EXPERT COMMITTEE

Prof. Ravindra Kumar Prof. S. Venkataramaniah

IMTCDL, Ghaziabad IIM Lucknow

Prof. Subhajit Bhattacharya Prof. Kunal Ganguly

IMT Ghaziabad IIT Kashipur

Prof. A. H. Kalro (Retd.) Mr. C. K. Mani

IIM Kozhikode Logchain, India

Prof. P. K. Jain Prof. Asif Zameer

IIT Delhi IMTCDL, Ghaziabad

Prof. B. B. Chakraborti (Retd.)

IIM Ranchi

COURSE COORDINATOR AND REVIEWER

Dr Narendra Mohan Mishra, MS, PGDCSA (BHU), MBA, PhD, FDPM (IIMA)
IMTCDL, Ghaziabad

MATERIAL FOR PRODUCTION

Source Material: Integrated Supply Chain and Logistics Management by Rajat K Baisya © 2020
ISBN: 9789353286651

ISBN: 978-93-5388-749-0 (PB)

Copyright @ SAGE Publications India Pvt. Ltd, 2021

SAGE Publications India Pvt Ltd

B1/I-1 Mohan Cooperative Industrial Area
Mathura Road, New Delhi 110 044, India
www.sagepub.in
 Advance Supply
Chain Management
Course Code: OPME006
 Table of Content

1 Understanding the supply chain: The Core Concept 1

2 Logistics Management 15
3 Logistics and Economy 25
4 Sourcing Management 38
5 Demand Estimation in a Supply Chain 55
6 Warehousing Management 84
7 Managing Inventory to satisfy Customer Demand 102
8 Transportation 126
9 Total Logistics Cost Management for Competitive Advantage 138
10 Global Logistics Value Chain Management 153
11 Supply Chain Performance Management 175
 1
UNIT

NOTES
Understanding the Supply
Chain: The Core Concepts

LEARNING OBJECTIVES
LO 1 Understand the core concepts of a supply chain in terms of its
definition and what it covers
LO 2 Identify the impacts and implications of supply chain
management on business performance
LO 3 Understand key challenges of supply chain management to
overcome for delivering results
LO 4 Appreciate the role of an effective and efficient supply chain in
creating a competitive advantage for the business

1.1 INTRODUCTION
Supply chain management (SCM) as a discipline has developed during the last two
decades, although business consultants have been discussing about the importance of
managing a supply chain efficiently as a prerequisite of delivering expected level of
the performance of any business since the late 1980s. But it was only during the post-
liberalization and globalization era that the importance of the SCM was recognized
by business leaders all over the world. SCM as a function has gone through signifi-
cant changes during the last two decades. In the course of time, the scope and limits
of SCM got extended to become end-to-end SCM. Today, it covers a wide range of
functions in business, starting from procurement to productions and operations, and
warehousing to distribution. Earlier, focus of business was on marketing and finance,
which were considered as the key functions responsible for the delivery of business
performance, and then came an era where businesses were focusing on people with
the thought that it is the people who deliver the result and, therefore, employee
engagement and retention and talent development had taken all the attention of the
business leaders. This may be uniformly true for all functions, and under Industry 4.0
environment, which we are now passing through, talent has always been seen by busi-
ness leaders all over the world as the topmost driver for global manufacturing com-
petitiveness (Global Manufacturing Competitiveness Index Report, 2018, by Deloitte).
A supply chain in today’s business covers almost all line functions and, therefore,
attracts the attention of the business. If a supply chain function is not efficient and
effective, businesses will not remain competitive in the marketplace, and even sur-
vival of the business itself will be threatened.
Since the concept of a supply chain was initially developed as an integrated func-
Self-Learning
tion, a lot of development has taken place since then. Today, it is highly Material 1
Advanced technology-driven. Procurement was once upon a time considered as a very mundane
Supply Chain
Management
function and very little attention was given by businesses which subsequently was
found to be a very important function offering considerable scope for cost reduction
and competitive advantage.
The purchase function was initially managed by some low-key executives by invit-
NOTES ing quotations and going through negotiations to get the best possible price for the
item(s) to be procured. Purchase managers were trying to focus on getting the best
possible price for key items required for manufacturing. It was much later that busi-
nesses realized that over 75% of the cost of the product is constituted by procured
items or bought-out items, and therefore, if a company has to be cost competitive, a
greater opportunity lies in managing the procurement function better, and thereafter,
the procurement function improves, adding a lot of incremental value to the business.
Today, the procurement function is highly developed and a lot of technologies,
including e-auction, vendor-managed inventory (VMI) and so on, are used in addition
to the concept of just-in-time (JIT) inventory as well as focused and preferred supplier
zeroed on after carrying out vendor development and vendor rating based on prede-
termined criteria. Businesses even use third-party funding and bill discounting to
reduce the procurement cost.
After making significant improvement in procurement functions, businesses start
focusing on core activities. And we have seen that companies started shifting manu-
facturing facilities to the places where it was costing least and satisfying all quality
criteria and also from the perspective of better customer service. We have seen that
companies started focusing on what they knew better, and thus manufacturing opera-
tions were shifting to outside the business. During the early 1990s, almost 100%
production was carried out in companies’ own manufacturing plants, but by the end
of that decade, almost 100% manufacturing was contracted out and businesses were
only focusing on marketing, research and development (R&D) and business develop-
ment activities. Today, most of the manufacturing has been outsourced to smaller
companies to benefit from the lower logistics and inventory holding cost, and thus
manufacturing operations are also spread over many locations and coming closer to
customers’ locations. Globally, manufacturing operations shifted to China, it being a
low-cost mass production country. China emerged as a global supply source.
India lost out on the race to become the global manufacturing hub mostly because
in terms of key global manufacturing competitiveness drivers, India lacks in many of
those parameters, including infrastructure and legal and regulatory framework. Many
businesses follow many innovative processes to improve upon the supply chain effi-
ciency. For example, Benetton produces all T-shirts in white and prints them closer to
the season when they can get more accurate estimate of demand of the colour of the
garments required in a particular year, thereby reducing the inventory. Otherwise,
excess and unsold stock may have to be rejected or disposed of as a discounted stock,
losing out on profitability. Dell manufactures laptops on getting confirmed orders to
reduce the inventory.
It has now been observed that manufacturing in a global location in say China and
selling the end product globally have other ramifications and complexities. In this
scenario, many a time input material has to come from many countries all over the
world, wherever those are best and cheapest, say China, and then re-transported to the
countries where it has to be sold, and that increases cost and complexity. Because of
Self-Learning
the distance between selling countries and production countries, inventory holding
2 Material gets larger, blocking costly working capital. The transportation cost also becomes
higher, and global corporations are carefully analysing the parameters to decide the Understanding
the Supply Chain:
best ways to manage a global supply chain with a clear objective of least cost and best The Core Concepts
service to the customers. These issues are changing the SCM processes now from the
earlier established practices. Many items and product categories are now standardized
and delivered to customers based on order received in knocked down conditions, and
these are assembled at customers’ premises. IKEA is a Swedish-founded multina- NOTES
tional group that designs and sells ready-to-assemble furniture, kitchen appliances
and home accessories, among other useful goods and occasionally home services.
The IKEA model of furniture business is now practised and replicated by even
domestic furniture manufacturers. International furniture manufacturers are also
entering countries with franchise route to be cost competitive. They supply in bulk
only the panels which are cut to size as per the customer’s order and fabricated at the
customer’s location or wherever they want. The business model is changing only from
competitiveness point of view. As competition is increasing, businesses are trying to
become more and more innovative to improve upon value delivery and, therefore, on
both benefits in terms of quality and functionality and cost, businesses are constantly
improving. And SCM offers greatest opportunity for incremental value delivery.
The logistics which covers warehousing and transportation is increasingly becom-
ing costlier and can form a significant part of the cost of the entire supply chain. In
the USA, logistics cost is about 8% of the GDP, whereas in India, it is about 15%.
There are significant opportunities for improving the logistics cost as well as manag-
ing warehousing better through the use of technology. Logistics cost is the new area
that businesses are now concentrating after taking care of procurement and produc-
tion or manufacturing. There are inbound and outbound logistics to be tackled and
non-value-adding activities to be eliminated. Logistics, therefore, is an integral part
of the supply chain now and needs special attention. From the considerations of logis-
tics cost, we can see that some East European countries are also now emerging as
preferred locations for cost-effective manufacturing for global players. Companies in
East Europe are producing auto components and accessories for all leading brands of
automobiles. For this reason, the logistics management has been emerging as an inde-
pendent discipline to focus on R&D in this area, and in many institutions abroad,
logistics is offered as a separate area for specialization.
In this course material, we have taken an integrated view on SCM and logistics and,
therefore, the units have been designed accordingly, which offers greater scope to
take an integrated view and derive the advantage of cost efficiency. Today’s supply
chain involves all parties, directly or indirectly working together in fulfilling the cus-
tomer expectations. SCM, thus, requires ability to work together with people and
organization both within and outside the business.

1.2 SCM AND BUSINESS PERFORMANCE

The length of the supply chain in manufacturing and marketing of products will
depend on the type of products and also on the processes followed, which determine
the number of intermediaries and partners as well as associates involved in the entire
value chain. For typical fast-moving consumer goods (FMCG) such as food and
household goods, it will involve the following stages:
 Customers
 Retailers Self-Learning
Material 3
Advanced  Wholesalers and distributors
Supply Chain
Management
 Manufacturers
 Raw material, packaging material and other input material suppliers
Under each stage, as mentioned above, the supply chain is connected by the flow of
products, funds and information, which happens in both directions and is managed by
NOTES one of the stages or even by an intermediary. Accordingly, the design of the supply
chain depends on customer needs and role played by the stages involved. The supply
chain complexity increases with the number of intermediaries in each stage. For
example, if a company has both in-house and out-house manufacturing facilities, then
the input material suppliers are also required to supply materials and components to
the contract manufacturers, who in turn also supply to both company and its distribu-
tors and wholesalers as per the model, and if they are located at different geographical
locations, then the complexity takes a much bigger dimension to be managed. The
complexity increases further if the suppliers are also located overseas and customers
located in other countries outside the parent company’s location. Simplified supply
chain stages can be shown as given in Figure 1.1.
The discipline of SCM has evolved over several decades of managing the industrial
production and distribution. Considerable amount of academic research leading to
innovations as well as practitioners experience and experimentation have gone into
the development of the SCM discipline and subject of study as we know it today
(Chen and Paulraj 2004). These disciplines are operations management, industrial
engineering as well as physical distribution. As can be understood that SCM involves
multiple management functions, therefore, it is an interdisciplinary subject requiring
knowledge of many other functions. Earlier, each of those functions was managed
independently in silos, but now those have been integrated in one as integrated SCM.
Each of these components of an integrated supply chain can be considered as a sepa-
rate stream, which can be broadly classified as follows:

Figure 1.1
Supply Chain Linkages and Stages

Supplier/ Wholesale/
Manufacture Retailer Consumer
Vendor Distributor

Supplier/ Wholesale/
Manufacture Retailer Consumer
Vendor Distributor

Supplier/ Wholesale/
Manufacture Retailer Consumer
Vendor Distributor

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4 Material
 Sourcing and procurement and supply chain Understanding
 Materials management the Supply Chain:
The Core Concepts
 Logistics and distribution management
The procurement function occupied a predominant position in the supply chain for
the reason that it impacts both cash flow and profitability of the business and requires
to be managed efficiently. If a company decides to manufacture all its products NOTES
through third parties and also distributes the products to its independent distributors,
then the whole supply chain will be a function of sourcing and procurement and
delivery. Online retailers such as Amazon and Flipkart actually operate like that.
The materials management function includes demand forecasting, inventory man-
agement, warehousing, stock keeping and scheduling, as well as production planning
and control. As over 60% of the manufactured cost is constituted by the bought-out
items, materials management offers considerable scope of improvement in terms of
route to cost reduction and, therefore, considered as very important. However, in rela-
tion to SCM, materials management can be regarded as flow of material into, through
and out of the enterprise.
The logistics management function is actually derived from the military or defence
logistics for managing military supply line. The Council of Logistics Management
(CLM) defines it as that part of the SCM process that plans, implements and controls
efficient and effective forward and backward flow and storage of goods and services
as well as information from the point of origin to the point of consumption to meet
the customers’ requirement. The distribution function in businesses in that sense
comes under logistics and is very important to be managed effectively to deliver the
overall performance of the SCM functions. Logistics comes for both bringing the
input materials inside the manufacturing premises and taking out the finished prod-
ucts for sales and distribution, and as such we call that inbound and outbound logis-
tics. Transportation has significant cost due to rise in fuel prices and energy cost.
Appropriate strategies need to be developed to contain the cost of transportation and
logistics. These issues have been discussed in greater detail in the unit on transporta-
tion (Unit 6).
Businesses are required to deliver incremental value on a sustainable basis to
ensure survival and growth and, therefore, unlocking the hidden value in the entire
supply chain is of primary focus. Also, because of the very dynamic nature of the
business, demand fluctuates and SCM has to gear up to meet the fluctuating demand.
Manufacturing operations need to be flexible and agile. That has influenced the devel-
opment of a flexible and agile supply chain to reduce the response time. To manage
today’s supply chain thus requires an integrated view supported by competitive opera-
tional strategies. Sustainability is another key area that requires attention and focus
including environmental concerns which will require judicious selection of technol-
ogy and processes ensuring green logistics and so on, which are the key concerns of
the global supply chain and logistics operators.

1.3 SCOPE OF SCM

By the way we understand SCM now, we can define it as the integration of key busi-
ness processes across the end-to-end supply chain for the purpose of creating value

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Material 5
Advanced for customers and other stakeholders. SCM revolves around efficient integration of
Supply Chain
Management
suppliers, manufacturers, warehouses, stores, wholesalers, retailers and customers. It
also optimizes the organizational resources to ensure the ideal level of servicing the
customer demand or requirement at all times.
This would mean that SCM is the management of a network of interconnected
NOTES businesses involved in the ultimate provision of product and service packages
required by end customers (Harland 1996). To compete in the global market and net-
worked economy, an interorganizational supply network can be acknowledged as a
new form of organization itself. An ideal level of SCM performance needs synchro-
nization of various other direct and indirect business functions, starting from demand
forecasting, procurement, production, warehousing, distribution, logistics and so on.
SCM now covers a wide variety of functions, and therefore, we look at these intercon-
nected functions in business and try to manage as integrated activities because of their
functional interdependencies. And as such, inefficiency in one function will impact
the performance in other associated and interlinked functions. In the context of cur-
rent global business environment and complexity, SCM, therefore, has to be viewed
as a unified integrated function. This function is so important that businesses have to
derive their competitive advantage through significant innovation in the entire SCM
functions. What had started initially in the early 1980s as global procurement chal-
lenges has now evolved as an integrated as well as very critical discipline in
business.
The three main streams of integrated SCM are as follows:
1. Sourcing, procurement and supply management
2. Materials management and demand management
3. Logistics and distribution management
A customer will be buying the product from the end selling point and that could be a
retail store in the neighbourhood. But to make the product available in time for the
customer to buy, there are numerous interconnected activities and associates, vendors
and suppliers are involved in a networked environment, all working in harmony to
make that happen in an integrated and effective chain of activities as has been shown
in Figure 1.2.

Figure 1.2
Scope of Supply Chain Management

Supplier

Supplier Storage Mfg. Storage Distributor Retailer Customer

Supplier

Supplier

Storage Service Customer

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6 Material
The supply chain is thus dynamic and essentially involves the constant flow of infor- Understanding
the Supply Chain:
mation, product and funds among various interconnected partners. In e-commerce, a The Core Concepts
customer will place an order online on say Amazon or Flipkart’s website and transfer
the money to buy a particular product after going through the information available
on the website about the product, price and availability. An e-retailer like Amazon
may decide to supply it from their warehouse or even from their registered suppliers’ NOTES
network stock points, involving either courier services or delivery service vendors, to
ensure that the product is delivered within the agreed delivery terms of the order of
the customer which needs to be processed immediately. Upon receiving the product,
if the customer finds it defective or not as per the expectation, he/she can either return
the product or get it replaced within a prescribed time, giving reasons thereof. The
e-retailer then has to take back the product and credit the customer and debit the sup-
plier or vendor and also adjust the inventory record immediately, which is in fact a
reverse logistics task to be managed. The operation as described, in fact, comes under
the SCM and as can be seen, it is highly complex.
Sourcing and procurement are important areas of SCM. Earlier, procurement was
considered a very mundane function, but soon businesses realized its importance in
terms of cost reduction possibilities, which has drawn the attention of top manage-
ment. The materials management function, in fact, includes multiple functions such
as forecasting, inventory management, stores management, warehousing and stock
keeping as well as scheduling. Logistics and distribution were initially derived from
military parlance dealt with movement and maintenance of armies, but when its appli-
cation came to be recognized in business, it was intended to cover physical movement
of goods and services across a supply chain till it reaches the end consumer for better
service and satisfaction.

1.4 KEY OBJECTIVES AND CHALLENGES OF SCM

For integrated SCM, a great degree of internal as well as external factors of the busi-
ness need to be aligned to improve the overall performance of SCM. This also results
in networking as well as technology selection and implementation. For efficient SCM
integration, one has to consider the various components and put together appropriate
structure and framework in place in order to produce the desired results. For efficient
management of an integrated SCM, businesses need to have an elaborate planning
and control mechanism and work process structure, management methods and prac-
tices as well as organization structure to ensure smooth flow of materials and facilities
supported by appropriate information flow and system. This is possible with compe-
tent and capable leadership with a well-defined organization structure and design and
favourable organization culture and attitude with adequate risk mitigation strategies
wherever required including a reward structure.
The primary objective of all supply chains has to be to maximize the overall value
generated in the chain which would also mean to generate supply chain surplus which
can be defined as follows:
Supply Chain Value = Customer Value – Supply Chain Cost
The customer value is in fact the price a potential customer is willing to pay for the
product offering, which depends not only on the product type, quality and benefits
that it offers to the target customers but also on how the product has been positioned Self-Learning
Material 7
Advanced in the customers’ minds and how it is promoted and marketed. The customer value,
Supply Chain
Management
therefore, has got to do with the effectiveness of the marketing function in the busi-
ness. However, marketers need support and cooperation to succeed in the market-
place in a competitive environment. The distribution which was earlier a sales
function is now integrated into the supply chain function. A supply chain, thus, now
NOTES plays a more integrated role. Without the cooperation, involvement and effective-
ness of the supply chain, it would be difficult for the marketers to create a steady
and growing demand for the product. A supply chain, therefore, plays a complimen-
tary role for the marketing function, and if the supply chain fails, marketing will
also fail.

1.5 OBJECTIVES AND CHALLENGES OF SCM

The key objectives that reflect the performance of SCM in a business world would
ultimately depend on achieving the cost reduction objective and to achieve that we
have many challenges. We need to coordinate activities across the SCM to improve
performance by:
 Reducing total cost
 Increasing customer service level
 Reducing the impact of bullwhip effect
 Utilizing the organizational resources in a better way
 Effectively and proactively responding to changes in the marketplace
To achieve the above-listed objectives, businesses have to have well-defined and
actionable strategies to manage the SCM functions across the entire value chain. As
the entire supply chain has to be managed with the sole objective to meet the custom-
ers’ real-time demand, estimating the demand accurately will hold the key to manag-
ing the supply chain effectively. The performance of a supply chain is also led by a
few critical or key drivers, including inventory control and management, transporta-
tion, facilities planning and information flow and accuracy. Unless these key strategic
drivers are managed well, the integration benefits will not emerge. These strategic
drivers illustrate the opportunities and challenges associated with SCM integration,
which will include the following:
1. Supply chain strategies: Push, pull and push–pull systems
2. Demand-driven strategies
3. Effective distribution strategies
Pull strategies are always better in the sense that in a pull strategy, the demand is
managed from the point of view of the real-term demand of the customers and it is
the task of the marketers to create the customer demand by effectively executing
demand pull marketing strategies and promotion including advertisement, whereas a
push strategy, which is manufacturers and marketers driven, often leads to artificial
demand, raising the level of the trade stock which in turn can cause other problems
such as increase in expiry stock and stock return and high debtors. The aim of the
efficient supply chain is to optimize the two apparently opposing objectives so that
the real-term demand is satisfied and we do not lose out on sales and at the same time
we also do not overstock the trade by overtrading, raising the working capital locked
up in the system leading to underperformance.
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 Understanding
1.6 KEY CHALLENGES the Supply Chain:
The Core Concepts
With increased awareness and concerns about the protection of environment, a
supply chain has added complexity and challenges. The regulations regarding envi-
ronment protection are forcing businesses to view the whole task of organizing
supply of products and making that available what customers want. The recent chal- NOTES
lenges of government asking FMCG companies such as Hindustan Unilever Limited
(HUL) and Procter & Gamble (P&G) to be responsible to take care of their own
waste coming from the use of packaging material, particularly non-biodegradable
packaging material used for production of items that the companies sell, are a
pointer in that direction. Environment-friendly countries such as Ireland have
decided to do away with the inner box that is normally used for packing toothpaste
tubes. In Ireland, now toothpaste tubes are sold without the box. Food regulatory
authorities have now banned the use of recycled plastic for packing food products.
The virgin polyester (PET) is non-biodegradable and also a costly packing material
for food products such as sauces, ketchups, beverages and mineral water. PET is a
product from petroleum refinery. Processes have now been developed to completely
decompose the used and recycled PET by pyrolysis and then reconstruct the virgin
PET material again from the components to recycle the used food grade polyesters.
New technologies are developed to overcome and address these challenges. There
are also new security concerns with respect to the movement of stocks in global
trade.
Terrorism, cross-border tension, trade rivalry, political conflict, piracy and so on
are becoming and posing increased threat for the movement of cargo in global trade.
The increased security concerns and related regulatory issues pose additional chal-
lenges for logistics and SCM in terms of securing the cargo and conforming to the
country-specific regulations. In addition to all these, there are issues related to piracy,
theft and pilferage and tempering of cargo as challenges to global logistics
operators.
As transportation is an integral part of logistics operation, with rising fuel cost,
transportation cost is also increasing, which is the key challenge to logistics opera-
tors. Sulphur content of the bunker fuel and new regulations for that are coming as a
big challenge. With rising cost of transportation, global logistics players are trying
many alternative strategies to contain those to be competitive. As a result, many
acquisitions and strategic alliances are now being seen to be happening. Sustainable
transportation is another challenge to logistics operators.
Handling of a hazardous and inflammable cargo requires additional safety mea-
sures, and there are regulations with respect to those to be complied with. SCM
covers wide areas and functions in a business. Large parts of capital investment are
also made in these areas to be effective. A supply chain represents key components
of costs in business; managing a supply chain effectively and efficiently is therefore
the key imperative to derive a competitive advantage in business. Businesses are seen
to be experimenting with new ideas and strategies to create a competitive advantage
in the business. Managing a supply chain better also improves the success rate of new
business, new products and start-ups.
The course is an attempt to see SCM and logistics management as an integrated
discipline in terms of managing the new challenges in a supply chain, which is very
vital for succeeding in the marketplace.
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Advanced
Supply Chain
1.7 ROLE OF SCM
Management
SCM really works by bringing positive impact by servicing the customers better,
thereby helping business to grow faster in terms of increased sales, growth and prof-
its. The primary role of SCM is to optimize the organizational resources to maximize
NOTES the sales and profit by servicing the real-term customer demand. In this task, SCM
primarily performs the following activities:
 Communicating the customer’s demand from the point of sale (POS) to the
supplier
 Physical flow process that engineers the movement of goods
 Optimizing the organizational resource to satisfy the customer’s demand
The key benefits that can accrue from the efficient SCM are, therefore, many and
include the following:
 Reduction of product losses in transportation and storage by making the processes
and functions more efficient and effective
 Providing a competitive advantage to the business by unlocking a lot of hidden
value in the entire supply chain
 Increase of sales resulting from better customer service, ensuring customer
satisfaction
 Dissemination of technology, advanced techniques, capital and knowledge among
the chain partners, thereby helping the channel partners to be more competitive
and efficient in their own businesses
It is a common practice of large businesses to help the contract manufacturers and
contract packers to become more cost-effective by infusion of technology and knowl-
edge and even sometimes investment in vendor’s facilities and then share the added
value so created for the benefit of both. This is a win-win situation for both principal
and vendors. Sometimes it is much easier to either experiment or practise in vendor’s
premises, rather than in the facilities and premises of large global players because of
rigidity and inflexible policies and practices which require time to change. We will
discuss a P&G case to bring in more clarity in this regard. P&G is generally recog-
nized as more proactive and innovative in relation to its own competitive sets, and it
is constantly experimenting to find better solutions to the newer challenges of the
global market. The case will, therefore, reveal some of their key strategic drivers to
find innovative solutions which can significantly improve business performance and
reduce risk of failures.

CaSeleT
Supply Chain in CoMpetitive World: a CaSe of li & fung

Victor Fung of Li & Fung gave an interview which was published in Harvard
Business Review (Magretta 1998). He said:
Say we get an order from an European retailer to produce 10,000 garments. For
this customer we might decide to buy yarn from a Korean producer but have it
woven and dyed in Taiwan. So we pick the yarn and ship it to Taiwan. The Japanese
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10 Material
 have the best zippers … so we go to YKK, a big Japanese zipper manufacturer, Understanding
the Supply Chain:
and we order the right zippers from their Chinese plants…. The best place to make The Core Concepts
the garments is Thailand. So we ship everything there…. The customer needs
quick delivery, we may divide the order across five factories in Thailand.
Effectively, we are customizing the value chain to best meet the customer’s needs.
The complexity as explained in this case of Li & Fung is explained diagrammatically in NOTES
Figure 1.3, which shows the complexity of the whole process of executing the European
order of garments by Li & Fung in order to deliver the best value to the ultimate cus-
tomer to ensure the sustainability of the whole business process which is hinging on the
ultimate customer satisfaction with quality, time and price. Li & Fung is Hong Kong’s
largest export trading company. It has also been innovative in SCM. In the interview
example, it can be seen that Li & Fung has created a supply chain for the purpose of
meeting a customer’s needs. In general, this case is more an exception than a rule but
serves to illustrate some of the pieces of a global supply chain which is not only com-
plex but also requires management knowledge and expertise.

Figure 1.3
CoMplexity in Supply Chain in li & fung buSineSS Model

Factory
Yarn
1
Dying &
Weaving Consumer
Yarn
Factory
2

The Consumer
Factory
Customer
3
(Retailer)
Zippers
Factory
4
Consumer

Factory
5

A value chain is another name for a supply chain. The concept of value chain was intro-
duced by Michael Porter (1985), and what we understand today by a value chain is in
fact another name of an extended end-to-end supply chain. A supply chain is a sequence
of organizations—their facilities, functions and activities—that are involved in produc-
ing and delivering a product or service.

In a supply chain, the members linked in the chain serve as both customers and sup-
pliers as they receive input materials from someone else and convert that to the fin-
ished product to sell to their own customer, and as such, each partner performs both
the roles. In the case of Li & Fung, as discussed above, the Korean yarn producer and
Japanese zipper producer are probably suppliers and also the customer’s customer.
SCM, therefore, links the organizations within the supply chain for meeting the
demand across the entire chain efficiently. In a typical non-brokered supply chain,
one or more of the organizations in the chain can also provide the management
function.
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Supply Chain
UNIT SUMMARY
Management
This unit discusses the new concepts of SCM as we know today, covering a wide
range of business functions which were earlier managed in silos and are now being
managed as integrated holistic functions. The unit also addresses the importance of
NOTES SCM in terms of delivering improved business performance and to remain competi-
tive to ensure survival and growth. The increased complexity and management chal-
lenges of a supply chain are elaborately discussed, highlighting the interrelationship
of various functions now included and considered as part of the supply chain. The
new regulatory, safety as well as packaging and environmental issues are also dis-
cussed, which are posing new challenges to be effectively managed. The role and
scope of SCM, its key objectives and the major challenges SCM integration faces has
also been discussed. Lastly, the unit addresses the new-found importance of logistics
management in a supply chain and key issues that make a very valid case of managing
the supply chain and logistics as an integrated function.

G lossa r y

 Supply Chain: The supply chain represents key components of costs in a busi-
ness; managing a supply chain effectively and efficiently is the key imperative to
derive competitive advantage in business.
 SCM: SCM covers a very wide range of activities, including procurement, ware-
housing, transport and logistics, inventory management, production, demand man-
agement, distribution and customer services.
 Logistics: Logistics is a combination of both, bringing the input materials inside
the manufacturing premises and taking out the finished products for sales and
distribution. It is also called as inbound and outbound logistics.
 Materials Management Function: The materials management function includes
demand forecasting, inventory management, warehousing, stock keeping and
scheduling, as well as production planning and control.
 Sustainability in SCM: Sustainability is a key area that requires attention and
focuses including environmental concerns which will require judicious selection
of technology and processes ensuring green logistics and so on, which are the key
concerns of the global supply chain and logistics operators.

Review Questi ons

Objective Type Questions

1. SCM covers wide-range of functions in _______________, starting from pro-
curement to productions and operations, and warehousing to distribution.
a. Development
b. Inventory
c. Business
d. Market
2. If a supply chain function is not _______________ and _______________, busi-
nesses will not remain competitive in the marketplace, and even survival of the
Self-Learning business itself will be threatened.
12 Material
 a. Practiced and replicated Understanding
the Supply Chain:
b. Efficient and effective The Core Concepts
c. Practiced and effective
d. Efficient and replicated
3. What should businesses follow to improve upon the supply chain efficiency?
a. Customer expectations NOTES
b. Innovative processes
c. Manufacturing of products
d. Marketing of products
4. Which function occupied a predominant position in the supply chain due to its
impact on both cash flow and profitability of the business?
a. Procurement
b. Materials management
c. Logistics management
d. Distribution
5. What is the full form of VMI?
a. Vendor Managed Inventory
b. Vendor Mastered Integration
c. Vendor Mastered Inventory
d. Vendor Managed Integration
6. The _________________ occupied a predominant position in the supply chain
for the reason that it impacts both cash flow and profitability of the business and
requires to be managed efficiently.
a. Purchase function
b. Materials management function
c. Logistics management function
d. procurement function
7. Which aspect covers warehousing and transportation as a significant part of the
entire supply chain?
a. Inventory
b. Logistics
c. Manufacturing
d. Customer service
8. The supply chain _______________ increases with the number of intermediaries
in each stage.
a. Complexity
b. Simplicity
c. Production
d. Distribution
9. Which function is actually derived from the military or defence logistics for man-
aging the military supply line?
a. Inventory management
b. Logistics management
c. Materials management
d. Distribution management Self-Learning
Material 13
Advanced 10. Businesses are required to deliver incremental value on a _______________
Supply Chain
Management
basis to ensure survival and growth and, therefore, unlocking the hidden value in
the entire supply chain is of primary focus.
a. Sustainable
b. Considerable
NOTES c. Manageable
d. Untenable
Answers: 1. c; 2. b; 3. b; 4. a; 5. a; 6. d; 7. b; 8. a; 9. b; 10. a

Descriptive Questions
1. What are the key functions that SCM encompasses in the current context?
2. Why is SCM so important in business in terms of delivering a competitive
advantage?
3. How has logistics management emerged as a key discipline and is part of supply
chain now?
4. Discuss the key role of SCM in delivering the business performance. Discuss the
criticality of the supply chain efficiency in India’s agriculture sector.
5. What are the key considerations to manage SCM as an integrated discipline?
6. Discuss the key complexities and challenges of SCM function

Re fe re nc e

Chen, I. J., and A. Paulraj. 2004. ‘Understanding Supply Chain Management: Critical
Research & Theoretical Framework’. International Journal of Production Research 42
(1): 131–163. Published online in February 2007.
Deloitte. 2018. Global Manufacturing Competitiveness Index (report). New York: Deloitte.
Harland, C. M. 1996. ‘Supply Chain Management: Relationships, Chains and Networks’.
British Journal of Management 7 (S1): S63–S80.
Magretta, Joan. 1998. ‘Fast Global and Entrepreneurial: Supply Chain Management, Hong
Kong Style’. Harvard Business Review (September–October): 102–114.
Porter, Michel E. 1985. ‘The Structural Analysis of Industries’. Competitive Advantage:
Creating and Sustaining Superior Performance, 11–15. New York, NY: The Free Press.

B ibliogr a phy

Fisher, Marshall L. 1997. ‘What Is the Right Supply Chain for Your Product?’ Harvard
Business Review (March–April): 83–93.
Kopczak, Laura R., and M. Eric Johnson. 2003. ‘The Supply-Chain Management Effect’.
Sloan Management Review (Spring): 27–34.
Robensen, James F., and William C. Copacino, eds. 1994. The Logistics Handbook. New
York: The Free Press. Slone, Reuben E. 2004. ‘Leading a Supply Chain Turnaround’.
Harvard Business Review (October): 114–121.

Self-Learning
14 Material
 2
UNIT

NOTES

Logistics Management

LEARNING OBJECTIVES
LO 1 Understand the importance and value of logistics for a business
set-up
LO 2 Understand the core concepts in logistics and its scope
LO 3 Identify the key types of logistics
LO 4 Enumerate the logistics activities and goals
LO 5 Get insights into the logistics industry in India

2.1 INTRODUCTION
Peter Drucker (1962) has said, ‘Logistics is the economy’s dark continent. It is the
most neglected but very promising business area.’ Global sourcing has posed serious
challenges and also opportunities for the logistics companies. Businesses are still
learning how to use logistics effectively, and logistics has thus become a key source
of a competitive advantage.
Efficient logistics function management is the key driver to deliver a competitive
advantage to business. Businesses, therefore, need to develop a strategic plan for the
effective logistics function to unlock the value in logistics management chain, and
logistics has thus emerged as one of the key functions in business.
Logistics is the integral part of SCM encompassing the planning and management
of all activities involved in sourcing and procurement, conversion and all logistics
management activities. In addition, it also includes coordination and collaboration
with channel partners, which can be suppliers, intermediaries, third-party service
providers and customers. In essence, SCM integrates supply and demand manage-
ment within and across companies. And logistics is the integral part of all interfaces.
Logistics, in fact, takes care of the way a company acquires materials such as raw
materials, packaging materials or parts, spares and components and intermediates,
how a company handles them once they arrive at the company’s manufacturing prem-
ises and how they are shipped out. Logistics, therefore, is the intervening facilitator
from the time material input is sourced and brought inside the company’s manufactur-
ing locations till it reaches the end customer as the final product to be consumed. On
the basis of this, very broadly logistics can be divided into inbound logistics and
outbound logistics. While inbound logistics deals with the input material, outbound
logistics deals with physical distribution and marketing logistics.
Physical distribution means the way a company delivers its product to the market, Self-Learning
which could be the intermediaries, customers or retailers and end users, and Material 15
Advanced marketing logistics are basically the physical distribution of goods. Marketing logis-
Supply Chain
Management
tics involves planning, delivering and controlling the flow of physical goods to a
market as well as the material and information necessary to meet customers’ demands.
Marketing logistics even covers market returns which need to be either disposed of or
reprocessed, as required, and that is a part of reverse logistics. The demands of the
NOTES customer must be met at a profit that increases revenue for the organization.

2.2 WHY IS LOGISTICS SO IMPORTANT?

Logistics can help improve value delivery to customers, and therefore, it can also
improve customer satisfaction and help businesses to become more competitive in the
marketplace. And that is the key to success. In order to succeed in the marketplace,
businesses have to consistently deliver superior value to their target customers and
consumers in relation to their own competitive set. All businesses have their identified
competitors with whom they compete, and it is essential that you deliver superior
value in comparison to your identified competitors to succeed. In this regard, it should
also be mentioned that all players in the same business are not necessarily competi-
tors and that same strategy will not address the challenges of all competitors, and
therefore, it is essential that businesses identify their competitors judiciously. And in
that task, effective and efficient logistics management holds the key.
Things began changing with the advancement in transportation systems. Population
began moving from rural to urban areas and to business centres. No longer did people
live near production centres, nor did production take place near residential centres,
where goods and services are mostly consumed. The geographical distance between
the production point and the consumption point thus increased. And logistics also
thus gained importance.
Logistics is one of the most important functions in business today. No marketing,
manufacturing or project execution can succeed without logistics support. For com-
panies, 10–35% of gross sales are logistics cost, depending on types of business,
geography and weight/value ratio of the product. Other factors have also come into
play recently. Since the early 1990s, the business scene has changed. Globalization,
free market and competition have required that the customer gets the right material,
at the right time, at the right point, in the right condition and at the lowest cost, which
has its implication in the global competitive environment where players try to out-
smart their competitive counterpart in order to thrive in the business.

bOX 2.1
CoSt of logiStiCS

Businesses spend a huge sum on managing logistics activities within the supply chain.
For example, in the USA, 25–35% of a product’s sale value is attributed to the logistics
cost for international logistics and 8–10% for domestic logistics. In 1993, the USA had
spent 10.7% of GDP to cover the cost of logistics, twice of that spent on national
defence. In 2000, the USA spent 10% of the price of all goods which was attributed to
the cost of logistics. Costs of logistics in any organization and in businesses depend on
three major factors, namely level of economic activity, efficiency and the transition of
managing SCM from the perspective of goods to orientation towards providing better
Self-Learning services to customers.
16 Material
 Logistics
2.3 CORE CONCEPT, DEFINITION AND SCOPE OF LOGISTICS Management

Logistics is the function that enables the flow of materials from suppliers into an
organization through operations within the organization out to the customers. It is
derived from the Greek word logistikos, which means ‘to reason logically’. It basi-
cally consists of all operations required for goods (both tangible and intangible) to be NOTES
made available in markets or at specific destinations.
According to CLA (USA), ‘Logistics 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 of consumption for the purpose of
conforming to the customer requirements.’ The Council of Supply Chain Management
Professionals (CSCMP), the largest professional organization on logistics, has pro-
vided the most useful definition of logistics, and according to that,
Logistics management is that part of the supply chain management that plans,
implements, and controls the efficient, effective forward and reverse flows and
storage of goods, services and other related information between the point of
origin and the point of consumption in order to meet the customers’
requirements.

Logistics management activities typically include inbound and outbound trans-

portation management, fleet management, warehousing, materials handling,
order fulfilment, logistics network design, inventory management, supply/
demand planning, and management of TPL service providers.

To varying degrees, the logistics function also includes sourcing and procure-
ment, production planning and scheduling, packaging and assembly, and cus-
tomer service. It is involved in all levels of planning and execution—strategic,
operational and tactical.
Based on this, it can be said that logistics management is an integral function which
coordinates and optimizes all logistics activities with the other functions in the busi-
ness, including sales and marketing, productions, operations and manufacturing,
finance, and information technology1.
The early years of the 21st century were characterized by a slow evolution from
logistics to SCM in both academic and business circles.
The small and medium-sized companies have been seen to be slower in terms of
accepting the emerging concept of SCM. However, large professional organizations
continued to be active in assisting academicians and practitioners in the logistics and
supply chain discipline.
The logistics side is well represented by CSCMP. It defines SCM as follows:
‘Supply chain management encompasses the planning and management of all activi-
ties involved in sourcing and procurement, conversion, and all logistics management
activities’ (CSCMP 2013). The handbook Transportation and Logistics Basics states:
‘The supply chain includes all partners in the logistics process. The idea is to have

1
IT; Council of Supply Chain Management Professionals [CSCMP] 2013, https://cscmp.org/
CSCMP/Educate/SCM_Definitions_and_Glossary_of_Terms/CSCMP/Educate/SCM_
Definitions_and_Glossary_of_Terms.aspx?hkey=60879588-f65f-4ab5-8c4b-6878815ef921 Self-Learning
[accessed on 3 September 2019 Material 17
Advanced integrated information sharing among all trading partners (vendors, manufacturers,
Supply Chain
Management
and customers)’ (Southern 1997, 248).
In business terms, logistics means the physical movement of goods from the sup-
plier point to the receiver point. The basic functional activities under logistics includ-
ing transportation, packaging and storage, loading and unloading, handling,
NOTES distribution, information system management, etc., are organically integrated based
on the practical needs of the businesses.

2.4 BASIC ELEMENTS OF LOGISTICS

Whereas the term logistics covers a very wide area of activities and functions as dis-
cussed above, the basic elements of logistics include the following functions:
1. Transportation
2. Warehousing
3. Inventory management
4. Packaging and utilization
5. Information and communication

2.5 LOGISTICS AS A DISCIPLINE

Logistics, over the years, has evolved as a discipline or management science and
covers strategic planning, forecasting, material-handling, warehousing, transporta-
tion, distribution and operation research. Logistics is now a multidisciplinary func-
tion. The scope of study of logistics as a discipline depends also on the types of
logistics including logistics costs and financing and TPL.

2.6 TYPES OF LOGISTICS

We can see that logistics is involved in every human endeavour and activity. Some of
the activities where logistics is the key to meet the objectives such as war logistics
and disaster logistics have become an independent area or discipline for study now.
There are activities and services where logistics will determine the performance and
success which include tourism logistics and medical logistics. Broadly, we can have
the following types of logistics, which are only indicative but not exhaustive:
 Business logistics: moving cargo
 General logistics: moving cargo and moving people
The activities involved in managing the logistics function for moving cargo which we
consider as business logistics will be different from when it has to be for moving
people. Although transportation is a common function in both, their objectives and
criteria of performance would be different.
We normally refer to moving cargo or business logistics in this course. Although
airlines or travel services are part of the logistics functions, we will refer to only busi-
ness logistics in the sense that it relates to moving cargo or goods. Other types of
logistics will include the following:
 Inbound logistics or procurement logistics
Self-Learning  Production logistics or internal logistics
18 Material
 Outbound logistics or distribution logistics or marketing logistics Logistics
Management
 Reverse logistics
 Green logistics
 Defence logistics
 Medical logistics
 Disaster logistics NOTES
 War logistics
 Agricultural logistics
 Tourism logistics
As the names indicate, the types of logistics will have their own performance criteria
and objectives as well as their own challenges to be managed, and each type of logis-
tics now needs to be discussed in specialized training and academic programmes. A
great deal of research activities are undertaken to make these logistics more cost
effective and efficient.

2.7 LOGISTICS ACTIVITIES AND GOALS

Logistics is about getting things to where they need to be and is much broader than
transportation of goods from one location to another. The overall goal of logistics,
thus, would be to achieve a targeted level of customer service at the lowest possible
cost. Logistics activities cover a wide range of tasks including the following:
 Network design
 Information processing
 Transportation
 Inventory management
 Warehousing, material-handling and packaging
The operational objectives of a logistics system can have several objectives including
the following:
 Rapid response
 Minimum variance
 Minimum inventory
 Movement consolidation
 Quality
 Life cycle support
Logistics, thus, is a support function to operations. Also, integrated logistics empha-
sizes the need to coordinate with suppliers and customers.

2.8 LOGISTICS INDUSTRY IN INDIA

A glimpse into various industrial sectors highlights the anticipated upsurge in trade
and commerce and the consequent growth in the need for a strong logistics
industry:
 Indian Logistics sector is 13% of its GDP. This is both significant and
inefficient.
 India’s nominal GDP could grow from US$2.37 trillion currently to US$3.6 tril- Self-Learning
lion by 2020 at an annual growth rate of 7%. Material 19
Advanced  By 2030, India’s crude steel production is expected to increase by a factor of 4.
Supply Chain
Management
 The demand for cement in the country is expected to double by 2030.
 Agricultural output, although reduced in size as a percentage of the economy, is
expected to increase from 207 MMT to 295 MMT by 2020.
 The Indian textiles industry is expected to triple from US$78 billion currently to
NOTES US$220 billion by 2020.
 The share of organized retail is expected to increase from 5% currently to 24% by
2020.
 India’s industrial energy consumption is expected to double by 2020. In this sce-
nario, the country will need to mine 2 billion tonnes of coal by 2030 and transport
75% of it. Further, around 30% of total transported coal will have to be imported
through ports.
 Overall EXIM cargo at Indian ports is projected to increase to around 2,800 MMT
by 2020 from approximately 890 MMT currently.
 Finished consumer goods, both imported and those produced in India, will have to be
transported to the country’s middle-class consumers, which, by 2030, are expected to
increase fourfold from the current middle-class population of 160 million.
 Because of the constraints and bottlenecks in the logistics infrastructure and more
particularly in the road transport infrastructure, there is a negative impact on the
India’s GDP growth (Table 2.1).

Table 2.1
Comparison on Key Parameters: India vs Global

Logistics Efficiency Indicators India Global

Road Transportation
Average truck speed (in kmph) 30–40 60–80 (China)
Four lane road length (in km) 7,000 34,000 (China)
National highway length (in km) 66,540 190,000
Average surface freight (in cents/km) ∼7 3.7 (Japan)
Average distance travelled by a truck per day (in km) 200 400
Air Transportation
Airport waiting time – Exports (in hours) 50 12
Airport waiting time – Imports (in hours) 182 24
Aviation turbine fuel as a % of operating cost 35–40% 20–25%
Ports & Sea Transportation
Turnaround time at ports (in hours) 84 7
Annual container handling capacity 8.4 mm TEUs 60 mm TEUs
Containers handled per ship, per hour (maximum) 15 25–30
Throughout density (maximum) 45,000 TEUs/ 17,000–
hectare 220,000 TEUs
Warehousing
Average inventory days 33 24 (China)
Others
Self-Learning
20 Material 3 PL share of logistics 9–10% 57% (USA)
 Figure 2.1 Logistics
LPI of India, China and Germany on Select Parameters Management

LPI
5

4 NOTES
Timeliness Customs

Tracking & Tracing Infrastructure

Logistics Competence International Shipments

Germany 2018 China 2018 India 2018

Country Parameter Germany China India

LPI rank 1 26 44
Customs 1 31 40
Infrastructure 1 20 52
International shipments 4 18 44
Logistics competence 1 27 42
Tracking & tracing 2 27 38
Timeliness 3 27 52
Source: https://lpi.worldbank.org/

 A comparison of logistics Performance Index based on the data of 2014 between

India, China and Germany has been shown in Figure 2.1 to indicate that India is
well below in terms of global ranking.

UNIT SUMMARY
Logistics which started initially as transportation gradually emerged as product distri-
bution, and finally as business logistics covering the scientific research and develop-
ment work including the technology development and interface of various information
technologies and ERP in the current context in terms of running the modern businesses
now. The unit also discusses why logistics functions are so important for sustaining a
business in the current context of global competitive environment and how effectively
managing these functions can help provide a competitive advantage to the business. It
also discusses why and how logistics management performance contributes to the
country’s economic growth. Key components and basic elements of logistics function Self-Learning
are explained as well as various types of logistics are discussed. Material 21
Advanced
Supply Chain
G lossa r y
Management
 Logistics: Logistics is the function that enables the flow of materials from suppli-
ers into the organization through operations within the organization out to the
customers. It is derived from the Greek word logistikos, which means ‘to reason
NOTES logically’.
 Cost of Logistics: Costs of logistics in any organization and in businesses depend
on three major factors, namely level of economic activity, efficiency and the transi-
tion of managing SCM from the perspective of goods to orientation towards pro-
viding better services to customers.
 Competitiveness and logistics infrastructure: Competitiveness has a direct rela-
tionship with the level and state of logistics infrastructure. Competitiveness is
normally measured at three levels—country level, industry category level and firm
level.

Review Questi ons

Objective Type Questions

1. Logistics is an integral part of _______________ encompassing the planning and
management of all activities involved in sourcing and procurement, conversion
and all logistics management activities.
a. Supply Chain Management (SCM)
b. Council of Supply Chain Management Professionals (CSCMP)
c. National Council of Physical Distribution of Management (NCPDM)
d. Logistics Performance Index (LP1)
2. Peter Drucker has said, ‘Logistics is the economy’s dark continent. It is the most
neglected but very promising business area.’ What has posed serious challenges
and also opportunities for the logistics companies?
a. Global enterprise
b. Global sourcing
c. Global investor
d. Global market
3. What factors have made it mandatory that the customer gets the right material, at
the right time, at the right point, in the right condition and at the lowest cost?
a. Supply/demand planning
b. Management of service providers
c. Globalization, free market and competition
d. Environmental concern and regulatory issues
4. Logistics is one of the most important functions in business today. No marketing,
manufacturing or project execution can succeed without logistics support. For
companies, based on types of business, geography and weight/value ratio of the
product, what percent of gross sales are logistics cost?
a. 10–35%
b. 15–45%

Self-Learning
22 Material
 c. 20–55% Logistics
Management
d. 25–65%
5. According to which of the following ‘Logistics is the process of planning, imple-
menting and controlling the efficient, effective flow and storage of goods, ser-
vices and related information from the point of origin to the point of consumption
for the purpose of conforming to the customer requirements.’? NOTES
a. Council of Supply Chain Management Professionals (CSCMP)
b. CLA (USA)
c. National Council of Physical Distribution of Management (NCPDM)
d. Transportation Journal
6. Logistics, over the years, has evolved as a discipline or management science and
covers strategic planning, forecasting, material-handling, warehousing, transpor-
tation, distribution and operation research. Logistics is now a _______________
function.
a. Multidisciplinary
b. Intermediate
c. Integrated
d. Simple
7. How many distinct phases has a logistics function evolved, from transportation to
business logistics?
a. Seven
b. Six
c. Four
d. Five
8. The mission of _______________ is to plan and coordinate all activities to
achieve desired levels of delivered service and quality at the lowest possible cost.
a. Business management
b. Logistics management
c. International management
d. Strategic management
9. Because of the constraints and bottlenecks in the logistics infrastructure and more
particularly in the road transport infrastructure, there is a _____________ impact
on the India’s GDP growth.
a. Positive
b. Neutral
c. Negative
d. Negligible
10. Logistics activities cover a wide range of tasks. Which among the following is not
one of them?
a. Analyzing Customer Feedback
b. Information processing
c. Transportation
d. Inventory management
Answers: 1. a; 2. b; 3. c; 4. a; 5. b; 6. a; 7. d; 8. b; 9. c; 10. a
Self-Learning
Material 23
Advanced Descriptive Questions
Supply Chain
Management 1. How important is the logistics function in business as well as the overall
economy?
2. What are the different types of logistics?
3. State the importance of logistics in Supply Chain Management (SCM).
NOTES 4. Highlight some of the recent developments of the Indian economy which reiter-
ated the need for a strong logistics industry.
5. Briefly discuss the role and scope of marketing logistics.

Re fe re nc e

Council of Supply Chain Management Professionals (CSCMP). 2013. http://cscmp.org/

about-us/supply-chain-management-deficition (accessed on 19 August 2019).
Drucker, Peter F. 1962. ‘The Economy’s Dark Continent’. Fortune (April): 103, 265, 268 and
270.
Southern, R. Neil. 1997. Transportation and Logistics Basic. Continental Traffic Publishing
Company

B ibliogr a phy

Robeson, James F., and William C. Copacino, eds. 1994. The Logistics Handbook. New York,
NY: The Free Press. Slone, Reuben E. 2004. ‘Leading Supply Chain Turnaround’.
Harvard Business Review (October): 114–121.

Self-Learning
24 Material
 3
UNIT

NOTES

Logistics and Economy

LEARNING OBJECTIVES
LO 1 Get insights into the historical perspective of an integrated
supply chain and logistics management
LO 2 Know the role and functions of an integrated supply chain and
its key deliverables
LO 3 Understand how logistics play a key role in the economy of a
country
LO 4 Understand how Physical infrastructure and SCM performance
are interrelated

3.1 EVOLUTION OF LOGISTICS: THE HISTORICAL

PERSPECTIVE
In the initial years, logistics was synonymous with transportation, but today transpor-
tation is only one of the sub-functions, but a very important one, of logistics. Logistics
as a discipline has developed into a very important function and part of the end-to-end
SCM. Today, logistics covers a wide range of activities and serves as a key integrator
of SCM. It has developed during last five decades, although in the beginning it was
relevant to military operations and focus was on transportation.
However, during the last few decades, it has developed from the narrowly defined
distribution management to the integrated management and linked to the global
supply chains. The mission of logistics management is to plan and coordinate all
activities to achieve desired levels of delivered service and quality at the lowest pos-
sible cost. In order to succeed in today’s global marketplace, companies must be ever
cognizant of these trends and develop a logistics management strategy that capitalizes
on the best-of-breed technology solution available today, so that they can meet the
demands of their customers today and be well prepared for the future. The logistics
function has evolved through five distinct phases as narrated below from transporta-
tion to business logistics.

3.1.1 THE 1950s’ TRANSPORTATION ERA

During the 1950s, the emphasis was on transportation and at that time several univer-
sity programmes were offered in transportation as major which did not include topics
such as logistics, physical distribution, physical supply and SCM. Computers or even
calculators were not available to calculate or quantify the data, nor was there much Self-Learning
discussion on the systems or total cost approach as we take today. Also, the idea of Material 25
Advanced the collaboration with the vendors and suppliers or customers was not the priority or
Supply Chain
Management
concern of the businesses in those days, and the term logistics was used in military or
defence context only, whose primary focus and key imperative were to get the right
supplies to the right place at the right time during wartime conditions.
James A. Houston (1996) surveyed the significance of logistics in the military and
NOTES said, ‘This work is a general historical survey of logistics in the American Military
experience.’
Although initial work on logistics was focused on military logistics, today logistics
covers a vast range of subjects.

3.1.2 THE 1960s’ PHYSICAL DISTRIBUTION ERA

During the 1960s, all studies related to transportation were related to physical distri-
bution and to a lesser degree on logistics. The National Council of Physical
Distribution Management (NCPDM), USA, representing professional physical distri-
bution managers, was formed in 1963, which changed into CLM in 1985 and again
changed its name to CSCMP in 2004. Today, CSCMP has more than 14,000 mem-
bers. Physical distribution (outbound logistics) and physical supply (inbound logis-
tics) were considered as two distinct functions.
During this decade, physical distribution received a lot of attention in the literature.
And one of the first textbooks titled Physical Distribution Management Logistics
Problems of the Firm, written by Smykay, Bowersox and Mossman (1961), that
focused on physical distribution and logistics was published during this decade). And
this subject got a great deal of attention of the researchers during the 1960s. The first
issue of the Transportation Journal was published in 1961 by the American Society
of Traffic and Transportation, and in 1966, US President Lyndon B. Johnson signed
‘Public Law 89-670’ establishing the Department of Transportation, and Alan S.
Boyd was selected as the National Secretary of Transportation.
During this decade, a great deal of emphasis was laid on the importance of logistics
in economy and business and as a consequence, a lot of academic activities were seen
to have initiated.

3.1.3 THE 1970s’ PHYSICAL SUPPLY AND PHYSICAL

DISTRIBUTION
During the early 1970s, physical supply or materials management, which is basically
inbound logistics, received considerable attention and later in the decade there was a
move to combine physical distribution with physical supply to emphasize on the much
broader concept of logistics management. Also, during that time, when there was an
advancement of basic concepts of logistics, we found that universities and academic
journals and textbooks as well as professional organizations contributed to make that a
productive decade for the development of logistics as a discipline that we know today.
Rails and roads are the most important modes of transport of goods within many
countries as well as in international logistics operation, and their cost, performance
criteria, service quality, effectiveness and efficiency and so on received attention.

3.1.4 THE 1980s’ TRANSPORTATION DEREGULATION AND

PHYSICAL DISTRIBUTION

Self-Learning
By the 1980s, the term physical distribution was phased out and the term logistics was
26 Material emphasized. To cite an example, the authors James C. Johnson and Donald F. Wood
had even changed the title of their textbook from Contemporary Physical Distribution Logistics and
Economy
to Contemporary Physical Distribution and Logistics in 1982.

3.1.5 THE 1990s’ BUSINESS LOGISTICS

During the 1990s, business logistics continued to be an important discipline, and most
of the cost-focused businesses became aware of the opportunities for savings in cost NOTES
through better negotiations with their freight carriers and implementation of the
system approach and total cost concept to management.
During that time, many transport companies also picked up the concept of the
logistics function and tried to promote the idea that they were not simply a transport
company or truck operators and also tried to position themselves in the market as
providers of total logistics solutions. During the same time, the major factors affect-
ing logistics were developments in electronics and communication technology such
as Internet and EDI. Also, there was growth with regard to TPL organizations as well
as strategic alliances and partnerships, and businesses started to view the logistics
function as an integral component of their overall business strategy.
The logistics management as a discipline got importance that a leading Journal of
Supply Chain Management published a lead article titled ‘Thirty-Five Years of The
Journal of Supply Chain Management: Where Have We Been and Where Are We
Going?’ (Carter and Ellram 2003). This article provided a much greater understand-
ing of the evolution of purchasing and supply research during the journal’s existence
from 1965 to 1999. The authors concluded that the legal and regulatory issues were
the major focus during the earlier years between the 1960s and 1970s. The procure-
ment function was considered important during the later 1970s. The areas of impor-
tance during the 1990s included procurement strategy, strategic impact on business
through purchasing as well as role of procurement in new product development,
involvement of purchasing function in supplier or vendor development and strategic
supplier alliances. And it was only after 1994 that the emphasis was on the broader
areas of supply chain issues.

3.2 PROCUREMENT AND OUTSOURCING KEY FOCUS FOR

COST COMPETITIVENESS IN LAST DECADE
We now understand that logistics is part of total SCM. In the era of globalization,
businesses were facing stiff competition from players around the world and in order
to compete in that global environment, businesses were constantly struggling to
improve on competitiveness. One of the key criterion of competitiveness was deliv-
ering goods and services at a lower cost than competition. In the last decade, busi-
nesses have focused on procurement functions to reduce the procurement cost and
significant result was achieved. In the last decade itself, we have seen a shift of
manufacturing operations where it is costing least, and we know that China has
emerged as the choice destination for global manufacturing. Businesses have also
resorted to outsourcing the manufacturing or production function. Most of large
multinational corporations (MNCs) have now stopped manufacturing themselves
and are sourcing from cheaper and smaller contract packers to reduce the cost of
goods and services. And contract packers are identified close to the customers’ clus-
ter to further reduce the distribution, redistribution and customer servicing costs.
Material procurement functions have also now been done through e-auctions to get Self-Learning
Material 27
Advanced most competitive rates. There are numerous developments that have taken place
Supply Chain
Management
using technology to reduce the product cost, and this area seems to be totally
exploited. In procurement functions, bill discounting as well as competitive dis-
counting is now being practised to make the entire process of procurement more
cost-effective and competitive.
NOTES

3.3 INCREMENTAL VALUE DELIVERY THROUGH EFFECTIVE

LOGISTICS MANAGEMENT
Currently, the entire focus of the business community is on logistics which acts as a
critical chain in the entire end-to-end SCM. We will gradually understand the role of
international logistics in terms of its capability to deliver superior value.
And, therefore, let us clarify the core concept of value. It is defined as benefits
divided by cost. The benefits include both tangible and intangible benefits. Intangible
benefits are associated with brand. And cost would mean the cost of acquiring the
product. We can, therefore, see that value can be improved by either increasing the
benefits or decreasing the cost or even both. And effective and efficient logistics man-
agement can impact both numerator and denominator positively and can thereby
improve the value delivery very significantly.
While effective and efficient logistics management can create incremental value in
the business, only creating value is not enough; it is also essential that you capture the
value so created and deliver that for the customers’ benefit. Only then business results
will be forthcoming. In this connection, Kenichi’s strategic 3C’s model (Kenichi
1982) makes abundant sense that the corporation and competitor are both trying to
deliver value to the customers but they themselves only differentiate by costs
(Figure 3.1).

3.3.1 STRATEGIC TRIANGLE OF 3C’s (KENICHI OHMAE 1982)

The practical significance of Strategic Triangle 3C’s is that your ‘corporation’ has to
perform against your ‘competition’ by delivering better and higher value to the ‘cus-
tomer’ based on the differential cost between your product against that of your
competitor.
Peter Drucker (1962) long ago said that logistics is the most neglected area till now.
Businesses are trying to learn to improve that function. A lot of work has been done

Figure 3.1
Corporation and Competition Differentiate Only on Cost

Strategic Triangle of 3C’s (Kenichi Ohmae 1982)

Corporation

Value Cost

Customer Competition
Value
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28 Material
in the recent past in this area and today we understand logistics in a much broader Logistics and
Economy
sense of the term.

3.3.2 THEORETICAL FOUNDATIONS OF

INTERNATIONAL LOGISTICS
Let us now discuss how international logistics has evolved over the years and also NOTES
theoretical foundations of international logistics, which means as to how several fac-
tors lead to internationalization of logistics management.
Four key management functions of logistics management within a company like
any other business are as follows: operational, financial, marketing and informational.
When such systems of interlinked companies are located all over the world and when
one such function is shared, it is called international logistics.
Operational cooperation at international scale often has similar objectives like lean
management or agile management. Using shared services often provides services like
IT services or HR services at a much lower cost and shared risks with consequential
benefits. In such an environment, businesses often apply a similar concept of inven-
tory management such as co-managed inventory (CMI), vendor-managed inventory
(VMI), and collaborative planning, forecasting and replenishment (CPFR). The envi-
ronmental concern and regulatory issues in many countries encourage the concept of
green logistics and reverse logistics.
The other triggering factors for international logistics are use of similar methods of
goods flow management such as JIT and Kanban, implementation of latest transpor-
tation technologies and tracking system, implementation of latest warehouse manage-
ment systems (WMSs) and technologies, automated control and monitoring system,
use of robots and artificial intelligence and so on. Other factors responsible may
include uniform measures and standardization of methods and processes and con-
struction of vast computer networks, implementation of modern communication
system, video conferencing, internet and so on, with an overall objective to improve
the functional efficiency of the entire interlinked organization itself.
The global forces have also compelled businesses to collectively improve things
and operations such as joint cost reduction programme and joint financial control and
management including cost control. Collaborative marketing such as making common
face and image and making joint bid for a business to make it more competitive using
collective strength using integrated IT system that supports and facilitates in pricing
and policy areas as well as through use of Global Data Synchronization Network
(GDSN) and exchange information via Electronic Data Interchange (EDI).

3.4 IMPORTANCE OF LOGISTICS IN ECONOMY

Why is logistics so important for the economy of a country? Globally, logistics is
about 10% of the GDP. In the USA it is about 8%, in India it is 15%, in China it is
about 12%, in Slovenia it is reported as 11% and in Germany it is 9%. What is
important is that logistics cost has a relationship with the economic health of a
nation. The logistics cost also has a direct relationship with the status of the infra-
structure in a country. Because of poor infrastructure and complex tax structure, cost
of logistics in India is still quite high when compared with other developed countries
of the world.
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Material 29
Advanced
Supply Chain bOX 3.1
Management
lpi and trade perforManCe

It has been established that Logistics Performance Index (LPI) is correlated with the
country’s international trade performance. Countries with stronger logistics perfor-
NOTES mance generally tend to see a higher percentage of their overall services export,
although it flattens after achieving a peak level performance. In India, logistics infra-
structure is now developing and is still poor, resulting in high logistics cost in the busi-
ness. Because of poor logistics infrastructure, many large public projects get delayed,
resulting in time and cost overrun. In fact, most of our large projects, as per a Planning
Commission’s report, incurred huge overrun up to three times of the original budgeted
cost of the project and the main reason could be logistics failure. Many hydropower
projects got delayed just because it was found that the road leading to the project site
was not suitable to take the load of a large turbine to be carried to the site for generation
of power which was not originally visualized when the project was planned, and con-
structing yet another road could come under the purview of many agencies including
state governments and other local bodies, which is time consuming to overcome due to
complexity and other associated issues and problems including legal issues that need to
be resolved. The result is delay and huge cost overrun.

There are many firm-level data which prove the point. For example, Shepherd (2011)
has reported that poorer trade facilitation data as measured by longer lead times of
export and import are always associated with higher level of trade-related corruption,
as poor performance always acts as an incentive to flout the rules by paying money.

3.5 PHYSICAL INFRASTRUCTURE AND SCM PERFORMANCE

In some areas, the performance of a supply chain largely depends on the physical
infrastructure in place. A supply chain becomes inefficient if the infrastructure is not
up to the mark or is deficient. For example, for an agricultural or horticultural supply
chain, cold chain storage facilities and infrastructure are the key determinants of the
performance of the agricultural supply chain. Industries which use agricultural or
horticultural products as raw material incur higher cost resulting from poor infrastruc-
ture for managing the inventories from the stage of post harvesting of the crops. These
infrastructures are normally developed either by the publicly funded organizations or
by the government or even by private companies, and the efficiency as well as effec-
tiveness of these infrastructures determine the cost of the input and also the perfor-
mance of the agro-based industries, including food-processing industries. In India, an
agricultural supply chain is still in its infancy, resulting in very high farm-level wast-
ages. We have a scenario where farm gate price, as well as cost of farm labour, is one
of the lowest in the world, but the market price or price at which these agricultural
items are delivered to customers is almost 3.5–4 times the farm gate price (Baisya
2012) as shown in Figure 3.2.
The agricultural supply chain needs the support of the necessary infrastructure for
reducing the wastage. The poor infrastructure results into high logistics cost pushing
the price of agricultural commodities and making them globally uncompetitive. The
agricultural logistics effectiveness is thus a key for growth of agro-based industries in
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30 Material
India. These are as discussed further.
 Figure 3.2 Logistics and
Cost Build-up and Trade Margins for Agro Commodities in India Economy

Present Scenario in Value Chain

Cost Build-up for 1-kg Basket of Fruit

11.6
NOTES
2.5
1.7
4.1
3.3

FARMER TRADER WHOLESALER RETAILER CONSUMER

PRICE
Retail Markups
350
220
160
100

FARM GATE PRICES MILK FISH FRUITS & VEGETABLES

3.5.1 COLD CHAIN FACILITIES

For managing an integrated supply chain in the agriculture sector, cold chain facilities
are essential to control quality, shelf-life and wastage of the primary agricultural pro-
duce. For this purpose, we need the following:
 Industrial cold stores in the production zones
 Refrigerated vehicles for long-distance transport
 Refrigerated rooms in wholesale markets

3.5.2 FIELD HEAT REMOVAL FACILITIES

Upon harvesting, the temperature of the crops should be brought down as soon as
possible before storage in cold chain facilities, which normally helps in extending the
shelf-life of the crop. These facilities are normally not available at the field site.
However, as soon as possible, the harvest should be brought to the storage centres or
warehouses where temperature control facilities can help in extending the storage life
of the product. There are various low-cost technologies available for the storage of
agricultural crop to extend the life and quality of the crop. The key concern of the
storage of grains is to bring down the product temperature upon harvesting by imme-
diately transferring the crop to a controlled temperature warehouse, as the major frac-
tion of the heat load needs to be removed that influences the rate of reactions during
storage.
These facilities either do not exist in India as required or have very limited avail-
ability, resulting in high post-harvest losses and also higher cost of the agricultural
and horticultural crops, which in turn make the agro-based industry non-competitive
in the global market.

3.5.3 WAREHOUSING FACILITIES

To store the grains and other agricultural crops, we also need adequate warehousing
Self-Learning
facilities which should provide ideal storage conditions to maintain the quality of the Material 31
Advanced grain and also temperature and humidity conditions as well as proper pest control and
Supply Chain
Management
other infestation control facilities to ensure that crops are not damaged during
storage.

NOTES CaSeleT
CritiCality of Supply Chain effiCienCy in agriCulture SeCtor:
a CaSe of food Corporation of india (toi report)

In the period 2010–2012, the Food Corporation of India (FCI) has allowed 46,658
tonnes of food grains to rot in 1,889 warehouses across the country. Again, 143.74
tonnes were reported stolen. The Times of India reported (https://times of india.india-
times.com/India/India-waste-21-million-tonnes-of-wheat-every-year-Report/article-
show/17969340.cms) that this much of food grains could have fed 800,000 people from
priority families under the National Food Security Act for an entire year. It could have
fed 10% of Bengaluru’s population or 6% of Mumbai’s citizens, if each person received
5 kg of food grains per month.
Such problems have been plaguing FCI for over decades, and it is trying to reduce
the buffer storage. A study by the London-based Institution of Mechanical Engineers
(IME) on global food wastage found that about 21 million metric tonnes (MMT) of
wheat goes waste in India. The Indian government buys food grains from the farmers
but does not have the space to store it. FCI has insufficient number of grain silos
(modern storage facilities), and grains are stored in outdoor depots across the country.
This makes grains prone to rodents, moisture, birds and pests. Unexpected rainstorms
and bad weather make matters even worse.
FCI had an excess of 15.65 MMT of food grains of the prescribed buffer norms as of
1 April 2016. But according to the norms which were reviewed in January 2015, FCI
should have stocked only 21.04 MMT of food grains as on 1 April but had 36.65 MMT.
This suggested that the problem of storing additional grains would plague FCI next year
(2017) also.
One of the reasons for the wastage of food is that grains are not moved out of the
warehouses in time and distributed. Due to this inefficiency in transporting grains out
of the warehouses and to the ration shops, massive quantities of grains pertaining to
years 2008–2009 were found in the FCI warehouses even in March 2012.
In June 2012, the grain stock with the state agencies had crossed 75 MMT for the
first time in the country’s history, whereas the covered storage area available was only
for 50 MMT, which means that 25 MMT of food grain had to be kept in open storage
with either kachcha or pucca plinths, and thus was exposed to large-scale damage and
pilferage. How much would get damaged and lost is anyone’s guess. The quality of the
covered storage in many places was also questionable. While the record production
would give satisfaction to many, when they will see that a sizeable chunk of this stock
was likely to get wasted as they would get soaked and damaged in rain, it will definitely
be a disappointment for everyone. However, if some measures were taken on war foot-
ing, some quantity of that surplus could possibly be saved. This quantity is estimated to
be about 9–10 MMT out of the surplus of 25 MMT. Still the wastage to the extent of
about 15 MMT is a distinct possibility and that itself is a huge loss. The initiatives that
the government could take were to provide incentive to state governments to lift and
transport the stock to various public distribution system (PDS) stock points so that those
could be sold to the public through PDS.
A question that normally arises is how we got into this situation. Good monsoon in
the earlier four years had resulted in an increase in crop production from 231 MMT in
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32 Material
 Logistics and
2007–2008 to 252 MMT in 2011–2012. But consumption of cereals had not been going Economy
up. The demand of cereals, in fact, had not gone up and on the contrary people were
consuming more of protein and fruits and vegetables and less of cereals. The dietary
habits had changed significantly over the years, thanks to the sustained campaign of
food marketers. The export of wheat was banned in February 2007, and it was opened
again only in September 2011 coupled with good harvest which had led to accumulation NOTES
of stocks, whereas the storage capacity had not increased commensurately. Some state
governments, notably Madhya Pradesh, had given a bonus of `100 per quintal in wheat,
which had thrown private operators out of the market, and government procurement had
increased significantly from less than 2 MMT in 2009–2010 to more than 6 MMT in
2012. Rajasthan had also followed the same example in 2012, and its procurement had
increased by almost 194% in 2012–2013 compared to 2010–2011. Also, states such as
Punjab and Haryana had put much higher statutory levies on wheat and rice at 14.5%
in Punjab and 12.5% in Haryana, which had again pushed private traders out from the
market and significantly pushed the state procurement upwards. It was like the state
takeover of grain trade in these states which had created an unprecedented problem and
scarcity of storage space. Rice could have been exported if we had encouraged export;
possibly excess rice stock could have been taken care of. In 2011–2012, India was
expected to export about 6.5–7 MMT of rice, and the same could have been repeated in
2012–2013, making India the second-largest rice exporter in the world. But wheat
export was not possible as Russian and Ukrainian wheat really pulled down the price of
wheat in global trade. As such, the real challenge was to store the wheat stock. The cost
of carrying the stock which includes storage and interest costs would be about 20%, and
this amount could possibly be given as incentives to state governments to lift the stock
and send that to PDS. The payment of bonus by certain states as well as the demand of
statutory levies by certain states has added to the problem by keeping private players
out of the grain trade. FCI, therefore, is a source of loss of precious food grains for not
having adequate storage facilities for storing grains. The scenario is same even for fruits
and vegetables, and as a result, India, as a country, loses huge amount for not having
logistics infrastructure which is so vital to the economy.
Inadequate storage facilities can result in huge losses to the exchequers. In a country
where there are people who still do not have two square meals a day, losing such mag-
nitude of grain due to shortage of storage space and resulting wastage is criminal. Such
a thing can only happen for not having the right procurement policies and also not
having the required supply chain infrastructure. This is the state of affairs with respect
to grain storage, which can be stored at ambient storage conditions. The situation is still
worse with respect to perishables where refrigerated storage conditions or cool cham-
bers are required to store the surplus. This situation of food grains rotting in FCI’s
warehouses which are ill equipped for proper storage is not something new. A few years
ago, it was reported that the government had approached the Delhi School of Economics
(DSE) to suggest them what to do with the bumper crop for which FCI did not even have
facilities to store, and large-scale wastage and damage were inevitable. Economists
from DSE suggested that surplus grains might be distributed free to the poor. Obviously,
the government did not act on their advice, though giving food free to people who were
starving would have been a good thing, instead of allowing the food grains to rot due to
lack of storage facilities.
The government is granting many incentives for setting up storage facilities including
cold chains. I know couple of entrepreneurs who have set up cold storage in northeast-
ern regions. But they are not very happy with the utilization of space as those cold stor-
ages are running less than 50% of their capacities. I asked them why they had gone for
such projects without making any detailed study of the surplus stock to be stocked in
Self-Learning
the region. The answer given by them was very simple. They said that the government Material 33
Advanced
Supply Chain is giving 50% subsidy on the cost of the project. Giving a blanket subsidy for locating
Management the storage warehouse at any place has led to a very peculiar situation. On the one hand
we have inadequate infrastructure, and on the other, we have unutilized space. This can
happen only when the facilities created are not well planned, following an appropriate
strategy.
NOTES What we need is a comprehensive plan and actions. Sporadic decisions are not going
to be yielding the expected result. The whole infrastructure will have a consequential
impact on the price of the commodities as well as of fruits and vegetables, which in turn
will influence the product prices in the market. And price is a key influencer on demand
and thus the growth of the entire industry. A holistic view is thus necessary to be taken
to build the supply chain infrastructure for the food industry. Only talking about the
need for the supply chain infrastructure is not enough. It needs to be comprehensively
planned and implemented. The criticality of the infrastructure needs to be understood in
view of what the industry needs and how it can be provided. An efficient supply chain
is actually the backbone of the industry. The industry clearly understands the fact that
over about 70% of the cost of product is contributed by the material cost and, therefore,
efficient SCM is the key to providing the competitive edge. And a large part of the
infrastructure has to be provided, by design, by the government, and that is the country’s
role to make the industry category competitive in global trade.
Source: https://timesofindia.indiatimes.com/india/Grains-rotting-with-FCI-could-have-fed–8L-
for-a-year/articleshow/52068428.cms (accessed on 24 March 2019).

UNIT SUMMARY
The unit covers in detail the evolution of logistics now as a full-grown discipline and
also outlines the importance of international logistics and its implication in business.
How robots and artificial intelligence are now being used for managing the logistics
and warehouse functions as well as material-handling functions in modern factories
is discussed briefly.

G lossa r y

 Strategic Triangle of 3C’s: The significance of the Strategic Triangle of 3C’s is

that your ‘corporation’ has to perform against your ‘competition’ by delivering
better and higher value to the ‘customer’ based on the differential cost between
your product against that of your competitor.
 Unified Integrated Function: A unified integrated function facilitates businesses
to derive their competitive advantage through a significant innovation in the entire
SCM functions.
 Performance of a Supply Chain: The performance of a supply chain is led by a
few critical or key drivers, including inventory control and management, transpor-
tation, facilities planning and information flow and accuracy.
 Physical Distribution: Physical distribution means the way a company delivers
its product to the market, which could be the intermediaries, customers or retailers
and end-users, and marketing logistics is basically the physical distribution of
goods.
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34 Material
 Logistics Performance Index (LP1): Logistics Performance Index (LP1) is cor- Logistics and
Economy
related with the country’s international trade performance. Countries with stronger
logistics performance generally tend to see a higher percentage of their overall
services export, although it flattens after achieving a peak level performance.
 Core Concept of Value: The core concept of value is defined as benefits divided
by cost. The benefits include both tangible and intangible benefits. NOTES

Rev i ew Q ue stions

Objective Type Questions

1. During the 1950s, several university programmes were offered in _______________
as major which did not include topics such as logistics, physical distribution,
physical supply and SCM.
a. Transportation
b. Inventory
c. Networking
d. Life cycle support
2. In which year did the National Council of Physical Distribution Management
(NCPDM), USA, representing professional physical distribution managers, was
formed?
a. 1960
b. 1985
c. 1966
d. 1963
3. _______________ and _______________ are the most important modes of
transport of goods within many countries as well as in international logistics
operation, and their cost, performance criteria, service quality, effectiveness and
efficiency and so on received attention
a. Airways and waterways
b. Rails and roads
c. Trucks and ships
d. Cargo and cars
4. In which year did business logistics owners become aware of the opportunities
for savings in cost through better negotiations with their freight carriers and
implementation of the system approach and total cost concept to management?
a. 1990
b. 1982
c. 1980
d. 1965
5. By the 1980s, the term _______________ was phased out and the term logistics
was emphasized.
a. Purchasing function
b. Physical distribution
c. Strategic supplier
d. Vendor development
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Material 35
Advanced 6. Which functions are performed through e-auctions to get the most competitive
Supply Chain
Management
rates?
a. Logistics management functions
b. Material procurement functions
c. Production function
NOTES d. Distribution function
7. Which benefits are associated with the brand as per the core concept of value?
a. Tangible
b. Customer
c. Strategic
d. Intangible
8. The practical significance of _______________ is that your ‘corporation’ has to
perform against your ‘competition’ by delivering better and higher value to the
‘customer’ based on the differential cost between your product against that of
your competitor.
a. Strategic Triangle of 3C’s
b. Competitiveness
c. International Logistics
d. Logistics Performance Index (LP1)
9. The environmental concern and regulatory issues in many countries encourage
the concept of _______________ logistics and _______________ logistics.
a. Defence and medical
b. Inbound and production
c. Green and reverse
d. Procurement and internal
10. Industries which use agricultural or horticultural products as raw material incur
_______________ cost resulting from poor infrastructure for managing the
inventories from the stage of post-harvesting of the crops.
a. Lower
b. Higher
c. Minimal
d. Competitive
Answers: 1. a; 2. d; 3. b; 4. a; 5. b; 6. b; 7. d; 8. a; 9. c; 10. b

Descriptive Questions

1. Discuss the key role of SCM in delivering the business performance. Discuss the
criticality of the supply chain efficiency in India’s agriculture sector.
2. Briefly describe the various triggering factors for international logistics.
3. Explain with example the role of physical infrastructure in the performance of a
supply chain.
4. Why is it essential to possess a cold chain facility to manage an integrated supply
chain in the agricultural sector?
5. Briefly explain the key criteria for cost competitiveness in the last decade.

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36 Material
 Logistics and
Re fe re n c e s Economy

Carter, C., and L. Ellram. 2003. ‘Thirty-Five Years of the Journal of Supply Chain
Management: Where Have We Been and Where Are We Going?’ Journal of Supply Chain
Management 39 (1): 27–39.
Drucker, Peter F. 1962. ‘The Economy’s Dark Continent’. Fortune (April): 103, 265, 268 and NOTES
270.
Houston, James A. 1996. The Sinews of War: Army Logistics, 1775–1953. Washington, DC:
Government Printing Office.

B i b l i ogr a phy

Lambert, Douglas M. 2004. ‘The Eight Essential Supply Chain Management Processes’.
Supply Chain Management Review 8 (6, September): 18–26.
Lee, Hau L. 2002. ‘Aligning Supply Chain Strategies with Product Uncertainties’. California
Management Review 44 (3, Spring): 105–119.
Marien, Edward J. 2000. ‘The Four Supply Chain Enablers.’ Supply Chain Management
Review 2 (3, March– April): 60–68.
Slone, Reuben E. 2004. ‘Leading Supply Chain Turnaround’. Harvard Business Review
(October): 114–121.

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Material 37
 4
UNIT

NOTES

Sourcing Management

LEARNING OBJECTIVES
LO 1 Understand global sourcing challenges and strategies
LO 2 Link global sourcing and supply chain sustainability
LO 3 Identify global sourcing models and frameworks
LO 4 Realize global trends in sourcing
LO 5 Identify CSFs in global sourcing and future factories
LO 6 Understand factors influencing outsourcing

4.1 OUTSOURCING AS COMPETITIVE ADVANTAGE

4.1.1 SOURCING CHALLENGES AND STRATEGIES
Companies can source their products and services from their company-owned manu-
facturing plants. They also have the option to get the product manufactured by third
parties through contract manufacturing route. Which option to be accepted would be
governed by various factors. It can also be a mixed sourcing in the sense that it will
be sourced from contract manufacturers partly and a part of the requirement is taken
care of by the company-owned manufacturing plant.
In the 1980s and 1990s, companies were manufacturing the products themselves.
When competitive pressure increased, they started outsourcing manufacturing to
reduce cost as major sourcing strategies. We have seen that many corporations are
closing down their production plants or even giving those plants on lease to contract
manufacturers and focusing on the core functions of the business such as sales and
marketing. Managing a product or manufacturing facilities does not only involve lot
of fixed capital but also requires working capital to run the day-to-day production
operations. Additionally, there are numerous issues and challenges in terms of man-
aging industrial workers. These challenges can be overcome going through contract
manufacturing route. In some cases, workers are even seen as highly volatile, creating
industrial relation issues to be tackled by the management. If there are proprietary
technology to be safeguarded, it is better to have your own manufacturing plant. For
capital goods and automobiles, most of the organizations and players opt for their
own manufacturing plants. But if the same product has to be manufactured for global
supply, companies will have the assembly line owned by themselves and rest of the
components are sourced from where it is cheap and best in quality. For FMCG, it is
now widely outsourced through contract manufacturing route. Global supply chain is
Self-Learning highly complex and competitive, and components need to be sourced from global
38 Material
suppliers for specific markets.
 Contract manufacturers play a vital role in the following: Sourcing
Management
• Reducing cost of production
• Reducing cost of distribution and logistics
• Providing much needed flexibility in business
• Improving response time for variable customer needs
• Allowing bigger players to focus on their core competency NOTES
• Providing competitive advantage to the business
Small but efficient contract manufacturers can be cost-effective for large compa-
nies and can provide support to the flexible market demand in dynamic business
environment. Small is therefore beautiful. Small but efficient contract manufacturers
also play a vital role in logistics management.

4.1.2 FUTURE FACTORIES

There are two distinct possibilities that can emerge for global manufacturing and
production operations. The future factories could be:
• Smaller
• More flexible
• Closer to the customers
• More cost-effective
• Use latest technology
• Be competitive
Or will it be large global focused factories? It is economy of scale against flexibil-
ity and productivity. Or both have to co-exist? Global players are getting product and
services manufactured in low cost countries such as China and India. But there are
other logistics cost that can force the global players to shift the production locations
to even European locations. East European countries are seen to be cost-effective and
closer to the market and therefore can emerge as preferred location for global produc-
tion and supply requirement. The logistics cost of taking products and merchandises
to European markets from China will be high and the inventory holding will also be
high, which makes a valid case for production closer to the customer locations with
more flexibility and higher productivity.

4.1.3 GLOBAL SOURCING CHALLENGE AND SUSTAINABILITY

OF SUPPLY CHAIN
In the past, there have been considerable concerns among academics, businesses and
government and also among non-governmental organizations about the so-called
global sourcing and logistics ‘carbon footprint’ of supply chain. Although only
recently this debate has really taken off, and there is a growing realization that the
days are not too far that organizations and even individuals will probably have to pay
for the carbon impact of the activities of the organizations. The penalty can be in the
form of additional taxes, levies or even capping of allowable emissions under carbon
trading regime. This incremental cost may raise questions regarding the commercial
viability of the operations of certain organizations.
From the organization’s perspective, it is not just the carbon impact of in-company
activities but also the total carbon effect of end-to-end supply chain that needs to be
clearly understood. With the current trend of global sourcing the implications of total Self-Learning
carbon impact can be very significant. Understand the total carbon impact for any Material 39
Advanced product clearly will require conducting the ‘Life Cycle Analysis’ of the emissions at
Supply Chain
Management
each stage from cradle to grave, in the sense that what is the total environmental cost
starting from sourcing raw material through manufacturing and selling and distribu-
tion and final disposal.
The decisions that businesses are now taking with regard to manufacturing and
NOTES sourcing locations have a bearing on the impact of carbon footprint in the context of
their supply chain performance from the point of view of environmental concerns.
The sourcing of products from low-cost countries in the last 10 years or so has trans-
formed the shape of many supply chains through the creation of longer and more
transport-intensive pipelines. As a result, in some cases, it can so happen that the true
cost of global sourcing might be much more than what companies realize as their
cost. It is not simply the logistics cost that the companies have to bear but also, in the
broader context, the external cost in the form of often-enlarged carbon footprint. In
view of the fact that transport represents a large proportion of the worldwide green-
house gas emissions, which is about 20% and still growing, it is inevitable that supply
chains will increasingly be under scrutiny in the future which would otherwise mean
that organizations will be in search for the ways to make their supply chains less
transport intensive.

4.2 MAKE-BUY DECISION, SOURCING STRATEGY

4.2.1 MODELS AND FRAMEWORKS FOR SOURCING
Meixell and Gargeya did a comprehensive literature review of global supply chain
design models and summarized that models developed prior to 1990 focus on the
problems of location of the plants. But models developed during 1990–1995 continue
to put emphasis on plant location issues and also pay attention to transportation issues
as well as infrastructure, lead time, currency fluctuation and selection criteria for
vendors. Whereas models developed during 1996–2000 consider price as a variable
and reconsider the plant location issue, but the models developed since 2000 took
global sourcing as part of the organization’s sourcing strategy and is linked with mar-
keting and concluded that global supply chain models need to address the supply
chain design problems from the consideration of both internal manufacturing and
external supplier locations. These can be summarized as follows:
• Global supply chain models have to be more comprehensive in design, with
emphasis on multiple production and distribution tiers in the supply chain.
• The performance measurement in global supply chain models has to be more
broadened in definition to address alternative objectives.
• And finally more numbers of the industries in various categories need to be inves-
tigated in the context of global supply design.
These authors have concluded that most of the models have aimed to solve a dif-
ficult problem related to globalization. However, only a few of them were able to
address the practical issues of global supply chain in more comprehensive manner.
Jin (2004) attempted to find an ideal point to minimize cost/agility trade-off, meaning
a mix of domestic and global sourcing strategy. Vestring, Rouse and Reinert (2005)
proposed the spreading of foreign operation and outsourcing relationships over a
broad, well-balanced mix of regions and countries to reduce the risk and increase the
Self-Learning potential reward.
40 Material
 These models have identified comprehensive lists of factors to consider when the Sourcing
Management
companies opt for global sourcing of goods and services. In risk management litera-
ture, some more comprehensive models dealing with the sourcing process can also be
found. However, Cousins, Lamming and Bowen (2004) argue that the literature is still
weak when it comes to environmental supply chain initiatives and practices where
risk identification needs to be more comprehensive to manage the risk arising out of NOTES
environmental issues.

4.2.2 CHARACTERISTICS OF SUCCESSFUL GLOBAL SOURCING

Based on a survey among companies using global sourcing, Trent and Monczka
(2003) identify a number of CSFs, which are summarized below:
• Personnel with required knowledge, skills and abilities
• Availability of required information
• Awareness of potential global suppliers
• Time for personnel to develop global strategies
• Availability of suppliers with global capabilities/suppliers interested in global
contracts
• Ability to identify common requirements across buying units
• Operations and manufacturing support/internal customer buy-in
• Direct site visits to suppliers
Based on the same survey presented in Trent and Monczka (2003), and additional
case studies on 15 companies, Trent and Monczka (2005) list the following sets of
characteristics for companies with successful global sourcing:
• Commitment at an executive level to global sourcing
• Rigorous and well-defined processes
• Availability of needed resources
• Integration through IT
• Supportive organizational design
• Structured approaches to communication

4.2.3 GLOBAL SOURCING AND LOGISTICS

The potential savings that can be accrued through global sourcing strategies will
depend on various factors as discussed by Fagan (1991) which includes commitment
of top management and total cost, not simply the direct cost. To derive the total
advantage, the relationships with foreign suppliers should be developed on the basis
of trust and respect. Monitoring and controlling through technology should also be
used in addition to the ways of handling business risks. A contingency plan should be
developed.

4.2.4 GLOBAL SOURCING TRENDS

Global sourcing is being practised in international trade for centuries, although the
types of sourcing that we practice now are qualitatively different from the century-old
practices for both technical and social reasons. Earlier, trade used to be mostly carried
out on raw materials or final finished products and seldom in intermediate products
such as components and services. Besides, unlike today, buyers–suppliers coordina-
tion and co-operations were not crucial, and all communications were limited to order Self-Learning
Material 41
Advanced processing. In addition, we have plethora of rules, regulations, control and risks asso-
Supply Chain
Management
ciated with the global trade.
A comprehensive global sourcing strategy will refer to the issues related to the
following:
• Logistics to identify the production units and locations which will serve the par-
NOTES ticular identified market(s) and how input material and components will be sup-
plied for manufacturing.
• The coordination and interfaces among manufacturing, R&D and marketing on a
global basis.
The primary objective of global sourcing for the firm is to exploit both its own and
suppliers’ competitive advantages as well as comparative locational advantages of
various countries in global competition. From the contractual point of view, the global
sourcing of intermediate products of components and services takes place in two
ways; these are as follows:
• From the parent or their foreign subsidiaries on intra ‘firm basis’, that is,
in-sourcing.
• From independent suppliers on ‘contractual’ basis, that is, outsourcing.
Similarly, from a locational point of view, multinational firms can procure goods
and services either (a) domestically (i.e., onshoring) or (b) from abroad (i.e.,
offshoring).
The new waves of global sourcing were observed during last few decades. The first
one was in mid-1980s, which was focused primarily on global sourcing of manufac-
turing activities, and research work during that era was also focused on manufactur-
ing firms. Kotabe and Omura (1989) did some study on global sourcing. During that
period, large manufacturing firms set up their operation globally and started to use
suppliers from many countries to exploit opportunities for best-in-class sourcing
(Quinn and Hilmer 1994). As a result, supply chain became more complex and
global, with manufacturing firms sourcing from many suppliers in many countries for
input materials, intermediates and also final product. We have discussed these taking
cases earlier.
We have witnessed in early 1990s the second wave of global sourcing when firms
started outsourcing IT services and companies abandoned in-house development of a
new IS, and we have seen the emergence of specialist providers such as EDS and
Accenture. Global sourcing is labour-intensive and involves standardized program-
ming that can easily be sourced from countries like India. The rising commercial
applications for a wide range of firm activities helped the introduction of ERP sys-
tems. All organizations were seen implementing ERP to optimize on the suppliers and
vendors to make business operations more competitive.
The third wave was characterized by the offshoring in the recent years since 2000.
During this stage, we have witnessed the rise in business process outsourcing that
extends beyond IT services and covers a wide range of other services relating to
HRM, finance and account, sales and after sales assistance provided by call centres.
In this regard, India is still a primary source country for producing the business pro-
cess software by the companies like Infosys, TCS and Wipro and many more.
However, competition is also now seen from other countries for such services.
In this regard, it has been observed by many that the foreign business process sup-
Self-Learning pliers may be moving up the knowledge chain more rapidly than expected by the
42 Material
 Table 4.1 Sourcing
Recent Waves in Global Sourcing Management

First Wave Second Wave Third Wave

Time Period (Since 1980s) (Since Early 1990s) (Since Early 2000s)
Type of activity Manufacturing Information Business processes NOTES
Technology
Destinations China, Central and India, Ireland and India, Pakistan,
Eastern Europe, others South Africa and
Mexico and others others
Type of firms Manufacturing Manufacturing, Financial services,
banks and others services more
generally
Primary motives Reduction in Obtaining enough Reduction in labour
labour costs skilled programmers costs and round-the-
and cost reduction clock service
provision
Source: Kotabe and Murray (2018).

sourcing firms. Such knowledge transfer could in the long run undermine sourcing
firms’ ability to differentiate themselves from their foreign suppliers, and these con-
cerns have previously been raised by many authors (Bettis, Bradley, and Hamel 1992;
Kotabe 1998; Markides and Berg 1988). The technology is therefore redefining the
business processes which is increasingly being witnessed now in Industry 4.0 envi-
ronment. The new technologies such as AI, block chain technology, robotics and digi-
tization are redefining the supply chain and logistics management processes. The
experience so far on these recent waves of global sourcing is summarized in Table 4.1.

4.2.5 GLOBAL SOURCING AND BUSINESS PERFORMANCE

One of the key drivers of global sourcing is to improve the business performance by
achieving cost-effectiveness (Trent and Monczka 2003). Companies located in OECD
countries often find that the labour costs are too high when compared to the value that
they add to the products and services they produce. Developing countries like India
lag behind in terms of productivity, but a part of the loss from lower productivity is
compensated by lower hourly labour costs. The labour-intensive activities like gar-
ment manufacturing in India and China could be more attractive and cost competitive.
In some cases like bicycle components, the production cost differences are so large
that it is not economically viable to use domestic sourcing, especially when the labour
costs represent a substantial part of overall production costs.
On the other extreme, some global sourcing is driven by knowledge concerns. For
example, inputs like say aircraft parts and technical expertise or some critical technol-
ogy and knowledge may be available in OECD countries, and global sourcing in this
case is not a choice but an imperative. When some raw materials are just not available
in domestically, they have to be sourced from the producing countries. Also, some-
times intermediate products are sourced from locations near the source of raw
materials.
Another factor in favour of global sourcing is that it is more cost effective to pro-
duce the products closer to customer markets, which enables easier access to Self-Learning
Material 43
Advanced customers. This also has many logistics advantages. For example, Japanese auto
Supply Chain
Management manufacturers have succeeded in replicating supply chains in North America and
Europe to operate closer to these markets, which has enabled them to improve their
product offerings and enhanced customer service. Global sourcing also helps in terms
of pooling the demand from the various regions and thus achieving maximum scale
NOTES and bargaining power through single sourcing from a foreign supplier.
The major problems and constraints in global sourcing arise out of cultural barriers
between various countries. These barriers include their value system coupled with the
issues related to language that can create communication problems and misunder-
standings which can even lead to quality problems in addition to those caused by
differences in technical standards or expectations. The other concerns related to
global sourcing is long lead time and supply chain uncertainty (Swamidas and Kotabe
1993). Finally, foreign suppliers may be able to integrate forward into the buyer’s
market by inventing around patents or ignoring them altogether.
Regarding long-term sustainability of firm’s core competencies, there are two
opposing views on long-term implications of international sourcing. One school of
thought argues that many successful companies have developed a dynamic organiza-
tional network through increasing cross-border joint ventures, subcontracting and
licensing activities (Miles and Snow 1986). This flexible network system, also known
as supply chain alliances, allows each participant to pursue its particular competence
with each network participant complementing rather than competing against the other
participants for the common goals. Such alliances are often formed by competing
companies in pursuit of complementary abilities (e.g., new technologies or skills)
from one another, thus helping the sourcing firm to acquire a competitive advantage
by sourcing major components that involve high asset specificity from its alliance
partners (Murray 2001).
The other school of thought argues that while a firm may gain short-term advan-
tages, there could also be negative long-term consequences. As the firm becomes
more reliant on its independent suppliers, it may not be able to keep abreast of con-
stantly evolving design and engineering technologies without engaging in those
developmental activities (Kotabe 1998). Consequently, the firm encounters the inher-
ent difficulty in sustaining its long-term competitive advantages. In other words, over
time, a firm’s technical expertise and capability surplus vis-à-vis its foreign suppliers
may diminish to the point that its value added is limited, and it may become more like
a trading company. An example of this is the development of Emerson Electronics
which turned into a trading company from an electronics producer and then into noth-
ing more than a brand that changed owners several times (see Kotabe, Mol, and
Ketkar 2008).
The advantages and disadvantages of global sourcing is summarized in Table 4.2.

4.2.6 DEGREE OF OUTSOURCING AND FIRM’S PERFORMANCE

There is a relationship between the degree of outsourcing and firm’s performance,
and therefore a balanced approach can deliver better performance. Kotabe and Mol
(2004, 2006) examined the relationship between the degree of a firm’s outsourcing
across all activities and its performance. Their underlying argument is that firms that
outsource all of their activities run into a multitude of problems such as a lack of
innovation and bargaining power and an inability to be distinct in the eyes of the
Self-Learning customer.
44 Material
 Table 4.2 Sourcing
Advantages and Disadvantages of Global Sourcing Management

Possible Advantages Possible Disadvantages

Increases size of potential supply base Having to deal with foreign institutions
such as legal differences NOTES
Lower production costs, especially for Having to deal with a foreign culture
labour intensive production and services which could affect communication
Increased technical expertise, especially for Having to deal with a foreign language
high-tech products from specialized which could affect communication
locations
More flexibility to switch between supply Need to pay import duties where
sources, whether internal or external applicable
Source closer to sales markets, experience Transportation costs and supply chain
in sourcing may be translated into sales uncertainty
Achieve scale economies through use of Forward integration by foreign suppli-
one global supply source ers, patent infractions possible
Source of intermediate products closer to Quality problems
source of raw materials
Raw materials only available from foreign Can affect employee commitment and
sources public relations
Focus on core competencies Dependence on independent suppliers,
and decreased ability to keep abreast of
emerging technical requirements
Source: Jean (2008, 266).

If, however, firms decide only to insource, they are likely to fail to use the powerful
incentives supplied by markets and will tend to become bureaucratic and inefficient.
Thus, outsourcing some parts but not all activities is the best solution. There is always
an optimal degree of outsourcing. If some activities and functions in a business are
outsourced, there is always a positive impact on the performance of the business.
Hence, there is a negative curvilinear (inverted U-shaped) relationship between the
degree of outsourcing and firm performance. Likewise, Leiblein, Reuer and Dalsace
(2002) empirically found that deviations from the optimal form of sourcing, as dic-
tated by transactional attributes associated with various contracting hazards, may
have a negative effect on the performance of the business.
Williamson (1985) distinguished between production and transaction costs. The
former refers to the costs of producing a good or service while transaction costs rep-
resent all the costs incurred, as the product moves from one supply chain partner to
the next. On one hand, when firms use offshoring by procuring from foreign suppli-
ers, it may help reduce their production costs, while in some instances, a local sup-
plier’s production costs may be lower than those of foreign suppliers. This is often the
exception rather than the rule. Transaction costs, on the other hand, tend to be higher
for offshoring as there are many types of institutional, cultural and language-related
barriers that must be overcome. Rangan (2000) discussed this situation in terms of the
costs of ‘search and evaluation’. Searching for supply sources abroad, whether inter-
nal or external, is somewhat more expensive than searching for local supply sources. Self-Learning
Evaluating those foreign supply sources is much more expensive because the Material 45
Advanced evaluation costs are strongly related to the familiarity that decision-makers have with
Supply Chain
Management
the other party. Since firms are likely to be less familiar with foreign supply sources
and decision-makers may not be able to draw on their networks in helping them
evaluate these sources, this situation induces substantial evaluation costs. Rangan
(2000) used this argument to explain why buying firms are much more likely to
NOTES choose a domestic than a foreign supplier even when the physical distance between
the buyer and each of these suppliers is the same. There should be a ‘balancing’ act
between production and transaction costs, and firms need to find the proper balance
between domestic and foreign sources if they wish to be located on the top of the
curve and deliver highest possible performance.
We argue that offshoring is a ‘balancing’ act between production and transaction
costs. Firms need to find the proper balance between domestic and foreign supply
sources (i.e., using onshoring and offshoring), if they wish to locate on the top of
the curve and obtain the highest possible performance. They can achieve this goal
by using foreign sources for part but not all of their sourcing. Sourcing everything
from abroad gives poor performance results because the disadvantages of offshor-
ing, like the hollowing-out argument, become too large. Focusing all efforts on
onshoring, however, is a serious form of myopia with equally disastrous effects for
firm performance, primarily because the firm is not capitalizing on important
opportunities to improve competitiveness.
Some activities are best outsourced globally while others ought to be integrated
(from a performance perspective). Optimal performance is reached when all activities
are correctly outsourced and/or integrated. Deviations from the optimum are costly
and in such a way that the farther from the optimum, the more costly these deviations
become.

4.2.7 KEY ISSUES IN GLOBAL SOURCING

Despite its inherent advantages, many firms have been seen to be highly dissatisfied
with their performance. This is because firms have failed in terms of evaluating the
global sourcing strategy—performance relationship in proper perspective—and have
taken over-generalized view of the sourcing benefits. The environment is a key con-
structs for understanding the organization’s behaviour and performance. It has been
seen that ‘the appropriateness of different strategies depends on the competitive set-
tings of businesses’ (Prescott 1986, 765). For manufacturing, Murray, Kotabe and
Wildt (1995) concluded that the financial performance advantage of global insourcing
over global outsourcing of non-standardized components improved with increased
product innovations, process innovations and asset specificity.

4.2.8 TECHNOLOGICAL PERFORMANCE AND SOURCING

DECISIONS
Using foreign firms manufacturing in China as subjects of the study, Murray, Kotabe
and Zhou (2005) found that global outsourcing of major components (in the form of
strategic alliance-based sourcing) did not have an effect on market performance.
Instead, product innovativeness and technological uncertainty moderated such a rela-
tionship. Specifically, at low levels of product innovativeness/technological uncer-
tainty, the use of strategic alliance sourcing of major components by the sourcing firm
is positively related to market performance. However, at higher levels of product
Self-Learning
46 Material
innovativeness/technological uncertainty, the sourcing–performance relationships Sourcing
Management
become negative.
Similarly, findings by Leiblein et al. (2002) in the manufacturing context concur
with the above conclusions. In refuting the popular arguments that insourcing or out-
sourcing will lead to superior technological performance, they found that sourcing
strategy per se did not significantly affect technological performance. Instead, the NOTES
sourcing strategy–performance relationship was driven by factors underlying sourc-
ing strategy choice. They further cautioned against the universalistic normative impli-
cations for firms deciding on whether or not to insource or outsource their value chain
activities and stressed the value of contingency-based theoretical approaches.

4.3 RISK MANAGEMENT IN OUTSOURCING

4.3.1 FACTORS INFLUENCING OUTSOURCING
The global sourcing of services did not take place until the second wave of global
sourcing so that the extant literature on global sourcing of services is limited when
compared to that in global sourcing of manufactured goods. Consistent with previous
studies of the global sourcing of manufactured goods, transaction cost analysis,
involving asset specificity, transaction frequency and business uncertainty, offers a
useful framework in studying the sourcing of services. Asset specificity refers to
investments made in specific (non-marketable) resources. When these investments are
made, a supplier and a buyer are ‘locked into’ the transaction because the assets are
specialized to that transaction and have limited or no value outside that transaction
(Williamson 1985). Murray and Kotabe (1999) found that, similar to components and
finished goods sourcing, supplementary services were sourced globally either by
insourcing or outsourcing. In addition, the relationship between asset specificity and
insourcing of supplementary services was moderated by the level of inseparability
and transaction frequency. Their empirical findings showed that firms tended to rely
more on global insourcing for inseparable supplementary services with high asset
specificity. Furthermore, the higher the asset specificity and the lower the transaction
frequency of the supplementary services, the higher these firms would use global
insourcing. Finally, insourcing and offshoring of supplementary services were nega-
tively related to a service’s market performance.
There is a range of contingency factors such as capital intensity, degree of service
inseparability, market uncertainty, transaction frequency at the transaction, firm and
context levels. These factors determine how much global outsourcing ought to take
place from a performance perspective. These contingency factors also explain how
much global outsourcing actually takes place in practice. If a company matches an
outsourcing decision to the relevant contingency factors, the resulting strategic fit
helps achieve superior performance. Table 4.3 summarizes the contingency factors in
global sourcing decisions.
It is important to note that these perspectives operate at three different levels: the
transaction, the firm and the context. Taken together, they represent almost all the
contingency factors that the academic literature has produced to date. Which of these
perspectives matters most is, to an extent, determined by the empirical context in
which outsourcing is investigated? Some of the perspectives have been more promi-
nent than others in recent academic studies of outsourcing. Transaction-cost
Self-Learning
Material 47
Advanced Table 4.3
Supply Chain perSpeCtiveS on global outSourCing
Management

Firm Level Context Level Transaction Level

Past Resource-based view Social networks
NOTES Present Costly contracting Industrial organiza- Transaction-cost
Microeconomics Core tion Institutional economics Agency
competences voids
Future Real options Relations
and learning
Source: Masaaki et al. (2008).

economics and the resource-based view may reflect their actual importance in prac-
tice, the scholarly knowledge production process or other factors. However, all of
these perspectives have some bearing on global outsourcing. Global sourcing deci-
sions are based on many complex and dynamic issues and require frequent review
from cost, availability, flexibility and performance. In addition, there are numerous
industry-specific issues. In this unit, two such industry sectors are covered from the
perspective of global sourcing head.

CaSe STuDY a
induStry SeCtor—retail

Global Sourcing Strategy: Perspective of Global Sourcing Director

Company A (a leading retail group in the UK) believes that they are a driver in leading
change; their global sourcing strategy reflects this, which is largely driven by its cus-
tomers. Their sourcing portfolio is changing rapidly because the global marketplace has
evolved so much over the last few years. However, in some product areas, they are now
sourcing more from Europe rather than the Far East because of emerging markets and
changes in consumer behaviour. On the other hand, it is exploring new sources in the
Far East, that is, Vietnam, Madagascar, Shanghai and so on, where capabilities are
stronger. The sourcing strategy is determined by the product category, for example,
quick response items are sourced primarily from Turkey, but new opportunities are aris-
ing from Bulgaria and Romania as they enter the EU. For other categories, 95% items
are sourced from China. In case of some categories, it is planned to source them from
Britain to promote local businesses.
Positive factors
Spreading risks:
• Range of factories that can produce the same products at varying lead times and
costs
• Increased number of options to source from
• Direct sourcing
Negative factors
• Do not have a panoramic view of the supply base, and have not always found the
right supplier
• Large number of suppliers, hence, supply base is being consolidated
Self-Learning • Maintaining control of factories
48 Material
 Sourcing
• Communication with suppliers, lack of visibility: ‘If you get it wrong direct sourcing Management
could go very wrong’
Main mode of transport
• Mainly sea freight, depending where products are procured from
• Quick turnaround products are moved by road NOTES
• Airfreight is used for strategic products only, and this is only 0.1% of everything
moved
Key priorities of global sourcing strategy
• Reliability of product
• Shipment on time
• Right product
• Delivered on time
Supply chain risk management tools and techniques
• Risk management is an integral part of the global sourcing decision-making.
• Supply management programme is a standard toolkit and enables decision-makers
to identify how to best deal with the capabilities from the supply base and how to
document performance.
• KPIs enable Company A to analyse key suppliers’ performance. The risk review is
completed every 3–6 months and supplier scorecards are developed to assess the
performance.
Major risks identified in global sourcing decisions
• Factories are ethical and not breaking civil law
• Communication with global supply base: Do they truly understand company phi-
losophy and product requirements?
• Missed opportunities that competitors can exploit
• Lack of visibility
Environment and infrastructure considerations
• Aiming to reduce CO2 emissions by 60% by 2010
• Sponsoring sourcing locally and closer, that is, European Initiatives such as reducing
the price of energy bulbs
• Not enough choice for transportation; UK rail network is poor and unreliable

CaSe STuDY b
induStry SeCtor—fMCg food and drink

Global Sourcing Strategy: Perspective of Global Head of Procurement

Company B is again a major FMCG food and drink player based out of the UK. The
input is given by their global sourcing director. The sourcing strategy is based on bal-
ancing cost and customer service. The sourcing strategy is determined by the type of
products: bulky products (e.g., detergents, paper, etc.) are sourced locally to reduce
logistics costs; small high-value products are produced in a few factories and then dis-
tributed around the world.
To make the sourcing decisions, the company looks at sales projections and service
level requirements from different regions, then they look at local supply availability and
import tariffs and duties, and finally at the capital costs involved. Find a balance Self-Learning
between cost and service levels. Material 49
Advanced
Supply Chain
• A total of 90% products come from the EU. In the future, Eastern Europe is more
Management likely to develop.
• Contracts and supplier relationships vary in length. Tend to use short-term contracts
(and relationships) for commodities and long-term for strategic supplies.
Positives factors
NOTES Optimizing total delivered cost (logistics and manufacturing)
Negative factors
Difficult trade-off between cost and service
Main mode of transport
• Roadways is the dominant source of transport (95%). Railways takes the rest.
• Railways is not used for delivering to customer because of long lead times and poor
reliability.
Key priorities
• Customer service
• Cost
• Quality
Supply chain risk management tools and techniques
• There is a health and safety organization focused on looking at risks at the plants.
• There is a business continuity plan for every plant, which the plant engineer is
responsible for. This includes risks at suppliers.
• Business continuity planning and health and safety analysis are used to assess risks.
• Generally use dual sourcing or multiple sourcing to mitigate supply risks. For most
of the products, they have several plants so that they can source from another one in
case of a disruption.
Major risk identified in global sourcing decisions
• Since most of the products come from EU, the company finds that there is not much
risk of global sourcing.
Environment and infrastructure considerations
• Environmental issues are in line with the company’s economic necessities, and the
company aims to minimize transport as much as possible.
• The company looks for a high vehicle utilization (over 90%). The network is
designed to minimize transport and achieve high utilization.
• Life-cycle analysis is conducted when designing new products. They try to design
new products to have the minimum environmental impact.
• The company primarily use road, and road congestion is a big issue. Rail is not
always appropriate, firstly because rail is not as flexible as road, but also because it
is not as reliable and not always more cost effective. All of our plants have rail con-
nections, but they are not fully utilized.

Case Questions
1. How and why key priorities of global sourcing criteria in two different industry sec-
tors differ?
2. Discuss the positives and negatives of the global sourcing strategy.
3. What are the key motivation factors for global sourcing?
4. Discuss the risks involved in global sourcing as perceived by Company A and
Company B.
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50 Material Source: Christopher et al. (2007).
 Sourcing
UNIT SUMMARY Management

Key advantages and disadvantages of outsourcing and also the stages of evolution of
global outsourcing have been discussed in brief. Global sourcing strategy and factors
influencing global sourcing are discussed in detail in this unit along with two cases
from retail and FMCG sectors to show what are the key factors these businesses con- NOTES
sider in order to take global sourcing decisions. We have also discussed the recent
trends in outsourcing.

G l os s a r y

 Supply chain alliances – A flexible network system that allows each participant
to pursue its particular competence with each network participant complementing
rather than competing against the other participants for the common goals.
 Life-Cycle Analysis – Also referred to as fuel cycle or well-to-wheel analysis, is
used to assess the overall greenhouse gas (GHG) impacts of a fuel, including each
stage of its production and use.
 Global supply chain models – these models need to address the supply chain
design problems from the consideration of both internal manufacturing and exter-
nal supplier locations. These also should be comprehensive in design, with empha-
sis on multiple production and distribution tiers in the supply chain.
 Critical success factors of global sourcing - These are - Personnel with required
knowledge, skills and abilities, Availability of required information, Awareness of
potential global suppliers, Time for personnel to develop global strategies,
Availability of suppliers with global capabilities/suppliers interested in global
contracts, Ability to identify common requirements across buying units, Operations
and manufacturing support/internal customer buy-in, Direct site visits to
suppliers.
 Asset Specificity - This refers to investments made in specific (non-marketable)
resources. When these investments are made, a supplier and a buyer are ‘locked
into’ the transaction because the assets are specialized to that transaction and have
limited or no value outside that transaction.

Rev i ew Que stions

Objective Type Questions

1. Which wave of global sourcing was witnessed in the early 1990s, when firms
started outsourcing IT services and companies abandoned in-house development
of a new IS?
a. First wave
b. Second wave
c. Third wave
d. Trending wave
2. One of the key drivers of global sourcing is to improve the _______________ by
achieving cost-effectiveness.
a. Market performance Self-Learning
b. Standard performance Material 51
Advanced c. Product performance
Supply Chain
Management
d. Business performance
3. Small but efficient _______________ manufacturers can be cost-effective for
large companies and can provide support to the flexible market demand in a
dynamic business environment.
NOTES a. Non-contract
b. Retail
c. Contract
d. Wholesale
4. The third wave of global sourcing trends was characterized by the offshoring in
recent years since _______________.
a. 1980
b. 1989
c. 2000
d. 1990
5. Which among the following is not a set of characteristics for companies with
successful global sourcing (as set forth by Trent and Monczka following a survey
conducted in 2003)?
a. Direct site visits to suppliers
b. Commitment at an executive level to global sourcing
c. Rigorous and well-defined processes
d. Integration through IT
6. The potential savings that can be accrued through global sourcing strategies will
depend on various factors which includes
a. commitment of top management
b. total cost
c. direct cost
d. All of the above
7. The new technologies such as AI, block chain technology, robotics and digitiza-
tion are _____________ the supply chain and logistics management processes.
a. Redefining
b. Restricting
c. Refining
d. Recycling
8. Contingency factors such as ______________, _______________,
_______________, transaction frequency at the transaction, firm and context
levels determine how much global outsourcing ought to take place from a perfor-
mance perspective.
1. capital intensity 2. degree of service inseparability 3. market uncertainty
4. Direct cost
a. Numbers 1, 2, 3 and 4
b. Numbers 1, 2 and 3
c. Numbers 1, 3 and 4
d. Numbers 2, 3 and 4

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52 Material
 9. At ____________ levels of product innovativeness/technological uncertainty, the Sourcing
Management
use of strategic alliance sourcing of major components by the sourcing firm is
____________ related to market performance.
a. low, positively
b. high, positively
c. high, negatively NOTES
d. moderate, not at all
10. Transaction costs tend to be ____________ for offshoring as there are many
types of institutional, cultural and language-related barriers that must be
overcome.
a. same
b. Lower
c. Higher
d. Nil
Answers: 1. b; 2. d; 3. c; 4. c; 5. a; 6. d; 7. a; 8. b; 9. a; 10. c

Descriptive Questions

1. Discuss the recent trends in global outsourcing and the factors behind that.
2. Discuss the key drivers of outsourcing. What are the advantages and disadvantages
of global outsourcing?
3. Reflect on the effect of technological innovation on sourcing decisions. Give
examples from South Asia to elucidate your answer.
4. Mention the vital roles played by contract manufacturers in a global supply chain.
5. What are the issues mentioned by a comprehensive global sourcing strategy?

Re fe re n c e s

Bettis, R., S. Bradley, and G. Hamel. 1992. ‘Outsourcing and Industrial Decline’. Academy
of Management Executive 6 (1): 7–16.
Byoungho Jin. 2004. ‘Achieving an Optimal Global versus Domestic Sourcing Balance
Under Demand Uncertainty’. International Journal of Operation & Production
Management 24 (12): 1292–1305.
Christopher, M., Fu Jia, Omera Khan, Charlos Mena, and A. Palmer. 2007. Global Sourcing
Logistics. Technical report, Cranfield University. https://www.researchgate.net/
publication/308402707
Cousins, P. D., R. C. Lamming, and F. Bowen. 2004. ‘The Role of Risk in Environment-
related Suppliers Initiatives’. International Journal of Operation & Production
Management 24 (6): 554–565.
Fagan, M. L. 1991. ‘A Guide to Global Sourcing’. The Journal of Business Strategy 12 (2):
21.
Jean, B. 2008. Advantages and Disadvantages of Global Sourcing (14 edition). Bingley:
Emerald Group publishing.
Kotabe, M. 1998. ‘Efficiency vs Effectiveness Orientation of Global Sourcing Strategy: A
Comparison of US and Japanese Multinational Companies’. Academy of Management
Executive 12 (4): 107–119.

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Advanced Kotabe, M., and G. S. Omura. 1989. ‘Sourcing Strategies of European and Japanese
Supply Chain Multinationals: A Comparison’. Journal of International Business Studies 20 (1): 113–
Management
130.
Kotabe, M., and J. Y. Murray. 2018. ‘Global Sourcing Strategy: An Evolution in Global
Production and Sourcing Rationalization’. In Advances in Global Marketing, edited by
L. Leonidou, C. Katsikeas, S. Samiee, and B. Aykol, 365–384. Cham, Switzerland: Springer.
NOTES
Kotabe, M., and M. J. Mol. 2004. ‘A New Perspective on Outsourcing and the Performance
of the Firm. In Global Corporate Evolution: Looking Inward or Looking Outward, edited
by M. Trick, 331–340. Pittsburgh, PA: Carnegie Mellon University Press.
———. 2006. ‘International Sourcing: Redressing the Balance. In Handbook of Global
Supply Chain Management, edited by J. T. Mentzer, M. M. Myers, and T. P. Stank, 393–
408. London: SAGE Publication.
Kotabe, M., M. J. Mol, and S. Ketkar. 2008. ‘An Evolutionary Stage Model of Outsourcing
and Competence Destruction: A Comparison of the Consumer Electronics Industry’.
Management International Review 48 (1): 65–93.
Leiblein, M. J., J. J. Reuer, and F. Dalsace. 2002. ‘Do Make or Buy Decisions Matter? The
influence of Organizational Governance on Technological Performance’. Strategic
Management Journal 23 (9): 817–833.
Markides, C. C., and N. Berg. 1988. ‘Manufacturing Offshore is Bad Business’. Harvard
Business Review 66 (5): 113–120.
Kotabe, Masaaki, Janet Y Murray and Michael J. Mol. 2008. ‘Global Sourcing Strategy and
Performance: A “Fit” Versus “Balance” perspective’. Research in Global Strategic
Management 14 (5, June): 259–277.
Miles, R. E., and C. C. Snow. 1986. ‘Organizations: New Concepts for New Firms’.
California Management Review 28 (Spring): 62–73.
Murray, J. Y. 2001. ‘Strategic Alliance-Based Global Sourcing Strategy for Competitive
Advantage: A Conceptual Framework and Research Propositions’. Journal of International
Marketing 9 (4): 30–58.
Murray, J. Y., M. Kotabe, and A. R. Wildt. 1995. ‘Strategic and Financial Implications of
Global Sourcing Strategy: A Contingency Analysis. Journal of International Business
Studies 26 (1): 181–202.
Murray, J. Y., M. Kotabe, and J. N. Zhou. 2005. ‘Strategic Alliance-based Sourcing and
Market Performance: Evidence from Foreign Firms Operating in China’. Journal of
International Business Studies 36 (2): 187–208.
Prescott, J. E. 1986. ‘Environments as Moderators of the Relationship Between Strategy and
Performance. Academy of Management Journal 29 (2): 329–346.
Quinn, J. B., and F. G. Hilmer. 1994. ‘Strategic Sourcing’. Sloan Management Review 35 (4):
43–55.
Rangan, S. 2000. ‘The Problem of Search and Deliberation in International Exchange: Micro
Foundations to Some Macro Patterns’. Journal of International Business Studies 31 (2):
205–222.
Swamidas, P. M., and M. Kotabe. 1993. ‘Component Sourcing Strategies of Multinational:
An Empirical Study of European and Japanese Multinationals’. Journal of International
Business Studies 24 (1): 81–99.
Trent, R. J., and R. M. Monczka. 2003. ‘International Purchasing and Global Sourcing: What
are the Differences?’ Journal of Supply Chain Management 39 (4): 26–37.
———. 2005. ‘Achieving Excellence in Global Sourcing’. MIT Sloan Management Review
47 (1): 24.
Vestring, T., T. Rouse, and M. Reinert. 2005. ‘Hedge Your Off Shorting Bets’. MIT Sloan
Management Review 46 (3): 27–29.
Williamson, O. E. 1985. The Economic Institutions of Capitalism. New York: Free Press.
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54 Material
 5
UNIT

NOTES
Demand Estimation
in a Supply Chain

LEARNING OBJECTIVES
LO 1 Understand the role and importance of forecasting in managing
a business as well as a supply chain
LO 2 Identify the characteristics of forecasts and factors influencing
forecasts
LO 3 Identify the types and levels of forecasts
LO 4 Get acquainted with various qualitative and quantitative
methods of forecasting
LO 5 Analyse demand forecasts and estimate forecasting errors

5.1 INTRODUCTION: ESTIMATING CUSTOMER DEMAND

Businesses are created for serving and satisfying customer demands, and only through
satisfying the customer demands and expectations organizations generate revenue
from sales and make profit for the shareholders, and that is the sole purpose of the
existence of a corporation. SCM functions and processes are designed to effectively
service the demand. However, the task of creation of demand rests with the sales and
marketing teams of the business, whereas meeting and satisfying the projected
demand is the job of the SCM team. Marketers are relentlessly trying and working
hard to increase the demand and delivering the projected growth of the business, and
they are always under pressure to deliver growth often more than realistically possible
and they often try to push stocks in the market. The SCM team has to meet that ever-
changing demand in a dynamic market and ensure customer satisfaction. Management
gives a higher target to the sales and marketing teams of the business. However,
growth can come only from increased customer demand, and as same customer is
unlikely to consume more, new customers need to be created. New customers can
come either from deeper penetration in the existing market of the business or through
the geographical expansion. The sales team will try to exploit both avenues. Either
way, the task of SCM changes in terms of complexity of demand management. These
two very important functions of the business, therefore, have to work in harmony and
in tandem with each other and support each other, which makes a valid case for dis-
cussing the integrated SCM.
The market is highly dynamic as well as competitive; satisfying a customer, there-
fore, in this complex and challenging environment, is all the more difficult. But sat-
isfying the customer requirement is always a sacrosanct task of the business. A
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customer has many choices; businesses are dependent on the customers. The pressure Material 55
Advanced on the SCM team in that environment is therefore immense. We will separately dis-
Supply Chain
Management
cuss in this unit how a corporation’s sales team can make SCM teams’ life all the
more difficult. To deliver business performance to be effective is more important, but
to be effective one also needs to be efficient. The efficiency and effectiveness of the
SCM function is therefore of paramount importance to ensure the delivery of bud-
NOTES geted cost and profit of the business. Although customer demand has been created by
the marketers, the demand has to be managed effectively by managing the inventory
optimally. Large part of the profit of the business is linked with the efficiency of the
supply chain, which is again a function of developing a realistic demand forecast in
its totality, considering the seasonal fluctuation in demand, if any, as well as due to
dynamic nature of the business environment beyond the control of the business and
also considering the fact that a stock-out situation has to be avoided for the reason
that in a fiercely competitive marketplace, a customer has many choices and alterna-
tives to choose from. Losing a loyal customer will have negative impact on business.
As inventory has to be optimized to effectively manage the demand, two very impor-
tant aspects of the business are also being discussed together in this unit.

5.2 THE STRATEGIC ROLE OF FORECASTING IN SUPPLY

CHAIN MANAGEMENT
5.2.1 UNREALISTIC DEMAND CAN MAKE SCM INEFFICIENT
The business planning exercise in any organization starts with the sales numbers pro-
jected in a given year by the company, involving its sales, marketing and planning
teams, following the view, goal and objective of the top management. The top man-
agement expresses the desire to achieve a certain goal and market share, and the sales
management team has to deliver that. Involving these three teams to prepare the cor-
poration’s annual budget is therefore a very vital and important task of the business
every year. Once sales numbers are finalized and approved, the planning function
works with the SCM team to ensure that the production planning is robust enough to
produce and deliver those quantities as per the sales requirement. SCM, in fact, has
to be dependent on the accuracy of the demand forecast emanated from the sales
department and approved by the top management, who in turn approves other
resources, including financial and manpower, for the business. Achieving the sales
target including in terms of its periodicity at stock-keeping unit (SKU) level is a key
imperative to the business. But it is not an easy task to project demand to that level of
accuracy, and there will always be a mismatch between the actual demand of the
market and the budgeted sales forecast. Thus, a constant adjustment in terms of pro-
duction planning and procurement planning would be necessary to align the supply
chain with the change in demand resulting from changed business environment. This
often results in a conflict between the sales and SCM teams. The sales team is also
responsible for achieving top-line value performance month wise, and in order to do
that, they often demand more quantity of items to be sold for which the company may
not have the capacity to produce to pass the blame to the SCM team for lack of supply
for their underperformance. The sales team sometimes even do it deliberately, know-
ing well that the SCM team cannot deliver the incremental demand over and above
the budgeted numbers. We have, therefore, observed that in a business, there is a
constant rift between the sales and SCM teams. This conflict is mostly unavoidable,
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56 Material
but the more accurate the demand forecast will be, the less the conflict and friction
will be between the two departments which are very vital for organizational perfor- Demand Estimation
in a Supply Chain
mance. Sales is the most difficult function in the business, but everything else and all
other functions in business depend on the sales. Everything else becomes meaningless
if the sales function does not perform. The sales team is therefore always under pressure
to perform, and often demand is to outperform. Sometimes the top management even
pushes the sales team to deliver something unrealistic, creating additional pressure in NOTES
the system which can even escalate the conflict.
It makes good sense that SCM is geared to deliver realistic customer demand and
not pseudo demand, and to achieve that, a demand forecast must consider that oppor-
tunities for growth are fully captured so that there is no loss of sales for non-supply,
and at the same time the demand should not be over-projected resulting in stock built-
up, blocking working capital and high debtors. A demand forecast is therefore a very
important task and an annual exercise reviewed periodically for any correction for the
business to be undertaken with all seriousness and rigours to ensure minimal forecast-
ing error. A great deal of past experience in the business helps in this task.

5.2.2 FORECASTING IN SUPPLY CHAIN

For effective SCM, businesses need a reasonably reliable forecast to start with, as a
demand forecast is the basis of all supply chain planning exercises. The businesses
which have product lines with a regular pattern of established demand are much
easier to manage in terms of designing, planning and implementing their end-to-end
supply chain. For such businesses, there is a pull of brands and product lines already
exist. But when products need to be pushed in the market to achieve targeted sales
volume, forecasts may not be that much accurate. The pull process is triggered from
the customer demand, whereas the push process is triggered by the managers of the
company based on what they want to achieve, which may not have any real-term
relationship with customer demand or requirement. Businesses which have multiple
locations have to generate forecasts from each location and then collate the same for
company-wide forecasts. Also, businesses which operate franchise models need to
generate collaborative forecasts based on an established process.
For large MNCs, forecasts have to be globally aggregated, collecting local country-
specific forecasts. The accuracy of the forecasts is a key concern for the both SCM
performance and overall business performance. Even resource allocation has a bear-
ing on the quality and accuracy of the forecasts. Forecasting, therefore, is a very
important function of the business done annually, although in reality, many or even
large numbers of businesses do it just as a ritual. Such businesses just keep a growth
factor in mind every year and build on the actual sales performance of the previous
year. In general and broadly, two approaches are followed for demand forecasting,
which can be classified as bottom-up approach and top-down approach. In bottom-up
approach, a corporation attempts to generate the sales forecast, taking the projections
from the front-line salespersons who really know what can be realistically delivered
given a certain support and competitive scenario. To help the front-line salespersons
to generate the primary numbers of forecast for the coming financial year, corpora-
tions normally prepare and share a document where business portfolio analysis, com-
petition analysis, business environment analysis as well as company’s focus on
certain categories of products including any plan for new products to be introduced
during the year, as well as marketing and promotional support are available so that
businesses can deliver the expected level of performance. This document normally Self-Learning
outlines the expectation of the shareholders of the company. The bottom-up approach Material 57
Advanced generates some sales numbers which will invariably fall short of meeting manage-
Supply Chain
Management
ment’s expectation. A process then starts which is in fact an iterative process of dis-
cussion to find out ways and means to come closer to the management’s expectations,
and finally democratically agreed figures are canned as the year’s sales budget, prod-
uct group wise, broken down to individual brands as well as SKUs. Then calendariza-
NOTES tion is done taking into account any seasonal fluctuations and then progressed to get
sales projection even salesman wise in details.

Reckitt Benckiser, an Anglo-Dutch MNC in FMCG sector, starts the annual budgetary
exercise from late August for the next financial year. There will be a global business
review document covering the company’s own business performance review and futur-
istic perspective and forecasts, including competitive analysis globally as well as for
regions. This document becomes the basis of country-specific initiatives for generating
the sales projection in each country, which creates yet another document discussing
similar parameters for the country itself and gives indications of future growth avenues
where the company intends to focus, which include the existing business and brands
giving reasons why. This document is discussed in the country’s management commit-
tee and approved for sharing with the sales and marketing teams and then percolated
down to front-line salesmen. The bottom-up figures are generated and collated from all
regions and then checked if those figures are matching or coming closer to the top man-
agement’s perspective to translate shareholders’ expectation both locally and if it also
integrates and delivers the expectation of the global headquarters in London. Once
approved, this becomes the finally canned budget which is a sacrosanct document for
the business unit to deliver. This entire process is spearheaded by the corporate planning
and business development department at both at headquarters and local country levels.
The final budget document gets the approval of the topmost authority like the board of
directors in their meeting. This entire process normally takes about three months to
complete. And this approved document finally becomes the starting or basis of SCM
planning and implementation. Large companies will invariably have their ERP software
like SAP which supports the monthly production and procurement and dispatch plan-
ning. It is needless to say that in spite of following such an elaborate and rigorous
system of budgeting with milestone and involvement of everyone in the organization,
occasional trouble related to short supply, out of stock or even excess stock and over-
trading leading to higher debtors could not be avoided. It can therefore be understood
that SCM is a very complex and dynamic document requiring frequent review and
course correction. And the reasons are many. Some of the MNCs even prepare what they
call ‘Goal Book’, which contains the budget document for five years; the first year is
firm and next four years are tentative, and this is in fact a rolling forecast which is
reviewed, revised and updated every year. No business accepts the growth rate lower
than the industry category growth rate because if the growth rate of a product category
is projected or forecasted lower than that, it would mean that the business is losing
market share in that product category itself, which consciously no business can accept
as it will trigger the downward journey for that brand and product category. The growth
forecast is thus normally higher than the category growth rate but how much is deter-
mined by all the factors influencing the performance of the product in the marketplace,
including competitive actions. While doing the budgetary exercise, businesses also give
more emphasis on volume forecast and not value forecast, and value is normally derived
and also impacted by any inflationary factor resulting in price increase. The real mea-
sure of growth is thus volume growth.
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58 Material
Characteristics of Forecasts Demand Estimation
in a Supply Chain
In spite of best intention, forecasts can be in general inaccurate and only degree of
inaccuracy might differ from company to company or even product to product in a
company. For an established product, a forecast will be more accurate but a new prod-
uct forecast will be inaccurate and to manage that supply chain, constant adjustments
and flexibility will be required. Forecasts can also be inaccurate for unrealistic growth NOTES
ambition of the business. For this reason, any forecast must have both expected value
of demand and a measure of the forecast error or demand uncertainty. Businesses do
not normally keep any record for discrepancies of real-term demand against the pro-
jected or forecasted demand, nor do they normally try to analyse the reasons for such
errors simply for the fact that reasons of error in different times would be different
and also the focus for the business is always to deliver budgeted profit and that focus
many a time forces businesses to either overtrade on certain brands and SKUs or
create artificial demand on item(s) to get to the desired profit figures. These actions
from the sales and marketing sides of the business are always supported by the man-
agement obviously at the cost of disorientation of all plans of the SCM team. But this
is the reality of the uncertain and dynamic nature of the business environment and
competitive actions which make all forecasts very difficult to implement by the SCM
team. In spite of all the efforts to make the sales and SCM teams to work in tandem
and harmony, the problems and conflicts still surface. Take the case of two businesses
in a similar product category, both expecting a healthy growth rate and delivering
similar numbers in terms of sales volume, but a forecast error can make the SCM
plans different for these two companies. The lesser the forecast error, the better it is
to manage.
Demand forecasts are normally made for short term, medium term as well as long
term. A short-term forecast, say for a month, will be more realistic and deliverable
than a medium-term one, say for a quarter, or a long-term one, say for a year. As such,
long-term forecasts are less reliable and hence have greater errors than the short-term
forecasts. Long-term forecasts have larger standard deviation of error in relation to
mean than short-term forecasts.
P&G, a couple of years ago, implemented a project called ‘Project Golden Eye’,
applying the Pareto principle that 20% distributors generate 80% of the sales
volume. They decided to focus on and deal with these 20% distributors, and remain-
ing 80% distributors were put under the 20% which had reduced the complexity of
the business hugely. P&G was able to get rid of large numbers of sales force and
create a lean organization which was more efficient. By reducing the numbers of
the direct distributors to be serviced, a lot of cost saving was made possible. And
by implementing an ERP software package such as SAP, P&G was able to directly
link the small numbers of distributors and replenish the stock sold in the earlier
period. The frequency of servicing the distributors and stockists also improved,
resulting in lower stockholding in the trade, and hence lower working capital and
higher profit. Customer service levels also increased significantly.
However, aggregate forecasts are normally more accurate than disaggregate fore-
casts for the reason that they have smaller standard deviation of error in relation to
the mean. It is not difficult to forecast the GDP of a country with less than 2–3%
error. But it is really difficult to forecast the sales revenue of a company in the same
country with that much of accuracy. It is in fact even more difficult to forecast the
sales volume of a product with the same level of accuracy which arises due to the Self-Learning
Material 59
Advanced degree of aggregation. The greater the aggregation, the greater will be the level of
Supply Chain
Management
accuracy of the forecasts.

Factors Influencing Forecast

The forecast for a company’s product lines depends on many internal as well as exter-
NOTES nal factors. Internal factors largely include the company’s advertisement and promo-
tional plan, product’s past demand in the same market, whether any new product
variant in different price segment is being introduced or not, competitive action in the
same market, economic growth, product category growth rate and so on. If the prod-
uct has long performance history and has a dominant position in the marketplace,
having strong brand, projection or forecasting becomes easier and that is more reli-
able also. The problem starts when the forecast has to be made for other products
including new products. Depending on the amount of valid information and data
available in a given situation, forecast methodology is decided. When heavy promo-
tion is resorted to for an established and strong brand to raise short-term demand, then
customers might even decide to stock the product when such promotional or price
discounting is announced and then buy less in subsequent months when the price is
brought back to normal. It happens when there is a steady demand for the product and
artificial demand is created by price discount and/or the promotion has resulted in
excess stocking but not consumption by the customers. But for a lesser known brand
or a product, such schemes are directed to generate trials and create new sets of cus-
tomers. A forecast in such a scenario will impact the supply chain plan as well as
performance.

Why Forecast?
The entire ERP commences when the sales forecasting exercise is completed and
approved. The forecast of the annual budgetary revenue is therefore very important
for all businesses, irrespective of their types, nature and character. The bigger the
company, more complex the forecast processes would be. Many decisions including
recruitment or staffing, organization structure and design are linked with the business
forecast as well brand marketing plan to achieve the forecasted volume.
Inaccurate demand predictions can have disastrous consequences on business per-
formance and profitability.

For example, Hewlett Packard was unable to predict the proper product mix for its cus-
tomers for two quarters in a row many years ago (Hograth 1975). The demand for low-
end printers and workstations was high, while the demand for commercial printers was
low. As a result, earnings were 14% less than the prediction or forecast given by the
analysts. The stock market also reacted sharply by knocking the company’s stock price
down by 5% in one day. This demonstrates the importance of being able to measure the
size of the market opportunities as well as kind of opportunities following a reliable
forecasting method that suits better for a company’s product category in a given market.

Market Potential
Market potential is actually the maximum demand over a given period of time based
on the number of potential users and their purchase rate. In fact, actual industry sales
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60 Material
are normally less than the market potential. Some potential always remains
unexploited for various reasons. However, a business must know about the total Demand Estimation
in a Supply Chain
potential to identify as well as understand the gap in the market. A company’s sales
projection can only be a part or portion of the total industry demand for the particular
product category. It is the maximum the company can sell at a given period of time
which again will depend on many other factors including the state of the product life
cycle the product currently is in and also on the competitive actions and company’s NOTES
own sales marketing plans and promotions.

5.3 COMPONENTS OF FORECASTING DEMAND

5.3.1 TYPES OF FORECASTS
The entire end-to-end supply chain planning actually stems from the sales forecast,
and the main purpose of planning is to allocate company resources in such a manner
that it achieves the targeted and budgeted sales figures. A company can forecast the
sales by forecasting market sales which we can call as market forecasting and then
making a prudent assumption of the percentage of that market which the company
can expect to get in a given environment, and that share of the total market can
become the company’s sales forecast. However, this estimate will be at an aggregated
level when business planners will be interested in forecasts at product level and
even product SKU level. There are numerous techniques that can be used for prepar-
ing sales forecasts. Let us look at the three basic levels of short-, medium- and long-
term forecasts and their practical utility.
1. Short-term forecasts: These short-term forecasts are usually for periods up to
three months. The general sales trend is not important here, and these forecasts are
normally used for tactical purposes such as production planning to take into con-
sideration any fluctuation in sale.
2. Medium-term forecasts: Medium-term forecasts are usually for a period of one
year. This is thus the annual budget of the business and has significance for the plan-
ners. This is, in fact, the starting POS forecast, and if sales forecast is incorrect,
the entire budget is incorrect. If the forecast is overoptimistic, then the company
will have unsold stock in inventory which has to be funded from working capital.
Or it will be lying as unsold stock at the channel partners’ warehouses, resulting
in higher debtors or even expiry of the stock resulting in write-offs, reprocessing,
and so on, impacting the bottom-line performance of the company. If the forecast
is pessimistic and is lower than the market opportunity for the company, there
will be loss of opportunity, resulting in underperformance and loss of market
share to competition which will have longer-term implication to the business.
Establishing the required process and rigours within the business to develop
annual sales budget realistically is the key to deliver the business for realizing its
potential.
3. Long-term forecasts: These are usually for periods of three years and more but
not more than five years as beyond five years it is not realistically possibly to
forecast considering the expected changes in business environment including tech-
nology and so on. In industries, three years is generally considered as long term,
but in steel industry or even energy sector, 10 years’ horizon is generally consid-
ered as long term. Long-term forecasts are worked out from macroeconomic and
environmental factors such as government policy and economic trends. These are Self-Learning
Material 61
Advanced normally referred to and discussed by corporate finance and board of directors for
Supply Chain
Management
long-term capital investment or for allocation of other resources, as such decisions
might even involve the construction of new factories or new technology and/or
upgradation of existing facilities.
In addition, other functions in a business can be directly and indirectly affected
NOTES in their planning considerations as a result of the sales forecast, and such functions
include the following:
 The production and operations department needs to know the sales forecasts so
that they can arrange production planning. There needs to be close coordination
and liaison between production and sales to determine customer priorities in
the short term. Production also needs to know long-term forecasts so that capi-
tal plant investment decisions can be made in order to meet anticipated sales in
future.
 The purchase department normally gets its cues to purchase from production via
purchase requisitions or bill of materials. For long-delivery items or for strate-
gic sourcing of key inputs, it is useful that the purchase department gets some
advance intimation or even warning for such a situation might be arising so that
they can better plan their purchases in terms of pricing and delivery schedule
requirement.
 The human resource department is also interested to know the sales forecast
from the manpower planning point of view.
 The finance and costing department needs to know the medium-term sales
forecast for their budgeting purpose. Longer-term forecasts are required by
financial accountants and top management for critical decisions related to
capacity building and resource planning.
 The R&D department also needs to know the forecasts, although their require-
ment is more for technological point of view. They are particularly interested
to know the expected life of the existing products and how technology is
impacting their costs, performance and so on in relation to competition to plan
and direct their R&D activities. They also use the market research reports to
design and develop the future products for the company suited to the changing
marketplace. Such a view reflects a marketing-oriented approach to customer
requirements.
 All sales promotion and marketing activities are aligned with the sales forecast
to ensure that the budgeted numbers are achieved and therefore the sales fore-
cast forms the critical input for the business to align all activities to happen in
an integrated manner.

5.3.2 LEVELS OF FORECASTING

Forecasts can be prepared at different levels of aggregation, starting from global level
to national and ultimately to SKUs, month wise as well as weekly, salesperson terri-
tory wise, taking into account the seasonal impact on sales performance and consumer
demand which can really help the corporation in designing and planning the supply
chain to satisfy the projected demand of the customers. For example, an organized
retail store buyer can take an easy approach to ask the store manager of each store to
give a forecast for his/her store and then the buyer can add up the individual store-level
forecasts to get the total ordering quantity for the company. It is based on the local
Self-Learning market intelligence that the store has, but store managers are forecasting well ahead
62 Material
of the actual demands, and therefore might even go wrong and forecasts might be Demand Estimation
in a Supply Chain
inaccurate. In this case, it is better to forecast the demand at the aggregate level for
ordering with the supplier, particularly for long-delivery or long-lead time items, and
then ask the store managers to forecast when they want the stock to be delivered to
their stores nearing the season when local market intelligence of the store manage-
ment team will be more closer to the reality and hence more accurate. NOTES

5.4 TIME SERIES METHODS

5.4.1 SEASONAL VARIATIONS
In large companies, a forecast is always an annual exercise when the annual sales
budget is approved and canned for planning purpose from which monthly budgets are
also derived and the supply chain function is planned to meet and service those tar-
gets. As the environment is dynamic, a constant or at least periodic review is gener-
ally done. The seasonal impact is normally taken into consideration when monthly
budgetary figures are drawn up for production planning and control taking more
realistic views of numerous issues including seasonality. If seasonality is not consid-
ered, a good forecast may ultimately turn out to be poor because of the failure to
consider seasonal factors. When historical sales figures are taken to forecast, the
accuracy of the forecast improves if suitable adjustments are done to eliminate the
seasonal effects (Table 5.1). It should be noted that seasonal adjustments are widely
used in business, and they reduce forecasting errors.

Some of the businesses are highly seasonal. For example, carbonated soft beverages
such as Pepsi and Coke are dependent on the impact and duration of summer season,
and in India more particularly the sales in northern territories, sales can be highly
skewed in summer months to the extent that about 45–50% of the year’s sales can
happen in a few summer months. The impact of the summer season is there in every
region, but it may not be that much skewed as in North India. For Mumbai or western
India, the impact could be around 30–35%, and in eastern India, it could be about
35–40%. Similarly, for a product like ice cream, sales in winter months in northern
regions come down drastically. Seasonal factors, therefore, have to be invariably con-
sidered for certain categories of products for determining the sales forecast. Besides, in
a country like India, the festival season of October–November, and in Western coun-
tries, the Christmas and holiday season, when all brands and businesses offer heavy
discounts to clear the inventory, automatically put pressure on the SCM function to meet
the unrealistic demand. For many businesses, last three months of sales could be as high
as 35–40% of the sales of the year. During these festival periods, there will be overtrad-
ing for artificial demand when consumers get their annual bonus which will invariably
make the beginning of the new year to start with a low volume of business. All these
types of fluctuations have to be managed optimally by effective SCM practices.

5.4.2 DEMAND FORECASTING

Broadly, we can divide the methods of forecasting into the following:
• Qualitative or subjective or judgemental
• Extrapolation
• Quantitative Self-Learning
Material 63
Advanced Table 5.1
Supply Chain Determining a Seasonal Index from Historical Sales Data
Management

Year Four-Year
Quarter 1 2 3 4 Quarterly Average Seasonal Index
NOTES 1 45 52 53 71 55.25 0.72a
2 72 92 85 95 86.00 1.13
3 86 85 90 96 89.25 1.17
4 77 58 87 76 74.50 0.98
Four-Year Sales = 1250/16 = 76.25 (average quarterly sales)
Note: a Seasonal index = Average sales for four quarter/Average quarterly sales = 55.25/76.25 = 0.72.

Table 5.2
Different Methods for Forecasting

Type of Methods Actual Methods

Qualitative/Subjective/Judgemental • Sales force composite
• Jury of executive opinion
• Intention to buy survey
• Industry survey
Extrapolation • Moving average
• Per cent rate of change
• Leading indicators
• Unit rate of change
• Exponential smoothening
• Line extension
Quantitative • Simple regression
• Multiple regression
• Econometric models

Table 5.2 summarizes the possible methods that can be applied under each broad
classification of forecasting methods. We will be discussing some of these methods
with case studies and examples in this unit for better clarity. The industry uses these
methods to various degrees. The sales force composite, which is in fact a bottom-up
approach, is quite commonly used by the industry and more particularly by the
FMCG industry for their reliability and confidence.
A major component of demand management is forecasting the amount of product
that will be purchased by consumers or end users. In an integrated supply chain, all
other demand will be derived from the primary demand. The key objective is to antici-
pate and respond to the primary demand as it occurs in the marketplace. Primary,
secondary and tertiary sales (consumer offtake) need to be balanced with excess stock
at each level linked to the service frequency of the business to avoid disharmony of
having excess stock resulting in overtrading. As integrated supply chain decisions are
normally derived from primary sales numbers, primary sales projection must have
some good correlation with real-term consumer offtake for which marketers must
have a sense of reading the pulse of the ultimate consumers.
Self-Learning In a typical channel distribution of FMCG, the actual consumer demand needs to
64 Material be managed by managing channel partners. The manufacturers need to satisfy the
demand reflected by consumer offtake by ensuring adequate stock level at whole- Demand Estimation
in a Supply Chain
salers’, distributors’ as well as retailers’ end, which calls for managing adequate
inventory levels at all points. Businesses normally subscribe to the retail survey
(audit) data that are routinely done by market research organizations like AC
Nielsen. Referring to these database will provide insight into trade stocks as well
as consumer offtake in different customer segments as well as geographical territo- NOTES
ries to understand the reality of product movement in each customer segment even
at the SKU level. Subscribing to these database helps in forecasting and planning
and also taking corrective action wherever required, and therefore serves as a useful
tool in terms of managing the demand and inventory in the system.
There are three basic types of forecasting models, namely (a) judgemental, (b)
time series analysis and (c) cause and effect relationship. Qualitative forecasting is
also sometimes referred to as judgemental forecasting which involves using judge-
ment and intuition and is preferred in situations where there are limited or no histori-
cal data available such as with a new product introduction. Judgemental forecasting
techniques include surveys and analogue techniques, among others. Judgemental
techniques are subjective as they are dependent more on opinion and less on math-
ematics in their formulation, and as such they are often used in conjunction with
other quantitative techniques.

Consumer–User Survey Method

The method essentially involves asking customers about their likely purchase inten-
tion during the forecasting period. For an industrial product where numbers of cus-
tomers are not too many, such research are often carried out by involving the
salespersons responsible for servicing those customers. But if there is competition in
the product category that your business represents, then it may not be easy to ascertain
what percentage of that incremental demand of that customer will really be sourced or
purchased from you. Yet another problem is that the salespersons as well as the cus-
tomers tend to become optimistic when forecasting the future requirement, and that
might lead to a higher degree of inaccuracy in the resulting forecast. Clearly, this way
only a small sample size can be covered, and therefore, it has limited utility for fore-
casting for FMCG where customers are wide and large in numbers and spread all
over.

Panel of Expert Opinion

This is also sometimes referred to as the jury method where specialists or experts on
the product categories who have knowledge of the product and industry are asked to
forecast. Most often, these experts come from outside the company and can also
include management consultants who operate within the particular industry.
Sometimes external experts may also include the customers who are in a position to
advise from a point of view of the buying company and as such the panel of experts
may finally consist of both internal and external experts. These experts come with a
prepared forecast and defend their projection in the committee in presence of other
members on which the discussion follows. The individual projections may subse-
quently be altered based on the opinion and discussion that follow in the committee
and in the end, if disagreement still follows, a mathematical aggregation may even be
necessary to arrive at a compromised forecast. This is in fact a ‘top-down’ exercise
for an industry category from which a company can derive its own share from the Self-Learning
Material 65
overall growth of the industry in that category. This method also has its limitation in
Advanced the sense that even if the company is in a position to estimate a demand from the total
Supply Chain
Management
projected industry demand volume, getting into an individual product and its variants
level in different sales territory is still not easy and involves some elements of guess
from the past experience. This method is thus again subjective and inaccurate (Kahn
1988).
NOTES
Sales Force Composite
This method involves salespersons making a product-by-product forecast for their
particular sales territory. The sum total of all salespersons’ forecasts covering the
entire sales territory would normally be equal to the company’s sales forecast taking
a bottom-up approach and sometimes it is also considered as a ‘grass-roots’ approach.
This approach can sometimes be realistic as salespersons involved in generating or
forecasting the numbers in their own territory are eventually responsible for deliver-
ing these forecasted numbers and hence company can rely on this forecast. However,
there is an inherent problem or shortcoming in this approach, that is, as salespersons’
own remuneration and incentive depend on realizing the forecasted numbers they
themselves project, there is a natural tendency to underreport the projected forecast
volume. Hence, a better approach could be the fusion of both bottom-up and top-
down figures.

Delphi Method
This method bears the resemblance of the ‘expert opinion’ method and a forecasting
team is chosen using a similar criterion. The main difference is that they do not
meet in a committee. The project administers a structured questionnaire to each
member of the team. The questionnaire can be administered in different stages to
ultimately bring out a forecast for the company covering the product categories that
the company sells. The questions addressed normally are of behavioural nature. For
example: Do you envisage that new technology products would replace some of our
product lines in next three–five years? If so, by what percentage of market share?
This question can then proceed to ask more pointed questions about a specific indi-
vidual company with the ultimate objective to translate opinion into some form of
forecast. After each round of questionnaires, the aggregate response from each is
circulated to the members of the panel before they complete the questionnaire for
the next round so that the members of the panel are not completing their question-
naire in a void but can moderate their response in the light of the aggregate results.
As the members do not meet in a committee, their responses are not influenced by
majority opinion and, therefore, a more objective forecast may result from the Delphi
method. However, it has a greater value in terms of generating industry trends and as
a technological forecasting tool in addition to providing useful information regarding
new products and processes to direct company efforts in the development of new
products. For developing a forecast sales territory-wise and product line-wise, its
usefulness is still limited.

Bayesian Decision Theory

This theory has been placed under qualitative techniques of forecasting, although it is
in reality a mix of both subjective and objective techniques. The technique is similar
to the critical path analysis in that it uses a network diagram, and probabilities must
Self-Learning
66 Material be estimated for each event over the network. Bayesian decision theory is a relatively
 Table 5.3 Demand Estimation
Expected Profit in Three Scenarios in a Supply Chain

Export Now Delay 1 Year Delay 2 Years

Events (E) (£) (£) (£)
Economic condition remains good 800,000 600,000 500,000 NOTES
Moderate downturn in economy 500,000 390,000 250,000
Economic recession –350,000 60,000 100,000

Table 5.4
Impact of Probability Factors on Expected Profit

Event Profit for Optimal Act Probability Expected Value (£)

A 800,000 0.5 400,000
B 500,000 0.4 200,000
C 100,000 0.3 30,000
630,000

new and somewhat controversial method for dealing with future uncertainties. The
technique, however, incorporates the firm’s own parameters as data inputs into the
calculation of a sales forecast.
Let us assume that the management feels that the country’s economy can go either
of the following ways in the next 12 months: continue to be buoyant (Event A), a
moderate downturn (Event B) and a serious recession (Event C). Each of these can be
considered as an external event on which the management has no control. If, however,
the management wishes to take a decision to maximize the profit, they can assign
subjective prior probabilities to each of the possible events. These are expected exter-
nal events which impact the sales performance of the company but are actually not
within the control of the company. The management takes three possible scenarios on
expected profit, which are shown in Table 5.3.
Management wishes to make the decision that can maximize the firm’s expected
profit after assigning the probability factor on each expected event happening. The
impact of that is shown in Table 5.4.
These prior probabilities are now incorporated into a decision tree which is made
up of series of nodes and branches as shown in Figure 5.1.
If more information is available based on the survey conducted by the company to
further improve upon the forecast, then those survey indicators should influence the
probability factors to be considered which in turn can change the decision tree.

Quantitative Forecasting Techniques

This is also sometimes referred to as objective or mathematical techniques.
Quantitative techniques are based on the manipulations of historical data.
An underlying assumption of time series forecasting is that the future demand is
solely dependent on the past demand. For example, this year’s demand is 10% more
than the last year’s actual sales. Time series analysis takes into account the historical
sales over a longer period of years to arrive at a realistic level of the projected sales.
Self-Learning
Cause and effect forecasting (also referred to as associative forecasting) assumes that Material 67
Advanced Figure 5.1
Supply Chain Decision Tree for Three Expected Events
Management
(a) = 0.4 800,000

(b) = 0.3
500,000
(c) = 0.3
NOTES
ow
ort N –350,000
Exp

(a) = 0.4 600,000

Delay 1 year
(b) = 0.3 370,000
(c) = 0.3
Del
ay 2 60,000
yea
rs
(a) = 0.4 500,000

(b) = 0.3 250,000

(c) = 0.3 100,000

one or more factors are related to the demand and that the relationship between cause
and effect can be used to estimate the future demand. This uses simple as well as
multiple regression techniques. In simple regression, the demand depends on only
variable, whereas in multiple regression, the demand depends on two or more vari-
ables. For example, the financing option can increase the demand or a high interest
rate can decrease the demand of a particular commodity or product.

Naive Forecasting
Naive forecasting is the simplest forecasting technique and is often used as the stan-
dard of comparison with the forecasts derived from other methods. A large number of
companies (over 30%) use this method of forecasting on a regular basis. This method
actually assumes that nothing is going to change and therefore the next quarter’s
forecast will actually be the current level of sales performance. Table 5.5 can be used
to predict the sales for the next quarter, taking actual sales of the earlier quarter.
The error in the naive forecast for quarter 2 is the difference between 59 and 65,
and the percentage error would be:

Forecast – Actual
Percentage forecasting error =
Actual
= (59 – 65)/65 = 58%

Table 5.5
Naive Forecasts from the Earlier Period Actual Sales

Quarter
1 2 3 4
Actual Sales in Units 59 65 85 92
Self-Learning
Naive Forecasts in Units 59 65 85
68 Material
If the data are adjusted for seasonality, the forecasting error for quarter 2 will come Demand Estimation
in a Supply Chain
down to a much lower value (7.6%), which is an acceptable figure.

MAPE Method
When you like to compare the forecasting accuracy over several time periods, the
mean absolute percentage error (MAPE) method is the method used by most of the NOTES
businesses (Lancaster and Wright 1983)). The MAPE can be calculated using the fol-
lowing formula:

(Forecast − Actual) /Actual

MAPE = × 100%
N
n
 i 1
(Forecast  Actual) /Actual
MAPE   100%
N

where N is the number of forecasts to be made. The main advantage of the MAPE
method is that it allows easy comparison of forecasting errors across product catego-
ries and companies.
Businesses normally prepare their annual budget, containing projected sales num-
bers, which is also calendarized month-wise for production planning. The budget
numbers are very broad, and the same undergo many iterations during the budget year
as several things change including unforeseen activities in the market changing the
demand which SCM has to consider in a continuous manner. The budget document
includes the market analysis in detail and competition analysis reports to decide on at
what rate possibly a business can grow under the given market and competitive envi-
ronment and in a given resource availability scenario for delivering business growth.
The broad figures for sales contained in the budget can be generated following several
methods, and the easiest of those is applying the projected growth factor over last
year’s actual sales achievement. The projected growth factor has to be at least equal
to or more than the industry category growth rate to retain the market share by the
business. A higher growth rate can be taken if any special activity or resource alloca-
tion is planned by the business to gain incremental market share. Usually, projecting
the next year’s sales forecast from the last year’s actual sales applying the growth
factor is normally practised by the industry. This, however, is the simplest approach
or method for estimating or forecasting the demand. A more elaborate sales forecast
can, however, be generated by the Delphi technique involving experts, time series
analysis and so on. Whatever may be the method, generating a demand forecast with
about 10% accuracy is a reasonable figure to plan production, procurement and inven-
tory. By resorting to the correction factor in every production and inventory cycle
based on actual achievement is likely to lead to an effective SCM plan for
implementation.

Moving Average Method

The moving average method actually predicts the future sales on the average sales
performance for the same product categories in the recent past. As such, average sales
revenue actually achieved for several periods in the recent past is used to predict or
forecast the sales for the next period, using the following formula: Self-Learning
Material 69
Advanced
St + St −1 + St − 2 +  + St − n +1
Supply Chain Ft +1 =
Management N

where
Ft+1 = forecast for the next period
NOTES
St = sales in the current period
N = number of periods in the moving average
The moving average method assumes that the future will be the average of the past
achievement. Therefore, when there is a strong trend in a time series, a moving aver-
age forecast without the trend adjustments lags behind. However, this lag can even be
an advantage when there is sudden increase and decrease in sales volume because in
that case, the moving average forecast will be more accurate. It should be pointed out
here that the limitation of moving average is that it does not consider the dynamic
nature of the business environment where each period can behave differently.
However, it must be remembered that moving average really does move. For example,
sales data from Table 5.1 can be used to make two periods’ moving average as
follows:

Quarter
1 2 3 4
Actual Sales 45 72 86 77
Two Periods’ Moving
Average 58.5      79

Exponential Smoothing
An important feature of exponential smoothing is its ability to emphasize the recent
information and data and systematically discount old information. A simple exponen-
tially smoothed forecast can be derived from the following equation:

Sˉt = aSt + (1 – a)Sˉt – 1

where
St = smoothed sales for period t + 1
a = smoothing constant
Sˉt = actual sales in period t
Sˉt – 1 = Smoothed forecast for the period t – 1
The above equation in fact combines a portion (a) of current sales with the dis-
counted value of the smoothed average calculated for the previous period to give a
forecast for the next period.
Using the data given in Table 5.5, we can work out taking smoothing constant of
0.4 as follows:

Quarter
1 2 3 4
Actual Sales 45 72 86 77
Self-Learning Smoothed Forecast 57.8 77.6
70 Material
 The forecast for quarter 3 can be obtained by multiplying the smoothing constant Demand Estimation
in a Supply Chain
0.4 with the current sales for quarter 2 plus 0.6 times of current sales of quarter 1
which will work out to 57.8; similarly, for quarter 4, the smoothed forecast will be
77.6. The critical decision with respect to exponential smoothing is selecting an
appropriate value for the smoothing constant (a) which actually ranges from 0 to 1,
with low value indicative of stability and high value allowing a rapid response to sales NOTES
changes. And as such, if we use the smoothing constant as 1.0, it will give the smooth-
ing forecast same as that is obtained by the naive method. Forecasts produced with a
low smoothing constant, for example, 0.2, lag behind and forecasts generated with
high values of smoothing constant such as 0.8 will likely overestimate sales at turning
points. If a business has the historical data, it must try to find out an optimum smooth-
ing constant by trying out different values of ‘a’ to see which one fits the best.
Regression techniques have advantages in situations in which managers wish to
incorporate other variables which can influence the sales volume in their forecasting
programme.

Linear Regression
In a simple linear regression equation, the relationship between sales (X) and some
variable (Y) can be assumed as linear, and therefore it can be represented by a straight
line. The equation then would be: X = a + bY, where a is the intercept and b is the
impact of the independent variable. The main step for deriving a linear regression
equation is to find the values for coefficients a and b that gives the line that best fits
the data and that can be obtained by employing a least-squares procedure as illus-
trated in Figure 5.2, where sales (X ) have been plotted against time (Y). The equation
is: X = 63.9 + 3.5Y. Two variable regression equations can thus be easily calculated.
However, a limitation in this is the assumption that sales follow a linear pattern which
is not correct. And there are cyclical sales patterns as well for many parameters
impacting the sales which a linear equation cannot capture. In that case, the sales
analyst can base the forecasting equation on the logarithm of the time series data to
generate an improved version of forecasting equations. Another problem is to decide

Figure 5.2
Fitment of Trend Regression to Seasonality-adjusted Sales Data

90
Sales

80
3.5

70

X=63.9 + 3.5Y

63.9
60

0 1 2 3 4 5 6
50 Self-Learning
Time Period Y
Material 71
Advanced how much of the past data should be included in the calculation to forecast. Although
Supply Chain
Management
all past data points can provide greater stability, sometimes shorter period regression
can do a better job of tracking changes.
The simple regression equations that have been described use time as an indepen-
dent variable, which is very common in sales forecasting, and with time as an inde-
NOTES pendent variable, a regression approach also becomes a trend forecast. However,
other variables which are closely related to sales forecast such as income growth of
the targeted consumers and frequency of use can also be used. But when sales seem
to be associated with the several independent variables, a multiple regression proce-
dure can be used to build the forecasting model.

hoW p&g foreCaSted itS detergent SaleS in italy

P&G is a global leader in detergent. It is considered as the most innovative company

in the FMCG sector, and to keep its supremacy, P&G invariably brings in some new
features on tangible and, if not, at least on intangible platforms to differentiate its
products from others and most importantly to differentiate from its immediate com-
petitor Unilever. P&G’s Italian subsidiary produces both liquid and powder detergents,
and the Italian company had a staff strength of 400. Their annual sales volume used to
be about US$385 million per year. They regularly prepare sales forecasts for two vari-
ants of powder detergents and one variant of liquid detergent for use in washing
machines. In addition, P&G Italy also prepares sales forecasts for one more brand of
powder and liquid detergents which are used in hand as well as bucket clothes wash.
For established brands like Ariel, P&G Italy uses their historical sales data and adjusts
those for incremental advertisement and promotional plan for the brands during the
year and then uses a computer program to prepare sales forecasts. Under normal cir-
cumstances, they use previous three years’ sales data to prepare the forecast for the
current year. Forecasts of sales volume for P&G Italy are prepared for medium term to
long term, and their most detailed forecasts are for three years. For new products, the
forecasts are normally prepared from the targeted market share to be built up to the
targeted level over a given period of time. As the liquid detergents are a new category,
there is no historical sales figure available to go by. As the forecasting error in P&G is
normally a few percentage points only, they are fully satisfied with their forecasting
process and efforts of preparing a sales forecast to be supported by an elaborate supply
chain planning to meet the projected demand.
It can be pointed out here that sales forecasting in most of the FMCG companies is
done through projection from historical data of say three years to see the trend, taking
into consideration the impact of marketing and advertisement plan for the year. This
plan is in addition to taking a bottom-up approach for generating a product category-
wise sales forecast involving front-line sales staff. It is also important to note that a sales
forecast is generated product category wise and brand wise, taking into account the
brand marketing plan to achieve the projected numbers and in that respect the entire
plan is integrated as a common objective and goal for the year.

Multiple Regression
When the projected sales volume depends on multiple variables, we need to use
multiple regression, and if there are a number of variables, a computer is used to
Self-Learning build forecasting based on historical relationships between sales and several
72 Material
independent variables. These independent variables need to be selected judiciously Demand Estimation
in a Supply Chain
based on past trends and experience to identify those which have significant impact
on sales. The multiple regression equation must capture some of the best indicators
of sales performance. The suggestive factors can be economic growth rate, market-
ing and promotional budget for the category, industry category growth rate, interest
rates, growth in target population and so on. However, these factors need to be pre- NOTES
dicted for future time periods before loading them into the forecasting equation.
There are other variables which would be product specific such as growth of infra-
structure and real estate in a given geographical area; new investment in certain
projects can also impact the sales volume, and those impacts on sales will not be
very difficult to predict. The decision whether to use a simple or multiple regression
forecasting model often depends on the values of three statistics that are calculated
by the computer forecasting program. For example, if the R2 value is 0.70, your
equation explains 70% of the variation observed in your data. Forecasting equations
with a high R2 value are generally preferable to equations that explain only 5–10%
of the variation. The standard error of the estimate tells you the range within which
you can expect to find the true value of the variable that you are predicting. Also,
errors in the coefficients for the variables in your equation should be smaller than
the coefficients. If, however, the errors are larger than the coefficients, there is a
good reason to drop that variable from the forecasting equation. With regression
forecasting, you need five observations for every independent variable in your equa-
tion. Thus, an equation with 1 predictor variable would need 5 observations, and an
equation with 3 variables would need 15 observations. If your data set does not meet
these requirements, then another forecasting method should be selected. Despite
complexities of multiple regression forecasting, this technique is most popular of all
the quantitative methods mentioned in Table 5.2 and has been reported to be used
regularly in almost 13–15% of the firms.

Trend- and Seasonality-Corrected Holt–Winters’ Exponential

Smoothing
The trend-corrected exponential smoothing as per Holt’s model is appropriate when
the demand is assumed to have a level and a trend in the systematic component but
no seasonality, which would mean that

Systematic Component of Demand = Level + Trend

Both trend- and seasonality-corrected exponential smoothing as per Winters’ model

are appropriate when the systematic component of the demand has a level, a trend and
also a seasonality factor, which thus would mean that

Systematic Component of Demand = (Level + Trend) × Seasonal Factor

Once data have been captured for the time series to be forecasted, the analyst’s next
step is to select a model for forecasting. Various statistical and graphic techniques
may be useful to the analyst in the selection process. The best place to start with any
time series forecasting analysis is to graph sequence plots of the time series to be
forecasted. A sequence plot is a graph of the data series values, usually on the vertical
axis, against time usually on the horizontal axis. The purpose of a sequence plot is to
Self-Learning
Material 73
Advanced Table 5.6
Supply Chain Applicability of the Methods
Management

Forecasting Methods Where Applicable

Moving average method No trend or seasonality
NOTES Simple exponential Smoothing No trend or seasonality
Holt’s model Trend but no seasonality
Winters’ model Trend and seasonality

give the analyst a visual impression of the nature of the time series. The presence/
absence of such components can help the analyst in selecting the model with the
potential to produce the best forecasts. After selecting a model, the next step is its
specification. The process of specifying a forecasting model involves selecting the
variables to be included, selecting the form of the equation of relationship and esti-
mating the values of the parameters in that equation. The model can be selected based
on the trend analysis and historical data and data quality available.
The forecasting methods we have discussed in this unit can be used in different
situations as given in Table 5.6.
We normally obtain an initial estimate of the level and trend by running a linear
simple regression between demand Dt and time period t of the form:

Dt = at + b

Running a linear regression between demand and time periods is appropriate because
in Holt’s model, assumption is that the demand has a trend but no seasonality, and
therefore their relationship is linear. The constant b measures the estimate of the
demand at period t = 0 which can be taken as the initial estimate L0. The slope a
measures the rate of change in demand per period and the initial estimate of the trend
T0. In period t, from the given estimates level Lt and trend Tt, the forecast for the future
period will be as follows:

Ft + 1 = Lt + Tt and Ft + n = Lt + nTt.  (5.1)

And, on observing the demand for the period t, the estimates of level Lt and trend Tt,
the forecast for future periods are expressed as

Lt + 1 = aDt + 1 + (1 – a) (Lt + Tt),  (5.2)

Tt + 1 = b (Lt + 1 – Lt) + (1 – b) Tt,(5.3)

where a is the smoothing constant for the level and b is the smoothing constant for
the trend, having value between 0 and 1. You should observe that for two updates of
level and trend and a weighted average of the observed value and the old estimates.
For Winters’ model, assume the periodicity of the demand to be p. We need the
initial estimates of the level L0, trend T0 and seasonal factors S1 – Sp. In period t, the
estimates level Lt, trend Tt and seasonal factors St,…, St + p – 1, the forecast for the future
period can be obtained from the following:

Self-Learning
Ft + 1 = (Lt + Tt) St + 1 and Ft + l = (Lt + lTt) St + 1.(5.4)
74 Material
After observing the demand for the period t + 1, we can revise the estimates for level, Demand Estimation
in a Supply Chain
trend and also seasonality factors as follows:

Lt + 1 = a (Dt + 1/St + 1) + (1 – a) (Lt + Tt),(5.5)

Tt + 1 = b (Lt + 1 – Lt) + (1 – b) Tt,(5.6)
NOTES
St + p + 1 = g (Dt + 1/Lt + 1) + (1 – g) St + 1,(5.7)

where a is the smoothing constant for the level, b is the smoothing constant for the
trend and g is the smoothing constant for the seasonal factor being between 0 and 1.
We can observe each of these impacts, and the revised estimate is a weighted average
of the observed value and the old estimate.

5.4.3 WHEN TO USE QUANTITATIVE FORECASTING METHODS

Quantitative forecasting techniques are best employed in situations where we have
access to historical data, and these are also helpful if the time series we are trying to
forecast are stable and do not often change the direction. Quantitative methods have
a distinctive advantage in situations where frequent forecasts are to be made for very
large numbers of products and product categories which may also need the use of
computers and forecasting software because of large numbers of calculations.
Forecasters also need to be conversant and familiar with various statistical tools and
procedures used by these techniques. Additionally, quantitative techniques are most
useful in situations where the management understands and also endorses their appli-
cation to sales forecasting problems. However, it should be remembered that simple
procedures such as naive, moving averages and exponential smoothing often have
lower forecasting errors than other complex methods (Dalrymple et al. 2003).

5.5 FORECAST ACCURACY

5.5.1 FORECASTING IN PRACTICE
For deriving realistic forecasts, a close coordination between sales and SCM teams
and also the channel partners including the IT team of the company is very much
desirable. Share only those data which are valuable for the specific business function.
The value of the data depends on where one is located in the entire chain. For exam-
ple, a retailer finds point-of-sales data very valuable in terms of measuring the per-
formance of the store. However, a manufacturer selling to a distributor or wholesaler
who in turn sells to the retailer does not find point-of-sales data that useful and instead
manufacturers find the aggregate demand data to be very useful. Historical sales data
should not be confused with the historical demand because there can be occasions of
loss of sales due to stock shortages and also there can be occasions when businesses
resort to overtrading creating artificial stock pressure in the system which results in
high debtors but the volume so traded appears in their official sales figures. Those
situations of overtrading and undertrading need to be corrected to get to the exact
demand forecast.

5.5.2 WHAT INDUSTRY PRACTICES

Industry tends to use simplistic methods to forecast sales as has been explained ear-
lier. The only concern is the degree of errors in their method. If the degree of error is Self-Learning
Material 75
Advanced very low and/or does not put the SCM tasks in difficulty in terms of handling a pos-
Supply Chain
Management
sibly stock-out situation resulting in loss of sales or a sudden spurt in demand offering
short-term opportunities to capture and grow, then the methods that are being
employed are for all practical purposes working well for the company.
But quantitative methods are also used under certain circumstances and situations.
NOTES For example, quantitative forecasting techniques are best employed in situations
where you have access to historical numerical data and also when time series that you
intend to forecast are stable and do not often change the direction. Quantitative meth-
ods have distinct advantages where forecasts need to be generated frequently and that
too for hundreds or thousands of products. Because large numbers of calculations are
required by quantitative forecasting methods, it often requires the use of computers
and forecasting software, and in addition one has to be well versed in statistical pro-
cedures used by these techniques. Most importantly, quantitative techniques are most
useful where the management understands and endorses their application to sales
forecasting problems.

CaSe STuDY
apollo pharMaCy

The pharmaceutical industry is a highly regulated market. Most of the pharmaceuti-

cal products are sold as prescription drugs. There are some products that are sold as
over-the-counter (OTC) drugs. Regulations restrict most of the prescription drugs
marketing strategies directed to generate prescriptions following canvassing and
convincing medical doctors like general practitioners to prescribe the company’s
prescription drug. Whether a particular doctor is prescribing or not can be under-
stood from the sales performance of the chemists and pharmacies around the area.
The prescription sales impact inventory management policy. Trade channel partners
and distributors mostly decide on stock ordering and inventory levels based on their
past experience.
While non-availability of prescription items in one pharmacy is not usually life-
threatening for any patient, the inconvenience caused due to delay may result in loss of
customer loyalty. Hence, a product should be available at retail outlets when customer
demands. Apollo Pharmacy retail chain does not follow any established demand fore-
casting technique. However, such forecasting can help the distributor to better manage
the inventory of critical drugs as well as fast-moving drugs including OTC drugs.
Forecasting aims at reducing uncertainty that confounds future decisions. However,
difficulties arise while fulfilling the assumptions of the economic order quantity (EOQ)
model, which includes a continuous, constant and known rate of demand (Hill 1988).
Prescription items can be substituted for one another (generic substitution and me-too
drugs with similar active molecules), which obviates EOQ assumptions.
For products where demand history is available, the future demand can be predicted
better using quantitative models from sales in the previous cycle (Tersine 1994). Time
series analysis predicts future attributes from the historical past and prior experience.
This method uses time as the independent variable to predict the demand. The causal
relationship is applicable under the assumption that there exists a cause and effect rela-
tionship between an input variable and its corresponding output (Wheelwright and
Makridakis 1985).
The sales data of Apollo Pharmacy belonging to Alwal region of Hyderabad,
Self-Learning Telangana, are given in Table 5.7, specifically adopted for the study. Apollo Pharmacy
76 Material
 Demand Estimation
Table 5.7 in a Supply Chain
CoMpariSon of MeaSureMent errorS obtained for okaCet and StaMlo beta uSing tiMe SerieS
foreCaSt ModelS

Okacet Stamlo Beta

6-Month Simple Winters’ 6-Month Simple Winters’ NOTES
Technique Moving Exponential Exponential Moving Exponential Exponential
Error Average Smoothing Smoothing Average Smoothing Smoothing
MAD 117.35 420.01 92.28 47.19 615.74 83.21
MSE 21,048.03 198,950.33 14,635.74 3,158.69 394,719.07 10,305.11
MAPE 42.43 157.39 27.50 45.62 550.30 61.86

belongs to a large umbrella group organization that follows consistent marketing/sales

policies across all its retail outlets.
The case study attempts to identify a suitable forecasting model for use by Apollo
Retail group from the various methods discussed in order to recommend one based on
the best fit from the values of mean absolute deviation (MAD), mean squared error
(MSE) and MAPE.

Forecasting Methods
The simple moving average technique is chosen for its simplicity of use. It is easy to
understand and implement. The simple exponential smoothing technique takes into
account the weighting factor/smoothing factor and thus helps in adjusting better to
recent changes in demand. The Winters’ exponential smoothing (WES) uses a seasonal
component in addition to the trend component, making it the most appropriate tech-
nique for the forecast of the study. The chosen forecasting models were recorded in
Microsoft Excel spreadsheets and simple Excel functions were used following equa-
tions given in the literature. These simple models formed the basis of the study with an
objective to delineate/identify the most suitable forecast model for the chosen product,
by comparing the actual sales value and predicted sales value.
The forecasting techniques are evaluated based on their accuracy in forecasting
actual demand data. Thus, MAD, MSE and MAPE are used to measure the error of
forecast obtained by using various techniques. Because MAPE is a percentage, it is a
relative measure, and is thus sometimes preferred to the MAD. The MSE, which is a
squared measure, is selected as it helps in penalizing errors more heavily.

Results
The actual demand data obtained from Apollo Pharmacy retail are recorded in
Table 5.7 of the supporting data. Table 5.8 depicts the measurement errors, obtained by
using each of the three forecasting techniques for the two prescription drugs. The fol-
lowing observations were made from Table 5.8.
For Okacet (Seasonal Demand)
WES captures the seasonality in sales of Okacet. Seasonality is evident in the sales
volume of Okacet, which peaks in early December compared to reduced sales in the
month of April (774 units vs 118 units). WES provides sales forecast most accurately
compared to the other three models (MAD = 92.28, MAPE = 27.50, MSE = 14,635.74).
For Stamlo Beta (Non-seasonal Demand)
Six-month moving average best predicts the demand for Stamlo Beta, which has a rela- Self-Learning
tively stable demand during an entire year or the time period in question. It accurately Material 77
Advanced
Supply Chain Table 5.8
Management SaleS data of apollo pharMaCy

Period Month and Year No. of Okacet Issued No. of Stamlo Beta Issued
NOTES
1 Dec 2010 413 233
2 Jan 2011 399 171
3 Feb 2011 307 258
4 Mar 2011 350 96
5 Apr 2011 277 169
6 May 2011 341 82
7 Jun 2011 536 133
8 Jul 2011 383 142
9 Aug 2011 486 167
10 Sep 2011 503 97
11 Oct 2011 485 86
12 Nov 2011 482 167
13 Dec 2011 744 66
14 Jan 2012 371 174
15 Feb 2012 376 81
16 Mar 2012 216 168
17 Apr 2012 118 32
18 May 2012 208 84
19 Jun 2012 202 135
20 Jul 2012 288 165
21 Aug 2012 415 180
22 Sep 2012 434 145
23 Oct 2012 301 236
24 Nov 2012 269 91
25 Dec 2012 359 174
26 Jan 2013 267 156
27 Feb 2013 281 190
28 Mar 2013 193 141
29 Apr 2013 216 171
30 May 2013 143 120
31 Jun 2013 255 293
32 Jul 2013 228 122
33 Aug 2013 419 118
34 Sep 2013 405 96
35 Oct 2013 286 63
36 Nov 2013 480 145
Self-Learning Source: Anusha et al. (2014).
78 Material
 Demand Estimation
provides sales forecast (MAD = 47.19, MSE = 394,719.07, MAPE = 45.62) compared in a Supply Chain
to the other models, although Winters’ model forecasts the demand equally well.
In summary, comparative values indicate that WES is a superior forecast model to
predict sales of pharmaceuticals whose demand fluctuates and/or varies seasonally. And
six-month moving average is a better forecast model to predict the sales of pharmaceu-
ticals whose demand remains fairly constant. Average works reliably for non-seasonal NOTES
pharmaceuticals for the chosen Apollo Pharmacy retail.

Sales Data
Daily sales data for the two products mentioned were collected for the period starting
from December 2010 and ending in November 2013. Data were obtained by contacting
the selected retail outlet manager. As observed, Apollo Pharmacy maintains electronic
data of its daily product sales using an ERP solution. Data such as number of units sold,
product code and number of items remaining in inventory were of particular importance
for this study.

Case Questions
1. Which of the forecasting models, among simple moving average, exponential
smoothing and WES, yields least error? The quantitative indicators to be used to
assess the forecast error are MAD, MSE and MAPE.
2. Which of the forecasting models, among simple moving average, exponential
smoothing and WES, most accurately predicts the demand for a seasonal pharma-
ceutical item, Okacet 10 mg tablet?
3. Which of the forecasting models, among simple moving average, exponential
smoothing and WES, most accurately predicts the demand for a random pharmaceu-
tical item, Stamlo Beta tablet?
Source: The case is based on the data reported by Anusha, Alok and Shaik (2014).

UNIT SUMMARY
The unit starts with explaining the critical role of forecasting in a supply chain. A
realistic demand forecast actually forms the basis of all supply chain planning, man-
agement and control. The basic approach to demand forecasting is explained, and
various types of forecasts and their implications in terms of efficient SCM are then
discussed. Various methods of forecasting including time series analysis, moving
average method, exponential smoothing and so on are elaborately discussed with
examples to explain where these methods can be used and will be useful. How histori-
cal data regarding the actual performance of companies help in generating forecasts
in the business and the forecasting methods used in real-life business with case stud-
ies are also discussed in this unit. Lastly, the role of IT in demand forecasting as well
as forecasting practices is discussed. A sales forecast many a time is higher than the
real-term demand from the customer, and it is important to manage the supply chain
to cater to the realistic demand which necessitates that companies learn to distinguish
between sales target and real-term demand. Chasing an unrealistic sales target can
create distortion in trade and also business in terms of their performance in real term
which is not desirable, whereas meeting the real-term customer demand really serves
the purpose of managing the supply chain effectively. Self-Learning
Material 79
Advanced
Supply Chain
G lossa r y
Management
 Short-term Forecast: A short-term forecast such for a month’s duration will be
more realistic and deliverable than a medium-term one, say for a quarter, or a long-
term one, say for a year.
NOTES  Long-term Forecast: Long-term forecasts are less reliable and hence have greater
errors than the short-term forecasts. Long-term forecasts have a larger standard
deviation of error in relation to mean than short-term forecasts.
 Business Planning Exercise: The business planning exercise in any organization
starts with the sales numbers projected in a given year by the company, involving
its sales, marketing and planning teams, following the view, goal and objective of
the top management.
 Demand Forecast: A demand forecast is a very important task and an annual
exercise reviewed periodically for any correction for the business to be undertaken
with all seriousness and rigors to ensure minimal forecasting error
 Bottom-up Approach: In the bottom-up approach, a corporation attempts to gen-
erate the sales forecast, taking the projections from the front-line salespersons who
really know what can be realistically delivered given a certain support and com-
petitive scenario.
 Market Potential: Market potential is the maximum demand over a given period
of time-based on the number of potential users and their purchase rate.
 Qualitative Forecasting: Qualitative forecasting is also sometimes referred to as
judgmental forecasting which involves using judgement and intuition and is pre-
ferred in situations where there are limited or no historical data available such as
with a new product introduction.
 Delphi Method: The Delphi method bears the resemblance of the ‘expert opinion’
method and a forecasting team is chosen using a similar criterion.

Review Questi ons

Objective Type Questions

1. The _______________ in any organization starts with the sales numbers pro-
jected in a given year by the company, involving its sales, marketing and planning
teams, following the view, goal and objective of the top management.
a. Customer demands
b. Sales team
c. Demand management
d. Business planning exercise
2. A company’s _______________ can only be a part or portion of the total industry
demand for the particular product category.
a. Production planning
b. Life cycle
c. Sales projection
d. Finance planning

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80 Material
3. If the medium-term forecast is _______________, then the company will have Demand Estimation
in a Supply Chain
unsold stock in inventory which has to be funded from working capital.
a. Affirmative
b. Progressive
c. Constructive
d. Overoptimistic NOTES
4. The sales force composite, which is in fact a _______________, is quite com-
monly used by the industry and more particularly by the FMCG industry for their
reliability and confidence.
a. Top-down approach
b. Tangible approach
c. Bottom-up approach
d. Intangible approach
5. In an integrated supply chain, all other demand will be derived from the
_______________ demand.
a. Primary
b. Secondary
c. Basic
d. Budgetary
6. In a typical channel distribution of FMCG, the actual consumer demand needs to
be managed by managing _______________ partners.
a. Survey
b. Channel
c. Business
d. Consumer
7. Which method involves salespersons making a product-by-product forecast for
their particular sales territory?
a. Sales Force Composite
b. Panel of Expert Opinion
c. Consumer-User Survey
d. Delphi
8. The _______________ method bears the resemblance of the ‘expert opinion’
method and a forecasting team is chosen using a similar criterion.
a. Consumer-User Survey
b. Delphi
c. Panel of Expert Opinion
d. Sales Force Composite
9. An important feature of _______________ is its ability to emphasize the recent
information and data and systematically discount old information.
a. Linear smoothing
b. Multiple smoothing
c. Trend smoothing
d. Exponential smoothing

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Material 81
Advanced 10. Running a _______________ between demand and time periods is appropriate
Supply Chain
Management
because, in Holt’s model, the assumption is that the demand has a trend but no
seasonality, and therefore their relationship is linear.
a. Linear regression
b. Multiple regression
NOTES c. Naive forecasting
d. Quantitative forecasting
Answers: 1. d; 2. c; 3. d; 4. c; 5. a; 6. b; 7. a; 8. b; 9. d; 10. a

Descriptive Questions
1. What are the various approaches to demand estimation, and what are the types of
forecasts businesses make and for what purpose?
2. Why do we need a forecast, and what internal and external factors influence the
forecast and how?
3. Which criteria decide the level of forecasting? Discuss how seasonality influ-
ences the forecast taking examples.
4. Discuss different methods of demand forecasting. Discuss the advantages and
disadvantages of sales force composite and industry survey methods.
5. When should you use the quantitative methods of forecasting? Discuss the multi-
ple regression technique with an example.
6. Why is the MAPE method useful? Discuss the moving average and exponential
smoothing methods of forecasting.
7. How does P&G forecast its detergent sales in Italy, and why are they satisfied with
their method and approach?
8. What is the normal industry practice for forecasting the demand while doing their
annual budgetary exercise?

Re fe re nc e s

Anusha, S. Lakshmi, Swati Alok, and Ashiff Shaik. 2014. ‘Demand Forecasting for the
Indian Pharmaceutical Retail: A Case Study’. Journal of Supply Chain Management
Systems 3 (2): 1–8.
Dalrymple, Douglas J., L. Cron William, and Thomas E. Decarlo. 2003. Sales Management:
Concepts and Cases, 228–246. 7th ed. Singapore: John Wiley & Sons (Asia).
Hill, W. J. 1988. ‘Alternative Inventory Control Methods for Use in Managing Medical
Supply Inventory’. MS thesis, AFIT/GLM/LSM/88S–35. School of Systems and
Logistics, Air Force Institute of Technology, Air University, Wright-Patterson AFB, OH.
Hograth, R. 1975. ‘Cognitive Processes and the Assessment of Subjective Probability
Distributions’. Journal of American Statistical Association 70 (350): 271–289.
Kahn, Kenneth B. 1998. ‘Revisiting Top-Down versus Bottom-Up Forecasting’. Journal of
Business Forecasting Methods & Systems 17 (2, Summer): 20.
———. 1999. ‘Benchmarking Sales Forecasting Performance Measures’. The Journal of
Business Forecasting Methods & Systems 17 (4, Winter): 20.
Lancaster, G. A., and G. Wright. 1983. ‘Forecasting the Future of Video Using a Diffusion
Model’. European Journal of Marketing 17 (2): 2.
Tersine, R. J. 1994. Principles of Inventory and Materials Management. 4th ed. Englewood
Cliffs, NJ: Prentice Hall.
Self-Learning Wheelwright, S. C., and S. Makridakis. 1985. Forecasting Methods for Management. 4th ed.
82 Material New York, NY: John Wiley & Sons.
Zachary, G. Pascal. 1989. ‘Hewlett to Post about Flat Net for 3rd Period’. The Wall Street Demand Estimation
Journal, 15 August, 10. in a Supply Chain

B i b l i ogr a phy

Brown, Robert G. 1959. Statistical Forecasting for Inventory Control. New York, NY: NOTES
McGraw-Hill.
Georgoff, David M., and G. Murdick Robert. 1986. ‘Manager’s Guide to Forecasting’.
Harvard Business Review (January–February): 2–9.
Gilliland, Michael. 2002. ‘Is Forecasting a Waste of Time?’ Supply Chain Management Review
(July–August): 16–23.
Gilloth, V. R., Ohi, Jack F. Jr and Wells, Willaim A. 1979. ‘An Evaluation of Seasonality in
the United States Air Force Medical Material Management System’. MS thesis, LSSR
13–79B. School of Systems and Logistics, Air Force Institute of Technology, Air
University, Wright-Patterson AFB, OH.
Hanke, J. E., and A. G. Reitsch. 1992. Business Forecasting. 4th ed. Boston, MA: Allyn &
Bacon.
Jobber, David, and Geoff Lancaster. 2005. Selling and Sales Management, 411–442. 6th ed.
Pearson Education (Singapore).
Makridakis, Spyros, and Steven Wheelwright. 1989. Forecasting Methods for Management.
New York, NY: Wiley.
Pilinkiene∙, V. 2008. ‘Selection of Market Demand Forecast Methods: Criteria and
Application’. Engineering Economics 3 (58): 19–25.
Rachmania, I. N. 2013. ‘Pharmaceutical Inventory Management Issues in Hospital Supply
Chains’. Management 3 (1): 1–5.
Saffo, Paul. 2007. ‘Six Rules of Effective Forecasting’. Harvard Business Review (July–
August): 122–131.
Sarang, D. N., and M. Laxmidhar. 2006. ‘Exploratory Investigation of Sales Forecasting
Process and Sales Forecasting System’. Master’s thesis. Jönköping International Business
School, Sweden.
Sarker, S. 2010. ‘Increasing Forecasting Accuracy of Trend Demand by Non-linear
Optimization of the Smoothing Constant’. Journal of Mechanical Engineering 41 (1):
58–64.

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Material 83
 6
UNIT

NOTES

Warehousing Management

LEARNING OBJECTIVES
LO 1 Understand the purpose, scope, functions and types of a
warehouse
LO 2 Design criteria and layout of a warehouse for efficient
warehousing activities
LO 3 Calculate the warehousing cost and identify the criteria
impacting warehousing performance
LO 4 Understand warehousing management system and performance
metrics

6.1 INTRODUCTION
Finished goods’ warehouses are located in strategic locations from where ultimate
customers as well as trade channel partners are serviced. The objective of locating
a warehouse is to respond to the customer demands in the quickest possible time
and at least cost. Companies do a lot of surveys as well as mathematical model-
ling to decide the location for finding out an optimum solution for transportation
and distribution of products, which is a subject matter of operations research.
Dynamic programming and simulations such as Monte Carlo simulation are car-
ried out to take appropriate and logical decisions for such crucial activities in a
business.
Warehousing has a significant cost in terms of total logistics cost (TLC). Besides,
effective and efficient warehousing is critical to distribution efficiency. Location and
type of warehousing and its management are thus critical decisions to a business.
Complexity of warehouse operation depends on the number of SKUs to be handled
and the number of orders received and filled. Order-filling rate and stock-filling rate
have to meet customer requirements as per the order conditions in addition to meet-
ing the delivery time and schedule to ensure high level of customer satisfaction. The
most performed activity in a warehouse is material-handling, which improves the
warehouse operational efficiency and helps reduce wastages and damage. But
material-­handling also adds a significant cost in terms of both capital and operational
costs, and as such, a warehouse has to be designed to minimize the need of material-
handling. Distribution efficiency is also linked with the warehouse management
efficiency in addition to the location of the warehouse. A specific warehouse can
only service that many customers around its location. The management perspective
Self-Learning
84 Material
is to consider managing both warehouse and distribution functions as an integrated Warehousing
Management
function.

6.2 WAREHOUSING PURPOSE AND SCOPE

Warehousing is actually a large intermediate storage space for holding stocks of fin- NOTES
ished goods till the time these stocks are sold to be delivered to the customer as per the
customer ordering quantity and input materials such as raw and packaging materials,
spares and components to be transferred to production and manufacturing departments
as and when required. Depending on types of inventory kept in a warehouse, the cus-
tomer could be internal or external. For example, raw material and packaging material
kept in a warehouse will be used internally by the production department, whereas
finished goods kept in a warehouse will be used for the external customers or buyers.
For distribution, warehouses are located in strategic locations identified in relation to
customer concentration. A distribution warehouse, therefore, normally holds finished
goods for sales, whereas a warehouse located in the vicinity of the manufacturing or
production location contains both finished goods and input materials, and for finished
goods it normally serves as a feeder warehouse to distribution warehouses. Businesses
incur storage cost in a warehouse as well as the handling cost. A warehouse needs to
be designed to improve the movement of stock for dispatch unhindered with minimal
or nil handling to reduce the cost. Efficient warehouse management will help the busi-
ness to improve profitability. From this point of view, a warehouse can be defined as
part of a logistics management system that stores the products for subsequent distribu-
tion to meet the customer demands. Warehousing provides time and space utility for
raw and packaging materials and other inputs including spares and consumables,
industrial goods and finished products to help customers as a dynamic valueadding
tool, which can ultimately provide a competitive advantage to the business. Warehouses,
if located in a strategic location, can significantly increase the value to the customers
by reducing the delivery time and cost as well as helping the customers in lowering
their inventory level, which helps customers to improve their profitability and in that
sense warehousing can play a strategic role in a business.

6.3 PRIMARY FUNCTIONS OF WAREHOUSE

A warehouse, in fact, has multiple functions, and those include the following:
 Consolidation for transportation: Depending on the customer’s order, the lot
size is consolidated collecting stocks in various SKUs as per the order from vari-
ous storage locations within the warehouse before transportation.
 Mixing of products: Products are grouped under various product mix configura-
tions which can facilitate their identification and also consolidation to execute
customer’s orders expeditiously.
 Docking: Products of various groups as identified are kept and stored at desig-
nated docking stations for loading and dispatch immediately on demand without
holding the stock. In docking stations, products come and are unloaded and
reloaded to another destination.
 Customer service: Meeting the customer requirements in terms of both ordering
quantity, product mix configuration as well as SKUs and service frequency for
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Advanced both internal and external customers is the responsibility of the designated ware-
Supply Chain
Management
house itself.
 Buffer against contingencies: It helps in meeting the fluctuating customer
demand including seasonal demand

NOTES
6.4 EFFICIENT WAREHOUSE MANAGEMENT
The designated warehouse performs its primary function to achieve the objective as
listed above, but the functional efficiency of the warehouse is determined by many
performance criteria which are the primary objectives of efficient functioning of the
warehouse. These performance criteria are as follows:
 Providing timely service to the customer: Customer orders have to be executed
as fast as possible to ensure that the customer never goes out of stock and also for
customer satisfaction. These days, customers demand more frequent deliveries in
small quantity rather than large deliveries to reduce the cost of stockholding that
needs higher service frequency which can add to the cost to marketers. In a com-
petitive environment, cost has to be contained by bringing in savings in production
and operations.
 Keeping track of items to find them readily and correctly when needed: This
helps in faster execution of customer orders and also in terms of managing the
warehouse better. This is essential for computerization of warehouse management
and is part of the design and implementation of an efficient WMS.
 Minimize the physical effort and material-handling to save cost: The design of
the warehouse and stock storage plan should be such that movements inside the
warehouse are managed most efficiently at least cost. The layout design should be
such that material handling is minimal which is a non-value-adding activity and is
kept at the minimal level to save cost incurred on moving goods into and out of
the warehouse. Material-handling can be minimized by properly designing the
layout following the industrial engineering principles and ensuring linear move-
ment of stocks and using material-handling equipment to improve efficiency by
reducing cost and wastages.
 Providing communication links with customers: A warehouse has to be an
important link for sales system of the company and the customers, and for that
purpose warehouse records have to be accurate and up to date. Real-time informa-
tion often needs to be provided to sales force as well as to customers so that they
can also plan their activities more efficiently.

6.5 TYPES OF WAREHOUSE

As warehousing is a significant cost in business, several alternative methods and
models are experimented and followed in real-life practices. Businesses are con-
stantly exploring possibilities of reducing the cost of warehousing, and we can see
various types of warehouses that are in use including the following:
Public warehousing: Public properties are available for businesses to be used as
warehouses on rent or lease. For example, Port Trust Authority, which owns the ware-
house space in the port areas, is normally given on long- or short-term lease to private
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86 Material
warehouse operators and are given on fixed or variable commercial terms to manu- Warehousing
Management
facturers and marketers for use. Businesses having international operations prefer
stockholding facilities in the port areas from the considerations of cost and
convenience.
Private warehousing: Privately built or constructed warehouses are available on rent
or lease at convenient locations to service the customers. For example, before enter- NOTES
ing a large city like Mumbai, most of the companies have their warehouses located in
Bhiwandi at a lower cost instead of bringing the stock to Mumbai city where the cost
of a warehouse is many times higher. The same is true for other large and smaller
cities around the country. Locating a warehouse in the outskirts of large costly cities
also saves the tax to be paid for entering and other constraints like longer waiting time
incurring cost before transport vehicles are allowed to enter the city limits and hence
works out to be more economical.
Third-party warehousing or contract warehousing: In this type of warehousing,
the goods are given to a third party on contract basis under some agreed commercial
terms to be stored on behalf of the company. The traditional carrying and forwarding
(C&F) agents also serve the similar purpose. Post implementation of Goods and
Services Tax (GST), the role of C&F has become irrelevant in the traditional sense,
but they also serve the purpose of warehousing for their principal as well as for redis-
tribution of stocks as C&F agents actually function as an extended arm of the market-
ers from where a company can bill to distributors, wholesalers as well as other
categories of customers, including institutional customers and large retailers such as
organized retailers and e-retailers in e-commerce.
Multi-client warehousing: Here, one warehouse is used by many clients, and this
helps in terms of sharing the space as per requirement of the individual companies
and also sharing the common area including utilities and security services and cost
thereof. This often becomes economical. In this model, warehousing can even be
directly linked dynamically with the space utilized for keeping the stock instead of
paying for a fixed storage space to make it ‘as used payment basis’—meaning that
you pay for the space you use dynamically and that will be very economical.

6.6 WAREHOUSE LAYOUT DESIGN CRITERIA

The internal layout of the warehouse has to be designed keeping the following design
criteria in mind with the object of efficient operations at least cost. The warehouse
should be located in a single-storey building having maximum height and least num-
bers of columns inside to ensure large space availability. A square building is pre-
ferred as space utilization is maximum in a square building and wastage of space is
minimum. This helps in making an effective storage plan. The layout design must
ensure maximum utilization of the height and available space of the storage area.
Maximizing aisle space for efficient movement of material-handling equipment like
fork lifts should also be ensured. The material-handling equipment that is used in
warehousing must be efficient, the movement of the goods should always be in a
straight line and the entire layout design must follow the principles of industrial engi-
neering. Any forward or backward movement should be avoided or eliminated. A
typical layout design of a warehouse and activities performed in different sections is
shown in Figure 6.1. Self-Learning
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Advanced Figure 6.1
Supply Chain Warehouse Layout Design and Activities Performed
Management

Receiving
Input
• Schedule Carrier
NOTES • Unload Vehicle
• Inspect for Damage

Warehouse Process

Put Away Storage

• Identify Product • Equipment

• Identify Product Location • Stock Location
• Move Products – Popularity
• Update Records – Unit Size
– Cube

Shipping Preparation Order Pricing

• Parking • Information
• Labelling • Walk & Pick
• Stocking • Batch Picking

Shipping Output

• Schedule Carrier
• Load Vehicle
• Bill of Lading
• Record Update

6.6.1 WAREHOUSING COST

There are two broad elements of warehousing cost, namely capital cost and operating
cost. Capital costs include the costs of space and material-handling equipment and
also WMS software which, of course, are incurred by those who have implemented a
computerized WMS. A large part of the cost of warehouse is the material-handling
systems and equipment. The operating costs, however, include the cost of direct
labour, utilities as well administrative cost and communication and documentation
costs.

6.6.2 WAREHOUSE ACTIVITIES

To perform the objectives and functions as mentioned above, there are numerous
activities that a typical warehouse has to perform which are as follows:
Receive goods: This entails accepting goods from suppliers and vendors as well
as outside transporters and other factories, checking the quantities received against
orders and the bill of lading, inspecting goods as per order specifications and
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88 Material
reporting discrepancy, if any, and also checking for damages and report as
 necessary for replacement or adjustment in record. Goods are normally received Warehousing
Management
at receiving docks for inspection and issuing a goods receipt note (GRN) for track-
ing the goods against each order subsequently, which is also required for making
suppliers’ payment. Goods are also returned for damage or otherwise unsellable
stock from the customers and market.
Identify goods: Items are identified with the appropriate SKU number and/or part NOTES
number as the case may be and the quantity received has to be recorded.
Transfer goods to storage area: Goods are sorted and put away at their desig-
nated storage locations so that as and when required it is easy to trace and retrieve
to ensure that there is no loss of time while we need to retrieve for using and/or
further dispatching.
Hold goods: Goods are kept in storage in their designated storage locations well
protected to avoid any damage and to facilitate subsequent utilization when
needed.
Pick goods: Items required from stock must be selected from storage and brought
to a marshalling area from where actual dispatch and/or shipping can be executed.
Picking should be done on first-in, first-out (FIFO) basis for efficient stock move-
ment from the warehouse.
Marshalling shipment: In this area, goods making up a single order are brought
together and checked for omissions or any errors or any other discrepancy. And
then order records are updated.
Dispatching shipment: Orders are packaged, shipping documents are prepared
and goods are loaded on the vehicle.
Provide information: A record must be maintained for each item in stock show-
ing the quantity on hand, quantity received, quantity issued and their location in
the warehouse. An appropriate information system (IS) should be used to ensure
accuracy of the information.
Record-keeping and documentation: Records of the warehouse stock, locations,
dispatches, age of the stock, near expiry stock, order deliveries and customer-wise
service records should be kept for ready reference at any time for sales system and
customers to access through the warehouse and inventory management system.
For maximizing the warehouse productivity and minimizing the cost of operation, we
need to maximize the use of space which forms the largest part of the capital cost.
The other significant capital cost is the investment made in the material-handling
equipment which depends on the degree of automation and computerization. As such,
for minimizing the operating cost, businesses have to ensure effective and efficient
use of labour and equipment. Labour being the largest component of the operating
cost, automation and a computerized controlled modern warehouse can operate with-
out any labour or with drastically lesser numbers of workers. Many large corporations
have completely automated warehouse operations running without involvement of
any labour using automation and artificial intelligence.

bOX 6.1
exaMple of autoMated WMS at krka

An international pharmaceutical company KRKA’s (pronounced as Karka) factory in

Europe has a completely automated WMS. Their factory in Slovenia is completely
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Advanced
Supply Chain automatic and computer-controlled; most of the functions are either automatic or run by
Management a few robots starting from batch weighing, mixing, tableting, packaging, warehousing
and dispatching. There is no manpower involved in certain functions. The entire ware-
house function for finished goods, raw materials and packaging materials is being man-
aged through a preprogrammed computer-controlled trolley and fork lifts moving on
NOTES guided rails. The goods are automatically picked from the designated storage areas and
being loaded in transport vehicles for dispatch against a particular order of a client or
sales invoice which is entered in the system and rest is automatic. Another auto seat
manufacturer TVP, producer of automobile seats for all brands of cars and supplies
worldwide, is completely managed by robots and controlled through artificial
intelligence.

6.6.3 FACTORS INFLUENCING EFFECTIVENESS OF WAREHOUSE

There are many factors impacting effectiveness of a warehouse such as cube utiliza-
tion and accessibility, stock location, order picking and assembly, and physical con-
trol and security of stocks.
Cube utilization and accessibility: Goods are stored not just on the floor but also in
the cubic space of the warehouse; warehouse capacity depends on how high goods
can be stored. The available height of the warehouse and volume of space should
therefore be fully utilized. For fork lift operation, a minimum of 18–20 ft high ware-
house is selected. Those who use telescopic fork lifts in automatic operation even go
for still more height. Utilizing the complete volumetric space reduces the cost signifi-
cantly. Accessibility means being able to get at the goods wanted with a minimum
amount of work. The warehouse design and storage patterns and identification and
location codes should facilitate by taking minimum time to access the items stored
whenever required. Utilizing both horizontal and vertical spaces to the extent possible
determines the cost of holding the stock (Figure 6.2).
Stock location: Objectives of designating a specific stock location are to provide the
required customer service and also to keep track of where items are stored to mini-
mize effort to receive, put away and retrieve items.
Locating various kinds of stocks within the warehouse to facilitate identification
and shipment when needed can follow different types of stock locating systems as
follows:
 Basic stock locating systems: Classify the goods stored in the warehouse in some
order based on their functions or use to facilitate easy identification in a large ware-
house. Several such systems with respect to grouping of stocks are in use such as:
 Functionally related items together
 Fast-moving items together
 Physically similar items together
 Working stock and reserve stock separately
 Fixed location: In this system, an SKU is assigned a permanent location, and no
other item is stored there. But fixed location systems usually have poor and less
efficient cube utilization and, therefore, are usually used in small warehouses
where throughput is small, and there are few SKUs to be handled and managed. A
fixed location, however, helps in terms of easy identification and audit of the stock.
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90 Material
 Figure 6.2 Warehousing
Cube Space Utilization and Accessibility Management

You pay for this

space (used or
unused)
NOTES

Space is
vertical...

...not just
horizontal

 Floating or random location: Goods are stored wherever there is an appropriate or

suitable space available, and the advantage of this system is that cube utilization
is significantly improved. It also requires accurate and up-to-date information
about the stock location and quantity SKU wise. Warehouses using floating loca-
tion systems are usually computer based. In the industry, this practice is widely
prevalent for the reason that no businesses would like to keep space unutilized as
space is money. Whenever a delivery van comes to deliver stocks, there is an
urgency to unload the stock to make space for the next van to arrive and park.
Under that kind of a situation, goods are kept after unloading wherever space is
available.
 Point-of-use storage: Inventory is stored close to where it will be needed and
normally used in repetitive manufacturing and JIT systems. Keeping the stock
close to where it is required for use has several advantages, including lesser cost
and time of handling and movement. The key advantage is that materials are
readily accessible to users and material handling is reduced or eliminated
altogether.
 Central storage: It contains all inventory in one central location which helps in
reduction of cost, and materials are accessible all the time. Safety stock level is
reduced as users do not need to carry their own safety stock. Central storage is
much easier to control, and inventory record accuracy is easier to maintain. Central
storage also facilitates specialized storage, if required. Large corporations nor-
mally follow this practice for better control and accurate information in a central
location. For a large business, a central warehouse is normally located in a strate-
gic location and serves as a feeder warehouse to feed stock to other local Self-Learning
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Advanced warehouses located closer to customer locations to facilitate better service and
Supply Chain
Management
flexibility.
Order picking and assembly: When an order is received, items must be obtained
from the warehouse and grouped and prepared for shipment, and to manage that func-
tion efficiently, industries follow various types of methods and/or systems such as:
NOTES
 Area system: An order picker circulates throughout the warehouse selecting items
on an order, and an order is ready to ship when the order picker is finished picking
the stocks as per the order requirement. This requires a little longer time to assem-
ble one order for delivery. This is practical for a small warehouse dealing in lim-
ited numbers of products and SKUs.
 Zone system: A warehouse is divided into several zones, and each picker works
only in an assigned zone. The order is normally divided by zone, and the items
from each zone are sent to the marshalling area for executing the order. When
product groups are large and each one is managed as a separate profit centre and/
or strategic business unit (SBU), zone system is better. For example, a company
deals with FMCG, industrial products as well as pharma products. Zone system
also avoids intermixing of stocks and ensures better control.
 Multi-order system: It is same as the zone system, except that each picker collects
items for a number of orders at the same time. In reality, this multi-order system
is practised. In large retail stores, orders are picked up throughout the day and in
the evening all orders are executed to facilitate deliveries indicated in the order.
Physical control and security elements: The goods stored inside the warehouse
have to be secured and safe at all times and should be in control of the warehouse
management team. Some standard practices must be followed to ensure security and
safety of the stock. These are as follows:
 Goods parts numbering system should be simple but unique to facilitate easy iden-
tification. It should also have a simple and well-documented transaction system
involving identifying the item, verifying the quantity, recording the transaction
and physically executing the transaction.
 Inventory must be kept in a safe and secured (locked) place with limited general
access or access through identity checks by those who are authorized. It should be
accessible only to the authorized people. A well-trained workforce should be
engaged to manage the warehouse to eliminate damages and wastages and pilfer-
ages as well as thefts. An adequate surveillance system such as CCTV monitoring
will help. But in spite of all these precautions, pilferage still happens and busi-
nesses have to absorb that cost. Needless to say that all those costs have to be
ultimately borne by the end customer. To be competitive, businesses have to con-
trol all such possible pilferage.
 Modern warehouses are fully automated and computerized, and customer orders
are processed by picking up stock from the designated locations and managed
through central data processing and inventory control stations. Most of the large
ports these days have warehouses including bonded warehouses where stocks are
kept and taken as per need paying the custom duties. This type of operation has
brought in significant improvement in operational efficiency in the business. Some
of these warehouses are used by many clients on a space-sharing basis, providing
space utilization efficiency.
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 Warehousing
6.7 WAREHOUSE MANAGEMENT SYSTEM Management

6.7.1 WMS AS AN ENABLER

A WMS is a proven, advanced software solution for manufacturing, distribution and
retail enterprises and TPL providers that can be used by enterprising organizations of
all sizes. It helps companies maximize product placement strategies, prioritize tasks, NOTES
implement fair productivity standards and increase logistics efficiency.
The evolution of WMSs is very similar to that of many other software solutions
such as ERP and material requirements planning (MRP). There is an overlap in func-
tionality among planning, transportation management systems, supply chain plan-
ning, advanced planning and scheduling, and manufacturing execution systems will
only increase the level of confusion among companies looking for software solutions
for their operations. Businesses have to decide on an appropriate software system out
of many such options available and that task is not easy. Only those businesses which
are very clear about their requirement can find an ideal solution for them. An efficient
ERP like SAP can serve as a useful tool and control software system for managing
the warehouse for a business. But still many businesses opt for WMS software. The
effectiveness of a WMS depends on how efficiently information processing and orga-
nization and handling of stock and type of automated environment as well as material-­
handling equipment are installed and managed. A WMS, therefore, also involves
significant investment in capital expenditure to derive commensurate benefits.

6.7.2 WHY AND WHEN IT IS NECESSARY

WMS is not always useful and has to be implemented when it is necessary and there
are valid reasons for taking such decisions.
 Not every warehouse needs a WMS. Certainly any warehouse can benefit from
some of the functionality, but businesses need to assess the benefits that can be
derived to justify the initial and ongoing costs associated with a WMS. WMSs are
big, complex, data-intensive applications. Large automated operations can defi-
nitely benefit.
 You need to manage your WMS efficiently to derive the full advantage. Otherwise,
a WMS can end up as an additional complexity and cost in your business. Many a
time, large operations end up creating a new IS or IT department with the sole
responsibility of managing the WMS. And that cost and complexity can offset the
benefits of the WMS. This is therefore a tricky decision that businesses need to
take with utmost care. Otherwise, a WMS can only add to complexity and cost
with no commensurate benefit forthcoming.

6.7.3 ADVANTAGES OF IMPLEMENTING WMS

A WMS, if implemented properly and supported by the necessary inventory data, can
lead to several benefits such as:
 Reduction in inventory
 Reduction in labour costs
 Increase in storage capacity
 Better customer service
 Increase in inventory accuracy
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Advanced  Better management of complex warehouse structure
Supply Chain  Optimized warehouse activity
Management
 Increase in trace and track ability of materials in warehouse
 Facilitate mobile data entry
 Increase in efficiency
NOTES  Reduction in customer complaints
The implementation of a WMS along with automated data collection is likely to
give a business better inventory data accuracy, reduction in labour costs and a
greater ability to service the customer by reducing cycle times. The predominant
factors that control inventory levels are lot sizing, lead times and demand vari-
ability. However, a WMS is unlikely to impact these factors. Beyond labour effi-
ciencies, the determining factors in deciding to implement a WMS tend to be
more often associated with the need to do something to service the customers that
the current system does not support (or does not support well) such as FIFO,
cross-docking, automated pick replenishment, wave picking, lot tracking, yard
management, automated data collection and automated material-handling
equipment.

6.7.4 IMPLEMENTING AND SETTING UP WMS

There are various requirements for implementing and setting up WMS, which are
listed below.
 The set-up requirements of a WMS can be extensive and also expensive. The
characteristics of each item and location must be maintained either at the detail
level or by grouping similar items and locations into categories, as discussed
earlier. And these details include exact dimensions and weight of each item in
each unit of measure the item is stocked (such as inches, cases and pallets) as
well as information such as whether it can be mixed with other items in a loca-
tion, whether it is rack-able, maximum stack height, maximum quantity per
location, hazard classifications, finished goods or raw material and fast- vs slow-
moving items.
 Although some operations need to set up each item this way, most operations ben-
efit by creating groups of similar products. In reality, most operations have a much
more diverse product mix and require much more system set-up. Setting up the
physical characteristics of the product and locations is only part of the picture. The
real-term requirement is very extensive in terms of organizing the layout, data
regarding inventory type and group and logic of taking decisions based on which
a WMS will operate.

6.7.5 WHEN WMS CAN BE ADVANTAGEOUS

A WMS can lead to many other operational benefits in addition to those listed above
as functional benefits that can accrue to the business if it is implemented properly. It
should be pointed out here that only very large and complex business organizations
with very diversified product portfolio and very large and well-dispersed customer
base to service can really benefit from the implementation of a WMS. Some of those
other benefits are as follows:
 Wave picking/batch picking/zone picking: Support for various picking methods
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 a logic can be a critical factor in WMS selection. An appropriate picking logic is Warehousing
Management
therefore a key criterion for efficient WMS operations.
 Task interleaving: Task interleaving describes functionality that mixes dissimilar
tasks such as picking and putting away to obtain maximum productivity. Used
primarily in fullpallet-load operations, task interleaving directs a lift truck operator
to put away a pallet on his/her way to the next pick. This requires a very standard NOTES
operating system to be implemented in warehouse operations.
 Integration with automated material-handling equipment: If you are plan-
ning on using automated material-handling equipment such as merry-go-round,
automated storage and retrieval system (ASRS) units, automated guided vehicles
(AGVs), pick-to-light systems and sortation systems, you will want to consider
this during the software selection process. Since these types of automation are
very expensive and are usually a core component of your warehouse, you may
find that the equipment will drive the selection of the WMS. If the WMS is inte-
grated with an automatic material-handling system, efficiency improves
significantly.
 Advanced shipment notifications (ASNs): If your vendors are capable of send-
ing ASNs (preferably electronically) and attaching compliance labels to the ship-
ments, you will want to make sure that the WMS can use this to automate your
receiving process.
 Cycle counting: Most WMSs will have some cycle counting functionality.
Modifications to cycle counting systems, as required, are common to meet specific
operational needs. A WMS needs to support the prevailing cycle counting
practices.
 Cross-docking: In its purest form, cross-docking is the action of unloading mate-
rials from an incoming trailer or rail car and immediately loading these materials
in outbound trailers or rail cars, thus eliminating the need for warehousing (stor-
age) altogether. This requires synchronized operations and planning as well as
coordination.
 Pick-to-carton: For parcel shippers, the pick-to-carton logic uses item dimen-
sions/weights to select the shipping carton prior to the order-picking process.
Items are then picked directly into the shipping carton. Shipping cartons are nor-
mally standardized to ensure ideal usage, and items to be shipped are normally
picked directly into the shipping cartons.
 Slotting: Slotting describes the activities associated with optimizing product
placement in pick locations in a warehouse. There are software packages designed
just for slotting, and many WMS packages also have slotting functionality and
need to be selected to match the requirement.
 Yard management: Yard management describes the function of managing the
inventory of trailers parked outside the warehouse, or the empty trailers
themselves.
It is generally associated with cross-docking operations and may include the
management of both inbound and outbound trailers. For efficient yard manage-
ment, goods truck parking queuing needs to be programmed based on a logic.
 Activity-based costing (ABC)/billing: This functionality is primarily designed
for TPL operators. It allows them to calculate billable fees based upon specific
activities. It also helps in terms of improving in cost criteria by eliminating non-
value-­adding cost from the process. Billing is linked with the activities required to Self-Learning
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Advanced 6.7.6 DEVELOPING A RESPONSIVE WMS
Supply Chain
Management If a large corporation implements a responsive and well-functional WMS, there are
various other benefits and supports that will be available for improving the business
performance. A WMS (Table 6.1) can also thus lead to other advantages including the
following:
NOTES
 Support goods returns processing and reverse logistics
 Use task interleaving to minimize deadheading

Table 6.1
Warehouse Performance Metrics

Category Measure Definition

Order On-time Orders delivered on time as per customer requirement
fulfillment delivery
perfor- Order fill rate Orders filled completely on first shipment (delivery)
mance
Order accuracy Orders picked, packed and shipped perfectly according to
(pack fill rate) customer order
Line (product Lines picked, packed and shipped perfectly
category)
accuracy
Order cycle time Time from order placement to shipment
Perfect order Orders delivered without changes, damages or invoice
completion errors
Inventory Inventory Actual inventory quantity to system-reported quality
manage- accuracy
ment Damaged Damage measured as a percentage of the value of the
measure inventory inventory
Storage Occupied space (square foot) as a percentage of the total
utilization storage capacity
Dock to stock Average time from carrier arrival until product is avail-
time able for picking
Inventory Time from physical receipt of goods to customer service
visibility notice of availability
Warehouse Orders per hour Average number of orders picked and packed per person
productiv- hour
ity Lines per hour Average number of order lines picked and packed per
person hour
Items per hour Average number of order items picked and packed per
person hour
Cost per order Total warehousing costs: fixed space, utilities and depre-
ciation including operational cost Variable: labour/
supplies and administration overheads
Cost as a Total warehousing cost as a percentage of total company
percentage of sales revenue
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sales
 Improve order consolidation, wave planning, inventory allocation and pick Warehousing
Management
sequencing
 Identify consolidation opportunities to free space and reduce outside storage
requirements
 Support bill of material, work order and value-added processing
 Update inventory records as events occur NOTES
 Provide accuracy that allows replacement of full physical with scheduled cycle
counts
 Time stamp each transaction and identify the operator who performed it
 Provide feedback to the workforce and support performance measurement
 Measure supplier and carrier performance

6.7.7 NEW TRENDS IN WMS

The recent trends in WMSs are resulting in further consolidation of the industry as
well as in terms of alliances with ERP and other enterprise system providers. A WMS
now facilitates ABC, which in turn helps in cost reduction. Latest WMS-embedded
profiling tools are used for space use analysis to facilitate relay out and inventory
slotting. Also, introduction of object-oriented toolkits for requirements of modelling
and WMS development has helped in the warehouse management performance

6.7.8 PRODUCTIVITY IMPROVEMENT TOOLS OF WMS

Barcode
A barcode is magnetic stripe against a light background normally used to identify a
stock. It is usually instantaneously identified by a barcode reading system. A barcode
is read through the reflectance and absorption of light. A light of a given wavelength
is beamed and moved across the barcode at a consistent speed and the reflected light
is measured with a photo receptor. The pattern of the barcode creates an electrical
wave which is sent to a computer chip called ‘decoder’. Barcode technology is a
widely used method of automatic identification. Automatic identification encom-
passes automatic reading of information most commonly through printing and read-
ing of information encoded in the barcode and thus eliminates any human error.

Barcode System Requirement

Bar coding system has to perform some typical tasks as described below:
 Barcode label and printer: Barcode labels are printed using barcode label print-
ers. These printers are normally faster printers than the normal laser printers.
These labels are then attached to an asset class or product for easy identification.
 Scanning equipment for data collection: The scanner accurately identifies, reads
and deciphers the information contained in each barcode label.
 Capturing the data to an external database: To be able to effectively use the
codes, a database is required to relay the information.
 Put to light and pick to light: In a ‘pick to light’ system, lights will guide the
operators to a specific SKU location where they will pick or select the orders from.
And in a ‘put to light’ system, light modules will guide the operators to the correct
location to sort or to ‘put’ the item into where it belongs.
If the products are barcoded, a ‘put to light’ system helps in faster sorting of products Self-Learning
based on their SKUs and product category. In large manufacturing organizations with Material 97
Advanced large numbers of products and variants, this system will really help the business. As
Supply Chain
Management
mentioned earlier, to make a WMS very effective, the inventories and IS need to be
organized to make the warehouse performance efficient and effective.
With a ‘put to light’ system, the operator simply grabs an item and scans the label
with a radio frequency (RF) unit. Lights illuminate at locations where the particular
NOTES item resides as well the quantities required to fill a customer order. The process is thus
repeated till the customer order is fulfilled. This is extremely fast, accurate and error-
free. ‘Pick to light’ and ‘put to light’ systems can be remarkably fast and accurate,
helping a significant increase in warehouse productivity. It is also the most cost-
effective means of providing dramatic improvement in warehouse cost reduction and
in increased productivity. Pick to light is a paperless solution that increases the pick
rate productivity, accuracy and cost efficiency of this otherwise labour-intensive
operation by reducing the walk time, eliminating reading errors and also simplifying
the task throughout the process.

UNIT SUMMARY
Warehousing is a very critical function to be managed effectively which determines
the productivity and cost-efficiency of the entire supply chain. A warehouse is
required to be located in a strategic location from the consideration of providing ideal
level of customer service at least cost which is a prerequisite for survival in a dynamic
market environment. Warehousing, therefore, plays a key role in distribution manage-
ment, and the efficiency of distribution management determines the success of the
business itself. Distribution management is an area that demands the attention of the
top senior-level management team, and key decisions are taken at the highest level of
the corporation. The decisions related to the distribution strategy and performance
criteria are taken by the senior management team in the business. The unit deals with
the functions and activities undertaken in a warehouse as well as types of warehouses
and which type suits for what kind and size of business. Warehouse design and con-
struction for efficient warehouse management, warehouse cost, activities and ware-
house location decision criteria are discussed with examples. Strategies and planning
of taking warehousing decisions as well as WMSs and warehouse operation are also
discussed. WMS implementation strategies and advantages as well as challenges are
discussed in detail. Warehouse performance metrics and factors influencing the per-
formance of a warehouse are also discussed in detail. Criticality of warehouse man-
agement and their implication on distribution performance are discussed.

G lossa r y

 Warehouse: A warehouse can be defined as part of a logistics management

system that stores the products for subsequent distribution to meet the customer
demands.
 Public Warehousing: Public warehouses are operated by the warehouse operators
and are given on fixed or variable commercial terms to manufacturers and market-
ers for use.
 Private Warehousing: Private warehouses are privately built or constructed ware-
houses available on rent or lease at convenient locations to serve the customers.
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98 Material
 Third-Party Warehousing or Contract Warehousing: In this type of warehous- Warehousing
Management
ing, the goods are given to a third party on contract basis under some agreed com-
mercial terms to be stored on behalf of the company.
 Multi-Client Warehousing: In multi-client warehousing, one warehouse is used
by many clients, and this helps in terms of sharing the space as per the requirement
of the individual companies and also sharing the common area including utilities NOTES
and security services and cost thereof.
 Marshalling Shipment: Here, the goods making up a single order are brought
together and checked for omissions or any errors or any other discrepancy. The
order records are then updated.
 Goods Receipt Note (GRN): Goods Receipt Note (GRN) is used for tracking the
goods against each order subsequently, and also required for making suppliers’
payment.
 Warehouse Management System (WMS): A WMS is a proven, advanced soft-
ware solution for manufacturing, distribution and retail enterprises and TPL pro-
viders that can be used by enterprising organizations of all sizes.
 Floating or Random Stock Location: Goods are stored wherever there is an
appropriate or suitable space available and it also requires accurate and up-to-date
information about the stock location and quantity SKU wise.
 Central Stock Storage: Central storage contains all inventory in one central loca-
tion which helps in reduction of cost, and materials are accessible all the time.
 Slotting: Slotting describes the activities associated with optimizing product
placement in pick locations in a warehouse. Many WMS packages also have slot-
ting functionality and need to be selected to match the requirement.

Rev i ew Q ue stions

Objective Type Questions

1. A _______________ needs to be designed to improve the movement of stock for
dispatch unhindered with minimal or nil handling to reduce the cost.
a. Business
b. Warehouse
c. Channel
d. Product
2. Under which function, products are grouped under various product blend con-
figurations to facilitate their identification and also consolidate the execution of
customer’s orders?
a. Mixing of products
b. Docking
c. Customer service
d. Consolidated for transportation
3. What helps in meeting the fluctuating customer demand including seasonal
demand and other variable demand situations during unusual situations in the
marketplace?
a. Buffer against transportation
b. Buffer against contingencies
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c. Docking Material 99
d. Mixing of products
Advanced 4. In which type of warehousing, the goods are given to a contract warehouse on
Supply Chain
Management
contract basis under some agreed commercial terms to be stored on behalf of the
company?
a. Third-party warehousing
b. Private warehousing
NOTES c. Public warehousing
d. Multi-client warehousing
5. Which cost includes the cost of direct labour, utilities as well administrative cost
and communication and documentation costs?
a. Layout cost
b. Distribution cost
c. Capital cost
d. Operating cost
6. For maximizing the warehouse productivity and minimizing the cost of opera-
tion, we need to _______________ the use of space which forms the largest part
of the capital cost.
a. Minimize
b. Maximize
c. Combine
d. Stabilize
7. Which system classifies the goods stored in the warehouse in some order based
on their functions or use to facilitate easy identification in a large warehouse?
a. Basic stock locating systems
b. Fixed location system
c. Floating location system
d. Random location system
8. Whose evolution is very similar to that of many other software solutions such as
ERP and material requirements planning (MRP)?
a. Logistics Management System (LMS)
b. Warehouse Management System (WMS)
c. Technology Management System (TMS)
d. Storage Management System (SMS)
9. The implementation of a WMS along with _______________ is likely to give a
business better inventory data accuracy, reduction in labour costs and a greater
ability to service the customer by reducing cycle times.
a. Automated environment
b. Automated data collection
c. Automated software
d. Automated material handling
10. What describes functionality that mixes dissimilar tasks such as picking and put-
ting away to obtain maximum productivity?
a. Cross-docking
b. Slotting
c. Task interleaving
d. Wave picking
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100 Material Answers: 1. b; 2. a; 3. b; 4. a; 5. d; 6. b; 7. a; 8. b; 9. b; 10. c
Descriptive Questions Warehousing
Management
1. Discuss the various functions of warehousing. What are the key indicators of effi-
cient warehousing management?
2. What are the different types of warehousing that the industry uses and for which
conditions those are preferred? NOTES
3. Discus the key design criteria for the layout of a warehouse for efficient operation.
What constitutes warehousing cost?
4. What are the key activities being performed in a warehouse and what are the fac-
tors that influence the effectiveness of warehouse performance?
5. Discuss the advantages of implementing WMS and when can WMS be
advantageous?
6. Discuss the key performance matrix of a typical warehouse and the productivity
improvement tools.

Re fe re n c e s

Baisya, R. K. 2015. ‘Challenges in Logistics Management—II: Choosing the Right

Distribution Mix and Building Efficient Distribution System’. Processed Food Industry
18 (4, February): 10–12.
Hammond, Allen L., William J. Kramer, Robert S. Katz, Julia T. Tran, and Courtland Walker.
2008. The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid.
Washington, DC: World Resource Institute and International Finance Corporation.
Huhmann, S. 2004. ‘Tapping India’s Rural Market’. Journal of Student Research: 92–99.
htttp://www.uwstout.edu/rs/2004/article1.pdf (accessed on 20 August 2019).

B i b l i ogr a phy

Eisenhart, Tom. 1990. ‘Drawing a Map to Better Sales’. Business Marketing (January):
59–61.
Maher, P. 1984. ‘National Account Marketing: An Essential Strategy, or Prima Donna
Selling?’ Business Marketing (December): 34–45
McDonald, M., and B. Rogers. 1995. Key Account Management. London: Butterworth-
Heinemann.
Millman, T. 1996. ‘Global Key Account Management and System Selling’. International
Business Review 5 (6): 631–645.
Millman, T., and K. Wilson. 1995. From Key Account Selling to Key Account Management’.
Journal of Marketing Practice 1 (1): 9–21.
———. 2001. ‘Structuring and Positioning Global Account Management Programmes: A
Typology’. Journal of Selling and Major Account Management 4 (1): 11–38.
Moss, C. D. 1979. ‘Industrial Salesman as a Source of Marketing Intelligence’. European
Journal of Marketing 13 (3): 94–102.
Tally, W. J. 1961, January. ‘How to Design Sales Territories’. Journal of Marketing 25 (3):
7–13.

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Material 101
 7
UNIT

NOTES
Managing Inventory for
Satisfying Customer Demand

LEARNING OBJECTIVES
LO 1 Understand why businesses need inventory and how it impacts
business performance
LO 2 Identify types and classification of inventories and inventory
cycle
LO 3 Explain inventory cost, control and management
LO 4 Describe different measures of product availability and key
concerns to manage them
LO 5 Appreciate the role of safety stock in terms of managing the
supply chain performance
LO 6 Identify the various factors that influence the required level of
safety inventory
LO 7 Detect the ways and means of reducing the levels of safety
stock without compromising product availability
LO 8 Understand the impacts of uncertainties in a supply chain and
estimating safety stock

7.1 INTRODUCTION
The inventory management policy of any organization has to be designed to hold
minimum inventory at all stock points including stocks of input materials and finished
stocks in manufacturing locations, intermediate stock points and warehouses as well
as trade stock of distributors and retailers to ensure servicing customer demands on
real-time basis, which would mean that there is no stock-out situation so that sales is
not lost as well as there is no extra stock increasing the working capital requirement
in the business. Inventory has to, therefore, be linked with sales order processing, and
sales order processing has to be linked with the production planning and procure-
ment. The problem starts when the sales order does not match the real-term consumer
offtake as determined by the sales happening from the front-end retailers in any busi-
ness. Retailers are selling directly to the end customers, and that is exactly the mea-
sure of the real term sales. Corporations many a time lose out on that focus for not
knowing the exact sales to the end consumers. The longer the channel length is, the
higher the trade inventory or even total inventory in the system will be. The trade
channel, therefore, has to be efficient and short to make the task of inventory manage-
ment more controllable.
All organizations have an inventory policy determined on the basis of several cri-
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102 Material teria which include service frequency, consumer demand, the cost the product(s),
replenishment time, industry and trade practices, commercial terms to be implanted Managing Inventory
for Satisfying
and enforced, consumer offtake data as revealed from the company’s own sales report Customer Demand
as well as retail audit data which companies subscribe from AC Nielsen, seasonality
of demand, company’s own marketing and promotional policy including activities
during a particular period which can spur the demand, production and procurement
lead time, manufacturing plant capacity and so on. In spite of the best intention, NOTES
inventory level is always seen to be a matter of great concern for all companies.
The production plant has to run as per its optimal capacity, otherwise manpower
and other overheads will not be fully utilized. The manufacturing plant capacity also
has to be aligned with the demand forecast. If the capacity utilization of the plant
becomes an issue, the cost of the production will go up because underutilization of
the capacity will lead to underabsorption of the overhead expenditure, which will
impact both SCM performance and productivity. Managing inventory, therefore, is
very critical to the management of the SCM performance as it has to optimize several
factors, both controllable and uncontrollable. Efficient and effective inventory man-
agement requires not only the reliable and historical data of the business but also the
experience of the operations manager who is entrusted for delivering the key objec-
tives and goals of SCM performance. Inventory management also requires close
coordination between departments in the business, including production, distribution,
warehousing and sales departments, within the business, and customers who need to
be serviced effectively, outside the business. It is therefore a very challenging task.

7.2 INVENTORY MANAGEMENT

Inventory constitutes the stock levels of raw, packaging material and other input
material such as standard spares and also the finished goods, as well as work in prog-
ress (WIP) carried in the business to service the demand in the market. More often
than not, the inventory in a business is disproportionately higher than the required or
optimal level, resulting in very high working capital locked up in business impacting
the performance of the organization itself. Managing inventory effectively to avoid
high level of stock of input material and finished goods is therefore the key to improve
business profitability. Most of the time, management is not well informed about the
inventory it is carrying, which leads to high level of stock tied up in the system cost-
ing a huge sum of money. In such a situation, company also often faces write off,
wastage and obsolescence and expiry or even redundant stock, particularly when a
model and or design of a product is changed or when a product formulation is
changed and earlier product is substituted by a new product.
The inventory, therefore, is the material that a firm obtains in advance of need,
holds until it is needed and then used, consumes, incorporates into a product, sells or
otherwise disposes of. A business inventory is temporary in nature. In that respect,
inventories are stock of any kind such as fuel and lubricants, spare parts and semi-
processed materials to be stored for future use mainly in the process of production, or
these can be known as the ideal resource of any kind with some economic value.
In a supply chain, one of the key variables which have to be managed is inventory.
The inventory includes a vast spectrum of materials that are being transferred, stored,
consumed, produced, packaged or sold in one way or the other during a firm’s normal
course of business. The planning, storing, moving and accounting for inventory are
the bases for all logistics. Inventory has a financial value, which for accounting pur- Self-Learning
poses is considered a floating asset. However, it may be very difficult to convert Material 103
Advanced physical inventory into liquid assets; hence, the inventory is a very risky investment.
Supply Chain
Management
The problem of liquidating excess inventory normally results from the very basic
reasons of overestimating the current demand. The demand can be wrongly esti-
mated, but sometimes businesses deliberately target a higher level of market share to
be achieved and plan the production and sales to achieve the higher level of perfor-
NOTES mance but in reality they might even fail to achieve the target resulting in stock pile-
up and loss of profitability. It has been seen that sometimes it becomes an
unmanageable proportion.
All businesses want to improve the performance of their operations over the previ-
ous year. As such, it can be noticed that at year-end, sales figures are abnormally high.
In order to show the yearend closing performance of the business better, businesses
often overtrade and invoice more stock than the requirement of the market in the last
quarter of the financial year and more so in the last month of the year closing. For
example, businesses are seen to invoice large stocks to their distributors before the
close of the year on credit basis. As this is not aligned to the customer requirement,
the distributor does not pay for the stock and agrees only to take a book entry with a
clear understanding that the company will take that excess stock back after the close
of the year. The last day of the year is always seen for all companies to sell a very
large stock to clear the inventory as the company’s account will show better result
with lower stock. For this purpose, companies even resort to extra promotional drives
to liquidate the stock by giving a discount. The excess stock that was sold stock but
which distributors could not sell is then often brought back to the company’s ware-
house or stock point. This is what we can call pseudo-sales and helps only dressing
the books of accounts. Such practice can only create distortion in the level of inven-
tory. While year-end inventory will be lower than actual, soon it will show a higher
value because of stock return.
If sales can be achieved with minimal or no inventory, that would be the ideal. Most
of the businesses do not have any idea how much inventory the business is carrying
at any given point of time and as such, the management sometimes wakes up with a
shock when they come to know about huge stock that they are carrying in inventory
in the factory, warehouse and also trade channel. The retail industry normally takes
physical inventory at regular intervals to manage the stock better just because the
entire profit of the operation normally depends on the efficient management of store
inventory. In spite of using ERP packages for managing the store operations, the stock
discrepancy still happens because of pilferage that are happening within the retail
stores which often go undetected in spite of having a CCTV monitoring system in
place. The book inventory and physical inventory often do not match. The organized
retailers take about 1–1.5% of the stock which can disappear from the system as
acceptable due to pilferage, and there is a constant surveillance and monitoring of
stock movement to control the pilferage. Anything in terms of reduction of losses due
to pilferage can be considered as an incremental profit straight sitting at the bottom
line of the profit and loss statement. From all these considerations and issues, manag-
ing inventory assumes additional importance.

7.3 INVENTORY MANAGEMENT GOAL

Inventories represent the largest single investment in assets as current assets for many
Self-Learning manufacturers, wholesalers and retailers. Inventory investment represents over 20%
104 Material
of the total assets of manufacturers and more than 50% of the total assets of wholesal- Managing Inventory
for Satisfying
ers and retailers. Thus, one goal in operations is to keep the level of inventory in the Customer Demand
supply chain as low as possible and to free up funds for other productive purposes.
Holding the inventories is connected with significant costs. Despite all the efforts
and technological innovations, inventories are often still the asset with lowest return
in the company. Arguably, majority of companies hold 25–40% more inventories than NOTES
actually needed. Unreasonably high inventory levels lower the company’s profit and
return on assets. The stated goal or objective, therefore, is to reduce or minimize the
level of the inventory without any loss of sales. For some products such as seasonal
products and food products, loss of sales would mean permanent loss and that cannot
be retrieved. Moreover, in such situations, your customers will also shift to your com-
petition, resulting in losing a customer for non-performance and non-delivery, which
itself is a big loss to the company. It takes a long time and effort to create a customer
and, therefore, losing a customer will always be considered as a big loss for the busi-
ness. It takes six times more effort to create a new customer, and by switching to your
competition if your customer is satisfied, bringing him/her back will be all the more
difficult. The goal of inventory management, thus, is to manage inventory without
facing a stock-out situation but also not to overstock.

7.4 TYPES OF INVENTORY

There are many types of inventories. The form of inventory depends upon the type of
concern or business. All types of inventories do not require same treatment, and there-
fore, policies with regard to each may also differ. Inventory can be classified based
on business requirement for better control and management for least cost of holding
the inventory and better supply chain performance. Broadly, one approach of classify-
ing types of inventories could be based on the type of use of the item(s) to be stored
or stocked. Based on the type of use, the classification can be as follows:
 Raw material inventories: These are raw materials and other supplies, parts and
components, which enter into the product during the production process and gen-
erally form part of the product.
 Packaging material inventories: These can include all types of packing material
required to be used in the manufacture or production of an item such as primary
packaging, secondary packaging, tertiary packaging and shipping cartons.
 WIP inventories: These are semi-finished, WIP and partly finished products
formed at various stages of production.
 Spare part inventories: Maintenance, repairs and operating supplies which are
consumed during the production process and generally do not form part of the
product itself are referred to as spare part inventories.
 Finished goods’ inventories: These are complete finished products ready for sale.
In a manufacturing unit, they are the final output of the production process.
Finished goods are intended as ready for sale. These itself can be further classified
as follows:
 Movement inventories: These include inventory for items that are held due to a
process delay while some inventory is moved from one location to another.
 Lot size inventories: From considerations like quantity price discounts, ship-
ping costs, setup costs, etc., make it more economical to offer inventory in one
economic lot. Self-Learning
Material 105
Advanced  Anticipation inventories: These are stock or inventories built in excess antici-
Supply Chain
Management
pating sudden levels of demand and are kept on hand to deal with uncertainty
in customer demand. Fluctuations in buying activity or seasonal demand or
even demand arising out of unusual activities in the market can lead to com-
plexity in inventory management and to be managed under demand
NOTES uncertainties.
 Fluctuation inventories: It is an inventory system in which the balance in the
inventory account is adjusted for the units sold each time a sale is made.
 Physical inventories: It is a manual count of the on-hand inventory. Physical
inventory thus would mean the actual count on a given date or at the end of a
period.
 Transit inventories: These are inventories of items between two stock points or
points of use.

7.5 ALTERNATIVE APPROACH FOR CLASSIFICATION OF

INVENTORIES
Inventory classification can have several approaches, and these approaches depend on
the company’s primary accounting and recording approach so that data can be cap-
tured accordingly from the corresponding location where physical inventories are
lying, and in what form and for what period that will facilitate the accounting and
recording process and system software that are being used by the company.
Corporations can even have their own approaches to facilitate accounting and make
stock management easier for them. There are many such approaches but broadly, we
can have the following approaches for classification also:
By the position in company’s production/operation process: This facilitates in
locating the inventory in relation to production and operation processes of the
company and can include the raw materials, packaging materials, WIP and fin-
ished goods as well as goods purchased for resale and advance payments to sup-
pliers (suppliers holding inventory on business owner’s cost). This approach has
been discussed in the preceding section.
By the financial accounting rules: This approach deals with and facilitates accurate
accounting of the inventories under a specific class. This facilitates the manage-
ment to take an action on those classes where the inventory level is higher than
projected or anticipated.
 Cycle stock: These are inventories for satisfying usual (predicted) demand
between replenishments (receiving new ordered quantities).
 In-transit inventories/pipeline stock: These are items that are en route from
one location to another. They may be considered part of cycle stock even when
they are not available for sale or shipment until after they arrive at the
destination.
 Safety or buffer stock: It is held in excess of cycle stock because of uncer-
tainty in demand or lead time. The amount depends on the extent of demand
fluctuation, replenishment lead time and planned availability level for custom-
ers. It makes the majority of inventory in the typical logistic system.
 Speculative stock: It is held for some reasons other than satisfying the current
demand such as getting quantity discounts, forecasted purchase price increase
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106 Material
 or materials shortage and protecting against strikes/natural disasters. Production Managing Inventory
for Satisfying
economies may also lead to the manufacture of products at times other than Customer Demand
when they are in demand.
 Seasonal stock: It is a form of speculative stock that involves accumulation of
inventory before a seasonal period begins like festival season or say harvesting
period in agriculture. NOTES
 Near-expiry stock: It is the stock that is nearing expiry and therefore needs to
be sold on priority basis through special promotion or even price reduction and,
if necessary, directly to the end consumers bypassing the channel partners.
Near-expiry stock can be sold by heavily discounting the price or can even be
donated for a cause. Pharmaceutical and food manufacturers are often seen
donating the near expiry stock to NGOs who in turn redistribute that to the
needy and poor for immediate consumption and use which helps them to create
a goodwill as well as a positive image for the company.
 Expired stock: The expired stock sometimes is possible to be reprocessed to
make it good for sale again. Sometimes and for some categories of products, a
small quantity of the expired stock is added to the fresh batch of production
without compromising the quality of the final products. Every organization has
its unique method and policy that it follows to deal with such inventory permit-
ted under law instead of just throwing it out as useless stock. However, under
normal circumstances, expired stock needs to be written off impacting the
financial performance of the company. Sometimes, the out-of-warranty or
expired stock requires special treatment for disposal as waste which is an addi-
tional cost for the business. This is true for stock which is hazardous in nature
and therefore cannot be directly disposed of without special treatment of
processing.
 Dead stock: These are the items for which no demand has been registered for
some specified period of time (obsolete products, demand season ended, fash-
ion changed rendering existing stock out of fashion and so on). Dead stock
needs a special disposal plan and depending on the products is sometimes sold
as scrap or waste. When the design of a model of a product changes in the
marketplace, the inventory related to that older model is normally a dead stock.
Such things happen in business, although companies make a transition plan
from one model to a newer model to minimize such dead stock. But even a best
plan for such transition will also leave behind some dead stock to be dealt with
in the best possible manner. If nothing else, dead stock can be sold as scrap
material.
It can be mentioned here that all companies have their own methods of dealing with
dead stock and out-of-warranty stock as well as for scrap or waste disposal which are
approved and accepted as standard norms of accounting practices.
Inventory has a significant impact on the material flow time, meaning the time that
elapses between the point at which material enters a supply chain as input material
and the point from where it exits at the time of delivery to the customers in the supply
chain. In a supply chain, sales throughput normally dictates the inventory level. For
example, sales throughput S, material flow time T and inventory I can be correlated
by Little’s law as follows:

I = ST (7.1)
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Material 107
Advanced If an organized retail outlet like Flipkart or Walmart holds 150,000 units in inventory
Supply Chain
Management
and sells 1,500 units everyday, Little’s law tells us that the average unit will spend
150,000/1,500 = 100 days in inventory. If, however, the flow time is reduced, the
inventory holding will also reduce. For example, if flow time is reduced to say 50
days from 100 days while sales throughput is still constant, the inventory holding will
NOTES reduce to 75,000 units. This is valid only when inventory and sales throughput have
consistent units.
An example: Reckitt Benckiser has very fast-moving products in its portfolio such
as Dettol antiseptic liquid, Harpic toilet cleaners and Mortein household insecticide.
It also has slow-moving products such as Brasso and Silvo metal polishers. Dettol and
Harpic require fast response time and the sales happen more or less in predicted lines
as per budgeted sales forecast. For fast-moving, regular selling, high-volume prod-
ucts, inventory is maintained at all stock points and in company operated and -man-
aged warehouses, whereas for slow moving products which sell in select locations
such as Brasso and Silvo, the inventory level is low. Sometimes these products are
produced once or twice in a year to be sold throughout the year, which is possible if
the product has a very long shelf life like the one mentioned in this example. However,
for low shelf-life, low-demand products, a better policy is to produce only against
confirmed customer order.
Amazon sells a wide variety of books. Almost all authors and publishers prefer to
keep their books stocked in Amazon. Some books are in high demand whereas others
are not and therefore are slow moving. Bestselling books are kept in all regional stock
points and warehouses so that they are closer to the customer locations and the
response time to service the order is low. But for slow moving books, the inventory
is not kept and books are procured from the publisher and distributors to execute the
order on receipt of the customer order.
These days, some of the best-known publishers like Taylor & Francis take very
small print run.
And even if the books are marketed or launched globally, they are printed on
demand and sold. From these examples, you can understand that both inventory levels
and locations have a direct relationship with the product demand and material flow
time.

7.6 INVENTORY COST MANAGEMENT

Inventory is the single largest cost that businesses incur in terms of working asset.
Inventory, therefore, needs to turn around as fast as possible, and we thus consider
sales to working asset ratio as an important parameter to be monitored. We also need
to ensure that the inventory which has entered the system first has to also exit first
following the FIFO principle. Most of the companies do not have any idea about how
much money is locked up in various kinds of inventories at various locations.
It gets revealed only when physical stock audit is done. To manage the inventory
more effectively, corporations have to know the location-wise inventory and also the
type of inventory which constitutes the inventory holding cost.
Inventory costs are traditionally categorized into four basic cost groups:
1. Purchase cost: For items that are purchased from outside the firms, this is usually
Self-Learning the unit price that the firm pays to its vendor. As an item moves through the logis-
108 Material tics system of the firms, its purchase cost in the inventory analysis should reflect
 its fully landed cost, which would mean the cost to acquire and to move the item Managing Inventory
for Satisfying
to that point in the system from where it will be used. Customer Demand
2. Ordering cost: In addition to the per unit purchase cost, there is usually an addi-
tional cost which is incurred whenever we order, record and/or replenish the inven-
tory. If we produce items internally, then there will be an organization set-up cost.
This happens because we have to shut down the manufacturing line, and change NOTES
over and reconfigure the line to make a specific item. This is the cost involved with
the processing of the order, involving paying the bill, auditing and so forth.
3. Holding cost: It is the cost that accrues due to the actual holding of the inventory
over a period of time. Many different kinds of costs can be considered as holding
cost. The key characteristics of holding cost vary with the amount of inventory
being held and the time that the inventory is held.
The holding cost can also be classified as follows: Storage cost or cost of space,
damaged spoiled goods cost and handling labour and insurance cost.
4. Storage cost: When a demand arises which cannot be satisfied from available
inventory, an inventory shortage occurs.
Purchase, ordering and holding costs can be thought of as the costs of having inven-
tories, while shortage cost results for not having inventory, or for not having enough
inventory at the right place and at the right time.

7.6.1 INVENTORY CONTROL

Inventory control is the process of managing materials inventory of right quality and
quantity to be made available as and when required at least cost without facing any
stock-out situation resulting in loss of either production or sales. The desired level of
inventory can be neither high nor low because a high level of inventory will lead to
an increase in carrying cost, while a low level of inventory will lead to an increase in
ordering cost.
The main criterion for managing inventory is deciding on an inventory policy
regarding the level of inventory to be maintained based on the classification and types
of inventory, the buffer stock as well as reorder points (ROPs) and lead time and
EOQ. Periodically, an inventory control policy is reviewed to see how the policy is
working in terms of cost and availability in real life.
The primary objective of inventory control is to ensure smooth flow of stock in
terms of supplying the required quantity and quality of materials at minimal cost and
investment locked up in inventory. The control processes must also take care of the
fluctuating demand and production, providing adequate flexibility and minimizing
the associated risk and uncertainty as well as obsolescence.

7.6.2 EFFECTIVE INVENTORY MANAGEMENT

Inventory management means the methods that are used for organizing, holding and
replenishing stock. The main purpose of inventory management is minimizing differ-
ences between customers’ demand and availability of items. These differences are
caused by three factors: customers’ demand fluctuations, suppliers’ delivery time
fluctuations and inventory control accuracy.
The main goal is to keep the inventories on an optimal level, without stock-outs and
excesses. For this, two controversial but simultaneously mutually dependent tasks,
such as the loss of sales due to stock-out situation and cost of holding additional Self-Learning
inventory to meet sudden demand of customers, should be solved. It is necessary to Material 109
Advanced have enough inventories to fulfil orders of external and internal clients to satisfy their
Supply Chain
Management
requirements.

7.6.3 ORDER FILL RATE AND PACK FILL RATE

Usually, customer service level is measured as availability or by order fill rate.
NOTES Businesses normally keep track of order fill rate and pack fill rate by having a budget-
ary objective to achieve a target order and pack fill rate and every year trying to
improve upon that target. Many have achieved above 99% of order and pack fill rate
targets and have well-controlled inventory and demand management systems in place.
By order fill rate we mean that the customer order in terms of value and volume
has been satisfied. When the inventory of a particular item is not there, the order value
can still be managed by replacing one type of stock by another if that is acceptable to
the customers. Sometimes customers are persuaded to take another product in place
of the product that they ordered, and they normally accept such requests for maintain-
ing the relationship with the business and even sometimes when the product offered
in place of the product that customer ordered is a fast-moving product and is in
demand.
But marketers’ and business objective is not only to fill the order but also the pack.
By pack fill rate we normally mean that the customer order is fulfilled not only in
terms of product types and categories as well as the value of the order but also in
terms of SKUs that the customer ordered. And as said earlier, businesses target to
achieve above 90% or even 99% pack fill rate, and to achieve that kind of perfection
both demand forecast and production planning and control need to be managed well,
and there has to be enough flexibility built into the process to achieve that targeted
pack fill rate. Businesses who do not achieve such high order fill and pack fill rates
try to improve upon these criteria and budget that target to be achieved every year as
an improvement target.
To minimize inventory carrying costs, a trade-off between the cost of capital tied
up and business profitability has to be achieved following EOQs and timing. This
would mean having an accurate, complete and timely inventory transactions record
and avoiding differences between accounting and real inventory levels. Two tools
commonly employed to ensure inventory accuracy and control are ABC analysis and
cycle counting. Inventory management includes all activities of planning, forecasting
and replenishment.
For effective inventory management, other techniques and tools that can be
employed are as follows:
Cross-docking: This involves unloading goods arriving from a supplier and imme-
diately loading these goods onto outbound trucks bound for various retailer loca-
tions. This eliminates storage at the retailer’s inbound warehouse and cuts the
lead time. It has been used very successfully by Walmart and Xerox, among
others.
Delayed differentiation: This involves adding differentiating features to standard
products late in the process. For example, Benetton decided to make all of their
wool sweaters in undyed yarn and then dye the sweaters when they have more
accurate demand data which arrives nearing the season. Another term for delayed
differentiation is postponement.
Direct shipping: This allows a firm to ship directly to customers rather than through
Self-Learning
retailers. This approach eliminates steps in the supply chain and reduces lead time
110 Material
 as well as pipeline inventory. Reducing one or more steps in the supply chain is Managing Inventory
for Satisfying
known as disintermediation. Companies such as Dell use this approach. Customer Demand

7.6.4 INVENTORY TRANSACTION

Inventories normally move positions and/or locations for being used for various pur- NOTES
poses. The transactions of inventories can therefore happen for various reasons. When
transactions of inventories take place, there is legal transfer of ownership of the inven-
tories in case of sales. But transactions of inventories can also take place internally
from one section to another, and thereby control mechanism as well as authority, and
responsibility can also shift. Some of the routine transactions of inventories that take
place within as well as outside the business may include the following:
 Normal stock receipt: from previously issued purchase orders and transfers
 Unexpected stock receipts: the stuff that just shows up on receiving stock
 Requisitions: a request for material to be consumed within a company
 Emergency requisitions
 Sales
Transactions of various types can arise out of numerous reasons such as a sales orders
to be delivered to the client, orders to be picked up, cash sales from stock point and
warehouse, direct shipment to end customers, transfer to other warehouses or facili-
ties when required, stock return, returning the material to suppliers for say non-­
conformance to standards, scrapping and writing-off stocks.

7.6.5 STOCK-KEEPING UNIT

The inventory control is made by an SKU. An SKU is an individual product that dif-
fers from other products in some way, and inventories are kept SKU-wise. The differ-
ence could be in size, colour, brand, model, package, function or some other relevant
characteristic such as flavour and fragrance, or a combination of these. Each SKU has
its own unique identification code (product code) in the inventory accounting system,
and it is counted and stored separately from other items.
Much of inventory control is directed at controlling each SKU in the inventory.
Although daily operations of inventories may require SKU-level control, strategic
planning of inventory levels can be accomplished by substantially aggregating prod-
ucts into broad groups by some characteristic—product groups. A basic approach is
when managing the inventory investment of all SKUs collectively is the issue.
As the number of SKUs increases in a business, the complexity of inventory man-
agement also increases and as such businesses need to rationalize the SKUs based on
their performance in terms of sales volume in the customer segment it served and the
importance of that segment in business as well as profit contribution it makes.
Sometimes, small-volume SKUs are also carried in business inventory in order to be
a player in all sub-segments of the business category for other strategic reasons. The
strategic reasons could be the need to be present in all sub-categories and subseg-
ments of the business to keep the leadership position in the category. For example,
Reckitt Benckiser is a leader in shoe care category and its brand is Cherry Blossom.
There are many subcategories in this shoe care range and that include wax, liquid,
cream, cleaners, shoe shampoo, chalk for canvas shoes, handy shine and so on. Some
of these sub-categories have very small volume of business contributing small amount
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in sales and profit but to keep their leadership position in the market, Reckitt has to Material 111
Advanced keep inventory of all these products adding complexity to the system. But the fact
Supply Chain
Management
remains that SKUs add to complexity in inventory management. If a corporation has
the leadership position in certain types of products or product categories and is grow-
ing at a healthy rate, the competition is normally seen to be making attempts to break
that monopoly and to do that, the competition will constantly explore the possibility
NOTES of finding a suitable entry point to carve out a niche for them from the leader. This
niche will be some segment of the customers who would be looking for some differ-
entiation or they even might be left uncovered and not serviced. To eliminate those
possibilities of entry points, new SKUs are often introduced by the marketer just to
cover all segments even if some segments are either small or not profitable. SKUs
thus increase and so does the complexity in inventory management in particular and
SCM in general.

7.6.6. BULLWHIP EFFECT

Manufacturers like to produce in large lot sizes because it is more cost-effective. The
problem, however, is that producing in large lots does not allow for flexibility in terms
of product mix. It also adds to the inventory which a business may not require imme-
diately. The downside is that ordering/producing large lots can result in large inven-
tories of products that are currently not in demand while being out of stock for items
that are in demand.
Retailers find benefits in ordering large lots for benefits such as quantity discounts
and advantages of many trade schemes and promotions. And it also provides enough
safety stock. Distributors and wholesalers like to stock more of products which are
fast-moving and for which schemes and other promotions are being announced to
meet the demand coming from the retailers they serve.
Ordering and producing in large lots can also increase the safety stock of suppliers
and its corresponding carrying cost. It can also create what is called the bullwhip
effect. Everyone linked in the supply chain has a natural tendency to keep enough
margin of safety stock when they place their demand. This makes a multiplier effect
in the whole chain, impacting the performance. This effect is what we call the bull-
whip effect.
The bullwhip effect is the phenomenon of orders and inventories getting progres-
sively larger (more variable) moving backwards through the supply chain. This is
illustrated graphically in Figures 7.1–7.3.

Figure 7.1
Wholesalers/Distributors’ Orders to the Manufacturers

20

15
Order Quantity

10

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112 Material Time
 Figure 7.2 Managing Inventory
Consumer Offtake at Retail Sales Point for Satisfying
Customer Demand
20

15 NOTES
Order Quantity

10

0
Time

Figure 7.3
Manufacturers’ Orders to the Suppliers/Vendors

20

15
Order Quantity

10

0
Time

7.6.6.1 Causes That Lead to the Bullwhip Effect

There are many reasons that are responsible for the bullwhip effect. Some of those
reasons are as follows:
Demand forecasting: Many firms use the min–max inventory policy. This means that
when the inventory level falls to the ROP (min), an order is placed to bring the level
back to the max, or the order-up-to-level. As more data are observed, estimates of the
mean and standard deviation of customer demand are updated. This leads to changes
in the safety stock and order-up-to-level and, hence, the order quantity. This also leads
to variability.
Lead time: As lead time increases, safety stocks and order quantities are also
increased. This also leads to more variability.
Batch ordering: Many firms use batch ordering such as with a min-max inventory
policy. Their suppliers then see a large order followed by periods of no orders fol-
lowed by another large order. This pattern is repeated such that suppliers see a highly Self-Learning
variable pattern of orders. Material 113
Advanced Price fluctuation: If prices to retailers fluctuate, then they may try to stock up when
Supply Chain
Management
prices are lower, again leading to variability.
Inflated orders: When retailers predict that a product will be in short supply, they
tend to inflate orders to ensure that they will have ample supply to meet the customer
demand when stocks are unlikely to be made available when needed. When the short-
NOTES age period comes to an end, the retailer goes back to the smaller orders, thus causing
more variability.

7.6.6.2 The Effect on Supply Chain Performance

To contain the impact of the bullwhip effect, there is a great deal of coordination
required within the business among various departments. The lack of such coordina-
tion may impact the performance of the business negatively. The consumer offtake or
retail sales normally follow an established pattern. However, most of the time, whole-
salers’ and distributors’ orders that come to manufacturers do not reflect the real-term
demand of the customers and there are various reasons for that including retailers
deciding to stock a higher quantity when some offer or quantity discount is announced
by the company or during festival season or even on hearing the news of possibility
of short supply. Besides, for fast-moving items retailers always like to stock a higher
quantity (Crowther 1964).
Wholesalers on the other hand trade on heavy discounts to liquidate the stock and
for that reason they order a higher quantity from the manufacturers. Wholesalers have
a tendency to rotate the stock faster even if it is necessary to sell at a low margin
because by increasing the stock turnover ratio, the total profit will be higher. But this
approach can lead to overstocking the market as consumer offtake in most of the
cases follows a more or less uniform pattern. The result is the bullwhip effect.
Wholesalers also perform the role of the redistributors where traditional channel part-
ners cannot directly reach. They also have the tendency to trade in other’s territories
whenever an opportunity arises, creating distortion of the sales figure. Manufacturers,
therefore, order for the input materials from their vendors and suppliers which varies
widely, and vendors are not in a position to estimate the manufacturers’ requirements
and plan their production schedules to meet their clients’ requirements. These vari-
abilities have been shown in Figures 7.1–7.3.
This distortion due to the impact of the bullwhip effect results in the rise in various
costs like manufacturing costs, as the company and its suppliers have to cater to the
orders which are at variance with the customer demand. This also increases the inven-
tory costs because the company as well as the trade channel partners has to keep a
much higher level of the inventory in comparison to the real-term customer demand.
Because of the bullwhip effect, transportation requirements fluctuate significantly
over time because a higher quantity needs to be transported during a high demand
period, raising the transportation costs. The bullwhip effect also increases the cost of
handling for receiving the goods as well as for shipping the goods out. This can also
result in occasional stock-out situations, particularly with the retailers who do not
order more and others corner the stocks by buying more than required which in turn
results in loss of sales. It should be noted that a company’s real-term sales will be the
quantity sold by the retailer to the ultimate consumer or consumer offtake. The fluc-
tuation and all the distortion of sales take place because of the bullwhip effect, not
only impacting the performance and profitability of the business but also creating
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confusion and misunderstanding in the whole supply chain.
114 Material
7.6.6.3 Reducing Impact of Bullwhip Effect Managing Inventory
for Satisfying
Centralizing demand information occurs when customer demand information is avail- Customer Demand
able to all members of the supply chain. This information can be used to better predict
what products and volumes are needed and when they are needed so that manufactur-
ers can better plan for production. However, even though centralizing demand infor-
mation can reduce the bullwhip effect by reducing the uncertainty, it will not eliminate NOTES
it totally. Therefore, other methods that are needed to cope with the bullwhip effect
include the following:
 Reducing variability: This can be accomplished by using a technique made
popular by Walmart and then Home Depot called everyday low pricing (EDLP). It
eliminates promotions as well as the shifts in demand that accompany them. Large
retail stores and wholesale stores run the EDLP programme regularly on select
stock to reduce the impact of the bullwhip effect.
 Reducing lead time: Order times can be reduced by using EDI with the partners
in the supply chain. Access to the database by the concerned people reduces the
lead time of ordering.
 Strategic partnerships: The use of strategic partnerships can change how infor-
mation is shared and how inventory is managed within the supply chain. These
will be discussed later in greater detail.

7.7 REORDER LEVEL AND INVENTORY REVIEW POLICY

7.7.1 MANAGING UNCERTAINTY IN SUPPLY CHAIN
Due to dynamic nature of businesses and changing environment, demand fluctuates.
A higher level of inventory increases the cost of holding and other associated prob-
lems related to a company’s performance, but the company also cannot afford to lose
sales on account of non-availability of stock. Safety inventory, therefore, is carried in
the system to satisfy the demand that exceeds the demand forecast. The two factors
that determine the appropriate order point are the delivery time stock, which is the
inventory needed during the lead time, that is, the difference between the order date
and the receipt of the inventory ordered, and the safety stock, which is the minimum
level of inventory that is held as a protection against shortages due to fluctuation in
demand.

ROP (R) = Normal consumption during lead time + Safety stock.

In the context of today’s business environment, customers can go around and

search across stores for a stock of an item that they are looking for. If Amazon is out
of stock of a book title, a customer can easily check if the same title is available on
Flipkart or even other stores like Barnes & Noble. Searching online is easy and that
makes a more valid case to ensure that the stock is available. For any supply chain,
following questions are required to be considered when the business is planning for
safety stock: What is the appropriate or desired level of product availability? How
much safety stock is required for the desired level of product availability? What
actions can be taken to reduce safety stock without compromising product availability
level?
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Material 115
Advanced 7.7.2 MEASURING PRODUCT AVAILABILITY
Supply Chain
Management There are several ways to measure the product availability. One of those measures is
product fill rate, which means the fraction of the product demand that is satisfied from
the product available in the inventory. It is the corporation’s decision about the fill rate
but in an intensely fought competitive environment, companies aim at a very high fill
NOTES rate nearing 99%.

Product fill rate = Product demand/Product available in inventory

(7.2)
= 99/100 = 99%

The other measure of product availability is order fill rate, which again means a frac-
tion of the order received that is filled by the inventory of the product itself and that
also measures the specific numbers of the orders. Besides, product fill rate and order
fill rate companies also measure pack fill rate to ensure a higher degree of customer
satisfaction. In addition to these measures, product availability can also be determined
by cycle service level (CSL) which is the fraction of the replenishment cycles that end
with all the customers’ demands being met. The replenishment cycle is the interval
between two successive replenishment deliveries, and therefore CSL is the probabil-
ity of not having a stock-out in a replacement cycle and is measured over a specific
number of replenishment cycles.

7.7.3 ESTIMATING SAFETY STOCK

Safety stock is the average stock on hand when a replenishment order arrives.
Therefore, for example, when the lead time of the order is LT weeks for a product,
say mobile phone, and mean weekly demand of the product is D,

Expected demand during the lead time = LT × D. (7.3)

Given that the distributor places the replenishment order when the ROP of the product
(mobile phones) is on hand,

Safety stock (SS) = ROP – (LT × D). (7.4)

This we will work out taking some examples.

Example 1. Estimating Safety Stock from Replenishment Policy
Let us assume a distributor of mobile phones having weekly demand with a mean of
3,000 and standard deviation of 500. Let us also assume that the manufacturer takes
about two weeks to fill the order (lead time of order). The distributor currently orders
12,000 mobile sets when the inventory on hands drops to 7,000.
As per the replenishment policy of the distributor,
• Average demand per week = D = 3,000
• Standard deviation of weekly demand = αD = 500
• Average lead time for replenishment = LT = 2 weeks
• ROP = 7,000
• Average lot size (ordering quantity) = 12,000
• Safety stock = SS = ROP – (LT × D) = 7,000 – (2 × 3,000) = 7,000 – 6000 = 1,000.
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116 Material
 The distributor thus will carry 1,000 safety stock as a safeguard against uncertainty Managing Inventory
for Satisfying
in demand. Customer Demand
• Cycle inventory = 12,000/2 = 6000
• Average inventory = cycle inventory + safety stock = 6,000 + 1,000 = 7,000
The distributor thus carries on an average 7,000 mobile sets in stock. NOTES
Average flow time = Average inventory/Average demand = 7,000/3,000 = 2.33
weeks, which means that each mobile set thus remains in the distributor’s stock for
2.33 weeks.
Example 2. Estimating Safety Stock from Desired CSL
CSL is the probability of not getting into a stock-out situation in a replenishment
cycle. Thus, CSL = The probability of demand during lead time should be less than
or equal to ROP. And to evaluate this probability, we need to determine the distribu-
tion of demand during the lead time which again follows a normal distribution with a
mean of DT and a standard deviation of αT.
Taking the earlier case of mobile phone in a store with an average sales per week
of 3,000 and standard deviation of 500, the lead time of ordering is 2 weeks. If the
store reviews the replenishment policy continuously, then let us estimate the safety
stock that the store should carry to achieve a CSL of 90%.
Here we have
• Demand per week = D = 3,000
• Mean standard deviation = αT = 500
• CSL = 0.9
• Lead time = T =2 weeks.
Because demand across time is independent, we can have
• DT = 2 × 3,000 = 6,000
• αT = √ T αT = √ 2 × 500 = 707
Thus, safety stock will work out as NORMSINV(0.90) × 707 = 906.
(Note: NORMSINV(P) returns the standardized normal deviate Z corresponding
with one-tailed probability P, where P must be a value between 0 and 1. NORMSINV
is the inverse function of the NORMSDIST function. NORMSINV(0.9) = 1.28155.)
Therefore, to achieve the cycle inventory service level of 90%, the safety stock is
906 mobile sets.
Businesses need to have a measure of product availability from the business per-
formance criteria like service level or order fill or pack fill rate, and using those cri-
teria of measures, companies will work out the safety stock in the business but most
importantly it is critical to business to use available managerial levers to lower the
safety stock without hurting product availability or losing out on sales and impacting
customer service levels as per the objective of the business.

7.7.4 REORDER POINT

Example 1: When there is variable demand and constant lead time, the inventory
level might be depleted at a faster rate during the lead time (Figure 7.4).
When the demand is uncertain, a safety stock of inventory is frequently added to
the expected demand during the lead time (Figure 7.5).
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Material 117
Advanced Figure 7.4
Supply Chain ROP with Variable Demand
Management

Inventory Level
Q

NOTES

ROP, R

0
LT LT
Time

Figure 7.5
ROP with Safety Stock
Inventory Level

Q
ROP, R

Safety Stock
0
LT LT
Time

7.7.5 SERVICE LEVEL

Service level to be achieved provides an assurance to the customers regarding what
will be the lead time to meet the demand of a customer from the time of receiving the
supply order to what level of accuracy. Following are its features:
• The probability that the inventory available during the lead time will meet demand.
• Stock-out means an inventory shortage.
• A service level of 90% means that there is 0.90 probability that the demand will
be met during the lead time and the probability that a stock-out will occur is 10%
(Figure 7.6).
When there is variable demand and constant lead time,

R = d LT + z  d LT (7.5)

where
dˉ = Average daily demand
LT = Lead time
d = Standard deviation of daily demand
Z = number of standard deviations corresponding to the service level probability
z  d LT = safety stock
The term  d LT, in this formula for the ROP is the square root of the sum of the
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118 Material
daily variances during the lead time.
 Figure 7.6 Managing Inventory
Service Level Determines the Safety Stock for Satisfying
Customer Demand
Probability of Meeting Demand
during Lead Time = Service Level

NOTES

Probability of
a Stockout
Safety Stock
Zσd L

dL R
Demand

Variance = (Daily variance) × (Number of days of lead time) =  d 2 LT

Standard deviation =  d 2 LT =  d LT,

Example 2: For the same e-Paint internet store, let us assume that the daily demand
for iron coat paint is normally distributed with an average daily demand of 30 gallons
and a standard deviation of 5 gallons of paint per day. The lead time for receiving a
new order of paint is 10 days. Determine the ROP and safety stock if the store wants
a service level of 95% with the probability of a stock-out equal to 5%.
Solution:
dˉ = 30 gallons per day
LT = 10 days
d = 5 gallons per day
For a 95% service level, Z = 1.65 (from table area under the standardized normal
curve)

Safety stock = z  d LT,

= (1.65) (5) ( 10)
= 26.1 gallons
R = d LT + z  d LT
= 30(10) + 26.1
= 326.1 gallons

When there is constant demand and variable lead time, if only lead time is variable,
then  d LT = d  LT

R = d LT + zd  LT ,(7.6)

where
d = Demand rate
LT = Average lead time
LT = Standard deviation of lead time
Z = Number of standard deviations corresponding to the service level probability Self-Learning
Material 119
Advanced Example 3: A motel uses approximately 600 bars of soap each day, and this tends to
Supply Chain
Management
be fairly constant. The lead time for soap delivery is normally distributed with a mean
of six days and a standard deviation of two days. A service level of 90% is desired.
1. Find the ROP.
2. How many days of supply are on hand at the ROP?
NOTES
Solution:
d = 600 bars per day
SL = 90%, so z = 1.28 (from table area under the standardized normal curve)
LT = 6 days
LT = 2 days

R = d LT + zd σ LT
= 600 × (6) + 1.28 × (600) × (2)
= 5,136 bars of soap
No. of days = R/d = 5,136/600 = 8.56 days

ROP: Variable demand and variable lead time Expression

If both demand and lead time are variable, then

 dLT  LT  2 d  d 2  2 LT .

R = d × LT + z LT  2 d + d 2  2 LT ,

where
dˉ = Average demand rate
LT = Average lead time
LT = Standard deviation of lead time
d = Standard deviation of demand rate
z = Number of standard deviations corresponding to the service level probability
Example 4: The motel replaces broken glasses at a rate of 25 per day. In the past, this
quantity has tended to vary normally and have a standard deviation of three glasses
per day. Glasses are ordered from a Cleveland supplier. The lead time is normally
distributed with an average of 10 days and a standard deviation of 2 days. What ROP
should be used to achieve a service level of 95%?
Solution:
dˉ = 25 glasses per day
SL = 95%, so z = 1.65 (from table area under the standardized normal curve)
LT = 10 days
LT = 2 days
d = 3 glasses per day

R = d × LT + z LT σ 2 d + d 2 σ 2 LT

= 25(10) = 1.6 10(3)2  (252 )(2 2 )

= 334 glasses
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120 Material
7.7.6 SINGLE PERIOD MODEL Managing Inventory
for Satisfying
Sometimes referred to as the newsboy problem, it is used to handle ordering of per- Customer Demand
ishables (fresh fruits, vegetables, seafood, cut flowers) and items that have a limited
useful life (newspapers, magazines, spare parts for specialized equipment). It focuses
on two costs: shortage cost and excess cost.
As the product is perishable and has a very limited shelf life or useful life, if there NOTES
is excess stock then businesses lose as the unsold stock is lost. Also, if there is short-
age of stock, then the loss will be arising out of loss of sales, dissatisfied customer
and customer moving to the competition.
Shortage costs may include a charge for loss of customer goodwill as well as the
opportunity cost of lost sales. Generally, shortage costs are simply unrealized profit
per unit.

C shortage (Cs) = Revenue per unit – Cost per unit.

Excess cost pertains to the items left over at the end of the period. In effect, excess
cost is the difference between the purchase cost and salvage value.

C excess (Ce) = Original cost per unit – Salvage value per unit

7.7.7 CONTINUOUS STOCKING LEVELS

Demand from customers should not ideally exceed the stocking level of the inventory.
As per the demand of the customers, inventory is constantly adjusted and replenished
with fresh stocks to keep the stocking level at optimum. Following are the features:
• The stocking level equalizes the cost weights.
• The service level is the probability that the demand will not exceed the stocking
level, and computation of the service level is the key to determining the optimal
stocking level (So). Service level has to be determined from the experience to avoid
excess stock and not losing the customer for shortage of stock which will lead us
to an optimal stocking level which is a trade-off between the two.

Service level (SL) = Cs/(Cs + Ce),

where
Cs = Shortage cost per unit
Ce = Excess cost per unit
Example 5: Sweet cider is delivered weekly to Cindy’s bar. The demand varies uni-
formly between 300 litres and 500 litres per week. Cindy’s pays 20 cents per litre for
the cider and charges 80 cents per litre for it. Unsold cider has no salvage value and
cannot be carried over into the next week due to spoilage. Find the optimal stocking
level and its stock-out risk for that quantity.

Ce = Cost per unit – Salvage per unit

= $0.20 – $0
= $0.20 per unit
Cs = Revenue per unit – Cost per unit
= $0.80 – $0.20
= $0.60 per unit Self-Learning
SL = Cs/(Cs + Ce) = 0.60/(0.60 + 0.20) = 0.75 Material 121
Advanced Thus, the optimal stocking level must satisfy the demand 75% of the time. For uni-
Supply Chain
Management
form distribution, this will be at a point equal to the minimum demand plus 75% of
the difference between maximum and minimum demands.

So = 300 + 0.75(500 – 300) = 450 litres

NOTES
The stock-out risk = 1 – 0.75 = 0.25.

7.7.8 IMPACT OF UNCERTAINTIES

Uncertainties in supply, process and demand are recognized to have a major impact
on the manufacturing function. Uncertainty propagates throughout the network and
leads to inefficient processing and non-value-adding activities. The uncertainty aris-
ing out of uncertain customer orders that leads to the question—how many and how
much stock that business should carry and will the supplier deliver the requested
stock on time and as per specifications. But those who can manage the uncertainty
better deliver much superior performance.

UNIT SUMMARY
This unit deals with the core issues which influence the level of inventory to be kept
at various stock points to cater to the real-term customer demand. Most of the busi-
nesses really do not have any idea about how much money and other resources are
locked up in the inventory impacting their business performance. This unit discusses
the methods and processes to bring in efficiency in inventory management by elabo-
rating and analysing the key issues and their consequences very critically. It is better
to run the business without any inventory following the JIT principle or ‘make to
order’ policy. But this may not be always possible and businesses will end up holding
some inventory at various locations. Inventory normally builds up in business often
without the knowledge of the management, and it comes to the knowledge of the
management when annual or periodic stock audit is conducted. In some of the busi-
nesses like retail operation including organized retail and online retail, inventory
management is the most critical operation, and in fact, the whole profit from the busi-
ness hinges on the effectiveness of the inventory management practices. These issues
are analysed and discussed in the unit. In an integrated SCM, the entire planning for
production and inventory including ordering of input materials like raw and packag-
ing material starts from the sales order received from the customer and optimized for
resource management as well as for the better performance of the company’s opera-
tions. The issues concerning the demand management and inventory management and
control are discussed. The concepts of cycle inventory and safety inventory are dis-
cussed with examples. The importance of efficient inventory management in terms of
servicing the customer orders and also avoiding a stock-out situation is critically
analysed taking many real-life business situations to understand how inventory can
impact business performance.
Inventory management goals, objective, types of inventory, classification of inven-
tory, inventory cost and management are also discussed with examples. Inventory
control, transaction, rotation and SKUs are explained. The bullwhip effect and rea-
sons thereof and how it can be controlled are also discussed. The impact of excess
Self-Learning inventory within a business as well as in trade channels and how those to be managed
122 Material for optimum performance are discussed.
 In a dynamic business environment, demand fluctuates and businesses need to Managing Inventory
for Satisfying
cater to the fluctuating demand. There are various reasons for demand uncertainty, Customer Demand
and this unit discusses those reasons with examples and exercises as well as a case to
drive the point. How safety stock is calculated to ensure product availability under
uncertainty conditions is discussed with examples.
NOTES

Gl o s s a r y

 Inventory: Inventory constitutes the stock levels of raw, packaging material and
other input material such as standard spares and also the finished goods, as well as
work in progress (WIP) carried in the business to service the demand in the market.
 Inventory Control: Inventory control is the process of managing materials inven-
tory of right quality and quantity to be made available as and when required at
least cost without facing any stock-out situation resulting in loss of either produc-
tion or sales.
 Cross-Docking: Cross-docking involves unloading goods arriving from a supplier
and immediately loading these goods onto outbound trucks bound for various
retailer locations.
 Stock-Keeping Unit (SKU): A stock-keeping unit (SKU) is an individual product
that differs from other products in some way, and inventories are kept SKU-wise.
 Bullwhip Effect: The bullwhip effect is the phenomenon of orders and inventories
getting progressively larger (more variable) moving backward through the supply
chain.
 Back-Ordering: The quantity requested by the customer is placed on a separate
order called a back-order and the special order is filled as soon as the product is
available from the internal or external source.

Rev i ew que stions

Objective Type Questions

1. Inventory _______________ represents over 20% of the total assets of manufac-

turers and more than 50% of the total assets of wholesalers and retailers.
a. Control
b. Investment
c. Management
d. None of the above
2. With an adequate inventory level, businesses are protected from any
_______________ and lead time of delivery.
a. Uncertainties in price
b. Uncertainties in production
c. Uncertainties in supply
d. Uncertainties in demand
3. How can you reduce the negative impact of inventory holding cost on the
business?
a. By efficient management of short-supply items
b. By efficient management of working capital Self-Learning
Material 123
Advanced c. By efficient management of finished goods
Supply Chain
Management
d. By efficient management of packaging material
4. Which type of inventories includes maintenance, repairs and operating supplies
during the production process and do not form part of the product itself?
a. Finished goods inventories
NOTES b. Raw material inventories
c. Spare part inventories
d. Packaging material inventories
5. _______________ inventory means the actual count on a given date or at the end
of a period.
a. Transit inventories
b. Movement inventories
c. Physical inventories
d. Fluctuation inventories
6. Which stock is held in excess of cycle stock due to uncertainty in demand or lead
time?
a. Pipeline stock
b. Safety or buffer stock
c. Speculative stock
d. Seasonal stock
7. _______________ stock are the items for which no demand has been registered
for some specified period of time
a. Dead
b. Expired
c. Near-expiry
d. Speculative
8. The main purpose of inventory management is _______________ between cus-
tomers’ demand and availability of items.
a. Minimizing differences
b. Maximizing differences
c. Consolidating differences
d. Establishing differences
9. _______________means the fraction of the product demand that is satisfied from
the product available in the inventory.
a. Product fill rate
b. Order fill rate
c. Product lead-time
d. Product response
10. Which is the minimum level of inventory that is held as a protection against short-
ages due to fluctuation in demand?
a. Delivery time stock
b. Safety stock
c. Expired stock
d. Dead stock
Self-Learning Answers: 1. b; 2. d; 3. b; 4. c; 5. c; 6. b; 7. a; 8. a; 9. a; 10. b
124 Material
Descriptive Questions Managing Inventory
for Satisfying
Customer Demand
1. Why do we need inventory? What are the important goals and objectives of inven-
tory management?
2. How does inventory impact business performance? Discuss different approaches
to classify the inventory. For efficient and responsive supply chain operations, how NOTES
should the inventory of various types be analysed?
3. What constitute inventory cost? Discuss the tools and techniques of effective
inventory management.
4. What is the bullwhip effect and what causes it? How does it impact the supply
chain performance?
5. How can businesses reduce the impact of the bullwhip effect? Discuss the possible
responses of businesses to a stock-out situation.

Re fe re n c e s

Crowther, John E. 1964. ‘Rationale for Quantity Discounts’. Harvard Business Review
(March–April): 121–127.

B i b l i ogr a phy

Lee, Hau L., and Corey Billington. 1992. ‘Managing Supply Chain Inventories’. Sloan
Management Review (Spring): 65–73.
Love, S. 1979. Inventory Control. New York, NY: McGraw-Hill.
Silver, Edward A., David Pyke, and Rein Petersen. 1998. Inventory Management and
Production Planning and Scheduling. New York, NY: John Wiley & Sons.
Vrat, P. 2014. Materials Management: An Integrated Systems Approach. India: Springer.
Zipkin, Paul H. 2000. Foundations of Inventory Management. Boston, MA: Irwin/McGraw-
Hill.

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Material 125
 8
UNIT

NOTES

Transportation

LEARNING OBJECTIVES
LO 1 Understand the role of transportation in supply chain and
logistics management
LO 2 Learn about the types and modes of transportation and
decision criteria on the selection of mode of transport system
for business
LO 3 Know about the global transportation network and challenges
of ocean shipping
LO 4 Familiarize with the situation of transport logistics in
India
LO 5 Recognize the key hazards in transportation

8.1 INTRODUCTION
The transport sector is considered as the most vital sector of any economy. Goods
and services move faster with well-developed road, port and rail infrastructures,
incurring lesser cost. If roads are wide and good, suitable for the movement of
heavy transport vehicles, freight cost will come down making the economy more
competitive. Transportation is therefore vital for growth and development of any
economy and society. The supply chain performance of any corporation is linked
with the status of the transport sector in that environment. One of the elements of
the cost of logistics operations is transport or shipping cost. There is therefore a
need for businesses to study this transport system, infrastructure as well as regula-
tion related to the movement of their goods and services from the point of produc-
tion to the point of consumption. Freight cost for both bringing the input material
to the production site and taking the output material to the consumption point
contributes lot to the cost of the product. In a typical situation and market struc-
ture that prevails in India which is highly complex, transportation cost is much
higher in comparison to the developed countries of the world. Finding out better
and more cost-effective options on mode of transport is a big challenge to the
logistic manager. Managing transportation effectively helps businesses to have
some competitive advantage over others. Manufacturing in-house against out-
house options also hinges on savings that can be derived by such decisions on
sourcing of products and services.

Self-Learning
126 Material
 Transportation
8.2 ROLE OF TRANSPORTATION
Transportation is an essential service and is the nerve centre of any economy. The
economy will come to a grinding halt if the transportation service is disrupted and no
system can tolerate such situations. This can even create civil unrest if essential goods
and services do not reach the locations in time where these are needed. In that sense, NOTES
the transportation industry plays a very useful role in the economy. The products are
produced and stored in one location but they are consumed in different locations. And
invariably, products are to be delivered in consuming centres and buyers are spread
all over in a geographical area to be covered by a company. Transportation is thus a
very important driver of the supply chain as products are hardly consumed where
these are produced. There was a time when logistics was almost synonymous with
transportation, but the transportation industry is really huge. India’s logistics industry
which is synonymous with transportation is worth about US$160 billion growing at
the compound annual growth rate (CAGR) of 10.5%, and with the implementation of
GST, total logistics industry is likely to touch US$215 billion by 2020 as per the
Economic Survey of 2017–2018. Indian logistics industry has grown at a CAGR of
7.8% during 2012–2017, and it provides employment to 22 million people. In terms
of global ranking of World Bank’s LPI, India’s rank improved to 35th in 2016 from
the earlier ranking of 54th in 2014, indicative of the fact that India has improved in
terms of global LPI.
To a large extent, the logistics sector in India remains unorganized. The industry is
facing challenges of high cost of logistics, impacting its competitiveness in both
domestic and international markets. Other factors responsible for higher costs of
logistics are poor physical infrastructure, lack of use of technology for material hand-
ing, fragmented warehousing and lack of seamless movement of goods across modes.
In order to develop this sector for integrated logistics management, it is important to
focus on new technology, higher investment in the sector, skilling and removal of
bottlenecks, improvement of intermodal transportation, automation, single window
clearance and simplifying processes, which are the key imperatives.
Freight cost is a significant element of cost in the supply chain, and managing trans-
portation effectively is a key determinant of success criteria for the business. In a
developing country like India, because of poor infrastructure, logistics cost is much
higher. While in India logistics cost is about 15% of the selling price, in the USA it is
about 8% and hence they are more competitive. Because of poor road conditions, it
takes much longer for trucks to travel from one place to another for carrying the goods.
The truck capacity is also lower because the roads are narrow in many places. Besides,
we also use slow-moving vehicles and traditional transport system such as auto-­
rickshaws, cycle-rickshaws, bullock carts, horse and camel carts and even human
beings carrying stock as headload for last-mile connectivity. The last-mile connectivity
adds not only cost but also complexity to the whole transport system. Before the imple-
mentation of GST, there were checkpoints at the entry of every state, which further
delayed vehicle movement and added to both cost and complexity. E-commerce play-
ers like e-retailers use courier service to deliver the product to individual customers
either sourcing it directly from the manufacturer-marketers or sourcing it from the
company’s strategic stock point where the inventory of some of the high-demand prod-
uct categories is always maintained. Because of the limitation of the reach of the
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Advanced courier service in a country like India as well as the complexity of tax compliance in
Supply Chain
Management
addition to penetration of the internet, e-commerce services have not yet been able to
reach their natural potential. Things, however, are now improving.
In global trade, freight is an important consideration of competitiveness. The supply
chain performance of some of the global companies such as Walmart and IKEA
NOTES depends upon the logistics cost as these companies source from low-cost countries and
then sell their products throughout the world. Transportation is therefore an important
element of consideration. Large format stores and global supply chain network help
them to improve the cost effectiveness. Their stocks are normally carried by large ship-
ping lines. The shipper in this case is the company like Walmart itself, as they are the
party that requires movement of the product between sourcing point and delivery point
of the supply chain, and the carrier is the party that moves or transports the product
and in this case that could be shipping lines like Maersk Line or DSV.
The world’s economic development is closely associated with the development of
transport infrastructure. Transport logistics helps sustain global economic growth and
accelerate the globalization of productive activities and markets. The continued
growth of geographical infrastructure is critical for the persistence of transport logis-
tics within the global economy. International transport has evolved from its original
relationships between ships, airport and other transport vehicles to physically making
cargoes between geographical points to match the supply and demand requirement.

8.3 FUNCTIONS OF TRANSPORT

Transportation helps in the growth of the business in FMCG by quickly replenishing
the goods at numerous stock points and retail outlets. An efficient transportation
system is a prerequisite for achieving the growth target in a competitive business.
Some products are consumed fast, and if quickly replenished, the incremental demand
can be generated. For some products, the sale is lost permanently due to non-­
availability of stock. Thus, transportation also helps in increasing the demand for the
product.
Transport helps in creating both time and space utilities by taking goods from pro-
duction centres located even in remote locations where there is no local demand to
places where demand exists, and also by moving goods and services faster from one
location to another. Transport helps consumers to enjoy quality goods produced in
distant locations including overseas locations. Without efficient transport, this would
not have been possible. Consumers need not have to consume only what is produced
locally. They get products produced and manufactured in distant locations as well.
Transport makes that distance short.
If the transport system is not efficient and effective, there will be scarcity of stocks
in certain locations resulting in price rise. Transport, thus, helps in terms of stabilizing
the price of the goods. For essential goods, an efficient transport system is a must.
Transport thus ensures even flow of commodities in the hands of consumers through-
out the period of consumption.
Transport also provides a competitive edge to the business by transporting large
stocks at preferential rates to remain competitive in comparison to local suppliers of
a similar or same product.
And lastly, transport increases the mobility of capital and labour from one location
Self-Learning to another, which is vital for economic growth. Labours migrate from one location to
128 Material
another in search of jobs. Capital equipment are sourced and transported from various Transportation
locations even from overseas for setting up large projects, creating new opportunities.
New projects would not be possible to set up without having an efficient transport
system in place to take the goods to sell where customers exist or even to transport
the plant and equipment to site for setting up the project.
NOTES

8.4 MODE OF TRANSPORTATION AND

CRITERIA OF DECISION
Mode of transportation largely depends on whether it is a domestic cargo or an inter-
national cargo. All international cargoes also involve transportation to the domestic
area after the cargo reaches the port of destination. In a typical supply chain, the fol-
lowing modes of transportation are used to ensure movement of goods from the point
of origin to the point of consumption. They are also used in combination wherever
required. For a domestic cargo, trucks and rails are the most widely used mode of
transportation.
 Rail
 Truck
 Air
 Water
 Pipelines
 Package carriers
 Intermodal
An international cargo is taken either by air or water. However, in Europe it is largely
surface transport as small countries are all connected through excellent high-speed
motorable roads. Rail connectivity is also good. Broadly, several modes of transport
can be reclassified as follows:
1. Road transport
2. Water transport
3. Air transport

8.4.1 ROAD TRANSPORT

If we consider the typical transport system that still prevails in a country like India,
we can have the following:
 Pathways: Goods are also transported as headloads or on animal cart or even on
animal backloads. In remote villages and forest areas including hilly areas, this is
still an important mode of transport where vehicles cannot reach. In Gomukh from
where the holy Ganges emerges and Topovan which is about 18 km from Gangotri
or similar such places in the Himalayan region, goods are transported by human
beings in headloads or on animals’ backs, as road transport is possible only up to
Gangotri. Goods reach such areas in animal transport mode. Animals such as
horses, ponies, donkeys, asses, buffaloes, camels, elephants, yaks and sheep are
used to transport goods in remote areas in hills, forests and deserts.
 Roadways: It is used for both vehicular and non-vehicular transport. Road trans-
port is one of the most important modes of transport in the commercial world.
There is a significant improvement. Vehicular transport cars, trucks, buses, lorries, Self-Learning
Material 129
Advanced auto-rickshaws, bullock carts, tongas, hand carts and so on, and non-vehicular
Supply Chain
Management
transport such as hamals and animals such as camels, dogs, elephants, horses and
mules are seen to be in use for carrying goods. In developed countries like the
USA and European Union (EU) countries, majority of the stock moves in heavy-
duty, fast-moving trucks, trailers and other fast-moving transport vehicles. Because
NOTES of an excellent road network connecting most of the countries, road transport is a
preferred mode of transport. Even in India, large part of the stock still moves by
truckers. Roadways thus facilitate the movement of a major portion of the goods
(Mover DB.com 2016).
 Tramways: Tramway is one of the cheaper, longer, quicker and safer modes of
land transport which is suitable only in large cities where it still exists. But in
many cities, it has been phased out. It has many limitations as it is considered a
slow-moving, high-cost as well as inflexible in nature mode, covering a limited
area, and is hardly used for goods transport even in local areas.
 Railways: Railway has been one of the most preferred modes of transport in many
countries. It has helped in the growth of commercial and industrial development
of various countries. Until the introduction of motor transport, railway had the
monopoly over the land transport. In India, it is the principal means of transport.
It carries over 80% of goods traffic and over 70% of passenger traffic. It covers
more than 60,000 km of distance in India. Railway includes both passenger and
goods trains and is much cheaper and hence preferred for bulk goods carrier for
essential goods.

8.4.2 WATER TRANSPORT

Water transport is the cheapest and oldest mode of transport for large and bulky car-
goes. An international cargo mostly moves by a ship as an ocean cargo. In Kerala, a
large part of trade within the state is carried out by water transport. Boats carry stock
through rivers and canals, taking stock from one part to another selling the stock of
goods en route. This is cheap, environment friendly and also economical. Accordingly,
inland water transport can thus be divided into river transport and canal transport.
River transport is suitable for small boats and steamers. It was highly developed in
the pre-railway days. But with the development of railways, river transport was
neglected and decayed gradually. Canals are the artificial waterways constructed for
the purpose of navigation as well as irrigation. It is therefore limited to certain areas.
A plan has been drawn up to develop some of these river transport for commercial
movement of cargo. In northeastern areas again, the idea of water transport has been
mooted and a plan has been drawn up for the purpose.

Ocean Transport
Ocean transport or shipping may be subdivided into various sub-categories based on
their scope and services offered to the logistics operator:
 Coastal shipping: Coastal shipping is a cheaper, speedy, flexible and economical
form of transport for the movement of bulky and heavy cargoes. Usually, coastal
shipping trade is reserved for the national shipping. In India also, from 1951
onwards, coastal shipping trade is extremely reserved for the national ships. The
government has taken initiatives to connect waterways through rivers which can
Self-Learning
reduce the cost of shipping. In places like Kerala, normal trade is also done carry-
130 Material ing goods through canals and local rivers.
 Overseas shipping: On the basis of their working, overseas shipping may be Transportation
divided into the following: liners (those ships which follow defined routes with
fixed places and fixed timetables), tramps (those ships which have no set routes or
fixed timetables) and oil tankers (special sea carriers of crude oil in very large
quantity). Liners may again be subdivided into passenger liners and cargo liners.
Major global carriers include Maersk Line, DSV, American President Lines NOTES
(APL), Evergreen Group, Hanjin Shipping Company and so on. In India, we have
Shipping Corporation of India—a public sector company acting as a major ship-
ping line from India. The Great Eastern Shipping Company Ltd is the India’s larg-
est private shipping company, which mainly transports liquid, gas and solid bulk
products. In global trade, water transport is the most dominant mode of transport
for all kinds of products and merchandise such as cars, food, grains and garments.
Considering the quantities shipped and long distances involved, the recent trend is
in the growth of the container shipment which has led to the demand of much
larger in size, faster and specialized vessels to improve the economy of the con-
tainer transport. Vessels used in ocean shipping, as mentioned above, thus include
the following:
 Bulk service: It is engaged in the transfer of dry bulk commodities from rail or
truck to deck.
 Liner service: It is engaged in a service that operates within a schedule and has
a fixed port rotation.
 Tramp service: It is engaged in a service that operates within a schedule and
has a fixed port rotation.

8.4.3 AIR TRANSPORT

It is the latest mode of transport started in the 20th century. The first air service started
between London and Paris in 1919, and it became a regular mode of transport during
the First World War (1914–1918), and thereafter it gradually increased and started
giving competition to railways. Like railways, air transport also has two components:
passenger and cargo. Air transport is considered for costly cargoes such as defence
cargo and urgent cargo, which are required to reach the destination urgently. For
example, during any disaster management situation or a war time situation, air cargo
is preferred as cost is not that much of an important consideration during those
situations.
Air freight is available to and from most countries including the developing world.
Forty per cent of the world’s manufactured products travel by air. Items that are of
high value or are high in size tend to travel by air. Also, items that need to be moved
on a short notice need to travel by air and as such defence services and their logistics
need to be transported by air.

Considerations for Selecting a Mode of Transport

There are many considerations to be taken into account for taking a decision regard-
ing the mode of transportation to be used in a particular case. These include the
following:
 Transit time
 Cost
 Predictability
 Non-economic factors Self-Learning
Material 131
Advanced The non-economic factors could be safety, reliability, past experience and even envi-
Supply Chain
Management
ronmental and sustainability factors.

8.4.4 PACKAGE CARRIERS

Package carriers are actually transportation companies including FedEx, UPS, DHL,
NOTES Blue Dart, postal service and many such courier companies which take small parcels
and courier packets for transporting all over the world. Given the small size of pack-
ages and multiple delivery points, consolidation of shipment is a key consideration in
terms of increasing the utilization and reducing the cost for package carriers. They
make use of trucks for local deliveries as well as for picking up of the packages. They
also have collection points and delivery and pick-up boys to manage the huge task of
collection and deliveries from multiple locations. Packages so collected are taken to
large sorting centres from where these are delivered by road, rail or air, as the case
may be, to various destinations. Key issues in this industry are location-specific chal-
lenges, the capacity of delivery points and information flow for tracking the package
en route till delivered. This mode of transport is preferred for online businesses which
handle customers in remote and multiple locations, and as such, with the growth of
online businesses, this industry has demonstrated significant growth.

8.4.5 PIPELINE
Pipelines are normally used to transport water by the municipal corporation or crude
petroleum oil or gas from the port terminal to the refineries located in the mainland.
This requires dedicated pipeline installations involving huge capital investment.
However, all refineries have their own network of pipelines to carry crude to the refin-
eries. The pipelines are designed to utilize the full installed capacity. They also face
security and pilferage issues and even disputes which they need to resolve.

8.4.6 INTERMODAL
Intermodal transportation is when more than one mode of transport are used to carry
the goods from the point of origin to the point of consumption. A variety of intermo-
dal transport is possible, for example, trucks and rails. As container shipping volume
has increased in global trade, intermodal transport has also increased as containers
are easy to transport from one mode to another and as such, containerized freight
often uses truck, water and rail combinations in global trade. Door-to-door deliverers
of cargoes in global trade invariably use intermodal transport of water, rail and truck
to make the best use of the transport infrastructure available in a given situation. The
key issue involved in intermodal transport is exchange of information flow to facili-
tate the shipment on real-time basis when goods are moving from one mode to
another, as these transfers often result in delays in delivery and thus also the
performance.

8.5 MAJOR MODES OF TRANSPORTATION

Major modes of transportation are thus road, rail (surface transport), sea and air. The
selection of the mode depends on cost, urgency and destination, and also on the mate-
rial to be transported. In global logistics, the most preferred modes of transport are
Self-Learning air and sea. However, sometimes special facilities like cold chain or refrigerated
132 Material
containers are required for the shipment of frozen goods like frozen marine products Transportation
that go from India to major European, Japanese as well US destinations. In domestic
transport, road is the most preferred; next to road is railways.
In Europe, both road and railways as surface transport are most important because
of the most efficient surface transport network. European cargo movement is some-
what similar to domestic cargo movement in countries like the USA and India. In a NOTES
domestic cargo, surface transport is the major driver for the delivery of the cargo.
However, if waterways are available and efficient, that would be the least costly mode
of transportation.

8.6 FACTORS IMPACTING ROAD TRANSPORT COST

There are several factors that impact the road transport cost which is high in India
when compared with that of developed countries. These factors include the
following:
 Road condition and network
 Number of traffic signals and crossings on the road to cross
 Type of road and its width
 Type of transport vehicles used for goods transport and their condition
 Loading capacity of the transport vehicle used
 Regulation and policy on surface transport
 Interstate controls and documentation
 Need for transhipment
 Loading/unloading facilities and mechanization
 Monitoring and control system
 Arrangement of stock in transport vehicle
 Communication network
 Driver’s personal efficiency and training
 Cost of motor fuel used (petrol, diesel, CNG)
 Last-mile connectivity
All these factors determine the travel time and also travel cost. In India, from the
northeastern part to south, the time taken is more than the time taken for a cargo to
move from Mumbai to a European destination.

8.7 MODE OF TRANSPORTATION: INDIA

8.7.1 DOMESTIC CARGO
This refers to all goods and merchandise required to be transported within the geo-
graphical territories of the country. Following are its features:
 Air cargo accounts for less than 1% of total cargo movement.
 Railways contribute 35%.
 Roads contribute 39%.
 Sea contributes 24% (8,000 km of coastline).
 Surface transport (road and rail) takes care of the largest load.
 Rail is cheaper, and for certain categories of goods including bulk commodities it
is the best option. Self-Learning
Material 133
Advanced 8.7.2 INTERNATIONAL TRANSPORTATION
Supply Chain
Management However, for an international cargo, port-to-port movement is all by sea. From the
destination port to the customer location, a cargo follows domestic cargo movement
facilities of that country again.
An international cargo, therefore, involves multiple agencies and channel partners.
NOTES Communication and information flow is, therefore, very critical to the efficiency and
cost of transport.

8.7.3 HAZARDS IN TRANSPORTATION

Transportation is associated with a lot of hazards and risks, which need to be man-
aged well. Also, there are international regulations and safety standards to be com-
plied with. There are reasons for such hazards. Some of those could be as follows:
 Air hazards are caused by variations and changes in temperature and pressure.
 Sea hazards are due to water damage, corrosive atmosphere, wave impact and
hostile storage conditions.
 Road/rail hazards are caused by shock, vibration, careless handling, impact break-
age and transhipment.
 Cargo overloading is also a cause of hazards in all forms of transport.
 Hazardous chemicals and inflammable goods also increase hazards in
transportation.
 Security issues increase with value of the consignment.

8.7.4 HAZARDS AND RISKS

All kinds of hazards lead to risk, and reducing hazards by taking adequate safety
measures increases cost. Risk is directly proportional to unknown travel conditions,
particularly handling, transshipment and last-mile connectivity. Risk in business
needs to be covered through adequate insurance against risk. And insurance will
depend on risk assessment, which in turn will depend on the quality of the cargo and
cargo types, geographical location, mode of transport and delivery schedule. Risk is
also associated with a specific ocean route. There has to be a trade-off between all
these risk variables and cost, but nothing can be made absolutely risk-free. To manage
hazards in transport, therefore, experience and gut feeling will come handy in taking
such decisions. However, the most important factor is the reputation of the ocean
liners in terms of their past performance as well as dispute settlement mechanism in
place.

8.7.5 WHAT IS RISK?

Risk actually arises out of unknown and is also directly proportional to the degree of
unknown. Nothing meaningful can be possible without taking some element of risk.
A dictionary definition of risk is ‘the possibility of loss or injury’. Risk involves the
understanding of the potential problems that might occur and how they might impede
the cargo and logistics movement. Risk management is like a form of insurance and,
therefore, it is an investment. Risk utility or risk tolerance is the amount of satisfac-
tion or pleasure received from a potential pay-off. Utility rises at a decreasing rate for
a person who is risk-averse. Those who are risk-seeking have a higher tolerance for
risk, and their satisfaction increases when more pay-off is at stake. The risk-neutral
Self-Learning approach achieves a balance between risk and pay-off.
134 Material
 Transportation
UNIT SUMMARY
This unit deals with the most important function in logistics and integrated SCM
which is transportation. Transportation is the most vital sector of any nation’s econ-
omy. The growth and performance of any economy get reflected from the status of
their transport industry. Goods and services need to be carried from the point of pro- NOTES
duction to the point of consumption by several modes of transport system. If the
transport system collapses, whole economy will collapse. On the other hand, an effi-
cient transport system can help making an economy vibrant. There are multiple
modes of transport vehicles and systems that are used in the industry to manage
supply chain and operations including logistics which are discussed in this unit.
Different modes of transportation used in both domestic and international cargo han-
dling are discussed with their relative advantages and disadvantages and also the costs
thereof.

Gl o s s a r y

 Transportation: Transportation is an essential service and is the nerve centre of

any economy. The economy will come to a grinding halt if the transportation ser-
vice is disrupted and no system can tolerate such situations.
 Freight Cost: Freight cost is a significant element of cost in the supply chain, and
managing transportation effectively is a key determinant of success criteria for the
business.
 Capital Equipment: Capital equipment are sourced and transported from various
locations even from overseas for setting up large projects, creating new
opportunities.
 Pathways: In pathways mode of road transportation, goods are also transported as
headloads, on animal carts or even on animal backloads.
 Roadways: Road transport is one of the most important modes of transport in the
commercial world. It is used for both vehicular and non-vehicular transport.
 Tramways: Tramway is one of the cheaper, longer, quicker and safer modes of
land transport which is suitable only in large cities where it still exists.
 Coastal Shipping: Coastal shipping is a cheaper, speedy, flexible and economical
form of transport for the movement of bulky and heavy cargoes.
 Package Carriers: Package carriers are actually transportation companies includ-
ing FedEx, UPS, DHL, Blue Dart, postal service and many such courier compa-
nies which take small parcels and courier packets for transporting all over the
world.
 Pipelines: Pipelines are normally used to transport water by the municipal corpo-
ration or crude petroleum oil or gas from the port terminal to the refineries located
in the mainland.
 Intermodal: Intermodal transportation is when more than one mode of trans-
port is used to carry the goods from the point of origin to the point of
consumption.
 Domestic Cargo: Domestic Cargo refers to all the goods and merchandise
required to be transported within the geographical territories of the country.
 Risk Utility or Risk Tolerance: Risk utility or risk tolerance is the amount of
satisfaction or pleasure received from a potential pay-off Utility rises at a decreas- Self-Learning
ing rate for a person who is risk-averse. Material 135
Advanced
Supply Chain
Review Questi ons
Management
Objective Type Questions

1. The economy will come to a grinding halt if the _______________ service is

NOTES disrupted and no system can tolerate such situations.
a. Integration
b. Communication
c. Transportation
d. Product
2. Transport _______________ the mobility of capital and labour from one location
to another, which is vital for economic growth.
a. Decreases
b. Stabilizes
c. Diminishes
d. Increases
3. Which cost is considered as an important consideration of competitiveness in
global trade?
a. Capital
b. Equipment
c. Freight
d. Material
4. If the transport system is not efficient and effective, there will be _______________
of stocks in certain locations resulting in price rise.
a. Scarcity
b. Abundance
c. Stability
d. Fluctuation
5. _______________ is one of the cheaper, longer, quicker and safer modes of land
transport which is suitable only in large cities where it still exists.
a. Tramways
b. Ocean
c. Roadways
d. Railways
6. In global trade, _______________ transport is the most dominant mode of trans-
port for all kinds of products and merchandise such as cars, food, grains and
garments.
a. Road
b. Rail
c. Water
d. Air
7. What factor depends on cost, urgency and destination, and also on the material to
be transported?
a. Selection of packages
b. Selection of materials
Self-Learning c. Selection of the mode of transport
136 Material
d. Selection of the infrastructure
 8. _______________is the amount of satisfaction or pleasure received from a Transportation
potential pay-off.
a. Risk management
b. Risk tolerance
c. Risk calculation
d. Risk element NOTES
9. In India, _______________ transportation takes place on a larger account and
mostly by sea. Only a small volume travels by air, and also fresh and perishables
go by air.
a. Local
b. Regional
c. Global
d. National
10. The _______________manager must learn about existing and planned infrastruc-
tures abroad and at home and factor them into the firm’s strategy.
a. Production
b. Procurement
c. Supply
d. Logistics
Answers: 1. c; 2. d; 3. c; 4. a; 5. a; 6. c; 7. c; 8. b; 9. c; 10. d

Descriptive Questions
1. How does transportation help in increasing the demand for the product?
2. What are the elements to be considered while selecting a mode of transport?
3. State a few factors that impact cost the road transport in India as compared to other
developed countries.
4. List the various hazards faced by businesses due to transportation.
5. What are the key features of domestic cargo in India?

Re fe re n c e s

Mover DB.com. 2016, March. ‘Top 10 International Container Shipping Companies’.

Available at: https://moverdb.com/shipping companies (accessed on 30 May 2019).

B i b l i ogr a phy

Ballou, Ronald H. 1999. Business Logistics Management. Upper Saddle River, NJ: Prentice
Hall.
Eno Transportation Foundation. 1988. Transportation in America. Washington, DC: Eno
Transportation Foundation.
Tyworth, John E., Joseph L. Cavinato, and C. John Langley Jr. 1991. Traffic Management:
Planning, Operations, and Control. Prospect Heights, IL: Waveland Press. www.
transsiberianexpress.net
The World Bank.

Self-Learning
Material 137
 9
UNIT

NOTES
Total Logistics
Cost Management for
Competitive Advantage

LEARNING OBJECTIVES
LO 1 Defining total cost in logistics
LO 2 Understanding logistics cost accounting system
LO 3 Analysing logistics cost
LO 4 Identifying components of total logistics cost

9.1 INTRODUCTION
Logistics costs quite significantly impact business performance in a country. In the
least developed as well as in less developed countries, logistics cost as a percentage
of total cost of goods and services is much higher than that in developed countries,
where logistics infrastructure is well developed. Analysis of the total cost offers
insight and a key to managing the logistics function for optimum performance.
Management should strive to reduce the total cost of logistics by carefully analysing
each cost component to understand the opportunity available to better manage that
cost element. To manage a business better, logistics must be viewed as an integrated
system. The need to view the logistics function as an integrated system is paramount
because reduction in one cost element may even lead to increase in the cost of other
components. Therefore, understanding interrelationships among various cost ele-
ments will be useful in order to take an integrated view and manage the total cost.
Effective management and real cost savings can be accomplished only by viewing
logistics as an integrated system and minimizing its total cost, keeping the firm’s
customer service objectives in focus. Businesses are exploring ways and means to
reduce the logistics cost to become more competitive. With rising fuel costs, TLC has
also been increasing. Besides, there are regulations relating to sustainability and envi-
ronment forcing logistics companies to strategize to contain the freight and other
related costs. Businesses are also evaluating the various options on sourcing the prod-
ucts from logistics cost and convenience point of view. Logistics cost management
has thus assumed increased significance in business.

9.1.1 ELEMENTS OF LOGISTICS COST

The various components of logistics costs can be classified as given below:
Self-Learning
138 Material  Transportation costs
 Warehousing costs Total Logistics
Cost Management for
 Order processing costs Competitive Advantage
 Inventory carrying costs
 Information and communication costs
 Administrative costs
 Customer servicing cost NOTES

9.2 LOGISTICS COST ACCOUNTING SYSTEM

It is not possible to improve anything if not measured properly. Measuring the exist-
ing logistics cost incurred by the business is therefore the primary task. The more the
details available, the better it will be to manage the logistics cost of each element. It
is a managerial task to decide in what format, and what details, these costs are to be
recorded for the study to find out where improvement is possible. There are three
major cost elements, namely fixed cost, variable cost and process cost, that impact
product cost and pricing.
Broadly, there are two approaches followed in the business to determine the logis-
tics cost:
 The financial accounting system
 The managerial accounting system
Every company should have their TLC budget to control the total cost. For initiating
any improvement on logistics cost budget, organizations must generate management
reporting system. Businesses normally generate both financial accounting statement
as well as management accounting statement.

9.2.1 FINANCIAL ACCOUNTING

Financial accounting system provides reports such as balance sheet, income state-
ments like profit and loss statement, and cash flow statements which are required by
outside stakeholders such as investors and stockholders as well as statutory authori-
ties. But this system may fail to meet the needs of managers of the organization. To
manage the company’s performance, the managerial accounting system serves the
purpose better. For all companies, monthly and other periodical reviews are con-
ducted by generating various reports to serve internal needs of the company and
manage its resources and profits better.
In this system, the logistics cost often gets merged with other operating costs of the
business and loses focus, as logistics cost elements are not differentiated and isolated
to draw managerial attention to understand the reason why, and therefore, the system
may fail to meet the needs of the managers.

9.2.2 MANAGEMENT ACCOUNTING

The logistics accounting system is a type of managerial accounting system which
addresses the typical parameters and more particularly various cost parameters of
logistics activities within the company and compares those with the budgeted num-
bers as well as determines the variance against previous year’s actuals costs incurred,
giving reason thereof. In addition, periodically these figures are also compared with
the industry standards as well as with the best practices and best performer in the
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Material 139
Advanced same category of the business. It can help managers to plan, implement and control
Supply Chain
Management
logistics system.
Logistics accounting information is useful for budgeting, which is an important
part of the logistics planning process. It also helps in the allocation of resources for
implementing the plans. Logistics accounting statements are not standardized like
NOTES financial accounting statements because the integrated information needs of one man-
ager often differ from those of another. Logistics accounting system generally allows
the user to analyse decisions, based on logistical costing.
Managerial accounting system can be prepared for the logistics manager’s needs
and focus, depending on which additional element-specific costs data can be gener-
ated to pay focused attention to the specific problem areas to rectify or improve the
scenario from the current level. It can help managers to plan, implement and control
logistics system. Logistics accounting information is useful for budgeting, which is
an important part of the logistics planning process.

9.2.3 LOGISTICS COST MANAGEMENT MODELS

There are various approaches employed for the management of logistics cost. They
are as follows:
 Activity-based costing or ABC
 Total cost of ownership
 Supply chain costing
 Total cost of relationship
 Total cost/value analysis
 Cost-to-serve method

9.3 ANALYSIS OF LOGISTICS COST

Broadly, logistics cost should be analysed from the point of view of the input–output
relationship in a sense that what amount of input delivers what output in the business
against the objectives. Some of the logistics cost incurred in the business can be con-
sidered as engineered costs, but some costs incurred in managing logistics can also
be the discretionary cost. Hence, it is better to represent the logistics cost separately
as engineered cost and discretionary cost. This discretionary cost can be assessed if
these are really needed or they really serve the purpose. ABC costing is often helpful
to find such issues if those are really helping the business. This can be explained by
taking an example of quality cost which has really three different costs, namely pre-
vention cost, appraisal cost and internal and external failure cost. And prevention of
failures often takes care of the cost of delivering the improved or better quality for the
customers. Representing the logistics costs in its proper perspective is therefore
important in order to manage and control the logistics cost in business better

9.3.1 ACTIVITY-BASED COSTING

ABC represents a radical departure from the traditional cost accounting systems. The
ABC methodology, rather than allocating costs to individual units, identifies the
activities that consume resources, matching costs to the level of such activities. The
key aspect of this methodology is the development of models that represent a logical
Self-Learning and quantifiable relationship between the utilization of resources, the performance of
140 Material
activities and the products or services that they provide. With these models, one can Total Logistics
Cost Management for
simultaneously mirror the flow of orders and products along the logistic chain, cap- Competitive Advantage
turing the costs at a level of desegregation that enables the analysis of profit by the
type of client, market segment and distribution channel. This application of ABC
costing to a logistic operator illustrates its main difficulties and benefits. ABC
approach helps businesses to understand if there are any redundant or non-value- NOTES
adding activities that are undertaken in the end-to-end logistics value chain so that
those can be eliminated to get significant improvement in the logistics cost and
performance.

9.3.2 WHEN ABC METHOD IS MORE USEFUL

Large diversified global corporations should undertake ABC costing methods and
cost audit. In general, companies having high overheads, product diversity or multiple
products, customer diversity, service diversity, and multiple location integrated logis-
tics are better placed to undertake ABC method. Let us examine in detail the compo-
nents of various items constituting logistics cost.

9.4 TOTAL LOGISTICS COST

Logistics cost for the average company is given in the Davis database. This cost is
increasing and transportation cost which is 37% of the total cost is driving the
increase. Transportation cost is again driven by the fuel or energy cost. Good rail and
road infrastructure and energy efficient highspeed transport carrier can help logistics
cost in handling domestic cargo. The Establish Davis Logistics Cost and Service
Database is an ongoing annual survey that manufacturers, distributors and retailers
participate to receive indicators of logistics cost elements (Table 9.1). Companies
with higher product values continue to have lower logistics costs. Smaller companies
continue to have higher logistics costs. Service performance levels have improved
since 2014. The Establish Davis Logistics Cost and Service Database is an ongoing
annual survey that manufacturers, distributors and retailers participate in to receive
indicators of logistics cost elements.
Poor logistics performance will reduce the company’s profitability by locking up
increased amount of capital in working capital management which is basically the
difference between current assets and current liabilities. Current asset would include
the stock levels coverage for raw material, packaging material, finished goods,

Table 9.1
Logistics Cost Breakup

Items % Sales (%) S/C WT (US$)

Transportation 4.43 36.42
Warehousing 1.99 16.16
Customer Service 0.41 1.92
Administration 0.30 1.15
Inventory Carrying 2.22 14.09
Total Logistics Cost 9.34 69.74 Self-Learning
Material 141
Advanced inventories in transit and WIP. Poor logistics management performance will eventu-
Supply Chain
Management
ally raise the level of stocks in the system.

9.4.1 TOTAL COST APPROACH IN LOGISTICS

In a competitive marketplace, businesses are constantly striving to deliver higher
NOTES value to their identified and target customers to avoid the immediate competition.
This is tantamount to the fact that the businesses are trying to make customer happy
by improving service delivery. Customers have many alternatives and options to
choose from, and losing a customer thus is suicidal for many businesses. It takes time
and resources to create a new customer, and therefore it makes immense sense for
businesses to try and retain an existing customer by constantly improving service
quality. Businesses exist because of customers; hence, customer service level and
quality cannot be undermined or compromised even if it has to be met at a higher cost.
As rightly said, customer is the king; at whatever cost, the customer must be satisfied.
Thus, the importance of customer service assumes additional significance in a
business.
A dissatisfied customer can easily spread a negative image of the company while
a satisfied customer can help create new customers by spreading positive word-of-
mouth publicity. This can be explained by taking an example of a customer who
received a damaged product which needs to be returned. Returning the goods can
upset his/her production or marketing plans and affect the performance of his/her
business. This customer is likely to remain a onetime customer and will soon switch
over to another supplier. The dissatisfied customer can also become a source of nega-
tive publicity for the concerned manufacturer damaging its reputation. On the other
hand, a satisfied and happy customer would recommend a particular product and/or
manufacturer and can even give unsolicited testimonials to the prospective customers.
Thus, it is important to keep the customers satisfied by ensuring high level of cus-
tomer service which would also mean having an up-to-date logistics system. The
logistics operator therefore plays a vital role in terms of promoting the suppliers
market reputation by ensuring timely delivery as well as keeping the goods free from
any damage and other forms of abuse. To make the customers happy and to improve
the service level, logistics performance management has a great role to play which
would also entail investment into the company’s logistics system which may require
huge investments. The capital costs of logistics is quite significant if businesses
intend to improve on logistics performance and cost.

9.4.2 HOLISTIC VIEW OF TOTAL LOGISTIC COST

It is imperative that a holistic view is essential to reduce the logistics cost and as such
total cost analysis is the key to managing the logistics function. The management has
to strive for reduction of TLC rather than the cost of each activities, which would
mean that logistics function should be viewed as an integrated system rather than the
individual system because sometimes reduction of cost of one activity may even give
rise to the increase in cost of other logistics activity. As such effective management
and real cost savings can only be accomplished by taking an integrated view covering
all sub-elements and components of logistics cost as mentioned above, with an objec-
tive that customers service level will never be compromised.
The TLC will thus depend on the customer service levels that the marketers would
Self-Learning like to maintain and that can include various costs discussed here.
142 Material
9.4.3 INVENTORY COST Total Logistics
Cost Management for
All businesses are required to carry certain level of inventory of input material such Competitive Advantage
as raw and packaging material, standard spares, etc., as well as of finished goods and
work in progress to manage the business. This is necessary to service the customers’
order. Company’s production programmes need to be planned keeping this objective
in mind. The level of inventory to be maintained depends on many factors, including NOTES
lead time of ordering and for receiving the input materials, mode of transport, the
number of warehouses planned, the levels of inventory to be maintained to ensure a
certain level of service, safety stock and so on. The inventory cost is the money locked
up in the cost of goods, insurance, occupation of space, pilferages, losses, damages
and so on, as well as the maintenance of inventory. Inventory costs are directly
affected by such factors as the mode of transport, number of warehouses planned and
the levels of inventory maintained to ensure certain level of service. These costs are
increased by the cost of the obsolescence of a product over a period of time, espe-
cially when the company makes rapid changes in product models or when products
are perishable. As and when a new product is introduced or an existing model is
replaced with a new one, some stocks of both input material and of finished goods
become redundant and obsolete in spite of having best plan for the transition. This
obsolete inventory also adds up to the total inventory cost not only for the cost of
material but also for the space occupied. When the manufacturer is unable to produce
goods because of lack of raw material or is unable to supply goods because of inad-
equate stock of finished products, he loses particular sales. Therefore, it is necessary
to examine both low and high inventory issues in relation to their impact in the
business.

9.4.4 WAREHOUSING COST

Goods have to be stored for some time after production, however small that time
interval may be. This is done either at the production centres or in the marketing area
or somewhere in between or at all the three locations. Raw materials as well as other
input materials are kept closer to the manufacturing locations, whereas the finished
goods’ warehouses are strategically located closer to the customer locations. The
warehousing of raw materials either steps up the cost of their supply or of the cost of
distribution of finished products. As a manufacturer wishes to approach the objective
of zero stock of the finished products or zero loss of production, adequate warehous-
ing capacity becomes essential; and this pushes the firm in higher fixed and operating
costs of warehousing. Also, to improve customer service to certain levels, it becomes
necessary to increase the number of warehouses. Accordingly, the company manage-
ment has to arrive at the optimum number of warehouses which is consistent with the
minimum total cost of distribution, taking into account the effect on the other ele-
ments of cost in the total logistical system.

9.4.5 PRODUCTION AND SUPPLY COST

Production cost per unit tends to decrease with an increase in the volume of produc-
tion with higher capacity utilization. Also, these costs vary between various produc-
tion points. If a manufacturer has several manufacturing plants producing the same
product, company has to make a decision to vary the supplies or production from
certain plants, based on both the cost of production in that particular plant and the
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customer demand that is planned to be satisfied from the goods produced from that Material 143
Advanced particular plant. This move of shifting production from one plant to another is taken
Supply Chain
Management
for these considerations, which inevitably affects the cost of production as well as the
cost of transit times, warehousing and inventory. The decision related to produce ‘in-
house’ vs ‘out-house’ is taken from the considerations of cost, quality and flexibility
to manage dynamic business environment today.
NOTES
9.4.6 CHANNEL DISTRIBUTION COSTS
Various alternatives for distribution are available to a manufacturer or marketer.
Distribution channels are decided upon various considerations, including product
types and distribution objectives and target markets and customers to be served.
Which channel to be opted for depends on numerous criteria, including channel effec-
tiveness and costs. This distribution may be through a sole selling agent at the national
level or through regional distributors or through wholesale dealers or by direct sup-
plies to dealers and retailers and even to customer as in the case of e-retailers. Mail
order sales or catalogue sales at different retail outlets of a manufacturer are direct
sales to the customer, which automatically involves decisions on establishing stock-
ists, storage points or warehouses in strategic locations. In the traditional marketing
concept, the manufacturer is interested in scaling down the discounts to the distributor
to reduce the total cost. But if the distributor’s discount is low, he may either not,
perhaps because of his low profit margin, distribute the goods in sufficient volume or
not render satisfactory level of customer services. This may bring about a loss of pres-
ent and future sales to the manufacturer. Similarly, changes in the distribution system
may take place by alternative usage of space, say, for inventory or marketing or pro-
duction centre. This may also affect customer service in one way or the other.
Therefore, a company has to carefully select channels of distribution since it affects
decisions relating ultimately to customer service and satisfaction. Whatever channel
of distribution company has decided to follow, there is a cost involved with it. The
channel distributions costs will typically include the following cost elements such as
channel partners margin, freight and insurance, trade inventory holding cost, fre-
quency of servicing and also trade debtors. The more frequent the service, the less the
trade inventory; the less the trade inventory, the less the debtors. In addition, the pos-
sibility of out of warrant or expiry stock and goods return will also come down.

9.4.7 TOTAL DISTRIBUTION COST

Perhaps the most important research concerning logistics is going on in designing
efficient and cost effective distribution systems. For this, an understanding of total
distribution cost is essential, so that proper trade-offs can be applied as a basis for the
planning and reassessment of distribution systems. The urgency of dealing with trans-
portation cost was highlighted by Thomas and Griffin (1996), who argued that since
transportation cost accounts for more than half of the TLC, more active research is
needed in the area. To optimize the distribution costs, it is essential to measure the
individual cost element and their impact on the customer service. Sometimes a judi-
cious tradeoff can be encouraged which can result into more effective and efficient
distribution system.

9.4.8 SUPPLY CHAIN AND LOGISTICS COST

The efficiency of a supply chain can be assessed using the TLC—a financial measure.
Self-Learning
144 Material It is necessary to assess the financial impact of broad-level strategies and practices
that contribute to the flow of products in a supply chain. Since logistics cut across Total Logistics
Cost Management for
functional boundaries, care must be taken to assess the impact of actions to influence Competitive Advantage
costs in one area with reference to their impact on costs associated with other areas
(Cavinato 1992). For example, a change in the capacity has a major effect on the cost
associated with inventory and order processing.
NOTES
9.4.9 COST ASSOCIATED WITH ASSETS AND ROI
Supply chain assets include accounts receivable, plant, property and equipment, and
inventories. With increasing inflation and decreased liquidity, pressure is on the firms
to improve the productivity of capital—to make the assets sweat. In this regard, it is
essential to determine how the cost associated with each asset, combined with its
turnover, affects total cash flow time. One way to address this is by expressing it as
average days required to turn cash invested in assets employed into cash collected
from a customer (Stewart 1995). Thus, total cash flow time can be regarded as a
metric to determine the productivity of assets in a supply chain. Once the total cash
flow time is determined, this can be readily combined with profit to provide insight
into the rate of ROI. This determines the performance by the top management in
terms of earnings on the total capital invested in a business.
With customer service requirements constantly increasing, effective management
of inventory in the supply chain is crucial (Slack et al. 1995). In a supply chain, the
total cost associated with inventory can be broken down into the following: opportu-
nity cost, consisting of warehousing, capital and storage; cost associated with inven-
tory at the incoming stock level and WIP; service costs, consisting of cost associated
with stock management and insurance; cost of finished goods, including those in
transit; risk costs, consisting of cost associated with pilferage, deterioration and
damage; cost associated with scrap and rework; and cost associated with too little
inventory accounting for lost sales/lost production (Lee and Billington 1992; Levy
1997; Slack et at. 1995).

9.4.10 INFORMATION PROCESSING COST

Information processing cost includes costs associated with order entry, order follow-
up/updating, discounts and invoicing. On the basis of survey results from various
industries, Stewart (1995) identified information processing cost as the largest con-
tributor to TLC. The role of IT is shifting from a general passive management enabler
through databases to a highly advanced process controller that can monitor activities
and decide upon an appropriate route for information. Modern IT, through its power
to provide timely, accurate and reliable information, has led to a greater integration
of modern supply chains than anything possible by any other means (Benjamin and
Wigand 1995; Naim 1997).

9.4.11 COMMUNICATION AND DATA PROCESSING COSTS

An effective distribution system requires optimum management and control related to
order processing, inventory control, accounts receivable, dispatches, communications
and so on. An increased number of distribution points would certainly improve cus-
tomer service, but it would make processing of information more cumbersome and
expensive. At the same time, if the time taken to process the information is decreased,
it is likely to lead better customer services. A manufacturer has to decide about the
Self-Learning
speed and convenience with which information may be processed. One of the ways Material 145
Advanced is the use of computers with advance software. The communication and data process-
Supply Chain
Management
ing now has changed with technology and automation. A lot of improvement has been
seen across manufacturing sector to help reduce this cost. Many large global corpora-
tions have also outsourced these activities to provide much faster service and 24×7
communication and information to its customers. This is particularly necessary for
NOTES global companies working in different time zones.

9.4.12 ADMINISTRATIVE COSTS

For providing the efficient logistic service to improve the customer satisfaction, the
marketer does not only need adequate facilities and infrastructure and investment in
technology and software and in material-handling equipment, but operating the
trained manpower is also required. To improve the efficiency in the whole system,
there will be some administrative expenses which is also a part of the administration
costs. Administrative cost also includes documentation and record keeping cost.

9.4.13 TRANSPORTATION COSTS

The cost of transportation varies generally with the speed with which goods are trans-
ported as well as with the mode of transportation and distance to be covered. Water
transport is the cheapest, while air transport is the most expensive one. Rail transport
is cheaper than road transport, beyond a certain distance. Both rail and road transport
stand somewhere in between water and air in terms of the cost of transportation.
Transportation cost is a significant part of the TLC. Businesses decide on various
modes of transportation based on the infrastructure available within the given geo-
graphical area. For international trade, bulk of the transportation takes place by ocean;
in domestic trade, bulk of the transportation takes place by road or rail. Certain cat-
egories of goods require special model of transportation like refrigerated containers
for the frozen goods which are quite costly. The cost of transportation would also vary
on the loading factor of the vehicle/container used. Appropriate packaging design can
help improve the loading factor of the product in a typical transport vehicle or
container.

9.4.14 MATERIAL-HANDLING COSTS

A suitable material-handling system should be designed to reduce the cost of
material-­handling to the minimum. Material-handling equipment is required both
within production plant and inside the warehouse. Also, a significant cost will be
involved in the investment on material-handling equipment, but there will be savings
on operation cost as well as on labour. Although one time capital investment will be
high, the recurring cost will be less. This would require the consideration of several
possible combinations of manual and mechanized handling of the goods and materi-
als. But material-handling operations have an impact on other distribution aspects
such as the cost of packaging as well as damages and losses that results from mate-
rial-handling. The design of the material-handling system and the consideration of its
cost also affect the selection of the mode of transportation, and hence the cost of
transportation gets affected.

9.4.15 PACKAGING COSTS

Self-Learning Decisions on packaging are affected by decisions on factors such as type of product,
146 Material the mode of transportation and type of material-handling equipment used. A total cost
approach would make it necessary for us to select packaging version, which takes into Total Logistics
Cost Management for
account other distribution factors as well. Thus, it would not be sufficient merely to Competitive Advantage
reduce the cost of packaging to the minimum. Packaging has many functions includ-
ing protecting the integrity and quality of the product until it is consumed. Packaging
can be of various types, including primary, secondary and tertiary or shipping cartons;
each of these has specific roles to play. Packaging has many functions in addition to NOTES
its primary function of protecting the product integrity and quality to make it survive
the hazards of transportation, multiple handing and adverse storage conditions which
are not always under the control of the manufacturers and marketers. The other func-
tions of packaging are as follows:
 It provides all product information, identity of product with its distinctive charac-
teristics as well as all statutory information including messages such as how the
product has to be used and/or consumed and how the product has to be stored until
consumed, and so on.
 Packaging also serves as a primary advertisement for the product and its manufac-
turers, and for that, packaging also has a merchandizing display value. For this
purpose, it needs to be made attractive to radiate the value of the product. And its
quality and cost will also be commensurate to these criteria.

9.4.16 CUSTOMER SERVICE COSTS

If the service level as well as the service frequency increases, customer satisfaction
improves, but the cost of service also increases. This needs to be viewed against
reduction on trade inventory, and a decision can be taken on the frequency of service.
Companies such as HUL and P&G have significantly increased the service, thereby
reducing the distributors and retailers inventory level, making them happier as the
channel partners’ investment on stock reduces and ROI increases at the same time. If
the manufacturer or supplier guarantees the satisfaction with goods and agrees to give
a refund on returned goods or exchange the returned goods, he must arrange for the
movement of defective or returned goods from the customer (or retailer) back to the
supply warehouse or manufacturing centre. For higher level of customer satisfaction,
if the marketers guarantees 100% return, if not satisfied, there is a cost attached with
this. Complaints of defects or deficiencies pointed out by customers in the goods that
are returned may therefore be utilized as management feedback to improve the qual-
ity of the service/product. Incidentally, with such a guaranteed service, the manufac-
turer would win the customer’s loyalty on a permanent basis. Guaranteed customer
service, therefore, involves certain costs to the organization, but it also leads to certain
benefits in the long run. It increases the value of the company in the market. As ser-
vicing customers and ensuring their satisfaction are the primary tasks of a business
for growth, survival and sustainability, there is always a cost attached to the higher
level of customer satisfaction. As we understand, customer service is a process of
providing a business competitive advantage over others and adding benefits to the
supply chain in order to maximize the total value to the end consumer.
There can be three levels of products that marketers may try to promote. First, the
core benefit or service, which constitutes what end-consumer expect. Second, the
tangible product, or the physical product or service itself. Third, the augmented prod-
uct, which includes benefits that are secondary, but an integral enhancement, to the
tangible product the customer is purchasing. Logistical customer service, installation
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warranties and after-sale service are examples of augmented product features. Having
Material 147
Advanced the right product at the right time in the right quantity without any damage or loss for
Supply Chain
Management
the right customer is an underlying principle of logistics system that recognizes the
importance of customer service.
Another aspect of customer service that deserves mention is the growing consumer
awareness of the price/quality ratio and the special needs of today’s consumers, who
NOTES are time conscious and demand flexibility.

CaSe Study

Dry Ice Inc. is a manufacturer of air conditioners in the USA that has seen its demand
grow significantly. Also, the demand is coming from various regions of the country.
Nationwide demand will have significant cost on logistics. The company, therefore, is
considering setting up production plants close to customer’s centres in different regions
in order to optimize on the logistics costs. They anticipate nationwide demand for the
year 2001 to be 180,000 units in the South, 120,000 units in the Midwest, 110,000 units
in the East and 100,000 units in the West. Managers at Dry Ice Inc. are designing the
manufacturing network and have selected four potential plant manufacturing sites that
are New York, Atlanta, Chicago and San Diego. From the consideration of capital cost
in production, the capacity of the plants could be either 200,000 or 400,000 units. Along
with the cost of producing and shipping air conditioners to each of the four markets, the
annual fixed cost at the four locations are as follows: US$6 million for New York,
US$5.5 million for Atlanta, US$5.6 million for Chicago and US$6.1 million for San
Diego.
Source: https://www.chegg.com (accessed on 4 September 2019).

Case Questions
1. Where should Dry Ice Inc. build its factories to cater to the increased demand of its
air conditioners?
2. How large should the manufacturing plants be in terms of capacity?
3. Discuss the logistics costs with decentralized production system against one central
location to cater to the demand from all regions.

UNIT SUMMARY
The component of logistics and their influence on total logistics in global business
environment has been discussed here along with what are the implications and on
what criteria those costs will depend and how they can be improved further. How
some of these costs are better managed in a collaborative networked environment
with direct real-time information exchange is also discussed. Different approaches to
determine the logistics costs in a business and how customer service level costs are
determined are also discussed.

G lossa r y

 Financial Accounting System: Financial accounting system provides reports

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such as balance sheet, income statements like profit and loss statement, and cash
148 Material
 flow statements which are required by outside stakeholders such as investors and Total Logistics
Cost Management for
stockholders as well as statutory authorities. Competitive Advantage
 Managerial Accounting System: Managerial accounting system can be prepared
for the logistics manager’s needs and focus, depending on which additional
element-­specific costs data can be generated to pay focused attention to the spe-
cific problem areas to rectify or improve the scenario from the current level. NOTES
 Activity-Based Costing (ABC): ABC helps in finding the avenues of cost control
which facilitates more focused analysis of a company-wide cost control pro-
gramme for better result and performance.
 Poor Logistics Performance: Poor logistics performance reduces the company’s
profitability by locking up an increased amount of capital in working capital man-
agement which is basically the difference between current assets and current
liabilities.
 Current Asset: Current asset includes the stock levels coverage for the raw mate-
rial, packaging material, finished goods, inventories in transit and WIP.
 Obsolete Inventory: Obsolete inventory adds up to the total inventory cost. It
includes inventory cost not only for the cost of the material but also for the space
occupied.
 Customer Service Level: Customer service level is directly linked with the per-
formance of logistics companies as logistics failure can stop business in the supply
chain leading to failure in customer demand and even losing a client.

Rev i ew Q ue stions

Objective Type Questions

1. _______________ should strive to reduce the total cost of logistics by carefully

analysing each cost component to understand the opportunity available to better
manage the cost element.
a. Supervisor
b. Management
c. Worker
d. Organizations
2. It is not possible to improve logistics cost, if not measured properly. Measuring
the existing logistics cost incurred by the business is therefore the _______________
task.
a. Primary
b. Secondary
c. Basic
d. Simple
3. _______________ is a managerial task to decide in what format, and what
details, these costs are to be recorded for the study to find out where improvement
is possible.
a. Logistics cost management models
b. Logistics cost accounting system
c. Logistics cost elements
d. Logistics cost estimation system Self-Learning
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Advanced 4. Which accounting system provides reports such as balance sheet, income state-
Supply Chain
Management
ments like profit and loss statement, and cash flow statements which are required
by outside stakeholders?
a. Administrative
b. Customer
NOTES c. Financial
d. Management
5. The key aspect of _______________ methodology is the development of models
that represent a logical and quantifiable relationship between the utilization of
resources, the performance of activities and the products or services that they
provide.
a. Activity-based Costing (ABC)
b. Total Cost of Ownership
c. Production and Supply Cost
d. Distribution Channel Cost
6. Poor logistics performance will reduce the company’s profitability by locking
up_______________ amount of capital in working capital management which is
basically the difference between current assets and current liabilities.
a. Decreased
b. Increased
c. Constant
d. Fluctuating
7. Which cost describes the money locked up in the cost of goods, insurance, occu-
pation of space, pilferages, losses, damages and so on?
a. Inventory
b. Warehouse
c. Production
d. Supply
8. The _______________ of raw materials either steps up the cost of their supply
or of the cost of distribution of finished products.
a. Inventory
b. Warehousing
c. Production
d. Transportation
9. ______________ cost per unit tends to decrease with an increase in the volume
of production with higher capacity utilization
a. Production
b. Inventory
c. Warehousing
d. Supply
10. The _______________ are decided upon various considerations, including prod-
uct types and distribution objectives and target markets and customers to be
served
a. Marketing channels
b. Sales channels
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 c. Delivery channels Total Logistics
Cost Management for
d. Distribution channels Competitive Advantage
Answers: 1. b; 2. a; 3. b; 4. c; 5. a; 6. b; 7. a; 8. b; 9. a; 10. d

Descriptive Questions NOTES

1. Explain the role of different cost approach in logistics.

2. What are the different costs involved in logistics?
3. Why does the financial accounting system fail to meet the needs of the
managers?
4. List the problems faced by businesses with traditional cost accounting as related
to logistics.
5. Why is it essential for businesses to try and retain an existing customer in logistics
cost management?
6. How can companies achieve an effective control and supervision of the entire total
cost of logistics?
7. State the factors that determine the level of inventory to be maintained.

Re fe re n c e s

Benjamin, R., and R. Wigand. 1995. ‘Electronic Markets and Virtual Value Chains on the
Information Super High Way’. Sloan Management Review 36 (2): 67–72.
Cavinato, Joseph L. 1992. ‘A Total Cost/Value Model for Supply Chain Competitiveness’.
Journal of Business Logistics 13 (2): 285–291.
Lee, H. L., and C. Billington. 1992. ‘Managing Supply Chain Inventory: Pitfalls and
Opportunities’. Sloan Management Review 33 (3): 65–73.
Levy, D. L. 1997. ‘Lean Production in an International Supply Chain’. Sloan Management
Review 38 (2): 94–102.
Naim, M. M. 1997. ‘The Book That Changed the World’. Manufacturing Engineer 76 (1):
67–72.
Slack, N., S. Chambers, C. Harland, A. Harrison, and R. Johnston. 1995. Supply Chain
Operations Management. London: Pitman Publishing.
Stewart, G. 1995. ‘Supply Chain Performance Benchmarking Study Reveals Keys to Supply
Chain Excellence’. Logistics Information Management 8 (2): 38–44
The Establish Davis Logistics Cost and Service Database. 2014. Available at https://www.
establishinc.com/establish-davis-database (accessed on 22 August 2019).
Thomas, D. J., and P. M. Griffin. 1996. ‘Co-ordinate Supply Chain Management’. European
Journal of Operational Research 94 (3): 1–15.

B i b l i ogr pa hy

Andrew C. Revkin. 2007. ‘Poor Nations to Bear Brunt as World Warms’. The New York
Times, April 1.
Beyond the Green Corporation. 2007. Bloomberg Businessweek, January 29.
Rushton, Alan, Peter Baker, and Phil Croucher. Ed. 1989. The Handbook of Logistics and
Distribution Management: Understanding the Supply Chain. London: Kogan Page
Publishers.
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Material 151
Advanced Stepien, Marcin, Sylwia Legowik-Swiacik, Wioletta Skibinska, and Izabela Turek. 2016.
Supply Chain ‘Identification and Measurement of Logistics Cost Parameters in the Company’.
Management
Transportation Research Procedia 16: 490–497.
Story, Louise. 2007. ‘Lead Paint Prompts Mattel to Recall 967,000 Toys’. The New York
Times, August 2.
Toyli, J. 2008. ‘Logistics and Financial Performance: An Analysis of 424 Finish Small- and
NOTES
Medium-sized Enterprises’. International Journal of Physical Distribution and Logistics
Management 38 (1): 57–80.
Xian-min ZOU. 2005. ‘Management and Control of Logistics Coast in Enterprises’.
Industrial Engineering Journal 4: 3.

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 10 UNIT

NOTES
Global Logistics Value
Chain Management

LEARNING OBJECTIVE
LO 1 Define international logistics
LO 2 Identify key drivers of its evolution and tools that facilitated
global logistics
LO 3 Recognize international logistics challenges and barriers to
global logistics
LO 4 Get introduced to Logistics Industry in India

10.1 INTRODUCTION
By value, it would normally mean a chain of activities that a firm of a specific indus-
try performs to deliver valuable products or services for the market (first introduced
by Michael Porter in 1985). Value is created by unlocking the hidden value and also
by removing non-value-adding activities from business processes. The value so cre-
ated needs to be captured to be delivered for offering better cost-value benefit to the
customers to succeed in the marketplace. Value chain matrix would suggest the areas
of improvement. In a competitive environment, businesses must have a better under-
standing of their consumers and are also required to deliver the customer requirement
better in comparison to their immediate competitors. Projecting and delivering supe-
rior values hold the key to success, and for doing so, businesses need to constantly
upgrade the product and services to remain aligned with the technology. Speed of
action and delivery as well as delivering the product where customer wants are also
the key requirements for success. A business has to deliver its normal profits as
returns to the shareholders. The normal profit is generated from pricing and costing
of the product and services. But incremental profit for the business can only be gener-
ated by managing the business processes better. One way of improving the value or
performance is reducing cost or improving cost management and resorting to elimi-
nating non-value-adding and redundant processes in the business. Another way of
reducing costs is by resorting to better working capital management such as reducing
the average inventory holding or increasing the average settlement period of debtors
and also the average settlement period of creditors.
Businesses have multiple objectives for their existence in addition to making profit
for which any economic activity is undertaken first of all. A business also has to
deliver growth by increasing market share and expanding geographical territory.
Besides, businesses also have to deliver a larger responsibility for the society by Self-Learning
Material 153
Advanced creating social value. Shareholder’s value is normally measured by financial param-
Supply Chain
Management
eters such as ROI, PAT, EVA, and so on, and these can be increased by managing
logistics more effectively, which can also help in delivering incremental financial
performance. The logistics cost can significantly impact ROI in any business.
Although the significant cost of logistics is arising out of transportation function,
NOTES logistics competency is achieved by coordinating the various functions and logistics
activities including network design, information, transportation, inventory, warehous-
ing, material-handling and packaging.

10.2 INTERNATIONAL LOGISTICS

International logistics is the design and management of a system that controls the
forward and reverse-flow of materials, services, information into, through and out of
international corporation and international geographic boundaries. This flow of goods
and services happens through an international logistics channel. International logis-
tics is a multidisciplinary function and covers a wide variety of disciplines and man-
agement functions.
Therefore, international logistic channel means the optimal routes created purpose-
fully and in a systematic way, most often within the confines of the already existing
international logistic networks (although in emergency, logistics networks may be
created individually, for example, temporary landing sites or warehouses) to the
recipient along with accompanying information.
The physical network: It begins with the supplier and ends with the ultimate client
and embraces all aspects related to product development, purchase, manufacturing,
physical distribution, after-sales service and the circulation of information.

10.3 KEY DRIVERS FOR EVOLUTION OF INTERNATIONAL

LOGISTICS
10.3.1 FIRST: GLOBAL SOURCING OF COMPONENTS
In international logistic channels, the subjects are linked by the physical movement
of goods and information. A good example may be the Singer sewing machine. The
basic components of these machines are produced in three continents: the housing in
the USA, the drive shafts in Italy, and the motors in Brazil. The final product is
assembled in Taiwan, while the customers are spread all over the world. The supply-,
manufacturing- and distribution-related functions between subjects located in various
parts of the world is a huge challenge, which needs to unite and integrate the system.

10.3.2 SECOND: NEW PRODUCT DEVELOPMENT—GLOBAL

EXPERTISE
International logistic channel is a network of companies established to develop a new
product, exchange resources, gain advantages through its size, reduce costs, increase
a competitive advantage and so on. They could be either horizontal and vertical. The
horizontal networks are established by manufacturers of similar or same goods. And
the vertical networks are represented by a set of companies connected with one
another in a ‘supplier–receiver’ relationship.
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10.3.3 THIRD: MINING COMPANIES DRIVING THE PROCESS Global Logistics
Value Chain
The subject structure of international logistic channels is created by mining compa- Management
nies, suppliers of materials and components, manufacturers, service providers, trans-
port companies, warehouses and logistics centres, distributors and all the relationships
between them.
NOTES
10.3.4 FOURTH: HIGH LEVEL OF CUSTOMER SATISFACTION
An international logistic channel is a quick, flexible and interconnected system,
driven by the mechanism of the customers’ choice, aiming to achieve a high level of
customer satisfaction as well as to gain the highest possible profit by the companies
within this channel.

10.3.5 FIFTH: HIGH DEGREE OF PROCESS ORIENTATION

Increased focus and process orientation for standardization of business processes
across countries in the network served as key drivers of global logistics operations.
The international logistic channel can be described by means of the following char-
acteristics: the process (the subject of the flow), the structure (the entity structure) and
the objectives (the scope of action and the areas of cooperation of participating
entities).

10.3.6 SIXTH: DRIVEN BY COST QUALITY CONSIDERATIONS

The range of international logistics channel consists of raw materials, auxiliary mate-
rials and cooperating elements, purchased on the supply market according to the
need, passed on to the production process and finished products submitted for sale
and delivered to the customer. The cost and quality consideration has driven the
global logistics business.

10.3.7 SEVENTH: CHANNEL LINKED TO EXPERTISE

IN THE AREAS
Depending on the configuration of the international logistic channel, its links may
consist of different kinds of mining, processing, service and trading companies. Their
position within the channel results from the division of work in the next stages of
production and sales of goods. Because of their role as senders and receivers of loads,
as well as the accompanying information and finance streams, their basic role in the
functioning of the international logistic channel is unquestionable.

10.4 INTERNATIONAL LOGISTICS CHALLENGES

There are numerous challenges that global logistics players have to face to deliver
performance. While effective logistic system is important for domestic operations, it
is also absolutely critical for global manufacturing and marketing. Domestic logistics
focuses on performing value-added services in a relatively controlled environment. It
is imperative that global logistics operations must accommodate all domestic require-
ments and also deal with growing uncertainties associated with distance, demand,
diversity and documentation. In global trade, the customers are demanding in terms
of quality, lead time and order fulfilment criteria. The marketers need to have clear
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Advanced understanding of changing customer needs and expectations. The firms must be more
Supply Chain
Management
and more flexible and proactive to anticipate and to adapt to such changes. The quest
for flexibility and reactivity affects the conception and the management of firms and
more generally their logistic systems, and contributes to the development of partner-
ship relations to the emergence of mergers or strategic alliances between companies.
NOTES As a result, a firm can no longer be considered an isolated entity but a component of
a wider supply chain network.
Operating challenges faced by global logistics systems vary significantly within
operating regions. North American logistics vision is one of the open geographies
with extensive demand for land-based transportation and limited need for cross-­
border documentation. European logistics views operations from a perspective char-
acterized by relatively compact geography, involving numerous political, cultural,
regulatory and language barriers. Pacific Rim logistics has an inland perspective that
requires extensive water or air shipment to transcend vast distances. In past, enter-
prises could survive and also could achieve substantial success with a unique North
American, European or Pacific Rim logistics regional capability. This is still true for
some firms. Those who intend to grow regional capabilities are required to extend
service zones. For global scale operations and economies, enterprises are developing
global logistic expertise.
Logistics principle is same domestically and globally; operating environments are
more complex and costly. Cost and complexity are represented by four D’s: distance
(longer), documents (extensive), diversity in culture (wide variation with cultural dif-
ference) and demand of customers (variable and fluctuating demand). Developing
appropriate strategies and tactics to respond to these four D’s is a challenge for logis-
tics management.

10.4.1 BARRIERS TO GLOBAL LOGISTICS

While many forces facilitate borderless operations, some significant barriers continue
to impede global logistics. Every country is concerned about balance of trade which
has a reflection on country’s economy. Three significant barriers are as follows:
 Markets and competition
 Financial barriers
 Distribution channels
Market and competition will cover entry restrictions, availability of information
(market size, demographics, competition, infrastructure) and pricing, competition
law, transfer pricing and antidumping law. Entry restrictions limit market access by
placing legal and physical barriers on import. Protection of domestic industry by
favourable tax structure and unfavourable import duty also acts as barriers in global
trade. In addition, complex duty structure and compliance issues add to the barriers
and challenges. Financial barriers normally result from forecasting and institutional
infrastructures. Difficulty in forecasting is due to global environment considering
customer trends, seasonality and competitive action. As such barriers to global trade
can be broadly classified as: trade barriers which are normally in terms of custom
duties and non-trade barriers which will be due to operational hurdles and
constraints.
In global environment, forecasting becomes difficult compounded by custom laws,
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156 Material
banks, insurance firms, legal counsellors and transport carriers. Logistics manager Global Logistics
Value Chain
must allow for additional inventory, transportation lead time and financial resources Management
to operate globally.
Distribution channel difference, infrastructure and trade agreements also act as bar-
riers confronting global logistics managers. Difference in transportation and material-
handling equipment, warehouse and port facilities and communication systems are NOTES
other such barriers.
Recently, efforts have been made to improve standardization with respect to
containerization.
However, major differences still exist with respect to transportation equipment,
vehicle dimension, capacity, weight, rail gauge and so on. When infrastructure is not
standardized, it is necessary for the products to be unloaded and reloaded into differ-
ent vehicles or containers as they cross national boundaries, resulting in increased
cost and time.

10.4.2 IMPACT OF GLOBALIZATION ON INTERNATIONAL

LOGISTICS
Globalization brings homogenization of consumer needs, liberalization of trade and
competitive advantages of operating in global markets. Companies are forced to think
and act globally in order to survive in such a dynamic environment. All these ele-
ments have a deep impact on the development and the positioning of companies on
international marketplaces where competition is cruel.

10.4.3 ROLE OF GLOBAL LOGISTICS

Globalization has helped in doing businesses beyond the national boundaries. Internet
has made it easier, and world has become really a global village. Cargo movement is
done physically using available options: physical movement of cargo, intermediaries,
freight forwarders, custom house indispensable. Knowledge, connectivity and docu-
mentation are crucial areas. Global operations of a business increase complexity.
Decrease in control over movement of goods is a challenge in global logistics
operations.

10.4.4 SUPPLY CHAIN AND THE INTERNET

Because of the internet, firms are able to conduct many more global comparisons
among suppliers and select from a wider variety of choices. When a customer has the
ability to access a company must be prepared for 24 hours order-taking and customer
service. For all countries, but particularly in less developed nations, the issue of uni-
versal access to the Internet is crucial.

10.4.5 GLOBAL LOGISTICS CAPABILITIES

Global logistics capabilities must include international transportation, cultural diver-
sity, multilanguage capability and extended supply chain operations. Global opera-
tions increase logistics cost and complexity. As complexity, operational uncertainty
increases in global logistics, control capability decreases. Control problems result
from extensive use of intermediaries, coupled with government intervention in cus-
toms requirement and trade restrictions and control.
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Advanced 10.4.6 GLOBAL OPERATING LEVELS OF
Supply Chain
Management
LOGISTICS COMPANIES
There are five levels of enterprise evolution from domestic logistics operation to
becoming global logistics operator:

NOTES  Level 1: Arm’s length

 Level 2: Internal export
 Level 3: Internal operations
 Level 4: Insider business practices
 Level 5: Denationalized operations

Arm’s Length
It is a preferred method of operation for the players with limited international experi-
ence. In this mode, companies either sell or consign their goods to the international
specialists who accept the responsibility of ordering, providing international transpor-
tation, documentation as well as market coordination, inventory management, invoic-
ing and product support. Advantage is that it reduces the risk substantially, but the
disadvantage is the loss of control on product and logistics operations.

Internal Export
When players develop the expertise to coordinate and manage international transpor-
tation and documentation, they graduate to this mode of operation. However, local
agents and distributors are retained to provide marketing, inventory management,
invoicing and product support. The advantage is that margins are improved because
of part control, but complete benefits are still not derived. The disadvantage is that it
reduces the sensitivity to local requirements for not being involved in sales, distribu-
tion and marketing for international market.

Internal Operations
At this level, companies would have local market presence in foreign countries, and
internal operations would include marketing, sales, production and distribution.
Companies would engage parent company employees and not local employees and
follow parent company practices for better control and low-risk internal operations.
Advantage is that at relatively lower level of risk there will be further increase in
control and sensitivity. However, the disadvantage is that it still relies heavily on
home country values, practices, policies, procedures and operations.

Insider Business Practices

This is a level up from the earlier level of operations in the sense that this further
internalizes international operations and follows local business practices by hiring
host country management, marketing and sales organizations and even local business
system and practices, and, as it grows, a separate host country business philosophy
emerges. The advantage is still further increase in control and sensitivity at manage-
able risk. However, the disadvantage is that home country business practices and
philosophy will still be dominant, and home country expectations and standards will
still be applicable.
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10.4.7 DENATIONALIZED OPERATIONS Global Logistics
Value Chain
This level operates and maintains foreign country operations and develops regional Management
headquarters to oversee the coordination of operations in the area. At this stage of
development, enterprise is stateless and policies and practices are not specific to
home country. Local marketing and sales organizations are supported by world-class
manufacturing and logistics operations. Also, product sourcing and marketing deci- NOTES
sions are made across a wide range of global alternatives and systems; processes are
designed to meet individual country requirement and aggregated to share knowledge
and financial reporting; and the company is acting as truly international or global
company.

10.4.8 GLOBAL OPERATIONS LEVEL

Most of the organizations involved in global logistics are actually operating at Levels
2, 3 and 4.
But a truly international firm must focus on Level 5 or denationalized operations.
Organizations at any other levels will retain a home country perspective. Denationalizing
operations require a significant level of management trust across countries, involving
diverse culture which would be possible when managers and staffs of the organization
are hired from other cultures as well. As the global operational levels progress, there
is an increasing dependency on system and also on the process of integration.

10.4.9 STAGES OF REGIONAL INTEGRATION

Free Trade Agreement
FTA normally is signed between friendly countries to facilitate the trade which elimi-
nates tariff on trade between countries in a region. This helps when the participants
in the free-trade area expect to gain by specializing in the production of goods and
services in which it has a comparative advantages and by importing such products and
services from other countries in agreement in which it faces comparative disadvan-
tages. In such a situation, trades among countries give them less expensive access to
a number of goods. FTA as such may either stimulate or reduce international trade,
and it can also reduce the access of the firms to more efficient producers or markets
outside their region. FTA must ensure the complementarity. India has such FTA with
countries in the Association of Southeast Asian Nations (ASEAN).

Customs Union
This eliminates the tariff between member countries and establishes external tariff
structure towards other regions and non-member countries. Advantage accrued to the
member countries in customs union is that none of the member nations can position
themselves to gain a tariff advantage at the expense of other countries. Member coun-
tries under this agreement are required to give some control over the economic poli-
cies to the group.

Common Market
The tariff policy in common market is similar to that of customs union. Besides, the
common market allows factors of production such as labour and capital as well as
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Advanced goods and people to move freely between member countries as dictated by the market
Supply Chain
Management
conditions. This has considerable impact on the local economy of the countries work-
ing in a common market because people move generally and relatively from a weaker
economy country to a stronger economy country.

NOTES Economic Union

This is the most advanced stage of development and it implies harmonization of eco-
nomic policies which is beyond the common market. Under this arrangement,
member countries standardize the monetary and fiscal policies, and although not
essential but normally economic union is likely to include common currency and
harmonized tax structure. Here, goods and production factories can also move freely
according to market conditions and demands, and no major fluctuations in monetary
exchange and interest rates will occur as we can see happening in EU.

10.4.10 COMPLEXITY OF LOGISTICS MANAGEMENT

End-to-end logistics management covers delivering input material to industry and
then taking output to end consumer at the least cost. This would entail the
following:
 Trade inventory—low
 Delivery time—fastest and timely
 Efficient system
 Failure rate—low
 Order fill rate and pack fill rate—accurate
Efficient service delivery at a lower cost provides competitive advantage to busi-
nesses. Logistics cost in typical distribution of FMCG products in India would be
anything up to 10–15% of the end selling price, including freight, insurance and
warehousing but excluding channel margins.
Managing it effectively obviously provides competitive advantage to the business
in terms of distinctive cost advantage.

10.4.11 ENTRY OF GLOBAL RETAILERS IN INDIAN MARKET

Global retailers such as Walmart, Tesco and others have already entered the Indian
market, competing with local retailers such as Big Bazar, More, Reliance and so on.
Global wholesalers (cash and carry format) such as Booker, Metro (Macro), and so
on also are operating in Indian market competing with local wholesalers such as
Reliance and Bharti Retail. Global online retailers such as Amazon.com and e-bay
also entered India and are competing with local e-retailers such as Flipkart.com and
Snapdeal.com. Overall retail market is of about US$300 billion, growing at the rate
of 6% every year. Together they only control about 4% of the total market. Rest is still
covered in traditional mode of distribution.
If we look at the retail density, it is at a high with 13 million retail outlets, 95%
mom and pop stores. On the other hand, organized retailing has only 4–5% share.
Channel intermediaries which are large in numbers—C&F agents, wholesalers, semi-
wholesalers, consignment agents, super-stockists, distributors, retailers make the
distribution and logistics tasks very complex to be managed.
Even large global companies such as P&G, Unilever, Nestle and Phillips that are
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operating in Indian soil for over several decades can reach about 1–2 million retailers
through their own network. Smaller players will not have the reach of more than 0.5 Global Logistics
Value Chain
million. The remaining market has to be covered through redistribution route. Management
Traditional channels have limited reach. Innovation in channel management holds the
key. Global logistics companies such as DHL and FedEx are also operating in India,
competing with local players such as GATI, Safe Express and many more. The 3P
logistics providers offer only point-to-point service in B2B mode. The entire spec- NOTES
trum of the chain was never covered. Logistics industry has large, medium, small and
tiny operators offering connectivity and control at various levels. Last mile connectiv-
ity is always a challenge. No single model will work for all markets. Some markets
are reached through the wholesale route. Some markets are covered through the orga-
nized retail route; some markets through dealer distribution network; and some
through super-stockists/consignment agents/C&F agent. No one model will work for
all markets.

10.4.12 LOGISTICS: A SOURCE OF COMPETITIVE ADVANTAGE

Procurement effectiveness of all these players is more or less the same. Success will
depend on competitive advantage from efficient SCM, mainly logistics. Competitive
advantage will have to be derived from the following:
 Time to deliver goods to the customer
 Reducing inventory in the system without losing out on delivery commitment
 Logistics cost which is the only source of competitive advantage is smart manage-
ment of logistics
Supply chain delays and uncertainty are major constraints to manufacturing growth
and competitiveness. According to a World Bank report, halving the delays due to
road blocks, tolls and other stoppages could cut freight times by 20–30% and logistics
costs by 30–40%. This alone can boost the manufacturing sectors by 3–4% of net
sales. There are around 650 check points at 29 state and 7 union territory borders
across India. Regulatory checks to the movement of goods across these borders raise
truck transit times by as much as 25%.

10.5 LOGISTICS INDUSTRY IN INDIA

A glimpse into various industrial sectors highlights the anticipated upsurge in trade
and commerce and the consequent growth in the need for a strong logistics
industry:
 Indian Logistics sector is 13% of its GDP. This is both significant and
inefficient.
 India’s nominal GDP could grow from US$2.37 trillion currently to US$3.6 tril-
lion by 2020 at an annual growth rate of 7%.
 By 2030, India’s crude steel production is expected to increase by a factor of 4.
 The demand for cement in the country is expected to double by 2030.
 Agricultural output, although reduced in size as a percentage of the economy, is
expected to increase from 207 MMT to 295 MMT by 2020.
 The Indian textiles industry is expected to triple from US$78 billion currently to
US$220 billion by 2020.
 The share of organized retail is expected to increase from 5% currently to 24% by
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2020. Material 161
Advanced  India’s industrial energy consumption is expected to double by 2020. In this sce-
Supply Chain nario, the country will need to mine 2 billion tonnes of coal by 2030 and transport
Management
75% of it. Further, around 30% of total transported coal will have to be imported
through ports.
 Overall EXIM cargo at Indian ports is projected to increase to around 2,800 MMT
NOTES by 2020 from approximately 890 MMT currently.
 Finished consumer goods, both imported and those produced in India, will have to
be transported to the country’s middle-class consumers, which, by 2030, are
expected to increase fourfold from the current middle-class population of 160
million.
 Because of the constraints and bottlenecks in the logistics infrastructure and more
particularly in the road transport infrastructure, there is a negative impact on the
India’s GDP growth (Table 10.1).
 A comparison of logistics Performance Index based on the data of 2014 between
India, China and Germany has been shown in Figure 10.1 to indicate that India is
well below in terms of global ranking.

Table 10.1
Comparison on Key Parameters: India vs Global

Logistics Efficiency Indicators India Global

Road Transportation
Average truck speed (in kmph) 30–40 60–80 (China)
Four lane road length (in km) 7,000 34,000 (China)
National highway length (in km) 66,540 190,000
Average surface freight (in cents/km) ~7 3.7 (Japan)
Average distance travelled by a truck per day 200 400
(in km)
Air Transportation
Airport waiting time – Exports (in hours) 50 12
Airport waiting time – Imports (in hours) 182 24
Aviation turbine fuel as a % of operating cost 35–40% 20–25%
Ports & Sea Transportation
Turnaround time at ports (in hours) 84 7
Annual container handling capacity 8.4 mm TEUs 60 mm TEUs
Containers handled per ship, per hour 15 25–30
(maximum)
Throughout density (maximum) 45,000 TEUs/ 17,000–220,000
hectare TEUs
Warehousing
Average inventory days 33 24 (China)
Others
3 PL share of logistics 9–10% 57% (USA)
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 Figure 10.1 Global Logistics
LPI of India, China and Germany on Select Parameters Value Chain
Management
LPI

4 NOTES
Timeliness Customs

Tracking & Tracing Infrastructure

Logistics Competence International Shipments

Germany 2018 China 2018 India 2018

Country Parameter Germany China India

LPI rank 1 26 44
Customs 1 31 40
Infrastructure 1 20 52
International shipments 4 18 44
Logistics competence 1 27 42
Tracking & tracing 2 27 38
Timeliness 3 27 52
Source: https://lpi.worldbank.org/

10.5.1 FUTURE OF LOGISTICS INDUSTRY IN INDIA

Indian logistics industry is on a growth path. According to the rating agency ICRA,
Indian logistics industry is expected to grow at the rate of 8–10% over the medium
term, which is a significant growth over the earlier five years’ CAGR of 7.8%. The
logistics industry in India was estimated to be around US$160 billion, and post-GST
implementation, this estimate was revised to about US$215 billion in next two years,
according to the Economic Survey 2017–2018. According to the Global Ranking of
the World Bank’s 2016 LPI, India jumped to the 35th rank in 2016 from the 54th rank
in 2014 in terms of overall logistics performance index. The World Bank Survey, in
fact, revealed that India’s logistics sector has improved its performance in all six
parameters: efficiency of the clearance process by border control agencies, including
customs; quality of trade- and transport-related infrastructure covering ports, Self-Learning
Material 163
Advanced
Supply Chain CaSe STuDY
Management anand Milk union liMited (aMul)

Amul means priceless in Sanskrit, amoolya. Brand name managed by an apex coopera-
tive organization—Gujarat Cooperative Milk Marketing Federation (GCMMF)—pro-
NOTES ducer of the World’s biggest vegetarian cheese brand, world’s largest pouched milk
brand. Amul is also the largest food brand in India that spurred the white revolution. It
has accreditation with ISO 9001 and has a HACCP certification by QAS, Australia.
Amul is a cooperative dairy founded in 1946, having annual revenue `292.25 billion
or US$4.1 billion in 2017–2018. Amul is the world’s largest milk producer. To make the
largest milk producing entity, more than 15 million milk producers pour their milk in
144,500 dairy co-operative societies across the country. A total of 184 district coopera-
tive unions are marketed by 22 state marketing federation and 18,544 village societies.
Total milk handling capacity of Amul is 32 million litre per day. Amul manufactures
wide range of milk, milk powder, health beverages, cheese, ghee, butter, ice cream and
traditional Indian sweets and milk products as well as chocolates. It operates through 56
sales offices, having 10,000 dealers and servicing 1 million retail outlets directly
(Figure 10.2).

Figure 10.2
aMul value Chain

Farmers Village Member GCMHFL Distributors Retailers

Cooperative Units
Societies

12
10,675
2.2 Million Units
Cooperative 700 EMP 3,000 500,000 Consumers
Numbers 10,000
Societies
EMP

Production Milk Milk Marketing Distribution Retailing

of Milk Collection Processing

End-to-End Value Chain of Amul

Logistics Challenge of AMUL

Procurement Logistics
• Handling of 32 million litre of milk per day
• About 18,544 separate village cooperative societies
• Approximately 15 million milk producing members
• 144,500 dairy co-operative societies across the country; 184 district cooperative
unions marketed by 22 state marketing federation; and 18,544 village societies.
Logistics/Coordination
• Storing and transportation of the milk from collection centres to production centres
and then to consumers.
• Distributing the milk and milk products through 10,000 distributors and more than
1 million retailers.
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 Global Logistics
Value Chain
Supply Chain Network of Amul Management

Farmers

NOTES

Village Village Local Milk Sold to

Cooperative Cooperative Restaurants/ Village & Local
Societies (With Societies (Without Other Milk-related Restaurants
Chilling Units) Chilling Units) Business

Chilling Plants

Milk Processing
Network Services Union &
Warehouses
Veterinary Services
Animal Husbandry
Animal Feed Factory
GCMMF
Milk Can Products Warehouses
Agricultural University
Rural Management
Institute Wholesalers
Trucking Facilities

Home Delivery
Retailers
Contractors

Decentralized Organization Structure of AMUL at Different Levels

LEVEL MEMBERS DECISION-MAKING

District level Chairpersons, • Price paid to district

State Register of Co-operatives, unions (fixed across
Federation NDDB Representative, unions)
Technical Expert, CEO

• Product mix and quantity

Chairpersons of Village • Price paid to village

District Dairy Co-operative
co-operative societies
Societies, BOD, MD

• Membership

Milk Producers, • Price paid to milk

Village suppliers
Managing Committee

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Material 165
Advanced
Supply Chain Coordination Between Participating Entities
Management
The participating entities on the inbound side are as follows:
• Village Dairy Cooperative Society (DCS)
• State Cooperative Milk Federation
NOTES
Main Functions of DCS
• Collection of surplus milk and payment on the basis on quality and quantity
• Providing support services to the members
• Selling liquid milk for local consumers of the village
• Supplying milk to the district milk union
State Cooperative Milk Federation
• Marketing of milk and milk products processed/manufactured by milk unions
• Establish a distribution network for marketing of milk and milk products
• Arranging transportation of milk and milk products from the milk unions to the
market
• Creating and maintaining a brand for marketing of milk and milk products
• Providing support services such as technical inputs, management support and advi-
sory services to the milk unions and members
• Pooling surplus milk from the milk unions and supplying it to deficit milk unions
• Establish feeder-balancing dairy plants for processing the surplus milk of the milk
unions
• Arranging for common purchase of raw materials used in manufacture/packaging of
milk products
• Decide on the prices of milk and milk products to be paid to milk unions
• Decide on the products to be manufactured at milk unions and capacity required for
the same
• Conduct long-term milk production, procurement and processing as well as market-
ing planning
• Arranging finance for the milk unions and providing them technical know-how
• Designing and providing training in cooperative development, and technical and mar-
keting functions
• Conflict resolution and keeping the entire structure intact

Upstream Procurement
• Activities at the village level comprised developing and servicing the DCSs.
• Increasing milk collection, procuring milk and transporting it to the chilling and
processing units twice a day.
• The DCSs provided the farmers with good quality animal feed, fodder and other
services like veterinary first aid.
• On an average, around a thousand farmers come to sell milk at their local co-opera-
tive milk collection centre.
• Each farmer is given a plastic card for identification.
• At the milk collection counter, the farmer drops the card into a box and the identifi-
cation number is transmitted to a computer attached to the machine.
• The milk is then weighed and the fat content of the milk is measured by an electronic
fat testing machine.
• Both these details are recorded in the computer. The computer then calculates the
amount due to farmer on the basis of the fat content.
• The value of the milk is then printed out on a slip and handed over to the farmer who
Self-Learning collects the payment at the adjacent window. Now farmers get direct credit to their
166 Material
 Global Logistics
account and get paid for their milk supplies. Payment information comes on their Value Chain
Management
mobile.

Cold Storage Network

• Chillers in proximity of villages NOTES
• Prompt transport to district facilities for further dispatch to consumers/processing
units
• Chilled trucks to transport processed products
• Delivery to local chillers by insulated rail tankers and chilled trucks
• Refrigerators and freezers with retailers and departmental stores to retain freshness

Distribution Downstream
• GCMMF coordinated with various unions to get a regular supply of milk and dairy
products.
• The processed milk and dairy products were procured from district dairy unions
and distributed through third-party distributors.
• To ensure quality and timely deliveries, GCMMF and the district unions had several
mechanisms in place.
• The unions monitored the supplies of milk and the distribution of finished
products.
Complexity of Distribution Operation
• First leg: Manufacturing units to company depots using 9 and 18 MT trucks
• Frozen food below –18°C, Dairy wet below 0–4°C
• Second leg: Depots to WDs (wet dealers), transport through insulated 3 and 5 MT
TATA 407s
• Third leg: WDs to retailers, transport through rickshaws according to the beat plan

Technology to the Rescue

• Amul started implementation of ERP in phases.
• Automatic milk collection system (AMCS) units at village society were installed in
the first phase to automate milk production logistics.
• AMCS facilities to capture member information, milk fat content, volume collected
and amount payable to each member electronically.

Automatic Milk Collection System

The benefits of the AMCS system are as follows:
• Time reduction
• Reduction of pilferage
• Reduced human errors
• On the spot payments for farmers
• Wastage is reduced
• Transparency of operation
• Operational integration

Transformation
• Radical changes in business processes—eliminating middlemen.
• Improved delivery mechanisms and transparency of business operations.
• Due to this process, AMUL is able to collect six million litres of milk per day.
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Material 167
Advanced
Supply Chain • Huge reduction in processing time for effecting payments to the farmers from a
Management week to couple of minutes.
• Processing of 10 million payments daily, amounting to transactions worth US$3.78
million.
• Amul also connected its zonal offices, regional offices and member’s dairies through
NOTES very small aperture terminals (VSATs).
• The customized ERP-EIAS has been implemented across the organization integrat-
ing various operational departments.
• Amul is also using Geographic Information Systems (GIS) for business planning
and optimization of collection processes.
• Indian Institute of Management Ahmedabad supplemented Amul’s IT strategy by
providing an application software—Dairy Information System Kiosk (DISK)—to
facilitate data analysis and decision support in improving milk collection.
• The kiosk would also contain an extensive database on the history of cattle owned
by the farmers, medical history of the cattle, reproductive cycle and history of
diseases.
• Farmers can have access to information related to milk production, including best
practices in breeding and rearing cattle.
• As a large amount of detailed history on milk production is available in the database,
the system can be used to forecast milk collection and monitor the produce from indi-
vidual sellers.
• Movement of 5,000 trucks to 200 dairy processing plants twice a day in a most opti-
mum manner.
• Practising JIT SCM with six sigma accuracy.
• Online order placements of Amul products.
• Distributors can place their orders on the website.
• Amul exports products worth around US$25 million to countries in West Asia,
Africa and USA. Amul also has a franchised operation in USA supplying Amul
products to locals in USA.

Case Questions
1. Discuss the complexity of the logistics task in the corporation.
2. How did management attempt to find unorthodox solution to the problems?
3. What are the various operational constraints in managing the logistics task?
4. What are the KPIs which you find have improved?
5. What are failure risks that organization is taking and what are their consequences?
6. What are the possible improvement areas?

Source: The data presented in this case is sourced from various published data and AMUL
website.

railroads, roads and IT; ease of arranging competitively priced shipments; compe-
tence and quality of logistics services (transport operators and customs brokers); abil-
ity to track and trace consignments; and timeliness of shipments in reaching
destination within the scheduled or expected delivery time.

10.5.2 AIR CARGO SECTOR WITNESSED SIGNIFICANT GROWTH

Indian air cargo sector has witnessed unprecedented growth in the last few years. As
Self-Learning per the latest report of CRISIL, India’s air cargo segment grew 14–15% in the fiscal
168 Material
year 2018, up from 12% growth in the previous year. With the support of enhanced Global Logistics
Value Chain
connectivity, improved infrastructure and regulatory environment, this sector is Management
expected to grow even further in the next five years. The government policy is also
supportive, which can be seen from the initiatives taken to boost growth in the sector
including the recent National Civil Aviation Policy, which has given a major thrust to
boost air cargo business in view of rising e-commerce activities and exports. Besides, NOTES
Civil Aviation Ministry, Government of India, has set up Air Cargo Logistics
Promotion Board with an objective to ensure efficiency, reduce cost and improve
inter-ministerial coordination for growth. In addition, significant investment in infra-
structure and technology by the government authorities has also supported the growth
trajectory.

10.5.3 THE HURDLES STILL TO OVERCOME

Although there are improvements on various parameters, in competitive scenario
India has to further improve related to infrastructure and logistics cost and availability
of skilled manpower to emerge as a global air cargo hub. The other obstacles include
lack of common policies across all sectors of transportation and logistics within India.
Also, border control processes in India are still tedious and time-consuming, adding
to delays and costs. The cost of logistics to GDP should be about 8%, but in India it
is still over 14%. This increases with more regulatory intervention and more touch
points in the movement of cargo within the country, although some argue that the cost
could be lowered down by increasing the business scale. However, with the enabling
policies, entrepreneurs get enthusiastic to invest more in the business activities, which
in turn can make business scale bigger.
Many initiatives from the private sector also help in terms of catalysing the growth.
For example, all systems must be process-driven without human intervention. Indian
logistics players can collaborate with their counterparts in developed countries to
develop cost-effective logistics models with infusion of technology to benefit from
the projected growth environment in India. The flexible solution in warehousing
based on the concept that you pay only when you make use of the facilities as well as
leased warehouse avoiding huge investment to start with and implementing effective
WMS and automation will help in accelerating the growth process.

10.5.4 INDIAN LOGISTICS INDUSTRY: GOVERNMENT INITIATIVES

Indian logistics industry has really grown during the last five years and GST imple-
mentation has also created a positive impact; as a result, more and more corporations
are consolidating their operation by moving closer to the consumption centres and
thereby driving the demand for the larger warehouse. Leasing activity was primarily
driven by the expansion and consolidation of businesses such as e-commerce, TPL,
retail, engineering and manufacturing, which together accounted for more than 75%
of the leasing reported in recent surveys. The grant of infrastructure status to the
logistics and warehousing sector has in fact increased investors’ interest, as it has
helped developers to gain access to infrastructure lending at easier terms and with
enhanced limits. Further, government has also set up National Investment and
Infrastructure Fund (NIIF) in partnership with certain domestic and international
investors as a quasi-sovereign wealth fund with a corpus of `0.4 trillion. Relaxation
of FDI norms has further created a positive impact on investment climate in the coun-
try’s logistics sector. Also, the government has proposed to develop 35 multimodal Self-Learning
Material 169
Advanced logistics parks, which will ease the movement of freight and reduce transportation
Supply Chain
Management
costs to spur further growth in the sector. Another initiative is of increasing the load
capacity of heavy vehicles by 20–25% and bringing it at par with global standard
which will reduce the logistics cost. The government’s plan to develop a National
Logistics Information Portal which will be the single online window to link seven
NOTES ministries including railways and highways under one portal will also be helpful for
various stakeholders in the logistics industry.
These initiatives have led to addition of over 20 million sq. ft new supply (both A
and B grades) to enter the market by the end of 2019. The entry of various private
equity firms and foreign players in the Indian logistics market would boost quality
supply, propelling the demand. Cities such as Mumbai, Pune and Chennai have
attracted major investments including Delhi-NCR and Bengaluru.

10.5.5 SOME MEGA TRENDS PAVING THE WAY FOR LOGISTICS

SECTOR GROWTH
The new trends which will have significant growth in logistics sectors are seen to be
the following:
 Demand-driven supply chain
 Robotics increasingly seen to be helping to reduce cost and improve efficiency
 Omni-channel logistics solutions
 Autonomous trucks to take logistics forward
 Blending of logistics and technology services
 Internet of things strengthening the SCM
 Hyper-local supply chains
 Blockchain technology

10.5.6 E-COMMERCE LOGISTICS: DRIVING THE CHANGE

With the robust growth in consumer demand of online purchases, Indian e-commerce
industry has emerged as one of the most dynamic and fast-paced growth industry and
is at its inflection point. The rapid growth of smartphones and internet connectivity
across the country especially in tier-II and tier-III cities has led to the growth of online
retailers, and thus direct beneficiary of this is the logistics industry. Whereas many
retailers are still losing money, the logistics industry including the courier industry
has shown significant positive impact. Developments such as digital payments,
analytics-­driven customer engagement by the use of artificial intelligence (AI) and
machine learning tools, and government-led initiatives have supported the growth of
this sector. The biggest challenge, however, in this cycle of supply chain depends on
the last-mile delivery. Connect India is committed to design the largest and most
robust last-mile distribution e-ecosystem by creating a model through 100,000 bricks-
and-mortar stores entrepreneurs, covering up to panchayat level distribution, which
will create proximity to the customers in rural India, which is the future of India.
However, the challenge here is skilled manpower, higher fuel costs impacting margin
due to increased cost and lack of volumes in many rural areas.

10.5.7 INLAND WATERWAYS

The Ministry of Shipping aims to double the share of transportation of cargo through
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170 Material
coastal shipping lines and inland water navigation by 2025 under Sagarmala
programme. The estimated volume of the total cargo transported by coastal shipping Global Logistics
Value Chain
in 2017–2018 is 110 million tonnes. The coastal shipping has also experienced a Management
growth of 9% CAGR over the last three years as against 4.5% CAGR over the preced-
ing three years. The National Waterways Act, 2016, has declared 106 new national
waterways in addition to 111 national waterways across 24 states with total navigable
network of over 20,000 km of waterways as it exists now. NOTES

10.5.8 OCEAN SHIPPING

Shipping lines have experienced consolidation over the last few years. Supply is still
high with most services having a higher capacity than demand. The higher capacity
and lower demand lead to price competition and rate cutting. Most carriers are
expecting larger vessels being delivered during next one to two years and some even
placing new orders. The pressure on rates will continue unless demand moves up
significantly. The industry is working on digitizing the entire shipping value chain to
positively impact the shipper, the consigner and the consignee, and provide much
greater control of their shipments by offering instant price quotes and bookings, trans-
parency and tracking, simplified paper work and proactive customer care.

10.5.9 INDIA ROAD TRANSPORT: ADAPTING DIGITIZATION

Indian transportation industry is continually growing at a CAGR of 15%. Over 7 million
goods vehicles are moving around the country and the freight volume has reached 1,325
billion tonne km, which is expected to double by the year 2025. India spends about 14%
of the GDP on transportation in comparison to 6–8% by developed countries. The
industry is still very fragmented, traditional and unorganized. However, the Indian
trucking industry has already started accepting digitization in its business, and online
truck booking is now common. In the trucking industry, spot market plays a pivotal role
in India. Both big and small players have to reach out to the spot market to fulfil their
daily transport requirements. Technology-enabled players have taken substantial chunk
of the market in last three to four years. Companies are now seen using machinery and
AI to predict the kind of volume which would happen at routes and lanes.

UNIT SUMMARY
Value chain is another name of end-to-end supply chain. In global business environment
large companies are managing their supply chain in a networked environment. They are
sourcing input materials from many countries wherever those are available at best price
meeting the quality and delivery schedule criteria, and transporting these input materi-
als yet to another country for production and or manufacturing or assembling for least
cost and capturing the value at each stage of the interface through effective logistics
management. These issues are elaborately discussed in the unit.
Logistics industry in India and its status and ranking in the world logistics industry
as well as logistics security issues are covered in this unit; global operating levels of
the logistics companies are also discussed. The unit also deals with the issues of man-
aging the challenges of integrated supply chain and logistics management, including
a discussion on stages of integration and benefits of integration. The case of Amul has
been discussed to explain how they are addressing the very complex supply chain and
logistics issues in the business and also how successfully they are able to integrate the
Self-Learning
functions. Material 171
Advanced
Supply Chain
G lossa r y
Management
 International Logistics: International logistics is the design and management of
a system that controls the forward and reverse-flow of materials, services, infor-
mation into, through and out of international corporation and international geo-
NOTES graphic boundaries.
 International Logistic Channel: International logistic channel means the optimal
routes created purposefully and in a systematic way, most often within the con-
fines of the already existing international logistic networks to the recipient along
with accompanying information.
 Free Trade Agreement (FTA): FTA normally is signed between friendly coun-
tries to facilitate the trade which eliminates tariffs on trade between countries in a
region.

Review Questi ons

Objective Type Questions

1. _______________ value is normally measured by financial parameters such as

ROI, PAT, EVA, and so on, and these can be increased by managing logistics
more effectively, which can also help in delivering incremental financial
performance.
a. Marketers
b. Shareholder’s
c. Traders
d. Transporter
2. What begins with the supplier and ends with the ultimate client and embraces all
aspects related to product development, purchase, manufacturing, physical distri-
bution, after-sales service and the circulation of information?
a. Personal network
b. Local network
c. Physical network
d. System network
3. Which networks are represented by a set of companies connected with one
another in a ‘supplier–receiver’ relationship in the evolution of international
logistics?
a. Vertical
b. Horizontal
c. Wide-area
d. Local
4. An international logistic channel is a quick, flexible and interconnected system,
driven by the mechanism of the customers’ choice, aiming to achieve a high level
of _______________ as well as to gain the highest possible profit by the compa-
nies within this channel.
a. Process orientation
b. Customer satisfaction
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 c. Global expertise Global Logistics
Value Chain
d. Global sourcing Management
5. _______________ logistics focuses on performing value-added services in a
relatively controlled environment.
a. International
b. Domestic NOTES
c. Inbound
d. Outbound
6. _______________ and _______________ are represented by four D’s: distance
(longer), documents (extensive), diversity in culture (wide variation with cultural
difference) and demand of customers (variable and fluctuating demand).
a. Market and competition
b. Time and resources
c. Cost and complexity
d. Hurdles and constraints
7. In the global environment, _______________ becomes difficult compounded by
custom laws, government policies and complexities as well as facilitating inter-
mediaries such as banks, insurance firms, legal counsellors and transport
carriers.
a. Calculating
b. Transportation
c. Marketing
d. Forecasting
8. Which method is a preferred method of operation for the players with limited
international experience at global operating levels?
a. Internal export
b. Arm’s length
c. Insider business practices
d. Denationalized operations
9. At _______________ level, companies would have local market presence in for-
eign countries, and internal operations would include marketing, sales, produc-
tion and distribution.
a. Level 2: Internal export
b. Level 5: Denationalized operations
c. Level 3: Internal operations
d. Level 1: Arm’s length
10. _______________ may either stimulate or reduce international trade, and it can
also reduce the access of the firms to more efficient producers or markets outside
their region.
a. Customs Union
b. Free Trade Agreement (FTA)
c. Economic Union
d. Common market
Answers: 1. b; 2. c; 3. a; 4. b; 5. b; 6. c; 7. d; 8. b; 9. c; 10. b
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Advanced Descriptive Questions
Supply Chain
Management 1. What do you mean by the term “Value” in Global Logistics Value Chain
Management?
2. Discuss with examples the three significant barriers to global logistics?
3. Enumerate the global operating levels initiated by the logistics companies.
NOTES 4. Trace the evolution of international logistics by identifying its key drivers.
5. Write a brief note on future of logistics industry in India. What has been the role
of the Indian government in this?
6. Discuss the introduction and development of e-commerce industry in India. How
has this affected the logistics industry in India?

Re fe re nc e s

Porter, Michael E. 1985. Competitive Advantage. New York: The Free Press.

B ibliogr a phy

Baufield, Emiko. 1999. Harnessing Value in Supply Chain: Strategic Sourcing in Action. New
York: Wiley.
Cachon, Gerald P., and Martin A. Larivieve. 2001. ‘Turning the Supply Chain into a Revenue
Chain’. Harvard Business Review 79 (3): 20–21.
Remko I. van Hoek. ‘Measuring the Unmeasurable and Improving the Performance in the
Supply Chain’. Supply Chain Management: An International Journal 3 (4): 187–193.

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 11UNIT

NOTES
Supply Chain Performance
Management

LEARNING OBJECTIVES
LO 1 Understand why achieving strategic fit of supply chain
capabilities with business objective is critical to a company’s
overall success
LO 2 Understand how a company achieves strategic fit between its
supply chain strategy and competitive strategy
LO 3 Realize key performance criteria of supply chain and how those
have to be derived and measured within the system
LO 4 Get clarity on how to start a company-wide performance
management programme to succeed and create competitive
advantage
LO 5 To be exposed to a framework of performance management
programme that can be applied in a given situation

11.1 INTRODUCTION
SCM has been a major component of competitive strategy to enhance organizational
productivity and profitability. The literature on SCM that deals with strategies and
technologies to effectively manage a supply chain is quite vast. In recent years, orga-
nizational performance measurement and metrics have received much attention from
researchers and practitioners. The role of these measures and metrics in the success
of an organization cannot be overstated because they affect strategic, tactical and
operational planning and control. Performance measurement and metrics have an
important role to play in setting objectives, evaluating performance and determining
future courses of actions of any organization. There are frameworks to promote a
better understanding of the importance of SCM performance measurement and met-
rics (Ramakrishna et al. 2010). In ultimate analysis, better SCM has to result into
improved financial performance. The SCM objective primarily has to be achieving
company’s strategic business objective. Businesses achieve financial goals, pursuing
a few key strategic drivers developed through careful analysis of the competitive
environment and business opportunity and also key competitive advantage of the
corporation. The strategic drivers of growth and performance of companies operating
in a category will thus be different for different corporations. The methods of distribu-
tions and product pricing will also be different for companies operating in a typical
business vertical, derived from their target market and strategies to reach and service
those identified markets. A company’s supply chain thus has to be managed to Self-Learning
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Advanced support its business strategy and therefore has to have an ideal fitment of supply chain
Supply Chain
Management
strategy with the business strategy.
Achieving the strategic fitment of supply chain with the company’s value chain,
strategic goal and key drivers to achieve that goal is essential and that will ensure the
consistency between customer priorities that the competitive strategy of the corpora-
NOTES tion intend to satisfy and the supply chain capabilities that the supply chain strategy
aims to build. To achieve that, different functions in the company must follow the
appropriate and approved structure and processes, and resources should be able to
execute these strategies successfully. Also the design of the overall supply chain and
the role of each stage must be aligned to support the supply chain strategy. If this does
not happen, company may even fail either because of a lack of strategic fit or because
its overall supply chain design, processes and resources do not provide the capabili-
ties to support the desired strategic fit. Most importantly, supply chain strategies and
capabilities will be required to support the company’s sales and marketing
strategies.
For example, if company stands for immediate delivery on receipt of the order,
supply chain has to ensure stock availability at all times at the stock delivery points
and do not resort to delaying the delivery for achieving other objectives like economy
in transport operations.
Another example that can be cited is of Dell. The competitive strategy of Dell is to
provide a large number of options to the customer by providing customizable prod-
ucts with their unique customer-specific configuration at a reasonable and competi-
tive price. As their focus was on customization, Dell’s supply chain was designed to
be responsive by ensuring that assembly units owned by Dell were not only strategi-
cally located but also flexible and capable to easily handle the variety of customer-
specific product specification. A facility focused on low cost and efficiency derived
from producing large numbers of the same specification would not have been appro-
priate for the Dell’s business strategy.
SSCM performance then will be analysed if the business strategy has been sup-
ported well by the supply chain capabilities and strategies to deliver the corporation’s
business goals and objectives.

11.2 SCM PERFORMANCE CRITERIA

Several studies have indicated that there is a strong relationship of the largest number
of suppliers and customer integration with market share and profitability. This would
mean that taking advantage of supplier capabilities and emphasizing a long-term
supply chain perspective in customer relationships can be correlated with firm’s per-
formance in terms of growth and profit. The growth can be measured in terms of both
business volume growth and increased market share. As logistics competency
becomes a more critical factor in creating and maintaining competitive advantage,
logistics measurement becomes increasingly important because the difference
between profitable and unprofitable operations becomes narrower. Firm’s logistics
management needs to be integrated with SCM in order to ensure improved customer
service and satisfaction. Power (2005) noted that firms engaging in comprehensive
performance measurement realized improvements in overall productivity. According
to experts, internal measures collected and analysed by the firm would generally
Self-Learning include the following performance criteria:
176 Material
 Cost Supply Chain
Performance
 Customer service Management
 Productivity measures
 Asset measurement
 Quality
In addition to the internal performance criteria as mentioned above, there can even be NOTES
company specific additional criteria that are normally derived from the company’s
past performance indicators and typical issues and problems that company experi-
ences in their supply chain. For example, vendor’s performance and ratings can
greatly influence supply chain performance of a corporation. Typically, it may be
required to track and rate the performance of key vendors. External performance
measurement is examined through customer perception measures and benchmarking
the ‘best practice’ as well as ‘best-in-class’ as mentioned below:
 Customer perception measurement
 Benchmarking with best practice

11.3 THE KEY ELEMENTS OF SCM

Supply chains comprise the flow of products, information and money. How they are
managed greatly affects an organization’s competitiveness and profitability. Proper
alignment with the business strategy is essential to ensure strong overall
performance.
SCPM is a unified approach to improving the effectiveness and efficiency of all
supply chain processes. Key elements that need to be considered are as follows:
 Supply chain strategy
 Organization
 Planning
 Management
 Control activities
The combination of these elements fills the gap between the business’s decision-
makers and IT systems for performance measurement with data structures and report-
ing tools. In a nutshell, they create a bridge between strategic directives and successful
execution by using available information to steer supply chains from an end-to-end
perspective. The foundation is aligned metrics that drive intended behaviour at the
management and operational levels. Ultimately, this will create value for both share-
holders and customers.

11.4 SCPM IN INDUSTRY 4.0

When companies look beyond the horizon of their daily business operations and
begin to think about Industry 4.0 and Smart Factory (or self-managed production),
they soon realize that a stable supply chain and a reliable forecast of quantities and
dates are prerequisites for Industry 4.0. With its wide range of functions, SCPM plays
a key role by delivering the required information and data for an optimal production
supply. Managing supply chain for better performance is a pre-requisite to operate in
Industry 4.0 environment when technologies including AI and robotics will redefine Self-Learning
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Advanced the way businesses would be conducted and thus it will serve as a basis for entering
Supply Chain
Management
the new era of Industry 4.0.

11.5 A FRAMEWORK FOR PERFORMANCE MEASUREMENT IN

NOTES
A SUPPLY CHAIN
A framework for performance measures and metrics is presented (Table 11.1) consid-
ering the four major supply chain activities/processes (plan, source, make/assemble
and deliver). These metrics were classified as strategic, tactical and operational to
clarify the appropriate level of management authority and responsibility for perfor-
mance. This framework is a part of a theoretical framework discussed by Gunasekaran
et al. (2001). Measures are grouped in cells at the intersection of the supply chain
activity and planning level. For example, supplier delivery performance can be found
at the intersection of the source activity and tactical planning level indicating that it
pertains to sourcing activities (source) and the tactical planning level. Supplier deliv-
ery performance would thus be a measure useful in analysing the performance of
mid-level managers—who are generally the ones responsible for tactical decisions—
as they undertake sourcing activities. More details could be added to fix personal
responsibility for measures with individual managers, or management positions.
This framework should be regarded as a starting point for an assessment of the
need for supply chain performance measurement. It is likewise important to under-
stand that the rated importance of metrics in this framework is based on a relatively
small sample, and thus, care should be taken in generalizing results to all supply
chains. The importance of individual metrics presented herein might not apply to all
supply chains in all industries. Again, the framework is only a starting point. It is
hoped that this framework will assist practitioners in their efforts to assess supply
chain performance.

11.5.1 MATURITY MODELS TO MEASURE SUPPLY CHAIN

PERFORMANCE
Essentially, maturity models are intended to describe the typical behaviour exhibited
by a company at a number of levels of ‘maturity’. This allows companies to codify
what might be considered good practice (and, conversely, bad practice). In addition,
there are some intermediate or transitional stages. The concept applies to a range of
activities, including quality management, software development, supplier relation-
ships and many more, both as a means of assessment and as part of a framework for
improvement. One of the earliest maturity approaches was Crosby’s Quality
Management Maturity Grid (QMMG). For this reason, most of the following
approaches have their roots in the field of quality management. QMMG expects com-
panies to evolve through five levels of maturity before ascending to quality manage-
ment excellence, namely uncertainty, awakening, enlightenment, wisdom and
certainty.
At each level, the performance of a number of key activities is described. For this
purpose, the approach provides a descriptive text for the characteristic traits of per-
formance for each level. The Capability Maturity Model (CMM) for Software, devel-
oped by the Software Engineering Institute at Carnegie Mellon, is perhaps the
best-known derivative from this line of work. CMM for Software provides software
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178 Material
 Table 11.1 Supply Chain
Framework of Supply Chain Performance Matrix Performance
Management

Supply
Chain
Activity/
NOTES
Process Strategic Tactical Operational
Plan Level of customer Customer query time Order entry methods
perceived value of Product development Human resource
product cycle time productivity
Variances against Accuracy of forecast-
budget ing techniques
Order lead time Planning process
Information process- cycle time
ing cost Order entry methods
Net profit vs pro- Human resource
ductivity ratio productivity
Total cycle time
Total cash flow time
Product develop-
ment cycle time
Source Technological Supplier delivery Efficiency of purchase
capability of supply performance order cycle time
source Supplier lead time Supplier pricing against
Ability to develop against industry norm market
alternative material Supplier pricing
Constant upgrada- against market
tion on cost and Efficiency of purchase
quality parameters order cycle time
Efficiency of cash
flow method
Supplier booking in
procedures
Make/ Range of products Percentage of defects Percentage of defects
Assemble and services Cost per operation Cost per operation hour
Manufacturing hour Human resource produc-
in-house vs Capacity utilization tivity index
out-house Utilization of EOQ
Deliver Flexibility of service Flexibility of service Quality of delivered
system to meet system to meet goods
customer needs customer needs On-time delivery of
Effectiveness of Effectiveness of goods
enterprise distribu- enterprise distribution Effectiveness of delivery
tion planning planning schedule invoice methods
schedule Effectiveness of Number of faultless
delivery invoice delivery notes invoiced
methods Percentage of urgent
Percentage of finished deliveries
goods in transit Information richness in
Delivery reliability carrying out delivery
performance Delivery reliability Self-Learning
performance Material 179
Advanced and maintaining software and how to evolve towards a culture of software engineer-
Supply Chain
Management
ing and management excellence. CMM for software provides a framework consisting
of five maturity levels that define the extent to which a specific process is defined,
managed, measured, controlled and effective which is widely accepted and imple-
mented. The fundamental assumption of this approach is that quality can be cultivated
NOTES through control. Therefore, companies at higher maturity levels are better managed,
have less risk and are more likely to deliver a quality product that meets the budget
and schedule. CMM for Software inspired the development of other frameworks,
such as the CMM for Systems Engineering (SE-CMM) and the CMM for Integrated
Product and Process Development (IPD-CMM). The most recent attempt to consoli-
date the multiple models is the Integrated CMM (CMM-I), which has motivated the
development of similar frameworks in other disciplines.
During the various stages of development in terms of maturity models of SCM
practices, the corporation progresses from some initial state to more advanced state.
Some do it faster than others and with fewer detours, but fast or slow, every company
that gets to world-class must evolve through theses stages to get there. Therefore, no
stage can be left out. In assessing performance or maturity level, a distinction is made
between two types of models: On one hand, there are models in which different
activities may be scored at different levels. On the other, there are models in which
maturity levels are ‘inclusive’, where a cumulative number of activities must all be
performed. In practice, however, maturity models are not primarily used as absolute
measures of performance but rather as part of an improvement process. In this regard,
the purpose of using a maturity model is to identify a gap that can be closed by sub-
sequent improvement actions.

11.5.2 OVERVIEW OF SCM MATURITY MODELS

Many of the aforementioned approaches and ideas of maturity have been adapted to
supply chains and their management. To analyse the characteristics of maturity
models in the field of SCM, Jording and Sucky (2016) developed a design-based
characterization of SCM maturity models. The goal of their work is to provide the
reader with a purpose-driven design-based catalogue that serves as a guideline for a
more efficient construction of maturity models.
The analysis of these models and their shortcomings reveals quality attributes of
SCM maturity models, which then provides the basis of the purpose-driven catalogue.
This catalogue specifies the essential building blocks of SCM maturity models.
A maturity model can be defined as a construction-based model that consists of
an anticipated, limited development path, separated into stages with defined charac-
teristics and dimensions. It has one or more objectives related to the stage evaluation,
gap identification and transformation. If a model of this kind focuses on intercorpo-
rate collaboration, customer focus, management of flow of goods and/or manage-
ment of information flow, it is called a SCM maturity model. The examination of the
numerous models identified in the literature review reveals that those models differ
between the anticipated evolutionary content and the operationalization of the
stages.

11.5.3 SCM PROCESS MATURITY MODEL

The SCM Process Maturity Model shows the progression of activities towards effec-
Self-Learning tive SCM and process maturity based on five stages. Each of the stages contains
180 Material
characteristics associated with process maturity. These characteristics include pre- Supply Chain
Performance
dictability, capability, control, effectiveness and efficiency. Due to its process orienta- Management
tion and wide adoption by the supply chain academic and practitioner communities,
the SCOR model serves as the basis to conceptualize the SCM Process Maturity
Model. The five stages describe the process maturity of four areas: plan, source, make
and deliver. In Stage 1 (ad hoc), the supply chain and its processes are unstructured NOTES
without any process measures in place. Functional cooperation is low, and the process
performance is unpredictable. As a result, customer satisfaction is low.
In Stage 2 (defined), basic SCM processes are defined and documented, and pro-
cess performance is more predictable. The improvement of functional cooperation
requires considerable effort. Targets are defined but still missed most of the time.
Customer satisfaction has therefore improved but remains low.
Stage 3 (linked) represents the breakthrough, as broad SCM jobs and structures are
put in place, and intra-company functions, vendors and customers are cooperating.
Process performance is more predictable, and defined targets are often achieved.
Increased customer satisfaction begins to show market improvement.
In Stage 4 (integrated), organizational structures and jobs are based on SCM pro-
cedures, and traditional functions begin to disappear. Cooperation between the com-
pany, its vendors and suppliers takes place on a process level. Advanced collaboration
with customers and suppliers helps process performance become highly predictable.
Targets are reliably achieved, SCM costs are dramatically reduced and customer sat-
isfaction becomes a competitive advantage.
In Stage 5 (extended), individual companies are no longer just competing against
each other but against entire supply chains. These supply chains represent a horizon-
tal, customer-focused, collaborative culture that shares common processes and goals,
as well as joint investments in improving the system.
It is revealed that there is a significant relationship between SCM process maturity
and overall SCM performance in an organization. Performance measured by each
area of the SCOR Model is the measurement of performance most related to SCM
process maturity. An explanation for this result is that the four areas of the SCOR
Model provide a clear process context (Table 11.2).
Delivery performance and order lead times are also significantly correlated with
SCM process maturity.
To achieve the defined enterprise goals, a company needs to successfully manage
the following seven supply chain views:
 SCM and logistics: Functions, processes, activities and tasks related to the inte-
gration, collaboration and development of the suppliers.
 Production systems: Functions, processes, activities and tasks regarding the
transformation of the product or service.
 Inventory management: Actions related to inventory management and control.
 Customer relationship management: Actions regarding meeting the customer’s
needs.
 Human resource management: Actions related to the enterprise’s employees,
their integration into the company and the work environment.
 ISs and technology management: Actions linked to the development and imple-
mentation of ISs and the technology management process.
 Performance measurement systems: To measure the enterprise’s performance
regarding processes, functions and employees. Self-Learning
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Advanced Table 11.2
Supply Chain Maturity levelS of the Supply Chain Maturity Model
Management

Level Level Name Description

1 Undefined Describes a competency area for which the enterprise has no
NOTES documentation or standardization. The processes are ad hoc,
dependent on the person doing the activity and reactive to the
environment.
2 Defined Describes a competency area for which the enterprise has defined
the process and procedures. The competency areas are isolated,
and there is little forward effort to integrate the many processes.
3 Manageable Describes a competency area for which the enterprise has defined
established procedures that they measure and manage to those
measurement. Moreover, the enterprise has taken action to inte-
grate and coordinate the internal processes and systems of the
enterprise.
4 Collaborative Describes a competency are for which the enterprise has estab-
lished procedures to collaborate with suppliers and customers.
5 Leading Describes a competency area for which the enterprise has estab-
lished procedures to collaborate with suppliers and customers; it
measures these practices and regularly obtains feedback to
improve these practices.
Source: SCOR Model, Supply Chain Council, 7 October 2004.

CaSe STuDY
Supply Chain perforManCe MeaSureMent of an autoMotive induStry—appliCability of SCor Model

SCOR Model as proposed by SCC for performance measurement is easy to understand,

practical and suitable for the automotive sector.

Introduction
Over the past 10 years, logistics sector in Morocco went through a strong growth which
has been reflected in the improvement of the performance of the LPI, a ranking done
annually by the World Bank. Morocco is currently at the 86th place worldwide in logis-
tics performance after being at 94th in 2007. A national strategy has been implemented
in Morocco to improve logistics performance and develop the competitiveness of
Moroccan businesses. The automotive industry is a highly globalized sector, where
there is competition from around the world. Faced with the increase in supply and the
strong pressure on prices, reinforced by the power of Asian groups (Toyota, Hyundai,
etc.) and the arrival of new players from emerging countries (Geely, Tata Group, etc.),
many companies seek to optimize their value chain in order to remain competitive. In
the supply chain of the automotive industry, many factories are working together to
manufacture a product (car, motor, truck, etc.).
Logistics can be considered a key competitive factor in the automotive industry due
to the increasing number of variants and options of the model. With the growing impor-
tance of logistics, the evaluation of logistics effectiveness and efficiency is gaining

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 Supply Chain
increased attention. There are many continuous improvement tools such as TQM, six Performance
Management
sigma, continuous process improvement and others that are available for companies to
improve their operations. However, none of these improvements programmes is dedi-
cated to the logistics chain.
In order to improve business systems, the ROI, to deal with competitiveness and
optimize the efficiency of their supply chain, some global companies apply the SCOR NOTES
Model.

SCOR Model
In SCOR, the integrated processes of plan, source, make, deliver, return and enable from
the supplier’s supplier to the customer’s customer represent SCM. Elements of business
process engineering, metrics, benchmarking, leading practices and people skills into a
single framework are combined with SCOR. The model itself is structured around
primary management processes. Using these process definition blocks, SCOR can be
used to model supply chains that are very simple or very complex using a common set
of definitions in disparate industries. In fact, public and private organizations and
companies around the world use the model as a basis for projects to improve the global
supply chain.

Basic Approach to Determine Performance

The SCOR Model has three levels of process detail. In practice, Level 1 describes the
number of supply chains, how their performance is measured, and necessary competi-
tive requirements. Level 2 presents the configuration of the planning and execution
strategies in the material flow, involving standard categories such as ‘make-to-stock’,
‘make-to-order’ and ‘engineer-to-order’. Level 3 considers the business processes and
system functionality used to process sales orders, purchase orders, work orders, return
authorizations, replenishment orders and forecasts. Level 4 process details are not con-
tained in SCOR but must be defined to implement improvements and manage processes.
Advanced users of the framework have defined process detail as far as Level 5.
Organizations using the SCOR Model performance metrics can compare their perfor-
mance levels with other organizations in the supply chain using a benchmarking tool
called SCORmark. The SCORmark database contains historical data from over 1,000
companies and 2,000 supply chains. The benchmarking process using the SCORmark
can be performed through the following steps: (a) defining the supply channels to be
compared, (b) measuring the internal and external performances, (c) comparing the
performance to relevant industrial companies, (d) establishing competitive demands and
(e) calculating the opportunity value of improvement.
• Superior is the performance (median value) on a specific indicator attained by 10%
of the best classified supply chains (SCs) comparing to the total of the supply chains
surveyed.
• Advantage is the performance (median value) among the top 10 companies and the
median of all the supply chains considered.
• Parity is the performance (median value) of all the supply chains considered.
The APICS, an association, announced the launch of the SCOR Model version 12.0.
Developed by a panel of international supply chain experts, this latest version of
SCOR incorporates Omni-channel, metadata, block chain and other emerging engines
that supply chain professionals are using today. SCOR has been the global

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Advanced
Supply Chain inter-sectorial standard for supply chain excellence over the last 20 years and, with
Management this update, will continue to support ways to measure, improve and communicate the
supply chain’s business performance.
APICS is the association for SCM and the leading provider of research, education
and certification programmes that elevate supply chain excellence, innovation and
NOTES resilience.
The company in this case is an international automotive company with more than 45
years of experience in the automotive sector, an annual turnover of approximately 3,300
million EUR and 14,500 employees around the world. For the purpose of evaluation, a
combination of workshops across all logistic functions, interviews of key executives,
physical documents made available and the data analyses was resorted to. The partici-
pants are dispersed across all levels of grading, from operative level up to logistics
management of the different sites.
In the beginning, the first series of workshops were conducted with the aim of align-
ing the logistic objectives found in the literature with those used on the site. From these
workshops, the proposed performance indicators as per the model are aligned with those
identified by the experts and proposed performance indicators with the ones identified
in the experts’ workshops. Performance indicators that were not named by the experts,
but proposed in standard SCOR, were highlighted and discussed in respect of their
added value in a supplement meeting. The subsequent model was aligned in another
round of workshops and additional interviews. After changing the detailed definition of
the SCOR model and each measure (alignment with data sources, adding responsibili-
ties), the system was implemented and data evaluation started as well as a dashboard
allowing performance indicator evaluation launched. Based on that, a quantitative
evaluation of each metric was started, which also emphasized initial improvement
potentials.
After having implemented the model and finalized its deployment, two brainstorming
sessions were conducted to compare the different experiences with this project and to
capitalize on it.

Brief Description of the Company

The company already present at Tunisia chose to develop in Morocco in order to accom-
pany its client and to have a base of production of plastic systems and be able to deliver
the manufacturers based in Spain. The Sheet Metal workshop has 10 presses having
capacity to press 150 to 800 tons of steel and transforms approximately 10,000 tons of
steel per year. It issues components for the body-in-white of the vehicles of a carmaker.
The plastic factory integrates approximately about 10 press 350 and 2,700 tons, and
transforms approximately 3,500 tons of plastic annually. It issues auto components and
engines for the two vehicles including components for the equipment suppliers associ-
ated with the company.

Supply and Production Control

The trades of the supply model and production control are exerted in the factory where
the role of the logistics consists in supplying the raw material, the components sub-
contracted and the sub-components necessary for the manufacturing of the components.
The trades of handling interns (receipt, shipping, management of the warehouses, etc.)
are also part of this model.
Administration of the sales: An administrator is in charge of the receipt of the cus-
tomer orders, imputation of the prices, the establishment of client base for an article
whose finality is the satisfaction of the client in terms of quantity, quality and lead
times.
Shipping, receipt, and transport: The trades of this model are exerted on upstream
flows of supply raw material, components and sub-contracted components.

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 Supply Chain
Currently, logistics is at the centre of all the activities of the company, divided into Performance
Management
four business families that cover all logistics activities: from the supply of raw material
to the shipment of the final product. In addition, logistics is one of the services of the
company that makes the most use of the computer tool: By following all the flows of
the company, by anticipating these flows (forecasts, expression of needs, etc.) and over-
flowing beyond from the company to suppliers and customers. NOTES
For the case, it uses as management tools: (a) SAP (Systems Applications and
Products) where the information is centralized, which integrates the different functions
of the company (accounting, finance, production, supply, marketing, human resources,
quality, maintenance, etc.), (b) EDI for the exchange of various documents internally
and externally of the company. It is indeed commercial documents or transport such as
invoices. The planning process within the company that were studied is managed by the
planner who processes once a week his calculation of net need for finished products via
SAP, checks the break dates of each part, and thanks to an Excel file it establishes the
planning of all the week as well as the orders of manufacture of the parts to manufac-
ture. These production orders are then issued to the production manager to be distrib-
uted to the production items, once the valid and closed planner has been completed and
sent to the stock manager as recorded on SAP.

Establishing Performance Metrics

The benchmarking of SCOR Model is done by comparing the indicators of Levels 1, 2
and 3. However, it is not necessary to apply the three performance levels in each axis.
That is why it would be better to prioritize these axes in order to put the level indicators
1 for less important axes and up to 3 for the most important. The prioritization of per-
formance axes depends on the type of business and management of the company. SCOR
standard set the notations for prioritizing strategic axes of the dashboard that will define
for each objective parameters to be fixed for benchmarking. Indeed, the notations S, A
and P are used by the SCOR model to prioritize the axes; these are as follows:
S stands for superior: It corresponds to the 90th percentile. This means that it
will line up with 10% of the best-performing companies.
A stands for advantage: It corresponds to the 70th percentile. The objective will
be to reach the performance of 30% of the best companies.
P stands for parity: It corresponds to the 50th percentile. The objective is to
exceed 50% of the best companies.
In order to evaluate the process performance, it will be very interesting to complete the
indicators that were already in place by other indicators proposed by the SCOR Model,
which correspond to its strategic axes.
According to the baseline with which to compare, there are three types of
benchmarking:
• Comparison on a historical basis. Monitoring indicator development.
• Internal benchmarking. It is the comparison between companies of the same
group.
• External benchmarking. The comparison is made by external organizations.
The SCOR Model proposes the external benchmarking because the more the reference
database will be, the results will be significant. The objective here will be to line up with
the best companies in the automotive sector basing on logistics activities. After defining

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Advanced
Supply Chain the indicators on the dashboard, the data were collected to calculate their values which
Management
were considered depending on the importance as mentioned below:
Reliability: Basic information for these indicators was derived from the history
of logistics rates and weekly reports.
NOTES Management of assets: This data was collected from the finance department and
management control. Most of them are confidential, so they will be expressed as a
percentage.
• Logistics costs. This information was collected from the accounts depart-
ment from history.
• Reactivity. This indicator corresponds to the lead time or the time required to
complete an order.
• Flexibility. Only the part of the supply was held in account for this axis
because it is the most important component in terms of time.
The next step is the measurement of the performance indicators for the dashboard.
Indeed, the formulas for calculating the different KPIs are presented below:
Equations
Number of processed orders
1. Service rate (SR) =
Number of total orders
2. Order fulfilment rate = SR (quantity by reference) × SR (deadline)
× SR (accuracy of documents)
Delivered volume
3. Fill rate =
Capacity of the truck
4. Percentage of sales costs (COGS) = Sales – Profits – Administrative cost/sales
Current assets Receivables
5. Working capital ratio = 
Current liabilities Payables
6. Financial cycle delay = Delay of customer dept + Number of days of stock
– payables delay
Paybles 365
7. Payables delay =
Annual sales
Customer debt 365
8. Delay of customer debt =
Annual sales
Stock value 365
9. Number of days of available stock =
Annual sales
n
∑ Abs (sales forecast (i )− sales (i ))
1
10. Forecast reliability rate = n
∑ sales forecast (i )
1

n
∑ Warehouse stock (i ) + Outstanding (i )
11. Coverage rate = 1

week average forecast

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 Supply Chain
n Performance
∑ Abs (planned (i )− realized (i ))
1
Management
12. Internal service rate = n
∑ planned (i )
1

n
∑ Abs (SAP stock (i ) – physical stock (i ))
1
NOTES
13. Rate of stock variance = n
∑ SAP stock (i )
1

Slaes
14. Rotation of fixed assets in the supply chain =
Net fixed assets

Number of written complaints

15. Customer complain rate =
Total number of affected deliveeries

Number of complete delivered orders on time

16. Service supplier rate =
Number of orderss to be delivered by suppliers

17. Cost of an out of stock = total costs related to a cessation of customer activity
Total outstanding TTC  number of days
18. Number of days of available stock =
Total turnover for the period

Number of returned deliveries from customers

19. Customer return rate =
Total number of deliveries

Number of returned deliveries to suppliers

20. Supplier return rate =
Total number of deliveries

The established scorecard containing the benchmarking values provided by the SCOR
standard as well as the improvement objectives for each metric are presented in
Table 11.3.
Best Practices Proposed by the SCOR Model
As presented in the dashboard set out in Table 11.3, the difference between the cur-
rent situation of the company and the value of benchmarking differs from one indi-
cator to another. It is clear that better gap analysis implies good performance
improvements. So the first task to do is to know the root causes of these gaps and
the processes involved. Regarding the processes mentioned above, the most per-
forming companies have established certain practices that have reported to them
tangible benefits. This is a kind of capitalization of experience that the SCOR
Model offers through benchmarking. Table 11.4 lists best practices offered by
SCOR framework, taking into account the processes previously diagnosed and the
anomalies observed.
Table 11.4 shows the best practices according to their difficulty of implementation
and the impact they will have on business processes. Priority actions for this project will
obviously be those who have the greatest impact and the least difficulty.

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NOTES

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Table 11.3
the SCoreCard Containing perforManCe MetriCS MeaSured for the CoMpany

Maximize/ Actual Benchmark Class Company

Performance Metrics Criteria Unit Minimize Frequency Value S A P Objective GAP
Service rate (SR) Reliability % Max Week 92% 100% 90% 80% S 8%
Order fulfilment rate Reliability % Max Week 77% 100% 90% 80% A 13%
Fill rate Reliability % Max Week 76% 96% 82% 75% A 6%
% of sales costs (COGS) Logistics costs % Min Month 5% 3% 8% 13% S −3%
Working capital ratio Management Ratio Min Month 2.2 1.2 1.5 2 A −0.7
of assets
Financial cycle delay Management Day Min Annual 90 13 42 80 A −48
of assets
Payable delay Management Day Min Annual 30 — — — —
of assets
Delay of customer debt Management Day Max Annual 45 — — — —
of assets
Number of days of available Flexibility Day Min Annual 85 13 34 78 A −55
stock
 Forecast reliability rate Reliability % Max Annual 91% 100% 90% 80% S 9%
Coverage rate Flexibility Ratio Min Month 2.5 1 1.4 2 S −1.5
Internal service rate Reliability % Max Week 95% 100% 95% 90% S 55
The rate of stock variance Flexibility % Max Week 88% 100% 95% 90% S 12%
Rotation of fixed assets in Management — — Annual Cb
the supply chain of assets
Customer complaints rate Flexibility % Min Week 6% 0% 2% 5% A 4%
Service supplier rate Flexibility % Max Week 95% 100% 95% 90% S 5%
Cost of an out of stock Logistics costs K€ Min Month 12 0 1 2 A −12
Number of days of available Logistics costs Day Min Month 15 3 5 7 A −10
stock
Customer return rate Logistics costs % Min Week 2% 0% 0.5% 1% S −2%
Supplier return rate Flexibility % Min Week 1% 0% 0.5% 1% S −1%
Source: The case is based on the data presented by Radouane Lemghari, Chafik Okar and Driss Sarsri presented at MATEC conference held at Morocco 2018.
NOTES

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Performance
Supply Chain
Advanced
Supply Chain Table 11.4
Management the beSt praCtiCeS propoSed by SCor Model

Processes Best Practices

NOTES P2 Supply All key participants in the supply chain, including strategic
planning partners, have full visibility of the demand/supply plan
VMI
CPFR
P2.1 Identify, The demand plan is updated frequently to reflect actual
prioritize product consumption or customer forecast information
requirements Maximize data integrity and system accuracy by ensuring over
99% accuracy of BOM configuration, inventory levels and
schedule requirements
P2.4 Establish Digital linkage (EDI, XML, etc.) is used to provide real-time
procurement plans demand information and handle routine transactions
Maintain data and system integrity by ensuring production data,
inventory levels and schedule requirements are over 99% accurate
A detailed production model that synchronizes PLAN and
MAKE activities in real-time
EP.7 Manages ABC classification
planning
configuration
S1.1 to S2.1 Electronic Kanban Pull Signals are used to notify suppliers of
Schedule deliveries the need to deliver product

Conclusion
Being part of a complex and highly competitive field, and in order to evaluate its
position in the automotive industries and to implement a benchmarking to improve
its performance, the company proposed to model its supply chain. To meet this need,
the SCOR Model was opted as a diagnostic tool by the company. The first step was
to model its supply chain, according to the SCOR Model, this model aimed to stan-
dardize the structure of the process from the existing model. The next step is to
develop the dashboard. Based on the results of this benchmarking, represent an
opportunity for improvement for the company. A set of best practices were selected
that can rectify the weaknesses detected at certain axes. To do this, an action plan
was developed to implement these best practices. The key outcome of this perfor-
mance measurement using SCOR Model adapted to company needs will help the
company to integrate proposals for improvements in future projects and logistics
department of the annual performance of external benchmarking, in order to validate
and renew the strategic direction of the company.
Case Questions
1. What are the advantages and key features of the SCOR Model of supply chain per-
formance measurement?
2. Discuss the methodology adopted to implement the performance measurement
system in the company.
3. How are performance measurement criteria determined?
4. What are the key benefits of conducting and implementing such performance mea-
Self-Learning surement model in the company in terms of its long-term objective delivery and
190 Material strategic direction?
 Supply Chain
UNIT SUMMARY Performance
Management
This unit deals with the SCPM and also benchmarking supply chain performance.
The objective of integrated SCM practice is to improve the overall performance of the
company. The unit discusses in detail the performance criteria of a business and how
those are identified and measured against stated objective as well as to deliver above NOTES
average industry-level performance. While performance measurement of supply
chain can be initiated in a business anytime, there are indications or signals for busi-
nesses to improve their supply chain performance for their own survival, those signals
are discussed in the unit. The performance criteria can include the general measure-
ment criteria, but most important criteria that impact the customer service and satis-
faction have to be included. In this connection, a broad framework of supply chain
performance index was discussed in detail. The unit also discussed the maturity levels
of SCM in organization which can be used by enterprises to understand their perfor-
mance level and compare with their competitors in the industry. This will be a useful
tool which will direct businesses regarding where they stand today in terms of SCM
practices and what is the way forward for them.

Gl o s s a r y

 Supply Chain Performance Management (SCPM): Supply Chain Performance

Management (SCPM) is a unified approach to improving the effectiveness and
efficiency of all supply chain processes.
 SCM Process Maturity Model: The SCM Process Maturity Model uses the
SCOR Model as a conceptual basis to describe the process maturity of the supply
chain activities plan, source, make and deliver.
 SCOR Model: The SCOR model is a management tool used to address, improve
and communicate SCM decisions within a company and with suppliers and cus-
tomers of a company.
 Supplier Delivery Performance: Supplier delivery performance is a measure
useful in analysing the performance of mid-level managers—who are generally
the ones responsible for tactical decisions—as they undertake sourcing activities.
 Capability Maturity Model (CMM): The Capability Maturity Model (CMM)
provides software organizations with guidance on how to gain control of their
processes for developing and maintaining software and how to evolve towards a
culture of software engineering and management excellence.

Rev i ew Q ue stions

Objective Type Questions

1. Which measurement is examined through customer perception measures and

benchmarking the ‘best practice’?
a. Internal performance
b. External performance
c. Strategic performance
d. Business performance
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Advanced 2. _______________ is a unified approach to improving the effectiveness and effi-
Supply Chain
Management
ciency of all supply chain processes.
a. Supply Chain Performance Management (SCPM)
b. Supply Chain Operations Reference (SCOR)
c. Logistics Management
NOTES d. Supply Chain Management (SCM)
3. Which level measures include the ability in day-to-day technical representation,
adherence to developed schedule, ability to avoid complaints and achievement of
defect-free deliveries?
a. Strategic
b. Tactical
c. Partnership
d. Operational
4. Which management needs to be integrated with SCM in order to ensure improved
customer service and satisfaction?
a. Firm’s production
b. Firm’s manufacturing
c. Firm’s storage
d. Firm’s logistics
5. Which measurement is examined through customer perception measures and
benchmarking the ‘best practice’?
a. Internal performance
b. External performance
c. Strategic performance
d. Business performance
6. _______________ is gradually evolving, due to faster access to information and
new ways of gaining insights.
a. Supply Chain Performance Management (SCPM)
b. Logistics Management
c. Supply Chain Operations Reference (SCOR)
d. Supply Chain Management (SCM)
7. A maturity model can be defined as a _______________ model that consists of
an anticipated, limited development path, separated into stages with defined char-
acteristics and dimensions.
a. delivery-based
b. construction-based
c. analysis-based
d. limitation-based
8. Correctly identify the five stages that describe the process maturity of four areas:
plan, source, make and deliver.
a. Stage 1 (ad hoc); Stage 2 (defined); Stage 3 (linked); Stage 4 (integrated);
Stage 5 (extended)
b. Stage 1 (ad hoc); Stage 2 (defined); Stage 3 (linked); Stage 4 (extended);
Stage 5 (integrated)
c. Stage 1 (defined); Stage 2 (linked); Stage 3 (integrated); Stage 4 (extended);
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192 Material
 d. Stage 1 (ad hoc); Stage 2 (defined); Stage 3 (analysed); Stage 4 (integrated); Supply Chain
Performance
Stage 5 (extended) Management
9. Which of the following is not one of the seven supply-chain goals that a company
needs to successfully manage to achieve the defined enterprise goals?
a. Production systems
b. Inventory management NOTES
c. Adaptive reporting
d. ISs and technology management
10. What is a key enabler of world-class supply chain reporting and performance
management?
a. Clear Accountability
b. Integrated Technology
c. Accurate inventory
d. Supply chain cost
Answers: 1. b; 2. a; 3. d; 4. d; 5. b; 6. a; 7. b; 8. a; 9. c; 10. b

Descriptive Questions

1. List the SCM performance criteria based on the internal measures collected and
analysed by an organization.
2. What are the key elements of a Supply Chain Performance Management (SCPM)?
3. Explain the role of SCPM in Industry 4.0.
4. State the main purpose of a successful performance management approach.
5. Why is it crucial to measure customer service and satisfaction?

Re fe re n c e s

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Jording, T., and E. Sucky. 2016. ‘Improving the Development of Supply Chain Management
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Research, 97–119. Wiesbaden: Springer Gabler.
Power, Damien. 2005. ‘Supply Chain Management Integration and Implementation: A
Literature Review’. Supply Chain Management 10 (4): 252–263.

B i b l i ogr pa hy

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