Logistics Supply Chain Management
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Logistics Management Chain Management Customer Service Supply Chain Networks
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Logistics and SCM : An Overview
Order processing
Order processing is the first of the four stages in the logistical process. The efficiency of order processing has a direct effect on lead times. Orders are received from the sales team through the sales department. Many companies establish regular supply routes that remain relatively stable over a period of time ensuring that the supplier performs satisfactorily. Very often contracts are drawn up and repeat orders (forming part of the initial contract) are made at regular intervals during the contract period. Taken to its logical conclusion this effectively does away with ordering and leads to what is called ‘partnership sourcing’. This is an agreement between the buyer and seller to supply a particular product or commodity as and when required without the necessity of negotiating a new contract every time an order is placed. Order-processing systems should function quickly and accurately. Other departments in the company need to know as quickly as possible that an order has been placed and the customer must have rapid confirmation of the order’s receipt and the precise delivery time. Even before products are manufactured and sold the level of office efficiency is a major contributor to a company’s image. Incorrect ‘paperwork’ and slow reactions by the sales office are often the unrecognised source of ill will between buyers sellers. When buyers review their efficiency of order processing is an and important factor in their evaluation. Asuppliers, good computer system for order processing allows stock levels and delivery schedules to be automatically updated so management can rapidly obtain an accurate view of the sales position. Accuracy is an important objective of order processing, as are procedures that are designed to shorten the order processing cycle.
Inventory
Inventory, or stock management, is a critical area of PDM because stock levels have a direct effect on levels of service and customer satisfaction. The optimum stock level is a function of the type of market in which the company operates. Few companies can say that they never run out of stock, but if stock-outs happen regularly then market share will be lost to more efficient competitors. The key lies in ascertaining the re-order point. Carrying stock at levels below the re-order point might ultimately mean a stock-out, whereas too high stock levels are unnecessary and expensive to maintain. Stocks represent opportunity costs that occur because of constant competition for thethat company’s limited resources. If the this company’s marketing strategy requires high stock levels be maintained, should be justified by a profit contribution that will exceed the extra stock carrying costs.
Warehousing
Many companies function adequately with their own on-site warehouses from where goods are dispatched direct to customers. When a firm markets goods that are ordered regularly, but in small quantities, it becomes more logical to locate warehouses strategically around the country. Transportation can be carried out in bulk from the place of manufacture to respective warehouses where stocks wait ready for further distribution to the customers. This system is used by large retail chains, except that the warehouses and transportation are owned and operated for them by logistics experts. Levels of service will ofincrease course increase when number warehouse locations increases, but cost will accordingly. Again, an of optimum strategy must be established that reflects the desired level of service.
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Transportation
Transportation usually represents the bulk of distribution cost. It is usually easy to calculate because it can be related directly to weight or numbers of units. Costs must be carefully controlled through the mode of transport selected amongst alternatives, and these must be constantly reviewed.
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The patterns of retailing that have developed, and the pressure caused by low stock holding and short lead times, have made road transport indispensable. When the
volume of goods being transported reaches a certain level some companies purchase their own vehicles, rather than using the services of haulage contractors. However, some large retail chains have now entrusted all their warehousing and transport to specialist logistics companies. For some types of goods, transport by rail still has advantages. When lead-time is a less critical element of marketing effort, or when lowering transport costs is a major objective, this mode of transport becomes viable. Similarly, when goods are hazardous or bulky in relation to value, and produced in large volumes then rail transport is advantageous. Rail transport is also suitable for light goods that require speedy delivery (e.g. letter and parcel post). Except where goods are highly perishable or valuable in relation to their weight, air transport is not usually an attractive transport alternative. For long-distance overseas routes air transport is popular. Here, it has the advantage of quick delivery compared to sea transport, and without the cost of bulky and expensive packaging needed for sea transportation, as well as higher insurance costs. The chosen transportation mode should adequately protect goods from damage in transit (a factor just mentioned makes air freight popular over longer routes as less packaging is needed than for long sea voyages). Not only do damaged goods erode profits, but frequent claims increase insurance premiums and inconvenience to customers, endangering future business.
Logistics and SCM : An Introduction
1.6.2 The Systems or ‘Total’ Approach to PDM
PDM has been neglected in the past; this function has been late in adopting an integrated approach towards it activities. Managers have now become more conscious of the potential of PDM, and recognize that logistical systems should be designed with the total function in mind. A fragmented or disjointed approach to PDM is a principal cause of failure to provide satisfactory service, and causes excessive costs. PDM is concerned with ensuring that the individual efforts that go to make up the distributive function are optimised so that a common objective is realised. This is called the ‘systems approach’ to distribution management and a major feature of PDM is that these functions be integrated. To plan an efficient logistics structure it is necessary to be aware of the interaction
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between the different distribution costs and how they vary with respect to the different depot alternatives (number, size, type and location). Figure 1.7 demonstrates how the individual distribution and logistics cost elements can build up the total logistics cost.
·
Storage Cost: Storage cost will increase as the number of depots will increase because there will be a need for more stock coverage, more storage space, more
management etc.
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Delivery cost: This will concern with the secondary transportation cost i.e. cost
of the depot mileage to the consumer. The greater the number of depots, thedelivery lesser isfrom the secondary and the delivery cost.
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Trunking Cost: This is the primary transport cost in the supply of products in
bulk to the depots from the central finished good warehouses or production points. As the number of depots increases this cost will also increases.
· ·
Inventory Cost: The main elements of inventory holding costs are: Capital Cost: The cost of physical stock. This is the financing charge, which is the current cost of capital to a company.
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Logistics and SCM : An Overview
· ·
Service Cost: That is stock management and insurance cost Risk Cost: Which occur through pilferage, deterioration of stock, damage and stock obsolescence. System Cost: These costs represent a variety of information or communication requirements ranging from the order processing to load assembly lists.
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Figure 1.7: Total Logistics Cost Source: Croucher Phil et al, The handbook of Logistics and distribution Management Page No .123
The top line on the graph shows the overall distribution cost in relation to the number of depots in the network. The minimum point on this curve represents the lowest cost solution. The result will depend on a number of factors –product type, geographical area of demand, service level requirements etc.
1.7
SUMMARY
Supply chain is network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer. Logistics expenditure accounts for around 15-20% of GDP. Thus by improving the efficiency of logistics operations, logistics can make an important contribution to the economy as a whole. Factors contributing to the growing interest in logistics include advances in information system technology, an increased emphasis on customer service, growing reorganization of the system approach and total cost concept. Supply chain management seeks to integrate performance measures over multiple firms or processes, rather than taking the perspective of a single firm or process. Supply chain integration links a firm with its customers, suppliers and other channel members. As
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such it integrates their relationships, activities, functions, processes and locations. Physical distribution management (PDM) is concerned with ensuring the right item needed for consumption or production to the right place at the right time and in the right condition at the right cost
Logistics and SCM : An Introduction
1.8
SELF ASSESSMENT QUESTIONS
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1.8
1) 2)
NOTES LOGISTICS & SUPPLY CHAIN M… SELF ASSESSMENT QUESTIONS
“Logistics is the function that is responsible for the flow of materials into, through and out of an organisation”. Elaborate? “These are many possible structures for SC, but the simplest view has materials converging on an organising through tiers of suppliers and products diverging through tiers of customers”. Elaborate. It is said that the overall aim for logistics is to achieve high customer satisfaction or perceived product value. This must be achieved with acceptable costs. How would you find the best balance? What is Physical Distribution Management? Describe its components? Also, elucidate the “total approach” to PDM. Describe the evolution most important stage? of Supply Chain concept. What in your opinion is the
3)
4)
5)
1.9
REFERENCES AND SUGGESTED FURTHER READINGS
Simchi Levi (2000), Designing and Managing the Supply Chain, Irwin/ McGraw-Hill, IL. Christopher, M., 1992, Logistics and Supply Chain Management: Strategies for Reducing Costs and Improving Services, Pitman, London. Croucher Phil, Rushton Alan and Oxley John, The handbook of Logistics
and distribution Management Douglas M. Lambert, 1998, Fundamental of logistics management,
1) 2) 3) 4) 5) 6) 7) 8)
McGraw Hill. Sahay B S, 1998, Supply Chain Management for Global competitiveness (Macmillan) Chopra Sunil and Meindl P, 2001, Supply Chain Management: Strategy, Planning, and Operation, Prentice Hall. Forrester J W 1961, Industrial dynamics, Cambridge, Massachusetts, The MIT press. Waters Donald, 2003, Logistics: An Introduction to SCM, Palgrave McMillan (Indian Edition), NY
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Logistics and SCM : An Overview
UNIT 2 PRINCIPLES OF SUPPLY CHAIN MANAGEMENT
Objectives
After reading this unit, you would be able to:
· · · ·
define how the supply chain works; understand the key processes required to integrate the supply chain; examine critical areas of Logistics-Marketing Interface; and
examine critical areas of Logistics-Manufacturing Interface. Structure 2.1 2.2 2.3 Introduction How does SCM Work? The Logistics-Marketing Interface
2.3.1 2.3.2 Logistics and Product Life Cycle Areas of Logistics and Marketing Interaction Customer Service Issues at the Logistics-Manufacturing Interface
2.4 2.5 2.6 2.7
The Logistics-Manufacturing Interface
2.4.1
Summary Self Assessment Questions References and Suggested Further Readings
2.1
INTRODUCTION
Now you are aware of what Logistics and SCM mean. You have appreciated the role of Logistics and SCM in the economy. SCM is basically a system that connects an organization with its customers and suppliers. SCM is the management of all key business processes across a number of supply chains. It is important to know about different supply chain processes for having an integrated SCM. Also there is a strong relation between Logistics group and Marketing group in an organization. Similarly, Manufacturing and Logistics are also interrelated. This unit will take you through to these concepts.
2.2
HOW DOES SCM WORK?
The supply chain management (SCM) is viewed as a system that links an enterprise with its customer and suppliers. As shown in Figure 2.1 information flows from customer in the form of forecast and orders to both the enterprise and suppliers. This information is refined through planning into specific manufacturing and purchasing objectives. As materials and products are purchased, a value added inventory flow is
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initiated which ultimately results in ownership transfer of finished product to customers. SCM is an integrated approach that is highly interactive and complex and requires simultaneous consideration of many trade-offs. SCM is the management of all key business process across a number of the supply chains. Successful SCM requires a
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change from managing individual function to integrating activities into key supply chain processes. Operating an integrated supply chain requires continuous information flows, which in turn helps to create the best product flows.
Logistics and SCM : An Introduction
Figure 2.1: Supply Chain System Source: Logistics Management, Bowersox et al., 1986
The customer remains the primary focus of the process. However, improved linkages with supplies are necessary because controlling uncertainty in customer demand, manufacturing processes and supplier performances are critical for effective SCM. The key processes for the integrated SCM (Figure 2.2) are as follows:
Customer Relationship Management
This is the process to identify the key customers. With customer moving to centre stage, more companies have begun a customer as a value independent entity. The companies no longer view salesto astreat selling of their products, but as selling of relationships, solutions, support and care. Customer relationship teams develop and implement partnering program with key customer. Product and service agreements specifying the level of performance are established with these key customers.
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Figure 2.2: Supply Chain Process for Integrated SCM Source: Lambert 1998
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Logistics and SCM : An Overview
Order processing
Order processing is the first of the four stages in the logistical process. The efficiency of order processing has a direct effect on lead times. Orders are received from the sales team through the sales department. Many companies establish regular supply routes that remain relatively stable over a period of time ensuring that the supplier performs satisfactorily. Very often contracts are drawn up and repeat orders (forming part of the initial contract) are made at regular intervals during the contract period. Taken to its logical conclusion this effectively does away with ordering and leads to what is called ‘partnership sourcing’. This is an agreement between the buyer and seller to supply a particular product or commodity as and when required without the necessity of negotiating a new contract every time an order is placed. Order-processing systems should function quickly and accurately. Other departments in the company need to know as quickly as possible that an order has been placed and the customer must have rapid confirmation of the order’s receipt and the precise delivery time. Even before products are manufactured and sold the level of office efficiency is a major contributor to a company’s image. Incorrect ‘paperwork’ and slow reactions by the sales office are often the unrecognised source of ill will between buyers sellers. When buyers review their efficiency of order processing is an and important factor in their evaluation. Asuppliers, good computer system for order processing allows stock levels and delivery schedules to be automatically updated so management can rapidly obtain an accurate view of the sales position. Accuracy is an important objective of order processing, as are procedures that are designed to shorten the order processing cycle.
Inventory
Inventory, or stock management, is a critical area of PDM because stock levels have a direct effect on levels of service and customer satisfaction. The optimum stock level is a function of the type of market in which the company operates. Few companies can say that they never run out of stock, but if stock-outs happen regularly then market share will be lost to more efficient competitors. The key lies in ascertaining the re-order point. Carrying stock at levels below the re-order point might ultimately mean a stock-out, whereas too high stock levels are unnecessary and expensive to maintain. Stocks represent opportunity costs that occur because of constant competition for thethat company’s limited resources. If the this company’s marketing strategy requires high stock levels be maintained, should be justified by a profit contribution that will exceed the extra stock carrying costs.
Warehousing
Many companies function adequately with their own on-site warehouses from where goods are dispatched direct to customers. When a firm markets goods that are ordered regularly, but in small quantities, it becomes more logical to locate warehouses strategically around the country. Transportation can be carried out in bulk from the place of manufacture to respective warehouses where stocks wait ready for further distribution to the customers. This system is used by large retail chains, except that the warehouses and transportation are owned and operated for them by logistics experts. Levels of service will ofincrease course increase when number warehouse locations increases, but cost will accordingly. Again, an of optimum strategy must be established that reflects the desired level of service.
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Transportation
Transportation usually represents the bulk of distribution cost. It is usually easy to calculate because it can be related directly to weight or numbers of units. Costs must be carefully controlled through the mode of transport selected amongst alternatives, and these must be constantly reviewed.
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The patterns of retailing that have developed, and the pressure caused by low stock holding and short lead times, have made road transport indispensable. When the
volume of goods being transported reaches a certain level some companies purchase their own vehicles, rather than using the services of haulage contractors. However, some large retail chains have now entrusted all their warehousing and transport to specialist logistics companies. For some types of goods, transport by rail still has advantages. When lead-time is a less critical element of marketing effort, or when lowering transport costs is a major objective, this mode of transport becomes viable. Similarly, when goods are hazardous or bulky in relation to value, and produced in large volumes then rail transport is advantageous. Rail transport is also suitable for light goods that require speedy delivery (e.g. letter and parcel post). Except where goods are highly perishable or valuable in relation to their weight, air transport is not usually an attractive transport alternative. For long-distance overseas routes air transport is popular. Here, it has the advantage of quick delivery compared to sea transport, and without the cost of bulky and expensive packaging needed for sea transportation, as well as higher insurance costs. The chosen transportation mode should adequately protect goods from damage in transit (a factor just mentioned makes air freight popular over longer routes as less packaging is needed than for long sea voyages). Not only do damaged goods erode profits, but frequent claims increase insurance premiums and inconvenience to customers, endangering future business.
Logistics and SCM : An Introduction
1.6.2 The Systems or ‘Total’ Approach to PDM
PDM has been neglected in the past; this function has been late in adopting an integrated approach towards it activities. Managers have now become more conscious of the potential of PDM, and recognize that logistical systems should be designed with the total function in mind. A fragmented or disjointed approach to PDM is a principal cause of failure to provide satisfactory service, and causes excessive costs. PDM is concerned with ensuring that the individual efforts that go to make up the distributive function are optimised so that a common objective is realised. This is called the ‘systems approach’ to distribution management and a major feature of PDM is that these functions be integrated. To plan an efficient logistics structure it is necessary to be aware of the interaction
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between the different distribution costs and how they vary with respect to the different depot alternatives (number, size, type and location). Figure 1.7 demonstrates how the individual distribution and logistics cost elements can build up the total logistics cost.
·
Storage Cost: Storage cost will increase as the number of depots will increase because there will be a need for more stock coverage, more storage space, more
management etc.
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Delivery cost: This will concern with the secondary transportation cost i.e. cost
of the depot mileage to the consumer. The greater the number of depots, thedelivery lesser isfrom the secondary and the delivery cost.
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Trunking Cost: This is the primary transport cost in the supply of products in
bulk to the depots from the central finished good warehouses or production points. As the number of depots increases this cost will also increases.
· ·
Inventory Cost: The main elements of inventory holding costs are: Capital Cost: The cost of physical stock. This is the financing charge, which is the current cost of capital to a company.
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Logistics and SCM : An Overview
· ·
Service Cost: That is stock management and insurance cost Risk Cost: Which occur through pilferage, deterioration of stock, damage and stock obsolescence. System Cost: These costs represent a variety of information or communication requirements ranging from the order processing to load assembly lists.
·
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Figure 1.7: Total Logistics Cost Source: Croucher Phil et al, The handbook of Logistics and distribution Management Page No .123
The top line on the graph shows the overall distribution cost in relation to the number of depots in the network. The minimum point on this curve represents the lowest cost solution. The result will depend on a number of factors –product type, geographical area of demand, service level requirements etc.
1.7
SUMMARY
Supply chain is network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer. Logistics expenditure accounts for around 15-20% of GDP. Thus by improving the efficiency of logistics operations, logistics can make an important contribution to the economy as a whole. Factors contributing to the growing interest in logistics include advances in information system technology, an increased emphasis on customer service, growing reorganization of the system approach and total cost concept. Supply chain management seeks to integrate performance measures over multiple firms or processes, rather than taking the perspective of a single firm or process. Supply chain integration links a firm with its customers, suppliers and other channel members. As
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such it integrates their relationships, activities, functions, processes and locations. Physical distribution management (PDM) is concerned with ensuring the right item needed for consumption or production to the right place at the right time and in the right condition at the right cost
Logistics and SCM : An Introduction
1.8
SELF ASSESSMENT QUESTIONS
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1.8
1) 2)
NOTES LOGISTICS & SUPPLY CHAIN M… SELF ASSESSMENT QUESTIONS
“Logistics is the function that is responsible for the flow of materials into, through and out of an organisation”. Elaborate? “These are many possible structures for SC, but the simplest view has materials converging on an organising through tiers of suppliers and products diverging through tiers of customers”. Elaborate. It is said that the overall aim for logistics is to achieve high customer satisfaction or perceived product value. This must be achieved with acceptable costs. How would you find the best balance? What is Physical Distribution Management? Describe its components? Also, elucidate the “total approach” to PDM. Describe the evolution most important stage? of Supply Chain concept. What in your opinion is the
3)
4)
5)
1.9
REFERENCES AND SUGGESTED FURTHER READINGS
Simchi Levi (2000), Designing and Managing the Supply Chain, Irwin/ McGraw-Hill, IL. Christopher, M., 1992, Logistics and Supply Chain Management: Strategies for Reducing Costs and Improving Services, Pitman, London. Croucher Phil, Rushton Alan and Oxley John, The handbook of Logistics
and distribution Management Douglas M. Lambert, 1998, Fundamental of logistics management,
1) 2) 3) 4) 5) 6) 7) 8)
McGraw Hill. Sahay B S, 1998, Supply Chain Management for Global competitiveness (Macmillan) Chopra Sunil and Meindl P, 2001, Supply Chain Management: Strategy, Planning, and Operation, Prentice Hall. Forrester J W 1961, Industrial dynamics, Cambridge, Massachusetts, The MIT press. Waters Donald, 2003, Logistics: An Introduction to SCM, Palgrave McMillan (Indian Edition), NY
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Logistics and SCM : An Overview
UNIT 2 PRINCIPLES OF SUPPLY CHAIN MANAGEMENT
Objectives
After reading this unit, you would be able to:
· · · ·
define how the supply chain works; understand the key processes required to integrate the supply chain; examine critical areas of Logistics-Marketing Interface; and
examine critical areas of Logistics-Manufacturing Interface. Structure 2.1 2.2 2.3 Introduction How does SCM Work? The Logistics-Marketing Interface
2.3.1 2.3.2 Logistics and Product Life Cycle Areas of Logistics and Marketing Interaction Customer Service Issues at the Logistics-Manufacturing Interface
2.4 2.5 2.6 2.7
The Logistics-Manufacturing Interface
2.4.1
Summary Self Assessment Questions References and Suggested Further Readings
2.1
INTRODUCTION
Now you are aware of what Logistics and SCM mean. You have appreciated the role of Logistics and SCM in the economy. SCM is basically a system that connects an organization with its customers and suppliers. SCM is the management of all key business processes across a number of supply chains. It is important to know about different supply chain processes for having an integrated SCM. Also there is a strong relation between Logistics group and Marketing group in an organization. Similarly, Manufacturing and Logistics are also interrelated. This unit will take you through to these concepts.
2.2
HOW DOES SCM WORK?
The supply chain management (SCM) is viewed as a system that links an enterprise with its customer and suppliers. As shown in Figure 2.1 information flows from customer in the form of forecast and orders to both the enterprise and suppliers. This information is refined through planning into specific manufacturing and purchasing objectives. As materials and products are purchased, a value added inventory flow is
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initiated which ultimately results in ownership transfer of finished product to customers. SCM is an integrated approach that is highly interactive and complex and requires simultaneous consideration of many trade-offs. SCM is the management of all key business process across a number of the supply chains. Successful SCM requires a
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change from managing individual function to integrating activities into key supply chain processes. Operating an integrated supply chain requires continuous information flows, which in turn helps to create the best product flows.
Logistics and SCM : An Introduction
Figure 2.1: Supply Chain System Source: Logistics Management, Bowersox et al., 1986
The customer remains the primary focus of the process. However, improved linkages with supplies are necessary because controlling uncertainty in customer demand, manufacturing processes and supplier performances are critical for effective SCM. The key processes for the integrated SCM (Figure 2.2) are as follows:
Customer Relationship Management
This is the process to identify the key customers. With customer moving to centre stage, more companies have begun a customer as a value independent entity. The companies no longer view salesto astreat selling of their products, but as selling of relationships, solutions, support and care. Customer relationship teams develop and implement partnering program with key customer. Product and service agreements specifying the level of performance are established with these key customers.
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Figure 2.2: Supply Chain Process for Integrated SCM Source: Lambert 1998
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