Logistic management


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Logistic management

  1. 1. IntroductionLogistics is concerned with getting the products and services where they are neededwhen they are desired. It is difficult to accomplish any marketing or manufacturingwithout logistical support. It involves the integration of information, transportation,inventory, warehousing, material handling, and packaging.The operating responsibility of logistics is the geographical repositioning of rawmaterials, work in process, and finished inventories where required at the lowest costpossibleThe formal definition of the word ‘logistics’ is: - it is the process of planning,implementing and controlling the efficient, effective flow and storage of goods,services and related information from the point of origin to the point ofconsumption for the purpose of conforming to customer requirements.Within the firm the challenge is to coordinate individual job expertise into an integratedcompetency focused on servicing customers. In most situations the desired scope ofsuch coordination transcends the individual enterprise, reaching out to includecustomers as well as material and service suppliers. Ina strategic sense, the seniorlogistics officer leads a boundary spanning initiative to facilitate effective supply chainrelationships. The excitement of contemporary logistics is found in making thecombined results of internal and external integration one of the core competencies of anenterprise. Throughout the history of mankind wars have been won and lost throughlogistical strengths and capabilities or the lack of them. Even though the generals of thepast have understood the critical role of logistics it only in the recent past that the bigorganizations have realized its role in the achievement of competitive advantage.Arth Shaw in 1915 pointed out that: the relations between the activities of demandcreation and physical supply… illustrate the existence of the 2 principles ofinterdependence and balance. Failure to co-ordinate any one of these activities with itsgroup-fellows and also with those in the other group, or undue emphasis or outlay putupon any one of these activities, it is certain to upset the equilibrium of forces whichmean efficient distribution. The physical distribution of the goods is a problem distinctfrom the creation of demand. There are many ways of defining logistics but theunderlying concept might be defined as follows: ‘Logistics is the process ofstrategically managing the procurement, movement and storage of materials, partsand finished inventory through the organization and its marketing channels insuch a way that current and future profitability are maximized through the cost-effective fulfillment of orders.’Competitive AdvantageEffective logistics management can provide a major source of competitive advantage.The bases for successes in the marketplace are numerous, but a simple model has beenbased around the three C’s – Customer, Company & Competitor. The source ofcompetitive advantage is found firstly in the ability of the organization to differentiateitself, in the eyes of the customer, from its competition and secondly by operating at alower cost and hence at greater profit. 1
  2. 2. Seeking a sustainable competitive advantage has become the concern of every managerwho realizes the marketplace and it is no longer acceptable to assume that the goodswill sell themselves. An elemental, commercial success is derived either form a costadvantage or a value advantage or, ideally both. The greater the profitability of thecompany the lesser is the production of cost. Also a value advantage gives the productan advantage over the competitive offerings. Successful companies either have aproductivity advantage or they have a value advantage or maybe a combination of thetwo.There are two main vectors of strategic direction that need to be examined: -♦ PRODUCTIVITY ADVANTAGEIn many industries there will be a competitor who will be a low cost producer and willhave greater sales volume in that sector. This is partly due to economies of scale, whichenable fixed costs to spread over a greater volume but more particularly to the impact ofthe experience curve.It is possible to identify and predict improvements in the rate of output of workers asthey become more skilled in the processes and tasks on which they work. BruceHenderson extended this concept by demonstrating that all costs, not just productioncosts, would decline at a given rate as volume increased. This cost decline applies onlyto value added, i.e. costs other than bought in supplies. Traditionally it has beensuggested that the main route to cost reduction was by gaining greater sales volume andthere can be no doubt about the close linkage between relative market share and relativecosts. However it must also be recognized that logistics management can provide amultitude of ways to increase efficiency and productivity and hence contributesignificantly to reduced unit costs.♦ VALUE ADVANTAGEIt is a cliché that customers don’t buy products they buy benefits. These benefits may beintangible i.e. they relate not to specific product features but to such things as image andreputation. Unless the product or service that we offer can be distinguished in some wayfrom its competitors there is a strong likelihood that the marketplace will view it as a‘commodity’ and so the sale will tend to go to the cheapest supplier. Valuedifferentiation can be gained in numerous ways. When a company scrutinizes marketsclosely it frequently finds that there are distinct value segments. In other words differentgroups of customers attach different levels of importance to different benefits. Theimportance of such benefit segmentation lies in the fact that often there are substantialopportunities for creating differentiated appeals for specific segments. Adding valuethrough differentiation is a powerful means of achieving a defensible advantage in themarket. Equally powerful as a means of adding value is service. Increasingly it is thecase that markets are becoming more service sensitive and this poses a challenge inmanagement of logistics. It is important to seek differentiation through means otherthan technology. A number of companies have responded to this by focusing uponservice as a means of gaining a competitive edge. Service in this context relates to theprocess of developing relationships with customers through the provision of an 2
  3. 3. augmented offer. This augmentation can take many forms including delivery service,after sales service, financial packages, technical support and so on.This matrix is a useful way of examining the options available for value andproductivity advantage: SERVICE COST & LEADER SERVICE LEADER COMMODITY COST MARKET LEADERIn commodity market situations where a company’s products are indistinguishable fromtheir competitors’ offerings the only strategy is to move towards being a cost leader ortowards being a service leader. Often the leadership route is not available. Thisparticularly will be the case in a mature market where substantial market share gains aredifficult to achieve.Cost leadership strategies have been based upon the economies of scale, gained throughgreater volume of sales. This is why market share is considered to be so important inmany industries. This cost advantage can be used strategically to assume a position ofprice leader and make it difficult for high cost competitors to survive. This costadvantage can come through effective logistics management. In many industrieslogistics cost represents such a large part of total costs that that it is possible to makemajor cost reductions through fundamentally reengineering logistics processes.The other way to come out of the commodity quadrant of the matrix is to seek a strategyof differentiation through service excellence. Customers ion all industries are seekinggreater responsiveness and reliability from suppliers; they are looking for reduced leadtimes, just-in-time delivery and value added services that help them do a better job ofserving their customers.GAINING COMPETITIVE ADVANTAGE THROUGH LOGISTICS A firm can gain competitive advantage only when it performs its strategicallyimportant activities (designing, producing, marketing delivering and supporting itsproduct) more cheaply or better than its competitors. Value chain activity disaggregates a firm into its strategically relevant activitiesin order to understand behavior of costs and existing and potential sources ofdifferentiation. They are further categorized into two types (i) Primary - inbound logistics, operation outbound logistics, marketing and sales, and service (ii) Support – infrastructure, human resource management, technology development and procurement 3
  4. 4. To gain competitive advantage over its rivals, a firm must deliver value to its customersthrough performing these activities more efficiently than its competitors or byperforming these activities in a unique way that creates greater differentiation.Logistics management has the potential to assist the firm in the achievement of both acost/productivity advantage and a value advantage. The under lying philosophy behindthe logistics concept is that of planning and coordinating the materials flow from sourceto user as an integrated system rather than, as was so often the case in the past,managing the goods flow as a series of independent activities. Thus under a logisticsmanagement regime the goal is to link the marketplace, the distribution network, themanufacturing process and the procurement activity in such a way that customers areservice at higher levels and yet at lower cost.THE MISSION OF LOGISTICS MANAGEMENTThe mission is to plan and coordinate all those activities necessary to achieve desiredlevels of delivered service and quality at lowest possible cost. Logistics must thereforebe seen as the link between the marketplace and the operating activity of the business.The scope of the logistics spans the organization, from the management of rawmaterials through to the delivery of the final product.Materials flow Suppliers Procurements Operations Distribution CustomersRequirements information flowREASONS FOR LOGISTICS TO EXISTLogistics management from this total system is the means whereby the needs ofcustomers are satisfied through the coordination of the materials and information flowsthat extend from the marketplace through the firm and its operations and beyond that tosupplies.For example for many years marketing and manufacturing have been seen as largelyseparate activities within the organization. At best they have coexisted, at worst therehas been open warfare. Manufacturing priorities and objectives have typically beenfocused on operating efficiency, achieved through long production runs, minimizedsetups, changeovers and product standardization. On the other hand marketing hassought to achieve competitive advantage through variety, high service levels andfrequent product changes.In today’s more turbulent environment there is no longer any possibility ofmanufacturing and marketing acting independently of each other. 4
  5. 5. It is now generally accepted that the need to understand and meet customer requirements is a prerequisite for survival. At the same time, in the search for improved cost competitiveness, manufacturing management has been the subject of massive renaissance. The last decade has seen the rapid introduction of flexible manufacturing systems, of new approaches to inventory based on materials requirement planning (MRP) and just in time (JIT) methods, a sustained emphasis on quality. Equally there has been a growing recognition of the critical role that procurement plays in creating and sustaining competitive advantage as part of an integrated logistics process. In this scheme of things, logistics is therefore essentially an integrative concept that seeks to develop a system wide view of the firm. It is fundamentally a planning concept that seeks to create a framework through which the needs of the manufacturing strategy and plan, which in turn links into a strategy and plan for procurement LOGISTICAL INTEGRATION Inventory FlowSuppliers Physical Manufacturing Procurement distribution support Customers Information Flow INTEGRATED LOGISTICS Logistics is viewed as the competency that links an enterprise with its customers and suppliers. Information from and about customers flows through the enterprise in the form of sales activity, forecasts and orders. As products and materials are procured, a value added inventory flow is initiated that ultimately results in ownership transfer of finished products to customers. Thus the process is viewed in terms of two inter-related efforts, inventory flow and information flow. Inventory Flow The management of logistics is concerned with the movement and storage of materials and finished products. Logistical operations start with the initial shipment of a material or component part from a supplier and are finalized when a manufactured or processed product is delivered to a customer. From the initial purchase of a material or component, the logistical process adds value By moving inventory when and where needed. Thus the material gains value at each step. 5
  6. 6. For a large manufacturer, logistical operations may consist of thousands of movements,which ultimately culminate in the delivery of the product to an industrial user,wholesaler, dealer or customer.Similarly for a retailer, logistical operations may commence with the procurement ofproducts for resale and may terminate with consumer pickup or delivery.The significant point is that regardless of the size or type of the enterprise, logistics isuseful and requires continuous management attention.In order to understand logistics it is useful to divide it into three areas.  Physical distribution  Manufacturing support  ProcurementPhysical distributionThe area of physical distribution concerns movement of a finished product to thecustomers. In physical distribution the customer is the final destination of the marketingchannel.Unless the products are delivered where and when needed, a great deal of marketingeffort can be wasted.All physical distribution systems have one feature in common: they link manufacturers,wholesalers and retailers and ensure that the product is available.Manufacturing supportThe area of manufacturing support concentrates on managing W.I.P inventory as itflows between the stages of manufacturing.A Master Production Schedule is prepared and arrangements are made for timelyavailability of materials, components, parts etc.Manufacturing support has one significant difference when compared with physicaldistribution.Physical distribution attempts to satisfy the needs of the customers while manufacturingsupport involves movement requirements that are under he control of the manufacturingenterprise.ProcurementProcurement is concerned with purchasing and arranging in-bound movement ofmaterials, parts and /or finished inventory from suppliers to manufacturing or assemblyplants, warehouses or retail stores.Procurement is also known as purchasing and buying and in some cases inboundlogistics. Procurement s concerned with availability of the desired material assortmentswhere and when needed.Within a typical enterprise, the three areas of logistics overlap. The prime concern of anintegrated logistical process is to coordinate overall value-added inventory movement.The three areas combine to provide integrated management of materials. 6
  7. 7. Information flowInformation flow identifies specific locations within a logistical system that haverequirements. Information also integrates the three operating areas. The primaryobjective of developing and specifying requirements is to plan and executeintegrated logistical operations. Within individual logistics areas, differentmovement requirements exist with respect to size of order, availability ofinventory, and urgency of movement. The primary objective of informationsharing is to reconcile these differences.Logistical information involves two major types of flows: 1. Coordination flows 2. Operation flows1. Planning and coordination flowsCoordination is the backbone of the overall information system. Coordinationresults in plans specifying:  Strategic objectives Strategic objectives detail the nature and location of customers, which are matched to the required products and services to be performed.  Capacity constraints Capacity constraints coordinate internal and external manufacturing requirements. Capacity constraints identify limitations, barriers, within basic manufacturing capabilities and determine appropriate outsource requirements.  Logistical requirements Logistics requirements specify the work that distribution facilities, equipment and labour must perform to implement the capacity plan.  Inventory deployments Inventory deployments are the interfaces between planning/coordination and operations that detail the timing and composition of where inventory will be positioned.  Manufacturing requirements Manufacturing plans are derived from logistical requirements and typically result in inventory deployment.  Procurements requirements 7
  8. 8. Procurements requirements schedule material and components for inbound shipment to support manufacturing requirements. In retailing and wholesaling situations, procurements involve manufacturing requirements.  Forecasting Forecasting utilizes historical data, current activity levels, and planning assumptions to predict future activity levels. Logistical forecasting is generally concerned with relatively short –term predictions. The overall purpose of information planning/coordination flow is to integrate specific activities within a firm and to facilitate overall integrated performance. 2. Operational flows The second aspect of information requirements is concerned with directing operations to receive, process, and ship inventory as required supporting customer and purchasing orders. Operational requirements deal with  Order management  Order processing  Distribution operations  Inventory management  Transportation and shipping  ProcurementDifferences between Supply chain management and Logistics management. 1. Supply chain management is a broader concept whereas Logistics management is a narrower concept. 2. The concept of Supply chain management is relatively new whereas the concept of Logistics management is relatively old. 3. Supply chain management is an extension of Logistics management. 4. Logistics management is primarily concerned with optimizing flows within the organization whilst supply chain management recognizes that internal integration by itself is not sufficient. 5. Logistics is essentially a planning orientation and framework that seeks to create a single plan for the flow of product and information through a business. Supply chain management builds upon this framework and seeks to achieve linkage and co-ordination between processes of the other entities in the pipeline, i.e. suppliers and customers, and the organization itself. 6. The focus of Supply chain management is upon the management of relationships in order to achieve a more profitable outcome for all parties in the chain where as the focus of Logistics management is upon the management of resources within the organization. 8
  9. 9. Traditional PerspectiveTraditionally 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 idf it leads to unwillingness tocorporate in order to compete. Behind this seemingly paradoxical concept is the idea ofsupply chain integration.Definition“Supply chain management is the management of upstream and downstreamrelationships with suppliers and customers to deliver superior customer value at lesscost to the supply chain as a whole.”ExplanationThe supply chain is the network of organizations that are involved through upstreamand downstream linkages, in the different processes and activities that produce value inthe form of products and services in the hands of ultimate consumer. Thus for examplea shirt manufacturer is a part of a supply chain that extends upstream through theweavers of fabrics to the manufacturers of fibres, and downstream through distributorsand retailers to the final consumer. Each of these organizations in the chain aredependent upon each other by definition and yet and yet paradoxically by tradition donot co-orporate with each other.Clearly this trend has many implications for logistics management, not the least beingthe challenge of integrating and coordinating the flow of materials from a multitude ofsuppliers, often offshore, and similarly managing the distribution of the finished productby way of multiple intermediaries.OriginIn the past it was often the case that relationships with suppliers and downstreamcustomers (such as distributors or retailers) were adversarial rather than co-operative. Itis still the case today that some companies will seek to achieve cost reductions or profitimprovements at the expense of their supply chain partners. Companies such as these donot realize that simply transferring costs upstream or downstream does not make themany more competitive. The reason for this is that ultimately all costs their way to thefinal marketplace to be reflected in the price paid by the end user. The leading- edgecompanies recognize the fallacy of this convectional approach and instead seek to makethe supply chain as a whole more competitive through the value it adds and the coststhat it reduces overall. They have not realized that the real competition is not companyagainst but rather supply chain against supply chain.Figure 1 suggests that there is in effect an evolution of integration from the stage 1position of complete isolation from the other business functions. An example would bewhere production or purchasing does their own thing in complete isolation from theother business functions. An example would be where production seeks to optimize itsunit costs of manufacture by long production runs without regard for the build-up of the 9
  10. 10. finished goods inventory and heedless of the impact it will have on the need forwarehousing space and the impact on working capital.Stage 2 companies have recognized the need for at least a limited degree of integrationbetween adjacent functions, e.g. distribution and inventory management or purchasingand materials control. The natural next step to stage 3 requires the establishment andimplementation of an ‘and-to-end’ planning framework that will be fully described laterin this book.Stage 4 represents true supply chain integration in that the concept of linkage and co-ordination that is achieved in stage 3 is now extended upstream to suppliers anddownstream to customers.Relationship buildingIt is apparent that supply chain management involves a significant change from thetraditional arm-length, even adversarial, relationships that so often typifiedbuyer/supplier relationships in the past. The focus of supply chain management is onco-operation and trust and the recognition that properly managed ‘the whole can begreater than sum of its part’s.Thus the focus of supply chain management is upon the management of relationships inorder to achieve a more profitable outcome for all parties in the chain. This brings withit some significant challenges since there may be occasions when the narrow self-interest of one of the parties has to be subsumed for the benefit of the chain as a whole.Whilst the phrase ‘supply chain management’ is now widely used, it could be arguedthat it should really be termed ‘demand chain management’ to reflect the fact that thechain should be driven by the market, not by suppliers. Equally the word ‘chain’ shouldbe replaced by ‘net work’ since there will normally be multiple suppliers and, indeed,suppliers to supplier as well as multiple customers and customers’ customers to beincluded in the total system.Figure 2 illustrates this idea of the firm being at the centre of a network of suppliers andcustomers.Extending this idea it has been suggested that a supply chain could more accurately bedefined as:“A network of connected and interdependent organizations mutually and co-operativelyworking together to control, manage and improve the flow of materials and informationfrom suppliers to end users.” Integrated log cycleNetwork design 10
  11. 11. Customer serviceSCM - Dist channelsSupply Network Management Or Demand Network ManagementThe Phrase ‘Supply Chain Management’ is widely used. It is a management ofupstream and downstream of relationships with suppliers and customers to deliversuperior customer value at less cost to the supply chain as a whole.So supply chain management focuses on the management of relationships in order toachieve a more profitable outcome for all parties in the chain. It is argued that it shouldreally be ‘Demand Chain Management’ as a chain should be driven by the market, andnot by suppliers. So also the word ‘chain’ should be replaced by ‘network’. Since therewill normally be multiple suppliers and, indeed, suppliers to suppliers as well asmultiple customers and customers’ customers to be included in the total system.S = Supplier; SS = Suppliers’ Supplier;C = Customer; CC = Customers’ Customer TRANSPORTATIONTransport FunctionalityTransportation is one of the most visible elements of logistics operations.Transportation provides 2 major functions: product movement & product storage.Product MovementWhether the product is in the form of materials, components, assemblies, work-in-process, or finished goods, transportation is necessary to move it to the next stage of themanufacturing process or physically closer to the ultimate consumer. A primarytransportation function of product movement is moving up and down the value chain.Since transportation utilizes temporal, financial, and environmental resources, it isimportant that items be moved only when it truly enhances the product value.Transportation involves the use of temporal resources because product is inaccessibleduring the transportation process. Such product, commonly referred to as in-transitinventory, is becoming a significant consideration as a variety of supply chain strategiessuch as just – in – time and quick response practices reduce manufacturing anddistribution center inventories.Transportation uses financial resources because internal expenditures are necessary forprivate fleets or external expenditures are required for commercial or publictransportation.Transportation uses environment resources both directly and indirectly.In direct terms, it is one of the largest consumers of energy (fuel and oil) in thedomestic United States economy. In fact, it accounts for close to 67% of all domestic oiluse. 11
  12. 12. Indirectly, transportation creates environmental expense through congestion, airpollution and noise pollution.The major objective is to move product from an origin location to a prescribeddestination while minimizing temporal, financial and environmental resource costs.Loss and damage expenses must also be minimized. At the same time the movementmust take place in such a manner that meets customer demands regarding deliveryperformance and shipment information availability.Product Storage:A less common transportation function is temporary storage. Vehicles make ratherexpensive storage facilities. However, if the in-transit product requires storage but willbe moved again shortly (e.g. in a few days), the cost of unloading and reloading theproduct in a warehouse may exceed the per-daily charge of storage in the transportationvehicle.In circumstances where warehouse space is limited, utilizing transportation vehiclesmay be a viable option.One method involves loading on the vehicle and then having it take an indirect route toits destination. This is desirable when the origin or destination warehouse has limitedstorage capacity.A second method to achieve temporary product storage is diversion. This occurs whenan original shipment destination is changed while the delivery is in transit.E.g. suppose a product is initially scheduled to be shipped from Chicago to LosAngeles. However, if during the delivery process, it is determined that San Francisco isin greater need of the product or has available storage capacity; the product could bedelivered to the alternative destination of San Francisco.In short, although product storage in transportation vehicles can be costly, it may bejustified from a total cost or performance perspective when loading or unloading costs,capacity constraints, or the ability to extend lead times are considered.PrinciplesThere are two fundamental principles guiding transportation management andoperations. They are economy of scale and economy of distance.Economy of scale refers to the characteristic that transportation cost per unit of weightdecreases when the size of the shipment increases.E.g. truckload shipments cost less per pound than less-than-truckload shipments. It isalso generally true that larger capacity transportation vehicles such as rail or water areless expensive per unit of weight than smaller capacity vehicles like motor or air.Transportation economies of scale exist because fixed expenses associated with movinga load can be spread over the load’s weight. The fixed expenses include administrativecosts of taking the order; time to position the vehicle for loading or unloading, invoicing 12
  13. 13. and equipment cost. These costs are fixed because they do not vary with shipmentvolume.E.g. suppose the cost to administer a shipment is $ 10.00. Then the 1-pound shipmenthas a per unit of weight cost of $10.00, while the 1,000 pound shipment has a per unitof weight cost of $0.01. Thus, it can be said that an economy of scale exists for the1000-pound shipment.Economy of distance refers to the characteristic that transportation cost per unit ofdistance decreases as distance increases.e.g. a shipment of 800 miles will cost less than two shipments (of the same combinedweight) of 400 miles. Transportation economy of distance is also referred to a setapering principle since rates or charges taper with distance. The rationale of distanceeconomies is similar to that for economies of scale.Longer distances allow the fixed expenses to be spread over more miles, resulting inlower overall per mile charge.These principles are important considerations when evaluating alternative transportationstrategies or operating practices. The objective is to maximize the size of the load andthe distance that is shipped while still meeting customer service expectations.Transport InfrastructureTransportation infrastructure consists of the rights-of-ways, vehicles, and carrierorganizations that offer transportation services on a for-hire or internal basis. The natureof the infrastructure also determines a variety of legal and economic characteristics foreach mode or multimodal system. A mode identifies the basic transportation method orform.Modal CharacteristicsRAIL NETWORKSince olden times, railroads have handled the largest number of ton-miles. As a result ofthe early establishment of a comprehensive rail network connecting almost all the citiesand towns, railways dominated the intercity freight tonnage till World War II and insome cases of Europe, Asia and Africa they even connected the countries. This earlysuperiority enabled railways to transport large shipments very economically.Railroads have come a long way, as we can see by just the US figures that 54.0% ofintercity transport in 1947 was by Railways, 39.2% in 1958, 36.4 % in 1980 and almost37% in 1992. The period from 1950-1970 saw a tremendous decline in use of railways.The capability to efficiently transport large tonnage over long distances is the mainreason railroads continue to handle significant intercity tonnage and revenue. Railroadoperations incur high fixed costs because of expensive equipment, right-of-way(railroads must maintain their own track), switching yards, and terminals. However, railexperiences relatively low operating costs. The replacement of steam by diesel powerreduced the railroads’ variable cost per ton-mile, and electrification offers potential for 13
  14. 14. more reductions. New labor agreements have reduced workforce requirements, furtherdecreasing variable costsThese days’ rail transport only focuses on transporting specific products, which arebest, suited to the requirement. Greatest railroad tonnage comes from raw materialextractive industries located at considerable distances. Despite problems, Rail fixed-variable costs are still superior for long distances. Railroads basically concentrate on thecontainer traffic and are becoming more responsive of the customer needs, emphasizingbulk industries and heavy manufacturing.They have expanded their intermodal operations through alliances and motor carrierownership. Railroads are even concentrating on development of special equipment.There are unit trains which are entire train carrying the same commodity, which arebulk products such as coal or grain. Unit trains are faster, less expensive to operate andquick as it can bypass rail yards and go direct to the product’s destination.There are also various different types, such as articulated cars for extended Rail chassis,double-stack railcars, have 2 levels of containers, thereby doubling the capacity of eachcar. It also reduces chances of damage because of their design. These technologies haveare being applied by railroads to reduce weight, increase carrying capacity, andfacilitate interchange.After a major decline till 1970, Railroads have emerged as a major mode of transportonce again since the early 80’s because of revitalization of rail network. Evidencesuggests that Rail network will be used extensively once again in the 1990’s and early21st century.MOTOR CARRIERSHighway transportation has increased rapidly since the end of World War II. This isbecause Motor carrier industry results from door-to-door operating flexibility and speedof intercity movement. They are even flexible because they can operate on each andevery kind of roadways.In comparison to railroads, motor carriers have relatively small fixed investments interminal facilities and operate on publicly maintained highways. Although the cost oflicense fees, user fees, and tolls are considerable, these expenses are directly related tothe number of over-the-road units and miles operated.The variable cost per mile for motor carriers is high because a separate power unit anddriver are required for each trailer or combination of tandem trailers. Laborrequirements are also high because of driver safety restrictions and the need forsubstantial dock labor. Motor carriers are best suited to handle small shipments movingshort distances.The characteristics of motor carriers favor manufacturing and distributive trades, shortdistances, and high-value products. Motor carriers have made significant inroads intorail traffic for medium and light manufacturing. This is also because of deliveryflexibility, tat they have captured a major chunk of the market. In short, the prospect formaintaining a stable market share in highway transport remains bright. 14
  15. 15. This industry even has a few problems, and one of the primary difficulties relate toincreasing cost to replace equipment, maintenance, driver wages, and platform and dockwages. Although accelerating, labor rates influence all modes of transport; motorcarriers are more labor-intensive, which causes higher wages to be a major concern.One more threat for hire-motor carrier industry is over-the-road transportation byshipper-owned trucks or by specialized carriers under contract to perform transportservices for shippers.Since 1980, the industry segments have become more definitive since deregulation, andinclude truckload (TL), less than truckload (LTL), and specialty carriers. TL segmentincludes loads over 15,000 pounds that generally do not require intermediate stops forconsolidation. LTL segment of the industry loads less than 15,000 pounds that generallyrequires stops at intermediate terminals for consolidation. Because of terminal costs andrelatively higher marketing expenses, LTL experiences a higher percentage of fixedcosts then TL.These characteristics have caused extensive industry consolidation, since deregulationhas resulted in small number of relatively large carriers worldwide.Specialty carriers include package haulers such as Federal Express and United ParcelService. These firms focus on specific requirements of the market or product. It is quiteapparent that highway transportation will continue to function as the backbone oflogistical operations for the foreseeable future.WATER TRANSPORTIt is the oldest mode of transportation. First it was the sailing vessels, which wasreplaced by steamboats in early 1800’s and by diesel power in the 1920’s.Domestic water transportation – involves the Great Lakes, canals, and navigable rivers.In every country, fewer system miles exist for inland water than any othertransportation mode. The main advantage of water transportation is the capacity to move extremely largeshipments. Water transport employs 2 types of vessels. Deep-water vessels, which aregenerally designed for Ocean and Great Lakes use, & are restricted to deep-water portsfor access. In contrast, diesel-towed barges, which generally operate on rivers andcanals, have considerably more flexibility.Water transport ranks between rail and motor carrier in the fixed cost aspect. Althoughwater carriers must develop and operate their own terminals, the right-of-way isdeveloped and maintained by the government and results in moderate fixed costs ascompared to railways and highways.The main disadvantage of water transport is the limited range of operation and speed.Unless the origin and destination are adjacent, supplement haul by rail or truck isrequired. The capability to carry very high cargo at an extremely low variable costplaces this mode of transport in demand when low freight rates are desired and speed oftransit is a secondary consideration. 15
  16. 16. But, water transport on the other hand isn’t all that flexible. Labour restrictions onloading and unloading at docks create operational problems and tend to reduce thepotential range of available traffic. Also, a highly competitive situation has developedbetween railroads and inland water carriers in areas where parallel routes exist.Great lakes are concentrating towards transportation of bulk products while Deep-watervessels transport a significant high volume of non-bulk items. Containerized cargofacilitates vessel loading and unloading and enhances intermodal capability byincreasing the efficiency of cargo transfer between highway, rail and water.Inland and great lakes will continue to be a viable option in future logistical systemswhile the slow passage of inland river transport can provide a form of warehousing intransit integrated into overall system design.PIPELINESSurprisingly, Pipelines are also one of the major form of transportation mediumthroughout the world. In 1989, in USA over 53% of all crude and petroleum ton-milemovements were through Pipelines.In addition to Petroleum, other important product transported by pipeline is the naturalgas. Pipelines are owned and operated privately in most of the countries and many gascompanies act as both gas distributors and contract transportation providers. Pipelinesare also utilized for transport of manufacturing chemicals, pulverized dry bulk materialssuch as cement, flour via hydraulic suspension, and sewage and water within cities andmunicipalities.Pipelines are very unique in nature compared to other types of transport, such as; theyoperate on 24-hour basis, seven days a week, and are limited by commodity changeoverand maintenance. Unlike other modes, there is no empty “Container” or “vehicle” thatmust be returned.Pipelines have highest fixed cost and lowest variable cost among transport modes. Highfixed costs result from right-of-way, construction and requirements for control stations,and pumping capacity. Since pipelines are not labour-intensive, the variable operatingcost is extremely low once the pipeline has been constructed. An obvious disadvantageof these pipelines is that they are not flexible and are limited with respect tocommodities that can be transported.Experiments regarding transport of solid products are still going on. Coal slurrypipelines are proving to be economical over long distances but it concernsenvironmentalists, as it requires massive quantities of water.AIR TRANSPORTAir transport is the newest and the least utilized mode of transport. Its major advantagebeing its speed, which is accompanied by high costs. A coast-to-coast shipment via airrequires only a few hours contrast to days taken by other mean of transportation. Thehigh cost of transport can be traded off for high speed, which allows other elements oflogistical design, such as warehousing, inventory to be reduced or eliminated. But still 16
  17. 17. air transport remains more of a potential opportunity than a reality because it is verymuch under utilized.The high cost of jet aircraft, coupled with erratic nature of freight demand, has limitedthe assignment of dedicated planes to all-freight operations. However premium carriersprovide planes dedicated for freight operations. This premium service started off withdocuments and has moved onto large parcels, which is an ideal service for firms with alarge number of high-value products and time-sensitive service requirements.The fixed cost of air transport is low as compared to rails, water and pipeline. In fact,air transport ranks second only to highway with respect to low fixed cost. Airways andairports are maintained by public funds and terminals are by local communities. Thefixed costs of airfreight are associated with aircraft purchase and the requirement forspecialized handling systems and cargo containers. But the air freight variable cost isextremely high as a result of fuel, maintenance, and labour intensity of both in-flightand ground crews.Since they require wide-open space, airports are generally not integrated with othermeans of transport. However more “all freight” airports are being developed so as toreduce conflict with passenger operations.No particular commodity dominates the traffic carried by airfreight operations. Theseoperations are carried more on emergency basis than routine basis. Firms usually utilizescheduled or non-scheduled air cargo movements when the situation justifies high cost.Products with greatest potential for regular air movements are those having high valueor extremely perishable. When the marketing period for an item is extremely limited, airtransport comes into the picture, as it may be the only practical method for logisticaloperations.Transportation Hidden CostsThe physical distribution component of a major project, including transportation of rawmaterials, project materials, machinery and equipment and such infrastructure facilitiesas roads, vehicles etc., usually accounts for 20 to 30% of the total capital cost.The general scarcity of various goods, unpredictable nature of the economy andeconomic behavior on the part of the business community and the bureaucracy in Indiamake it all the more necessary for one to plan well ahead. In fact, planning oftransportation and infrastructure must be done well ahead of general planning, so thatresources spent on other parts of the project do not result in in - fructuous expenditure.In developed countries, these facilities are already available in abundance or areprovided for well in advance. In developing countries, action is generally initiated onlyafter the project has been partially put through or when it becomes totally inescapable todo so.On the other hand, because of lack of these facilities, such problems are faced evenduring construction.Eg. Trucks get stuck in muddy roads, work sites remain unapproachable, and seriousvehicular accidents are caused near the project areas. 17
  18. 18. In developing countries, for the supervision of construction of a building, usually noqualified individual is appointed for the co ordination and planning of transportationinfrastructure, which forms a major fraction of the total cost of a project running intocrores.For a major project, the average total cost to the economy of a project costing Rs. 100crores which is delayed by one year from the date of targeted completion is 39% morethan the original budgeted cost on account of the following:1. The rate of interest on capital may be taken at nearly 12%.2. The profit on income per year about 12%3. The cost of depreciation on account of obsolescence or rusting without running of the plant at 5%.4. The cost of escalation of the project cost at 10%.The cost of delay in the completion of the project would therefore be roughly aboutRs.11 lakhs per day or Rs. 3.25 crores per month. It would be worthwhile to educatesenior executives to recognize these facts, for this aspect of the project is usuallyignored by project authorities.Project authorities do not hold themselves responsible for the transportation bottlenecksand resulting delays. These delays are due to non-receipt of equipment, machinery, rawmaterials etc. and these delays generally run into months. Due to such delays, theproject suffers heavy losses, which occur because of congestion in the ports, trafficjams, railway restrictions etc. Therefore, it is financially more practical to obtain criticalequipment, machinery and raw materials, critical not from the point of view ofavailability in the market but critical form the standpoint of transportation bottlenecks-so that the likely delays are avoided.A proper transportation planning of materials, therefore, may well save a project as wellas the economy form the ill effects of wasteful expenditure. At the same time it wouldhelp speed up production.Transportation Cost ElementsFollowing are the essential elements of transportation to be taken into account:1. Transport Mode – The most critical decision is the selection of appropriate modeof transport. This fixes two basic elements of distribution function:a) Transit time or time lapse between production and sale;b) Level of transportation costs.There is an inverse relationship between transit time and transport cost – the lower thetransit time, the higher the transport cost. However, a decision that takes into accountonly one cost factor cannot be justified. An evaluation of the effect of transit time onother costs must also be considered. Unsold production represents a high cost, and thelonger the transit time, the higher the level of unsold production.2. Inventory Costs – A first class service to clients often requires immediate delivery and, hence a higher level of inventory at the market centre. Economy, on the other hand, calls for minimum inventory. The level of output held in stock is dictated by- 18
  19. 19. a) Transit time: If the time lapse between production and sale is longer, the level of inventory becomes higher.b) Sales pattern: If the pattern of sales is erratic, higher inventory levels are caused.c) Production pattern: If the production pattern is erratic, higher inventory levels have to be maintained to prevent stock –outs.Assuming that the sales and production patterns are largely fixed, the importantvariable, which can influence stock, levels in transit time. As transit time is reduced, thelevel of static stock can be reduced with accompanying stock reduction.3. Transit Capital – Capital can be released by changing the proportion of the total output in transit. This can be done by adjusting the transit time. As transit time is reduced, the quantity of goods in transit can be decreased with an associated reduction in transit inventory costs. By realizing the capital cost of transit inventory and goods in transit, capital commitments can be reduced, and more capital can be available for other purposes.4. Obsolescence - When a slow or erratic mode of transport is employed, a higher level of inventory is necessary to ensure continuous, prompt delivery to the customer. However, when designs change rapidly, obsolescence reduces the market value of the products in store. Rapid advances in technology bring about swifter technical obsolescence. Any goods in the pipeline realize a lower figure when new models are introduced by a company or it’s competitors. Air distribution can overcome this problem, and the effect of such obsolescence can be minimized.5. Packaging – The nature of packaging of a product is often determined by the mode of it’s transport. E.g. Because of the dry conditions of carriage, short transit times and minimum handling, air cargo generally requires much less packaging than other forms of long distance transport. Goods dispatched by air may require only a dust cover or even no cover at all. In some cases, savings on the packaging of sophisticated products may more than pay for the actual transport charges. Less packaging may lead to other advantages too. These include lower unpacking costs and lower chargeable weight for freight.6. Insurance – Insurance risks are based on transit time as well as the possibility of damages en route. With faster transit times, skillful handling, substantial reduction in damage and greater security in transit, insurance premiums tend to fall substantially.7. Breakages – Cost of breakages is an important factor in any cost benefit analysis. Because breakages may be indemnified by insurance companies, the true cost of damage to cargos can easily be overlooked. In the first place, the vulnerability of various products sent by different modes is reflected in the insurance premium. To high premiums must be added the clerical work involved in establishing claims, making replacements and the loss of customer’s goodwill. The replacements themselves will be subject to the same hazards and premiums will require further documentation. Therefore, only that mode of transport must be selected which substantially reduces real damage in transit. This calls for a selection of the routes which are more direct and which avoid transshipment. Handling equipment must also be more sophisticated. Containers can be used by shippers for door-to-door transportation, thereby avoiding all handling of goods by the carrier. 19
  20. 20. 8. Pilferage – Many expensive administrative problems associated with breakages also apply to pilferage. This problem is reduced for example, when door-to-door containers are used, a fact which is again reflected in lower insurance rates.9. Deterioration – In many surface cargos, deterioration may be avoided only by complicated and expensive packing to counteract mechanical shock, exposure to weather or unfavorable temperature etc. Some cannot be stored at all, except at great expense, and others deteriorate slowly. Deterioration can be costly in terms of packing, stock losses and expensive conditioning in store. It can only shut the door on many distant markets. A high speed of transport and the frequency of services can overcome many of these problems.10. Transport Costs – Transport can be divided into 3 phases: (i) Delivery to docks, airport or railway station. (ii) Transport from one terminal to another. (iii) Delivery from the terminal to the consignee’s place. In the cost-benefit analysis of the turnaround time of a company’s delivery and collection vehicles, their man hour costs can be significant. Some customers may find this item to be more costly than the cost of the major journey.Transport Elements:Whether the movement of material and equipment is by rail, sea, air or road, adequatefacilities for their free flow to and from the factory must be ensured. The factors whichaffect progress at the construction stage, and production and dispatches aftercommission, have been discussed in the following paragraphs:1) Terminal Facilities:Terminal facilities are usually grudgingly provided. One reason for this is that any delayor any in convenience caused to truck operators is not a loss to the project. It is treatedas a loss to the carrier. In some cases, this may be true. However, this usual incidence ofstoppage or regulation of the production process can be minimized, if not eliminated.Often extreme stinginess is expressed in planning for these facilities, which includestorage space, and loading and unloading arrangements in a suitable area. If the storagespace is not adequate or if the traffic is exceptionally heavy, production suffersinevitably. Since transport requirements of each project are different and depend on itslocation, physical availability of infrastructure, etc, it is not advisable to prescribe oneuniform scale of terminal facilities. They must be worked out for an individual projecton the basis of its own specific requirements.Storage, loading and unloading facilities, good quality roads, which are usablethroughout the whole year, and suitably, designed yard for railway wagons have to beplanned as a part of terminal facilities. It is also essential to pay special attention to themaintenance of loading and unloading equipment, the design, location, length, heightand other features of loading and unloading platforms, etc., and the maintenance ofcirculating area and roads where heavy vehicles ply. 20
  21. 21. The overall savings in transport rates would more than justify the expenditure incurredon the provision of additional facilities. This ahs not been recognized by the planners ofindividual projects.For rail movement, not only sufficient number of loading lines, but also sufficientnumber of marshalling, examination and holding lines must be planned for. These linesmust be suitably connected with one another to ensure smooth shunting operations. Theconfiguration of lines (yard designs) is more important than the number of lines in theyard, for the requirements of prime mover (shunting engines) can also be cut down by asuitable design of yard.2) Vehicles:An important feature of movement of finished products of major projects is the type ofvehicle used for movement. The vehicle dimensions, capacity. Type and its specialcharacteristics, if any, have to be examined with the reference to the quality andquantity of goods to b moved. In case of sea transport---- the size, speed and the type ofship, in case of road movement---- capacity, moving dimensions and speed of the trucksand in case of rail movement---- the capacity, type and general availability of wagonsmust be closely examined.Planned movement on any section must be taken into account utilisation of the existingsectional capacity, the expected general growth in traffic on the section, and thepossible future identifiable streams of new traffic. If movement on a saturated section isinevitable, line capacity of the section must be increased.3) Prime Movers:The motive power utilized for the internal handling of vehicles and transportation todestinations is another important component of the total movement system. In the caseof rail movement, locomotives required for the shunting and marshalling of wagonswithin the plant must be of such weight, horsepower and performance characteristics aswill match the specific tasks of shunting and reception and dispatch of wagons. In caseof road movement, suitable design and layout of conveyors and mechanical loaders canreduce the drudgery of manual labour and make pre-despatch and post-receipt handlingoperations more efficient.4) Routes And Sectional Capacity:Another important aspect of transport planning is the routes for streams of traffic, viz.,roadways, railways, waterways and airways. The routes or pathways must haveadequate capacities. Generally speaking, because of lack of understanding of thetransportation subject, executives take it for granted that capacity of routes is unlimited.A very important but invisible component of movement activity is sectional capacity,which is dependant on permissible sectional speed and other characteristics of a section.In turn, sectional speed depends on the geometrics of the road (track, sea route, roadsurface, carriage way, gradients and curves, etc.). 21
  22. 22. Over a section of railways or roadways between two stations A and B, only a limitednumber of wagons, trucks or vehicles can be pushed through, depending on theavailability of terminal facilities to handle these vehicles, the facilities to enablevehicles to move on the section, and availability of sufficient number of vehicles.Unless sufficient capacity is developed on each of the different routes to move thevehicles, the additional number of vehicles provided would not necessarily lead tohigher levels of transport availability. On the contrary, movement may become moresluggish.5) Transit Time:The relative locations of a plant and the customers or suppliers determine largely thetransit time for raw materials, spare parts and finished products. Transit time generallynever receives adequate attention in the panning of major projects. There is a generalimpression that, if need be, transit time can be drastically cut at any time by air-lifting aconsignment. Apart from the fact that the neglect of transportation planning leads to anoverall higher cost of transportation, in practice, reduction in transit time actuallyachieved may not justify the heavy cost of air transport. Rough estimates of transit timefrom unreliable sources are generally utilized for planning movements of goods.Although more detailed information sources may be readily available. It is essentialtherefore, that executives understand clearly the difference between:(a) Normal transit time under normal conditions;(b) Normal transit time under abnormal conditions;(c) Optimal transit time;(d) Most optimistic transit time(e) Most pessimistic transit time; and(f) Desirable transit time. Because the importance of transit time is not adequately recognized, it is notrealistically provided for. Major projects suffer from the heavy delays even before thecommencement of construction because of the non-availability of constructionequipment and machinery in time. The existing bottlenecks in the fields oftransportation are almost always ignored. Construction schedules, inventories,warehousing facilities, order processing or production schedules, etc., are generallyplanned without the recognition of the inevitable delays that flow from thesebottlenecks.6) Weigh Bridge:Another usually neglected aspect of industrial transportation activity is the factoryweigh bridge. Weigh bridges ion factories are generally inaccurate, if not actually out oforder. It is seldom appreciated that the losses continuously occurring on this singlepiece of factory equipment and general inefficiency, which results from its ineffectiveand inefficient management, can be easily avoided by proper advance planning.Executives ignore the usual traffic jams at factory gates slow down receipts anddispatches, which, in turn, indirectly affect output. The relative advantages of varioustypes of weigh bridges must be properly appreciated by executives, and a weigh bridgewhich will handle the anticipated volume of traffic expeditiously must be selected.7) Distribution pattern 22
  23. 23. The pattern of movement of the finished produced by road or rail must be plannedproperly. For example, when the requirements of the number of rail wagons are to beworked out, it is not sufficient to take the average lead or distance for the whole countryfor calculating fleet requirements. it is also not sufficient to use the figure of theexisting average lead of general goods ,or even that pertaining to a specific commodity.However, when it comes to actually transport, because of imprecise pre-planning, themanufacturer wants the commodity carrier to transport goods to anywhere andeverywhere n the country. This presents a problem. The manufacturer providesinformation to the common carrier about the quantity o goods to b e marketed. Butdetailed information must be supplied to the carrier so that the carrier can plan themovement in entirety.8) Nature of productAnother aspect, which is often disregarded by project managements as well as commoncarrier, is the variability arising out of the specialized nature of products to be moved.The generally low level of sophistication in transport planning in the country had madeit difficult for the planners to appreciate the fact that transport capacity is influenced bythe nature of goods, their packing and other specialized requirements, such as specialhandling equipment.etc.Freight Rate StructureFreight rates of any mode of transport are based on the following principles:1. Freight should the actual cost of transport operation. The actual cost of operation depends on the following factors:a) Fixed costs - Freight should cover interest on capital, depreciation, registration and insurance expenses of a vehicle, if applicable, general upkeep of the vehicle, administration overheads, and expenditure on other fixed facilities, etc.b) Semi-fixed costs - Freight should cover the salary of the driver, cleaner, conductor and miscellaneous maintenance expenses, which vary partially with the running of the vehicle.c) Vehicle Utilization - A transporter is interested in getting maximum mileage out of his vehicle by moving it at top speed to cover the distance in as short a time as possible. i. If the consignments loaded or the route covered is not conducive, the transporter would quote a higher freight rates. ii. Higher freight rates are also quoted when vehicles are detained at terminals either for certain formalities, terminal congestion in busy ports or at factory gates, or while waiting for loading or unloading operations. Terminal detentions are invariably accounted for in the freight rates themselves, but they are normally not noticed at all.iii. Freight rates are quoted higher if there an expectation of obtaining a return trip with a load or if considerable empty movement of vehicles is involved after unloading. 23
  24. 24. iv. Vehicle Utilization is affected by the nature of goods. Hazardous goods that are likely to cause damage to the other consignments or the vehicle itself attract higher freight rates. v. Consignments, which can be loaded less by weight in a vehicle, attract higher unit freight rate since they yield poor utilization of the vehicle.2. Traffic Bearing Capacity:An age-old consideration for the freight rates is the doctrine of “what traffic can bear.”Transportation adds place utility to goods, for it makes them marketable at anotherplace. However, after the addition of the cost of transport, the price of goods should bestill attractive to the buyer.3. Public Use:Freight rates all over the world are governed on human grounds that items of public useshould be made available to the common man at the cheapest rate. For example,foodgrains and salt are carried at rock-bottom prices, sometimes even at those, which donot cover the actual cost of operation.4. Government Policies:Freight rates are often framed on the basis of government objectives, which aim atserving certain points – such as promotion of certain type of trade, development ofcertain industries, etc. In such cases, freight rates are either depressed to promote theparticular traffic or hiked to discourage particular traffic.5. Reasonable Profit:The transporter must provide for a reasonable profit after covering the cost ofoperations and capital investment. This margin must give not only return of investmentbut also compensate him for the entrepreneurial time and effort he puts in, but alsoprovide sufficient funds for future development of his enterprise.IntermodalChartROAD TRANSPORTRoad transport forms an essential part of any transport activity, whether rail, sea or air.It is essential as a supplementary and complementary mode of transport to completemovement by other modes of transport. Eg. From one terminal i.e. the railway stationthe goods have to be carried to the destination like an area by road.Road transport offers certain advantages like i. Door to door service to customers which neither rail nor neither sea nor air transport can offer. ii. On per unit basis, the cost of making a road is 1/6th that of laying a railway line.iii. Capital investment in case of railways is much less then railways designed to carry equivalent quantum of traffic. 24
  25. 25. iv. Road transport provides employment to six million persons (two million direct and four million indirect)There are negative points also to be viewed like: i. As much as 6200 crores are collected in dues but only 10% of this revenue is used for development of roads, which a disadvantage as road transport is till not well organized. ii. Road transport industry is not come of age in India, as there are very few companies, which own the entire fleet of trucks. Single vehicle owners operate most of the road transport.There is a system of associates, who pool in their vehicles and other resources and sharethe benefits of vehicle contribution. The associates operate from different cities. Anassociate in one city, say, Mumbai, watches the interest of his counterpart in Delhi.Together they operate as a team. They minimize expenses on the maintenance of abranch office at the out-station and yet give the identity of a single branch operator.Problems in Road Transport:Road transport faces a number of problems. This is evident from the following facts:1) There is an occasional storage of diesel fuel in the country.2) Vehicle availability in the country has been problematic. With the recent entry of a number of manufacturers, the situation has improved to some extent.3) The cost of components and accessories, such as tyres and batteries, has escalated tremendously.4) The Octroi and police check posts are to many, resulting in heavy detention to road vehicles.5) The present Motor Vehicle Act regulating the issue of licenses and permits and movement of vehicles is very restrictive. It was decades ago to control and regulate traffic. The current requirements of traffic are for development. There are persistent demands from various transport associations for suitable amendments of the Motor Vehicle act. But they do not seem to receive due attention.6) Conditions on Indian road are very bad and hazardous. They tend to reduce speed of vehicles, which leads to wastage of natural transport capacity.7) Roadside maintenance and service facilities have not developed though found necessary.8) The system of national, zonal and state permits restricts free growth of road transport but the system has to be followed.Transportation Network Design OptionsClassical economists neglected the importance of facility, location and overall networkdesign Economists, when originally discussed supply – demand relationships, facility,location and transportation cost differentials were assumed to be non existent or equalamong competitors.  The number, size, geographical relationship of the facilities are used to perform logistics operation directly affect customer service capabilities and cost.  Network design – primary responsibility of logistics.  Typical logistics facilities are manufacturing plants, warehouses, gross dock operations and retail stores. 25
  26. 26.  Determining (i) How many of each facility are required (ii) Their geographic location (iii) The work to be performed at each is a significant part of network design. In specific situations facility operations may be outsourced to service specialists. No matter who does the actual work, all facilities must be managed as an integral part of a firm’s logistical network. You have a network for internal customers, external customers as well as suppliers. Suppliers should be made to understand what their commitment is and follow it. You have to co-exist with your suppliers and share information with them. Network design must take into account geographical location because a great deal of variation exists between different geographical markets. If you set up your base in a place where your demand is high then after a while the demand shifts and come from another location, then again you are in a dilemma.In a dynamic, competitive environment• Product assortment• Customer supplies• Manufacturing requirementsAll of the above are constantly changing. However re-location of all logistics facilitiesat one time is inconceivable. Relocation or redesign of specific facilities is possible.Over a period of time, all facilities should be evaluated, to determine if their location isdesirable.Selection of a superior location network can provide the first step.Your network of facilities forms a structure from which logistical operations areperformed. Your network should incorporate transportation and information. Specificwork tasks related to network design are processing customer orders, management ofinventory, material handling.LOGISTICS PLANNING PROCESSTo match the changing environment in the logistics due to the changes in the markets,competitors, suppliers and technology, there is a need for a systematic planning anddesign methodology to formally include the relevant consideration and effectivelyevaluate the alternatives.MethodologyThe logistics relational and operating environment is constantly changing. Even for theestablished industries, a firms markets, demands, costs and service requirements changerapidly in response to the customer and competitive behavior. Just as no ideal logisticalsystem is suitable for all enterprises the method for identifying and evaluatingalternative logistics strategies can vary extensively. However there is a general processapplicable to most logistics design and analysis situations. The process can besegmented into three phases: problem definition and planning, data collection and 26
  27. 27. analysis, and recommendations and implementation. The following discussion describeseach phase and illustrates the types of issues encountered.PHASE I: PROBLEM DEFNITION AND PLANNINGPhase 1 of logistics system design and planning provides the foundation for the entireproject. A thorough and well-documented problem definition and plan are essential toall that follows.1. Feasibility AssessmentThe process of evaluating the need and desirability for change is referred to asfeasibility assessment and it includes the activities of situational analysis, supportinglogic development, and cost benefit estimation. The objective of doing so is tounderstand the environment, process, and performance characteristics of the currentsystem and to determine future estimation.a) Situational analysis: The purpose of the situational analysis id to provide seniormanagement with the best possible understanding of the strengths and weaknesses ofthe existing logistics capabilities for both current and future environment. Thesituational analysis is the performance of measures and characteristics that describe thecurrent logistics environment through:  Internal review: Internal review is necessary to develop a clear understanding of existing logistics by covering the overall logistics process as well as each logistics function with respect to its stated objectives and its capabilities to meet those objectives. It profiles historical performance, data availability, strategies, operation and tactical policies and practices. All major resources such as workforce, equipment, facilities, relationships and information are examined. The comprehensive review attempts to identify the opportunities that might motivate or justify logistics system redesign or refinement. Assessment must consider the process (physical and information flows through the value – added chain), decisions (logic and criteria currently used for value chain management), and key measures for each major logistics activity. These measurements focus on the key performance indicators and the firm’s ability to measure them.  Market assessment & competitive evaluation: the objective is to document and formalize customer perceptions and desires with regard to the changes in the firm’s logistical capabilities. It’s the review of the trends and service demands required by customers by the use of interviews with the selected customers or through customer5 surveys. The assessment focuses on the external relationships with the suppliers, customers (wholesalers and retailers) and consumers (final consumer). The assessment not only considers trends in requirements and processes but also the enterprise and the competitor’s capabilities.  Technology Assessment: it focuses on the application and capabilities of the key logistics technologies, including transportation, storage, material handling, packaging, and information processing. The assessment considers the firm’s capabilities in terms of current technologies and the potential for applying new technologies. The objective of the assessment is to identify advancements that 27
  28. 28. can provide effective trade – offs with other logistics resources such as transportation and inventory.b) Supporting logic development: The second feasibility assessment task isdevelopment of a supporting logic to integrate the findings of the internal review,external assessment and technology study. Supporting logic development builds onthis comprehensive review in three ways  First - supporting logic development forces a critical review of the potential opportunities for logistics improvements and a determination of whether additional investigation is justified, using logistics principles such as tapering principle, principle of inventory aggregation. The resulting benefits or costs should be clearly identified.  Second - it critically evaluates current procedures and practices using comprehensive, factual analysis and evaluation that isn’t influenced by opinion and thus help in identifying areas with improvement potential which in turn provides a foundation to determine the need for strategic adjustment. The deliverables of this evaluation process include classification of planning and evaluation issues prioritized into primary and secondary categories across short and long range planning horizons.  Third - the process of developing supporting logic should include clear statements of potential redesign alternatives such as  Definition of current procedures and systems  Identification of the most likely system design alternatives based on leading industry and competitive practices  Suggestion of innovative approaches based on new theory and technologiesThe alternatives along with being practical should also challenge the existingpractices. Flow diagrams and /or outline illustrating the basic concepts associatedwith each alternative are constructed, which frame opportunities for flexible logisticspractices, clearly outline value added and information flow requirements and providea comprehensive overview of the options. A recommended procedure requires themanager responsible for evaluating the logistical strategy to develop a logicalstrategy to develop a logical statement and justification of potential benefits.Using customer service concept and logistics integration logic and methodology,the manager should commit to paper the most attractive strategy alternatives.c) Cost benefit estimate: The final feasibility assessment is a preplanning estimate ofthe potential benefits of performing a logistics analysis and implementing therecommendation. Benefits should be categorized in terms of:  Service improvements - It includes results that enhance availability, quality or capability. Improved sciences increase loyalty of existing customers and may also attract business.  Cost reduction - Cost reduction benefits may be observed in two forms:First, they may occur as a result of a one time reduction in financial or managerialresources required to operate the existing system for e.g. Reduction in capitaldeployed for inventory and other distribution related assets 28
  29. 29. Second, cost reductions may be found in the form of out - of - pocket or variable expenses. For e.g. new technologies for material handling and information processing often reduce variable cost by allowing more efficient procedures and operations.  Cost prevention - Cost prevention reduces involvement in programs and operations experiencing cost increases. Any cost prevention justification is based on an estimate of future conditions and therefore is vulnerable to some error for e.g. many material – handling and information technology upgrades are at least partially justified through financial analysis of the implications of future labor availability and wage levels. In the final analysis, the decision to undertake in – depth planning will depend on how convincing the supporting logic is, how believable estimated benefits are, and whether estimated benefits offer sufficient return on investment to justify organizational and operational change. These potential benefits must be balances against the out 0- of pocket cost required to complete the process.2. Project Planning: Logistics system complexity requires that any effort to identifyand evaluate strategic or tactical alternatives must be planned thoroughly to provide asound basis for change. Project planning involves five specific items:a) Statement of objectives: The statement of objectives documents the cost and serviceexpectations for the logistics systems revisions. It’s essential that they be statedspecifically and in terms of measurable factors. The objective fine market or industrysegments, the time frame for revisions, and specific service levels. For e.g., desireddelivery of 98 percent of all orders within 48 hours after the order is placed, minimalcustomer shipments from secondary distribution centers, back – orders held for amaximum of five days, etc. specific definitions of these objectives direct system designefforts to ache9ice explicit performance levels. Total system cost can then bedetermined.b) Statement of constraints: The second project planning consideration concernsdesign constraints. On the basis of the situational analysis, it’s expected that seniormanagement will place restrictions on the scope of permissible system modificationsdepending on the specific circumstances of individual firms. But constraints can affectthe overall planning process for e.g. one restriction common to distribution systemdesign concerns the network of manufacturing facilities and their product mixassortment which the management often holds constant for logistical system redesign asthere are large financial investments in existing production facilities. The purpose ofdeveloping a statement of constraints is to have a well-defined starting point and overallperspective for the planning effort. The statement of constraints defines specificorganizational elements, buildings, systems, procedures, and/or practices to be retainedfrom the existing logistical system.c) Measurement standards: Such standards direct the project by identifying the coststructures and performance penalties and by providing a means to ass’s success. 29
  30. 30. Management must stipulate guidelines for each category as a prerequisite to formulationof a plan. It is important that the standards adequately reflect total system performancerather than a limited, sub optimal focus on logistics functions. Once formulated, suchstandards must be held constant throughout system development. An importantmeasurement requirement is to quantify a list of assumptions that underlie or providethe logic supporting the standards. Measurement standards should include definitions ofhow cost components such as transportation are calculated and also relevant customerservice measures and method of calculation must also be included.d) Analysis procedures: Analysis techniques range from simple manual methods toelaborate computerized decision support tools. For e.g., models incorporatingoptimization ort simulation algorithms for evaluating and comparing alternativelogistics warehouse networks. Once the project objectives and constraints are defined,planning must identify alternative solution techniques and select the best approach.Selection an analysis technique must consider the information necessary to evaluate theproject issues and optionse) Project work plan: On the basis of feasibility assessment, objectives, constraints andanalysis technique, a project work plan must be determined and the resources and timerequired for completion identified. The alternatives and opportunities specified duringthe feasibility assessment provide the basis for determining the scope of the study. Inturn the scope determines the completion time. One of the most common errors instrategic planning is to undere4stimate the time required to complete a specificassignment. Overruns require financial expenditures and reduce project credibility.There are a number of PC – based software packages available to structure projects,guide resource allocation, and measure progress.PHASE II: DATA COLLECTION AND ANALYSISOnce the feasibility assessment and project plan are completed, phase 2 focuses on datacollection and analysis. This includes activities to (1) define assumptions and collectdata, and (2) analyze alternatives1) ASSUMPTIONS AND DATA COLLECTION:This activity builds on the feasibility assessment and project plan to develop detailedplanning assumptions and identify data collection requirements. Specific tasks are asfollowsa) Define analysis approach and techniques: The most common techniques areanalytical, simulation and optimizationThe analytical approach uses standard numerical methods, such as those availablethrough spreadsheets, to evaluate each logistics alternative. For e.g., spreadsheetavailability have increases the use of analytical tools for distribution applicationsA simulation approach can be likened to a “wind tunnel” for testing logisticsalternatives. Simulation is widely used, particularly when significant uncertainty isinvolved. The testing environment can be physical (a model material handling systemthat physically illustrates product flow in a scaled down environment) or numerical(such as a computer model of a material handling environment that illustrates product 30
  31. 31. flow on a computer screen) current software makes simulation one of the most costeffective approaches foe dynamically evaluating logistics alternativesOptimization uses linear or mathematical programming to evaluate alternatives andselect the best one. Because of its powerful capabilities, optimization is usedextensively for evaluating logistics network alternatives such as the number andlocation of the distribution centers.b) Define and review assumptions: Assumptions definition and review build on thesituation analysis, project objectives, constraints and measurements standards. Forplanning purposes, the assumption defines the key operating characteristics, variablesand economies of current and alternative systems. Assumptions generally fall into threeclasses:Business assumptions - They define the characteristics of the general environmentincluding relevant market, consumer, and product trends and competitive actions,within which an alternative logistics plan must operate. They are generally outside theability of the firm to change.Management assumptions define the physical and economic characteristics of thecurrent or alternative logistics environment and are generally within the firm’s ability tochange or refine. Typical assumptions include a definition of alternative distributionfacilities, transport modes, logistics processes and fixed and variable costs.Analysis assumption defines the constraints and limitations that must be included to fitthe problem to the analysis technique. These assumptions frequently concern problemsize, degree of analysis detail and solution methodology.The elements of assumption categories are as follows BUSINESS ASSUMPTIONS 1. Scope: Definition of business units and product lines to be included 2. Alternatives: Range of options that can be considered 3. Market Trends: Nature and magnitude of change in market preferences and buying patterns 4. Product Trends: Nature and magnitude of change in market preferences and buying patterns particularly with respect to package size and packaging. 5. Competitive actions: Competitive logistics strengths, weaknesses and strategies. MANAGEMENT ASSUMPTIONSMarkets: Demand patterns by market area, product and shipment sizeDistribution Facilities: Locations, operating policies, economic characteristics andperformance history of current and potential distribution facilities.Transportation: Transportation rates for movement between potential and existingdistribution facilities and customersInventory: Inventory levels and operating policies for each distribution facility 31
  32. 32. ANALYSIS ASSUMPTION 1. Product Groups: Detailed product information aggregated to fit within the scopeof analysis 1. Technique. 2. Market Areas: Customer demand grouped to aggregate market areas to fit thescope of analysis techniquesc) Identify data resources: The process of data collection begins with afeasibility assessment. A fairly detailed specification of data is required to formulateor fit the analytical technique. For situations when data are extremely difficult tocollect or when the necessary level of accuracy is unknown, sensitivity analysis canbe used to identify data collection requirements. For e.g. an initial analysis may becompleted using transportation costs estimated with distance – based regressions. Thetypes of data required in a logistical design n study can be divided into three classes:business assumptions, management assumptions and analysis assumptions. Themajority of data required in a logistical study can be obtained from internal records.Although considerable searching may be needed, most information is generallyavailable. - The first major data category is sales and customer orders. The annual sales forecast and percentage of sales by month, as well as seasonality patterns are necessary for determining logistics volume and activity levels. Historical samples of customer order invoices are also needed to determine shipping patterns by market and shipment size. The combination of aggregate measures of demand and detailed order profiles of projects the requirements that the logistics system must be capable of satisfying. Specific customer data are also required to consider the cost and time associated with moving the products across distance. Customers and markets ate often aggregated by location, type, size, order frequency, growth rate, and special logistical services to reduce analysis complexity. - For integrated channel analysis, its necessary to identify and track the costs associated with manufacturing and purchasing. It’s often necessary to consider the number and location of plants, product mix, production schedules and seasonality. Identification of policies and costs associated with inventory transfer, reordering, and warehouse processing, inventory control rules and product allocation procedures. For each of the current and the potential warehouse, the operating costs, capacities, product mix, storage levels and service capabilities should be established. - Transportation data requirementsTransportation data requirements include the number and type of modes utilized,modal selection criteria, rates and transit times, and shipping rules and policies.For most logistics analysis applications, a select amount of future market data isuseful for evaluating future scenarios. Although the management may be able toprepare a consolidated sales forecast it is difficult to prepare a market-by-marketprojection of sales. There can be two solutions to this problem.1. Usage of demographic projections that correlate highly with sales can help thecompany to estimate future demand levels and hence determine future logisticsrequirements. Secondary data published by various government agencies can alsoprovide a data bank of environmental information 32
  33. 33. 2. Keeping a watch on the competitors strategies and capabilities by documenting competitive logistical system designs and flows can be helpful in providing competitive benchmarks that compare customer service capabilities, distribution networks and operating capabilities. d) Collect Data Once the data sources have been identified the company can start assembly of required data and conversion of that data to an appropriate format for the analysis tool. To avoid errors like overlooking data that does not reflect major components of logistical activity or collection of data from a misrepresentative time period, the data collection process should be properly documented. e) Collect Validation Data The objective of validation is to increase management credibility regarding the analysis process and to ensure that the results of the analysis accurately reflect reality. It is important to ensure that a through investigation is conducted into analytical results based on data that might not accurately reflect the past.2) ANALYSIS The analyst uses the technique and data from the previous activity to evaluate logistics strategic and tactical alternatives. The process of analysis includesa) Define analysis questionsThis involves defining specific analysis questions concerning alternatives and the rangeof acceptable uncertainty. The questions build on research objectives and constraints byidentifying specific operating policies and parameters. For e.g.: In the case of inventoryanalysis questions might focus on alternative service and uncertainty levels.b) Complete and validate baseline analysisThe second task completes the baseline analysis of the current logistics environmentusing the appropriate method or tools. Results are compared with validation datacollected previously to determine the degree of fit between historical and analyticalfindings. The comparison should focus on identifying significant differences,determining sources of possible errors and identifying and correcting them. c) Complete alternative analysisAn evaluation of systems alternatives should be accomplished either manually orelectronically to determine the relevant performance characteristics of each alternative.d) Complete sensitivity analysisIn this phase uncontrollable factors like demand, factor cost or competitive actions arevaried to assess the ability of potential alternatives to operate under a variety ofconditions. Sensitivity analysis in conjunction with an assessment of potential scenarioprobabilities is then used in a decision tree to select the best alternative.PHASE III - RECOMMENDATIONS & IMPLEMENTATIONSPhase III operationalize planning and design efforts by making specific managementrecommendations and developing implementation plans. 33
  34. 34. a) RecommendationsAlternative and sensitivity analysis results are reviewed to determine recommendationsto management. There are four steps in this part of the phase namely: - 1. Identify the Best Alternative Performance characteristics and conditions for each alternative must be compared to identify the two or three best options. The decision tree analysis should identify the best alternative i.e.: The one that meets the desired service objectives at the minimum total cost. 2. Evaluate Costs and Benefits A Cost Benefit analysis compares the alternatives for a base period and then projects comparative operations across a particular planning horizon. Potential benefits such as cost reduction; service improvement and cost prevention are identified and quantified. In other words when evaluating the potential of a particular logistical strategy an analysis comparing present cost and service capabilities with projected conditions must be completed for each alternative. 3. Develop a Risk Appraisal Risk Appraisal considers the probability that the planning environment will match the assumptions. It also considers the potential hazards related to system changeover. Risk related to adoption of a selected alternative can be quantified using sensitivity analysis. For e.g.: Assumptions can be varied and the resulting influence on system performance for each alternative can be determined. The end result of a risk appraisal provides a financial evaluation of the downside risk if the planning assumptions fail to materialize. Risks related to system changeover such as unanticipated delays, a series of contingency plans etc can also be quantified and a series of contingency plans could be tested to determine their possible impact. 4. Develop Presentation The final step in this procedure is a presentation to the management / submission of a report that identifies specific operating and strategic changes, provides qualitative reasons for suggesting these changes and then quantitatively justifies the changes in terms of service, expenses, asset utilization or productivity improvements.b) ImplementationThe actual plan or design implementation is the final process activity. An adequateimplementation procedure is the only means to obtain a tangible return from theplanning process. This broadly includes four phases. 1. Define Implementation Plan The implementation plan has to be defined in terms of the individual events, their sequence and their dependencies. The planning process may initially develop at a macro level. But it must ultimately be refined to provide individual assignment responsibility and accountability. Plan dependencies identify the interrelationships between events and thus define the completion sequence. 2. Schedule Implementation 34