2. SDM – Ch 15 Tata McGraw Hill 2
Learning Objectives
• Principles of materials management, logistics
and supply chain management
• Logistics interface with other functions
• Inventory management principles and
systems
• Warehousing management fundamentals
• Transportation management practices
• How IT enables the logistics function
• Understand about the performance
measurement of the logistics function
3. SDM – Ch 15 Tata McGraw Hill 3
Materials Management
• Materials forms the largest single cost item in
most manufacturing companies – needs to be
carefully managed
• Materials management function includes
planning and control, purchasing and stores
and inventory control
• Materials management is the precursor to
logistics and supply chain management
Logistics……
4. SDM – Ch 15 Tata McGraw Hill 4
Logistics Defined
• Logistics means having the right thing, at
the right place, at the right time
• The procurement, maintenance, distribution
and replacement of personnel and materials
– Webster’s Dictionary
• The science of planning, organizing and
managing activities that provide goods or
services – Logistics World, 1997
5. SDM – Ch 15 Tata McGraw Hill 5
Logistics
• Functions: planning, procurement,
transportation, supply and maintenance
• Processes: requirements determination,
acquisition, distribution and conservation
• Business: science of planning, design and
support of business operations of
procurement, purchasing, inventory,
warehousing, distribution, transportation,
customer support, financial and human
resources
6. SDM – Ch 15 Tata McGraw Hill 6
Scope of Logistics
• Choice of markets
• Procurement
• Plant location and layout
• Inventory management
• Location and management of warehouses
• Choices of carriers, mode of transport
• Packaging decisions
• Relevant to all enterprises: manufacturing,
Government, Institutions, service
organisations
7. SDM – Ch 15 Tata McGraw Hill 7
Components of LOG
Management
•Natural
Resources
(land, facilities
Equipment)
•HR
•Finance
•Information
•Marketing
Orientation
(competitive
Advantage)
•Time and
Place utility
•Efficient move
to customer
Customer service
Demand forecasting
Distribution
Communications
Inventory control
Materials handling
Order processing
Parts and service support
Plants and warehouse selection
Procurement
Packaging
Return goods handling
Salvage and scrap disposal
Traffic and transportation
Warehouse and storage
Input Output
Logistics Activities
8. SDM – Ch 15 Tata McGraw Hill 8
Links and Flows
Customer’s
customer
Supplier’s
supplier
SupplierLead FirmCustomer
General cash flow
Information flow
Information flow
General material flow/ service flow
Inbound / Upstream logisticsOutbound / Downstream logistics
Source: ICFAI
9. SDM – Ch 15 Tata McGraw Hill 9
Logistics and Marketing
• Interface on:
– Product design and pricing
– Customer service policies
– Sales forecasts and order processing
– Inventory policies and location of warehouses
– Channels of distribution and despatch planning
– Transportation to reach products to customers
• Production wants larger production runs to
minimise time spent on set up changes on
the machines. Marketing wants smaller runs
of a variety of products.
10. SDM – Ch 15 Tata McGraw Hill 10
The Value Chain
Company Infrastructure
Organisation, people, methods
Systems & technology
Procurement
Inbound
logistics
Operations
Outbound
logistics
Marketing
& sales
Service
Primary activities
S
U
P
P
P
O
R
T
margin
margin
Source: Michael Porter
11. SDM – Ch 15 Tata McGraw Hill 11
Logistics Plan Outline
• Internal analysis (current position)
– Organisation
– Human resources
– Transportation
– Relations with internal customers
– Quality of product
– Quality of Service
• External / situation analysis
– Competitor logistics performance
– Trends
– External environment / economy
– Public, private and contract warehouse
– Public, private and contract carriage
12. SDM – Ch 15 Tata McGraw Hill 12
Principles of Logistics Excellence
Alling & Tyndall
Strategic Operational
Link logistics to corporate
strategy
Organise comprehensively
Use the power of information
Emphasise human resources
Form strategic alliances
Focus on financial
performance
Target optimum service levels
Manage the details
Leveraging logistics volumes
Measure and react to
performance
13. SDM – Ch 15 Tata McGraw Hill 13
Logistics Focus Areas
Customer service related Operations related
Packaging
Order processing
Spare parts and service support
After sales Customer service
support
Demand forecasting
Distribution communications
Return goods handling
Plant and warehouse site
location
Procurement
Inventory control
Materials handling
Salvage and scrap disposal
Traffic and transportation
Warehousing and storage
Logistics may be confined to the company whereas SCM extends beyond
14. SDM – Ch 15 Tata McGraw Hill 14
Supply Chain Management
• Business context:
– Globalization of the market place
– Advances in technology
– Increasingly demanding, informed customer base
– Purchase decisions on dimensions of quality, price
and time
• Innovative supply chain:
– To meet customer driven challenges
– To reduce costs
– Improve service levels
– Enhance speed to market
15. SDM – Ch 15 Tata McGraw Hill 15
Supply Chain Integration
• Optimising the supply chain requires
supplier and customer involvement to
integrate processes, policies, systems,
database and strategies between
diverse trading partners
16. SDM – Ch 15 Tata McGraw Hill 16
Integrated
Supply Chain
Management
Manufacturing/
Re-manufacturing/
Assembly
Demand & Lead
Time Management
Storage &
Transportation
Materials
Management
Inventory Management and
control
Customer Analysis
Purchasing/Supplier
Partnering
Order Fulfillment
Supply Chain Integration
Inventory management…
17. SDM – Ch 15 Tata McGraw Hill 17
Why Carry Inventory?
• Support production requirements
• Support operational requirements
• Maximize customer service – ensure
availability when needed – protect
against uncertainty
• Hedge against marketplace uncertainty
• Take advantage of order quantity
discounts
18. SDM – Ch 15 Tata McGraw Hill 18
Functions of Inventory
• Inventory serves as a buffer between:
– Supply and demand
– Customer demand and finished goods
– Requirements for an operation and the
output from the previous operation
– Parts and materials to begin an operation
and the suppliers of the materials
The shock absorber of business !
19. SDM – Ch 15 Tata McGraw Hill 19
Factors Which Drive Inventory
• Target service level parameters
• Lot sizing practices
• Safety stock and safety time
conventions
• Volume discounts and purchase
arrangements
• Seasonal build up needs
20. SDM – Ch 15 Tata McGraw Hill 20
Categories of Inventory
• Anticipation – built in anticipation of future
demand – peak season, strike, promotion
• Fluctuation (safety) – to cover random,
unpredictable fluctuations in supply and
demand and lead time – to prevent disruption
in operations, deliveries etc
• Lot-size – to take advantage of quantity
discounts, reduce shipping, set up and
clerical costs – also called cycle stock
21. SDM – Ch 15 Tata McGraw Hill 21
Categories of Inventory
• Transportation – pipeline or movement
inventories – to cover the time needed to
move from one point to another – factory to
distribution point for example
• Hedge – for materials where prices are
volatile
• Maintenance, repair and operating supplies
(MRO) – to support M and O – spare parts,
lubricants, consumables etc
22. SDM – Ch 15 Tata McGraw Hill 22
Types of Inventory
• Obvious….
– Raw materials
– Work-in-process
– Finished goods – of primary concern to
marketing
– Maintenance, repair and operating (MRO)
supplies
– In-transit, pipeline
Performance measures…
23. SDM – Ch 15 Tata McGraw Hill 23
Performance Measures
• Inventory turns = Annual cost of goods
sold /average inventory in value
• Days of sales = inventory on hand /
average daily sales
24. SDM – Ch 15 Tata McGraw Hill 24
Types of Inventory Systems
• Pure Inventory – when and how much to
order. RM procurement. Simple
manufacturing operations
• Production Inventory – finite production
rates. Demand fluctuation. Products compete
for manufacturing capacity
• Production – distribution Inventory –
compete for production capacity. Geographic
placement of inventory for best service of
demand
25. SDM – Ch 15 Tata McGraw Hill 25
Types of Classification
• ABC category – most common for all
• HML - high, medium, low - similar
• FSND – fast moving, slow moving, non-
moving, dead – spare parts / FG
• SDE – scarce, difficult, easy to obtain –
procurement / Spares
• GOLF – govt, ordinary, local, foreign source –
procurement / Spares
• VED – vital, essential, desirable – spare parts
/ FG
• SOS – seasonal, off-seasonal - commodity
26. SDM – Ch 15 Tata McGraw Hill 26
ABC Inventory Analysis
• Based on Pareto’s law:
– A – 20% items worth 80% of value
– B – 30% items worth 15% of value
– C – about 50% items account for 5% of the usage
• Classify items based on the above criteria
• Apply degree of control in proportion to the
importance of the group
27. SDM – Ch 15 Tata McGraw Hill 27
Inventory Related Costs
• Unit costs – basic value of the item carried
• Ordering costs – generating and sending a
material release, transport, any other
acquisition costs
• Carrying costs – capital, storage,
obsolescence
• Stock-out costs
• Quality costs – non-conforming goods
• Other costs – duties, tooling, exchange rate
differences etc
28. SDM – Ch 15 Tata McGraw Hill 28
Approaches for Controlling
Inventory
• Continuous review:
– Safety stocks and forecasting methods
– Excess and obsolete inventory
• Part simplification and re-design
• On-site supplier managed inventory
• Use of supply chain inventory management
systems, Materials Requirement Planning,
Distribution Requirement Planning etc
• Automated inventory tracking systems
• Supplier – buyer cycle-time reduction
Warehouse management…
29. SDM – Ch 15 Tata McGraw Hill 29
Stores Management
Objectives
• Providing efficient service to users
• Reduce cost of carrying goods
• Providing correct, updated stock figures
• Controlling inventory
• Preventing damage to or obsolescence of
materials
• Achieve all of the above with good
housekeeping
30. SDM – Ch 15 Tata McGraw Hill 30
Functions
Warehouses
Material
handling
Storage
function
Customer
service
Information
transfer
Temporary Permanent
Receive goods
Identify goods
Sort goods
Despatch to storage
Hold inventory
Recall, select goods
Marshal the shipment
Despatch the shipment
Prepare records and
advices
31. SDM – Ch 15 Tata McGraw Hill 31
Purpose of Warehousing
• To provide desired level of customer
service at the lowest possible total cost
• It is that part of the firm’s logistics system that
stores products (RM, Packing Materials, WIP,
FG) at and between point of origin and point
of consumption and provides info to
management on the status, condition and
disposition of items being stored
• Distribution warehousing relates mainly to FG
32. SDM – Ch 15 Tata McGraw Hill 32
Reasons for Warehousing
Service related Cost related
Maintain source of supply
Support customer service
policies
Meet changing market
conditions
Overcome time and space
differentials
Support JIT programs of
suppliers and customers
Provide customers with the right
mix of products at all times
Temporary storage of materials
to be disposed or re-cycled
Achieve production economies
Achieve transportation
economies
Take advantage of Quantity
Purchase discounts and forward
buys
Least Logistics cost for a
desired level of customer
service
33. SDM – Ch 15 Tata McGraw Hill 33
Warehouses
• Support manufacturing
• Mix products from multiple facilities for
shipment to a single customer
• Break-bulk
• Aggregate
• Used more as a ‘flow-thru’ point than as
a ‘hoarding’ point
34. SDM – Ch 15 Tata McGraw Hill 34
Distribution Warehousing
• The objective is to set up a network of
warehouses closest to the customer
locations to service markets better and
minimise cost
• Could be C&FA s, depots or distribution
centers
• Macro location strategies:
– Market positioned
– Production positioned
– Intermediately positioned
35. SDM – Ch 15 Tata McGraw Hill 35
Distribution Center
• Warehouse designed to speed the flow
of goods and avoid unnecessary costs
• Speeds bulk-breaking to avoid inventory
carrying costs
• Helps to centralise control and co-
ordination of logistics activities
• Products can also be cross-docked
(one vehicle to another)
Market positioned..
36. SDM – Ch 15 Tata McGraw Hill 36
Market Positioned
• Warehouses located nearest to the final
customer
• Factors influencing are:
– Order cycle time
– Transportation costs
– Sensitivity of the product
– Order size
– Levels of customer service offered
Production positioned….
37. SDM – Ch 15 Tata McGraw Hill 37
Production Positioned
• Warehouses located close to the production
facilities or supply sources
• Not the same level of customer service as the
earlier one
• Serve as points of aggregation / collection for
products made in a number of plants
• Factors influencing are:
– Perishability of raw materials
– Number of products in the product mix
– Assortments ordered by customers
– Transport consolidation rates ex; FTL
In between…
38. SDM – Ch 15 Tata McGraw Hill 38
Intermediate Positioned
• Mid point locations between the final
customer and the producer
• High customer service levels possible even if
products made in number of units
• Other macro approaches look at cost
minimisation or cost and demand elements to
maximise profitability
Transportation management….
39. SDM – Ch 15 Tata McGraw Hill 39
Transportation
• Very important in the Logistics function:
– Movement across space or distance adds value to
products
– Transportation provides time and place utility
• Role of transportation includes:
– Provides opportunity for growth under competitive
conditions
– Deeper penetration into markets
– Wider distribution means greater demand
– Can influence product prices favourably
Principles….
40. SDM – Ch 15 Tata McGraw Hill 40
Transportation Principles
• Continuous flow
• Optimise unit of cargo - stackability
• Maximum vehicle unit – capacity utilization
• Adaptation of vehicle unit to volume and
nature of traffic
• Standardisation
• Compatibility of unit load equipment
• Minimum of dead weight to total weight
• Maximum utilization of capital, equipment and
personnel
Process….
41. SDM – Ch 15 Tata McGraw Hill 41
The Selection Criteria
• Environmental analysis: shipper, carrier,
government regulations, public influence
• Deciding objectives
• Selecting mode
• Select transport type within the mode
• Define functions of transport
• Evaluation and control – customer perception
/ satisfaction, best practice benchmarking
42. SDM – Ch 15 Tata McGraw Hill 42
Cost Factors
• Can be product related or market related.
• Product related: density, stowability, ease or
difficulty of handling and liability
• Market related: competition, location of
markets, Government regulations, traffic in
and out of the market, seasonality of
movements and impact on customer service
• Five prominent modes:
– Road, rail, air, water and pipeline.
– Sixth one is use of Ropeways
43. SDM – Ch 15 Tata McGraw Hill 43
Customer Service Factors
• Consistency, dependability
• Transit time
• Coverage – door-to-door for example
• Flexibility in handling a range of
products
• Loss and damage performance
• Additional services provided
Reverse logistics…
44. SDM – Ch 15 Tata McGraw Hill 44
Reverse Logistics
• Movement of goods from the market or
customer back to the company
• The need:
– Increased awareness of the environment
– Stringent legislation
– For some it is part of the business
– Profitability of dealing with scrap, surplus
• Surplus, obsolescence can result due to:
– Over optimistic sales forecasts, change in product
specs, errors in estimating material usage, losses
in processing or overbuying based on incentives
Comparison of modes……
45. SDM – Ch 15 Tata McGraw Hill 45
Advantages of Rail
• Economy – more so for goods over
long distances
• Efficiency of energy
• Reliability – not affected by weather
conditions
46. SDM – Ch 15 Tata McGraw Hill 46
Disadvantages
• Uneconomical for small shipments and
short distances
• Not suitable for remote stations
• Costly terminal handling facilities
• Inflexible time schedules
Road transport…..
47. SDM – Ch 15 Tata McGraw Hill 47
Road Freight Advantages
• Through movement – direct from consignor to
consignee, no transshipment
• Flexibility – routes and loading routines can
be easily altered, operate day and night
• Less capital costs – for own fleet + immunity
from industrial action
• Fast turn-around – if articulated units like
tractors and trailers are used
• Minimum delays
48. SDM – Ch 15 Tata McGraw Hill 48
Disadvantages
• Susceptibility to weather and road conditions
– in spite of the best protection
• Unsuitability for heavy loads – rail transport
more economical for bulk loads
• Unsuitability for long distances – again the rail
telescopic rates are more favourable
Air transport….
49. SDM – Ch 15 Tata McGraw Hill 49
Air Transport Advantages
• Faster mode
• Reduction in cost particularly inventory
• Broad service range
• Increasing capabilities
• Disadvantages:
– High cost
– Weather affects flight conditions
– Limitations on heavy consignments
Water transport……
50. SDM – Ch 15 Tata McGraw Hill 50
Water Transport
• Advantages:
– Mass movement of bulk
– Lowest freight cost
– Preferred for long haul of low value commodities
• Disadvantages:
– Not for quick transit
– Suitable for certain types on commodities only
Pipeline….
51. SDM – Ch 15 Tata McGraw Hill 51
Pipeline Movement
• Advantages:
– Reliable, continuous, all weather transport
– Low energy consumption – hence low cost
– Low maintenance and operating costs
– Underground, no space problem
– Can traverse difficult terrain
– Minimal transit losses
– Operation round the clock, safe
– Economies of scale – double the throughput for
only 30% additional cost
• Disadvantage is in the investment cost
Ropeways….
52. SDM – Ch 15 Tata McGraw Hill 52
Ropeways
• Advantages:
– In hilly or inaccessible areas
– Long and circuitous routes with streams / deep
valleys
– For commodities capable of movement in ropeway
buckets
– Short haulages of less than 50 kms
– Areas where other carriers are uneconomical
• Disadvantages:
– Heavy investments
– Limitations on size and quantity of haul
How to decide on the right carrier?
53. SDM – Ch 15 Tata McGraw Hill 53
Carrier Selection
Traffic Related Shipper related Service related
Length of haul
Consignment weight
Dimensions
Value
Urgency
Regularity of
shipment
Fragility
Toxicity
Perishability
Type of packing
Special handling
required
Size of firm
Investment priorities
Marketing strategy
Network of
production and
distribution
Availability of rail
sidings
Stockholding policy
Management
structure
System of carrier
evaluation
Speed (transit time)
Reliability
Cost
Customer relationship
Geographical coverage
Accessibility
Availability of special
vehicles / equipment
Monitoring of goods
Unitisation
Ancillary services –
bulk breaking, storage
54. SDM – Ch 15 Tata McGraw Hill 54
Chart of Relative Merits
Parameter Weight
age
Rail Road Air Water Pipe
line
Rope
way
Speed 30 5 6 8 4 3 3
Versatility 10 6 8 5 6 3 2
Reliability 20 6 8 5 5 7 4
Availability 10 7 8 5 6 3 2
Continuity of
service
10 6 7 5 5 8 3
Distribution cost 20 4 5 6 6 7 8
Total score 10 5.4 6.7 5.1 5.1 5.1 4.0
Overall ranking 10 2 1 4 5 5 6
55. SDM – Ch 15 Tata McGraw Hill 55
Key Learnings
• Support to customer service has evolved
from materials management to logistics and
to supply chain management
• Production and marketing are the two internal
customers of Logistics
• Logistics also has a direct impact on the
financials of a company
• Three important functions of logistics are
inventory management, warehousing and
transportation
56. SDM – Ch 15 Tata McGraw Hill 56
Key Learnings
• Inventory directly supports customer service
but also adds to the cost and has to be
managed carefully
• Warehousing provides the place utility and
works as a balance between production and
meeting customer needs
• Transportation supports the place and time
utility and uses different modes to reach the
products to the consumer
• Modern day supply chains integrate the
operations of a firm, its suppliers and
customers
