangeforperiodicreview,physical
verification,andensureproperaccounting.
•Tosuperviseforsmoothfunctioning.
Zubin Poonawalla

278. 278
Choosing the most suitable
storage system
Anystoragesystemisacompromisebetween
theuseofspaceandtheuseoftime.Thebasic
systemsofstorageare:
•Fixedlocation
•Randomlocation
•Zonedlocation
Fixedlocationmeansthatstockcanbefound
immediatelywithoutacomplexsystemof
recordingbuttherecanbeaconsiderable
wasteofspace.
Zubin Poonawalla

279. 279
Randomlocationmeansspaceisbetterutilized,but
accurateandelaboraterecordshavetobekeptabout
wherethematerialsare.
Zonallocationmeansthatgoodsofaparticulargroup
arestoredinagivenarea.Theymaybeeither
randomlystoredinazonedlocationorstored
accordingtofixedlocation.
Alargemechanizedstoresischaracterizedby
groupingtogetherthefastmovingorhighturnover
goods,andmediumandslowmovingitems.
Fastmovingmaterialsareusuallypositionednearthe
inputandoutputendofastorewiththeobjectiveof
reducingtraveltimeandthusspeedingtheprocess
throughout.
Zubin Poonawalla

280. 280
Centralization and
Decentralization of Stores
•Centralizationhelpstoensureeconomy,effect
bettercontrol,reducemanpowerneedsandis
suitableforsmallinstallations.
•Centralizationmakesitdifficulttoprovide
servicetovariousworkcentresscatteredin
differentlocations.
•Decentralizationontheotherhandis
advantageoustoworkshopslyingscatteredin
wideareassothatthevariousstoresmaybe
keptnearproductionshopfloors.
Zubin Poonawalla

281. 281
Variety Reduction
•Manytimespurchasesaremadetomeeturgent
requirementsandthesematerialsbecomeslowmoving
oreventotallydeadstockwithinashortperiod.
•Quiteoften,purchasesarenotlinkedwithstock
availabilitybecauseofthefactthatmanyitemsarenot
properlyidentifiedandincludedinthestorescatalog.
•Varietyreductionwouldrequire
-Periodicreviewofnon-movingandslowmoving
items.
-Eliminatingnon-movingandobsoleteitems.
-Deliberateeliminationofduplicateandunnecessary
itemsheldinthestock.
Zubin Poonawalla

282. 282
Standardization
•Massproductiontechniquesarebasedonthe
principleofuniformityandinterchangeability
ofmanyparts,componentsandmaterialsused
inproductionprocess.
•Standardproductscanbemanufacturedona
massscaleandtheirproductioncostcanbekept
tominimum.
•Standardizationleadstocheaperandeasier
procurementandthecostofreplacementcan
alsobereduced.
Zubin Poonawalla

283. 283
•InIndia,BureauofIndianStandards/IndianStandards
Institutionisthenationalbodythatdealswith
standardizationatnationallevel.
•Thestandardizationcanbedoneinrespectof
products,processes,materials,parts,componentsetc.
•Withthehelpoffrequencydistribution,itiseasyto
ascertainthesizesandtypesmostfrequentlyusedand
whichcanberetainedasstandardsizesandtypes.
•Standardizationenablesindustrytohaveabettercontrol
oninventory,achieveseconomyofmaterialsand
parts,avoidswastages,plansfordisposalofunwanted
stock,andoverallreductioninstocks.
•Through standardizationand variety
reduction,rationalizedcodificationbecomesbecomes
easier.
Zubin Poonawalla

284. 284
Classification and Codification
•Invariably,alargenumberofunnecessaryitemsin
inventorycanbetracedtodifferentandmisleading
nomenclature,faultynumberinganduseoftradeor
brandnamestodescribethesameitems.
•Itisusefultoclassifythematerialsinrelationtotheir
basiccharacteristicstherebybringingtogetherallclosely
similarmaterialsandpartstogetherirrespectiveoftheir
functions.
•Astandardnumericalcodingisusedforthepurposeof
purchase,storesandissuethusresultinginreductionof
long,andambiguousdescriptions.
Zubin Poonawalla

285. 285
Ways to classify and codify
•Thefirststepistoknowthebasicnatureand
characteristicsofallmaterialsusedinan
enterprise.
•Classifythematerialsinbroadcategoriesand
thengroupandsubgrouptheminlogical
progressionofkinds,typesandsizesetc.The
examplesare:
(a)Rawmaterials
(b)Semi-processedmaterials
(c)Mechanicalproductsandequipments
Zubin Poonawalla

286. 286
(c)Mechanicalproductsandequipments
(d)Electricalproductsandequipments
(e)Chemicals,alliedproducts,chemical
processingequipments
(f)Laboratorychemicalsandsupplies
(g)Officeequipmentsandsupplies
•Afterclassificationasperthenatureanduse,a
codeorsymbolisallocatedtoeachofthem.
•Thecodeorsymbolshouldbesimple,flexible
andadaptabletochangingsituations.
Zubin Poonawalla

287. 287
Codification System
1.Alphabetic system
2.Numeric system
3.Decimal system
4.Alphanumeric system-a combination of
alphabetical and numeric system
5.Brisch system
6.Kodak system
Zubin Poonawalla

288. 288
Alphabetical system
•Alphabetsbecomethebasisforallottingthe
codes.Thefirstalphabetofthenameofthe
materialbecomesthestartingpointof
codification.
•Thissystemissuitablewhenthenumbersof
itemsarenotverylargeandalsoavailabilityof
codesislimited.
Zubin Poonawalla

289. 289
Class Group Code
Raw Materials
Iron Bars, M.S. IR-BS-MS
Iron Bars, Bright SteelIR-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
Zubin Poonawalla

290. 290
Numerical System
•Systemisbasedonnumbers-eithersimple
numbers,orblocknumberordashorstrokenumbers.
(a)Simplenumbers
-Onenumberisallotedagainsteachmaterial,while
certainothernumbersarekeptasprovisionofother
items.
(b)Blocknumber
-Thenumbersaredesignedsothatmaterialsofsimilar
natureorblockcomeunderoneblocke.g.raw
materialsunderoneblockof1-1000;consumables
andlubricantsunder1001-2000;packingmaterials
under2001-3000.
Zubin Poonawalla

291. 291
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
Zubin Poonawalla

292. 292
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
Zubin Poonawalla

293. 293
Codification according to
the Category of materials
Iron 1-100
Steel & allied products101-200
Copper 201-300
Nickel 301-400
Alloy 401-500
Zubin Poonawalla

294. 294
(c) Dash/Stroke number
Materials Dash/stroke number
Raw materials 15
Iron ore 15-1 or 15/1
Iron, pig 15-2, or 15/2
Iron melted 15-3, or 15/3
Iron, bright 15-4, or 15/4
Iron, steel 15-5, or 15/5
Iron, sheets 15-6, 15/6
Iron, bars 15-7, 15/7
Iron, moulds 15-8, 15/8
Zubin Poonawalla

295. 295
Decimal system
•Withintherangeoftennumerals0-9,some
significanceisattachedtoeverydigitinthe
codeandwholerangeofitemsinstorescanbe
codified.
•Generally7to8digitsarefoundtobe
sufficientforallpracticalpurposesbutitmay
beextendedupto10digitsinorderto
accommodateanyothercharacteristicsofthe
material.
•Asafirststep,theentirerangeisclassified
underbroadcategories.
Zubin Poonawalla

296. 296
•Further,classificationisdonefortype,size,
grade,shape,conditions,etc.
•Thefirstdigitsignifiesthebroadclass,the
seconddigitsignifiesthegroup,thethirddigit
signifiesthesub-group.fourthdigitsignifies
thetype,thefifthdigitsignifiesthesize,sixth
digitsignifiesthegrade,seventhdigitsignifies
theshape,theeighthdigitsignifiesthe
conditionetc.
•Generallytheprimaryclassificationshould
notbeextendedtomorethan10broadclasses.
Zubin Poonawalla

297. 297
Materials Code
Number
Materials Code
Number
Raw Materials including
ferrous & non-ferrous
metals
0 Electrical equipment,
accessories and fittings
5
Steel sections-rolled, flat
and square
1 Capital machinery
including spares and parts
6
Casting and forgings2 Jigs, tools and fixtures-
production stores
7
Mechanical assemblies,
sub-assemblies,
components and
accessories
3 Fuels, lubricants,
chemicals and allied items
8
Work in progress,
comprising of sub
assemblies, components
and semi finished goods.
4 Miscellaneous stores 10
Zubin Poonawalla

298. 298
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 MN
Manganese Acetate 21 MN-21
Manganese Dioxide 22 MN-22
Manganese Oxalate 23 MN-23
Zubin Poonawalla

299. 299
Main class Subgroups-ISubgroups-IICode
Phosphorus PH
Phosphoric Acid 51 PH-51
Phosphorus Pentoxide 52 PH-52
Phosphorus Trioxide 53 PH-53
Sulphur SP
Sulpherous Acid 81 SP-81
Sulphuric Acid 82 SP-82
Sulphur Oxide 83 SP-83
Zubin Poonawalla

300. 300
Brisch System
•Quitesimilartonumericalsysteminwhich7-digit
numericalcodeassignedtoeachitem.
•Thematerialsaregroupedasunder:
(a)Primarymaterials
(b)Overtheshelfitemspurchased
(c)Componentsaccordingtocompany‟sowndesign.
(d)Assembliesandsubassemblies.
(e)Tools,jigsandfixturesetc.
•Materialsarefurthersubdividedaccordingtotheir
classcharacteristics.
•Byestablishingdifferencesatvariouslevels,thyare
againsub-dividedatsilllowerlevels.Zubin Poonawalla

301. 301
Kodak system
•Firststepistoclassifyonthebasisofpurchase
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
Zubin Poonawalla

302. 302
71-80Office,laboratoryequipments
andstationeries
81-90Fuels and lubricants
Zubin Poonawalla

303. 303
•Inthesecondstep,subclassificationdetailsof
thematerials,say,classcode21-30i.e.
mechanicalproductsandloosetoolsis
provided.
Zubin Poonawalla

304. 304
Principals of Logistics
Information
•Informationflowisakeyelementoflogistics
information.
•Thecommonformsoflogisticsinformationare:
-Customerandreplenishmentorders
-Inventoryrequirements
-Warehouseworkorders
-Transportationdocumentation
-Invoices.
•Traditionalpaper-basedinformationflowresultsinslow,
unreliable,anderror-proneinformationtransferthereby
increasingoperatingcostanddecreasingcustomer
satisfaction. Zubin Poonawalla

305. 305
•Astechnologycostsaredecliningandusageis
easier,logisticsmanagersaremanaging
informationelectronicallyatreducedlogistics
expenseswithincreasedcoordinationresultingin
enhancedservicesbyofferingbetterinformation
tocustomers.
•Thespecifictechnologiesincludeelectronicdata
interchange(EDI),personalcomputers,artificial
intelligence,wirelesscommunications,barcoding
andscanning.
Zubin Poonawalla

306. 306
•Foreffectivelogisticsinformation,timelyand
accurateinformationflowiscriticalbecauseofthe
followingthreereasons.
(1)Customersperceivethatinformationaboutorder
status,productavailability,deliveryscheduleand
invoicesisnecessaryelementoftotalcustomer
service.
(2)Informationcanreduceinventorybyminimizing
demanduncertainty.
(3)Informationfacilitatesallocationofresourcesfor
achievingstrategicadvantage.
Zubin Poonawalla

307. 307
Information Functionality
•Logisticsinformationsystemlinkslogistics
activitiesintoanintegratedprocessthatisbuilt
onthefollowingfourlevelsoffunctionality.
1.Transactionsystem
2.Managementcontrol
3.Decisionanalysis
4.Strategicplanning
Zubin Poonawalla

308. 308
Transactionsystem:
•Initiatesandrecordstheindividuallogistics
activitiesinasequenceasgivenunder:
1.Orderentry
2.Inventoryassignment
3.Orderselection
4.Shipping
5.Pricing
6.Invoicing
7.Customerinquiry
Zubin Poonawalla

309. 309
Customer order
receipt
Inventory assigned
to the order
Directing material
handlers to
select the order
Movement, loading
and delivery of order
Printing of
invoice for
payment
Zubin Poonawalla

310. 310
Managementcontrol
•Focusesonperformancemeasurementand
reporting.Thecommonperformancemeasures
include:
1.Financial
2.Customerservice
3.Productivity
4.Quality
•Afewexamplesare:
(a)Transportationandwarehousingcostperkg.-
Costmeasure
(b)Inventoryturnover-Assetmeasure
Zubin Poonawalla

311. 311
(c)Casefillrate-Customerservicemeasure
(d)Casesperlabourhour-Productivitymeasure
(e)Customerperception-Qualitymeasure.
Decisionanalysis
•Vehicleroutingandscheduling
•Inventorymanagement
•Facilitylocation
•Operationaltrade-offsandarrangementse.g.
verticalintegrationversusthirdparty
outsourcing.
Zubin Poonawalla

312. 312
Strategicplanning
•Strategicallianceswithvariousvaluechain
members.
•Developmentoffirmcapabilitiesandscanning
marketopportunities.
•Customerresponsivenesstoimproved
services.
Zubin Poonawalla

313. 313
Principles of designing LIS
applications
•Theprinciplesunderlyingthedesigningof
logisticsinformationsystemsapplicationsare:
1.Availability
2.Accuracy
3.Timeliness
4.Exception-basedLIS
5.Flexibility
6.Appropriateformat
Zubin Poonawalla

314. 314
1.Availability
-Rapidavailabilityofinformationisextremely
necessarytorespondtocustomersandimprove
managementdecisions.
-Customersfrequentlyneedquickaccessto
inventoryandorderstatusinformationregardlessof
managerial,customer,orproductorderlocation.
-Manytimesitwarrantstheneedfordecentralized
logisticsoperationssothatinformationsystemis
capableofbeingaccessedandinformationupdated
fromanywhereinthecountryoreventheworld.
-Informationavailabilityreducessubstantiallythe
operatingandplanninguncertainty.
Zubin Poonawalla

315. 315
2.Accuracy
-Logisticsinformationmustaccuratelyreflect
bothcurrentstatusandperiodicactivityfor
customerordersandinventorylevels.
-„Accuracy‟isthedegreetowhichLISreports
matchactualphysicalcountsorstatus.
-Incaseoflowconsistencybetweenphysicaland
informationsysteminventorylevels,bufferstock
becomesnecessarytoaccommodatethe
uncertainty.
-Increasedinformationaccuracyreduces
inventoryrequirements.
Zubin Poonawalla

316. 316
3.Timeliness
-Timelinessreferstothedelaybetweentheoccurrence
ofanactivityandtherecognitionofthatactivityinthe
informationsystem.
-Logisticsinformationmustbetimelytoprovidequick
managementfeedback.
-Timelyinformationreducesuncertaintyandidentifies
problems,thusreducinginventoryrequirementsand
increasesdecisionaccuracy.
-Whenacontinuousphysicalproductflowmayexist
suchas“workinprocess”to“finishedgoods”,
informationsystemprovidinginventorystatusmaybe
updatedonanhourly,shift,ordailybasis.
-Realtimeorimmediateupdatesaretimelierbutresult
inincreasedrecord-keepingefforts.Zubin Poonawalla

317. 317
4. Exception-based LIS
-LISshouldbestronglyexceptionorientedandutilized
toidentifydecisionsthatrequiremanagement
attention,particularlyinrespectofverylargeorders,
productswithlittleornoinventory,delayed
shipments,anddecliningoperatingproductivity.
5.Flexibility
-LISmustbeabletoprovidedatatailoredtomeetthe
requirementsofaspecificcustomer.
-Forexample,somecustomersmaywantinvoices
aggregatedacrosscertaingeographicboundariesor
divisionsorretailer.
-Retailer„A‟maywantindividualinvoicesforeach
store,whileRetailer„B‟maydesireanaggregated
invoicethattotalsallstores.Zubin Poonawalla

318. 318
6.AppropriateFormat
-Logisticsreportsandscreensmustcontainright
informationintherightstructureandsequence.
-Forexample,LISshowingadistributioncentre
inventorystatuswithoneproductandone
distributioncentrelistedperscreen.
(a)Thisformatwillrequirecustomerserviceexecutive
checkinventorystatusateachdistributioncentre
whenattemptingtolocateinventorytosatisfya
specificcustomerorder.
(b)Thisimpliesthatiftherearefivedistributioncentres,
areviewandcomparisonoffivecomputerscreensis
required.
Zubin Poonawalla

319. 319
(c)Appropriateformatwouldprovideasinglescreen
withinventorystatusforallfve-distributioncentres.
(d)Thecombinedscreenmakesitmucheasierfora
customerserviceexecutivetoidentifythebestsource
fortheproduct.
(e)Thiscanbeconsideredasanappropriateformatas
onesinglescreenorreportcontainsandeffectively
presentsallrelevantinformationforadecisionmaker.
-Aneffectiveformatshouldintegratepastandfuture
informationregardingonhandinventory,demand
forecast,andplannedreceiptsforeachsingletemata
distributioncentre.
Zubin Poonawalla

320. 320
Logistics Information Systems
Planning & Coordination
Flows
-Capacity Plan
-Logistics Plan
-Manufacturing Plan
-Procurement Plan
Operating Flows
-Order management
-Order processing
-Distribution operations
-Transport & shipping
-Procurement
Zubin Poonawalla

321. 321
A.Planning&CoordinationFlows
-CapacityPlan
•Developedkeepinginmindtheinternalandexternal
manufacturing,warehousing,andtransportation
resources.
•Foreachproduct,capacityplansdeterminethe
“where”,“when”and“howmuch”forproduction,
storage,andmovement.
•Capacityproblemscanberesolvedeitherbyresource
acquisitionoralliancesi.e.contractmanufacturingor
facilityleasing.
•Estimatingproductioncapacityrequirementsthrough
priorschedulingorcontractmanufacturinghelpsin
managingcapacityconstraints.
Zubin Poonawalla

322. 322
•Postponementofproductionordeliveryi.e.by
delayingproductionandshipmentuntilspecific
requirementsareknownandcapacitycanbe
allocatedisanothermethodofsolvingsuch
problems.
•Sometimes,itmaybecomenecessarytooffer
customerincentivessuchasdiscountsor
allowancesinordertopostponedelivery.
•Capacityconstraintshaveamajorinfluenceon
monthlyorweeklyproductionforeach
manufacturinglocation.
Zubin Poonawalla

323. 323
-Logisticsplan
•Thefuturelogisticsrequirementsarebasedon
forecasts,customerordersandsalespromotions.
•Theforecastsarebasedonsalesandmarketing
inputsinconjunctionwithhistoricalactivitylevels.
•Customerordersincludecurrentorders,future
committedorders,andcontracts.
•Mathematically,logisticsrequirementscanbe
computedas
Forecasts(sales/marketinginputs,historicaltrends)
+Customersorders(currentorders,futurecommitted
orders,contracts)+Promotions(salespromotion,
advertising)=Perioddemand–Inventoryonhand-
Plannedreceipts=Periodlogisticsrequirements.
Zubin Poonawalla

324. 324
•Logisticsrequirementsmustbeintegratedwith
bothcapacityconstraintsandmanufacturing
requirementstoachievethebestperformance.
-ManufacturingPlan
•Facilitateschedulingofproductionresourcesand
resolveday-to-daycapacitybottleneckswithinthe
materialsmanagementsystem.
•Primarily,bottlenecksmayresultfromraw
materialsshortagesordailycapacitylimitations.
•Manufacturingrequirementsdeterminethemaster
productionschedule(MPS),manufacturing
requirementplanandconsequentlymaterial
requirementplan(MRP-I/II).
Zubin Poonawalla

325. 325
•MPSdefinesweeklyordailyproductionand
machineschedules,whereasMRPcoordinates
thepurchaseandarrivalofmaterialsand
componentstosupportthemanufacturingplan.
•Bothlogisticsrequirementsandmanufacturing
requirementsmustoperateinparallel.
-ProcurementPlan
•Procurementplanschedulesmaterialreleases,
shipments,andreceipts.
•Therequirementscheduleisusedforpurchase
negotiationsandcontracting.
Zubin Poonawalla

326. 326
B.OperatingFlows
Operatingflowsincludetheinformation
activitiesrequiredtoreceive,process,and
shipcustomersordersandtocoordinatethe
receiptofpurchaseorders.Theseinclude:
1.Ordermanagement
2.Orderprocessing
3.Distributionoperations
4.Transportationandshipping
5.Procurement
Zubin Poonawalla

327. 327
-Ordermanagement
•Involvesentryandmaintenanceofcustomer
ordersusingcommunicationtechnologiessuch
asmail,phone,fax,orEDI.
•Offersinformationregardinginventory
availabilityanddeliverydatestoestablishand
confirmcustomerexpectations.
•Ordermanagementincombinationwith
customerservicerepresentativesformthe
basicinterfacebetweenthecustomerand
enterpriseLIS.
Zubin Poonawalla

328. 328
-Order processing
•Involvesassigningandallocatingavailableinventory
tocustomerandreplenishmentorders.
•Allocationmaytakeplaceonarealtimebasisor
batchmode.
•Batchmodemeansordersaregroupedforperiodic
processing,suchasdayorshift.
•Orderprocessingalsoincludesselectionoforder
fromdistributioncentreorwarehouseandpackitfor
shipment.
•Orderprocessingalsoincludesselectionoforder
fromdistributioncentresorwarehousesandpackit
forshipment.
Zubin Poonawalla

329. 329
-Distribution operations
•Distributionoperationsmusthavesynergywith
inventorycontrolandwarehousingsystems.
•LISindistributionoperationwouldincludeproduct
receipt,materialmovement,andstorageandorder
selection.
•Inabatchenvironment,LISguidestasksdoneby
eachmaterialhandlerhandlingforklifts,palletsetcin
thewarehouse.
•Inareal-timetimeenvironments,thetechnologies
likebarcoding,automatedhandlingequipmentare
usedtoreducetimeelapsedbetweenthedecisionand
action.
Zubin Poonawalla

330. 330
-Transportandshipping
•Theactivitiesincludeshipmentplanning,
scheduling,shipmentconsolidation,transport
documentationgeneration,andcarrier
management.
•Historically,transportationandshipping
emphasizesgenerationofdocumentationand
rategeneration.
•ModernLISintransportationandshipping
laysmorestressuponauditing,routingand
scheduling,invoicing,reportingand
performancemonitoring.Zubin Poonawalla

331. 331
-Procurement
•Includesmanagementofpurchaseorder
preparation,amendment,release,vendor
evaluationandvendorrating.
•ProcurementLISmustbeabletotrackand
coordinatematerialreceipt,facilitycapacity,
inboundandoutboundmovements,and
performancemeasurement.
Zubin Poonawalla

332. 332
Application of Information
Technology
Thespecifictechnologiesthathavewidespread
useinlogisticsare:
1.ElectronicDataInterchange(EDI)
2.PersonalComputers
3.Artificialintelligence
4.Communicationtechnology
5.Barcodingandscanning
Zubin Poonawalla

333. 333
1.ElectronicDataInterchange
•Intercompany computer-to-computer
exchangeofbusinessdocumentsinstandard
formats.
•Determinescapabilityofcommunicating
informationbetweentwoorganizations
electronicallyinsteadoftraditionalmail,
courierorevenfax.
•LISwouldconsistofrealtimedataon
inboundmaterialflows,productionstatus,
productinventories,customers‟shipmentsand
incomingorders.
Zubin Poonawalla

334. 334
•Canbevisualizedintwodifferentperspectivesviz.
externalperspectiveandinternalprospective.
(a)Externalperspectiveincludesneedtocommunicate
ordershipmentandbillinginformationwithvendors,
financialinstitutions,transportcarriers,andcustomers.
(b)Internalperspectiveincludesexchangeofinformation
onproductionscheduleandcontroldata.
•BenefitsofEDIare:
(a)Increasedinternalproductivitythoughfaster
informationtransmissionaswellasreduced
informationredundancy.
(b)Betteraccuracybyreducingthenumberoftimesand
individualsinvolvedindataentry.
(c)Improvedchannelrelationship.
(d)Increaseabilitytocompeteinternationally.
Zubin Poonawalla

335. 335
(e)Reducedlabourcostassociatedwithprinting,
mailing,andhandlingpaper-based
transactions,telephoneandotherclerical
activities.
2.Personalcomputers
•Lowcostandhighportabilitywithacapability
ofbringingaccurateandtimelyinformationto
thedecisionmakerwhetherinoffice,atthe
warehouse,orontheroad.
•Responsivenessandflexibilityofferedby
decentralizedPCsresultsinmorefocused
servicecapability.Zubin Poonawalla

336. 336
•TheuseofLAN,WANandClient/server
architectureoffersbenefitsofdecentralization,
responsivenessandflexibilitythroughoutthe
enterprise.
•Theclient/servernetworkcangloballytrack
inventoryinmotion,provideshipment
informationtothecustomerswhendesiredand
alsofacilitatedecisionsregardingfacility
location,inventoryanalysis,routingand
scheduling.
•Thedecisionsareinvariablyinrespectof
(a)Whichmarketstoserve?
(b)Whichproducttopicknextinthewarehouse?
Zubin Poonawalla

337. 337
(c)Driverreportinganddeliverinformation.
(d)Reportingvehiclelocation
(e)Identifyinglowest-costfuelstop.
3.ArtificialIntelligence
•Aimedatmakingcomputersimitatehuman
reasoningandaremoreconcernedabout
rationalizingratherthannumericprocessing.
•Theapplicationsare:
(a)Carrierselection
(b)Internationalmarketing&logistics
(c)Inventorymanagement
Zubin Poonawalla

338. 338
4.Communicationtechnology
•Applicationofradiofrequency,satellite
communications,andimageprocessing
technologiescanrelatequicklytotheproduct
movementanddecentralization.
(a)Radiofrequency:
-usedwithinrelativelysmallerareassuchas
distributioncentrestofacilitatetwo-way
informationexchange
-Real-timecommunicationwithmaterial
handlerssuchasforkliftdriversandorder
selectors.
Zubin Poonawalla

339. 339
-Updatinginstructionsandprioritiestoforklift
driversonrealtimebasis.
(b)Satellitecommunication
-Usefulforprovidingafastandhighvolume
informationaroundtheglobe.
-Communicationdishesonthetopofvehicles
allowcommunicationbetweendriverand
shippers.
-Providesup-to-dateinformationregarding
locationanddeliveryandallowsdispatchers
toredirecttrucksinresponsetoneedortraffic
congestion.
Zubin Poonawalla

340. 340
-Usedbytheretailchainstotransmitquicklydailysales
toheadquartersthathelpsinactivatingstore
replenishmentandalsotoprovidedinputtomarketing
regardinglocalsalespattern.
(c)Imageprocessing
-Reliesuponfaxandopticalscanningtechnology.
-Usedintransmissionoffrightbillinformation
-Proofofdeliveryreceipt
-Billsoflading.
•Astheconsignmentgetsdeliveredtocustomers,
supportingdocumentsaresenttoimageprocessing
locationswhereitiselectronicallyscannedandlogged
ontothesystem.
Zubin Poonawalla

341. 341
•Electronicimagesofdocumentsarethen
transmittedtomaindatacentrewheretheyare
storedonopticallaserdiskandcustomerscan
accessthedocumentsthroughcomputer
linkagesorphonecalltotheservice
representatives.
•Asthecustomersexperiencethecompetitive
benefitsofrealtimeinformationtransfer,there
willbeincreasedemandforthiscommunication
technology.
Zubin Poonawalla

342. 342
Information sharing though
geostationary satellite
Geostationary satellite
Retail
store
Head office
Transport
company
Zubin Poonawalla

343. 343
•Geostationarysatellitecommunication
technologyhasfacilitatedrealtime
informationtransmissionandsharingamongst
thecompany,itstransporters,andretail
outlets.
Zubin Poonawalla

344. 344
5.BarCodingandScanning
•Typicalapplicationsincludetrackingreceiptsatthe
warehouseandsalesattheretailstores.
•Barcodinginvolvesplacementofreadablecodeson
theitems,cartons,containersandevenrailcars.
•Thesebarcodesdistinguishpackagesizeandflavours
andreduceerrorswhenreceiving,handling,or
shippingproduct.
•Whiletherequirementsofretailersareindividual
item,theshippersandcarriersareconcernedwith
contentsofpallets,containersorcartons.
•Itisimportanttoincludeasmuchinformationas
possibleinthesmallestarea.
Zubin Poonawalla

345. 345
•Thelimitation,however,is“smallerandmore
compactcodesincreasethepotentialforscanning
errors.”
•Ascanneropticallycollectsthebarcodedataand
convertsthemtousableinformation.
•Theapplicationsofbarcodeandscanningare:
(a)Point-of-sales(POS)inretailstores,receipts,
accurateinventorycontrol,trackingofeachstock-
keepingunit(SKU)sold,replenishment,and
providingtimelyinformationbeneficialtoall
channelmembers.
(b)Facilitatingmaterialhandlerstrackproduct
movement,storagelocation,shipmentsand
receipts.
Zubin Poonawalla

346. 346
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.
Zubin Poonawalla

347. 347
Enterprise Resource Planning
(ERP)
•ERPisaninformationtechnologyindustry
termforintegrated,multi-moduleapplication
softwarepackagesdesignedtoserveand
supportseveralbusinessfunctionsacrossan
organization.
•Astrategictoolthathelpstheorganization
improveoperationsbyintegratingbusiness
processesandhelpingtooptimizethe
allocationofavailableresources.
Zubin Poonawalla

348. 348
•Thesesystemsarecommercialsoftwarepackagesthat
facilitatecollectionandintegrationofinformation
relatedtovariousareasofanorganizationsuchas
finance,accounting,humanresources,inventory,
procurement,andcustomerservices.
•ERPactsasacoreinformationcentreofthe
organizationthatleadstobetterunderstandingofits
business,directresources,andplanforfuture.
•Thesystemsenabletheorganizationtostandardize
andimproveitsbusinessprocessestoimplementbest
practicesfortheirindustry.
•ThepopularERPpackagesinthemarketareSAP,
OracleFinancials,BAAN,Peoplesoft,andJD
Edwards.
Zubin Poonawalla

349. 349
Lean Manufacturing
•Leanmanufacturingisabusinessinitiative
toreducewasteinmanufacturedproducts.
•Thewastemaybefromtheproduction
processorfromanypartoftheorganization.
•Thebasicideaistoreducethecost
systematicallythroughouttheproductand
productionprocess.
•Basicconceptsanorganizationmusthave
beforeimplementingleanmanufacturingare:
(a)Continuousflow
(b)StandardizedflowZubin Poonawalla

350. 350
(c)Valuestream
(d)Valueaddedactivities
(e)Pullproduction
Continuousflow
-Referstotheflowofmaterialfrominventoryi.e.raw
materialstothefinishedgoodsstage.
-Processingofthematerialsfromrawmaterialtothe
finishedgoodstageshouldbecontinuousandthere
shouldnotbeanydelaysorwaitingtimeinbetween
asitleapsuptotheincreaseincostofproductionfor
aparticularproduct.
-Waitingtimecanoccurduetovariousreasonssuchas
changeinsetup,replacingabrokenordamagedtool
etc.
Zubin Poonawalla

351. 351
-Thustheaimoforganizationshouldbetoreducethe
waitingtimeandtomakemanufacturingprocessa
continuousprocesswithoutanystoppagesinbetween
fortheflowofmaterialsfromtherawmaterialstage
tothefinishedgoodsstage.
Standardizedwork
-Referstoimprovedlayout,worksequence,andwork
methods.
-Involvestrainingofpeopletodevelopefficientwork
flowsconsideringsafety,quality,quantityanduseof
resources.
-Standardizedworkwouldeliminatewastagesthereby
improvingwork.
Zubin Poonawalla

352. 352
ValueStream
-Allactivitiesrequiredtobringaphysicalproduct
throughthemanufacturingandotherbusinessprocesses
startingfromacceptanceofrawmaterialsorcomponents
todeliveryofthefinishedproduct.Thesewouldinclude
(a)Thedeliveryoftherawmaterials
(b)Thequalityproceduretobefollowedtoacceptthe
material.
(c)Theloadingoftherawmaterialonthepoductionline.
(d)Themanufacturingoftoolsfortheproductionofthe
finishedproduct.
(e)Thesetuptimerequiredformanufacturingaparticular
product.
(f)Theremovalofthefinishedproductfromtheproduction
lineanditspackaging.
Zubin Poonawalla

353. 353
(g)Thevaluestreamismappedtoanalyzeallsteps
fromstarttofinishandredesignthemtoensurethat
theyaddvaluetothefinalproduct.
Value-addedactivities
-Activitiesinthevaluestreamareidentifiedasvalue-
added(VA)ornon-valueadded(NVA).
-VAactivitiesarethoseactivitiesthataddvaluetothe
productandthevalueadditioncanbeinanyformlike
themachinethatconvertstherawmaterialstothe
finishedproducts.
-NVAactivitiesarethoseactivitieswhichdonotadd
anyvaluetothefinishedproductlikethemovement
ofthesemi-finishedgoodfromonemachineto
another.
Zubin Poonawalla

354. 354
-Theseactivitiesshouldbeeliminatedasmuch
aspossibleasinsteadofaddingvaluetothe
finishedproducttheyaddmorecosttothe
product.
-SomeNVAactivitiesareunavoidablesuchas
qualitycheckingproceduresatvariousstages
ofthemanufacturingprocess.
-Thesequalityprocedureseventhough,donot
addanyvaluetothefinalproduct,arerequired
astheyareverymuchessentialforthefinished
producttobeoftherequiredquality.
-Oncemapped,thevaluestreamactivitiesare
identifiedasVAorNVA.
Zubin Poonawalla

355. 355
Pull production
-Materialsaresuppliedwhenneeded,avoiding
unnecessaryWIPandtheflowofmaterialsthrough
thesystem.
-Thisensuresthatworkisperformedonlywhen
required,thereisnowaitingtimeandleadingto
reducedproductioncostandconsequentlythecostof
finishedproduct.
-Themainconcernhereistheavailabilityoftheright
materialattherighttime.
-Thismaybeaproblemforacompanywhichdoes
nothaveavendorrelationshipprogrammeinplaceas
thevendorsmightdelaythedeliveryofmaterial
resultinginadelayinproductionwhichinturnleads
totheincreaseinthecostoftheproduct.Zubin Poonawalla

356. 356
•Leanmanufacturingtakesintoaccountallthe
conceptsmentionedandtriestodecreasethe
thecostofproductionwhichinturnleadsto
decreaseinthecostofthefinishedproduct.
•Leanaddressesthewasteoftimeduringsetup
bytryingtominimizethesetuptimerather
thanminimizingthenumbersetups.
•Ratherthanreducingthenumberofproducts
orputtingnewmachinesontheshopfloor,it
triestominimizethesetuptimebyanalyzing
therequirementsofdifferentcomponentsfor
allthesetupsonaparticularmachine.Zubin Poonawalla

357. 357
•Leanmanufacturingcoordinateswithallthesupply
lines-internalandexternal-andlinksallpartsofvalue
streamthussavingtimeandminimizingproduction
delays
•InternalsupplylinecorrespondstotheWIPmaterial
beingshiftedfromonemachinetoanotherorfrom
storestoamachineorrawmaterialsfromthe
inventorytotheproductionline.
•Theexternalsupplylinecorrespondstothesupplyof
rawmaterialsbyvendorsontimesothatthe
machinescanbeputintoproductionassoonasthe
productionplaniscomplete.
•TheidentificationofVAandNVAactivitiesatall
partsofvaluestreamiscarriedoutextensivelyand
focusisonhowtominimizeNVAactivities.
Zubin Poonawalla

358. 358
•Emphasisisalsoonpullproductionsothatthe
waitingtimeforthematerialsbeforetheyare
loadedontoamachineforprocessingis
reducedasithelpsinreducingthecostof
production.
•Thus,thebasicideaofleanmanufacturingis
toreducewasteandToyotaispioneerin
developingandimplementingthissystem
popularlyknownas„ToyotaProduction
System.‟
Zubin Poonawalla

359. 359
Misconceptions and Misgivings
of Lean Manufacturing
Someofthemostfrequentmisconceptionsand
misgivingsofleanmanufacturingare:
(1)Leanmanufacturingshouldgiveresultsassoonasitis
implemented.
(2)Itisconfinedtoaninternalimplementationinan
organizationandshouldnotbeextendedtosuppliers.
(3)Leadstoretrenchmentofpersonnelastheveryideaof
goingleanistostreamlinetheprocessesandremove
wastefromthesystem.
Zubin Poonawalla

360. 360
•Howitfunctionsisthenottheresponsibilityof
theemployeesofanorganizationbutonlyof
thosefewwhoareimplementinglean
manufacturingintheorganization.
•Itcanfunctiononlyontheshopfloorand
cannotbeappliedtotheotheractivitiesofan
organization.
•Ifonetechniqueissuccessfulinimplementing
leaninoneorganization,ithastobesuccessful;
inanotherorganizationaswell.
•Itprovidessolutionstoalltheproblems.
Zubin Poonawalla

361. 361
Lean Manufacturing and SCM
•Inworldoflean,manufacturingcompaniestryto
produceonlywhathasbeendemandedbythe
customer,andonlywhenthatproductisrequired.
•Butwhyshoulditstopthere?Whatabouttherestof
thesupplychain?
•Tooptimizethebenefitsofleanthroughoutthe
supplychain,itisessentialformanufacturing
companytobuildapartnershipwithitssuppliers,as
iftheyweredepartmentswithintheirowncompany.
•Thepartnershipworksonthepremisethat
manufacturingcompanywillpullonlywhatit
consumesandnothingmore.
Zubin Poonawalla

362. 362
•Thesuppliersreplacewhatmanufacturing
companyhasconsumedandnothingmore.
•Inthiswayinventoriesaremaintainedattheir
minimumforbothsupplierandcustomer.
•Achievingthisleveloftrustandefficiency
withcompany‟ssupplierwillrequirefrequent
communicationandextensivesharingof
information.
•Successfulpartnershipwouldresultfrom
invitingeachothertostrategicplanning
sessions,attendingeachother‟seventsfor
removingwaste/processimprovementsand
otherjointactivities.
Zubin Poonawalla

363. 363
•Tocreateaneffectivesupplier-customer
relationships,itisadvantageoustodevelopa
two-wayservicelevelagreement(SLA).
•SLAforcesbothpartiestoclarifythe
relationshipbyestablishingthetypeandlevel
ofservicetobeprovidedbyyoursupplierand
whattypesofqualityinputsrequiredfrom
you.
Zubin Poonawalla

364. 364
Key Approaches to make lean
successful throughout Supply Chain
•Manufacturingcompaniesmustshareinformationtothe
verydetailedleveltohelpsuppliersseethesavings
potential.
•Manufacturingcompaniesmustbecommittedtolong-term
implementationofleanstrategiesandnotjusta“flavourof
themonth”.
•Manufacturingcompaniesmustgivesupporttitssuppliers
supportintermsoftrainingandtroubleshooting.
•Manufacturingcompaniesmustdemonstratethepotential
benefitsofleannotonlyfortheirowncompanybutalso
foralltheirsupplierscoveringbothbottomlineand
servicepointsofview.Zubin Poonawalla

365. 365
Difference between mass production
& lean production
Attributes Mass production Lean production
Customer satisfactionMakes 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 relationsBased 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.
Zubin Poonawalla

366. 366
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 modelTeam based model
Demand ManagementForecasting Customization
Zubin Poonawalla

367. 367
•Thebasicelementarewasteelimination,
continuousonepieceworkflow,andcustomer
pull.
•Focusofaboveintheareasofcost,quality
anddeliveryformsthebasisforalean
productionsystem.
Benefitsofleanmanufacturing
•Wastereductionby80%
•Productioncostreductionby50%
•Manufacturingcycletimedecreasedby50%
•Labourreductionby50%whilemaintaining
orincreasingthroughput.
Zubin Poonawalla

368. 368
•Inventoryreductionby80%whileincreasing
customerservicelevels.
•Capacityincurrentfacilitiesincreaseby50%.
•Improvedcashflowthroughincreasing
shippingandbillingfrequencies.
Componentsofleanproductionsystem
•Flexiblemanufacturing
•Just-in-time
•Outsourcing
•Leansupplychain
•ERP&CRM
•E-businessandEDI.Zubin Poonawalla

369. 369
Integration of Lean manufacturing and
SCM.
1.Reducethesupplybase
-Reducethenumberofsuppliersforeach
commodityofpurchasestoaminimum,a
feworoftenonlyone.
2.Developstrategiclongtermpartners
-Developsupplierpartners,especiallyinthe
commoditieskeytothecompany‟sgrowth
andfuturesuccess.
-Planandexecuteforalongtermrelationship
andexchangeinformation.
Zubin Poonawalla

370. 370
3.Managesupplierwithcommodityteams
-Involvecrossfunctionalteamsforstrategic
issueswithkeysuppliers.
-Abovewillhelpinconsideringtotalcostthan
immediatepriceinpurchasedecisions.
4.Certifysuppliers
-Createanduseacertificationprocessthat
challengessuppliersandmakethemproudto
becertified.
-Ensuethatthecertificationprocesscontains
thecriteriaimportanttoyourcompany.
-Recognizecertifiedsupplierspublicly.
Zubin Poonawalla

371. 371
5.ConnecttosupplierswithInternetTechnologies
-Exchangedatapertainingtoquality,schedules,
engineeringchange,prototypesandpilotruns,return
goods,orderstatus,capacityplanning,etc.
-Customizewebpageforkeysuppliers.
6.Collaboratewithsuppliers
-Makebuyingdecisionsbasedontotalcostof
ownership.
-Informsuppliersassoonasnewordersarrive.
-Eliminateincominginspection.
-Buycomplete,testedsubassemblies.
-Letsupplierschoosewheretobuycomponentsfrom
anapprovedlist.
Zubin Poonawalla

372. 372
-Giveincentivestocompaniestolocatetheir
plantsnearbytoreducedeliverytimeand
encouragefrequent,smalldailydeliveries.
-Trainandhelpsupplierstobecompatiblewith
theirproductionsystems.
-Certifysuppliersandeliminateincoming
inspection.
-Letsupplierschoosewheretobuy
componentsfromanapprovedlist.
7.Outsourceforrightreason
-Focusonorecompetenciesandoutsourcethe
rest.
Zubin Poonawalla

373. 373
-Purchasecompletedassemblies,testedand
readytogoontheassemblyline.
-Allowsupplierstoparticipateindesignand
subsequentlybuildandtestassemblies.
-Providesuppliersdrawings,blueprintsand
otherinformationquickly.
Zubin Poonawalla

374. 374
Supply Chain Vulnerability &
Ethical Issues
•Thefundamentalprinciplesare:
-Loyaltytoyourorganization.
-Justicetothosewithwhomyoudeal.
-Faithinyourprofession.
•Demonstrateloyaltytotheemployerbydiligently
followingthelawfulinstructionsoftheemployer,
usingreasonablecareinexercisinggrantedauthority.
•Avoidanypersonalbusinessorprofessionalactivity
thatwouldcreateaconflictbetweenpersonal
interestsandtheinterestsoftheemployer.
Zubin Poonawalla

375. 375
•Avoidsolicitingoracceptingmoney,loans,or
preferentialdiscounts,gifts,entertainment,
favoursorservicesfrompresentorpotential
suppliersthatmightinfluence,orappearto
influence,supplymanagementdecisions.
•Handleconfidentialorproprietaryinformation
withduecare.
•Promotepositivesupplierrelationships
throughcourtesyandimpartiality.
•Avoidimproperreciprocalagreements.
•Conductsupplymanagementactivitiesin
accordancewithnationalandinternational
laws,customsandpractices.Zubin Poonawalla

376. 376
Recommended guidelines
•Situationsmayoccurinwhich,throughunanticipated
circumstances,abusinessrelationshiptranspireswith
apersonalfriend.Theperceptionaswellaspotential
ofaconflictofinterestshouldbediscussedwith
management,andareassignmentofprocurement
responsibilityshouldbeconsidered.
•Businessmeetinglocationsshouldbecarefully
chosen.Environmentsotherthantheofficemaybe
perceivedasinappropriatebythebusiness
communityorbyco-workers.
•Conversationthatcentresaroundexcessivelyon
personalaffairsshouldbeavoided.
Zubin Poonawalla

377. 377
•Obtainthemaximumvalueformoniesexpendedas
agentfortheemployer.
•Avoidusingtheemployer‟spurchasingpowerto
makepurchasesforspecificindividuals‟nonbusiness
use.
ConducttobeAvoided
•Engaginginbusinessoremploymentinan
organizationthatisasuppliertotheemployer
•Lendingmoneyto,orborrowingmoneyfromany
customerorsupplier.
•Usingtheorganization‟sname(unlessauthorized)to
lendweightorprestigetosponsorshipofapolitical
partyorcause,orendorsingtheproductorserviceof
anotherorganization.
Zubin Poonawalla

378. 378
•Ownershipofstocksinasupplierofgoodsor
servicesshouldbereportedtotheemployerfor
reviewtoavoidthepotentialforimpropriety.
Interestsbymembersoftheprofessional‟simmediate
familyareconsideredtobeofthesamesignificance
asdirectownership.
Howtodealwithissuesofinfluence?
•Exerciseextremecautioninevaluatingthe
acceptanceofgiftsandthefrequencyofthesame.
•Establishnominalvalueinorganizationpolicyto
addresssupplier‟sofferingsofnominalvalueasa
gestureofgoodwillorforpublicrelationspurposes.
•Refusegiftsexceedingnominalvalue,andreturn
themwithapoliteexplanation.
Zubin Poonawalla

379. 379
•Seekdirectionofmanagementifitappearsthat
businessrelationshipmaybeimpairedoappeartobe
impairedbyrefusalofagiftorentertainment.
•Occasionally,duringthecourseofbusiness,itmay
beappropriatetoconductbusinessduringmeals.
•Suchmealsshouldbeforaspecificbusinesspurpose
andfrequentmealswiththesamesuppliershouldbe
avoided.
•Thesupplymanagementprofessionalshouldbeina
positiontopayformealsasfrequentlyasthe
supplier.Budgetingisrecommeneforthisbusiness
activity.
Zubin Poonawalla

380. 380
Internationalpractices
•Insomecultures,businessgifts,meals,entertainment
arenormalandexpectedwhileinothercultures,
businessistransactedatarm‟slengthandbusinessgifts,
mealsandentertainmentareviewedasinappropriate.
•Supplymanagementprofessionalsmustunderstand
suchvariationsandestablishpoliciesandproceduresto
dealeffectivelywithsuppliersfromdifferentcultures.
•Suppliersalsoshouldbeinformedoforganization‟s
policieswithrespecttobusinessgifts,meals,and
entertainment.
•Supplymanagementprofessionalsshouldact
courteouslytosupplier‟srepresentativeswhomay
inadvertentlyactcontrarytoorganization'spolicies.
Zubin Poonawalla

381. 381
Confidentiality&proprietaryinformation
•Confidential&proprietaryinformationwould
includequotation/bids,costsheets,financial
information,wageandsalaryscales,personal
informationaboutemployees,officersanddirectors,
productdesign,supplysourcesorsupplier
informationetc.
•Itistheresponsibilityoftheindividualsharing
confidentialorproprietaryinformationtoensurethat
recipientunderstandshisorherobligationtoprotect
suchinformation.
•Supplyprofessionalsarecautionednottodivulge
suchinformationunlessitisrequiredtobeshared.
Zubin Poonawalla

382. 382
Dealingwithreciprocity
•Whensupplymanagementprofessionalsortheir
organizationsgivepreferencetosuppliersbecause
theyalsocustomersorwhenorganizationinfluences
asuppliertobecomeacustomer,theprofessionalor
theorganizationisengaginginapracticeknownas
reciprocity.
•Dealingwithasupplierthatisalsoacustomermay
notconstituteaproblemif,infact,thesupplierisone
ofthebestsources.
•Supplyprofessionalshouldnotgetinfluencedby
salesormarketingprofessionalstoengagein
reciprocity.
Zubin Poonawalla

383. 383
•Listofsuppliersshouldnotbeprovidedtosalesor
marketingdepartmentfortheiruseinpursuing
improperreciprocalarrangement.
•Whenmakingsourcingdecisions,supply
professionalsmustbeespeciallycarefulwhen
dealingwithsuppliersthatarecustomers.
Applicablelaws
•Supplymanagementprofessionalsmustbeawareof
thefollowinglaws:
(a)Contractandcommerciallaws
(b)Traderegulations
(c)Governmentprocurementregulations
(d)Patents,copyrights,trademarklaws.
(e)Transportationandlogisticslawsandregulations
(f)Environmentallaws.Zubin Poonawalla

384. 384
Outsourcing
•Organizationsoutsourcetoaddressspecific
businessissuesandopportunities.
•Typically,theissuesandopportunitiesan
organizationfaceswillfallinoneormoreof
threegeneralcategories
(a)Tactical
(b)Strategic,and
(c)Transformational
Zubin Poonawalla

385. 385
Tactical reasons for Short-term
Outsourcing
•Reduceandcontroloperatingcosts
-Mostimportanttacticalreasonforoutsourcingis
toreduceorcontroloperatingcosts.
-Accesstotheoutsideprovider‟slowercost
structureisoneofthecompellingshortterm
benefitsofoutsourcing.
-Certainresearchstudieshavefoundcompanies
reportinganaverage9%reductionincostsdue
tooutsourcing.
Zubin Poonawalla

386. 386
•Freeingcapitalforinvestment
-Outsourcingreducestheneedtoinvestcapitalfundsin
non-corebusinessfunctions.
-Thus,fundsareavailableforinvestmentincoreareas.
-Improvesfinancialmeasurementsofthefirmby
eliminatingtheneedtoshowreturnonequityfrom
capitalinvestmentsinnon-coreareas.
•Cashinfusion
-Outsourcingsometimesinvolvesthetransferofassets
fromthecustomertotheserviceprovider.
-Equipments,facilities,vehicles,andlicensesusedin
currentoperationsaresoldtotheserviceproviderasa
partoftransactionresultingincashpayment.
-Thiscashcanbeusedinotherpartsoftheoperation.
Zubin Poonawalla

387. 387
•Unavailabilityofresourcesinternally
-Companiesoutsourcebecausetheydonothaveaccess
totherequiredresources-human,capitalorintellectual.
-Forinstance,ifanorganizationisexpandingits
operations,especiallyintonewgeographicarea,
outsourcingisviableandimportantalternativeto
buildingtheneededcapabilityfromtheground-up.
•Functionsdifficulttomanageoroutofcontrol
-Introducingbestinclassmanagementandbusiness
processesaserviceproviderofferscanbequickwayto
bringcontroltoasituation.
Zubin Poonawalla

388. 388
Strategic Reasons for Long-term
Outsourcing
•Improvebusinessfocus
-Allowsthecompanyfocusonbroaderbusiness
issueswhilehavingoperationaldetailsassumed
byanoutsideexpert.
•Providesaccesstoworld-classcapabilities
-Partneringwithanorganizationwithworldclass
capabilitiescanofferaccesstonewtechnology,
tools,andtechniquesthattheorganizationmay
notcurrentlypossess.
Zubin Poonawalla

389. 389
•Freesresourceforotherpurpose
-Outsourcingpermitsanorganizationtoredirect
itsresourcesfromnon-coreactivitiestowards
buildingknowledgebaseskillshavinglongterm
paybackandimpactoninnovation.
Zubin Poonawalla

390. 390
-Bettercareeropportunitiesforpersonnelwhoswitchto
theoutsourcingprovider.
-Morestructuredmethodologies,procedures,
procedures,anddocumentation.
-Competitiveadvantagethroughexpandedskills.
•Providesaccelerationtoreengineeringefforts.
-OutsourcingisapowerfultoolforBusinessProcess
Reengineering.
•Sharedrisks&quickresponse
-Whencompaniesoutsourcetheybecomemoreflexible,
moredynamic,andbetterabletoadapttochanging
opportunities.
-Companiescanrespondquicklytocustomerstoresolve
deliveryandanyotherservicerelatedissue.
Zubin Poonawalla

391. 391
Transformational Reasons for
Outsourcing
•Helpsrespondtoshorteningproductlifecycles
-CompaniesfacingshorteningofPLCareusing
outsourcingtoconcentratetheirtimeandefforts
tomarket.
•Redefinesrelationshipswithsuppliersand
businesspartners.
-Outsourcingtransformstheentiresupplychain
byshorteningthechainandprovidesadditional
servicestransformingthecustomerexperience.
Zubin Poonawalla

392. 392
•Helpsinsurpassingthecompetitors
-Amazon.comchangedretailingduetonewtechnology,
andacadreofoutsourcingproviders.
-Changewaseffectedbypartneringwiththethirdparty
providerswhocouldmanagecallcentres,process
orders,andfulfillorders.
•Helpstoenternewmarketswithreducedrisks
-Firmsmoveintonewmarketsornewopportunitieswith
littleexperience,particularlyintheareasofe-
commerce.
-ServiceproviderslikeIBMGlobalServicesarehelping
brickandmortarfirmscreateentirelynewcustomer
baseon-line.
Zubin Poonawalla

393. 393
Concept of Outsourcing
•Whenanenterpriseidentifiesaneedforaspecific
productorservice,ithastodecidewhethertomakethe
productandperformtheserviceinternally(make)orto
purchasetherequirementfromanexternalsource
(buy).
•Make-versus-buydecisioncentresaroundtheeconomic
trade-offassociatedwitheachoption.
•Outsourcingdecisionsexaminenotonlythefirmthat
hasthelowestcostbutalsowhichonecanproduceor
markettheproductbetterorperformsuperiorservice.
•Callsforassessmentofstrategiccorecompetency.
Zubin Poonawalla

394. 394
•Forinstance,forafirmtoevaluatewhethertoowna
privatefleetoftrucksoroutsourcebyhiringcarriers,
notonlythecurrentratesandcostsareimportantbut
alsothelong-termcosttrends.
Specialization
•Outsourcingdecisionistakenbyconsideringthe
specializedskillsthatdifferentiatethecompanyfrom
itscompetitors.
•Forinstance,atransportcompanycanimplementa
satellitetrackingservicecapableofquicklypinpointing
thelocationofatrucksothatitcanprovidecustomers
withaccuratedeliverystatusinformation.
•Thistechnologywillprovidethetransportcompanya
uniquecompetitiveadvantageforcustomerswhovalue
theavailabilityofinstantaneousinformationtracking.
Zubin Poonawalla

395. 395
•Thus,thecompanywillstandtogainby
outsourcingtransportationbyobtaining
specializedskillsratherthandeveloptheame
capabilityinternally.
Zubin Poonawalla

396. Logistical Measurement
•Inordertooptimizetheperformanceoflogistics
systemitisessentialtoevaluatethesameandcontrol
it.
•Tohaveabettertrackoflogisticalsystemweneedto
dividethemeasurementinto:
-Internalperformance,and
-Externalperformance.
•DimensionsofPerformancemeasurement
(1)Forperformancemeasurement,firststepistoimprove
thequalityofinformationthatmustbeobtainedto
measure,compareandguidelogisticalperformance.
396Zubin Poonawalla

397. (2)Secondly,theoldreportingformatsneedtobe
redesignedtotakeadvantageofthenew
computer-basedcontrolsystems.
→Objectives
397
Objectivesfordeveloping&implementing
performancemeasurementsystem.
Monitoring Controlling Directing
Zubin Poonawalla

398. •Monitoring
-Measuresandtracksthehistoricallogisticsperformancefor
reportingtomanagementandcustomers.
-Typicalmonitoringincludesservicelevelsandlogisticscost
components.
•Controlling
-Measuresandtracksongoingperformanceandisusedtoreview
alogisticsprocessinordertobringintocompliancewhenit
exceedscontrolstandards.
-Forexample,“transportation–damagetracking”.
-Byhavingasystemperiodicallyreportingtheproductdamage,
logisticsmanagementcanidentifythecauseandmodifythe
packagingorloadingprocess.
398Zubin Poonawalla

399. •Directing
-Referstothemethodsdesignedtomotivate
personnel.
-Typically,itwouldinclude“payfor
performance”practiceusedtoencourage
warehouseortransportationpersonnelto
achievehigherlevelsofproductivity.
•Anexample:
-Considerthematerialhandlersinthewarehouse
ordeliveryboyswhoarepaidforeighthoursof
workbasedonstandardproductionrate.
399Zubin Poonawalla

400. -Whenthematerialhandlers/deliveryboys
completetheassignedtasksinlessthanthe
allottedtime,theyaregivenbonus.
-Iftheemployeesrequiremorethantheallotted
time,thedisincentiveisthattheyare
compensatedfortheadditionaltime.
400Zubin Poonawalla

401. 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.
401Zubin Poonawalla

402. Objectives of Activity Based
Measures
•Torecordthelevelofactivity
-Example:Numberofcases
•Torecordthelevelofproductivity
-Example:Casesperlabourhour.
•Thetypicalactivity-basedmeasuresare:
(1)Orderentrytimeperorder
(2)Delivertimeperorder
(3)Orderselectiontimeperorder.
402Zubin Poonawalla

403. (4)Inquirytimeperorder
(5)Orderentrytimepercustomer
(6)Orderselectiontimepercustomer
(7)Deliverytimepercustomer
(8)Orderselectiontimeperproduct
(9)Deliverytimeperproduct.
B.Processbasedmeasures
•Theabovestatedactivitybasedmeasuresrecord
thelevelofactivity/productivitybutdonot
measuretheperformanceofoverallprocessof
satisfyingthecustomers.
403Zubin Poonawalla

404. •Forinstance,theordertakersmayberatedhigh
withrespecttoactivitybasedmeasurementon
thebasisofnumberofcallsperhour;theymay
fairpoorlyinoverallsatisfactionprocessas
theyfailtolistencarefullytocustomers.
•Itisimportantthatperformancemeasurestake
intoaccounttheoverallprocessperspective.
•Thus,processbasedmeasuresrefertothe
customersatisfactiondeliveredbytheentire
supplychain.
404Zubin Poonawalla

405. Internal Performance Measurement
•Internalperformancemeasurementfocuseson
activitiesrequiredtoservecustomers.
•Measurementoftheseactivitiesandthe
comparisonthereofwiththestandardsis
necessarytoimproveperformance,motivateand
rewardemployees.
•Alsofocusesoncomparingactivitiesand
processestopreviousoperationsand/or
objectivesintermsofcost,customerservice
andproductivitymeasures.
405Zubin Poonawalla

406. •Cost
-Reflectsinpercentage,theactualcostincurred
toaccomplishaspecificoperatingobjective,by
businessunitslikemanufacturers,wholesalers,
retailersetc.
-Thetypicalcostperformancemeasuresare:
(a)Costperunit
(b)Warehousecosts
(c)Inboundfreight
(d)Orderprocessing
(e)Costasapercentageofsales
406Zubin Poonawalla

407. (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
407Zubin Poonawalla

408. (d) On time delivery
(e) Back orders
(f) Cycle time
(g) Customer feedback
-These measures examine a firm‟s 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.
408Zubin Poonawalla

409. -Thetypicallogisticsproductivityperformance
measuresreportedasusedbymanufacturers,
wholesalersandretailersare:
(a)Unitsshippedperemployee
(b)Unitsperlabour(Rs)
(c)Orderpersalesrepresentative
(d)Comparisonwithhistoricaldata
(e)Comparisonwithstandardsset
(f)Productivityindex
409Zubin Poonawalla

410. Types of Productivity Measures
Therearethreetypesofproductivitymeasures-static,
dynamicandsurrogate.
•Staticproductivitymeasures
-Whenalltheoutputsandinputsinagivensystemfora
specificperiodareincluded,itisconsideredstaticasit
isbasedononlyonemeasurement.
•Dynamicproductivitymeasures
-Whenoutputsandinputsinasystemforoneperiod
comparewithanotherperiod,theresultisdynamic
productivityindex.
410Zubin Poonawalla

411. -Forexample:(Outputs2008/Inputs2008)
(Outputs2007/Inputs2007)
•Surrogateproductivitymeasure
-Representsfactorsthatarenottypically
includedintheproductivitybuthavehigh
impactonthesame.
-Examplesarecustomersatisfaction,profit,
effectiveness,andefficiency.
411Zubin Poonawalla

412. Asset Measurement
•Focusisonhowfastliquidassetssuchasinventoryaswellas
howwellfixedassetsgeneratereturnoninvestment.
•Typicallogisticsassetmeasurementmeasures,(oftenreported
aspercentage),usedbymanufacturers,wholesalers,and
retailersare:
(a)Inventoryturnover
(b)Inventorycarryingcosts
(c)Inventorylevels(no.ofdays)
(d)Obsoleteinventory
(e)Returnonnetassets
(f)Returnoninvestment
412Zubin Poonawalla

413. Quality Measurement
•Referstoprocessorientedevaluationto
determinetheeffectivenessofaseriesof
activitiesratherthananindividualactivity.
•Thetypicalqualitymeasures,reportedas
percentage,usedbymanufacturers,wholesalers,
andretailersare:
-Frequencyofdamage
-Damagereportedinrupees
-Numberofcustomer
-Costofreturnedgoods 413Zubin Poonawalla

414. Perfect Order
•Perfectorderrepresentsidealperformance.
•Itmeasuresorderentry,creditclearance,
inventoryavailability,accuratepicking,on-time
delivery,correctinvoicing,paymentwithout
deductions.
•Theperfectorderrepresentsthefollowing
standards:
-Completedeliveryofallitemsrequested.
-Deliveryasrequiredbycustomerwithone-day
tolerance.
414Zubin Poonawalla

415. -Completeandaccuratedocumentation
supportingtheorder,includingpackinglists,
billsoflading,invoices.
-Faultlessinstallation,correctconfiguration,no
damage.
PerfectOrderBusters
1.Orderentryerror
2.Missinginformatione.g.missingcode
3.Non-availabilityofordereditem
4.Inabilitytomeetshipmentdate
5.Pickingerror
415Zubin Poonawalla

416. 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 416Zubin Poonawalla

417. External Performance Measurement
Doneonthebasisofcustomerperception
measurementandbestpracticebenchmarking.
•CustomerPerceptionMeasurement
-Referstoregularmeasurementofcustomer
perceptionsthatisobtainedthroughcompanyor
industrysponsoredsurveysorbysystematicfollow
up.
-Themostimportantmeasurementofcustomer
perceptionsareregarding:
(1)Availability
(2)Performancecyclelength
417Zubin Poonawalla

418. 3. Information availability
4. Product support services
Consultantsandindustryassociationsadminister
thesemeasurements.
•BestPracticesBenchmarking
-Benchmarkingmaybecarriedoutinrelationto
operationsofbothcompetitorsandleadingfirmsin
relatedandnon-relatedindustries.
-Typically,organizationsareusingbenchmarkingin
importantstrategicareastocalibratelogistics
operations.
-Benchmarkingprovidesthefoundationforcustomer
satisfactionandtheperfectorder.
418Zubin Poonawalla

419. The key areas of benchmarking are as under:
•Asset management
•Cost
•Customer service
•Productivity
•Quality
•Technology
•Transportation
•Warehousing
•Order processing
•Materials handling
419Zubin Poonawalla

420. Thebestpracticebenchmarkingfocuseson
practicesandprocessesofacomparable
organization.
Theareasofreviewincludeidentifyingkey
performancemeasuresandtrackinghistorical
andcurrentperformancelevels.
Methodsofbenchmarking
1.Bytakinghelpfrompublishedlogisticsdata
available,periodicals,consultants,and
universityresearchers.
420Zubin Poonawalla

421. 2.Bybenchmarkingprivatelyagainst
noncompetitivefirmsinone‟sownorarelated
industry.
3.Bycreatingastrategicalliancewiththe
organization(s)thatsystematicallyshare
benchmarkdataonaregularbasis.
-Thesealliancesrequiremoreefforttomaintain
butusuallyprovidesubstantialinformation.
421Zubin Poonawalla

422. 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
422Zubin Poonawalla

423. •Stage3
1.Establishfunctionalgoals
2.Developactionplans
•Stage4
1.Implementspecificactionsandmonitor
progress
2.Re-calibratebenchmarks
423Zubin Poonawalla

424. Logistics Costing
•Logisticsrelatedcostsaredynamicanddonot
readilyfitwithtraditionalaccountingmethods.
•Theaccountingdifficultiesbecomemore
pronouncedwhentryingtodeterminecostsfora
particularoperationoraparticularcustomer.
•Activity-basedcostingcanbeusedtohelpfirms
manageandtobenchmarklogisticscosts.
•Basedonthis,onecanevaluatetheirlogistics
costs,intotalorbyfunction.
424Zubin Poonawalla

425. •Totallogisticalcostisthebasicintegrative
conceptinlogisticalnetworkdesign.
-Forexample,theuseofexpensiveairfreightin
asituationwhereinspeedanddependabilityof
airdeliverywouldreduceothercostssuchas
warehousingandinventory.
-Insuchsituation,highcostpremium
transportationwouldbejustifiedby
achievementoflowertotalcost.
425Zubin Poonawalla

426. Logistics Performance Evaluation
•Itisimportanttoidentifycostsassociatedwith
performingspecificlogisticstaskssuchas
warehousingexpensesforspecificSKU.
•Thoughthecostoflogisticsfunctionisgivenin
mostaccountingsystems,allocationoflogistics
costsbrokendowntoindividualactivitiesisnot
given.
426Zubin Poonawalla

427. Deficiencies of Traditional Accounting
System
1.Reportingoftransportationexpenditure
-Inmanypurchasingsituationsthefreightis
notreportedatallasaspecificcostsasmany
timesproductsarepurchasedondelivered
basis,whichincludestransportationcost.
-Progressiveprocurementproceduresrequire
expensesforallservicesincluding
transportationareidentifiedseparatelyfrom
purchasecostforevaluativepurposes.
427Zubin Poonawalla

428. 2.Failuretospecifyandassigninventorycost
-Insuranceandtaxesarenotidentifiedand
assignedresultinginambiguityinreporting
inventorycost.
-Thefinancialburdenforassetscommittedto
materials,work-in-processandfinishedgoods
inventoryisnotidentified,measured,and
separatedfromotherformsofcapitalexpense
incurredbytheenterprise.
-BrandManagershouldbeheldresponsiblefor
hisbrand‟sinventorycarryingcost.
428Zubin Poonawalla

429. Activity Based Costing
•Reliesontheconceptthatexpensesneedtobe
assignedtothatactivitythatconsumesa
resourceratherthantoanorganizationalbudget.
•Forexample,assumethatthetwoproducts,
producedinthesamemanufacturingfacility,
requiredifferentassemblyandhandling
procedures.
-Outofthetwoproducts,onemayneed
additionalequipmentorlabourforassemblyor
packagingoperations.
429Zubin Poonawalla

430. -Iftotallabourandequipmentcostsareallocatedtothe
productsonthebasisofsalesorthenumberofunits
produced,thenboththeproductswillbechargedfor
additionalassemblyandpackagingoperationsrequired
byonlyoneofthem.
-Thiswillreducetheprofitabilityofthatproductwhich
didnotrequireadditionalequipmentorlabourbecause
thisproductwillbepayingfortheoperationsitdidnot
need.
-Inthecontextofmanufacturing,thefairshareofall
overheadsandoperatingcostfactorsshouldbe
identifiedandassignedtoaspecificproduct.
430Zubin Poonawalla

431. •Logisticalactivitybasedcostingmustprovidethe
managersdetailedinformationabouttheprofitabilityof
aspecificcustomer,order,product,orservice.
→CostIdentification
•Thecostsassociatedwiththeperformanceofalogistics
functionare:
(1)Forecasting
(2)Ordermanagement
(3)Transportation
(4)Inventory
(5)Warehousing
(6)Packaging
431Zubin Poonawalla

432. 432
Logistics Costs
Direct Costs
Indirect costs Overheads
Zubin Poonawalla

433. •Directoroperationalcosts
-Expensesincurredspecificallybyperformance
oflogisticswork.
-Includecostoftransportation,inventorycosts,
warehousingcosts,andmaterialhandlingcosts.
-Forexample,Transportationcostsforan
individualtruckloadordercanbedirectly
attributedtoaspecificorder.
-Similarly,directadministrativecostoflogistic
operationcanbeisolated.
433Zubin Poonawalla

434. •Indirectexpenses
-Forexample,costofcapitalinvestedinrealestate,costof
transportationequipment,primerateofinterest,analternateuse
ofcapitalandexpectedrateofreturn..
-Indirectcostsareattributedtologisticalactivitiesbymanagerial
judgmentandaredifficulttoisolate.
-Thequestionishowindirectcostsuchasequipmentcost
associatedwiththewarehouseshouldbeallocatedtothecustomer
ordershippedfromthewarehouse?
-Thiscanbeansweredbyallocatingthecostonthebasisofthe
averagecostperunit.
-Asageneralrule,aspecificcostisnotassignedtologistical
factorsunlessitisunderthemanagerialcontroloflogistics
organization.
434Zubin Poonawalla

435. Cost Formatting
•Thetypicalwaytoformatactivity-basedcostsisto
assignexpensestotheeventbeingmanaged.
•Forinstance,toanalyzeacustomerorder,allcoststhat
resultfromassociatedperformancecyclecontributeto
totalactivitycost.
•Theareasofanalysisinlogisticsactivitybasedcosting
are
1.Customerorders
2.Channels
3.Products
4.Value-basedservices
435Zubin Poonawalla

436. •Threecommonwaysofformattingare:
1.Functionalgrouping
2.Allocatedgrouping
3.Fixed-variancegrouping.
•Functionalgrouping
-Allexpendituresfordirectandindirectlogistical
servicesperformedinaspecifiedoperatingtimeare
formattedandreportedundersub-accounts
classification.
-Bydoingsoatotalcoststatementcanbeconstructed
forcomparisonofoneormoreoperatingperiods.
436Zubin Poonawalla

437. •Allocatedcostformatting
-Overalllogisticalexpenditureisassignedtoameasureof
physicalperformance.
-Thiswillgeneratelogisticalcostpertonne,perunit,per
productline,perorderetc.
-Thismethodbecomesusefulforcomparativeanalysisof
operatingresults.
•Fixed-variancegrouping
-Consistsofassigningcostseitherfixedorvariabletothe
operatingexpenditurethatresultfromdifferentvolumes
ofactivity.
-Theformattingwilluseusefixedandvariablecosts
separately. 437Zubin Poonawalla

438. -Fixedcostsdonotdirectlyvarywithvolume
suchascostofdeliverytruck.
-Thesecostswouldremainasitisevenifthe
volumewerereducedtozero.
-However,costofdieseltooperatethetruckis
variable,asthetotalcostwoulddependonhow
frequentlythetruckisdriven.
-Useoffixedandvariablecostformatting
providesaconvenientwaytocontrolexpenses
inlogisticalsystemdesign.
438Zubin Poonawalla

439. Total Cost Presentation
•Forthepurposeofpresentinglogisticaltotalcost
analysis,thefocusremainsoninventoryand
transportation.
•Bothinventoryandtransportationexpensescan
berepresentedinaformatthatincludesboth
activityandfunctionalcostrelationship.
•Forexample,communicationcostsassociated
withorderprocessing,warehousingstorageand
materialhandlingcanbeclassifiedunderthe
inventoryumbrella.
439Zubin Poonawalla

440. •Intermsofinventory,totalcostincludesallexpenses
relatedtoinventorycarryingcostandcustomer
ordering.
-Inventorycarryingcostincludestaxes,storage,capital,
insurance,andobsolescence.
-Costoforderingincludesthefullexpenseofinventory
control,orderpreparation,communications,updating
activities,andmanagerialsupervision.
-Thetotalcostoftransportationincludeshiring
expenses,accessorialcharges,costsrelatedtohazards
incurredinvariousmodesoftransport,andlegaland
associatedadministrativeexpenses.
440Zubin Poonawalla

441. 441
Logistical Operations
Spatial dimension Temporal Dimension
Zubin Poonawalla

442. •Transportationdealswithspatial(geographical)
dimensionsoflogisticaloperationbypositioningthe
productwherethecustomerwants.
•Inventoryinvolvestherateatwhichthecapitalassets
areused(temporal)tomeetthecustomerrequirements
byhavingtheproductavailablewhencustomerwants
topurchase.
•Classificationofcostsintermsofinventoryor
transportationprovidesforthetrade-offdetermining
thecostjustificationforlogisticalnetworkdesign.
•Thebasicpurposeofactivitybasedcostingistogive
managersabetterperspectiveofthetotalcost
associatedwiththeperformanceofaspecificactivity.
442Zubin Poonawalla

443. SummaryofCosts-Transportationandinventory
accountfor80-90percentoftotallogisticalexpenses
•Inventorycarryingcostsinclude
-Expensesontax,storage,capitalinsuranceetc.
-Costsincurredtoavoidobsolescence.
-Materialhandlingandpackaging
-Costonupdatingactivitiesincludingdataprocessingin
receiving,managingandcontrollinginventory.
•Transportationrelatedcostsinclude
-Directcostssuchasfreightrateandaccessorialcharges.
-Indirectcostssuchasthecostincurredonliabilitiesnot
protectedbythecarriers,andthemanagerialcosts.
443Zubin Poonawalla

444. Mission Based Costing
•Thepremisesthissystemisbasedonareas
under:
-Itshouldmirrorthematerialsflowi.e.itshould
becapableofidentifyingthecoststhatresult
fromprovidingcustomerserviceinthemarket
place.
-Itshouldbecapableofenablingseparatecost
andrevenueanalysistobemadebycustomer
typeandbymarketsegmentordistribution
channel.
444Zubin Poonawalla

445. •Thissystemovercomesdangersinherentin
dealingwiththeaverageslikeaveragecostper
deliverysinceaveragecostcanconceal
substantialvariationseithersideofthemean.
•Ausefulconceptof„mission‟emergesto
addressaboveproblems.
•Incontextoflogisticsmissionisasetof
customerservicegoalstobeachievedwithina
particularproduct/market.
•Missionscanbedefinedintermsofthetypeof
marketserved,bywhichproductsandwithin
whatconstraintsofserviceandcosts.
445Zubin Poonawalla

446. 446
Distribution
mission A
Distribution
mission B
Distribution
mission C
Purchasing
Production
Sales
Marketing
Transportation
Etc
Zubin Poonawalla

447. •Thesuccessfulachievementofdefinedmissiongoals
involvesinputsfromlargenumberoffunctionalareas
withinthefirm.
•Aneffectivemissionbasedlogisticscostingsystem
wouldseektodeterminetotalsystemscostofmeeting
desiredlogisticobjectivei.e.theoutputofthesystem
andthecostsofthevariousinputsinvolvedinmeeting
theseoutputs.
•Thefigureshownisindicativehowthreedistribution
missionsmaymakeadifferentialimpactupon
functionalareacosts.
•Inthissystemofcostingthefunctionalbudgetis
determinedbythedemandsofthemissionitserves.
447Zubin Poonawalla

448. 448
Functional
area 1
Functional
area 2
Functional
area 3
Functional
area 4
Mission A
Mission B
Mission C
Functional
area inputs
Total
mission
cost
100
50
70
220
90
70
30
190
20
200
50
270
80
20
70
170
290
340
220
850
Zubin Poonawalla

449. •Thecostpermissionisidentifiedhorizontallyandfrom
thisthefunctionalbudgetsmaybedetermined
vertically.
→Howdoesthisapproachwork?
•Firstly,thefunctionalareasassociatedwithaparticular
distributionmissionisidentifiede,g.transport,
warehousing,inventoryetc.
•Secondly,incrementalcostsforeachfunctionalarea
incurredasaresultofundertakingthatmissionmustbe
isolated.
•Inincrementalcosts,thesunkcostsarenotincludedas
thesewouldbestillincurredevenifthemissionwere
abandoned.
449Zubin Poonawalla

450. •Indeterminingthecostsofafunctionalarea
e.g.transport,attributabletoaspecificmission,
thequestionshouldbeasked:
-Whatcostswouldweavoidifthis
customer/segment/channelwerenolonger
serviced?
-Theseavoidablecostsarethetrueincremental
costsofservicingcustomer/segment/channel.
-Oftentheywillbesubstantiallylowerthanthe
averagecostbecausesomanydistributioncosts
arefixedand/orshared.
450Zubin Poonawalla

451. -Forexample,avehicleleavesaMumbai
DepottomakedeliveriesinKalyanand
Nashik.
-IfthosecustomersinKalyanabandonedbut
thoseinNashikretained,whatwouldbethe
differenceinthetotalcostoftransport?
-Theanswerwouldbe–notverymuch.
-However,ifthecustomersinNashikwere
dropped,butnotthoseinKalyan,therewould
begreatersavingsofcostsbecauseofthe
reductionofkilometerstravelled.
451Zubin Poonawalla

452. •Thisapproachbecomespowerfulwhencombinedwith
acustomerrevenueanalysis,becauseevencustomers
withlowsalesofftakemaystillbeprofitablein
incrementalcostterms,ifnotonaveragecostbasis.
•Inotherwordsthecompanywouldbeworseoffif
thosecustomerswereabandoned.
•Missionbasedcostinghelpsindetermining
profitabilityanalysisforcustomers,marketsegments
ordistributionchannels.
•Customerprofitabilityattemptstorelatetherevenue
producedbyacustomer/marketsegment/distribution
channeltothecostsofservicingthatcustomer/market
segment/channel.
452Zubin Poonawalla