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  • Great article. Thanks for the info, very helpful. BTW, if anyone needs to fill out a “1991 CA CP10.5, [Jan 1991]”, I found a blank form here: "" and also here "CP105"
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  1. 1. Indira Gandhi National Open University MS-55 School of Management Studies LOGISTICS AND SUPPLY CHAIN MANAGEMENTLogistics and SCM : An Overview 1
  2. 2. Indira Gandhi National Open University School of Management Studies MS-55 LOGISTICS AND SUPPLY CHAIN MANAGEMENTDesign and Management of SCM 2
  3. 3. Indira Gandhi National Open University MS-55 School of Management Studies LOGISTICS AND SUPPLY CHAIN MANAGEMENTIT Enabled SCM 3
  4. 4. Indira Gandhi National Open University MS-55 School of Management Studies LOGISTICS AND SUPPLY CHAIN MANAGEMENTCost and PerformanceMeasurement in SCM 4
  5. 5. Indira Gandhi National Open University MS-55 School of Management Studies LOGISTICS AND SUPPLY CHAIN MANAGEMENTDistribution Network Planning 5
  6. 6. Indira Gandhi National Open University MS-55 School of Management Studies LOGISTICS AND SUPPLY CHAIN MANAGEMENTEmerging Trends 6
  7. 7. MS-55: LOGISTICS AND SUPPLY CHAIN MANAGEMENT Course ComponentsBLOCK 1 LOGISTICS AND SCM : AN OVERVIEWUnit 1 : Logistics and SCM : An IntroductionUnit 2 : Principles of Supply Chain ManagementUnit 3 : Customer Focus in Supply Chain ManagementBLOCK 2 DESIGN AND MANAGEMENT OF SCMUnit 4 : Logistics : Inbound and OutboundUnit 5 : Models for SCM IntegrationUnit 6 : Strategic Supply Chain ManagementUnit 7 : Organizing for Global MarketsBLOCK 3 IT ENABLED SCMUnit 8 : Information Technology : A Key Enabler of SCMUnit 9 : Intelligence Information SystemUnit 10 : IT Packages in SCMBLOCK 4 COST AND PERFORMANCE MEASUREMENT IN SCMUnit 11 : Cost Analyses and MeasurementUnit 12 : Best Prictices and Benchmarkin for SCMUnit 13 : Performance Measurement and Evaluation of SCMBLOCK 5 DISTRIBUTION NETWORK PLANNINGUnit 14 : Transportation MixUnit 15 : Locational StrategyUnit 16 : Logistics and SCM EnvironmentBLOCK 6 EMERGING TRENDSUnit 17 : Future Trends and IssuesUnit 18 : Design for SCM and Greening the Supply ChainUnit 19 : SCM in Service Organization/Non-Manufacturing Sector
  8. 8. MS-92 : MANAGEMENT OF PUBLIC ENTERPRISES Course ComponentsBLOCK 1 PUBLIC ENTERPRISE: AN OVERVIEWUnit 1 : Public Enterprise: Concept and PolicyUnit 2 : Public Enterprise Scenario National and InternationalUnit 3 : Nature and Scope of Public EnterpriseUnit 4 : Forms of Public EnterprisesBLOCK 2 PUBLIC ENTERPRISE: ACCOUNTABILITY AND GOVERNANCEUnit 5 : Concept and Policy of Accountability and AutonomyUnit 6 : Government - Public Enterprise : InterfaceUnit 7 : Accountability to LegislatureUnit 8 : Relationship with other AgenciesUnit 9 : Corporate Governance and Corporate Social ResponsibilityBLOCK 3 PUBLIC ENTERPRISE: PERFORMANCE AND EVALUATIONUnit 10 : Appraisal of Public Enterprise Performance-IUnit 11 : Appraisal of Public Enterprise Performance-IIUnit 12 : Sickness and Public Enterprise and Turnaround StrategiesUnit 13 : Dimensions and Methods of Evaluating Enterprise PerformanceBLOCK 4 ORGANISATION AND MANAGEMENTUnit 14 : Board of Directors: Constitution and FunctioningUnit 15 : Personnel Management Issues in Public EnterprisesUnit 16 : Project ManagementUnit 17 : Management of Finance, Marketing and Production, IssuesBLOCK 5 PRIVATISATION AND DISINVESTMENTUnit 18 : Concept, Policy and DimensionsUnit 19 : Privatisation: International ExperienceUnit 20 : Disinvestment : Experience and StrategiesUnit 21 : Implications of DisinvestmentBLOCK 6 CASE STUDIESCase 1 : State Bank of India, 19981Case 2 : Corporate Planning at SAIL, 1989—93Case 3 : Gloom to Glory: The Successful Turnaround of the Singareni Colleries Company LimitedCase 4 : HR Initiatives for Turnaround of Visakhapatnam Steel Plant
  9. 9. Indira Gandhi National Open University MS-55 School of Management Studies Logistics and Supply Chain ManagementBlock1LOGISTICS AND SCM : AN OVERVIEWUnit 1Logistics and SCM : An Introduction 5Unit 2Principles of Supply Chain Management 18Unit 3Customer Focus in Supply Chain Management 27
  10. 10. Expert Committee (as on 24th March, 2000)Prof. D.K. Banwet Prof Sadananda Sahu Dr. Sanjay S. GaurDept of Management studies, Dept. of Industrial Engineering Shailesh J. Mehta School ofIIT, Delhi & Management, IIT, Kharagpur Management, IIT Bombay, MumbaiProf. B.S.Sahay, Prof. Atanu Ghosh Prof N. V. NarasimhanManagement Development Shailesh J. Mehta School of Director, SOMS,Institute, Gurgaon Management, IIT Bombay, IGNOU Mumbai New DelhiProf. Amarlal H. Kalro Mr. Satish Kumar Dr. Himanshu Kumar Shee,IIM Kozhikode Director (Movement), (Coordinator)Calicut Dept of Fertilizers, Ministry School of Management Studies, of Chemical & Fertilizers, IGNOU Krishi Bhawan, New DelhiProf. J.L.Batra Mr. Deepak Jakate,FORE School of Management General Manager - Logistics,New Delhi United Phosphorus Limited, MumbaiProf. N. Sambandam Dr. Kaushik SahuNITIE, Xavier Institute ofMumbai Management, BhubaneswarCourse Preparation Team (2004)Prof. Sushil (Course Editor) Dr. Ravi Shankar (Course Editor) Dr. Biplab DuttaDept. of Management Studies Dept. of Management Studies Vinod Gupta School ofIndian Institute of Technology Indian Institute of Technology, ManagementNew Delhi New Delhi IIT, KharagpurProf. N. Sambandam Prof .Karuna Jain Lt Col. Kaushik SircarNITIE, Shailesh J. Mehta School of Assistant Quarter MasterMumbai Management, Indian Institute of General Operations & Logistics, Technology Bombay, Mumbai Headquarter 4 CorpsProf Sadananda Sahu Mr. D N Srivastava Mr. Sandeep BiswasDept. of Industrial Engineering Advisor ( Training & Safety) & Institute for Integratedand Management Head of Distribution Deptt. ) Learning in ManagementIIT, Kharagpur (Retd.) in Cement Group (IILM), New Delhi M/S Larsen & Toubro Ltd, JharsugudaProf. Atanu Ghosh Mr. Deepak Jakate Prof. B. B. KhannaShailesh J. Mehta School of General Manager - Logistics, Director,Management, Indian Institute United Phosphorus Limited,of Technology Bombay, Mumbai IGNOU, New DelhiMumbaiDr. Anurag Saxena Dr. Himanshu Kumar Shee(Course Co-ordinator) (Course Co-ordinator)-On leaveSchool of Management Studies School of Management Studies,IGNOU, New Delhi IGNOU, New DelhiPrint Production: Tilak Raj, S.O.(P), SOMS, IGNOUDecember, 2004ã Indira Gandhi National Open University, 2004ISBN-81-All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any othermeans, without permission in writing from the Indira Gandhi National Open University.Further information on the Indira Gandhi National Open University courses may be obtained from theUniversitys Office at Maidan Garhi, New Delhi-110068.Printed and published on behalf of Indira Gandhi National Open University, New Delhi by Director,School of Management Studies, IGNOU.Cover Design by M/s. King Kraft, Karol Bagh, New DelhiLaser Composed By : M/s. Tessa Media & Computers, Sarai Jullena, New DelhiPaper Used : “Agrobased Environment Friendly”.
  11. 11. BLOCK 1 LOGISTICS AND SCM : AN OVERVIEWUnit 1: Logistics and SCM - An Introduction discusses about definition of Logistics& Supply Chain Management It discusses the process of development of logisticsand its role in the economy. It also converse about Physical Distribution Management(PDM) and its components.Unit 2: Principles of SCM defines how the supply chain works. It highlights the keyprocesses required to integrate the supply chain. It further examines the critical areasof Logistics-Marketing Interface and critical areas of Logistics-ManufacturingInterfaceUnit 3: Customer focus in SCM comprehends the key processes required toenhance customer focus in the supply chain. It delineates with the concept ofEfficient Customer Response (ECR), Quick Response (QR) and Accurate Response(AR). It further scrutinizes chain relationship within and beyond organization
  12. 12. Logistics and SCM : AnOverview4
  13. 13. Logistics and SCM : AnUNIT 1 LOGISTICS AND SCM : AN Introduction INTRODUCTIONObjectivesAfter going through this unit, you should be able to:· define Logistics and Supply Chain Management (SCM);· understand the development of logistics and its role in the economy; and· discuss Physical Distribution Management (PDM) and its components.Structure1.1 Introduction1.2 Logistics and SCM1.3 Development of Logistics1.4 The Role of Logistics in the Economy1.5 Logistics and Competitive Performance1.6 Physical Distribution Management (PDM) 1.6.1 Components of PDM 1.6.2 The Systems or “Total” Approach to PDM1.7 Summary1.8 Self Assessment Exercises1.9 References and Suggested Further Readings1.1 INTRODUCTIONThere is a great deal of material that is moved in any organization. Organizationscollect raw materials from suppliers and deliver finished goods to the customers. It islogistics that executes this function. In other words, logistics is the function thatmoves both tangible materials (e.g. raw materials) and intangible material (e.g.information) through the operations to the customers (as a finished product). Incontinuation to this explanation, we would introduce what a supply chain means. “ Asupply chain consists of a series of activities involving many organizations throughwhich the materials move from initial suppliers to final customers. There may bedifferent supply chain for each product. The chain of activities and organizations isnamed differently as per the situation. If the emphasis is on operations then it is calledprocess; if the emphasis is on marketing then it is called logistics; if the emphasis ison value-addition then it is called value-chain; if the emphasis is on meeting customerdemand then it is called demand chain; if the emphasis is on movement of materialthen we use the most general term i.e., supply chain. This unit will introduce you withthe concept of a supply chain.1.2 LOGISTICS AND SCMA supply chain may be considered as a group of organizations, connected by aseries of trading relationships. This group covers the logistics and manufacturingactivities from raw materials to the final consumer. Each organization in the chainprocures and then transforms materials into intermediate/final products, anddistributes these to customers. 5
  14. 14. Logistics and SCM : An The supply chain can be defined as the integral management (within the companyOverview and through other companies) of the company’s various logistical stages such as materials procurement, production, storage, distribution and customer service. The Supply Chain concept should be seen as a whole, that is, the entire system from the origin of procurement to the final consumption of goods or services. In supply chain network we must include all the organizations involved in the production of certain goods or services (from the origin of procurement to final consumption), and each of the logistical stages within these organizations. Thus, the supply chain is a network linking and interweaving different supply chains of all the companies involved in a production process. A diagram depicting the typical supply chain is shown in Figure 1.1. Raw Semi-Finished Finished End Material Products Products Distributors Consumer Figure1.1: Typical Supply chain The supply chain activity therefore constitutes complex objects, as it involves decision-makers from many different companies, who sometimes have no direct relationship and are place in very different geographical locations; yet the decisions they make are mutually dependent upon each other. Hence, there is a need for an information system capable of linking together the different members of the chain so that there is an open communication between them. The concept of supply chain is not new. Historically we have moved from physical distribution to logistics management and then to supply chain management. This major difference seems to be that supply chain management is the preferred name for the actualization of “integrated logistics”, with it acting as an enabler, it is now possible to have an integrated process view about the logistics and all allied processes related to business. Ideally the supply chain should be a “seamless” chain as shown in Figure 1.2. Raw Material Product Ordering Channel Seamless Supply Chain Material Flow channel End Customer Figure 1. 2: Seamless Supply Chain6 Source: Sahay B.S., 1998
  15. 15. The importance of logistics can be gained from the fact that logistics and supply chain Logistics and SCM : Anmanagement costs are in range of 10 to 15 of the GDP for developing countries while Introductionit is around 18 to 20 per cent for developed countries. The concept of integratedlogistics consists of two interrelated efforts:· Logistics operation: Logistic operation can be basically clubbed into physical distribution management, materials management and internal inventory transfer.· Logistic coordination: Logistic coordination pertains to forecasting, order processing, operational planning and product procurement or MRP. This integration is effected through effective information flows.DefinitionsForrester (1961) suggested that the five flows of any economic activity — money,orders, materials, personnel and equipment are interrelated by an informationnetwork, which gives the “system,” which is now called as supply chain due to itsown character.According to Christopher (1992) supply chain is network of organizations that areinvolved, through upstream and downstream linkages, in the different processes andactivities that produce value in the form of products and services in the hands of theultimate consumer. Managing these linkages and delivering the product/service to thecustomer in a cost effective way is SCM. Supply chain management encompassesmaterials/supply management from the supply of basic raw materials to final product(and possible recycling and re-use). Supply chain management focuses on how firmsutilize their suppliers’ processes, technology and capability to enhance competitiveadvantage. It is a management philosophy that extends traditional intra-enterpriseactivities by bringing trading partners together with the common goal of optimizationand efficiency.Supply Chain Management is a set of approaches utilized to efficiently integratesupplier, manufacturer, warehouse and stores so that merchandise is produced anddistributed at the right quantities, to the right location and at the right time, in order tominimize system under costs while satisfying service level requirements (Levi(2000)).The common thread in these definitions is that supply chain management seeks tointegrate performance measures over multiple firms or processes, rather than takingthe perspective of a single firm or process.Supply chain management has provided the next logical stage in the evolution ofcompetitiveness for the manufacturing organization and added, importantly, a concernfor the flow of materials to and from the organization. Supply chain managementintegrated suppliers to the end consumers and emphasized the need for collaborationto optimize the whole system. As such, supply chain management is the process ofdesigning, planning and implementing change in the structure and performance of the‘total’ material flow in order to generate increased value, lower costs, enhancedcustomer service and yield a competitive advantage. In effect, the addition of supplychain management to the marketing model created a truly ‘systems’ approach to theorganization and its direct and indirect trading relationshipsThe content of supply chain management with in a firm varies considerably with thetype of business. Figure 1.3 shows the different components of logisticsmanagement. 7
  16. 16. Logistics and SCM : AnOverview MANAGEMENT ACTIONS Planning Implementation Control INPUT INTO OUTPUT OF LOGISTICS LOGISTICS Natural Resources (Land, Marketing Orientation Facilities and Equipment) (Competitive Advantage) CUSTOMERS SUPPLIERS Human Resources Raw In process Finished Time, Place, Utility Material Inventory Goods Efficient movement to Financial Resources Customer Information Resources Proprietary Asset LOGISTICS ACTIVITIES · Customer Service · Plant and Warehouse Site · Demand Forecasting Selection · Distribution Communication · Procurement · Inventory Control · Packaging · Material Handling · Return Goods Handling · Order Processing · Salvage and Scrap Disposal · Parts & Service Support · Traffic and Transportation Figure 1.3: Components of Logistic Management (Source: Douglas M. Lambert, 1998, Pg-5) A representative list of logistic element for a firm is given in Table 1.1. Table 1.1: Logistic Element Facility Location Determining location, number and size of facilities needed, Allocation demand to facilities Transportation Mode and service selection Carrier routing Vehicle scheduling Inventories Finished goods stocking policies Record keeping Supply scheduling Short term sales forecasting Customer Service Cooperate with marketing in: determining customer needs and wants for service determining customer response to service Order Processing and Information Sales order procedure Flows Information collection, storage and manipulation Data analysis Warehousing and Material Handling Space determination Stock layout Material handling equipment selection Stock storage and retrieval Equipment replacement policies Protection Packaging Design for: handling, storage, protection Product Scheduling Co-operate with production in : specifying aggregate production quantities8 sequencing and timing of production
  17. 17. Logistics and SCM : An1.3 DEVELOPMENT OF LOGISTICS IntroductionLogistic activity is literally thousand of years old, dating back to the earliest form oforganized trade. As this area of study however it first began to gain attention in theearly 1990s. More emphasis has been given to logistics after the Gulf war in 1990-91when the efficient and effective distribution of store supplies and person were thekey factors for success. With rising interest rates and increasing energy cost logisticsreceived more attention as a major cost driver. Logistics cost became a more criticalissue for many organization because of globalization of industry. This has affectedlogistics in two primary ways. First, the growth of world-class competitors from othernations has caused organization to look for new way to differentiate theirorganizations and product offerings. Second, as organizations increasingly buy andsell offshore, the supply chain between the organizations becomes longer, more costlyand more complex. Excellent logistics management is needed to fully leverage globalopportunities. Information technology input has given a next boom to logisticsmanagement. This gave organization the ability to better monitor transactionintensive activities such as ordering movement and storage of goods and materials.Combine with the availability of computerized quantitative models; this informationincreased the ability to manage flows and to optimize inventory levels and movement.Other factor contributing to the growing interest in logistics include advances ininformation technology, increased emphasis on customer service, growingreorganization of the system approach and total cost concept. The profit leveragefrom logistics and realization that logistics can be used as a strategic weapon incompeting the market place.The system approach is a critical concept in logistics. Logistics is in itself a system.It is a network of related activities with the purpose of managing the orderly flow ofmaterial and personal with in the logistic channel. The system approach simply statesthat all functions or activities need to be understood in terms of how they effect andare affected by other elements and activities with which they interact. The idea isthat if one looks at action in isolation, he or she will not understand the big picture orhow such action affects or are affected by other activities. In essence the sum oroutcome of a series of activities is greater than its individual parts.Activity 1Every organization has to move materials to support its operations. What do servicecompanies like Internet Service Providers move? Is the concept of supply chainrelevant for these companies?.................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................1.4 THE ROLE OF LOGISTICS IN THE ECONOMYLogistics play a key role in the economy in two significant ways. First, logistics is ofthe major expenditures for business. Logistics expenditure accounts for around15-20% of GDP. Thus by improving the efficiency, logistics make an importantcontribution to the economy as a whole. 9
  18. 18. Logistics and SCM : An Second, logistics support the movement and flow of many economic transactions; it isOverview an important activity in facilitating the sale of virtually all goods and services. To understand this role from a system perspective, consider that if goods do not arrive on time, customer can not buy them. If goods do not arrive at the proper place or in the proper condition, no sale can be made. Thus all economic activities throughout the supply chain will suffer. One of the fundamental ways that logistics add value is by creating utility. From an economic stand point utility represent the value or usefulness that an item or service has in fulfilling a want or need. There are four types of utilities namely; Form, Possession, Time and Place. Form utility is the process of creating the good or service or putting them in proper form for the customer to use. Possession utility is value added to a product or service because the customer is able to take actual possession like credit arrangement and loans. These two utility are not directly related to logistics but these are not possible without getting 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. The time and place utility are directly related to logistics. Time utility is the value added by having an item when it is needed. Place utility is the item or service available where it is needed. The five rights of logistics are the essence of the two utilities provided by logistics time and place utility. 1.5 LOGISTICS AND COMPETITIVE PERFORMANCE Today logistics department appears on the organization charts of many large organizations. Linking logistics activities directly to organization strategic plan can work effectively to support their organization for achieving competitive advantage. Porter user a tool called the value chain as shown in the Figure 1.4 to separate buyers, supplier and a firm into the discrete but interrelated activities from which value stems. The value chain concept may be used to identify and understand the specific source of competitive advantage and how they related to buyer value. Value is the amount a customer is willing to pay for the products, services provided by an organization. Value added is the difference between what the customer pays and the cost to the organization in providing that product or service. Porter defines the five categories of primary activity involved in competing in any industry. Inbound logistics: Activities associated with receiving, storing and disseminating input to the product. Operation: Activity associated with transforming input into the final product form. Outbound logistics: Activity associated with collecting storing and physical distribution of the product to buyers. Company Infrastructure Support Organization, People Activity System & Technology Procurement Inbound Operation Outbound Marketing Logistics Logistics & Sales Service Primary Activity Figure 1.4: Porter Value Chain10 Source: Porter, Michael E., “Competitive Advantage”. 1985, the Free Press. New York)
  19. 19. Marketing and Sales: Activities associated with providing a means by which Logistics and SCM : Anbuyers can purchase the product and inducing them to do so such as advertising, Introductionpromotion etc.Service: Activity associated with providing service to enhancer maintain the value ofthe product such as installation, repair etc.The effective logistics management can provide a major source of competitiveadvantage. The source of competitive advantage is found firstly in the ability of theorganization to differentiate itself in the eyes of the customer from its competitor andsecondly by operating at a lower cost and hence at greater profit. There are twobases of success in any competitive context. One is the cost advantage and second isthe value advantage. Cost advantage is achieved through greater productivity andvalue advantage is pursued through a different plus over competitive offerings. Hi Va l u e A d v a n t a g e Service Leader Cost and Service Leader Commodity Cost Leader Market Lo Lo Productivity Advantage Hi Figure 1.5: Competitive MatrixSource : Christopher, M., 1992, Logistics and Supply Chain ManagementFrom the matrix shown in Figure 1.5 it is clear that successful companies will oftenseek to achieve a position based upon both a productivity advantage and a valueadvantage. Logistics management can play a critical role to gain both advantages. Inmany industries logistics cost represents such a significant proportion of total cost thatit is possible to make major cost reduction through fundamentally reengineeringlogistics process. In term of value advantage, companies can gain through servicedifferentiation. Today markets have become more service sensitive. Customer in allindustries are seeking greater responsiveness and reliability from suppliers, they arelooking for reduced lead time, just in time delivery and value added services thatenable them to do better job of serving their customers.Traditionally most organizations have viewed themselves as entities that existindependently from others and indeed need to compete with them in order to survive.However such a philosophy can be self-defeating if it leads to an unwillingness tocooperate in order to compete. Behind this seemingly paradoxical concept is the ideaof supply chain integration. Supply chain integration links a firm with its customers,suppliers and other channel members. As such it integrates their relationships,activities, functions, processes and locations. The purpose is to improve theeffectiveness and efficiency of SC for ultimate consumers.A model of the evolution of supply chain is shown in Figure 1.6 Integration starts withthe ‘baseline’ organization (Stage 1) with a reasonably informal approach tomanagement by departments. This level of evolution involves the processing ofmaterial requirements and planning routines that are short term in nature. Thematerial inventories simply arise in response to reactive management practices. Thekey requirement of employees is to react to failure and manage as best that they can.The Stage 2 organization reflects the traditional form of supplier management. Thebusiness departments tend to operate autonomously. The Stage 2 organization is 11
  20. 20. Logistics and SCM : An focused on the annual budget allocation and departmental cost management. For theOverview purchasing function this implies seeking out the lowest price provider of material requirements often through a process of tendering, the use of ‘power’ and the constant switching of supply sources to prevent ‘getting too close’ to any individual source. The Four stage of Development Stage 1: Baseline Purchasing Material Production Sales Distribution Control Stage 2: Functional Integration Materials Manufacturing Distribution Management Management Management Stage 3: Internal Integration Materials Manufacturing Distribution Management Management Management Stage 4: External Integration Suppliers Internal Supply Customers Chain Figure 1. 6: Supply Chain Integration The Stage 3 organization is internally integrated and has a much greater level of interest in material flow processes from suppliers to customers rather than the ‘grenade over the all’ approach of the earlier two forms. The organization has integrated the aspects of the internal supply chain that it can influence and control. In parallel, planning systems operated throughout the organization are integrated and demand information, production schedules and material requirements are synchronized by teams of individuals that were once subordinates of separate departments. For this company, the demand and material flow drive the entire system in an end-to-end supply chain and the organization makes use of Just in time materials management techniques. The Stage 4 company has begun to realize the benefits of true supply chain management and the ability to synchronize all activities within the factory and to interface the factory with its suppliers and customers. Under these conditions, the collaborative and participative internal environment is extended upstream and downstream and the planning of supply chain management is recognized formally. The factory is ‘customer oriented’ instead of product oriented and seeks to partner with key customers and suppliers in order to better understand how to provide value and customer service. This form of company has full improvement processes within the organization that are encapsulated in medium term plans for the organization and its supply chain. The organization makes most use of information systems to enhance12 the responsiveness of the organization and supply chain to deliver products and has
  21. 21. also developed a capability in terms of product design that includes customer and Logistics and SCM : Ansupplier involvement. To enhance the nature of collaboration the organization Introductionrewards supplier partnerships with sole sourcing agreements in return for a greaterlevel of support to the business and a commitment to on-going improvement ofmaterial flow and relationship management. The model provides a useful means ofanalyzing the current state of the organization and understanding where thenext interventions would be needed in order to improve performance.Activity 2Describe the Supply Chain for a paper manufacturing organization.....................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................1.6 PHYSICAL DISTRIBUTION MANAGEMENT (PDM)There are many decisions that must be taken, when a company organizes a channelor network of intermediaries, who take responsibility for the management of goods asthey move from the producer to the consumer. Each channel member must becarefully selected and the company must decide what type of relationship it seekswith each of its intermediate partners. Having established such a network, theorganisation must next consider how these goods can be efficiently transferred, in thephysical sense, from the place of manufacture to the place of consumption. Physicaldistribution management (PDM) is concerned with ensuring the product is in the rightplace at the right time.It is now recognised that PDM is a critical area of overall supply chain management.Business logistical techniques can be applied to PDM so that costs and customersatisfaction are optimised. There is little point in making large savings in the cost ofdistribution if in the long run, sales are lost because of customer dissatisfaction.Similarly, it does not make economic sense to provide a level of service that is notrequired by the customer but leads to an erosion of profits. This cost/service balanceis a basic dilemma that physical distribution managers face.The reason for the growing importance of PDM is the increasingly demanding natureof the business environment. In the past it was not uncommon for companies to holdlarge inventories of raw materials and components. Although industries and individualfirms differ widely in their stockholding policies, nowadays, stock levels are kept to aminimum wherever possible. Holding stock is wasting working capital for it is notearning money for the company. To think of the logistical process merely in terms oftransportation is much too narrow a view. Physical distribution management (PDM)is concerned with the flow of goods from the receipt of an order until the goods aredelivered to the customer. In addition to transportation, PDM involves close liaisonwith production planning, purchasing, order processing, material control andwarehousing. All these areas must be managed so that they interact efficiently witheach other to provide the level of service that the customer demands and at a costthat the company can afford.1.6.1 Components of PDMThere are four principal components of PDM namely; Order processing, Stock levelsor inventory, Warehousing and Transportation. 13
  22. 22. Logistics and SCM : An Order processingOverview 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 and sellers. When buyers review their suppliers, efficiency of order processing is an important factor in their evaluation. A 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 the company’s limited resources. If the company’s marketing strategy requires that high stock levels be maintained, this 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 of course increase when number of warehouse locations increases, but cost will increase accordingly. Again, an optimum strategy must be established that reflects the desired level of service. 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. The patterns of retailing that have developed, and the pressure caused by low stock14 holding and short lead times, have made road transport indispensable. When the
  23. 23. volume of goods being transported reaches a certain level some companies purchase Logistics and SCM : Antheir own vehicles, rather than using the services of haulage contractors. However, Introductionsome large retail chains have now entrusted all their warehousing and transport tospecialist logistics companies.For some types of goods, transport by rail still has advantages. When lead-time is aless critical element of marketing effort, or when lowering transport costs is a majorobjective, this mode of transport becomes viable. Similarly, when goods are hazardousor bulky in relation to value, and produced in large volumes then rail transport isadvantageous. Rail transport is also suitable for light goods that require speedydelivery (e.g. letter and parcel post). Except where goods are highly perishable orvaluable in relation to their weight, air transport is not usually an attractive transportalternative. For long-distance overseas routes air transport is popular. Here, it has theadvantage of quick delivery compared to sea transport, and without the cost of bulkyand expensive packaging needed for sea transportation, as well as higher insurancecosts.The chosen transportation mode should adequately protect goods from damage intransit (a factor just mentioned makes air freight popular over longer routes as lesspackaging is needed than for long sea voyages). Not only do damaged goods erodeprofits, but frequent claims increase insurance premiums and inconvenience tocustomers, endangering future business.1.6.2 The Systems or ‘Total’ Approach to PDMPDM has been neglected in the past; this function has been late in adopting anintegrated approach towards it activities. Managers have now become moreconscious of the potential of PDM, and recognize that logistical systems should bedesigned with the total function in mind. A fragmented or disjointed approach toPDM is a principal cause of failure to provide satisfactory service, and causesexcessive costs.PDM is concerned with ensuring that the individual efforts that go to make up thedistributive function are optimised so that a common objective is realised. This iscalled the ‘systems approach’ to distribution management and a major feature ofPDM is that these functions be integrated.To plan an efficient logistics structure it is necessary to be aware of the interactionbetween the different distribution costs and how they vary with respect to thedifferent depot alternatives (number, size, type and location).Figure 1.7 demonstrates how the individual distribution and logistics cost elements canbuild 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.· Delivery cost: This will concern with the secondary transportation cost i.e. cost of delivery from the depot to the consumer. The greater the number of depots, the lesser is the secondary mileage and the delivery cost.· 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. 15
  24. 24. Logistics and SCM : An · Service Cost: That is stock management and insurance costOverview · 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. Cost Total Distribution Cost Trunking Cost Inventory Cost Storage Cost System Cost Local Delivery Cost No. of Depots 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. As16
  25. 25. such it integrates their relationships, activities, functions, processes and locations. Logistics and SCM : AnPhysical distribution management (PDM) is concerned with ensuring the right Introductionitem needed for consumption or production to the right place at the right time andin the right condition at the right cost1.8 SELF ASSESSMENT QUESTIONS1) “Logistics is the function that is responsible for the flow of materials into, through and out of an organisation”. Elaborate?2) “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.3) 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?4) What is Physical Distribution Management? Describe its components? Also, elucidate the “total approach” to PDM.5) Describe the evolution of Supply Chain concept. What in your opinion is the most important stage?1.9 REFERENCES AND SUGGESTED FURTHER READINGS1) Simchi Levi (2000), Designing and Managing the Supply Chain, Irwin/ McGraw-Hill, IL.2) Christopher, M., 1992, Logistics and Supply Chain Management: Strategies for Reducing Costs and Improving Services, Pitman, London.3) Croucher Phil, Rushton Alan and Oxley John, The handbook of Logistics and distribution Management4) Douglas M. Lambert, 1998, Fundamental of logistics management, McGraw Hill.5) Sahay B S, 1998, Supply Chain Management for Global competitiveness (Macmillan)6) Chopra Sunil and Meindl P, 2001, Supply Chain Management: Strategy, Planning, and Operation, Prentice Hall.7) Forrester J W 1961, Industrial dynamics, Cambridge, Massachusetts, The MIT press.8) Waters Donald, 2003, Logistics: An Introduction to SCM, Palgrave McMillan (Indian Edition), NY 17
  26. 26. Logistics and SCM : AnOverview 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 Introduction 2.2 How does SCM Work? 2.3 The Logistics-Marketing Interface 2.3.1 Logistics and Product Life Cycle 2.3.2 Areas of Logistics and Marketing Interaction 2.4 The Logistics-Manufacturing Interface 2.4.1 Customer Service Issues at the Logistics-Manufacturing Interface 2.5 Summary 2.6 Self Assessment Questions 2.7 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 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 change from managing individual function to integrating activities into key supply chain processes. Operating an integrated supply chain requires continuous18 information flows, which in turn helps to create the best product flows.
  27. 27. Logistics and SCM : An VALUE ADDED Introduction INVENTORY FLOW Enterprise Physical Manufacturing Customers Support Purchasing Suppliers Distribution REQUIREMENT INFORMATION FLOW Figure 2.1: Supply Chain SystemSource: Logistics Management, Bowersox et al., 1986The customer remains the primary focus of the process. However, improvedlinkages with supplies are necessary because controlling uncertainty in customerdemand, manufacturing processes and supplier performances are critical for effectiveSCM. The key processes for the integrated SCM (Figure 2.2) are as follows:Customer Relationship ManagementThis is the process to identify the key customers. With customer moving to centrestage, more companies have begun to treat a customer as a value independent entity.The companies no longer view sales as selling of their products, but as selling ofrelationships, solutions, support and care. Customer relationship teams develop andimplement partnering program with key customer. Product and service agreementsspecifying the level of performance are established with these key customers. Demand Management Customer Service Management Order Fulfillment Manufacturing Flow Management Procurement Product Development and Commercialization Return Channel Performance Metrics Figure 2.2: Supply Chain Process for Integrated SCMSource: Lambert 1998 19
  28. 28. Logistics and SCM : An Customer Service ManagementOverview Increased and intense competitions all around have made customer service as the key differentiator in a marketing system. Customer service provides the single source of customer information. It provides the customer with real time information on promised shipping dates and product availability. Customer service is a valuable business activity governing both resources and top management attention. Customer service is being offered in many forms such as post warranty support, fast repairs, speedy response to service calls from customers, easy availability of spares, qualified, competent and customer friendly technicians. Demand Management Customer demand in the form of irregular order pattern is the largest source of variability. Given this variability in customer ordering, demand management is a key to an effective SCM process. Manufacturers are moving from a push system to make to order mode, in such case predicting or forecasting demand is the key driver on which all of the supply related decision will depend. The demand management process must balance the customer’s requirement with the firm’s supply capabilities. A good demand management system uses point of sales and “key” customer data to reduce uncertainty and provide efficient information flows through out the supply chain. Customer Order Fulfillment The key to effective SCM is to achieve high order fill rate. Order fill rate can be defined as % of order fulfilled before or on the due date set by the customer. Performing the order fulfillment process effectively requires integration of firms manufacturing, distribution and transportation plans. Manufacturing Flow Management This functional area decides how production should be organized and managed. Traditionally production system uses push strategy but in a customer focus environment pull strategy is more effective. To implement pull system, manufacturing process must be flexible to respond to market changes. This requires the flexibility to perform rapid change over to accommodate mass customization; orders are processed on a just in time basis in minimum lot size. In a customer focused business world, production process has to optimize balance between customer satisfaction and efficiency. Procurement Procurement is concerned with buying and movement of materials, parts or finished inventory from supplier location to manufacturing or assembly plants, warehouse or retail stores. Traditionally procurement is carried out on the basis of bid and buys system whereas in new integrated concept long-term partnerships are developed with core group of suppliers. Suppliers are involved at the early design stage which can lead to reduction in product development cycle times. For quick response to customer demand purchasing activities are carried out with rapid communication mechanism such as EDI and interest linkages. This reduces the cost and time on the transaction portion of the purchase. Product Development and Commercialization In today’s fast changing environment new products are life bloods of a company. For the firm to remain competitive it has to sharpen its product development times. This requires that customer and suppliers must be integrated into product development process. Return Channel Managing the return channel as a business process offers the same opportunity to20 achieve a sustainable competitive advantage as managing the supply chain from an
  29. 29. out-bound perspective. Effective process management of return channel enables the Logistics and SCM : Anidentification of productivity improvement opportunities and break through projects. IntroductionFocusing effort on improvement in key business process is the foundation of SCMphilosophy. Thus the goals of these processes are to:a) Develop customer focused teams that provide beneficial product and service agreement to strategically significant customersb) Provide a permit of contact for all customers, which efficiently handle their inquiries.c) Continually gather, compile and update customer demand to match requirement with supply.d) Develop flexible manufacturing system that responds quickly to changing market conditions.e) Manage supplier partnership that allows for quick response and continuous improvement.f) Fill 100% of customer order accurately and on timeg) Enhance profitability by managing the return channel (reverse logistics)Activity 1Take the case of an organization where you are working or about which you know ofand identify the key processes within that organization vis-à-vis those proposed byLambert...................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................2.3 LOGISTICS-MARKETING INTERFACETraditionally logistics group assumed primary responsibility for warehousing, inventoryand transportation within many organizations while marketing group is responsible fornegotiation, promotion and selling. As neither group had responsibility for over allchannel management, conflicts arose at the expense of overall organization goal. Theorganizations had realized that functional interdependence, not internecine conflicts, isthe key to satisfy customer needs. Despite the realization by logistics and marketingmanager that cooperation is essential marketers often criticize logistics departmentfor being cost minimizers having no concern for customer needs while logisticsdepartment accuses marketers of chasing sale at any cost. Therefore it is essentialthat organizations identify area of agreement and potential conflict. Seniormanagement must be keen to actively support cooperation between the two groups.This can be assisted by performance measurement that rewards cooperation and aspirit of interdependence that actively discourages parochial behaviour. 21
  30. 30. Logistics and SCM : An 2.3.1 Logistics and Product Life CycleOverview Product life cycle (PLC) is a key marketing concept that affects the relationship between logistics and marketing. For different stages of PLC i.e., introduction, growth, maturity and decline, different level of logistics support is required by marketing. In the introduction and growth stage timely cost effective fulfillment of order is a major requirement in ensuring initial acceptance of the product. Later as sales slow down and the product moves into the maturity and decline stages, the company changes to trimming cost as the product faces stiff price competition and consequent pressure on margins. Hence there is need for a logistics manager to understand what marketing is trying to achieve with each product and what appropriate level of logistics support is required accordingly. 2.3.2 Areas of Logistics and Marketing Interaction In today’s competitive environment organizations are utilizing the benefits of their established logistics/marketing interface to be competitive not in terms of product and price but also logistics services tailored to meet individual customer needs. These organizations are able to differentiate themselves from their competitors by offering a total service with logistics forming an essential part of the total value chain. The major area of interaction between logistics and marketing includes (Gattorna 1995): · Product Design: This can have a major effect on warehouse and transportation utilization (and therefore costs). · Pricing: This is the means by which logistics services customer demand affects the overall cost of the product and in turn the organization’s pricing policies. · Market and Sales Forecasts: Marketing forecasts will largely dictate the level of logistics resources needed to move products to customers. · Customer Service Policies: If marketing opts to offer a very responsive level of service to customer, logistics resources, in the form of facilities and inventory, will need to be very considerable. · Number and Location of Warehouses: This is one of the greatest areas of contention and can only be satisfactorily resolved if marketing and logistics develop the policy jointly. · Inventory Policies: This is another area of contention, as these decisions have a significant bearing on operational costs and the extent to which desired levels of customer service are achieved. It is another key area where policy should be developed jointly. · Order Processing: Responsibility for who receives customer’s orders and the speed and efficiency with which they are processed has a major impact on operational costs and customer’s perceptions of service levels. This is another area where joint policy-making is preferable. · Channels of Distribution: Decisions to deliver direct to the customer or through intermediaries will greatly influence the level of logistics resources required. As channels change, so will the resources required. Marketing should definitely consult with logistics when making channel decisions.22
  31. 31. Logistics and SCM : An2.4 THE LOGISTICS-MANUFACTURING INTERFACE IntroductionManufacturing and logistics are interrelated so no one can be considered in isolation.Decisions made in these two areas commit the organization to relatively long-lastingcost structures and also determine the manner in which the business competes in itschosen markets.To maintain its competitive position in a dynamic industry, the manufacturing andlogistics functions must respond positively by considering the manufacturing/logisticsnetwork as whole and continuous improvement programmes coordinated across thevarious activities like delivery service, production priority control and purchasing toexploit the synergy available.There are two fundamental competitive strategies, which every organization has todecide to remain unbeaten in the competitive environment. Cost leadership i.e., be thelowest-cost producer in the industry or meaningful differentiation i.e., to differ bycompetitor in some form, that can be in terms of service like delivery time, deliveryreliability etc. or in terms of technical advantages like superior features, superiorproduct etc. In new environment, where integration is the driver to achievecompetitive advantage, organizations have evolved new approaches to developinterface between two functions. The differences in these perspectives are shown inTables 2.1 and Table 2.2 when organizations decide to compete on the basis of costleadership and differentiation respectively.Table 2.1: Manufacturing / logistics approach when the basis for competing is cost leadership (Source: Gattorna 1995) Basis for Competing: Lowest – Cost Competitor Old Approach New Approach Cost-reduction programmes Eliminate all non-value adding activities/procedures/ tasks etc Reduce inventory Reduce the need to buy capacity by shortening internal lead times Trim 10% all budget allocations Reduce the material conversion cost by simplifying processes through integration and technology Defer capital expenditure Emphasize product and process quality so as to reduce costs associated with rework, breakdowns etc. Emphasize control on expenses Reduce need for inventory through superior planning particularly direct labour systems, shortened internal lead times; linking processes etc Which also results in: Which also results in: · Inadequate support · Improved product performance · Poor product quality · Reduced product variability · Ageing equipment/processes · Improved flexibility · Poor customer service · Improved responsiveness to market · An image of being unreliable · Poor product availability · Poor delivery service 23
  32. 32. Logistics and SCM : An Table 2.2: Manufacturing / logistics approach when the basis for competing is differentiationOverview (Source: Gattorna 1995) Basis for Competing: Product Availability and delivery time Old Approach New Approach Increase inventory to act as a buffer Shorten internal lead times to improve responsiveness to market Increase number of branch warehouses Emphasize schedule performance to ensure reliable supply Increases capacity to provide flexibility Emphasize product and process quality so as to reduce delays caused by rework, breakdowns etc. Release orders early to production Utilize express transport and centralized distribution to prevent misallocation of stock Emphasize production output Initial superior customer service and order entry systems to enhance customer communication Which also results in: Which also results in: Higher costs Lower costs Negatives cause by the complexity of Improved product performance the system and poor product quality Reduced product variability caused by emphasis on ‘getting the product out’ Long internal lead times caused by An image of reliability early release of works orders to give the plant ‘plenty of time’ Stock-outs due to work order overload, Improved flexibility in volume and product mix confused priorities and difficulty in allocating stock to many warehouses Logistics link the manufacturing both from characteristics of inputs i.e., suppliers of raw materials and characteristics of market i.e., customers. For a given manufacturing organization there is a production/branch warehouse configuration, which satisfies most constraints or pressures imposed by the inputs or the markets. For effective operation of manufacturing/logistic interface there are two primary determinants i.e., Capacity and Location. Capacity is related to location and logistics in the following way. First, production capacity must be matching in some sensible way to the market demand then in accordance with the production capacity matching is required for the logistics network i.e., procurement, storage, order entry and processing, outbound transport, branch warehouse and final customer delivery. The capacity issues are very crucial decision and are required to change as per the market demand and demand locations. Short-term solutions can be capacity enhancement by overtime, second and third shifts, third party contracting, extension of the existing facility and long-term solution are additional facility in a new location or extensive capacity in new location. Short term decisions possess the least risk, and impact on the logistics network only in terms of the additional capacity requirement where as long term solution demand a re-evaluation of the manufacturing/logistics network not only in terms of the capacity of each component but also the strategic necessity and location of each facility (factory, warehouse) in terms of its contribution to the effectiveness of the total network. In other words, a change in location and capacity of any one facility requires a review of the location and capacities of all other facilities. Clearly, the issues involved in location, capacity and logistics are inextricably linked.24
  33. 33. 2.4.1 Customer Service Issues at the Logistics-Manufacturing Logistics and SCM : An Introduction InterfaceCustomer service strategy is an on-going process of increasing both the quality andnumber of links between the manufacturing organization and the customer. Thewhole emphasis in today’s service intensified businesses are to increase a series ofboth human and information based technological relationships between customer andthe organization so that better customer services and satisfaction to the customer canbe realized. The issues at the manufacturing/logistics interface for better customerservice are as follows:Demand ForecastingThe general function of product forecasting in the short to mid term is to contribute tothe process of ensuring the availability of stock for customers. This includes the useof distribution requirements planning (DRP) wherever appropriate. For the longerterm, forecasting at the product group level is crucial for manufacturing capacity andflexibility decisions.Customer and Supplier Oriented SystemOrganizational systems will need to be directly related to the issues of how to bind thecustomer more tightly to the organization and how effectively integrate suppliers intothe overall supply chain with the objective of enhancing customer service.The systems installed by organizations will need the capability to formally link thecustomer in a form that benefits both parties. Systems will also be required to linkwith suppliers in a manner that gives meaning to the concept of strategic alliances. Ina strategic alliance the supplier and the manufacturer agree to a relationship that goesbeyond the normal commercial relationship such that each obtains synergistic benefitssimilar to that obtained by forward/backward integration but with least associatedrisks and negative attributes.Plant ConfigurationsThe location, nature and operating performance of manufacturing facilities, centralwarehouses and branch warehouses impact heavily on both cost structure andservice levels. In the longer term, and in conjunction with other factors (systems,supplies), the plant/branch configuration is a major structural input to reducing overallsupply chain costs. When the links between manufacturer and customer andmanufacturer and supplier are complete, a rethink of the logistics (supply chain)network from supplier through to customer will be required, for two reasons:· Available technology, particularly information technology, will allow certain plant/branch configurations, previously ruled out, to be feasible.· There will be an on-going need to reduce (in real terms) the cost of the network.A key feature of this process will be the requirement of involving in an appropriatemanner both customers and suppliers. This will be new ground for manyorganizations and will force a re-evaluation of values and mission in somecircumstances.Master Production schedulingThe master production schedule (MPS) is an area where a number of parties(manufacturing, logistics, marketing, finance) have a vested interest. Often as not,though, it is done by one group in isolation from the others. In the operational sensethe MPS is primarily concerned with stock availability within a set of constraints suchas capacity. As such, it is the single instrument, which demonstrates the plan for:a) Finished goods inventory levels 25
  34. 34. Logistics and SCM : An b) Customer service in terms of stock availabilityOverview c) Machine utilization d) Capacity utilization e) Labor productivity f) Output g) Need for overtime/casual employees and so on. The real power of the MPS, however, is its potential to involve all interested parties. In practice, when people from marketing, logistics and manufacturing get together and agree on a schedule, the result is a superior schedule. Clearly the MPS may be used as a vehicle to integrate a number of parties into the planning and decision- making process with the result being a superior plan which, when executed, results in superior customer service. 2.5 SUMMARY In this unit, we have discussed how the supply chain works and what are the key processes required to integrate the supply chain. We have also examined the critical areas of logistics-marketing interface and logistics-manufacturing interface. These interfaces are critical for enhancing supply chain performance. Finally we have discussed how manufacturing-logistics interface could provide better customer service. 2.6 SELF-ASSESSMENT QUESTIONS 1) Explain various supply chain processes for an integrated SCM. Are there any other processes that you can think of? 2) What are the primary responsibilities of logistics group and marketing group within an organization? Why there is a conflict between the two? What measures can be taken to enhance cooperation? 3) What are the differences between manufacturing/logistics approach when the basis for competing is i) Cost leadership ii) Differentiation 2.7 REFERENCES AND SUGGESTED FURTHER READINGS 1) Bowersox D. J., Closs D. J. and Helferich O K, 1986, Logistical Management, Macmillan. 2) Chopra S. and Meindl P, 2001, Supply Chain Management: Strategy, Planning, and Operation, Pearson Education Inc. 3) Christopher M., 1992, Logistics and Supply Chain Management: Strategies for Reducing Costs and Improving Services, Pitman. 4) Lambert D. M., 1998, Fundamental of Logistics Management, McGraw Hill. 5) Gattorna J, 1995, Handbook of Logistics and Distribution Management, Ashgate Publishing Company. 6) Gattorna, J. L. & Walter P. W., 1996, Managing the Supply Chain : A strategic26 Perspective, Plagrave Macmillan Indian Reprinted Ed., 2004
  35. 35. Logistics and SCM : AnUNIT 3 CUSTOMER FOCUS IN SUPPLY CHAIN Introduction MANAGEMENTObjectivesAfter reading this unit, you would be able to:· understand the key processes required to enhance customer focus in the supply chain;· define Efficient Customer Response (ECR);· define Quick Response (QR) and Accurate Response (AR); and· examine chain relationship within and beyond organization.Structure3.1 Introduction3.2 Customer Service3.3 Functional vs. Innovative Products: SCM Issues3.4 Efficient Consumer Response3.5 Quick Response and Accurate Response3.6 Chain Relationship within and Beyond the Organization3.7 SCM as a Core Strategic Competency3.8 Summary3.9 Self Assessment Questions3.10 References and Suggested Further Readings3.1 INTRODUCTIONManagement of a supply chain means managing all the different processes andactivities that produce value in the hands of the ultimate consumer. A supply chaincan be viewed as the network of entities through which the material and informationflow. Those entities may include suppliers, carriers, manufacturing sites, distributioncenters, retailers and customers. [1]. Effective streamlining of the supply chain canimprove the customer service levels dramatically, reduce excess inventory in thesystem, and cut excess costs from the network of the organization. [2]Supply Chain Management competency contributes to an organization’s success byproviding customers with timely and accurate product delivery. The customer is anydelivery destination – from consumers’ homes to retail and wholesale businesses tothe receiving docks of a firm’s manufacturing plants and warehouses. The customerbeing serviced is the focal point and driving force in establishing Supply ChainManagement performance requirements. It is important to clearly understandcustomer service deliverables when establishing Supply Chain Managementstrategies.The customer-focused marketing is built on three fundamental concepts.· The essence of a marketing orientation to business policy· Developing Supply Chain Management competency as strategic resource to customer service planning· The changing nature of most desired Supply Chain Management practice to accommodate product life-cycle requirements.This unit will discuss the customer focus in Supply Chain Management. 27