Supply chain management

SUPPLY CHAIN MANAGEMENT

Supply Chain Management: It envelops all the activities starting from point of origin through the point of consumption till End of Life of the Product or service. It includes planning and execution part of satisfying the customer’s demand.

Supply Chain Includes :Supply Chain Includes :

• Purchasing• Manufacturing• Ware Housing• Transportation• Customer Service• Demand Planning• Supply Planning

SCM essentially ensures three flows:•Product Flow / Service Flow•Information Flow•Finance Flow

Example’s Of Supply Chains:

Auto manufacturer like TATA Motors, companies like Delphi TVS, Lucas TVS etc., will be tier 1 suppliers.

Tier 1 supplier , Delphi TVS, is supplying fuel Injection systems to TATA Motors, in the next level ,Delphi TVS buys few components like machined Casting & Forgings from Geekay Auto components company, who can be called as Tier 2 supplier.

Geekay Auto components company, Tier 2 supplier will procure the raw material needed for their casting from JSW Steels, the Tier 3 supplier.JSW steels will procure iron and coke from iron ore mine

• Ever-increasing customer demands in areas of product and service cost, quality, delivery, technology, and cycle time brought about by global competition.

•The emergence of and greater acceptance of higher-order cooperative inter-organizational relationships.

•The information revolution.

Logistics Management is that part of supply chain management that plans, implements, and controls the efficient ,effective forward and reverse flow and storage of goods , services and related information between the point of origin and the point of consumption in order to meet customer’s requirements.

•The process of planning, implementing, and controlling the efficient, cost effective flow of raw materials, in-process inventory, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal.

•Inclusion : Remanufacturing, Refurbishing

•Manufacturing returns•Distribution returns•Customer returns•Forecast accuracy and demand variability•Promotional activities•New product introduction•Product range and safety stock policy•Product life cycles•Logistics trade-offs•Purchasing policies•High on-shelf availability•Legislative factors•Cash flow management•Liberal returns policies•Customer ‘no-faults found’

•Return’s Policy•Product Life cycle (“Cradle to grave” = traditional LCA “Cradle to cradle” = evolving LCA)•Handling & Gate keeping•Collection•Inspection and sorting•Reconditioning•Disposition and redistribution•Negotiation and Outsourcing

Top-Line is where an organization reports the total revenues on their come statement.

In contrast, bottom-line refers to Net Income (top line revenues minus expenses).Bottom line activities typically focus on cutting expenses in order to improve income.

Logistics and supply chain management have an impact on revenue growth because the improvement of service they can support can have positive effects on sales and on customer retention.

Functional integration - close relationships between functions such as shipping and inventory or purchasing and raw material management from raw material management through production, shipping, and sales organization to embrace suppliers and customers.

Internal integration - integration of all internal functions.

External integration – integration outside the organization to embrace suppliers and customers.

“ You can’t manage what you don’t measure “

“Anything that gets measured gets done”.

Performance Measurement is the process of quantifying the efficiency and effectiveness of an action.

A performance measure has a number and a unit of measure.

• The number > magnitude (how much)

• Unit > meaning (what)Performance measures are always tied to a goal or an objective (the target).

Input Measures: Used to understand the human and capital resources used to produce the outputs and outcomes

Process Measures: Used to understand the intermediate steps in producing a product or service.

Output Measures: Used to measure the product or service provided by the system or organization and delivered to the customers

Outcome Measures: Evaluate the expected, desired or actual results to which the outputs of the activities of a service or organization have an intended effect.

Impact Measures: Measure the direct or indirect effects or consequences resulting from achieving performance measurement goals

Holistic approachProcess-basedAligned with strategyA dynamic systemBalanced approachA managerial toolCover strategic, tactical and operational levelProvide a forward looking (leading) perspectiveTool for improvementProvide drill-down functionalityHandling conflicting objectivesSimpleComparabilityRelevant metrics

• Return on investment (ROI) = Income / Capital

• Return on Assets or Inventory (ROA) = (Income

after taxes + Interest – interest tax shield +

capitalized interest) / Total assets

• Internal Business Process Perspective : Waste reduction, time compression, flexible response, unit cost reduction

• Customer Perspective : Product quality, delivery time, flexibility

• Financial Perspective : Benefits for supply chain operators, deriving on one hand from cost reduction and on the other hand from the increase in revenues; higher profit margins , improved cash flow, revenue growth, higher return on assets.

• Learning & Growth Perspective : The capability to continuously improve performance, as learning and innovation abilities are the basis of the maintenance and the improvement of supply chain performance.

For performance comparisons, to set targets, to understand and adopt best practices.

• Internal: Focused on the processes of a single company

• External: which examines processes outside of a company’s direct industry and competitive, which examines processes at firms within the same industry.

Challenges In Benchmarking:

• Process comparability/Standardization

• Common definitions

• Finding appropriate supply chain/firms to benchmark

• Data for comparisons from other firms.

• Inventory Turnover Ratio : A ratio showing how many times a company's inventory is sold and replaced over a period.

• ITO = Cost of goods sold / Average inventory at costCost of goods sold = Sales - Gross profit (or) + Gross loss

Opening stock + Net purchases + Direct Expenses - Closing stockAverage inventory = (Opening stock + Closing stock) / 2Alternatively,

Inventory turnover ratio = Net sales / Average inventory at cost. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. ITO do not talk about service levels, ie stock outs or shortages.

Inventory Conversion Period:Inventory Conversion Period:• Is the Number of days taken to dispose off average inventory:• = Days in the year/Inventory turnover ratio • No of days in the year x Average inventory at cost/Cost of goods soldExampleCost of goods sold is Rs 4,50,000, Opening stock was Rs.1,25,000, Closingstock was Rs.1,75,000Solution:(1) Inventory turnover ratio = Cost of goods sold / Average inventory= 4,50,000 / 1,50,000*= 3 times*(1,25,000 + 1,75,000) / 2(2) Inventory conversion period = No. of days in the year/Inventoryturnover ratio= 365 / 3= 121.66 days (say) 122 days.

Impact of ITO : Impact of ITO : ExampleExample

Cost of goods sold is Rs.10 million, and the average inventory is Rs 2.5 million,• Inventory turns ratio => 10/2.5 = 4

• What would be the reduction in average inventory, if the inventory turns were increased to 10 time per year = 10,000,000/10 = Rs.1,000,000, Reduction in Inventory = Rs.1,500,000

If the cost of carrying inventory is 20 % of the average inventory, what is the annual savings ?20% x 1,500,000= Rs.300,000

• For Purchasing function -Supplier Performance, Cost Per Unit Purchased.

• For Logistics division -Transportation Costs, Warehouse Productivity.

Approaches - Process based

• Order fulfilment-(e.g., order-to-cash)

• New product development/introduction- (e.g., concept-to-first sale or production batch)

• Total cycle time - (e.g., materials purchase to customer payment or cash-to-cash)

Calculation FormulaCalculation Formula

• Cash to Cash Cycle Time in Days = AR days + INV Days – AP Days• AR days = Accounts Receivable in days = (Accounts receivables x 365) / Revenue• AP Days = Accounts Payable in Days = ( Accounts Payables x 365) / Cost of Goods Sold• INV = Inventory Days = ( Inventory x 365) / Cost of Goods Sold

Collaboration through strategic alliances, joint ventures, third party logistics, short- and long-term contracts, partnership sourcing, and retailer–supplier partnerships.

• Strategic level is - capital investment and restructuring the supply network

• Managerial level - optimization of the flow of goods and involves forecasting, planning and resource control.

• Operational level - Routine and repetitive tasks such as production or transportation scheduling and stock control.

Metrics for measuring collaboration :

Joint plan on product assortment

Joint plan on promotional events

Joint development of demand forecasts

Joint resolution on forecast exceptions

Consultation on pricing policy

Joint decision on availability level

Joint decision on inventory requirements

Joint decision on optimal order quantity

Joint resolution on order exceptions

Flexibility in volume, schedule, time and cost.

CO2 Equivalent:

Emissions of all non-CO2 gases should be converted to units of CO2eq using respective Global Warming Potentials (GWP).

A company’s GHG inventory contains 70,00,000 tons of CO2/year, 4.00,000 tons of CH4/year and 700 tons of N2O/year.

Total CO2eq = tons CO2(GWP[CO2]) + tons CH4(GWP[CH4]) + tons N2O(GWP[N2O])

= 70,00,000 (1) + 4,00,000 (21) + 700 (310)

= 15,617,000 tons CO2eq

On average 20 Vehicles with an average mileage of 8Km/l delivers raw materials. These vehicles use diesel to travel 100 Km each and are in operation for 300 Days in a year

Emission Factor Diesel: 2.7458 Kg Co2/L

Annual CO2 Emissions:

= 20 x 100 KM x 300 Days x 2.7458 2.7458 Kg Co2 / 8kml

=205935 Kg CO2

Supply Chain Risks :• Political and currency risks• Cyber attacks• Failed communications with suppliers• Terrorism• Traditional property-related risks, such as fire,

natural disasters, power-grid blackouts and equipment breakdowns.

Risk Value:• Risk Value = Probability x Impact of disruption.

• When there is a 10 percent chance that a delivery will be delayed, and any delay would cost Rs20000,

Then expected value of delay = 0.1 x 20000 = 2,000.

Probability:Probability of an Event = No. Of. Times that the event occurs / No. Of. Observations.

In the last 100 Deliveries from a supplier , 32 arrived more than a day late. So this gives an empirical probability of 32/100 = 0.32 deliveries are more than a day late

•Demand PlanningDemand Planning•SourcingSourcing•InventoryInventory•Logistics & Logistics & TransportationTransportation•Information TechnologyInformation Technology

Demand planning is a multi-step operational supply chain management (SCM) process used to create reliable forecasts. Effective demand planning can guide users to improve the accuracy of revenue forecasts, align inventory levels with peaks and troughs in demand, and enhance profitability for a given channel or product.

Sources of Demand Variability:•Competition•Seasonality•Life Cycle Trends•External Factors•Promotions•Disasters

Causes of Bull Whip Effect:Demand Forecast ErrorsLead TimesPrice Fluctuations and PromotionsRationing & Short Gaming

Counter Measures for Bull Whip Effect:Multiple Forecasts

Information SharingElectronic Data InterchangeVendor Managed Inventory

Reducing the lead timesMaintaining Stable PricesPreventing Short Gaming

Demand Demand Classification:Classification:Independent Demand: Demand for a finished product is independent demand

Dependent Demand: Demand for component used in making the product is dependent

Note: Forecasting should be done only for the independent demand, dependent demand can then be calculated from the forecast

Make To Stock (MTS): Here, the product is built against a sales forecast and sold to the customer from finished goods stocks. Example: Sugar, Cement, Soaps, Beverages

Make To Order (MTO): Here, the product is based on a standard design, but component production and manufacture of the final product is linked to the order placed by the final customer specification. Example: High End Motor Vehicles and Aircraft.

Engineer To Order(ETO): In this case, the product built to customer ‘s specification. Example: Large Construction Projects , Ship Building.

Assemble To Order(ATO): Here, the product is built to customer specifications from existing stock of components . Example: Computers, Modular Furniture

Forecasting is the process of making statements about events whose actual outcomes (typically) have not yet been observed.

Principles of Forecasting:• Forecasts are always wrong• Forecasts are more accurate for groups than for

single items• Forecasts of Short Term Demand are more

accurate than Long Term Demand

Seasonality Index: Seasonal variation is a component of a time series which is defined as the repetitive and predictable movement around the trend line in one year or less. It is detected by measuring the quantity of interest for small time intervals, such as days, weeks, months or quarters.

For example, retail sales tend to peak for the Christmas season and then decline after the holidays. So time series of retail sales will typically show increasing sales from September through December and declining sales in January and February.

Calculation: If your doctor who sees 320 patients each month on average but you typically treat 360 patients in the month of July. You have seasonality index for July of 1.125(360/320). If you think your average monthly load up to 340 in the next year. Then you would expect to see about 382 patients in July of next year (340 x 1.125)

Naïve Forecast: It assumes that demand in the next time period will be same as the demand in the last time period.

For example: If a retailer sold 500 pairs of boots in February, the naive forecast would be for sales of 500 pairs of boots in March

• The capacity of the supplier in terms of Infrastructural facilities, financial resources, technological knowhow, commitment towards quality, delivery schedule etc. need to

be properly ascertained.

• Procurement involves sourcing right material from right supplier/s in right time with right quantity.

• Step 1: Identification of requirements of an item by User Department in terms of type, quality and quantity etc.

• Step 2: Identification of the right sources of supply and invitation of quotations.

• Step 3: Comparison of quotations, negotiation with the vendors and placing of purchase order.

• Step 4: Keeping track of purchase order.

• Step 5: Inspection of quality, quantity etc. and receipt of purchase order.

Vendor evaluation, a strategic issue in view of its potential in improving overall supply chain performance attempts to

(I) Reduce the risk and uncertainty associated with procurement.

(Ii) Maximize overall value to the organization.

(Iii) Build long-term relationship with suppliers.

List of supplier evaluation criteria considered important from the perspective of different researchers are as follows:

Price

Quality / Reliability of the product

Technical support / After sales support

Ability to meet delivery schedule / Delivery lead time

Quality system at suppliers’ place/ quality policy /quality philosophy

Technological capability / Innovation capability / R & D capability

Breadth of product line / Ability of a supplier to supply a number of items

Sensitivity of suppliers to buyers’ requirements

Willingness of suppliers to share information

Existence of IT / Communication system

Integrity of vendor/ Vendor’s image

Financial capability of the supplier

Business volume / Amount of past business

Geographic proximity of suppliers

Support in new product development

• Study conducted in a large Engineering Organization primarily engaged in manufacture of diesel locomotives.

• Large number of high value and critical (Strategic) items are purchased from different suppliers.

• Stores and Purchase department professionals were consulted about the practices being followed

• List of criteria was shown to the professionals.

• Finally list of criteria made relevant to the organization.

Eliciting opinions from the Experts:• Three top-most Executives from Stores and Purchase department identified as Experts.• Explained the purpose of the study and pair-wise comparison• The Experts show their preferences in terms of linguistic variables suggested such as Very high, High etc.

•Vital element of any organization which enables it

- to run its operation in an uninterrupted manner and

- to provide a satisfactory level of service to its customers.

•The issue is – how much inventory should an organization keep – too much or too little?

•Trade-off between providing good customer service versus achieving operating efficiency.

•Performance measures of inventory management: inventory turnover ratio.

•Generally higher the ratio, the better is the performance.

•Desirable number of turns depends on the type of industry and the amount of profit margins.

•High-end retailers have a low turnover rate while supermarkets have a fairly high turnover rate.

• On The Basis Of Physical Characteristics (Or Accounting Classification), Inventory Is Divided Into Three Main Types:

- Raw Materials And Purchased Parts

- Work-in-process (WIP) Goods

- Finished Goods• On The Basis Of Functional Classification:

- Cycle Inventory

- Safety Inventory

- Pipeline Inventory

- Anticipation Inventory

- Decoupling Inventory

• Ordering costs:Costs associated with the preparation of purchase order, getting the necessary approval for placing the purchase order, actual placing of the order and follow-up of the same.

• Carrying costs:Costs incurred in connection with the physical storage of items.

• Shortage costs:Costs incurred by the firm when demand exceeds supply of inventory on hand. There are two types of shortage costs:(i) Lost Sales Cost (Ii) Backorder Cost.

• Assumptions of the basic EOQ model:- Only one product is involved- Annual demand requirements are known- Demand is even throughout the year- Lead time does not vary- Each order is received in a single delivery- There are no quantity discounts

Notations:• D: Annual demand• A: Setup or Order Cost• C: Cost per unit• h: Holding cost per year as a percentage of unit product cost• H: Inventory carrying costs per unit per year = h*C• Q: Lot Size• T: Reorder interval• Number of orders per year = D/Q• Annual material cost = C*D• Annual order cost = (D/Q)*A• Annual holding cost = (Q/2)*H• Total annual variable cost (TC) = (D/Q)*A + (Q/2)*H

The total cost curve reaches its minimum where the carrying and ordering costs are equal, i.e. Q/2 *(H) = (D/Q)*Ai.e.

Key insights:Total cost curve is relatively flat in the vicinity of EOQ. This indicates that the total cost is not particularly sensitive to the optimal order quantity.In deciding the optimal lot size, the tradeoff is between order (set-up) cost and holding cost.If demand increases by a factor of k, it is optimal to increase batch size by a factor of Sqrt k.If lot size is to be reduced, one has to reduce fixed order cost.

• Takes care of variability in demand and supply lead time.

• Reduces the risk of stock out during lead time.

• The determinants of safety stock and reorder point are as

follows:

- The rate of demand

- The lead time

- The extent of demand variability

- The extent of lead time variability

- The degree of stock out risk acceptable to the management or the level of service to be provided to customers.

• Popularly known as Q model or FOQ model or ROP model.

• Relevant policy is known as (s, S) or (s, Q) policy. ‘s’ and ‘S’ stand for reorder point (ROP) and order upto level (OUL) respectively while Q indicates order quantity. The relationship is as follows:

S=Q+s

ROP: Sum of the expected demand during lead time and safety stock which is determined in case of ROP or FOQ model.

OUL: Expected demand during lead time and review period.

• Normally utilized when the items purchased or handled are expensive in nature and• Management needs to closely monitor the level of its inventory on a continuous basis.

• Applicable for most of the retail stores handling FMCG or groceries.• Also known as fixed order interval (FOI) model and the relevant policy is known as periodic review policy or base stock policy.• Orders for the items are placed at fixed intervals.• Inventory level is also checked only in those intervals.• Order up to level remains fixed.• Order quantity computed on the basis of order up to level and inventory level on hand at fixed intervals.• The amount of safety inventory to be kept in this model is much higher than that in case of FOQ model. Because the safety inventory has to cover the period of lead time plus the fixed order interval.

The base-stock level includes two components:

• Average demand during (r+LT) period (the time until the next order arrives): (r+LT)*d

• Safety stock during that time: z* sd * Ö(r+LT)

• Items from the same supplier may be clubbed together, which yield savings in ordering costs, packaging costs, shipping costs, handling costs and other related administrative costs.

• Service level is the probability that all orders will be filled from stock during the replenishment lead time or during the reorder cycle.

• A retailer has specified a service level of 95 percent. This implies that during 100 such reorder cycles, we can expect stock out situation in about five cycles.

• A firm keeping a higher level of safety factor is in a position to provide higher level of customer service.

• Service level increases as the level of safety inventory increases.

• The marginal increase in service level in the initial period is higher than that in the later period.

• Variability in demand and lead time has an important bearing on the amount of safety stock to be kept by a firm.• The absolute value of lead time also has an impact on the amount of safety stock to be maintained.• Reduction in variability of supplier lead time provides highest benefits to the firm in terms of minimizing safety stock requirement.• Reduction in variability of demand is not a significant driver in minimizing safety stock requirement.• Reduction in average lead time does not have much impact in minimizing safety stock requirement.

• Special category of items for which demand occurs for a very short period.

• The problem of managing inventory in a single period with uncertain demand widely known as newsvendor problem.

• Goods are to be kept ready before the selling season starts in order to take care of the demand.

• Opportunity does not exist to place a second order during the selling season.

• The issue is: how many items should the manager order before the selling season starts?

• Examples: fashion products, high technology products, perishable goods etc.

ABC classification:• Items are classified into A, B and C category based on the annual consumption value of items.• ‘A’ category items: High value items and constitute roughly 10% of the whole items but account for approx. 70% of the total annual consumption value.• ‘B’ category items: Medium value items and account for approx. 20% of the whole items and contribute towards 20% of the annual consumption value.• ‘C’ category items: Low value items and constitute roughly 70% of the items and account for only 10% of the annual consumption value.

VED classification:• Items are segregated on the basis of criticality of the items specified by the end users.• ‘V’ indicates vital items without which the entire functioning of the plant or the machine gets severely affected.• ‘E’ indicates essential items required by the end users.• ‘D’ denotes desirable items from the point of view of the end users.• This classification is quite popular in maintenance management.

FSN classification:• Items are classified based on the volume of consumption.• ‘F’ indicates fast moving items• ‘S’ indicates slow moving and• ‘N’ indicates non-moving items.• Fast moving items generally kept in all decentralized stores.• Slow moving items generally stocked in a centralized store.• Non-moving items need to be disposed off gradually.

• Inventory management jointly agreed upon by a retailer and a supplier which ensures minimum mismatch between demand and supply.• Supplier takes the entire responsibility of determining when to replenish and how much to replenish at the retail store.• The supplier also decides about the right inventory policy.• The retailer will have to share actual demand data with the supplier through EDI, which helps improve the forecast.• Supplier owns the inventory as long as the goods are lying in the shelves of retailer.• One of the shortcomings of VMI is the sale of substitute products of the competing manufacturers by the retailers.

• A computer based information system that converts a master schedule of end products into time-phased requirements of sub-assemblies, components and raw materials.• Procurement lead time of input items and assembly time of sub-assemblies are considered for timely completion of end items.• Also known as dependent demand estimation method.An MRP system is designed to meet simultaneously three objectives:• Ensure inputs are available for production and end items are manufactured for delivery to customers in time.• Maintain the lowest possible level of inventory.• Prepare delivery schedules and accordingly plan manufacturing and purchasing activities.It provides answers to the following three questions:

• WHAT is needed?• HOW MANY/HOW MUCH is needed?• WHEN is it needed?

(i) A master production schedule, which provides the details of how much end items are desired and when,

(ii) A bill-of-materials file, which tells the composition of a finished item,

(iii) An inventory record file, which shows how much inventory is on hand or on order.

• Developed on the basis of aggregate production plan.• Also gets inputs from specific customer orders• Specifies which end items are to be produced, how many Quantities are needed and when the same is to be delivered.• Divides the planning horizon into a series of time periods or Time buckets, which are often expressed in weeks.

• The schedule indicates that 50 units of P will be needed in week 2, 90 units in week 4 and another 80 units in week 6.

• Provides a clear idea about the composition of a product.• The list of items in BOM is hierarchical.• Shows the quantity of each item needed to complete one unit of an item upstream.• The diagram below shows an assembly diagram for a sofa and its product structure tree.

• Refers to the information relating to the status of each item by individual time period.

• Includes the quantity of the item available in the store, gross requirements, scheduled receipts, projected available balance etc.

• Also includes information on procurement lead time of the item, setup time of each production run, run time for each sub-assembly or assembly etc.

• Changes due to new orders, cancelled orders, stock receipt and withdrawal etc. are to be recorded in the inventory record file.

• Main purpose of MRP processing is to determine the net requirements of items in right time periods.• Considers the requirements of end products specified by MPS and explodes them into time-phased requirements of sub-assemblies, components etc.• Quantities estimated through exploding the BOM are gross requirements.• Net requirements are computed asNet requirements in period t = Gross requirements in period t –Projected on-hand inventory in period t + Safety stock

MRP processing takes place through the following list of items.

• Gross requirements: indicates the total expected demand for an item during each time period regardless of the quantity available on-hand.

• Scheduled receipts: indicates the open orders scheduled to arrive from the vendors.

• Projected available balance: implies the expected amount of inventory that will be on hand at the beginning of each time period.

• Net requirements: shows the actual amount needed in each time period.

• Planned-order receipts: tells the quantity expected to be received at the beginning of each period in which it is shown.

• Planned-order releases: indicates a planned amount to order in each time period which equals the planned-order receipts offset by lead time.

Primary reports: considered to be the main report

•Planned orders: a schedule indicating the amount and timing of future orders

•Orders releases: authorization for the execution of planned orders

•Changes: Change in due dates or order quantities or cancellation of orders.

•Secondary reports: considered to be the optional outputs

•Performance-control reports: Evaluation of system by measuring the deviations from plans.

•Planning reports: Useful for assessing future material requirements.

•Exception reports: Reports on major discrepancies such as late orders, late delivery, excessive scrap rates etc.

•Material requirements can be computed using both lot-for-lot ordering and lot-size ordering

Council of Supply Chain Management Professionals (CSCMP) has defined logistics as “The process of planning, implementing and controlling the efficient, cost effective flow and storage of raw material, in-process inventory, finished goods and related information from the point of origin to the point ofconsumption for the purpose of conforming to customer requirements”.

Logistics costs account for 13% of GDP in India compared to 8-9% of GDP in the US.The inefficiencies in the logistics industry arise from

A Fragmented Market,Multiple Taxes,Physical Infrastructure Bottlenecks,Archaic Labour Laws, AndState-Centered Policies.

The industry is growing at a rate of 8-10% per annum and is expected to reach a size of $385 billion by 2015.

Transportation constitutes the largest element and accounts for maximum cost of logistics.• Transportation decision depends on the supply chain network design of a firm.• Transportation-related decisions have a direct impact on supply chain efficiency and supply chain responsiveness of a firm.• A firm desirous of becoming responsive has to set up warehouses and retail stores at many places which increases operations and maintenance cost and inventory carrying cost at the facilities. However, this reduces transportation cost.• A firm emphasizing upon efficiency will need to set up few distribution centers and warehouses. This will minimize operations and maintenance cost and inventory carrying cost at the facilities. However, transportation cost is likely to increase.

• Transportation cost• Value density (weight, volume, chemical properties etc.)• Patterns of demand (Volume of demand and the variability in demand)• Mode of transportation (in terms of cost, speed, capacity, reliability etc.)Transportation cost: depends on(i) The distance to be moved by the item from origin to destination,(ii) Total quantity of the same item carried in the vehicle etc.- Marginal cost of transport decreases, as longer distance is covered. This is technically known as ‘economies of distance’.- Unit cost of transportation also decreases, if the vehicle is moved in full truck load (FTL) mode rather than in less-than truck load (LTL) mode, also known as‘Economies Of Scale’.

Value densityreveals the importance of transportation cost in the overall product cost. It captures transportation-inventory trade-off.(i) High Value-density Items: Examples: gold, diamond, high technology products etc.- Transportation cost constitutes a small percentage of the overall cost of the product.-Firms can use faster and expensive mode of transportation.(ii) Medium Value-density Items: Examples: FMCG, consumer durables s etc.- Transportation cost constitute moderate percentage of the overall cost of the product.- Firms use neither very fast nor very slow mode of transport but attempt to choose between these mode two modes.(iii) Low Value Density Items: Examples: coal, iron ore, cement etc. - Transportation cost accounts for a significant percentage of the total product cost. - Firms use slower mode of transportation.

• Patterns of demand:(i) Volume of demand (cycle stock)

• FTL mode of transport for products with volume of demand.• LTL mode of transport for products with low volume of demand.

(ii) Uncertainty associated with the product demand (safety stock)(iii) Long lead time (high safety stock)

• Faster mode of transport for products with high demand uncertainty• Slower mode of transport for products that have a stable demand

• Mode of transportation:• Rail• Road• Air• Water• Pipeline

•Suitable for low value-density products

•Long and unreliable lead time

•Off-track delays (at pickup and delivery end)

•Indian railways is the second largest rail network in the world.

•Accounts 30% of freight movement in India

•Very high in-transit damages and losses

•95% of the freight carried is in bulk goods and within that coal accounts for 50% of the traffic.

• India accounts for the second highest network of roads in

the world.

• National highways constitute only 2% of the total roads, but

carry almost 40% of the traffic.

• 80% of the roads considered as ‘village roads’.

• Trucks account for about 65% of freight movement in India.

• More expensive than rail, but offers the advantages of

door-to-door delivery and shorter delivery time

• Low freight rate and poor quality of service

• Unreliable transit time

• High in-transit damages.

•Expensive

•Rapid and reliable delivery

•Small, time-sensitive and high value-density goods

•Preferred mode for e-businesses (e.g., Amazon, dell etc.)

•Consolidation of shipments (especially important for Package carriers that use air as a primary method of Transport)

•Air transport contributes a very small percentage towards Freight movement in India but expected to play a Significant role in near future.

•One of the cheapest modes of transport•Very large loads at very low cost•Slowest amongst all.•Limited to certain geographic areas•Ocean, inland waterway system, coastal waters•Considerable delays at ports in loading and unloading•Extensively used for international cargo.•The amount of cargo handled by the Indian ports is very low compared to the International standard.•The amount of cargo handled by the Indian ports is very low• compared to the International standard.

• High fixed cost• Primarily used for transportation of crude petroleum, refined petroleum products, natural gas etc. when the point of origin and the point of destination remain same.• Best for large and predictable demand• Used for getting crude oil to a port or refinery, but not for getting refined gasoline to a gasoline station.• Losses and damages also remain at a very minimum level.• Unit cost of transportation is also very low.• In India, pipelines are being laid to transport gases and petroleum products to different places.

•Freight Cost•Lot Size•Delivery Time•Delivery Time Variability•Losses And Damages

Total Cost Approach To Performance Measures:

Total cost = Transportation cost + Cycle stock inventory carrying cost + Pipeline inventory carrying cost + Safety stock inventory carrying cost + Cost of losses and damages.

Impact Of Speed On Transportation Decision:

Delivery time has a significant impact on the choice of transportation mode.

• High-value products should be shipped by a faster mode of transport.

• Low-value items should be shipped by a relatively cheaper mode of transport.

• To decide how the items should be delivered to the final customers.

• To find out how many distribution centers/ warehouses are to be set up and where the same should be located.

• To ship the goods to the geographically dispersed market areas in a cost-effective manner by evaluating different distribution network options:

- Direct shipment network

- Direct shipping with milk-runs-Shipment via Central Distribution Centre

Cross Docking:• Popularized by Wal-Mart and now currently it is being utilized by a number of organizations worldwide.• Appropriate for products with high, predictable and stable demand.• Used for facilitating the movement of goods from a set of suppliers to the set of buyers.• Inbound truck carries a product from a supplier to the cross- docking centre in FTL mode.• Outbound truck loaded with different products of different suppliers in FTL mode at cross-docking point.• Provides the benefit of economies of scale in both inbound and outbound transportation.• Product flows faster from supply sources to the demand center’s and inventory is held at the cross-docking centre for 12-14 hours only.• It requires a significant degree of coordination and synchronization between incoming and outgoing trucks.

Hub & Spoke Model:• Suitable for airlines and postal services.

• Hub is considered to be the centralized point wherein all operations like sorting of parcels, segregation of passengers etc. are carried out.

• Spokes indicate different routes to be followed for shipping products to different locations.

• One of the disadvantages of this network is that all parcels or passengers will have to come to the hub first irrespective of the locations of the originating station.

• To overcome this limitation, sometimes firms may attempt to create regional hubs at different regions.

Determining Dimensional Weight

To determine if dimensional weight applies to your package, follow

these steps:

1. Transportation charges may be assessed based on dimensional weight, which is a volumetric standard. Dimensional-weight pricing is applicable on a per-package basis. Dimensional weight is calculated by multiplying length by width by height of each package. If the total is 3 cubic feet (5,184 cubic inches or 84,951 cubic centimeters) or larger, divide by 166 (if multiplied in inches) or by 6,000 (if multiplied in centimeters). (If the total is less than 5,184 cubic inches or 84,951 cubic centimeters, dimensional weight does not apply).

2. Divide the cubic size by 166 (if measured in inches) or by 6,000

(if measured in centimetres), rounding up to the nearest whole pound.

This is the dimensional weight of your package.

3. Compare this number with the actual weight of your package.

Price your shipment based on the greater of the two values

• An operation that receives, sorts, stores, or centralizes goods for the purpose of storage or for facilitating the movement of goods from sources to final destinations.

• Warehouses are used to reduce transportation costs, improve operational flexibility, shorten customer lead time and lower inventory carrying costs.

Warehouse Types:

• Finished Goods Warehouse

• Consolidation Warehouse

• Break-bulk Warehouse

• Cross-docking Warehouse

• Responsible for the storage of finished goods.

• chemical properties, arrival date,

demand pattern, expiry dates etc.

Continuous inflow and outflow of goods.

• Goods getting in and out of the warehouse are to be properly

recorded.

• Products are to be kept in designated places depending on

physical characteristics,

• Suitable, when supplies come from various sources in small quantities while the need of the customers happens to be very high.

• Small shipments from all suppliers are combined into a large shipment in the warehouse.

• A single manufacturer may use a consolidation warehouse to bring together the outputs from several plants.

• The reverse of the consolidation warehouse.

• The bulk incoming shipment from a single supplier is divided into small shipments for the purpose of delivery to the final customers.

• The bulk cargo of oil, gas, fertilizers etc. coming from a single source is broken down into small consignments.

• Similar to break-bulk warehouse except that it involves multiple suppliers.

• Different items arriving in bulk from different suppliers in FTL

mode are broken down into smaller shipments in the cross-docking warehouse.

• Smaller shipment of each item is loaded into the outbound truck in FTL mode.

• Most commonly used in retail chains.

Ideal Facility for Pure Supplier Consolidation(Full Pallet Movement)

Warehouse Space Requirements

WAREHOUSE PROCESSPut-away

•Identify Product•Identify Product Location•Move Products•Update Records

Storage•Equipment•Stock Location–Popularity–Unit Size–Cube

Shipping Preparation•Packing•Labeling•Stacking

Order Picking•Information•Walk & Pick•Batch Picking

Shipping•Schedule Carrier•Load Vehicle•Bill of Loading•Record Update

RECEIVING•Schedule Carrier•Unload Vehicle•Inspect for damage

INPUT

OUTPUT

Material handling is the combination of art and science of: Moving Storing Protecting Controlling The Material

Material handling means providing the Right Amount Of The Right Material In The Right Condition At The Right Place In The Right Position In The Right Sequence In The Right Time For The Right Price By The Right Method

In A Typical Manufacturing Facility:◦25% of the work-force is used in material handling◦55% of the factory floor is reserved for it◦87% of the production time!◦ It may represent 15% to 70% of the total cost generated in the company

Goals Of Material Handling:◦Reduce unit costs of production◦Maintain or improve product quality, reduce damages, and provide for

protection of materials◦Promote safety and improve working conditions◦Promote productivity◦Promote increased use of facilities◦Control inventory

CATEGORIES:Containers And Unitizing Equipment

Material Transport Equipment

Storage And Retrieval Equipment

Automatic Identification And Communication Equipment

Sorting Conveyor’s

To Ensure Safety; Easy Handling Maintain Temperature; Longevity Of The Cargo Prevent Theft And Pilferage Help In Storage Display Information; Special Instructions Warning And CautionsPacking Types:Primary Packaging

Immediate envelop that covers the productSecondary Packaging

Cluster or group of primary packagesTertiary Packaging

For bulk handing, warehousing / transportation. Eg: palletized units

Information Technology refers to collection, processing, transmission, and storage of information.

Information – Types

Active

Passive

Information Systems: Definitions

Data

Information

Knowledge

Insight

INFORMATION: Definition

Data in some recognizable form, which shows us one or more patterns that may justify a change in our enterprise. The ability to arrange all of the home addresses of persons and display them on a map can tell where to start another branch, how to route delivery etc.

KNOWLEDGE: Definition

Information taken to the next level of abstraction, which is revealed in relationships. If address maps are overlaid over a period, then we know how people migrated. It can help in extrapolating and look into the future and plan

INSIGHT: Definition

Highest level of abstraction. Having insight (or vision) means understanding the meaning of knowledge and of seeing the implications of decisions far in advance.

Raw material (suppliers) Iron ore Silicon Farming

Backward integration Steel

Current transformation Automobiles Integrated

circuits Flour milling

Forward integration Distribution systems Circuit boards

Finished goods (customers) Dealers

Computers Watches

CalculatorsBaked goods

Vertical Integration Examples of Vertical Integration

BULLWHIP EFFECT – CAUSEInformation was not integrated and hence was not visible; volatility in demand is magnified as demand information is propagated upstreamConsider two scenarios

Delivery of Christmas giftDelivery of Valentine’s gift

INFORMATION SHARING AMONG PARTNERSProduction PlansHoliday and Maintenance SchedulesShipment SchedulesInventory StatusPlans for promotion / offersNew Product / Model launchesSales DataLabour shortage / strikes / unrestPolitical instability

Integration of Information:

Components: Exchange of information, transparency and access to databases.

Collaborative planning:

Components: Planning together, joint product design, joint forecast, and replenishment

Coordination of work

Components: Jointly planned production work, procurement, maintenance, replenishment design, development and other activities

Typical Elements of Order Processing

Sales order

Order Preparation• Requesting

products or services

Order Transmittal• Transferring

order information

Order Entry• Stock checking• Accuracy checking• Credit checking• Back ordering/

order canceling• Transcription• Billing

Order Filling• Product retrieval, production, or purchase• Packing for shipment• Scheduling for delivery• Shipping document preparation

Order Status Reporting• Tracing and tracking• Communicating with

customer on order status

Sales order

Order Preparation• Requesting

products or services

Order Transmittal• Transferring

order information

Order Entry• Stock checking• Accuracy checking• Credit checking• Back ordering/

order canceling• Transcription• Billing

Order Filling• Product retrieval, production, or purchase• Packing for shipment• Scheduling for delivery• Shipping document preparation

Order Status Reporting• Tracing and tracking• Communicating with

customer on order status

Developing the ability to produce goods or service previously purchased

Integration may be forward, towards the customer, or backward, towards suppliers

Can improve cost, quality, and inventory but requires capital, managerial skills, and demand

Risky in industries with rapid technological change

Formal collaborationEnhance skillsSecure supplyReduce costs

Cooperation without diluting brand or conceding competitive advantage

A middle ground between few suppliers and vertical integration

Supplier becomes part of the company coalition

Often provide financial support for suppliers through ownership or loans

Members expect long-term relationships and provide technical expertise and stable deliveries

May extend through several levels of the supply chain

Radio Frequency Tags: Keeping the Shelves StockedRadio Frequency Tags: Keeping the Shelves StockedSupply chains work smoothly when sales are steady, but often break down when confronted by a sudden surge in demand. Radio frequency ID (or RFID) tags can change that by providing real-time information about what’s happening on store shelves. Here’s how the system works for Proctor & Gamble’s Pampers.

Uses the internet to facilitate purchasing

Electronic ordering and funds transfer

Electronic data interchange (EDI)

Advanced shipping notice

Online Catalogs

1. Catalogs provided by vendors

2. Catalogs published by intermediaries

3. Exchanges provided by buyers

Health care products – ghx.com

Retail goods – gnx.com

Defense and aerospace products – exostar.com

Food, beverage, consumer products – transora.com

Steel and metal products – metalsite.com

Hotels – avendra.com

Auctions

Maintained by buyers, sellers, or intermediaries

Low barriers to entry

Increase in the potential number of buyers

RFQs

Can make requests for quotes (RFQs) less costly

Improves supplier selection

Real-time inventory tracking

The Logistics Information System

INTERNAL

Finance/Accounting

Marketing

Logistics

Manufacturing

Purchasing

EXTERNAL

Customers

Vendors

Carriers

Supply chain partners

LOGISTICS INFORMATION

SYSTEM

OMS

•Stock availability

•Credit checking

•Invoicing

•Product allocation to customers

•Fulfillment location

WMS

•Stock level management

•Order picking

•Picker routing

•Picker assignments and work loading

•Product availability estimating

TMS

•Shipment consolidation

•Vehicle routing

•Mode selection

•Claims

•Tracking

•Bill payment

•Freight bill auditing

INTERNAL

Finance/Accounting

Marketing

Logistics

Manufacturing

Purchasing

EXTERNAL

Customers

Vendors

Carriers

Supply chain partners

LOGISTICS INFORMATION

SYSTEM

OMS

•Stock availability

•Credit checking

•Invoicing

•Product allocation to customers

•Fulfillment location

WMS

•Stock level management

•Order picking

•Picker routing

•Picker assignments and work loading

•Product availability estimating

TMS

•Shipment consolidation

•Vehicle routing

•Mode selection

•Claims

•Tracking

•Bill payment

•Freight bill auditing

Definition of EDI

Interorganizational exchange of business documentation in structured, machine-processable form.Unstructured Structured

Fax EDIE-Mail Order entryPerson-to-person Computer-to-computer

EDI Versus Traditional Methods

BUYER'S PURCHASINGAPPLICATION

SELLER'S ORDERENTRY APPLICATION

PURCHASING

PURCHASING

POST OFFICEBUYER'S

COMPUTER

EDI FLOW

PO POSELLER'S

COMPUTER

ORDERENTRY

Typical EDI Configurations

Manufacturer

Manufacturer

Manufacturer

Manufacturer

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Third-party

vendor

Proprietary system

Value-added network (VAN)

Replacement of inventory with information Reduced variability in the supply chain Better coordination of manufacturing,

marketing, and distribution Streamlined order processing and reduced

lead-times

Enterprise resource planning (ERP) All company functional areas use a common database to:

Standardize manufacturing processes Integrate financial data Standardize human resource data

Shortcomings Costs of installation – may be coming down Primarily designed for large companies – SAP now with

mid-sized package Time-consuming installation process Standardization

Asset Visibility Location of Critical assets in the yard Planning for workload and workforce

ACTIVE – always on and can be read from any interrogator – very expensive.

PASSIVE – battery activated by the interrogator and must be within close proximity to the interrogator – relatively inexpensive – goal is to get the price down to $.05 per tag – real cost is in the infrastructure to implement

Active RFID Tag on pallet in Kuwait Theater Distribution Center

Class 3 capabilities plus active communication and the ability to communicate with other tagsClass 4

Class 2 capabilities plus a power source to provide increased range and/or advanced functionality, e.g., sensorsClass 3

Class 1 with extended TID, extended user memory, authenticated access control, ++Class 2

EPC, TID, “kill function”, optional password-protected access control, and optional user memoryClass 1

Read only, (i.e., the EPC number is encoded onto the tag during manufacture and can be read by a reader, not written to)Class 0

Tag Class CapabilitiesEPC Tag Class

TID = Transponder Identification