2021
SUPPLY CHAIN AND
LOGISTICS MANAGEMENT
NOTES
RANJANVISHAL01@GMAIL.COM
UNIT-1
Supply Chain Concepts: Objectives of a Supply Chain
Supply Chain
A supply chain is a network between a company and its suppliers to produce and distribute a specific product
to the final buyer. This network includes different activities, people, entities, information, and resources. The
supply chain also represents the steps it takes to get the product or service from its original state to the
customer.
Supply chains are developed by companies so they can reduce their costs and remain competitive in the
business landscape.
A supply chain involves a series of steps involved to get a product or service to the customer. The steps include
moving and transforming raw materials into finished products, transporting those products, and distributing
them to the end user. The entities involved in the supply chain include producers, vendors, warehouses,
transportation companies, distribution centers, and retailers.
The elements of a supply chain include all the functions that start with receiving an order to meeting the
customer’s request. These functions include product development, marketing, operations, distribution,
finance, and customer service.
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A supply chain is a network between a company and its suppliers to produce and distribute
a specific product or service.
The entities in the supply chain include producers, vendors, warehouses, transportation
companies, distribution centers, and retailers.
The functions in a supply chain include product development, marketing, operations,
distribution, finance, and customer service.
Supply chain management results in lower costs and a faster production cycle.
The objective of a supply chain
The objective of every supply chain is to maximize the overall value generated. The value of a supply chain
generates is the difference between what the final product is worth to the customer and the effort of the supply
chain expands in filling the customer’s request. For most commercial supply chains, the value will be strongly
correlated with supply chain profitability, the difference between the revenue generated from the customer
and the overall cost across the supply chain.
For most commercial supply chains, the value will be strongly correlated with supply chain profitability, the
difference between the revenue generated from the customer and the overall cost across the supply chain.
For example, a customer purchasing a computer from Dell pays $2,000, which represents the revenue the
supply china receives. Dell and other stages of the supply chain incur costs to convey information, produce
components, store them, transport them, transfer funds, and so on.
The difference between the $2,000 that the customer paid and the sum of all costs incurred by the supply chain
to produce and distribute the computer represents the supply chain profitability. Supply chain profitability is
the total profit to be shared across all supply chain. Supply chain success should be measured in terms of
supply chain profitability and not in terms of the profits at an individual stage.
Stages of Supply Chain
Supply chain management encompasses such a wide range of functions that it can seem daunting, even to
the most experienced international businessperson. However, the process can be effectively modelled by
breaking it down into several main strategic areas. One common and very effective model is the Supply Chain
Operations Reference (SCOR) model, developed by the Supply Chain Council to enable managers to address,
improve and communicate supply chain management practices effectively. The SCOR model runs through
five supply chain stages: Plan, Source, Make, Deliver, and Return.
Stage 1: Plan
Planning involves a wide range of activities. Companies must first decide on their operations strategy. Whether
to manufacture a product or component or buy it from a supplier is a major decision.
Companies must weigh the benefits and disadvantages of different options presented by international
supply chains.
Options include:
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Manufacturing a product component domestically
Manufacturing a component in a foreign market by setting up international production
facilities
Buying a component from a foreign supplier
Buying a component from a domestic supplier
If companies are manufacturing products, they must decide how they will be produced.
Goods can be:
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Make to stock (produced and stored, awaiting customer orders);
Make to order (constructed in response to a customer order);
Configure to order (partially manufactured the product and completed it after a firm
customer order is received); or
Engineer to order (manufactured a product to unique specifications provided by a
customer).
Sometimes, goods can be produced by a combination of these methods. Companies must also decide whether
they will outsource manufacturing. This operations planning is essential because these decisions influence the
supply chain.
Planning also involves mapping out the network of manufacturing facilities and warehouses, determining the
levels of production and specifying transportation flows between sites. It also involves assessing how to
improve the global supply chain and its management processes.
When planning, companies should ensure that their supply chain management strategies align to business
strategies, that communication plans for the entire supply chain are decided and that methods of measuring
performance and gathering data are established before planning begins.
Stage 2: Source
This aspect of supply chain management involves organizing the procurement of raw materials and
components.
Procurement is the acquisition of goods and services at the best possible price, in the right quantity and
at the right time.
When sources have been selected and vetted, companies must negotiate contracts and schedule deliveries.
Supplier performance must be assessed and payments to the suppliers made when appropriate. In some cases,
companies will be working with a network of suppliers. This will involve working with this network,
managing inventory and company assets and ensuring that export and import requirements are met.
Stage 3: Make
This stage is concerned with scheduling of production activities, testing of products, packing and release.
Companies must also manage rules for performance, data that must be stored, facilities and regulatory
compliance.
Stage 4: Deliver
The delivery stage encompasses all the steps from processing customer inquiries to selecting distribution
strategies and transportation options. Companies must also manage warehousing and inventory or pay for a
service provider to manage these tasks for them.
The delivery stage includes any trial period or warranty period, customers or retail sites must be invoiced and
payments received, and companies must manage import and export requirements for the finished product.
Stage 5: Return
Return is associated with managing all returns of defective products, including identifying the product
condition, authorizing returns, scheduling product shipments, replacing defective products and providing
refunds.
Returns also include “end-of-life” products (those that are in the end of their product lifetime and a vendor
will no longer be marketing, selling, or promoting a particular product and may also be limiting or ending
support for the product).
Companies must establish rules for the following:
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Product returns
Monitoring performance and costs
Managing inventory of returned product
Value Chain Process
A value chain is a business model that describes the full range of activities needed to create a product or
service. For companies that produce goods, a value chain comprises the steps that involve bringing a product
from conception to distribution, and everything in between—such as procuring raw materials, manufacturing
functions, and marketing activities.
A company conducts a value-chain analysis by evaluating the detailed procedures involved in each step of its
business. The purpose of value-chain analyses is to increase production efficiency so that a company may
deliver maximum value for the least possible cost.
Components of a Value Chain
In his concept of a value chain, Porter splits a business’s activities into two categories, “primary” and
“support,” whose sample activities we list below. Specific activities in each category will vary according to
the industry.
Primary activities consist of five components, and all are essential for adding value and creating a
competitive advantage:
(i) Inbound logistics
Functions like receiving, warehousing, and managing inventory.
(ii) Operations
Procedures for converting raw materials into finished product.
(iii) Outbound logistics
Activities to distribute a final product to a consumer.
(iv) Marketing and sales
Strategies to enhance visibility and target appropriate customers—such as advertising, promotion, and pricing.
(v) Service
Programs to maintain products and enhance consumer experience—customer service, maintenance, repair,
refund, and exchange.
Support Activities
The role of support activities is to help make the primary activities more efficient. When you increase the
efficiency of any of the four support activities, it benefits at least one of the five primary activities. These
support activities are generally denoted as overhead costs on a company’s income statement:
(i) Procurement
How a company obtains raw materials.
(ii) Technological development
Used at a firm’s research and development (R&D) stage—designing and developing manufacturing
techniques; and automating processes.
(iii) Human resources (HR) management
Hiring and retaining employees who will fulfill business strategy; and help design, market, and sell the
product.
(iv) Infrastructure
Company systems; and composition of its management team—planning, accounting, finance, and quality
control.
VALUE CHAIN PROCESS
Step 1 – Identify subactivities for each primary activity
For each primary activity, determine which specific subactivities create value. There are three different types
of subactivities:(i) Direct activities: Create value by themselves. For example, in a book publisher’s marketing and sales
activity, direct subactivities include making sales calls to bookstores, advertising, and selling online.
(ii) Indirect activities: Allow direct activities to run smoothly. For the book publisher’s sales and marketing
activity, indirect subactivities include managing the sales force and keeping customer records.
(iii) Quality assurance: Activities ensure that direct and indirect activities meet the necessary standards. For
the book publisher’s sales and marketing activity, this might include proofreading and editing advertisements.
Step 2 – Identify sub activities for each support activity.
For each of the Human Resource Management, Technology Development and Procurement support activities,
determine the sub activities that create value within each primary activity. For example, consider how human
resource management adds value to inbound logistics, operations, outbound logistics, and so on. As in Step 1,
look for direct, indirect, and quality assurance sub activities.
Then identify the various value-creating sub activities in your company’s infrastructure. These will generally
be cross-functional in nature, rather than specific to each primary activity. Again, look for direct, indirect, and
quality assurance activities.
Step 3 – Identify links
Find the connections between all of the value activities you’ve identified. This will take time, but the links are
key to increasing competitive advantage from the value chain framework. For example, there’s a link between
developing the sales force (an HR investment) and sales volumes. There’s another link between order
turnaround times, and service phone calls from frustrated customers waiting for deliveries.
Step 4 – Look for opportunities to increase value
Review each of the sub activities and links that you’ve identified, and think about how you can change or
enhance it to maximize the value you offer to customers (customers of support activities can be internal as
well as external).
Cycle view of Supply Chain Process
Supply Chain is a sequence of processes and flows that take place within and between different stages and
combine to fill a customer need for a product. The processes in a Supply Chain are divided into series of
cycles, each performed at the interface between two successive stages of a Supply Chain. Cycle view of Supply
Chain is useful in making operational decisions as role of each member of Supply Chain is clearly defined.
Key Issues in SCM
Key Issue #1: Globalization
Globalization presents several critical supply chain management challenges to enterprises and organizations:
First, to reduce costs across the supply chain, enterprises are moving manufacturing operations to countries
which offer lower labor costs, lower taxes, and/or lower costs of transport for raw materials. For some
companies, outsourcing production involves not only a single country, but several countries for different parts
of their products.
However, outsourcing not only extends the production process globally, but also the company’s procurement
network. Having suppliers in different geographic locations complicates the supply chain. Companies will
have to deal with, coordinate, and collaborate with parties across borders regarding manufacturing, storage,
and logistics. Furthermore, they have to extend or maintain fast delivery lead times to customers who want to
receive their products on schedule despite the increased complexity in the manufacturer’s supply chains.
Finally, they also have to maintain real-time visibility into their production cycle — from raw materials to
finished goods — to ensure the efficiency of their manufacturing processes.
Second, as companies expand sales into global markets, localization of existing products requires a significant
change in the supply chain as companies adapt their products to different cultures and preferences. There is
an inherent risk of losing control, visibility, and proper management over inventory , especially if enterprise
applications are not integrated. This requires managing diverse structures of data across geographies
effectively.
For example: many manufacturers in Asia still handle trading partner communications via fax and email while
suppliers in North America and Europe have utilized EDI for decades. As technology matures, suppliers in
emerging markets may skip EDI altogether and move to a more modern API driven approach to
communication just as developing countries have skipped land lines in favor cell phones.
Supply chain practitioners need to ask if their enterprise technology is prepared to handle these diverse forms
of communication that arise from Globalization, and build a business case to stay prepared.
Key Issue #2: Fast-changing Markets
According to EduCBA, consumer behavior is affected by cultural, social, personal, and psychological factors
that are quickly being changed by technology and globalization. Social media is creating new pressures for
consumers to conform while putting pressure on enterprises to utilize these sources of information to respond
to changing preferences in order to stay interesting and relevant.
Like globalization, the fast-changing consumer market also brings with it supply chain management
challenges:
First, products have shorter life cycles due to rapidly changing market demands. Enterprises are under pressure
to keep up with the latest trends and innovate by introducing new products, while keeping their total
manufacturing costs low because they understand that trends will not last for a long time. This also demands
a flexible supply chain that can be utilized for manufacturing other products and for future projects.
Second, aside from new products, companies also need to constantly update product features. Enhancing
product features requires enterprises to redesign their supply chain to accommodate product changes.
Finally, innovation presents a challenge in forecasting demand for new products. The constant innovation
necessitated by fast-changing markets also means enterprises will constantly have to anticipate demand for
new products. Enterprises need to create and maintain an agile supply chain that can respond well to spikes
and dips in demand and production needs.
Companies should be asking if they have all the data needed to make planning decisions to address challenges
created by fast-changing markets. For example, if stated lead times from suppliers are longer than actual
times, this will lead to higher inventory levels than are actually required and affect costly decisions around
network planning and optimization. Omnichannel retail has reated silos of sales data that have to be blended
and harmonized to detect demand signals earlier in the planning process as well.
Key Issue #3: Quality and Compliance
Aside from influencing consumer behavior, social media highlights the importance of having high-quality
products. According to research conducted by eMarketer, reading reviews, comments, and feedback is the top
social media activity that influences online shopping behavior. Furthermore, social media has not only raised
consumers’ expectations of product quality, but has also amplified the damages caused by product recalls.
Thus, enterprises are under increasing pressure to create high-quality products and to create them consistently.
They can do so by addressing quality at every level of the supply chain, such as raw materials procurement,
manufacturing, packaging, logistics, and product handling.
Product quality often goes hand-in-hand with compliance. Enterprises need to ensure that they meet local and
international regulatory standards in manufacturing, packaging, handling, and shipping of their products.
Aside from passing quality control and safety tests, enterprises are also required to prepare compliance
documents such as permits, licenses, and certification which can overwhelm them and their supply chain
management systems.
Emerging capabilities like IoT, Smart Packaging, and Blockchain are changing how compliance is enforced
and measured. However, these innovations will produce streams of data that can’t be handled with the
enterprise technology of the past 20 years. Managers should carefully consider where these investments make
sense and asking IT if the business is utilizing platforms based on micro-services and big data to support these
heavy data lifting requirements.
Logistics & SCM
All the activities, associated with the sourcing, procurement, conversion and logistics management, comes
under the supply chain management. Above all, it encompasses the coordination and collaboration with the
parties like suppliers, intermediaries, distributors and customers. Logistics Management is a small portion of
Supply Chain Management that deals with the management of goods in an efficient way.
LOGISTICS MANAGEMENT
SUPPLY CHAIN
MANAGEMENT
Meaning
The process of integrating the
movement and maintenance of
goods in and out the organization
is Logistics.
The coordination and management
of the supply chain activities are
known as Supply Chain
Management.
Objective
Customer Satisfaction
Competitive Advantage
Evolution
The concept of Logistics has been
evolved earlier.
Supply Chain Management is a
modern concept.
How many organizations
are involved?
Single
Multiple
One in
another
Logistics Management is a fraction
of Supply Chain Management.
Supply Chain Management is the
new version of Logistics
Management.
Supply Chain Management, it is a broader term which refers to the connection, right from the suppliers to the
ultimate consumer.
It has been noticed that there is a drastic change in the manner in which business was conducted many years
ago and now. Due to the improvement in the technology, which leads to the development of all key areas of
business. Supply Chain Management also evolved as an improvement over Logistics Management, from past
years. Check out this article to understand the difference between Logistics Management and Supply Chain
Management.
Difference
Logistics Management
The management process which integrates the movement of goods, services, information, and capital, right
from the sourcing of raw material, till it reaches its end consumer is known as Logistics Management. The
objective behind this process is to provide the right product with the right quality at the right time in the right
place at the right price to the ultimate customer. The logistic activities are divided into two broad categories
they are:
(i) Inbound Logistics: The activities which are concerned with procurement of material, handling, storage
and transportation
(ii) Outbound Logistics: The activities which are concerned with the collection, maintenance, and
distribution or delivery to the final consumer.
Apart from these, other activities are warehousing, protective packing, order fulfillment, stock control,
maintaining equilibrium between demand and supply, stock management. This will result in savings in cost
and time, high-quality products, etc.
Supply Chain Management
Supply Chain Management (SCM) is a series of interconnected activities related to the transformation and
movement of raw material to the finished goods till it reaches to the end user. It is the outcome of the efforts
of multiple organizations that helped in making this chain of activities successful.
These organizations may include the firms with whom the organization is currently working like partners or
suppliers, manufacturers, wholesalers, retailers, and consumers. The activities may include integration,
sourcing, procurement, production, testing, logistics, customer services, performance measurement, etc.
Supply Chain Management has a multi-dimensional approach which manages the flow of raw materials and
works in progress (semi-finished goods) within the organization and the end product outside the organization
till it reaches the hands of the final consumer with a complete emphasis on the customer requirement.
Key Differences between Logistics and Supply Chain Management
The following are the major differences between logistics and supply chain management:
1. The flow and storage of goods inside and outside the firm are known as Logistics. The
movement and integration of supply chain activities are known as Supply Chain
Management.
2. The main aim of Logistics is full customer satisfaction. Conversely, the main aim behind
Supply Chain Management is to gain a substantial competitive advantage.
3. There is only one organization involved in Logistics while some organizations are involved
in Supply Chain Management.
4. Supply Chain Management is a new concept as compared to Logistics.
5. Logistics is only an activity of Supply Chain Management.
Logistics is a very old term, firstly used in the military, for the maintenance, storage and transportation of
army persons and goods. Nowadays, this term is used in many spheres, not specifically in the military after
the evolution of the concept of Supply Chain Management. It has also been said that SCM is an addition over
Logistics Management as well as SCM comprises of logistics. Both are inseparable. Hence they do not
contradict but supplement each other. SCM helps Logistics to be in touch with the transportation, storage and
distribution team.
Supply Chain Drivers and Obstacles
Supply Chain Drivers
Supply chain capabilities are guided by the decisions you make regarding the five supply chain drivers. Each
of these drivers can be developed and managed to emphasize responsiveness or efficiency depending on
changing business requirements.
The five drivers provide a useful framework for thinking about supply chain capabilities. Decisions made
about how each driver operates will determine the blend of responsiveness and efficiency a supply chain is
capable of achieving. The five drivers are illustrated in the diagram below:
1. PRODUCTION
This driver can be made very responsive by building factories that have a lot of excess capacity and use flexible
manufacturing techniques to produce a wide range of items. To be even more responsive, a company could
do their production in many smaller plants that are close to major groups of customers so delivery times would
be shorter. If efficiency is desirable, then a company can build factories with very little excess capacity and
have those factories optimized for producing a limited range of items. Further efficiency can also be gained
by centralizing production in large central plants to get better economies of scale, even though delivery times
might be longer.
2. INVENTORY
Responsiveness can be had by stocking high levels of inventory for a wide range of products. Additional
responsiveness can be gained by stocking products at many locations so as to have the inventory close to
customers and available to them immediately. Efficiency in inventory management would call for reducing
inventory levels of all items and especially of items that do not sell as frequently. Also, economies of scale
and cost savings can be gotten by stocking inventory in only a few central locations such as regional
distribution centres (DCs).
3. LOCATION
A location decision that emphasizes responsiveness would be one where a company establishes many
locations that are close to its customer base. For example, fast-food chains use location to be very responsive
to their customers by opening up lots of stores in high volume markets. Efficiency can be achieved by
operating from only a few locations and centralizing activities in common locations. An example of this is
the way e-commerce retailers serve large geographical markets from only a few central locations that perform
a wide range of activities.
4. TRANSPORTATION
Responsiveness can be achieved by a transportation mode that is fast and flexible such as trucks and
airplanes. Many companies that sell products through catalogs or on the Internet are able to provide high
levels of responsiveness by using transportation to deliver their products often within 48 hours or less. FedEx
and UPS are two companies that can provide very responsive transportation services. And now Amazon is
expanding and operating its own transportation services in high volume markets to be more responsive to
customer desires. Efficiency can be emphasized by transporting products in larger batches and doing it less
often. The use of transportation modes such as ship, railroad, and pipelines can be very efficient.
Transportation can also be made more efficient if it is originated out of a central hub facility or distribution
centre (DC) instead of from many separate branch locations.
5. INFORMATION
The power of this driver grows stronger every year as the technology for collecting and sharing information
becomes more wide spread, easier to use, and less expensive. Information, much like money, is a very useful
commodity because it can be applied directly to enhance the performance of the other four supply chain
drivers. High levels of responsiveness can be achieved when companies collect and share accurate and timely
data generated by the operations of the other four drivers. An example of this is the supply chains that serve
the electronics market; they are some of the most responsive in the world. Companies in these supply chains,
the manufacturers, distributors, and the big retailers all collect and share data about customer demand,
production schedules, and inventory levels. This enables companies in these supply chains to respond quickly
to situations and new market demands in the high-change and unpredictable world of electronic devices
(smartphones, sensors, home entertainment and video game equipment, etc.).
Obstacles to Achieving Strategic Fit
Increasing Variety of Products: In the era of mass customization production variety is increasing.
The customers becoming increasingly demanding. Today’s customers are demanding faster fulfilment, better
quality, and better performing products for the same price that they are paying today.
The supply chain is getting fragmented. At one time vertical integration was the order of the day. But the
present trend is to concentrate on core competence and outsource more activities. Thus the supply chain is
more fragmented now.
Globalization is creating global supply chains and hence physical distance is increasing between a company
and its suppliers and a company and its customers.
While creating a strategy is difficult, executing it is much more difficult. Many companies understand Toyota
Production System now, but still find it difficult to implement and operate.
Supply Chain Strategies
Supply chain and logistics improvements are neither easy nor inexpensive. Better strategic and operational
investments and decisions in supply chain and logistics can help to reduce cost by 10% to 40%, and also to
grow overall corporate revenues through enhanced customer service and demand management.
In response to such challenges, the Stewart School of Industrial and Systems Engineering’s Supply Chain and
Logistics Institute (SCL) established a Center of Focused Research in Supply Chain Strategy. Faculty and
students from ISyE bring a wide range of backgrounds and methodology to the supply chain strategy research
done in our partnerships with industry. This work involves developing business and operational strategies for:
(1) Designing, synchronizing and optimizing global supply chains,
(2) Integrating people, process, and technologies to achieve supply chain objectives,
(3) Developing competitive advantage from outsourcing and collaboration, and
(4) Providing supply chain oversight and control. The Center is involved with a variety of related projects.
Designing and controlling efficient and effective supply chains is an extremely important factor in reducing
costs and maximizing revenues in companies. In fact, developing strategies for supply chain improvement is
also a matter of survival in today’s highly competitive and global environment. Join the Stewart School of
ISyE in this exciting area of research that include:
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Designing, synchronizing and optimizing global supply chains
Integrating people, process, and technologies to achieve supply chain objectives
Developing competitive advantage from outsourcing and collaboration
Providing supply chain oversight and control
Best Practices in SCM
“The major trends in business right now — low-cost country sourcing, outsourcing, customization,
globalization — all create tremendous complexities in a supply chain,” said Steve Matthesen, vice president
and global leader for supply chain at Boston Consulting Group, in a special business operations report. “In
most cases, however, companies have not changed how they manage this critical part of the business.”
According to the Indian Institute of Materials Management, “Business today is in a global environment [and]
companies are going truly global with Supply Chain Management (SCM)… Companies have changed the
ways in which they manage their operations and logistics activities. Changes in trade, the spread and
modernization of transport infrastructures and the intensification of competition have elevated the importance
of flow management to new levels.”
The following best practices in supply chain management offer a critical look at best-in-class manufacturers
and what they are doing to implement the most effective supply chains.
1. Set up your supply chain council
Without an internal council of leaders in place, your supply chain may lack a clear strategy for efficiency and
functionality. There’s also a good chance an existing supply chain strategy will not align with the company’s
overall strategy if your organization doesn’t have a governing body to synchronize the two. For example, if a
company goal is to improve inventory turns, your supply chain probably shouldn’t take in a container of raw
material requiring about 12 months to consume. By supporting your supply chain with a council of executive
leadership and lower level management, your council can improve cross-functional communication and
demonstrate the value of an organized supply chain — two barriers to success that often hinder operations
without a supply chain council.
2. Establish an appropriate and thoughtfully staffed supply chain structure.
Ideally, your supply chain will be staffed and structured in a way that maximizes effectiveness as well as
efficiency in order to bring the most benefit to your organization. Most organizations these days find that a
centralized strategy, implemented by specialized managers in their various business units is the most optimal
approach. Reportedly, this combination leads to more harmony between strategy and implementation, while
also resulting in the best service. In staffing your supply chain, you should be more focused on strategy than
simply transactional ability with your top leadership. These leaders should extend this strategic thinking
toward creating value using strong interpersonal skills (such as communication and relationship management)
internally as well as externally.
3. Identify areas where technology can help improve and streamline processes.
Approximately 79 percent of supply chain enterprises surveyed worldwide fault manually driven processes as
the cause for continued lack of supply chain visibility. Lack of visibility and another global concern, the
uncoordinated nature of supply chain processes can be solved with the automation provided by technology:
“On average, large companies report that their international supply chains are only 50 percent as automated
as their domestic supply chains. Overall, only 6 percent of companies report that they have highly automated
end-to-end and cross-functional processes.” Although improving efficiency in your supply chain is a key
concern when selecting software and technology, it’s backwards to structure your processes around
technology. Instead, review processes that are producing below standard to determine areas where technology
can help improve, and then select your software solutions to fit those needs. With appropriate technology in
place, detailed reporting data will be more accessible and accurate to better inform the supply chain council
for performance measures as well as strategic planning.
4. Maintain healthy supplier relationships
An important indicator of success in this industry is the health of your supplier relationships. These
connections should be maintained and cultivated on an ongoing basis, beyond the finalization of your deal.
The best supplier relationships are the ones with two-way communication between the buyer and seller. Your
objectives should include mechanism(s) to maintain the health of your relationship, goals for continuing
improvement and value, performance measurement and a platform for conflict resolution.
5. In procurement, look at total cost of ownership over price
Follow the example of best-in-class companies, and move away from the procurement practice of selecting a
supplier based completely on price. Instead, strategic sourcing involves understanding the total cost of
ownership/consumption (TCO) of a product or service. This makes more business sense when you remember
that the cost of acquisition for most products and services is only 25 to 40 percent of the TCO, while the rest
is comprised of operating, warehousing, and transportation costs, to name a few. Not surprisingly, your
procurement teams will need more collaboration with your suppliers in order to determine an accurate TCO.
6. Source suppliers strategically and with collaboration
Strategic selection of suppliers is at the heart of successful supply chain management, and adding a
collaborative element to strategic sourcing produces even better results. In a 2009 Industry Week article, J.
Paul Dittmann of the University of Tennessee noted that successful supply chains are proficient in five key
pillars of excellence: Talent, technology, internal collaboration, external collaboration, and change
management. Collaboration is at the heart. Take your sourcing beyond the purchasing department to engage
your suppliers in the decision-making process. Solicit their feedback on all areas of internal business or
function that may affect the success of your initiatives or processes. With collaborative strategic sourcing,
you’ll enjoy streamlined operations, reduced costs, and improved responsiveness.
7. Move contract management responsibility to the supply chain
Although potential savings are often negotiated during the procurement process, they are rarely fully realized.
This is most commonly because of a lapse in communication or lack of follow-through on contract
compliance. To combat this and actually realize those cost savings, best-in-class companies move contract
management under the supply chain. This allows the supply chain leader to leverage spend where there is
greater opportunity for reducing costs and mitigating risk, usually with services.
8. Optimize inventory for reduced cost
In any business, there’s a desire to reduce costs and improve the bottom line. This is especially true in times
of global economic downturn, like the one we’re currently subject to. In light of and in support of these efforts,
supply chain management should include a consistent look at optimizing inventory quantities. There’s a very
real cost of holding and storing inventory, and it’s almost always higher than the generally assumed 20 to 25
percent. In fact, “Research reveals that inventory holding costs could represent up to 60 percent of the cost of
an item that is held in inventory for 12 months,” as reported by Supply Chain Quarterly. To optimize your
supply chain inventory, include forecasting and demand planning.
9. Establish regular reviews to ensure efficiency and mitigate risk
Your supply chain council and leadership team members should be constantly reviewing procedures and
policies to ensure compliance, efficiency, and currency. This will help avoid process bottlenecks and help
streamline operations while mitigating the risk of theft, fraud, and the like. Risk mitigation in the supply chain
must adhere to some important steps: identifying all elements of risk, evaluating their probability of
occurrence, estimating the financial impact in the event of an incident, and prioritizing risks for appropriate
monitoring and prevention measures.
10. Be socially responsible and establish “green” initiatives
It’s no longer optional for your supply chain company to actively reduce its carbon footprint, instead, supply
chain organizations must become sustainable and socially responsible if they hope to thrive or even survive.
While the U.S. doesn’t yet have a carbon-trading regime, buyers are now considering environmental impact
when they choose suppliers. On a more general scale, social responsibility is also becoming more and more
significant in buyers’ estimation when making purchase decisions. A best-in-class supply chain organization
should have a measurable framework of policies and procedures designed to improve the workplace for the
greater good of employees, the organization itself, and also its community.
Obstacles of Streamlined SCM
1. Juggling multiple systems to complete the same task
When information is fragmented across different applications and tools, operational delays become inevitable.
For example, a team might end up checking several carrier systems for updates while sharing error-laden
spreadsheets via email.
Reconciling all of this data saps valuable time. It also complicates tasks such as procurement and supply
planning, producing considerable inefficiencies that drive up costs for workflows such as freight invoicing.
Ideally, such islands of information can be consolidated without having to resort to onerous manual processes.
Integrated supply chain solutions implemented by a trusted partner such as Inspirage will put you on the track
to a more cost-effective, scalable and transparent supply chain management solution.
2. Outsourcing logistics visibility to third parties
Outsourcing to third party logistics providers is unavoidable in some industries, not to mention a practical
necessity among large organizations with national or even global footprints. At the same time, ineffective
third-party partnerships can become a major drag on overall supply chain visibility, with cascading effects
across the whole enterprise.
Relying on outside help for logistics visibility creates issues similar to those we raised in the first item above:
Namely, time-consuming and expensive fragmentation. In contrast, having data points such as carrier
commonly available in a platform such as Oracle Transportation Management greatly simplifies transportation
management.
The results often speak for themselves. A more streamlined supply chain is both economical and easy to
manage, thanks to features such as centralized data repositories.
3. Working with outdated technology
Have you ever researched a product on a retailer’s website, checked to verify that it’s available at a specific
location, visited that store and discovered instead that the item is out of stock? There are many reasons for
such discrepancies, with lack of an up-to-date data near the top of the list.
While consumers regularly engage with organizations across multiple devices and platforms, companies do
not always possess the right tools to keep pace. Accordingly, they might have to lean on decades-old ERP
systems and complex customizations, which together contribute to difficulties in meeting product demand,
allocating costs for parts and ensuring that publicly viewable indicators of store stock (e.g., on an e-commerce
site or in a mobile app) are accurate.
4. Paying too much for essential services
As a result of these flaws and many others, many organizations end up with a supply chain burdened by costs
and incapable of adapting to evolving requirements. Overpaying for freight invoices is a prime example of a
pitfall opened up by inefficient supply chain management: much of the cost of paying for these items can be
eliminated with the right pairing of processes and tools.
The good news is that you have worthwhile options for modernizing your approach to supply chain
management. Inspirage is an end-to-end Oracle partner with a long track record of ensuring industryappropriate implementations that finish on time and on budget.
UNIT-2
Evolution and Objectives of Logistics
Evolution of Logistics
The evolution of logistics in the 1990s can be traced back to “physical distribution management” in the 1970s
when there was no coordination among the various functions of an organization, and each was committed to
attain its own goal. This myopic approach then transformed into “integrated logistic management” in the 1980s
that called for the integration of various functions to achieve a system-wide objective. Supply Chain
Management (SCM) further widens this scope by including the suppliers and customers into the organizational
fold, and coordinating the flow of materials and information from the procurement of raw materials to the
consumption of finished goods.
Logistics involves getting, in the right way, the right product, in the right quantity and right quality, in the
right place at the right time, for the right customer at the right cost. The logistic network consists of the
suppliers, the retailer and the users. The purpose of an integrated logistic network in a supply chain is to fulfill
customer orders through providing place utility to deliver products and services to end users. The place utility
is achieved by managing a number of key functions of a supply chain. The functions include:
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Demand management
Inventory management
Transportation
Warehousing
Order processing
Information Management
Logistics is a key enabler of supply chain collaboration. Improving performance in this field allows supply
chains to increase their efficiency significantly and help to create innovations in different areas. In this context,
an important task is to find structures and approaches which enable all types of performance management in
logistics and supply chains for a better fulfillment of customer needs.
Objectives of Logistics
1. Cost Reduction and Profit Maximization
Logistics management results in cost reduction and profit maximization, primarily due to:
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Improved material handling
Safe, speedy and economical transportation
Optimum number and convenient location of warehouses etc.
2. Efficient Flow of Manufacturing Operations
Inbound logistics helps in the efficient flow of manufacturing operations, due to on-time delivery of materials,
proper utilization of materials and semi-finished goods in the production process and so on.
3. Competitive Edge
Logistics provide, maintain and sharpen the competitive edge of an enterprise by:
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Increasing sales through providing better customer service
Arranging for rapid and reliable delivery
Avoiding errors in order processing; and so on.
4. Effective Communication System
An efficient information system is a must for sound logistics management. As such, logistics management
helps in developing effective communication system for continuous interface with suppliers and rapid
response to customer enquiries.
5. Sound Inventory Management
Sound inventory management is a by-product of logistics management. A major headache of production
management, financial management etc. is how to ensure sound inventory management; which headache is
cured by logistics management.
Components and Functions of Logistics Management
According to Phillip Kotler, “Market logistics involve planning, implementing and controlling physical flow
of material and final (finished) goods from the point of origin to the point of use to meet customer
requirements, at a profit.”
Logistics management consists of the process of planning, implementing and controlling the efficient flow of
raw-materials, work-in-progress and finished goods and related information-from point of origin to point of
consumption; with a view to providing satisfaction to the customer.
Components of Logistics Management
Logistics management consists of three major components:
1. Order processing or Input
This component is the first process of logistics where information about the resources and production is
gathered based on which the products are manufactured. In the case of freight forwarding, order processing
refers to the step where the various source of vendors and transportation are gathered for the importing or
exporting of goods.
2. Inventory Management
Inventory management plays an important role in the supply chain management system. As the name suggests,
inventory management helps the logistics company in allocating the resources like transport vehicles, labour
and other resources according to the order received by the client. This helps in making sure that no orders or
freights are being left out or are being delayed for delivery.
3. Freight transportation
This is the last and the major component of logistics management. After the order is processed and the
resources are allocated in order to transport the freight to the destination. Various routes and types of
transportation are analysed to check which transportation and the routes will deliver the product on or before
the delivery time. There are tools and software which analyse these factors with the help of artificial
intelligence and machine learning tools and provide the best plans to the logistics company.
These components together help in delivering the best quality goods to the consumers and is delivered on
time. These components help in reducing the additional costs and increasing the productivity of the work,
therefore the logistics company will be able to provide the best services with great quality to their clients and
consumers.
Functions of Logistics Management
(i) Network Design
Network design is one of the prime responsibilities of logistics management. This network is required to
determine the number and location of manufacturing plants, warehouses, material handling equipment’s etc.
on which logistical efficiency depends.
(ii) Order Processing
Customers’ orders are very important in logistics management. Order processing includes activities for
receiving, handling, filing, recording of orders. Herein, management has to ensure that order processing is
accurate, reliable and fast.
Further, management has to minimize the time between receipt of orders and date of dispatch of the
consignment to ensure speedy processing of the order. Delays in execution of orders can become serious
grounds for customer dissatisfaction; which must be avoided at all costs.
(iii) Procurement
It is related to obtaining materials from outside suppliers. It includes supply sourcing, negotiation, order
placement, inbound transportation, receiving and inspection, storage and handling etc. Its main objective is to
support manufacturing, by providing timely supplies of qualitative materials, at the lowest possible cost.
(iv) Material Handling
It involves the activities of handling raw-materials, parts, semi-finished and finished goods into and out of
plant, warehouses and transportation terminals. Management has to ensure that the raw-materials, parts, semifinished and finished goods are handled properly to minimize losses due to breakage, spoilage etc. Further,
the management has to minimize the handling costs and the time involved in material handling.
(v) Inventory Management
The basic objective of inventory management is to minimize the amount of working capital blocked in
inventories; and at the same time to provide a continuous flow of materials to match production requirements;
and to provide timely supplies of goods to meet customers’ demands.
Management has to maintain inventories of:
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Raw-materials and parts
Semi-finished goods
Finished goods
(vi) Packaging and Labeling
Packaging and labeling are an important aspect of logistics management. Packaging implies enclosing or
encasing a product into suitable packets or containers, for easy and convenient handling of the product by
both, the seller and specially the buyer.
Packaging facilities the sale of a product. It acts as a silent salesman. For example, a fancy and decorative
packaging of sweets, biscuits etc. on the eve of Diwali, makes for a good sale of such items.
Labeling means putting identification marks on the package of the product. A label provides information about
– date of packing and expiry, weight or size of product, ingredients used in the manufacture of the product,
instructions for sale handling of the product, price payable by the buyer etc.
(vii) Warehousing
Storage or warehousing is that logistical activity which creates time utility by storing goods from the time of
production till the time these are needed by ultimate consumers.
Here, the management has to decide about:
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The number and type of warehouses needed and
The location of warehouses.
(viii) Transportation
Transportation is that logistical activity which creates place utility.
Transportation is needed for:
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Movement of raw-materials from suppliers to the manufacturing unit.
Movement of work-in-progress within the plant.
Movement of finished goods from plant to the final consumers.
Distribution Related Issues and Challenges in Logistics
Management
1. Fuel Costs
One of the highest costs contributing to the ‘cutting transportation cost’ concern is fuel prices. Higher fuel
prices are likely to increase transportation costs for US shippers this year by pushing up fuel surcharges. Rising
India diesel fuel prices are escalating surcharges added to freight rates, which is reversing a two-year trend
that cut into the revenue and earnings of truckers as fuel prices plummeted.
2. Business Process Improvement
Not withstanding the need for new technology, which we discuss in number eight on this list, it has become
an increasing challenge for the logistics industry to stay on top of new advances in business processes. Taking
advantage of these new opportunities sounds enticing but adoption and onboarding can be overwhelming.
3. Improved Customer Service
Customers want full transparency into where their delivery is at all times. These days, the location of a package
is as interconnected as your social network. In fact, as customer expectations have increased, their willingness
to pay for fast shipping has decreased with just about 64 percent of consumers unwilling to pay anything extra
for less than two-day shipping.
4. Economy
With high fuel prices comes a greater credit crisis and rising inflationary demands that take a greater toll on
the US economy. This industry is then pressured by increasing compliance regulations, declining demand,
additional capacity with additional increases in key cost centers.
5. Driver Shortage & Retention
Hiring and retention remain an issue despite the lower demand mentioned above.
6. Government Regulations
Carriers face significant compliance regulations imposed by federal, state and local authorities.
7. Environmental Issues
The anti-idling and other emission reduction regulations brought about by state and local governments has
created concern that the compliance costs could exceed benefits.
8. Technology Strategy & Implementation
While the industry understands and supports many of the benefits of these technologies, some questions
remain as to how they will pay for it and who will help implement the improvements.
Gaining Competitive Advantage through Logistics
Management
Effective logistics management can provide a major source of competitive advantage. The bases for
successes in the marketplace are numerous, but a simple model has been based around the three C’s –
Customer, Company & Competitor. The source of competitive advantage is found firstly in the ability of the
organization to differentiate itself, in the eyes of the customer, from its competition and secondly by operating
at a lower cost and hence at greater profit.
Seeking a sustainable competitive advantage has become the concern of every manager who realizes the
realities of the marketplace. It is no longer acceptable to assume that the goods will sell themselves. An
elemental, commercial success is derived either form a cost advantage or a value advantage or, ideally both.
The greater the profitability of the company the lesser is the cost of production. Also a value advantage gives
the product an advantage over the competitive offerings. Successful companies either have a productivity
advantage or they have a value advantage or maybe a combination of the two.
There are two main vectors of strategic direction that need to be examined:
1. Productivity Advantage
In many industries there will be a competitor who will be a low cost producer and will have greater sales
volume in that sector. This is partly due to economies of scale, which enable fixed costs to spread over a
greater volume but more particularly to the impact of the experience curve.
It is possible to identify and predict improvements in the rate of output of workers as they become more skilled
in the processes and tasks on which they work. Bruce Henderson extended this concept by demonstrating that
all costs, not just production costs, would decline at a given rate as volume increased. This cost decline applies
only to value added, i.e. costs other than bought in supplies. Traditionally it has been suggested that the main
route to cost reduction was by gaining greater sales volume and there can be no doubt about the close linkage
between relative market share and relative costs. However it must also be recognized that logistics
management can provide a multitude of ways to increase efficiency and productivity and hence contribute
significantly to reduced unit costs.
2. Value Advantage
It is a cliché that customers don’t buy products they buy benefits. These benefits may be intangible i.e. they
relate not to specific product features but to such things as image and reputation. Unless the product or service
that we offer can be distinguished in some way from its competitors there is a strong likelihood that the
marketplace will view it as a ‘commodity’ and so the sale will tend to go to the cheapest supplier. Value
differentiation can be gained in numerous ways. When a company scrutinizes markets closely it frequently
finds that there are distinct value segments. In other words different groups of customers attach different levels
of importance to different benefits. The importance of such benefit segmentation lies in the fact that often
there are substantial opportunities for creating differentiated appeals for specific segments. Adding value
through differentiation is a powerful means of achieving a defensible advantage in the market. Equally
powerful as a means of adding value is service. Increasingly it is the case that markets are becoming more
service sensitive and this poses a challenge in management of logistics. It is important to seek differentiation
through means other than technology. A number of companies have responded to this by focusing upon service
as a means of gaining a competitive edge. Service in this context relates to the process of developing
relationships with customers through the provision of an augmented offer. This augmentation can take many
forms including delivery service, after sales service, financial packages, technical support and so on.
In commodity market situations where a company’s products are indistinguishable from their competitors’
offerings the only strategy is to move towards being a cost leader or towards being a service leader. Often the
leadership route is not available. This particularly will be the case in a mature market where substantial market
share gains are difficult to achieve.
Cost leadership strategies have been based upon the economies of scale, gained through greater volume of
sales. This is why market share is considered to be so important in many industries. This cost advantage can
be used strategically to assume a position of price leader and make it difficult for high cost competitors to
survive. This cost advantage can come through effective logistics management. In many industries logistics
cost represents such a large part of total costs that that it is possible to make major cost reductions through
fundamentally reengineering logistics processes.
The other way to come out of the commodity quadrant of the matrix is to seek a strategy of differentiation
through service excellence. Customers ion all industries are seeking greater responsiveness and reliability
from suppliers; they are looking for reduced lead times, just-in-time delivery and value added services that
help them do a better job of serving their customers.
GAINING COMPETITIVE ADVANTAGE THROUGH LOGISTICS
A firm can gain competitive advantage only when it performs its strategically important activities (designing,
producing, marketing delivering and supporting its product) more cheaply or better than its competitors.
Value chain activity disaggregates a firm into its strategically relevant activities in order to understand
behavior of costs and existing and potential sources of differentiation. They are further categorized into two
types
(i) Primary: inbound logistics, operation outbound logistics, marketing and sales, and service
(ii) Support: infrastructure, human resource management, technology development and procurement
To gain competitive advantage over its rivals, a firm must deliver value to its customers through performing
these activities more efficiently than its competitors or by performing these activities in a unique way that
creates greater differentiation.
Logistics management has the potential to assist the firm in the achievement of both a cost/productivity
advantage and a value advantage. The under lying philosophy behind the logistics concept is that of planning
and coordinating the materials flow from source to user as an integrated system rather than, as was so often
the case in the past, managing the goods flow as a series of independent activities. Thus under a logistics
management regime the goal is to link the marketplace, the distribution network, the manufacturing process
and the procurement activity in such a way that customers are service at higher levels and yet at lower cost.
Transportation: Function, Cost & Mode of
Transportation
Transport or Transportation is the movement of humans, animals and goods from one location to another.
In other words, the action of transport is defined as a particular movement of an organism or thing from a
point A to a Point B. Modes of transport include air, land (rail and road), water, cable, pipeline and space. The
field can be divided into infrastructure, vehicles and operations. Transport enables trade between people,
which is essential for the development of civilizations.
Transport infrastructure consists of the fixed installations, including roads, railways, airways, waterways,
canals and pipelines and terminals such as airports, railway stations, bus stations, warehouses, trucking
terminals, refueling depots (including fueling docks and fuel stations) and seaports. Terminals may be used
both for interchange of passengers and cargo and for maintenance.
Function of Transportation
Transportation Functionality provides 2 major functions which are described below:
1. Product Movement
To move various types of product whether it is raw materials component, semi- finished goods, finished goods,
packaging material, scrap and so on. Transportation has become a very essential. Infact if human beings are
considered as a product. One can be amount of people transport from one place to another by private and
public carriers.
Transportation of a product involves the use of temporal resources. This is because a particular product is
inaccessible while it is in-transit. i.e while it is being transport from one place to another place. These products
are called in-transit inventories. These products are significantly important because they influence a variety
of supply chain decision. For e.g, if supply chain is a considering a just in time strategy, or say. quick response
strategy with regard to supply of goods to the customer then this influences the time for which the goods
should be in transit because the goods have to reach quickly, or just in time to meet the requirement of the
customer. Further, if goods are dispatched only when a customers requires them. Then such decision also
affects the amount of inventories that have to be stored at the distribution centers.
Transportation of product involves the use of financial resources. Expenses on transport result from cost of
driver, cleaner, casual laborer, taxes, administrative costs, and repairs/ maintenance. In addition, if during
transportation there is product loss or product damage, may be this expenses have also to be taken into
consideration.
Transportations of product also use environmental resources. Either directly or indirectly. In direct terms,
transportation uses a very large amount of energy in term of fuel and oil. Though attempts are being made to
make transport vehicles more fuel efficient. But consumption of fuel and oil is not expected to decrease
because of the ever-increasing global operation in indirect term, transportation create environmental expenses
in terms of congestion, air pollution, and noise pollution.
2. Product storage
Though it is not very common, but one of the functions of transportation is also temporary storage of goods.
Of course, storing goods in vehicles is quite an expensive affair. However, in case of goods have to be moved
once again within Just a few days. It is advisable to keep them stored in transport vehicles themselves. This
will avoid the cost of unloading and loading as well as the possible damage to goods during such operation.
It may happen that a company has limited storage facility at a particular warehouse. Hence, when the company
loads the goods in to the transport vehicle to be sent to the warehouse. It may request the transport company
to take a longer route to reach the destination. This will act as temporary storage for the goods.
TRANSPORT COSTS
Transport systems face requirements to increase their capacity and to reduce the costs of movements. All users
(e.g. individuals, corporations, institutions, governments, etc.) have to negotiate or bid for the transfer of
goods, people, information and capital because supplies, distribution systems, tariffs, salaries, locations,
marketing techniques as well as fuel costs are changing constantly. There are also costs involved in gathering
information, negotiating, and enforcing contracts and transactions, which are often referred as the cost of doing
business. Trade also involves transactions costs that all agents attempt to reduce since transaction costs account
for a growing share of the resources consumed by the economy.
Frequently, corporations and individuals must take decisions about how to route passengers or freight through
the transport system. This choice has been considerably expanded in the context of the production of lighter
and high value consuming goods, such as electronics, and less bulky production techniques. It is not
uncommon for transport costs to account for 10% of the total cost of a product. This share also roughly applies
to personal mobility where households spend about 10% of their income for transportation, including the
automobile which has a complex cost structure. Thus, the choice of a transportation mode to route people and
freight between origins and destinations becomes important and depends on a number of factors such as the
nature of the goods, the available infrastructures, origins and destinations, technology, and particularly their
respective distances. Jointly, they define transportation costs.
Transport costs come as fixed (infrastructure) and variable (operating) costs, depending on a variety of
conditions related to geography, infrastructure, administrative barriers, energy, and on how passengers and
freight are carried. Three major components, related to transactions, shipments and the friction of distance,
impact on transport costs.
MODE OF TRANSPORTATION
1. Road transportation
Road infrastructures are large consumers of space with the lowest level of physical constraints among
transportation modes. However, physiographical constraints are significant in road construction with
substantial additional costs to overcome features such as rivers or rugged terrain. While historically road
transportation was developed to support non-motorized forms of transportation (walking, domestication of
animals and cycling at the end of the 19th century), it is motorization that has shaped the most its development
since the beginning of the 20th century.
Road transportation has an average operational flexibility as vehicles can serve several purposes but are rarely
able to move outside roads. Road transport systems have high maintenance costs, both for the vehicles and
infrastructures. They are mainly linked to light industries where rapid movements of freight in small batches
are the norm. Yet, with containerization, road transportation has become a crucial link in freight distribution.
2. Rail transportation and pipelines
Railways are composed of a traced path on which wheeled vehicles are bound. In light of more recent
technological developments, rail transportation also include monorails and maglev. They have an average
level of physical constrains linked to the types of locomotives and a low gradient is required, particularly for
freight. Heavy industries are traditionally linked with rail transport systems, although containerization has
improved the flexibility of rail transportation by linking it with road and maritime modes. Rail is by far the
land transportation mode offering the highest capacity with a 23,000 tons fully loaded coal unit train being the
heaviest load ever carried. Gauges, however, vary around the world, often challenging the integration of rail
systems.
Pipeline routes are practically unlimited as they can be laid on land or under water. The longest gas pipeline
links Alberta to Sarnia (Canada), which is 2,911 km in length. The longest oil pipeline is the Transiberian,
extending over 9,344 km from the Russian arctic oilfields in eastern Siberia to Western Europe. Physical
constraints are low and include the landscape and pergelisol in arctic or subarctic environments. Pipeline
construction costs vary according to the diameter and increase proportionally with the distance and with the
viscosity of fluids (from gas, low viscosity, to oil, high viscosity). The Trans Alaskan pipeline, which is 1,300
km long, was built under difficult conditions and has to be above ground for most of its path. Pipeline terminals
are very important since they correspond to refineries and harbors.
3. Maritime transportation
Because of the physical properties of water conferring buoyancy and limited friction, maritime transportation
is the most effective mode to move large quantities of cargo over long distances. Main maritime routes are
composed of oceans, coasts, seas, lakes, rivers and channels. However, due to the location of economic
activities maritime circulation takes place on specific parts of the maritime space, particularly over the North
Atlantic and the North Pacific. The construction of channels, locks and dredging are attempts to facilitate
maritime circulation by reducing discontinuity. Comprehensive inland waterway systems include Western
Europe, the Volga / Don system, St. Lawrence / Great Lakes system, the Mississippi and its tributaries, the
Amazon, the Panama / Paraguay and the interior of China. Maritime transportation has high terminal costs,
since port infrastructures are among the most expensive to build, maintain and improve. High inventory costs
also characterize maritime transportation. More than any other mode, maritime transportation is linked to
heavy industries, such as steel and petrochemical facilities adjacent to port sites.
4. Air transportation
Air routes are practically unlimited, but they are denser over the North Atlantic, inside North America and
Europe and over the North Pacific. Air transport constraints are multidimensional and include the site (a
commercial plane needs about 3,300 meters of runway for landing and take off), the climate, fog and aerial
currents. Air activities are linked to the tertiary and quaternary sectors, notably finance and tourism, which
lean on the long distance mobility of people. More recently, air transportation has been accommodating
growing quantities of high value freight and is playing a growing role in global logistics.
5. Intermodal transportation
Concerns a variety of modes used in combination so that the respective advantages of each mode are better
exploited. Although intermodal transportation applies for passenger movements, such as the usage of the
different, but interconnected modes of a public transit system, it is over freight transportation that the most
significant impacts have been observed. Containerization has been a powerful vector of intermodal integration,
enabling maritime and land transportation modes to more effectively interconnect.
6. Telecommunications
Cover a grey area in terms of if they can be considered as a transport mode since unlike true transportation,
telecommunications often do not have a physicality. Yet, they are structured as networks with a practically
unlimited capacity and very low constraints, which may include the physiography and oceanic masses that
may impair the setting of cables. They provide for the “instantaneous” movement of information (speed of
light). Wave transmissions, because of their limited coverage, often require substations, such as for cellular
phone networks. Satellites are often using a geostationary orbit which is getting crowded. High network costs
and low distribution costs characterize many telecommunication networks, which are linked to the tertiary and
quaternary sectors (stock markets, business to business information networks, etc.). Telecommunications can
provide a substitution for personal movements in some economic sectors.
Containerization
Containerization is a system of intermodal freight transport using intermodal containers (also called shipping
containers and ISO containers). The containers have standardized dimensions. They can be loaded and
unloaded, stacked, transported efficiently over long distances, and transferred from one mode of transport to
another—container ships, rail transport flatcars, and semi-trailer trucks—without being opened. The handling
system is completely mechanized so that all handling is done with cranes and special forklift trucks. All
containers are numbered and tracked using computerized systems.
Containerization originated several centuries ago but was not well developed or widely applied until after
World War II, when it dramatically reduced the costs of transport, supported the post-war boom in
international trade, and was a major element in globalization. Containerization did away with the manual
sorting of most shipments and the need for warehousing. It displaced many thousands of dock workers who
formerly handled break bulk cargo. Containerization also reduced congestion in ports, significantly shortened
shipping time and reduced losses from damage and theft.
The main advantages of containerization are:
(i) Standardization
Standard transport product that can be handled anywhere in the world (ISO standard) through specialized
modes (ships, trucks, barges and wagons) and equipment. Each container has an unique identification number
and a size type code.
(ii) Flexibility
Can be used to carry a wide variety of goods such as commodities (coal, wheat), manufactured goods, cars,
refrigerated (perishable) goods. There are adapted containers for dry cargo, liquids (oil and chemical products)
and refrigerated cargo. Discarded containers can be recycled and reused for other purposes.
(iii) Costs
Lower transport costs due to the advantages of standardization. Moving the same amount of break-bulk freight
in a container is about 20 times less expensive than conventional means. The containers enables economies of
scale at modes and terminals that were not possible through standard break-bulk handling.
(iv) Velocity
Transshipment operations are minimal and rapid and port turnaround times have been reduced from 3 weeks
to about 24 hours. Containerships are faster than regular freighter ships, but this advantage is undermined by
slow steaming.
(v) Warehousing
The container is its own warehouse, protecting the cargo it contains. This implies simpler and less expensive
packaging for containerized cargoes, particularly consumption goods. The stacking capacity on ships, trains
(doublestacking) and on the ground (container yards) is a net advantage of containers.
(vi) Security and safety
The contents of the container is unknown to carriers since it can only be opened at the origin (seller/shipper),
at customs and at the destination (buyer). This implies reduced spoilage and losses (theft).
Drawbacks of containerization:
(i) Site Constrains
Containers are a large consumer of terminal space (mostly for storage), implying that many intermodal
terminals have been relocated to the urban periphery. Draft issues at port are emerging with the introduction
of larger containerships, particularly those of the post-panamax class. A large post-panamax containerships
requires a draft of at least 13 meters.
(ii) Capital intensiveness
Container handling infrastructures and equipment (giant cranes, warehousing facilities, inland road, rail
access) are important capital investments that require readily sources. Further, the push towards automation
is increasing the capital intensiveness of intermodal terminals.
(iii) Stacking
Complexity of arrangement of containers, both on the ground and on modes (containerships and double-stack
trains). Restacking difficult to avoid and incurs additional costs and time for terminal operators. The larger
the mode or the yard, the more complex the management.
(iv) Repositioning
Many containers are moved empty (20% of all flows). However, either full or empty, a container takes the
same amount of space. The observed divergence between production and consumption at the global level
requires the repositioning of containerized assets over long distances (transoceanic).
(v) Theft and Losses
High value goods and a load unit that can forcefully opened or carried away (on truck) implied a level of cargo
vulnerability between a terminal and the final destination. About 1,500 containers are lost at sea each year
(fall overboard), but these figures vary substantially depending on if a specific incident takes place on any
given year.
(vi) Illicit Trade
The container is an instrument used in the illicit trade of goods, drugs and weapons, as well as for illegal
immigration (rare). There are concerns about the usage of containers for terrorism but no documented use has
emerged.
Cross Docking
Cross-docking is a practice in logistics of unloading materials from an incoming semi-trailer truck or railroad
car and loading these materials directly into outbound trucks, trailers, or rail cars, with little or no storage in
between. This may be done to change the type of conveyance, to sort material intended for different
destinations, or to combine material from different origins into transport vehicles (or containers) with the same
or similar destinations.
Cross-dock operations were pioneered in the US trucking industry in the 1930s, and have been in continuous
use in less-than-truckload operations ever since. The US military began using cross-docking operations in the
1950s. Wal-Mart began using cross-docking in the retail sector in the late 1980s.
In the LTL trucking industry, cross-docking is done by moving cargo from one transport vehicle directly onto
another, with minimal or no warehousing. In retail practice, cross-docking operations may utilize staging areas
where inbound materials are sorted, consolidated, and stored until the outbound shipment is complete and
ready to ship.
Advantages of Cross-docking:
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Streamlines the supply chain, from point of origin to point of sale
Reduces labor costs through less inventory handling
Reduces inventory holding costs by reducing storage times and potentially eliminating the need to
retain safety stock
Products reach the distributor, and consequently the customer, faster
Reduces or eliminates warehousing costs
May increase available retail sales space
Less risk of inventory handling
Disadvantages of cross-docking:
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Potential partners may not have the necessary storage capacities
An adequate transport fleet is needed to operate
A computerized logistics system is needed
Additional freight handling can lead to product damage
Labour costs are also incurred in the moving and shipping of stock
Factors influencing the use of retail cross-docks
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Cross-docking depends on continuous communication between suppliers, distribution centers, and all
points of sale
Customer and supplier geography, particularly when a single corporate customer has many multiple
branches or using points
Freight costs for the commodities being transported
Cost of inventory in transit
Complexity of loads
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Handling methods
Logistics software integration between supplier(s), vendor, and shipper
Tracking of inventory in transit
Cross-dock facility design
Cross-dock facilities are generally designed in an “I” configuration, which is an elongated rectangle. The goal
in using this shape is to maximize the number of inbound and outbound doors that can be added to the facility
while keeping the floor area inside the facility to a minimum. Bartholdi and Gue (2004) demonstrated that this
shape is ideal for facilities with 150 doors or less. For facilities with 150–200 doors, a “T” shape is more cost
effective. Finally, for facilities with 200 or more doors, the cost-minimizing shape is an “X”. Cross docking
is a logistics procedure where products from a supplier or manufacturing plant are distributed directly to a
customer or retail chain with marginal to no handling or storage time. Cross docking takes place in a
distribution docking terminal; usually consisting of trucks and dock doors on two (inbound and outbound)
sides with minimal storage space.
UNIT-3
Bullwhip Effect in SCM
The bullwhip effect on the supply chain occurs when changes in consumer demand causes the companies in
a supply chain to order more goods to meet the new demand. The bullwhip effect is a distribution channel
phenomenon, rather problem, in which demand forecasts yield supply chain inefficiencies. This mostly
happens when retailers become highly reactive to consumer demand, and in turn, intensify expectations around
it. This results into inefficient asset allocations and high inventory fluctuations, moving down in the supply
chain.
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The bullwhip effect usually flows up the supply chain, starting with the retailer, wholesaler,
distributor, manufacturer and then the raw materials supplier.
This effect can be observed through most supply chains across several industries; it occurs
because the demand for goods is based on demand forecasts from companies, rather than
actual consumer demand.
The bullwhip effect can be explained as an occurrence detected by the supply chain where
orders sent to the manufacturer and supplier create larger variance then the sales to the end
customer.
These irregular orders in the lower part of the supply chain develop to be more distinct
higher up in the supply chain.
How Do we minimize the bullwhip effect?
Every industry has its own unique supply chain, inventory placements, and complexities. However, after
analyzing the bullwhip effect and implementing improvement steps, inventories in the range of 10 to 30
percent can be reduced and 15 to 35 percent reduction in instances of stock out situations and missed customer
orders can be achieved. Below are some of the methods to minimize the bullwhip effect.
1. Accept and understand the bullwhip effect
The first and the most important step towards improvement is the recognition of the presence of the bullwhip
effect. Many companies fail to acknowledge that high buffer inventories exist throughout their supply chain.
A detailed stock analysis of the inventory points from stores to raw material suppliers will help uncover idle
excess inventories. Supply chain managers can further analyze the reasons for excess inventories, take
corrective action and set norms.
2. Improve the inventory planning process
Inventory planning is a careful mix of historical trends for seasonal demand, forward-looking demand, new
product launches and discontinuation of older products. Safety stock settings and min-max stock range of each
inventory point need to be reviewed and periodically adjusted. Inventories lying in the entire network need to
be balanced based on regional demands. Regular reporting and early warning system need to be implemented
for major deviations from the set inventory norms.
3. Improve the raw material planning process
Purchase managers generally tend to order in advance and keep high buffers of raw material to avoid
disruption in production. Raw material planning needs to be directly linked to the production plan. Production
plan needs to be released sufficiently in advance to respect the general purchasing lead times. Consolidation
to a smaller vendor base from a larger vendor base, for similar raw material, will improve the flexibility and
reliability of the supplies. This, in turn, will result in lower raw material inventories.
4. Collaboration and information sharing between managers
There might be some inter-conflicting targets between purchasing managers, production managers, logistics
managers and sales managers. Giving more weight to common company objectives in performance evaluation
will improve collaboration between different departments. Also providing regular and structured interdepartmental meetings will improve information sharing and decision-making process.
5. Optimize the minimum order quantity and offer stable pricing
Certain products have high minimum order quantity for end customers resulting in overall high gaps between
subsequent orders. Lowering the minimum order quantity to an optimal level will help provide create smoother
order patterns. Stable pricing throughout the year instead of frequent promotional offers and discounts may
also create stable and predictable demand.
Performance Measurement: Dimension, Tools of
Performance Measurement
Supply chain performance measure can be defined as an approach to judge the performance of supply chain
system. Supply chain performance measures can broadly be classified into two categories:
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Qualitative Measures: For example, customer satisfaction and product quality.
Quantitative Measures: For example, order-to-delivery lead time, supply chain response
time, flexibility, resource utilization, delivery performance.
Here, we will be considering the quantitative performance measures only. The performance of a supply chain
can be improvised by using a multi-dimensional strategy, which addresses how the company needs to provide
services to diverse customer demands.
Quantitative Measures
Mostly the measures taken for measuring the performance may be somewhat similar to each other, but the
objective behind each segment is very different from the other.
Quantitative measures is the assessments used to measure the performance, and compare or track the
performance or products. We can further divide the quantitative measures of supply chain performance into
two types. They are:
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Non-financial measures
Financial measures
Non – Financials Measures
The metrics of non-financial measures comprise cycle time, customer service level, inventory levels,
resource utilization ability to perform, flexibility, and quality. In this section, we will discuss the first four
dimensions of the metrics:
Cycle Time
Cycle time is often called the lead time. It can be simply defined as the end-to-end delay in a business process.
For supply chains, cycle time can be defined as the business processes of interest, supply chain process and
the order-to-delivery process. In the cycle time, we should learn about two types of lead times. They are as
follows:
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Supply chain lead time
Order-to-delivery lead time
The order-to-delivery lead time can be defined as the time of delay in the middle of the placement of order by
a customer and the delivery of products to the customer. In case the item is in stock, it would be similar to the
distribution lead time and order management time. If the ordered item needs to be produced, it would be the
summation of supplier lead time, manufacturing lead time, distribution lead time and order management time.
The supply chain process lead time can be defined as the time taken by the supply chain to transform the raw
materials into final products along with the time required to reach the products to the customer’s destination
address.
Hence it comprises supplier lead time, manufacturing lead time, distribution lead time and the logistics lead
time for transport of raw materials from suppliers to plants and for shipment of semi-finished/finished products
in and out of intermediate storage points.
Lead time in supply chains is governed by the halts in the interface because of the interfaces between suppliers
and manufacturing plants, between plants and warehouses, between distributors and retailers and many more.
Lead time compression is a crucial topic to discuss due to the time based competition and the collaboration of
lead time with inventory levels, costs, and customer service levels.
Customer Service Level
The customer service level in a supply chain is marked as an operation of multiple unique performance indices.
Here we have three measures to gauge performance. They are as follows:
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Order fill Rate: The order fill rate is the portion of customer demands that can be easily
satisfied from the stock available. For this portion of customer demands, there is no need
to consider the supplier lead time and the manufacturing lead time. The order fill rate could
be with respect to a central warehouse or a field warehouse or stock at any level in the
system.
Stockout Rate: It is the reverse of order fill rate and marks the portion of orders lost
because of a stockout.
Backorder Level: This is yet another measure, which is the gauge of total number of orders
waiting to be filled.
Probability of on-time delivery: It is the portion of customer orders that are completed
on-time, i.e., within the agreed-upon due date.
In order to maximize the customer service level, it is important to maximize order fill rate, minimize stockout
rate, and minimize backorder levels.
Inventory Levels
As the inventory-carrying costs increase the total costs significantly, it is essential to carry sufficient inventory
to meet the customer demands. In a supply chain system, inventories can be further divided into four
categories.
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Raw materials
Work-in-process, i.e., unfinished and semi-finished sections
Finished goods inventory
Spare parts
Every inventory is held for a different reason. It’s a must to maintain optimal levels of each type of inventory.
Hence gauging the actual inventory levels will supply a better scenario of system efficiency.
Resource Utilization
In a supply chain network, huge variety of resources is used. These different types of resources available for
different applications are mentioned below.
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Manufacturing Resources: Include the machines, material handlers, tools, etc.
Storage Resources: Comprise warehouses, automated storage and retrieval systems.
Logistics Resources: Engage trucks, rail transport, air-cargo carriers, etc.
Human Resources: Consist of labor, scientific and technical personnel.
Financial Resources: Include working capital, stocks, etc.
In the resource utilization paradigm, the main motto is to utilize all the assets or resources efficiently in order
to maximize customer service levels, reduce lead times and optimize inventory levels.
Financial Measures
The measures taken for gauging different fixed and operational costs related to a supply chain are considered
the financial measures. Finally, the key objective to be achieved is to maximize the revenue by maintaining
low supply chain costs.
There is a hike in prices because of the inventories, transportation, facilities, operations, technology, materials,
and labor. Generally, the financial performance of a supply chain is assessed by considering the following
items:
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Cost of raw materials.
Revenue from goods sold.
Activity-based costs like the material handling, manufacturing, assembling rates etc.
Inventory holding costs.
Transportation costs.
Cost of expired perishable goods.
Penalties for incorrectly filled or late orders delivered to customers.
Credits for incorrectly filled or late deliveries from suppliers.
Cost of goods returned by customers.
Credits for goods returned to suppliers.
In short, we can say that the financial performance indices can be merged as one by using key modules such
as activity based costing, inventory costing, transportation costing, and inter-company financial transactions.
Supply Chain Operations Reference Model (SCOR
Model)
One of the most promising models for strategic decision-making in supply chain management is known as the
SCOR model. 70 leading members of the manufacturing, distribution, and solutions supplier industries (in
collaboration with the Supply Chain Council) developed the management tool, which is short for “Supply
Chain Operations Reference Model.” The program has been designed in a way that it can applicable to any
size operation. The SCOR model is a process meant to assess waste, establish standards, and continuously
improve. It is a repetitive framework of constant engagement and discovery, developed to describe all the
business activities associated with the phases of satisfying a customer.
SCOR MODEL: Management Process
The SCOR model is based on three major principles: process modeling/re-engineering, measuring
performance, and best practices. There are 5 distinct process-modeling building blocks to the SCOR model:
1. Plan: These are processes that relate to demand and supply planning. Standards must be
established to improve and measure supply chain efficiency. These rules can span
compliance, inventory, transportation, and assets, among other things.
2. Source: This step in the SCOR model involves any processes that procure goods or
services in order to meet a demand (real or planned). Material acquisitions and sourcing
infrastructure are examined to determine how to manage the supplier network, inventory,
supplier performance, and agreements. This stage should help you plan on when to receive,
verify, and transfer a product in the supply chain.
3. Make: In order to meet planned or actual demand, this is the process in which a product is
transformed to its final state. This step is particularly important in the manufacturing and
distribution industries, and helps to answer the questions of: make-to-order, make-to-stock,
or engineer-to-order? The “make” part of the process includes production activities,
packaging, staging, and releasing the product. It also involves production networks and
managing equipment and facilities.
4. Deliver: Any process that involves getting the product out, from order management and
warehousing, to distribution and transportation. This step also involves customer service
and overall management of product lifecycles, finished inventories, assets, and
importing/exporting requirements.
5. Return: This final step focuses on all products that are returned or received, for any reason.
Organizations must be prepared to handle the return of defective products, containers, and
packaging. The return process involves the application of business rules, return inventory,
assets, and regulatory requirements. This final step directly extends to post-delivery
customer support and follow-up.
SCOR MODEL: Scope
The SCOR model does not attempt to explain every business process or activity. As in all business models,
there is a specific scope that the SCOR model addresses, including the following segments:
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Customer Interactions: The entire process of the customer relationship, from order entry
through paid invoice.
Product Transactions: All product, from the supplier’s supplier to the customer’s
customer, including equipment, supplies, bulk products, etc.
Market Interactions: From the understanding of demand, to the fulfillment of every order.
The focus of SCOR can also be defined and measured on 3 levels of process detail.
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Level 1: Defining Scope – geographies, segments, and context
Level 2: Configuration of the supply chain
Level 3: Process element details – identifies key business activities within the chain.
A major supplier of light bulbs around the world, Philips Lighting has been using the SCOR model since 1999.
They recently reported to the Supply Chain Council that over the years, incorporating the SCOR model into
their business framework has directly resulted in improved customer service and reduced inventories. The
SCOR model is a tried and true process for manufacturing and distribution industries that has seen decades of
success. When applied correctly, it can streamline processes and refine your organization’s supply chain.
Demand Chain Management
Demand-chain management (DCM) is the management of relationships between suppliers and customers
to deliver the best value to the customer at the least cost to the demand chain as a whole. Demand-chain
management is similar to supply-chain management but with special regard to the customers.
Demand Chain Management software tools bridge the gap between the customer-relationship management
and the supply-chain management. The organization’s supply chain processes are managed to deliver best
value according to the demand of the customers. DCM creates strategic assets for the firm in terms of the
overall value creation as it enables the firm to implement and integrate marketing and supply chain
management (SCM) strategies that improve its overall performance. A study of the university in Wageningen
(the Netherlands) sees DCM as an extension of supply chain management, due to its incorporation of the
market-orientation perspective on its concept.
A Demand-driven supply network (DDSN) is one method of supply-chain management which involves
building supply chains in response to demand signals. The main force of DDSN is that it is driven by
customers demand. In comparison with the traditional supply chain, DDSN uses the pull technique. It
gives DDSN market opportunities to share more information and to collaborate with others in the supply
chain.
DDSN uses a capability model that consist of four levels. The first level is Reacting, the second level is
Anticipating, the third level is Collaborating and the last level is Orchestrating. The first two levels focus on
the internal supply chain while the last two levels concentrate on external relations throughout the Extended
Enterprise.
In a demand-driven chain, a customer activates the flow by ordering from the retailer, who reorders from the
wholesaler, who reorders from the manufacturer, who reorders raw materials from suppliers. Orders flow
backward, up the chain, in this structure.
Many companies are trying to shift from a build-to-forecast to a build-to-order discipline. The property of
being demand-driven is one of degree: Being “0 percent” demand-driven means all production/inventory
decisions are based on forecasts, and so, all products available for sale to the end user is there by virtue of a
forecast. This could be the case of fashion goods, where the designer may not know how buyers will react to
a new design, or the beverage industry, where products are produced based on a given forecast. A “100
percent” demand-driven is one in which the order is received before production begins. The commercial
aircraft industry match to this description. In most cases, no production occurs until the order is received.
Competitive Advantages
To create sustainable competitive advantages with DDSN, companies have to do deal with three conditions:
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Alignment (create shared incentives)
Agility (respond quickly to short-term change)
Adaptability (adjust design of the supply chain)
Misconceptions
There are five commonly-made misconceptions of demand driven (DDSN):
Companies might think they are demand driven because they have a good forecast of their company.
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They have implemented lean manufacturing.
They have great data on all their customers.
They think it is a technology project and the corporate forecast is a demand visibility signal.
They have a better view of customers demand.
An important component of DDSN is DDM (“real-time” demand driven manufacturing). DDM gives
customers the opportunity to say what they want, where and when.
Demand Driven execution
Demand-chain management is the same as supply chain management, but with emphasis on consumer pull vs.
supplier push. The demand chain begins with customers, then funnels through any resellers, distributors, and
other business partners who help sell the company’s products and services. The demand chain includes both
direct and indirect sales forces. Customers demand is hard to detect because out of stock situations (OOS)
falsify data collected from POS-Terminals. According to studies of Corsten/Gruen (2002, 2008) the OOS-rate
is about 8%. For products under sales promotion OOS rates up to 30% exist. Reliable information about
demand is necessary for DCM therefore lowering OOS is a main factor for successful DCM.
Corsten and Gruen describe key factors for lowering OOS-rates:
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Data accuracy
Forecast and order accuracy
Order quantity
Replenishment
Capacity (time supply)
Capacity (Packout) and Planogram Compliance
Shelf Replenishment
Global Supply Chain Management
Firms are creating truly global supply chains because it enables them to reduce their costs. Companies can
take advantage of lower production costs and they can outsource to free capital from non-core activities and
generate large-scale efficiencies. In addition, the costs of shipping, communications and tariff-related charges
have come down over the years.
Global supply chain management involves planning how the entire supply chain will function as an integrated
whole, with the aim of generating an optimum level of customer service while being as cost efficient as
possible.
Other aims include increasing the speed by which your product reaches your customers, as well as flexibility
in dealing with customer transactions.
It incorporates management processes that integrate the network of suppliers, manufacturers, warehouses and
retail outlets so that the right type of goods are sourced, supplied, produced and shipped in the right quantities,
to the right locations, at the right time and are received in sound condition.
To achieve successful integration, flows of information (such as purchase orders, shipping notices, waybills
and invoices), materials (including raw and finished products) and finances (payments and refunds) through
the supply chain must be co-ordinated effectively.
What are the three things all successful supply chain management needs?
Supply chain management touches all of an organization’s functions. To be successful, it requires focused
effort across the entire company and collaboration with all outside suppliers and service providers. This means
that supply chain management must have a multidimensional approach, involving people, processes and
technology.
People
People are key to supply chain management because they are the core of organizations. For successful supply
chain management, the people involved must have the skills and knowledge to manage sourcing,
manufacturing, storage and transportation of products. They must have a solid view of the company’s strategic
business vision and know how their role fits into the overall functioning of the supply chain.
Processes
The processes in supply chain management are the actions taken with the aim of satisfying customers. They
include all functions involved in the supply chain: sourcing, distribution, transportation, warehousing, sales
and customer service. They also include all actions performed by external companies that are part of the supply
chain.
Technology
Technology is used in the supply chain to connect people and processes. However, people involved in the
supply chain will not use technology unless they find it easy to adopt. Careful selection and implementation
of the supply chain technologies a company uses is essential for supply chain success.
The Benefits of Global Supply Chain Management
In the modern global marketplace, advances in communications and transportation technologies have led
customers to expect a steady and regular supply of products in good condition at the lowest possible price,
despite the long distances most products, commodities and foodstuffs are shipped.
Companies must always be looking for ways to improve the functioning of their supply chains to ensure that
their supply meets projected demands cost effectively. If they do not produce sufficient product to meet
demand, they will lose customers. If they produce too much product, they must pay for expensive warehousing
of the excess inventory, which they might not be able to sell.
If supplies are not sourced carefully and production is not monitored, companies might be faced with mass
product recalls or returns. These can result in financial ruin for a company.
“By managing their supply chains carefully, companies can select the most cost-effective solution at
each stage in the chain and can avoid business costs. This provides a company with a real competitive
edge.”
The cost savings provided by supply chain management enhance additional cost-cutting manufacturing
methods and strategies that many international companies have already instituted. These strategies include the
following:
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Just-in-time (JIT) manufacturing (reducing inventory levels, overall costs, product
variability and production times, and also improving product quality)
Lean manufacturing (producing goods using less manpower, raw materials, time and
space)
Total quality management (embedding awareness of quality in all operational strategies)
Global supply chain management has many benefits for a company. It enables business processes to be
organized using international organizations that be reduced, companies can react rapidly to unforeseen market
conditions, transport strategies can be improved, costs can be minimized and waste can be eliminated. You
can get your product to market substantially more quickly.
Small- and medium-sized businesses benefit as well. These smaller organizations, especially with niche
technologies or specializations, can now sell to multinational organizations or to their suppliers. Many of these
large firms have started outsourcing activities that were carried out internally in the past.
Challenges in establishing Global Supply Chain
In every industry, networks of suppliers, manufacturers, trade intermediaries and customers have spread
around the globe as companies strive to lower their costs, increase their profits and improve productivity in a
highly competitive global marketplace. A paradigm shift has occurred in which companies that once built
domestically to sell internationally now look globally for raw materials, services and finished goods to sell
into a defined marketplace. This shift is happening because of reduced barriers to trade and investment, lower
transportation costs, ease of information flows, new enabling technologies and the emergence of economies
such as China and India. Supply chain management aims to manage the flow of goods, information and
finances among these business networks in the most efficient manner. Companies have discovered that
effective supply chain management cuts costs, reduces waste, prevents over-production and helps ensure that
customers are more satisfied with product, price and service. This means it is an essential tool for
competitiveness in a global marketplace.
Challenges that companies face with global supply chains include the following: Currency fluctuations: When
dealing with suppliers or customers overseas, companies must plan for fluctuating charges and income from
foreign exchange rate variations.
Maintaining intellectual property protection: A company might be able to have a product assembled
overseas more cost effectively than assembling it domestically. However, some countries have less stringent
laws regulating protection of intellectual property.
Identifying and assuring the reliability of international business partners: With suppliers, distributors,
customers and business partners located in many regional areas of the world, it can be difficult for companies
to monitor the business practices and financial stability of all organizations in the supply chain.
Accessing finance and insurance: Financial transactions conducted internationally are always more
complicated than domestic transactions. Companies must establish lines of credit with banks and work with
other members of the supply chain to identify preferred methods of payment. Obtaining the correct insurance
to protect foreign property and shipments is also essential.
Compliance with international regulations and standards: Quality standards, import and export
restrictions, safety and packing regulations and labelling regulations vary around the globe. For companies
new to international trade, ensuring that materials provided by a foreign supplier will meet all domestic entry
regulations can be a daunting undertaking.
If you ignore or mishandle these risks, they can result in cost penalties and distracting inefficiencies.
Identifying the risks up front, so you know what to look for, can be the key to success. The following six risks
can easily have a negative impact on your business:
1. Quality levels and defects. Manufacturing processes aren’t perfect, so the industry
typically accepts a certain quality level for products. Complexity and variability are part of
any production process, and unfamiliar sources might not adhere to accepted U.S. defect
levels. Choosing a non-U.S.-based sourcing firm can open up questions and disputes about
which party is liable for defect percentages that rise above normal.
2. Time zones. Some U.S. firms experience issues when dealing with companies on the other
side of the country—and never mind the 13-hour time difference between the United States
and Asia. Waking and working hours do not coincide, which can be a challenge when a
pressing issue arises. Waiting one day to clarify a product question or process change can
often simply be too long for companies that are trying to run nimble operations.
3. Long-range logistics. Purchasing items at a delivered price is easy, but the shipment can
be delayed. Whether it is a factory hold-up or transit problem, ignoring the complexity of
long-range logistics can be a risk.
4. Accountability and compliance. Companies should consider social compliance every
time they look at global sourcing. They need to conduct due diligence about child labor
practices, acceptable working conditions, forced labor, and fair compensation practices.
Barring the hiring of local staff members, however, there isn’t a surefire way to ensure
social compliance from across the globe. Risk comes in the form of severe brand damage
due to unfair or illegal practices that come to light.
5. To receive on-time product delivery, it is vital to have firm completion dates and shipping
timeframes. An item that is globally sourced, however, is often just a piece of a bill of
materials that must be on hand for product completion. Delays from a non-U.S. source can
derail production and drive up related costs.
6. Language barriers. Global partners offer competitive pricing and efficiencies, but still
often conduct day-to-day business in a different language. Managers will likely speak
English, but their directions must be relayed to line staff, and your own words might be lost
in translation. Errors are bound to happen when communications aren’t translated and
interpreted perfectly.
These six factors present mighty risks, but they are not insurmountable. Companies looking to take advantage
of global sourcing opportunities can build their own teams located in the United States or abroad, or work
with experienced partners to mitigate and remove these risks. The benefits of sourcing from outside the
country can be great when handled properly.
Factor that influences designing Global Supply Chain
Network
Designing Supply Chain Network for each industry or business involves arriving at a satisfactory design
framework taking into all elements like product, market, process, technology, costs, external environment and
factors and their impact besides evaluating alternate scenarios suiting your specific business requirements. No
two supply chain designs can be the same. The network design will vary depending upon many factors
including location and whether you are looking at national, regional or global business models.
1. Supply Chain Network in Simple and basic Terms Involves determining following
process design:
Procurement
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Where are your suppliers
How will you procure raw materials and components
Manufacturing
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Where will you locate the factories for manufacturing/assembly
Manufacturing Methodology
Finished Good
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Where will you hold inventories, Number of Warehouses, Location of warehouses etc.
How will you distribute to markets – Transportation and Distribution logistics
All above decisions are influenced and driven by Key Driver which is the Customer Fulfillment.
2. Designing Supply Chain Network involves determining and defining following
Elements:
 Market Structure
 Demand Plotting or Estimation
3. Market Segment
 Procurement Cost
 Product /Conversion Costs
 Logistics Costs including Inventory holding costs
 Over heads
 Cost of Sales
4. Network Design aims to define:
 Best fit Procurement model – Buying decision and processes- VMI, JIT, Kanban,
procurement cost models etc.
 Production processes – One or more number of plants, plant capacity design,
Building to order, build to stock etc, in-house manufacturing or outsource
manufacturing and related decisions including technology for production.
 Manufacturing Facility design – Location, Number of factories, size of unit, time
frames for the plant setup project etc.
Finished Goods Supply Chain network – Number of warehouses, location & size
of warehouses, inventory flow and volume decisions, transportation.
 Sales and Marketing Decisions – Sales Channel and network strategy, Sales
pricing and promotions, order management and fulfillment process, service
delivery process definitions.
5. Network Design also examines:
 Derives cost estimates for every network element
 Examines ways to optimize costs and reduce costs
 Extrapolates cost impact over various product lines and all possible permutations
and combinations to project profitability
6. Some of the key factors that affect the supply chain network modeling are:
 Government Policies of the Country where plants are to be located.
 Political climate
 Local culture, availability of skilled / unskilled human resources, industrial
relations environment, infrastructural support, energy availability etc.
 Taxation policies, Incentives, Subsidies etc across proposed plant location as well
as tax structures in different market locations.
 Technology infrastructure status.
 Foreign investment policy, Foreign Exchange and repatriation Policy and
regulations.

Supply Chain Network designs not only provide an operating framework of the entire business to guide the
managements, they also examine the structure from strategic view point taking into account external
influences, interdependencies of all processes and critically evaluate opportunities to maximize profitability.
Supply Chain Design consultants use various design software’s and optimization techniques coupled with
inputs from industry consultants and experts.
UNIT-4
Warehousing: Concept and Types
A warehouse may be defined as a place used for the storage or accumulation of goods. The function of storage
can be carried out successful with the help of warehouses used for storing the goods.
Warehousing can also be defined as assumption of responsibility for the storage of goods. By storing the goods
throughout the year and releasing them as and when they are needed, warehousing creates time utility.
Functions of Warehousing:
1. Storage:
This is the basic function of warehousing. Surplus commodities which are not needed immediately can be
stored in warehouses. They can be supplied as and when needed by the customers.
2. Price Stabilization:
Warehouses play an important role in the process of price stabilization. It is achieved by the creation of time
utility by warehousing. Fall in the prices of goods when their supply is in abundance and rise in their prices
during the slack season are avoided.
3. Risk bearing:
When the goods are stored in warehouses they are exposed to many risks in the form of theft, deterioration,
exploration, fire etc. Warehouses are constructed in such a way as to minimise these risks. Contract of bailment
operates when the goods are stored in wave-houses.
The person keeping the goods in warehouses acts as boiler and warehouse keeper acts as boiler. A warehouse
keeper has to take the reasonable care of the goods and safeguard them against various risks. For any loss or
damage sustained by goods, warehouse keeper shall be liable to the owner of the goods.
4. Financing:
Loans can be raised from the warehouse keeper against the goods stored by the owner. Goods act as security
for the warehouse keeper. Similarly, banks and other financial institutions also advance loans against
warehouse receipts. In this manner, warehousing acts as a source of finance for the businessmen for meeting
business operations.
5. Grading and Packing:
Warehouses nowadays provide the facilities of packing, processing and grading of goods. Goods can be
packed in convenient sizes as per the instructions of the owner.
Importance of Warehousing In the Development of Trade and Commerce:
Warehousing or storage refers to the holding and preservation of goods until they are dispatched to the
consumers. Generally, there is a time gap between the production and consumption of products. By bridging
this gap, storage creates time utility.
There is need for storing the goods so as to make them available to buyers as and when required. Some amount
of goods is stored at every stage in the marketing process. Proper and adequate arrangements to retail the
goods in perfect condition are essential for success in marketing. Storage enables a firm to carry on production
in anticipation of demand in future.
A warehouse is a place used for the storage or accumulation of goods. It may also be defined as an
establishment that assumes responsibility for the safe custody of goods. Warehouses enable the businessmen
to carry on production throughout the year and to sell their products, whenever there is adequate demand.
Need for warehouse arises also because some goods are produced only in a particular season but are demanded
throughout the year. Similarly certain products are produced throughout the year but demanded only during a
particular season. Warehousing facilitates production and distribution on a large scale.
Benefits from Warehouses:
1. Regular production:
Raw materials need to be stored to enable mass production to be carried on continuously. Sometimes, goods
are stored in anticipation of a rise in prices. Warehouses enable manufacturers to produce goods in anticipation
of demand in future.
2. Time utility:
A warehouse creates time utility by bringing the time gap between the production and consumption of goods.
It helps in making available the goods whenever required or demanded by the customers.
Some goods are produced throughout the year but demanded only during particular seasons, e.g., wool,
raincoat, umbrella, heater, etc. on the other hand, some products are demanded throughout the year but they
are produced in certain region, e.g., wheat, rice, potatoes, etc. Goods like rice, tobacco, liquor and jaggery
become more valuable with the passage of time.
3. Store of surplus goods:
Basically, a warehouse acts as a store of surplus goods which are not needed immediately. Goods are often
produced in anticipation of demand and need to be preserved properly until they are demanded by the
customers. Goods which are not required immediately can be stored in a warehouse to meet the demand in
future.
4. Price stabilization:
Warehouses reduce violent fluctuations in prices by storing goods when their supply exceeds demand and by
releasing them when the demand is more than immediate productions. Warehouses ensure a regular supply of
goods in the market. This matching of supply with demand helps to stabilise prices.
5. Minimisation of risk:
Warehouses provide for the safe custody of goods. Perishable products can be preserved in cold storage. By
keeping their goods in warehouses, businessmen can minimise the loss from damage, fire, theft etc. The goods
kept in the warehouse are generally insured. In case of loss or damage to the goods, the owner of goods can
get full compensation from the insurance company.
6. Packing and grading:
Certain products have to be conditioned or processed to make them fit for human use, e.g., coffee, tobacco,
etc. A modern warehouse provides facilities for processing, packing, blending, grading etc., of the goods for
the purpose of sale. The prospective buyers can inspect the goods kept in a warehouse.
7. Financing:
Warehouses provide a receipt to the owner of goods for the goods kept in the warehouse. The owner can
borrow money against the security of goods by making an endorsement on the warehouse receipt. In some
countries, warehouse authorities advance money against the goods deposited in the warehouse. By keeping
the imported goods in a bonded warehouse, a businessman can pay customs duty in installments.
Type of Warehouses:
Private Warehouses:
The private warehouses are owned and operated by big manufacturers and merchants to fulfill their own
storage needs. The goods manufactured or purchased by the owner of the warehouses have a limited value or
utility as businessmen in general cannot make use of them because of the heavy investment required in the
construction of a warehouse, some big business firms which need large storage capacity on a regular basis and
who can afford money, construct and maintain their private warehouses. A big manufacturer or wholesaler
may have a network of his own warehouses in different parts of the country.
Public Warehouses:
A public warehouse is a specialised business establishment that provides storage facilities to the general public
for a certain charge. It may be owned and operated by an individual or a cooperative society. It has to work
under a license from the government in accordance with the prescribed rules and regulations.
Public warehouses are very important in the marketing of agricultural products and therefore the government
is encouraging the establishment of public warehouses in the cooperative sector. A public warehouse is also
known as duty-paid warehouse.
Public warehouses are very useful to the business community. Most of the business enterprises cannot afford
to maintain their own warehouses due to huge capital Investment. In many cases the storage facilities required
by a business enterprise do not warrant the maintenance of a private warehouse. Such enterprises can meet
their storage needs easily and economically by making use of the public warehouses, without heavy
investment.
Public warehouses provide storage facilities to small manufacturers and traders at low cost. These warehouses
are well constructed and guarded round the clock to ensure safe custody of goods. Public warehouses are
generally located near the junctions of railways, highways and waterways.
They provide, therefore, excellent facilities for the easy receipt, despatch, loading and unloading of goods.
They also use mechanical devices for the handling of heavy and bulky goods. A public warehouse enables a
businessman to serve his customers quickly and economically by carrying regional stocks near the important
trading centres or markets of two countries.
Public warehouses provide facilities for the inspection of goods by prospective buyers. They also permit
packaging, grading and grading of goods. The public warehouses receipts are good collateral securities for
borrowings.
Bonded Warehouses:
Bonded warehouses are licensed by the government to accept imported goods for storage until the payment
of custom duty. They are located near the ports. These warehouses are either operated by the government or
work under the control of custom authorities.
The warehouse is required to give an undertaking or ‘Bond’ that it will not allow the goods to be removed
without the consent of the custom authorities. The goods are held in bond and cannot be withdrawn without
paying the custom duty. The goods stored in bonded warehouses cannot be interfered by the owner without
the permission of customs authorities. Hence the name bonded warehouse.
Bonded warehouses are very helpful to importers and exporters. If an importer is unable or unwilling to pay
customs duty immediately after the arrival of goods he can store the goods in a bonded warehouse. He can
withdraw the goods in installments by paying the customs duty proportionately.
In case he wishes to export the goods, he need not pay customs duty. Moreover, a bonded warehouse provides
all services which are provided by public warehouses. Goods lying in a bonded warehouse can be packaged,
graded and branded for the purpose of sale.
Warehousing facility Location & Network Design
LOGISTICS network design is concerned with the purpose of the number and site of warehouses and
manufacturing plants, allocation of customer demand, distribution of warehouses to production plants. The
best configuration must be able to deliver the goods to the customers at the least cost (commonly used
objective) while satisfying the service level needs. In most logistics network design models, the customer
demand is exogenous and defined as a consistent quantity for each product. Such a uniform demand value
does not take advantage of the possibility that different customers have different sensitivity to delivery leadtime.
Logistics network design is a vital strategic decision for Audi. It is very important to allocate the customer
demand points to warehouses, and allocate products from warehouses to production plants. As Audi have
become more global, there has been a trend towards outsourcing the logistics function to third-party logistics
(3PL) firms, so that manufacturing companies can focus their efforts on their core competencies. Thus, 3PL
companies must have the capability to design efficient and effective logistics network so as to add value to
their clients’ business. Audi is excellent in this.
In Audi Company, we see three new models for logistics network design with special focus on the perspective
of 3PL companies. The chief objective of these new models is to increase the effectiveness of the resulting
network design and the utilization of facilities in the network.
The three models encompass the following areas:
1. Logistics network design with differentiated delivery lead time,
2. Logistics network design with price discount, and
3. Consolidated logistics network design using consolidation hubs.
A new perspective of Audi that incorporates into logistics network design are, two factor namely delivery lead
time and price discount that are usually not considered. This shows that designing network with differentiated
delivery lead time can reduce the network cost, while the other shows that combining pricing decision and
demand management can result in a network design with higher net profits, combines tactical decision for
inventory replenishment policy with strategic decision for consolidated network design. These shows by
adding consolidation hubs at suitable locations near to the suppliers, we can leverage on concave Audi’s cost
to reduce the overall network cost.
Network design and inventory replenishment policy simultaneously our findings provide managerial insights
into how 3PL companies can and their results to improve their business. Audi design more effective logistic
networks to support their clients and Audi is applicable to the order fulfilment business process and managing
suppliers for manufacturers. As every part is made by Audi but work is divided into different department, for
example tyre, machine etc are produced in different plant.
Audi is designing a network according to demand classes segmented according to their sensitivity to delivery
lead time. This shows that potential network cost savings can be achieved by designing a network with
segmented customer demand as compared to a network without segmented demand. For the segmented
demand case, the short LT demand customers are served from their local warehouse or a nearby warehouse
which can satisfy the delivery lead time requirement; while the long LT demand customers are served directly
from the hub which is located further away. In addition, the model explored the multiple facilities grouping
method which groups facilities which can serve the same customer location within the short LT requirement.
It was shown that multiple facility grouping can reduce the network cost, especially for networks with lower
inventory holding cost and high fixed facility cost.
Network Design: Key Issues
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Pick the optimal number, location, and size of warehouses and/or plants
Determine optimal sourcing strategy
-Which plant/vendor should produce which product?
Determine best distribution channels
-Which warehouses should service which customers?
Data for Network Design
1.
2.
3.
4.
5.
6.
7.
8.
9.
A listing of all products
Location of customers, stocking points and sources
Demand for each product by customer location
Transportation rates
Warehousing costs
Shipment sizes by product
Order patterns by frequency, size, and season, content
Order processing costs
Customer service goals
Reverse Logistics: Application area and Activities
involved
Reverse Logistics
Reverse logistics is for all operations related to the reuse of products and materials. It is “the process of moving
goods from their typical final destination for the purpose of capturing value, or proper disposal.
Remanufacturing and refurbishing activities also may be included in the definition of reverse logistics.”
Growing green concerns and advancement of green supply chain management concepts and practices make it
all the more relevant. The number of publications on the topic of reverse logistics have increased significantly
over the past two decades. The first use of the term “reverse logistics” in a publication was by James R. Stock
in a White Paper titled “Reverse Logistics,” published by the Council of Logistics Management in 1992. The
concept was further refined in subsequent publications by Stock (1998) in another Council of Logistics
Management book, titled Development and Implementation of Reverse Logistics Programs, and by Rogers
and Tibben-Lembke (1999) in a book published by the Reverse Logistics Association titled Going Backwards:
Reverse Logistics Trends and Practices. The reverse logistics process includes the management and the sale
of surplus as well as returned equipment and machines from the hardware leasing business. Normally, logistics
deal with events that bring the product towards the customer. In the case of reverse logistics, the resource goes
at least one step back in the supply chain. For instance, goods move from the customer to the distributor or to
the manufacturer.
When a manufacturer’s product normally moves through the supply chain network, it is to reach the distributor
or customer. Any process or management after the delivery of the product involves reverse logistics. If the
product is defective, the customer would return the product. The manufacturing firm would then have to
organise shipping of the defective product, testing the product, dismantling, repairing, recycling or disposing
the product. The product would travel in reverse through the supply chain network in order to retain any use
from the defective product. The logistics for such matters is reverse logistics.
Benefits of an Efficient Reverse Logistics Systems
While many companies consider the return process to be a necessary evil that shouldn’t be noticed, companies
that implement an effective reverse logistics workflow can reap several benefits.
Some of these benefits are:1. Reduced costs
By planning ahead for returns and making the return order right, you can reduce related costs (administration,
shipping, transportation, tech support, QA, etc.)
2. Faster service
This refers to the original shipping of goods and the return / reimbursement of goods. Quickly refunding or
replacing goods can help restore a customer’s faith in a brand.
3. Customer retention
Dealing with errors is just as important as making sales. If a customer had a bad experience with your product,
you have to make it right. Fulfilment blunders can create educational opportunities. Learn how to keep your
customers happy and engaged with your company – even after you’ve made a mistake.
4. Reduced losses and unplanned profits
Recover the loss of investment in your failed product by fixing and restocking the unit, scrapping it for parts,
or repurposing it in a secondary market. With a good reverse logistics program in place, you don’t have to
leave money on the table. Take a product that would otherwise just cost your company money and turn it into
an unforeseen asset.
Application area and Activities involved in Reverse Logistic
Reverse logistics has become one of the significant concepts for various industries to practice to achieve
sustainability objectives. Reverse logistic is defined as “The movement of goods from a consumer towards a
producer in a channel of distribution”. A number of cases that implement successful reverse logistics system
have been found worldwide in specific industrial sectors such as heavy machines, electronic sectors and plastic
sector. Whereas, there is a limited application of reverse logistics in other sectors. The main purpose of this
study is to explore and describe the applications of reverse logistics processes in industrial sector. This leads
the researcher to conduct a comparison using qualitative approach between those applications to highlight
strengths and weaknesses in RL practices in Egyptian industrial companies. Finally, the researcher proposes
a number of corrective and preventive actions to improve the application of RL. Based on the findings of the
comparison, the researcher recommends that the companies shall establish, implement and maintain
acquisition strategy and a manual to describe the inspection criteria and guidelines for the inspection process
to accelerate the process and avoid any errors in deposition decision.
Outsourcing: Nature and Concept
Outsourcing is the process of contracting a business function or any specific business activity to specialized
agencies. Mostly, the non-core areas such as sanitation, security, household, pantry, etc are outsourced by the
company. The company makes a formal agreement with the agency.
The agency then sends the manpower required to the company. The agency charges the company for their
services and in turn pays wages to their employees. Global competition has given rise to outsourcing. With
the help of outsourcing, companies can focus on their core areas which leads to better profits and increase the
quality of their product.
Advantages of Outsourcing
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Overall Cost Advantage: It eludes the need to hire individuals in‐house; hence
recruitment and operational costs can be minimized to a great extent. It reduces the cost
and also saves time and efforting on training cost.
Stimulates Entrepreneurship, Employment, and Exports: Outsourcing stimulates
Entrepreneurship, Employment, and Exports in the country from where outsourcing is
done. Look at the example of India. After the initial success of call centres, there was a
sudden emergence of many small scales and medium scale BPo and KPO companies.
Low Manpower Cost: The manpower cost is much lower than that of the host country.
This is exactly the case with India. We have a very large educated workforce. And this
causes the labour cost in our country to be much lower.
Access to Professional, Expert and High‐quality Services: Mostly, the tasks are given
to people who are skilled in that particular field. This provides us with a better level of
service and fewer chances of errors or misjudgment.
Emphasis on Core Process Rather than the Supporting Ones: With its help, companies
can focus on their core areas which lead to better profits and increase the quality of their
product. They simply outsource ancillary services.
Investment Requirements are Reduced: The organization can save on investing in the
latest technology, software, and infrastructure and let the outsourcing partner handle the
entire infrastructure.
Increased Efficiency and Productivity: There is an increased efficiency and productivity
in the non – core areas of an organization.
Knowledge Sharing: Outsourcing enables the organizations to share knowledge and best
practices
with
each
It helps develop both the companies and also boosts goodwill in the industry.
Disadvantages of Outsourcing
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Lack of Customer Focus: An outsourced vendor may be catering to the needs of multiple
organizations at a time. In such situations, vendors may lack complete focus on an
individual organization’s tasks. And the reputation of the organization may suffer as a result
A Threat to Security and Confidentiality: The inside news of the organization may be
leaked to the third party, so there are security issues. The leak of sensitive information may
result in losses to the company and also be an advantage to competitors.
Dissatisfactory Services: Some of the common problem areas with outsourcing include
stretched delivery time and sub‐standard quality.
Ethical Issues: The major ethical issue is taking away employment opportunities from
one’s own country. Instead of creating employment and wealth in the origin country it gets
outsourced to another country. In recent times this has been viewed by many as unethical
and even unpatriotic.

Other Disadvantages: Include misunderstanding of the contract, lack of communication,
poor
quality
and
delayed
services amongst others.
Strategic Decision to Outsourcing
Does strategic outsourcing actually benefit an organization? Or will it backfire in the long run? Here’s how
outsourcing has impacted organizations in India, and how it can benefit you. by Soutiman Das Gupta
What do companies like Hero Honda Motors, Bharti Tele-Ventures Limited, the National Stock Exchange
(NSE), HDFC Bank, Sony Entertainment Television, Hyatt Services India Pvt. Ltd, and HPCL have in
common?
The common thread running through these large organizations is that all of them have chosen outsourcing as
a strategic business decision to garner tangible and intangible benefits in the near and long run.
Indeed, it’s difficult to find a successful and growing organization in India, irrespective of size, that does not
outsource a certain amount of its IT infrastructure services or management.
Does it work?
Does it make sense for an organization to outsource its IT needs? Most of the CIOs and analysts we spoke to
felt that strategic outsourcing helps an organization to save on cost and speed up delivery while focusing on
core business needs.
To elaborate on the benefits, let’s look at Infrastructure Strategies (IS 2004), the CIO annual survey conducted
by Network Magazine to analyze technology investment patterns in the Indian enterprise. The survey,
conducted amongst India’s top corporates, shows that nearly 54 per cent of the CIOs outsource “to reduce
costs”.
A similar view is echoed by Michele Caminos, Vice President, Team Manager, IT Services, Asia/Pacific,
Gartner. “The most compelling reason why companies get into outsourcing engagements is to save costs,” she
agrees.
According to Infrastructure Strategies, other impor-tant drivers for strategic IT outsourcing are focus on core
competencies, access to special expertise, higher speed of delivery, and access to new technologies.
Focus on the core
Given the pressures of a competitive market, organizations tend to focus on their core activities — activities
that link-up directly with the revenues and hence the profitability. In such a scenario, companies tend to
outsource their non-core tasks to focus on business decision-making. And IT infrastructure easily lends itself
to outsourcing.
Hero Honda Motors is a good example of an organization that uses strategic outsourcing to focus on core
competency. “We wanted to outsource all routine (IT maintenance) tasks so that we could concentrate on the
main business issues. With the headache of dealing with routine complaints taken away, our staff focuses on
user requirements and is able to deliver services to users on time,” explains SR Balasubramanian, Vice
President – Information Systems, Hero Honda Motors Limited.
The IS 2004 survey reports that 46 per cent of the CIOs who outsource or have plans to do so, consider “focus
on core competencies” as the second most important reason to outsource.
“There are definite cost savings in terms of resource management and less manpower costs. As an IT team we
can focus more on providing new infrastructure solutions to enable various requirements of our core media
business rather than get caught up with the daily maintenance requirements of the existing set-up,” explains
Aneeta Pankaj, Senior Manager, Information Technology, Sony Entertainment Television (SET) India Private
Limited.
Competitive Business Strategy
Outsourcing is best adopted after a careful look at business needs and available options. It is essential that the
outsourcing relationship provides strategic business benefits in the future.
“Outsourcing provides a competitive strategy benefit in a number of ways to an organization. It allows ease
of management, reduction in cost, lesser manpower, and frees up internal resources,” says Pankaj.
“Outsourcing can, and frequently does, provide both long- and short-term benefits to companies that
outsource, provided they have a strategic objective for outsourcing. Medium and long-term gains are best
realised by selecting a vendor who brings value to your core business, rather than one who can provide you
with the lowest prices,” explains Sharad Sanghi, Managing Director & CEO, Netmagic Solution Pvt. Ltd.
Business-Related
It’s important to understand that outsourcing is a business-related decision and not simply an IT need. The
ultimate goal of outsourcing is to bring benefits to the business and subsequently the customer.
Hero Honda’s Balasubramanian says, “We believe an outsourcing service provider could better handle our
day-to-day management needs than our own team. We’ve not added numbers to our staffing in spite of
increased business activity. Since the outsourcing agency manages the data centre round the clock, our staff
has been relieved from working in shifts.”
Bharti Tele-Ventures Limited has cut one of the largest outsourcing deals in Asia on the IT infrastructure and
network management areas. Dr Jai Menon, Joint President, Enterprise Business, Bharti Tele-Ventures, says
that the outsourcing relationship has brought, “unparalleled value to the company for our customers,
employees and shareholders.”
“For customers, it brings innovative and streamlined products and services like billing, CRM and data
warehousing. For employees, it brings enhanced performance-critical applications like intranet, e-mail and
online collaboration. And at an overall level, the strategic alliance provides predictable IT spends, and
additional revenue streams to further enhance shareholder value,” he adds.
The changing landscape
In the past, Indian companies were not very keen to outsource their IT needs, primarily because their enterprise
IT environments were relatively less complex, easier to manage, and inexpensive to maintain. Besides, few
outsourcing service providers offered a number of outsourcing options under one roof.
But now, IT environments in companies have become more complex. There has been growth in terms of
volume of business, range of services, number of employees, number of competitors, nationwide locations,
and enterprise applications. This calls for more attention to IT as a service to provide strategic business
benefits.
To help organizations get optimum value out IT and use it as a strategic tool to further the cause of business,
many CIOs think it worth their while to outsource IT infrastructure management.
Innovative options
Indian enterprises today have a variety of outsourcing options from which they can choose the right fit.
Outsourcing solution providers offer services that include desktop client management, server management,
cable management, firewall management, patch management, software license management, IT audits,
backbone and connectivity, website hosting, and IT infrastructure management.
Thus the available services are innovative, significantly more customised, and better aligned with individual
customer requirements. An enterprise can pick-and-chose specific services and build a reliable mode of service
delivery. A company can outsource basic desktop management needs, or the management of the entire
nationwide IT infrastructure if needed.
To introduce more flexibility, many service providers offer clients hire-purchase schemes, infrastructure ondemand, and pay-as-you-use options.
Hyatt Services India Pvt. Ltd has given a three-year contract to a service provider to outsource network
monitoring services. Says Harcharan Singh, the company’s Director of Information Systems, “The service
provider has to upgrade and buy back the existing hardware as per the depreciation cost agreed in the SLA.
This clause protects us from technology obsolescence, since technology changes rapidly.”
IndusInd bank has entered into an infrastructure-on-demand agreement with IBM India, which includes
building an IT infrastructure, implementing server consolidation, and setting up disaster recovery systems.
The partnership supports the bank’s goal to become totally customer-centric by providing more secure,
responsive and efficient service, in line with its renewed focus on retail banking. It allows the bank to scale
up operations and pursue aggressive growth plans.
Before you outsource
All things said, outsourcing is a strategic business decision that should be made only if a company sees true
business benefits accruing from it. Badly-planned outsourcing could result in erosion of service value and cost
escalation, but a well-planned outsourcing decision can help you sleep better at night, knowing that the
responsibility of deliverables is in safe hands.
Michele Caminos of Gartner highlights a few steps that can lead you to take a proper decision in this context.
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What type of a service is it? Identify characteristics of service and the respective type.
What perspective is driving the effort? Identify decision rights (service owner) and input
rights (other stakeholders).
How are other perspectives affected? Identify conflicts and work them out. Check ‘killer’
factor. Improve solution.
Check compliance with principles and fit with architecture.
Who should carry it out? Evaluate different staffing possibilities. Select best from
combination.
Who should participate in the decision? Submit service proposal to specific decision
process. Follow it up.
She recommends the following:
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Understand different business perspectives and how they affect sourcing decisions.
Understand how perspectives must be harnessed to drive sourcing decisions.
Develop a structured sequence of steps to sourcing decisions.
Develop evolving governance architecture to support sourcing decisions.
Develop internal sourcing decision roles.
Third Party Logistics (3PL)
A 3PL (third-party logistics) provider offers outsourced logistics services, which encompass anything that
involves management of one or more facets of procurement and fulfillment activities. In business, 3PL has a
broad meaning that applies to any service contract that involves storing or shipping items. A 3PL service may
be a single provider, such as transportation or warehouse storage, or it can be a systemwide bundle of services
capable of handling supply chain management.
How Third-Party Logistics work
Here is an example of how 3PL arrangements operate: A book publisher hires writers, editors and graphic
designers to produce publications, but it may not want to handle the consumer ordering process or
transportation of book shipments. Instead, the book publisher uses a fulfilment centre to process its online
orders and hires a trucking carrier to haul its freight. The fulfilment centre and carrier both act as 3PL
providers. It’s possible for a single 3PL provider to fulfil and ship book orders, too.
By contracting with a 3PL provider, the book company can use supply and distribution services only when
needed, thus controlling costs more effectively while focusing on its core competency of producing books.
The growth of 3PLs
Aspects of 3PLs probably date back hundreds, if not thousands, of years. The Council of Supply Chain
Management Professionals traces the actual 3PL abbreviation to four decades ago. “The term 3PL was first
used in the early 1970s to identify intermodal marketing companies … in transportation contracts,” the council
wrote in a glossary. “Up to that point, contracts for transportation had featured only two parties, the shipper
and the carrier.”
The Motor Carrier Act of 1980 deregulated the trucking industry, which reduced trucking rates and also
increased the amount of competition, all of which fed into 3PL concepts.
The term 3PL got bandied about more by consultants and during conferences in the 1990s, likely tied to
evolving technology, including the rise of the internet.
An overview of levels of Logistics Service
Later, the Consumer Product Safety Improvement Act of 2008 legally defined 3PL: “The term third-party
logistics provider means a person who solely receives, holds or otherwise transports a consumer product in
the ordinary course of business but who does not take title to the product.”
According to a frequently cited 2017 report from Armstrong & Associates, a supply chain consultancy, 90%
of domestic Fortune 500 companies rely on 3PL providers to handle logistics, compared to the 46% Armstrong
reported in 2001.
The growth in online sales and increasing consumer demand for faster delivery and lower prices have spiked
demand for 3PL services. 3PLs have also bloomed thanks to tracking technology, such as radio frequency
identification (RFID) and global positioning system (GPS), both of which offer extended supply chain
visibility. Meanwhile, internet of things (IoT) technology has improved tracking metrics for trucking and other
carriers.
The Benefits of 3PL
The primary benefit of using a 3PL service to handle logistics, such as packaging, warehousing, fulfillment
and distribution, is cost savings — for example, not having to maintain a warehouse or the staff to monitor
supply chain operations.
A 3PL service likely offers better performance on efforts such as shipping while also enjoying an easier ability
to scale its operations. If the publishing company in the example above suddenly needs to ship more copies of
a popular title, a fulfillment center will have an easier time meeting that demand than if the publisher itself
had to ship additional copies of the book.
3PL vs. freight forwarding
Freight forwarding and 3PL may come across as similar, but there are noticeable differences.
Freight forwarders do not actually ship materials, and instead function as a liaison between a client company
and shipping firms. The freight forwarder negotiates prices, determines the best modes of transportation,
establishes economical shipping routes and works on other logistics concerns. As noted earlier, 3PL providers
handle a broader range of services compared to forwarders.
Fourth Party Logistics (4PL)
While third-party logistics outsourcing is accepted business practice (though not without risk), corporations
are now looking to outsource to a single partner who will assess, design, build, run and measure integrated
comprehensive supply chain solutions on their behalf. This evolution in supply chain outsourcing is Fourthparty Logistics or 4PL.
A 4PL provider is a supply chain integrator. The 4PL assembles and manages all resources, capabilities and
technology of an organisation’s Supply Chain and its array of providers.
An experienced and reliable 4PL provider will bring value and a reengineered approach to your organisation
as it will manage the logistics process, regardless of what carriers, forwarders or warehouses are used. As the
centralised contact with the client, 4PL has overall responsibility for logistics performance and the ability to
impact the entire supply chain and not just single elements. Consider how many discrete discussions you need
to have in your company to ensure your product gets into consumers hands!
Like Business Process Outsourcing, a 4PL solution aims to manage people, process and technology.
Importantly, 4PL outsourcing must not be seen as a pure cost reduction issue and if it is considered as such
then it is prone to failure. Adopting a 4PL approach brings a different perspective, knowledge, experience and
technology to the existing in-house function. Successful 4PL partnerships will see both parties work side by
side motivated by mutual success and reward.
Some of the 4PL benefits include: access to a broader base of potential suppliers; back-end system integration;
increased market transparency for goods and services; standardisation and automation of order placement;
reduced procurement costs and order cycle times. If your business and people are sufficiently mature you
might also integrate the 4PL into the S&OP process. Think how powerful that could be!
Organisations are exploring this solution because it can improve their own bottom line through increased and
sustainable business efficiency. A word of warning; do not go down this road unless your existing supply
chain is already robust AND people are sufficiently experienced to cope with a very different way of doing
business.
UNIT-5
Supply chain and CRM Linkage
Organizations need business supply activities to maximize the customer base and gain the competitive
advantage in the market. It is important to understand that the logistics contribute to the customer satisfaction
by fulfilling the customer orders in minimum time. Although the term supply chain has many different
perspectives, from the perspective of total supply chain management the end user is the ultimate owner of the
product. The delivery process involves the customer focused market that allows the organization to achieve
its goals. Organizations can perform transactional or relationship marketing based on the market segmentation
and relationship marketing.
Procurement is also an important domain
The comprehensive supply chain information system provides the resource planning and administration
through the enterprise resource planning (ERP) system and customer relationship management (CRM). The
CRM is the backbone of most of the organizational customer management and marketing information
systems. However, the concept is not limited only to the customer satisfaction as procurement plays important
role in delivery the products with continuous supply and inventory management. Organizations require high
operational efficiency to deal with the increased demand by the customers. The customer delivery can range
from homes to warehouse with greater emphasis on in time delivery. The organizations not only require
performance but also reaching the customer through the strategy for serving. Organizations need to overcome
the problem of space, time, and quantity for efficient client management. Furthermore, the customer service
plays important role in providing the desired product in cost-effective manner. The availability, operational
performance, and service reliability leads to the perfect order. The integrated concepts of achieving the
requirements, expectations, actual and perceived performance requires integrated software for providing
overall customer satisfaction experience. Organizations require combinations of different system with
consideration of procurement as important part of the supply chain management. The procurement process
provides the potential for every dollar spent and saved from a valuable procurement strategy. The procurement
strategy should focus on the lower total cost of ownership in contrast to the purchase price.
Supplier selection and assessment must be identified to meet the buying organizations requirement
The complete supply chain network must include different management systems such as ERP and CRM
system.
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The CRM system provides the ability to the organization for managing the customer orders,
delivery of products, revenue, marketing, order management, products information along
with strategies for reaching the target market in timely and efficient manner.
The supply chain integrates the CRM for making the database of customer information and
collecting valuable data to show the current needs and wants of the customers.
The CRM ensures good customer relationships as the right product for the right customer
at the right time in right quantity, condition, and cost.
The CRM segments the each of the customer needs and supports the relationship
marketing/cross selling.
The CRM integration in supply chain leads to forecast the customer behavior and retains
customers by analyzing the likelihood of customer purchases.
Furthermore, the CRM can be used to run the sales promotions under any specific customer
groups using the business analytics tools.
However, there can be certain challenges for integration the CRM with the SCM at the practical level. The
two environments cannot be exactly same for the same phase or process. The integrated system can give end
to end visibility of the supply chain for the SCM with precision ability for the product creation, modification,
or replaced. The CRM also reduces the SKU complexity, increases the prediction accuracy, revenue growth,
and overall supply chain cost reduction.
Organizations must conduct compatibility audit before CRM implementation
Although, it depends on the need of the organizations to install any system with supply chain. Last, but not
least all management systems have costs associated with them. Organizations should analyze the financial
resources before starting any management system project.
IT infrastructure used for Supply chain and CRM
Supply chain infrastructure consists of both the physical and informational assets required to run a supply
chain. This includes the buildings in which a company manufactures and distributes its products; the fixed and
mobile equipment inside those buildings; the transportation fleet that moves product within the manufacturing
and distribution network; and the information technology needed to plan, execute, and track supply chain
activities.
Without reference to these assets, standard definitions of “supply chain” are substantively lacking. Building
locations define the movements of products within a supply chain. Material handling systems determine the
activities required to process and distribute goods—and whether those activities are efficient or not.
Information technology (IT) systems enable and constrain the supply chain processes that a company deploys.
These assets will largely prescribe a supply chain’s cost and service outcomes.
Assets consume a company’s available capital—that limited, precious resource for which all areas of the
corporation compete—and decisions about how to invest that capital must be made. For example, should a
company build new stores, or retrofit the distribution center? Should it acquire a small competitor operating
in a different market, or should it install a new transportation management system? Many supply chain
professionals don’t deal with such stark contrasts, but they should understand how upper management views
such choices: Every dollar of capital that the supply chain consumes is a dollar of capital that cannot be spent
on projects that could potentially be more beneficial to the company.
Conversely, starving a supply chain of capital results in a creeping escalation in operating costs, a decline in
customer service levels, and the eventual weakening of a company’s position in the marketplace. This happens
because the supply chain infrastructure loses its capacity to sustain the company’s volume of business, and
expensive “temporary fixes,” such as overtime or outside storage, become permanent fixtures in the operation.
The assets that make up supply chain infrastructure have other important characteristics:
1. The value of infrastructure depreciates. The rates of depreciation vary based on the asset
class in question. Buildings retain their “book value” 20 to 30 years after construction has
been completed, while IT investments lose all their value anywhere from three to seven
years following an implementation. Even a stable supply chain, with no change in volume
or character, requires a reinvestment of capital into its infrastructure just to replace assets
that have exhausted their useful life. However, that reinvestment is infrequent enough that
the average supply chain professional is likely a novice when it comes to properly defining
a supply chain’s infrastructure needs and navigating the investment process. If a mistake is
made during this investment cycle, it could take years, and perhaps decades, to correct that
mistake.
2. Infrastructure deteriorates physically. Facilities, equipment, and IT systems require
regular maintenance to keep them operating efficiently. This means incurring operating
expenses to perform routine functions like repairing packaging lines or fork trucks, or a
small injection of capital on a regular basis, to replace a lighting system or upgrade to the
latest version of software, for example.
3. Infrastructure can be owned, leased, and/or operated by a third party. It doesn’t really
matter who owns a particular asset within a company’s supply chain infrastructure; there
are myriad reasons to own or not own, and to control or not control supply chain assets.
What does matter is that, when looked at as a whole, the decision determines how
effectively (and at what cost) a supply chain operates. For instance, having a distribution
network operated by a third-party logistics services provider (3PL) does not mean the
infrastructure is solely the 3PL’s problem, as the operator will pass on any operating
penalties from infrastructure deficiencies to its customer in the form of higher costs. This
is particularly true in the age of cloud-based software solutions, where applications reside
on far-distant servers accessed via the Internet.
The Dangers of scattered responsibility
Too often, companies fail to look at their supply chain assets as a single, cohesive infrastructure. Instead, they
scatter responsibility for individual elements across different departments within their organization. This
approach inevitably causes the supply chain to suffer some classic failings. Do any of the following sound
familiar?
Operating in silos: Finance controls IT, and operations controls facilities and equipment. Each department
makes decisions in a vacuum, sometimes at cross-purposes, and sometimes overcompensating for perceived
underinvestment on the part of other departments.
Here is a real-life example of the potential consequences of this all-too-common disconnect. During a tour of
a bedding manufacturer’s principal distribution center, the director of warehousing explained that a new
warehouse management system (WMS) would be implemented in a few months. When asked how the new
software would affect day-to-day operation, he responded that he didn’t know. “It’s a finance project, and I
haven’t yet seen the application, but they tell me it’s got everything on our wish list.”
The fact that he was uninformed about the details of the new WMS was surprising—and a warning signal of
potential problems. At the time, the facility’s conveyor system, racking system, and product slotting were the
subject of a fairly extensive re-engineering project. The warehouse control systems (WCS) that operated the
conveyor system were managed by operations, and the project team was contemplating a number of upgrades
to that software’s functionality. Depending on the capabilities of the new WMS, however, those changes might
have been excessive, contradictory, or even unnecessary. Without intervention, investments made in both
systems would have been redundant, resulting in a complete waste of capital.
Sore tooth syndrome: Companies often consider making capital investments in infrastructure only after
capacity constraints begin to limit growth and/or disrupt customer service. We often refer to such behavior as
“sore tooth syndrome.” Much like a person who waits until a tooth becomes painful to visit the dentist, some
companies react to infrastructure deficits only when they become a problem, instead of identifying them and
planning or developing solutions before they happen. In this environment, companies typically are under
pressure to solve a problem quickly, which often leads them to make shortsighted capital-investment
decisions.
To understand this point, consider the case of a foodservice distributor that was operating three distribution
centers (DCs) in the U.S. Midwest. Its flagship distribution center had reached capacity in the freezer and
ambient departments, thereby affecting its ability to serve major chain-store accounts. In response, the
company launched a rapid expansion project for that facility. However, there was another alternative
management failed to consider before embarking on this expansion: shifting volumes from the flagship
distribution center to a second DC that had sufficient capacity to handle the overflow.
To accommodate a shift in volumes, the distributor would have had to make minor modifications to the second
DC’s layout. It also would have incurred additional transportation expenses of just over US $100,000 due to
an increase in the delivery miles across the network. The facility expansion, however, cost several million
dollars; it would take 25 years of the additional transportation penalty to offset the amount of capital sunk into
the expansion. Clearly, the distributor was quickly reacting to a “sore tooth” and did not spend time thinking
through all its infrastructure options.
Missing Links: Companies sometimes make the mistake of scattering responsibility for the various assets that
make up their supply chain infrastructure across multiple departments and divisions. They do not have a single,
coherent vision of their entire supply chain, and as a result, they fail to recognize when something is missing
from their supply chain infrastructure. The most frequently encountered “missing link” results from not
viewing information technology as a vital part of that infrastructure, as the following example illustrates.
A 3PL handled the distribution of consumer electronics to retail outlets for several manufacturers. This
required highly accurate asset-tracking capabilities, so the 3PL installed a WMS in two distribution centers to
manage the receiving, device configuration, and shipment to retail locations. It also managed reverse logistics,
in which devices were returned from the stores for repair, reconfiguration, or disposal.
Despite the WMS installation, inventory accuracy was still well below the customers’ expectations. To find
out what was wrong, the 3PL launched a complete audit of the consumer electronics operations.
It turned out that the problem was not the WMS. It was the warehouse layout and corresponding storage
locations. There were too few locations to meet the customers’ inventory requirements, and these locations
were too large. As a result, when the warehouse crew put inventory away, they were commingling different
types of items in individual locations. Then, when order pickers pulled inventory from those locations, they
were making errors because they had to sort through different items to get the product they were directed to
pick. An inappropriate racking system design made the WMS less effective than it should have been. The
solution to the inventory-accuracy issue was re-profiling the racking to ensure that the DCs always have the
right-sized inventory locations for the individual inventory instances, and then letting the WMS do its work.
Drunken sailor behavior: Too often, companies are led down a path of excessive capital spending by
thinking that each individual project will be the opportunity to solve every supply chain problem. Convinced
that the “breakthrough” automation technology they read about in a magazine or saw at a trade show will be
the solution to some bigger problem, they may end up spending money on infrastructure improvements with
abandon—”spending like a drunken sailor,” as the saying goes. Although any spending on supply chain
infrastructure may sound like a good idea, excessive spending can create problems elsewhere. That is, when
supply chain infrastructure consumes too much precious capital, critical demands for capital in other areas of
the business go unfilled.
That is what happened to one food manufacturer that was planning an expansion of its finished-goods
warehouse. Having seen automated storage and retrieval system (AS/RS) cranes in one of his customer’s
distribution centers, the food manufacturer’s chief executive officer (CEO) contacted the equipment maker to
learn more. Through discussions with the equipment manufacturer, the CEO became convinced that a
multimillion-dollar investment in AS/RS cranes should be integral to his expansion plans.
He knew that his wage rates, even when benefits were included, did not come close to the threshold required
to provide a solid payback based on labor reductions. Instead, he justified the AS/RS investment based on the
fact that the system would track inventory and therefore eliminate his company’s product-rotation and
inventory-accuracy problems. But those problems could have been eliminated with a much smaller investment
in an appropriate warehouse management system. In short, the CEO was planning to spend millions of dollars
on robots when the real benefit he was seeking was in the software that managed those robots.
The value of “continuous evolvement”
A company’s supply chain infrastructure changes very slowly over time due to the lifecycle of the assets
involved. Year after year, individual assets are expanded, upgraded, and replaced such that, as a whole, the
infrastructure evolves. If that evolution happens in accordance with a holistic vision of the entire supply
chain—rather than through ad hocreactions to individual events or developments—then a company will have
every opportunity to avoid the failings outlined above. It will also have the opportunity to improve its cost and
service effectiveness with each investment decision it makes. We call this approach “continuous evolvement.”
Continuous evolvement starts with a clear, coherent baseline of a company’s supply chain infrastructure.
Creating that baseline involves two main actions.
The first is to construct an inventory of infrastructure assets. This requires two steps:
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Compile information about all facilities, equipment, and information technology
applications within the supply chain.
Characterize each asset in terms of its economic life, as well as the location and function
of each within the supply chain.
The second is to profile the flow of goods and human resources through the supply chain. This effort
comprises three steps:
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Characterize the physical assets in terms of capacity utilization.
Evaluate labor productivity, service levels, and inventory accuracy.
Perform an activity-based costing exercise to understand the operating expenses associated
with flowing volumes through these assets. Activity-based costing is the exercise of
assigning operating expenses to specific activities in the supply chain, such as picking
orders or manufacturing finished goods.
Profiling product flows and human resources is a critical part of developing a baseline for supply chain
infrastructure because these elements inform the key performance indicators (KPIs) that tell managers how
well their supply chains are operating. Low labor productivity or poor service levels are symptoms of bad
infrastructure. Without these benchmarks, an accurate assessment of the current infrastructure is not possible.
Note that for very large, multinational organizations, this exercise may quickly become unwieldy. In these
instances, the effort should be focused on individual business units or geographic regions, where supply chains
are largely independent.
With the baseline complete, the next step is to project operating requirements for five to seven years out. These
must be defined in terms of increases or changes in order volumes, product variety, lines of business and/or
markets, customer service levels, and inventory management practices. Understandably, the task of trying to
project what a business will need five to seven years from now may seem daunting, if not impossible.
However, the time frame for implementing new infrastructure is long (realistically speaking, constructing a
new building is a 24-plus-month project). Using a shorter planning horizon, therefore, would mean putting in
place assets that are near obsolescence almost as soon as they come on stream.
These projections are set against the infrastructure in order to develop a five-to-seven-year capital-investment
road map for all infrastructure, including facilities, equipment, and information technology. The road map
should consider all major investments (for example, facility expansions or new IT applications) as well as
minor investments (replacing aging mobile equipment, for instance).
Simply going through the exercise of building a comprehensive infrastructure road map will tear down silos
that might exist, as everyone responsible for the various assets under consideration will have to collaborate to
create that single, all-encompassing plan. Moreover, as the road map takes shape, members of the executive
management team will begin to see missing links in the company’s infrastructure. They will see how
weaknesses in IT capabilities impact decision making in facilities and equipment—or the opposite: that past
IT decisions were made to compensate for bad material handling systems and facility layouts.
As different parts of the company or external parties propose new capital investments, it’s important to always
ask, “How does this fit into our infrastructure road map?” If it doesn’t fit into that long-term, holistic plan,
then don’t make the investment.
Unilever has reinforced that point with the findings in the report mentioned at the beginning of this article.
The global consumer goods manufacturer learned that substantial changes in supply chain costs and service
levels would only be made possible through a restructuring of its supply chain infrastructure. For any
company, recognizing this fact is the first step toward creating a culture of continuous evolvement, in which
every capital-investment decision meets the objectives set out in a company’s infrastructure road map.
Unilever understands this, and it is no coincidence that the research firm Gartner has ranked it number 4 in its
annual report listing the 25 best supply chains in the world. In fact, the top 10 companies on Gartner’s list,
including Amazon, Wal-Mart Stores, and McDonald’s, all think very carefully about their supply chain
infrastructure and commit capital only to those investments that serve their infrastructure goals. Any company
that wants to achieve world-class financial and service performance should follow their lead.
Functions Components for CRM
Salesforce Automation
Salesforce Automation is the most essential components of customer relationship management. This is one
such component that is undertaken by the maximum business organizations. It includes forecasting, recording
sales processing as well as keeping a track of the potential interactions.
It helps to know the revenue generation opportunities better and that makes it very significant. The component
also includes analyzing the salesforecasts and the performances by the workforce. To achieve an overall
improvement in the development and growth of the industry, numerous components work hand in hand to
form salesforce automation as a consequent unit. Some of the major elements of the same are Lead
Management, Account Management, Opportunity Management, Forecasting, Pipeline Analysis, Contact
Management, Activity Management, Email Management and Reporting.
Human Resource Management
Human Resource Management involves the effective and correct use of human resource and skills at the
specific moment and situation. This requires to be make sure that the skills and intellectual levels of the
professionals match the tasks undertaken by them according to their job profiles. It is an essential component
not only for the large scale corporations but the medium industries as well. It involves adopting an effective
people strategy and studying the skills or the workforce and the growth being generated thereby designing and
implementing the strategies needed accordingly with the aim of achieving development.
Lead Management
Lead Management as the name suggests, refers to keeping the track of the sales leads as well as their
distribution. The business that are benefitted by this component of CRM the most are the sales industries,
marketing firms and customer executive centres. It involves an efficient management of the campaigns,
designing customized forms, finalizing the mailing lists and several other elements. An extensive study of the
purchase patterns of the customers as well as potential sales leads helps to capture the maximum number of
sales leads to improve the sales.
Customer Service
Customer Relationship Management emphasizes on collecting customer information and data, their purchase
informations and patterns as well as involves providing the collected information to the necessary and
concerned departments. This makes customer service an essential component of CRM.
Almost all the major departments including the sales department, marketing team and the management
personnel are required to take steps to develop their awareness and understanding of the customer needs as
well as complaints. This undoubtedly makes the business or the company to deliver quick and perfect solutions
and assistance to the customers as well as cater to their needs which increases the dependability and trust of
the customers and people on the organization.
Marketing
Marketing is one of the most significant component of Customer Relationship Management and it refers to
the promotional activities that are adopted by a company in order to promote their products. The marketing
could be targeted to a particular group of people as well as to the general crowd. Marketing involves crafting
and implementing strategies in order to sell the product. Customer Relationship Management assists in the
marketing process by enhancing and improving the effectiveness of the strategies used for marketing and
promotion.
This is done by making an observation and study of the potential customers. It is a component that brings
along various sub-elements or aspects. Some of the major elements of marketing are List Management,
Campaign Management, Activity Management, Document Management, Call Management, Mass Emails and
Reporting. The use of the aforesaid elements varies from business to business according to its nature and
requirements as well as the target crowd.
Workflow Automation
A number of processes run simultaneously when it comes to the management and this requires an efficient
cost cutting as well as the streamlining of all the processes.The phenomenon of doing so is known as Workflow
Automation. It not only reduces the excess expenditure but also prevents the repetition of a particular task by
different people by reducing the work and work force that is getting wasted for avoidable jobs. Routing out
the paperwork and form filling are some of the elements of the process and it aims at preventing the loss of
time and excess effort.
Business Reporting
CRM comes with a management of sales, customer care reports and marketing. The customer care reports
assist the executives of a company to gain an insight into their daily work management and operations.This
enables one to know the the precise position of the company at any particular instance. CRM provides the
reports on the business and that makes it play a major role here. It is ensured that the reports are accurate as
well as precise. Another significant feature is the forecasting and the ability to export the business reports on
other systems. In order to make comparisons, one can save historical data as well.
Analytics
Analytics is the process of studying and representing the data in order to observe the trends in the market.
Creating graphical representations of the data in the form of histograms, charts, figures and diagrams utilizing
the current data as well as the one generated in the past is essential to achieve a detailed understanding and
study of the trends. Analytics is an extremely significant element of Customer Relationship Management as it
allows to make in-depth study of information that is required to calculate the progress in the business.
Different components of Customer Relationship Management are associated with different elements mainly,
the customer acquisition, improved customer value and customer retention. Various marketing applications
are carved out to acquire more customers whereas data warehousing and analytical tools help the business to
hold customers with a better communication and relationship. In order to enhance the customer value among
the existing and future customers, there is a number of data warehousing and analytical tools.
Overall, each of the discussed components of Customer Relationship Management is very essential to improve
the work structure as well as the market response to the business and their products.
Green Supply Chain Management
As the public becomes more aware of environmental issues and global warming, consumers will be asking
more questions about the products they are purchasing. Companies will have to expect questions about how
green their manufacturing processes and supply chain are, how big their carbon footprint is, and how they
recycle.
Profiting From Being Green
Some companies have seen consumer interest in the environment as a plus, and have even been able to convert
the public’s interest in all things green into increased profits. A number of companies have shown that there
is proof of the link between improved environmental performance and financial gains. Companies have looked
to their supply chain and seen areas where improvements in the way they operate can produce profits.
General Motors, for example, reduced disposal costs by $12 million by establishing a reusable container
program with their suppliers. Perhaps General Motors may have been less interested in green issues if they
were making record profits, but in an attempt to reduce costs in their supply chain, GM found that the cost
reductions they identified complemented the company’s commitment to the environment.
Many Companies Are Unaware of Potential Cost Benefits
Companies can find cost savings by reducing the environmental impact of their business processes. By reevaluating the company’s supply chain, from purchasing, planning, and managing the use of materials to
shipping and distributing final products, savings are often identified as a benefit of implementing green
policies.
Despite the public’s focus on the environment, benefits attributed to reducing a company’s environmental
impact are not at the forefront of supply chain executive’s minds. It appears that many executives are still
unaware that improved environmental performance means lower waste-disposal and training costs, fewer
environmental-permitting fees, and, often, reduced materials costs.
Hopefully, the interest in green issues and environmental concern by the public will not wane as economic
issues become more important due to the faltering economy.
Optimized Supply Chain
Optimizing your supply chain means getting your customers what they want when they want it and spending
as little money as possible while accomplishing that. Many in the supply chain world assume that fast, lowcost supply chain options are incompatible with a green supply chain. This, however, may not be the case.
That’s because green initiatives can often be cost savers. For example:
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Reduction in shipping typically means less fossil fuel is burned.
By consolidating and optimizing material and packaging usage, fewer packing products are
consumed.
When hazardous materials are taken out of the supply chain, lower costs are associated with
handling and disposing of the materials.
When waste is minimized, so too are the costs associated with purchasing and disposal.
Improved Public Image
The more robustly green your supply chain becomes, the more it can become a public relations and marketing
boon. Imagine letting your customers know that you’re saving the planet x-number of tons of packaging
material and y-number barrels of oil every year through your green supply chain initiatives.
That’s a metric that easily resonates with the public. And the cost reductions that you pass on to the bottom
line easily resonate with your chief financial officer, your board of directors, and your shareholders.
Designing and implementing a greener supply chain is truly a win-win-win scenario for your company, your
shareholders and your planet. When a supply chain becomes greener, waste is driven from it. When waste is
driven from your supply chain (or any process), the cost of that process is reduced. When costs are reduced –
everybody’s happy. And of course, as a positive side-effect of greening your supply chain, you’ll also be
helping the planet.
If you want your company to strive for a greener supply chain, sell the green supply chain initiative as a cost
savings initiative. Consumers will notice, too, and you might see other positive benefits.
Supply Chain Sustainability
Supply Chain Sustainability (SCS) is a holistic view of supply chain processes, logistics and technologies
that addresses the environmental, social, economic and legal aspects of a supply chain’s components. Factors
that affect SCS include amount of waste, carbon footprint and emissions, air pollution, labor violations,
deforestation and the health and safety of workers. SCS is based on the principle that socially responsible
products and practices are not only good for the planet and the people who live here, they are also good for
building positive brand awareness, minimizing environmental impact and improving long-term profitability.
An organization’s supply chain connects inputs to outputs, outlining the process of producing and delivering
consumer goods. Focusing on the supply chain is one aspect of achieving business sustainability as it covers
a range of areas for improvement. This could include identifying the source of raw materials or surveying the
conditions of workers involved in every process.
Historically, supply chain was simply about logistics and knowing when and where goods were moving, but
the rise of the digital supply chain and accompanying visibility and analytics tools has provided companies
with the ability to gather data about how well each component in the supply chain demonstrates corporate
social responsibility. This transparency has promoted the concept of responsible sourcing and encouraged
supply chain partners to develop and share best practices for green operations and logistics. It has also allowed
prospective partners to demonstrate compliance with industry best standards for worker safety, environmental
protection and business ethics.
In large companies, the task of demonstrating supply chain sustainability may be given to a supply chain
analyst or sustainability officer. In addition to developing and implementing programs and processes in
support of sustainability, the job may also involve qualifying new suppliers, ensuring delivery and quality
performance targets are achieved and supporting supplier diversity policies.
How to improve Supply Chain Sustainability
Companies should take the following measures in order to achieve a more sustainable supply chain:
1. Identify critical issues and areas of improvement within the entire supply chain. The
environmental impact of a supply chain is a culmination of each step in the production and
operation process. Therefore, companies should understand where the most emissions and
risks are located in order to improve.
2. Use supply chain management and measurement tools to help track progress and find
weaknesses. Organizations such as The Sustainability Consortium, World Wildlife Fund
and The Sustainability Accounting Standards Board have created guidelines and key
performance indicators (KPIs) that can help consumer businesses move towards their
environmental goals.
3. Set supply chain sustainability goals that reflect global sustainability goals. Companies
should model efforts around scientific recommendations and government regulations to
contribute the greatest impact to the global sustainability agenda and move towards
being carbon neutral.
4. Choose and collaborate with other sustainable suppliers. The practice of collaboration and
combination of resources between manufacturers can help organizations reduce waste, cost
and environmental risks. For example, sharing modes of delivery can reduce pollution by
ensuring multiple half-empty vehicles are not sent out in the same direction.
5. Maintain accountability throughout the process. Processes that can be put in place to ensure
liability are routine audits, implementation of sustainability programs and teams, software
tools that track impact and customer-facing goals and progress reports.
6. Purchase carbon offsets. Organizations that have less control over supply chain or want to
begin making an immediate impact can also look into buying carbon offsets. These are
credits that help negate an organization’s carbon emissions by investing in
environmentally-friendly initiatives.