LOGISTICS
NOTES
Logistics
Logistics is the process of planning and executing the efficient transportation and storage of
goods from the point of origin to the point of consumption. The goal of logistics is to meet
customer requirements in a timely, cost-effective manner.
Originally, logistics played the vital role of orchestrating the movement of military personnel,
equipment and goods. Today, the term logistics applies to any context that requires moving
commercial goods within the supply chain.
Military logistics is the discipline of planning and carrying out the movement and maintenance
of military forces. In its most comprehensive sense, it is those aspects or military operations
that deal with:
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Design, development, acquisition, storage, distribution, maintenance, evacuation, and
disposition of materiel.
Transport of personnel.
Acquisition or construction, maintenance, operation, and disposition of facilities.
Acquisition or furnishing of services.
Medical and health service support
Logistics, including reverse logistics, is the comprehensive process of planning, implementing,
and controlling the efficient and effective flow and storage of goods, materials or parts and all
related information from their point of origin to their destination and, when necessary, in the
opposite direction, with the ultimate goal of meeting customer requirements. This process
encompasses a wide range of activities, such as procurement, production, inventory
management, transportation, distribution, returns management, and even disposal, all while
focusing on efficiency, sustainability, and customer satisfaction.
Many companies provide logistics services to manufacturers, retailers and other industries with
a large need to transport goods. Some of these logistics providers own the full range of
infrastructure, from jet planes and trucks to warehouses and software, while others specialize in
one or two parts. DHL, FedEx and UPS are well-known logistics providers.
Typically, large retailers and manufacturers own major parts of their logistics network. Most
companies, however, outsource the function to third-party logistics (3PL) or fourth-party
logistics (4PL) providers. A business might turn to a 3PL provider to manage specific aspects of
logistics, such as warehousing, while retaining some oversight of these operations. Businesses
outsource all aspects of logistics to 4PL providers, including oversight and management.
Outsourcing an entire supply chain relieves customers of time-consuming and costly logistics
processes.
What are the functions of logistics?
Transportation and warehousing are the two major functions of the logistics industry.
Transportation management focuses on planning, optimizing and executing the use of vehicles
to move goods between warehouses, retail locations and customers. The transportation is
multimodal and can include ocean, air, rail and roads.
Not surprisingly, transportation management is a complex process that involves planning and
optimizing routes and shipment loads, order management, freight auditing and payment.
Carrier management is an important aspect since the price, availability and capacity of
transportation carriers varies widely. Logistics companies typically use transportation
management system (TMS) software to help meet the demands of transport-related logistics.
On-time delivery of intact packages has always been important throughout the supply chain
process. However, it has become even more critical in recent years as omnichannel commerce
has becomes more common. Suppliers, manufacturers, distributors and retailers have had to
improve their logistics processes to meet the demand for faster, more convenient delivery of a
large number and variety of goods. They also have had to better integrate their processes and
systems, implementing ways to improve supply chain visibility.
Difference between logistics and supply chain management
Logistics management is an important component of supply chain management (SCM), and the
terms are sometimes used interchangeably.
Logistics management
Logistics management focuses on materials handling and managing the movement of finished
products as efficiently as possible. The terms inbound logistics and outbound logistics are used
to denote logistics for goods arriving at or leaving a facility, respectively.
Another important category of logistics management is reverse logistics. This is the process
used to return a product to a distribution center for servicing, refurbishing, decommissioning
and recycling. This is especially pertinent to e-commerce.
Supply chain management
SCM encompasses a much broader range of supply chain planning activities. These include
demand planning, sales and operations planning, and supply chain execution, including strategic
sourcing and transportation management.
Differences between forward and reverse logistics
THE FOUR LINKAGES THROUGHOUT A TYPICAL SUPPLY CHAIN
Inbound Logistics
*Get the first part from your book*
These activities are critical to the smooth operation of inbound logistics and the efficient flow of
goods into a company’s production process. By effectively managing these activities, businesses
can reduce costs, improve supply chain visibility, and increase competitiveness in the market.
Challenges
Shipping inefficiency: Delays or disruptions in the transportation of goods can lead to increased
costs and reduced efficiency in the production process. Traffic congestion, bad weather, or
problems with the transportation provider can cause these delays.
Information vacuum: Lack of visibility into the movement of goods can make it challenging to
track progress and identify potential problems. This can be caused by a need for more
communication between the company, its suppliers, or logistics providers or problems with
tracking systems.
Supply and demand balance: Maintaining the right balance between the supply of materials and
the demand for finished products can be challenging. This can be especially difficult when
demand is fluctuating or when there are unexpected changes in the supply chain.
Capacity constraints: Insufficient storage or production capacity can limit a company’s ability to
manage inbound logistics efficiently. This can lead to delays in the production process and may
require the company to invest in additional facilities or equipment.
Quality issues: Poor quality materials or components can lead to defects in the finished product,
which can have a negative impact on customer satisfaction and the company’s reputation.
Ensuring the quality of materials is a crucial challenge in inbound logistics.
How to Optimize it
Implementing an advanced planning and scheduling system: Businesses can more effectively
plan and coordinate their inbound logistics activities by using a system that can track the
movement of goods and anticipate demand. This can reduce delays and improve the efficiency
of the production process.
Developing solid relationships with suppliers: Building strong, collaborative relationships with
suppliers can help improve delivery reliability and timeliness. This can be achieved through
regular communication, mutual trust, and shared goals.
Leveraging technology: By using technology such as transportation management systems,
warehouse management systems, and inventory control systems, businesses can improve the
visibility and control of their inbound logistics process. This can reduce costs, improve efficiency,
and increase customer satisfaction.
Improving transportation and storage: By optimizing the transportation and storage of goods,
businesses can reduce costs and improve the efficiency of their inbound logistics process. This
may involve choosing the most cost-effective carriers, using efficient storage methods, and
implementing inventory management systems.
Focusing on quality: Ensuring the quality of materials is a critical factor in optimizing inbound
logistics. By working with reliable suppliers, implementing quality control measures, and
monitoring the quality of materials throughout the process, businesses can reduce defects and
improve the overall efficiency of their inbound logistics.
Stages in Inbound Logistics
1. Planning: Identifying the materials or components needed for production and
developing a plan to source, purchase, and transport them.
• Establish clear objectives and goals for the inbound logistics process.
• Identify the types of goods and materials that need to be sourced and the quantities
required.
• Determine the most cost-effective and efficient means of transportation.
• Develop a schedule for receiving goods and materials.
• Consider potential risks or challenges during the inbound logistics process and plan
accordingly.
2. Sourcing: Identifying and selecting suppliers that can provide the needed materials or
components at a competitive price and with reliable delivery.
• Identify and evaluate potential suppliers.
• Negotiate terms and conditions, including pricing, delivery schedules, and payment
terms.
• Select the most suitable supplier based on the organization’s needs and preferences.
• Maintain ongoing communication with the supplier to ensure that the relationship is
mutually beneficial.
3. Purchasing: Negotiating purchase agreements with suppliers, including pricing, delivery
schedules, and payment terms.
• Prepare and issue purchase orders to suppliers.
• Monitor the order’s progress and ensure it is delivered on time and in the required
quantity.
• Review and verify invoices to ensure they match the purchase order terms.
• Process payments to suppliers in a timely manner.
4. Transportation: Coordinating the movement of goods from suppliers to the company’s
warehouses or production facilities.
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Coordinate the movement of goods from the supplier to the organization.
Select the most suitable mode of transportation based on factors such as cost, time, and
type of goods.
Monitor the progress of the transportation and ensure that it is carried out following the
agreed-upon schedule.
Maintain ongoing communication with the transportation provider to address any issues
or delays promptly.
5. Storage: Organizing and storing materials in a way that allows for efficient retrieval and
use in the production process.
• Determine the appropriate location for storing goods and materials.
• Organize and label storage areas to ensure that goods can be easily located and
retrieved as needed.
• Implement appropriate security measures to protect against theft or damage.
• Monitor the condition of stored goods and materials and take any necessary action to
ensure their quality and integrity.
6. Inventory management: Tracking the movement of materials and ensuring that sufficient
quantities are available to meet production needs.
• Regularly review and update the organization’s inventory levels to ensure they are
sufficient to meet demand.
• Monitor the expiration dates of perishable items and take any necessary action to
prevent waste.
• Implement an inventory management system to track and manage inventory levels,
including barcodes or RFID tags.
• Conduct regular physical inventory counts to verify the accuracy of the inventory
management system.
Outbound Logistics
Outbound logistics is the process of managing and controlling the storage, transportation, and
delivery of goods to their end customers. In other words, it’s all about how your business moves
finished inventory out of your supply chain – and fulfills customers’ orders.
Many elements go into a successful outbound logistics process for a business. These include
inventory management, order management, packaging procedures, and distribution networks.
Preparing each order and delivering it on-time to the appropriate location is critical for a
successful sale – and with a streamlined outbound logistics process, you’ll get it done every
time.
Steps in Outbound Logistics
Storage
The storage process depends on a warehouse using the correct methods to keep the finished
goods in a safe environment and ensuring they’re easy for staff to access. Because a customer
can order a product at any time, effective organization of the warehouse is essential. It can also
be more cost-efficient to store as little product as possible because stored goods aren’t earning
a profit, and they occupy space the business can use for other purposes.
Transportation
Transportation is the main process of outbound logistics. Logistics depends on transportation,
and companies try to move products from one location to another as efficiently as possible
while using the most effective methods. Many factors impact transportation, such as:
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Delays(which can arise due to bad whether, bad roads, very long journeys during which a
driver may need to rest for example)
Fluctuations in fuel prices
The dependability of the transport team
Businesses consider these external influences when planning for efficiency. For example, if a
company combines a delayed shipment with products that are about to leave on schedule, it
can keep the rest of the deliveries on schedule, saving time and money.
Elements of Outbound Logistics
Warehousing
Warehouse management is the process of keeping your products safe and ready for a potential
purchase. You may store them in your own warehouse or one owned by a third-party logistics
provider. One option is far more cost-effective than the other, but each has their own benefits.
Inventory Management
One of the most important considerations for any business is the way you pick, pack, and store
your finished goods in the right place. Inventory management ideally integrates with software
systems so you can keep track of your own inventory and prepare it for shipment at a moment’s
notice.
Transportation
The transportation element of outbound logistics is how you ship your products to various
distribution or fulfillment centers. This is usually handled by freight trucks, planes, or even ships.
In many instances, this is the make-or-break point of how well a business does in sales each
year – so make sure this aspect of your supply chain operates like a well-oiled machine.
Last-Mile Delivery
Last-mile delivery is the final step of the outbound logistics process in your supply chain. Its
called “last mile,” cause its the final leg of the supply chain, where goods are transported from a
distribution center or local hub to their ultimate destination, which is typically a customer’s
doorstep or a retail store. This involves route planning and optimization, fleet management,
vehicle tracking, and Proof of Delivery.
Benefits of optimized outbound deliveries
If you’re able to improve your outbound delivery logistics, you’ll not only increase customer
satisfaction but also reduce your overall costs. And you know what that means – higher profits
at the end of the day.
With an optimized route management system in place, you’ll cut costs on fuel and drive time.
This means less money spent at the pump and fewer hours on the road for your drivers. Your
business will keep that money, and your customers will receive their products faster.
Delivery speed is actually ranked among the highest factors in customer satisfaction. That’s why
so many people opt to pay for same-day delivery from their favorite retailers. If you speed up
the time it takes you to get your products to distribution centers and retailers, your customers
won’t have to worry about exceedingly long wait times to get the products they want most.
Optimizing your outbound logistics
Improving your outbound logistics is all about optimizing every process with the latest
techniques and technology. Here are some ways your business can accomplish this:
Route Optimization Finding the best routes for delivery drivers is key for getting your goods
to distribution centers and to your customers as quickly and efficiently as possible. However,
this doesn’t always mean seeking the shortest route – most of the time, it’s about minimizing
external factors. Fortunately, route optimization software’s exist that can dramatically help with
this process.
Dispatch Management Satisfying your customers’ needs by moving your products when and
where they’re needed comes down to proper dispatch management. You must match customer
requests and have the delivery drivers needed to complete the transportation – every time. This
requires reducing your service time and labor costs by assigning the right driver at the right time
to ensure timely, complete deliveries.
Components of outbound logistics
Outbound logistics comprises the following core components:
Outbound process
There are numerous essential stages that businesses follow in the outbound logistics process.
For example, if a sales department receives a customer purchase order, it first checks the
inventory to confirm it can fulfill the order. The department then sends this order to the
warehouse, where staff find the product and pack it for delivery to the client. The sales team
then charges the customer for the order.
Channels of distribution
Many businesses use channels of distribution instead of working directly with the client. A
channel of distribution can be an individual or another business that specializes in distribution.
For example, a company that manufactures chairs may have a variety of clients in its distribution
channels.
These channels may be websites, shops or other vendors, and they’re responsible for
promoting, storing and transporting the chairs. A key part of outbound logistics is selecting
distributors that promote the product and have a strong delivery network, which can provide
greater reliability.
Inventory system
An effective inventory system is essential for ensuring outbound procedures operate efficiently.
Businesses often use their past sales and inventory record to predict future demand and make
certain they have enough goods to fulfill orders. Having too much or too little product can cause
challenges for a business, whereas having the right quantity can increase the order fulfillment
rate and raise profits.
Delivery optimization
Optimizing distribution and delivery is another essential component of outbound logistics. A
common approach is to use system barcode scanning for inventory tracking. This helps to keep
the client updated on the status of the order, and it helps to prevent errors by making them
easily identifiable to both the customer and the fulfilling business. Such a process allows the
business to meet its delivery deadlines and increase customer satisfaction.
The 4 steps of the outbound logistics process
Outbound logistics includes several steps, and understanding how to complete this process can
help a business improve its processes. Here are the four steps for completing the outbound
logistics process:
1. Order validation
Order validation involves scanning orders for potential errors or duplications so the business can
ensure it’s sending the correct product in the correct amounts. Businesses often allow
customers to edit their orders by adding, changing or removing items, or they can delete entire
orders before the items are ready for delivery. Having a strong order validation process can help
notify a business of any changes in an order and establish a consistent protocol for responding
to them.
2. Replenishment
Replenishment is how a company prepares for future deliveries by replacing products after
customers order them. This can include moving existing goods from a secondary storage
location to a primary one, or it can be a business producing new goods to move into storage.
The replenishment process enables businesses to remain prepared for orders, and
preparedness can reduce production or delivery delays while ensuring the efficiency of its
outbound logistics.
3. Final inspection, packing and loading
After producing a product and before shipping it, a business ordinarily has a team inspect the
product to ensure it functions properly and meets quality standards. If it does, the team labels
and packs the product before loading it for shipment. Having an effective inspection process can
reduce returns or repeat shipments and increase customer satisfaction.
4. Shipment
The final step in the outbound process is the distribution of the product to its intended location.
The shipping team can record the process, along with any notes for documentation.
Later, the business can refer to the documentation should it be necessary to respond to
customer feedback. With an order-tracking system, the business can record each step of the
delivery process to ensure there are no delays, and it can address any shipping challenges as
they arise to ensure successful delivery.
Intraorganisational Movements
Intraorganisational movements refer to changes or transitions that occur within an organization.
They include;
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Job rotation
it is the systematic movement of employees from one job to another within the
organization to achieve various human resources objectives such as orienting new
employees, training employees, enhancing career development, and preventing job
boredom or burnout. The practice of moving employees between different tasks to
promote experience and variety. Employees move between different roles or
departments within the same organization. This can help them gain diverse skills and
experiences.
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Promotions
An employee promotion is a recognition for that person’s contribution to your company.
Employee promotions can come in many forms, but typically will involve some
combination of: Higher salary. More senior job title. More and higher-level
responsibilities. Promotion is transferring an employee to a new position that commands
higher pay, privileges, or status than the old one, and it is a vertical move in rank and
responsibility. Promotion is vertical movement of an employee within the organization.
In other words, promotion refers to the upward movement of an employee from one job
to another higher one, with increase in salary, status and responsibilities. A horizontal
promotion is when an employee moves to a new position at the same level within the
organization. This type of promotion is used to reward employees for their hard work
and dedication. It also gives them the opportunity to continue developing their skills.
Promotion may be temporary or permanent, depending upon the needs of the
organization.
Lateral moves
A lateral move is a career change where an individual moves from one position to another with
little change in their salary, title, or level. A lateral move occurs when an employee moves Into a
new position within the same pay grade as their current position. A lateral move is a career
change that involves taking a new position that is equal in level or compensation to your current
position. Employees switch to different roles or departments at the same level of hierarchy. This
can be done for personal growth or to address specific needs within the organization. Lateral
move example: An employee is an Project Assistant at a paygrade 22. There is an open Medical
Office Assistant paygrade 22. The employee applies, interviews, receives and accepts the offer.
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Transfers
Employees are moved to different geographical locations or offices within the same
organization. It is a form of internal mobility, in which the employee is shifted from one job to
another usually at a different location, department, or unit. Transfer can either be temporary or
permanent depending on the decision of the organization, and it is initiated by any of the two,
i.e. employer or employee.
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Demotions
Demotion is where an employee is reassigned by their employer to a role within the
organization that carries lesser responsibility, status or remuneration than their current role. A
demotion takes place when an employee is shifted from one role to a lesser role in the
company. For example, if an employee is a manager, a demotion might return them to a linelevel employee (non-management employee). Usually seen as negative employment actions like
termination or being rejected for a promotion opportunity. A demotion occurs when a manager
reduces an employee’s job title, role or duties. How you define demoted depends on the
situation. A demotion can either be temporary or permanent and is often used as an alternative
to letting an employee go.
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Cross functional teams
A cross-functional team is a group of people with a variety of expertise who come together to
achieve a common goal. It typically includes employees from all levels of an organization. Cross
functional teams are groups consisting of people from different functional areas of the company
– for example, marketing, product, sales, and customer success. They exist to bring people
together with different perspectives that can improve problem solving and lead to smarter,
more sustainable decision making. Instead of competing for resources, cross functional teams
collaborate to optimize use of time, money, and effort to improve customer satisfaction while
helping to meet organizational goals. Team members from different departments collaborate on
specific projects, promoting knowledge sharing and innovation.
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Succession planning
Succession planning is a process of developing talent to replace executive, leadership or other
key employees when they transition to another role, leave the company, are fired, retire or die.
It is relevant to all companies, from the largest to the smallest, in both the for-profit and not-forprofit sectors.
The planning process Is meant to create a talent pipeline of successors that will keep the
organization running with little to no interruption when inevitable staff changes occur.
Effective succession planning works by assessing staffing needs that may arise as well as
creating long-term goals and strategies to manage those gaps, including through leadership
development.
Succession planning is the process of identifying the critical positions within your organization
and developing action plans for individuals to assume those positions. It is a business strategy
companies use to pass leadership roles down to another employee or group of employees.
Succession planning is the process of identifying top performers and potential leaders for critical
roles in the organization to ensure business continuity. Succession planning focuses on
identifying and growing talent to fill leadership and business-critical positions in the future.
Succession planning involves preparing employees for possible future roles; it is not preselection.
These movements can be driven by various factors, such as career development, organizational
restructuring, talent management, or responding to changing business needs. Properly
managed Intraorganisational movements can help an organization adapt to evolving challenges
and nurture the growth of its employees.
Recovery and Recycling
In logistics, recovery and recycling refer to the processes of collecting, reusing, or repurposing
materials and products to minimize waste and reduce environmental impact.
Recovery: Recovery in logistics involves the collection and retrieval of materials or products that
have been used or discarded. This can include items like pallets, packaging materials, or even
damaged goods. The goal is to recover these items and find ways to reintroduce them into the
supply chain or other value-added processes instead of disposing of them as waste.
**Materials Retrieval**: Recovery involves the identification and collection of materials or
products that are no longer in their original state or are considered waste. This can include
items like used packaging materials (pallets, crates, cardboard), returned products, or goods
damaged during transport.
**Sorting and Inspection**: After collection, these materials are often sorted and inspected to
determine their condition and suitability for reuse. For example, damaged products may be
assessed to see if they can be repaired.
**Repair or Refurbishment**: Depending on the type and condition of recovered items,
logistics companies may invest in repairing or refurbishing them. This extends the lifespan of
products and reduces the need for new replacements.
**Reintegration into the Supply Chain**: Recovered materials or products that meet quality
standards can be reintroduced into the supply chain. For instance, repaired pallets can be used
for shipping again, reducing the need for new pallets.
Recycling: Recycling involves the transformation of used materials or products into new
products or raw materials. In logistics, this typically refers to recycling materials like cardboard,
plastics, metals, or paper. Recycling helps reduce the consumption of virgin resources, energy,
and the environmental impact associated with manufacturing new products from scratch.
**Material Transformation**: Recycling involves the conversion of used materials into raw
materials or new products. Commonly recycled materials in logistics include cardboard, plastic,
glass, and metal.
**Collection and Separation**: Used materials are collected, sorted, and often separated by
type. For example, plastics are sorted into different categories based on their resin type.
**Processing**: Once sorted, the materials undergo processing to clean, shred, and prepare
them for manufacturing. For instance, recycled plastic bottles may be cleaned and transformed
into plastic pellets for use in new products.
**Manufacturing New Products**: These processed materials are then used to manufacture
new products or packaging materials. For instance, recycled cardboard can be used to make
new boxes.
**Environmental Benefits**: Recycling helps conserve natural resources, reduce energy
consumption, and minimize waste in landfills. It’s an essential part of sustainable logistics
practices.
Both recovery and recycling play vital roles in promoting sustainability and reducing the
environmental footprint of logistics operations. By adopting these practices, logistics companies
can contribute to a more circular economy where resources are used efficiently, and waste is
minimized.
MORE NOTES ON MATERIALS MANAGEMENT…
Definitions
Materials management is a core function of supply chain management, involving the planning
and execution of supply chains to meet the material requirements of a company or
organization. These requirements include controlling and regulating the flow of material while
simultaneously assessing variables like demand, price, availability, quality, and delivery
schedules.
It's the process of planning, organizing and controlling the flow of materials from the point of
origin to the point of consumption.
Materials management also involves assessing material quality to make sure it meets customer
demands in line with a production schedule and at the lowest cost.
Material management systems embrace all of the activities related to materials and are a basic
business function that adds value to a finished product. It can also include the procurement of
machinery and other equipment needed for production processes as well as spare parts.
Typical roles in Materials Management include inventory analysts, inventory control managers,
materials managers, material planners, and expediters as well as hybrid roles like
buyer/planners.
Regardless of role, the main objective of Materials Management is assuring a supply of material
with optimized inventory levels and minimum deviation between planned and actual results.
The objectives of material management are sometimes referred to as the ‘Five R’s of Materials
Management:’
The right material
At the right time
In the right amount
And of the quality that is:
At the right price
From the right sources
What are the Types of Material Management?
The work undertaken by materials management experts can be broken down into five different
types, as follows:
1. Material Requirements Planning
This important step in material management directly affects profits as the lower the amount of
material used, the lower the cost of production and the more profit is delivered. Reducing
material overspend has caused some industries to consider ‘Just in Time (JIT)’ strategies that
require very small levels of inventory. However, this still requires careful planning to maintain
without impacting production schedules.
2. Purchasing
Purchasing should be done economically and on time to maintain material supplies and increase
final profits by lowering expenses.
3. Inventory Control
An inventory can include a range of goods being held including partially finished items, goods
ready for sale and those used in production. Many industries try to time purchasing so that
materials enter stores just ahead of production, although there is also a need to gauge supplier
levels so items can be stocked before they become unavailable.
Inventories are required to control the flow of raw materials, purchased goods and finished
parts and components.
This can be broken down into three factors:
**Maximum Stock
This is the maximum amount of material that is held in stock at any given time.
**Minimum Security Stock
As stock levels fluctuate during production, there is also a need to ascertain a minimum stock
level, bearing in mind supplier delivery times, cost of the orders and production requirements.
**Re-Order Point
This is the point at which orders should be made so as to keep warehouse supplies aligned with
supplier delivery times and production schedules.
4. Material Supply Management
Supply chain management can require materials to be distributed to different sites or
production centers, each of which needs to be continuously supplied. Lack of stock can lead to
financial losses through having to source replacement production materials or having to halt
production schedules.
Poor storage can also lead to material supply disruptions through damaged or misplaced stock.
Material management teams should be able to mitigate against these situations by using
alternative supply systems.
5. Quality Control
Quality control of materials is also important, since good quality materials lead to good quality
products. Factors such as durability, dimensional accuracy, dependability, performance,
reliability and aesthetic value can all be important quality factors for materials management,
depending upon the applications.
All five of these types need to work together for the successful management of materials from
purchase and supply through to utilization.
Why is it Important?
Materials management is vital to ensure there is an unbroken chain of materials for production
purposes to meet customer demands. Not only does it make sure production schedules can be
met, but it can also save costs for a finished product while also maintaining quality through the
materials that are purchased and used.
Materials management crosses the line between purchasing, logistics and inventory
management, making it vital for processes reliant on raw materials, machinery, and
maintenance, among others.
Conclusion
Materials management uses inventories and production requirements for planning and control
to ensure materials are available as required to meet production schedules.
This material planning includes managing logistics, stock levels, materials quality, cost and more.
This requires a step-by-step overview of processes and requirements.
Materials management has been an important part of industrial processes since the industrial
revolution (if not before!), and is still used by modern companies across a range of industries to
prevent any pauses in production.
With ties to other business areas, such as purchasing and warehousing, material managers need
to interact with a supply chain to make sure materials are delivered where they are needed at
the right time.
PHYSICAL DISTRIBUTION MANAGEMENT (PDM)
Physical distribution management (also known as logistics management or supply chain
management) refers to the process of efficiently planning, implementing, and controlling the
flow of goods, services, and information from the point of origin to the point of consumption.
This encompasses various activities such as transportation, inventory control, warehousing and
storage, containerization, materials handling and protective packaging. (A distribution network
design too).
The primary goals of physical distribution management are to minimize costs, optimize service
levels, and ensure timely and accurate delivery of products or services to customers. It involves
coordinating and optimizing the movement of goods and information throughout the supply
chain to meet customer demand while minimizing inventory holding costs and transportation
expenses.
Effective physical distribution management plays a crucial role in improving overall supply chain
performance, enhancing customer satisfaction, and gaining a competitive advantage in the
marketplace. Modern technology and software systems often support these efforts, helping
companies streamline their logistics and distribution processes.
What is Physical Distribution?
Physical distribution in supply chain management deals with the series of actions that moves
final products from production to the consumer. The channels involved include warehousing,
inventory control, order processing, materials handling, transportation, and customer service.
Physical distribution and the ability to get a product to a consumer quickly and economically has
a direct impact on customer satisfaction. By storing goods in convenient locations, and by
creating fast, reliable means of moving those goods, small business owners can help assure
continued success in a rapidly changing, competitive global market.
Transportation:
Warehousing and storage:
Containerization:
Materials handling:
Protective packaging:
Inventory control:
Inventory is a logistics element that is closely related to storage and warehousing. It is
concerned with what stock to hold, where the stock is located and how much stock to hold. In
effect, inventory is controlling the flows of goods going into and out of a warehouse.
The 7 Wastes of Lean Manufacturing
The seven wastes of Lean Manufacturing are what we are aiming to remove from our processes
by removing the causes of Mura and Muri as well as tackling Muda directly. But what exactly are
the seven wastes of Lean Manufacturing (or 7 Mudas)?
The Seven Wastes of Lean Manufacturing are;
Transport
Inventory
Motion
Waiting
Over-Processing
Overproduction
Defects
Muda
Any activity that consumes resources without creating value for the customer.
The simplest way to describe waste is as “Something that adds no Value.” Our customers would
not be happy to pay for any action that we take that does not add value to what they actually
want and nor should we be.
The Waste of Transport
Transportation is a waste and costs you money.
Transport is the movement of materials from one location to another, this is a waste as it adds
zero value to the product. Why would your customer (or you for that matter) want to pay for an
operation that adds no value?
Transport adds no value to the product, you as a business are paying people to move material
from one location to another, a process that only costs you money and makes nothing for you.
The waste of Transport can be a very high cost to your business, you need people to operate it
and equipment such as trucks or fork trucks to undertake this expensive movement of
materials.
The Waste of Inventory
Inventory Hides Problems
Inventory costs you money, every piece of product tied up in raw material, work in progress or
finished goods has a cost and until it is actually sold that cost is yours. In addition to the pure
cost of your inventory it adds many other costs; inventory feeds many other wastes.
Inventory has to be stored, it needs space, it needs packaging and it has to be transported
around. It has the chance of being damaged during transport and becoming obsolete. The waste
of Inventory hides many of the other wastes in your systems.
The Waste of Motion
Excessive motion of either people or a machine is a waste.
Unnecessary motions are those movements of man or machine which are not as small or as
easy to achieve as possible, by this I mean bending down to retrieve heavy objects at floor level
when they could be fed at waist level to reduce stress and time to retrieve. Excessive travel
between work stations, excessive machine movements from start point to work start point are
all examples of the waste of Motion.
All of these wasteful motions cost you time (money) and cause stress on your employees and
machines, after all even robots wear out.
The Waste of Waiting
Eliminate the waste of waiting to make your processes smoother
How often do you spend time waiting for an answer from another department in your
organization, or waiting for a delivery from a supplier or an engineer to come and fix a machine?
We tend to spend an enormous amount of time waiting for things in our working lives (and
personal lives too), this is an obvious waste.
The Waste of Waiting disrupts flow, one of the main principles of Lean Manufacturing, as such it
is one of the more serious of the seven wastes or 7 mudas of lean manufacturing.
The waste of Overproduction
Over producing what the customer does not want now is a waste.
The most serious of all of the seven wastes; the waste of overproduction is making too much or
too early. This is usually because of working with oversize batches, long lead times, poor
supplier relations and a host of other reasons. Overproduction leads to high levels of inventory
which mask many of the problems within your organization.
The aim should be to make only what is required when it is required by the customer, the
philosophy of Just in Time (JIT), however many companies work on the principle of Just in Case!
The Waste of Over-processing
Doing More than the customer wants costs you money
The waste of Overprocessing is where we use inappropriate techniques, oversize equipment,
working to tolerances that are too tight, perform processes that are not required by the
customer and so forth. All of these things cost us time and money.
One of the biggest examples of over-processing in most companies is that of the “mega
machine” that can do an operation faster than any other, but every process flow has to be
routed through it causing scheduling complications, delays and so forth. In lean; small is
beautiful, use small appropriate machines where they are needed in the flow, not break the
flow to route through a highly expensive monstrosity that the accountants insist is kept busy!
The Waste of Defects
Defects hide many other problems and wastes
The most obvious of the seven wastes, although not always the easiest to detect before they
reach your customers. Quality errors that cause defects invariably cost you far more than you
expect. Every defective item requires rework or replacement, it wastes resources and materials,
it creates paperwork, it can lead to lost customers.
The Waste of Defects should be prevented where possible, better to prevent than to try to
detect them, implementation of pokayoke (mechanisms used to eliminate errors by effectively
making it impossible to make mistakes in a given process.) systems and autonomation (Jidoka,
also known as autonomation, is a Lean manufacturing method that emphasizes quality control.
It is based on the idea of stopping the production line as soon as a defect is detected.) can help
to prevent defects from occurring.
Additional wastes
Waste of Talent; failing to make use of the people within your organization. This is an issue that
many of our companies in the West fail to address. We still tend to operate within a command
and control environment and take little real notice of what our employees really think and what
they can contribute. Your employees are your greatest asset by far and can help you to drive out
many of the other wastes.
Waste of resources; failure to make efficient use of electricity, gas, water. Not only does this
waste cost you money it is also a burden on our environment and society as a whole.
Wasted materials; too often off-cuts and other byproducts are just sent to landfill rather than
being utilized elsewhere.
Eliminating the Seven Wastes
Eliminating the seven wastes is something that can be done through the implementation of
Lean and the various lean tools, however the focus of your implementation should not be to
identify and remove waste. Instead you should use the principles of lean manufacturing to
identify value according to the customer and make those value adding processes flow through
your organization at the pull of the customer. This approach helps you to make your value
adding processes more efficient and causes the waste to literally “dissolve.”
Approaching lean from a perspective of removing the 7 wastes rather than making value flow
however usually ends up with us making non-value adding processes more efficient and we get
better and better at doing things that the customer does not want. To eliminate the 7 wastes of
lean we have to focus on the lean principles and value as perceived by our customers.
Just In Time (JIT)
JIT 1
JIT is a form of inventory management that requires working closely with suppliers so that raw
materials arrive as production is scheduled to begin, but no sooner. The goal is to have the
minimum amount of inventory on hand to meet demand.
It is a management strategy that aligns raw-material orders from suppliers directly with
production schedules. Companies employ this inventory strategy to increase efficiency and
decrease waste by receiving goods only as they need them for the production process, which
reduces inventory costs. This method requires producers to forecast demand accurately.
JIT inventory ensures there is enough stock to produce only what you need, when you need it.
The goal is to achieve high volume production with minimal inventory on hand and eliminate
waste.
How does it work?
JIT is what’s known as a lean management process. In JIT, all parts of any production or service
system, particularly people, are interconnected. They inform each other and are mutually
dependent on generating successful outcomes. This practice’s origin comes from Kaizen, a
Japanese term meaning “change for the better.”
Organizations may vary in how they implement JIT in their environment, but the general steps
are the same.
JIT inventory cycle
Steps in Cycle of Continuous Improvement for JIT Inventory
Design: The JIT process begins with a review of the essential manufacturing building blocks:
product design, process design, personnel and manufacturing planning. Then plans are put into
place to eliminate disruption, minimize waste and build a flexible system.
Manage: A Total Quality Management (TQM) review ensures there is continuous improvement
throughout the process. A management review defines workers’ roles and responsibilities,
defines and measures statistical quality control, stabilizes schedules, and checks out load and
capacity schedules and levels.
Pull: Educate the team on production and withdrawal methods using signaling methods like
Kanban. Review lot size policies and reduce lot sizes.
Establish: Vendor relationships are vital to the success of JIT. Review vendor lists. Settle on
preferred suppliers, negotiate contracts, discuss lead times, delivery expectations and usage
metrics and measures. Learn how to make the most of them in the supply chain.
Fine-tune: Determine inventory needs, policies, controls and reduce inventory movements.
Build: Inform your team about the skills and capabilities it needs to complete its work and
conduct team education and empowerment sessions to educate them.
Refine: Reduce the number of parts and steps in production by refining, standardizing and
reviewing the entire process.
Review: Define and implement quality measures and metrics and conduct a root cause analysis
of any problems. Emphasize improvements and track trends to improve every aspect of JIT.
OR THIS CYCLE…
Just-in-Time (JIT) is a methodology aimed at improving efficiency and reducing waste in
production processes. Here’s a simple cycle for the steps of continuous improvement in JIT:
1. **Identify Areas for Improvement:** Regularly assess your production processes to
identify areas where improvements can be made. This could include reducing inventory,
minimizing downtime, or streamlining workflows.
2. **Set Objectives:** Define clear and measurable objectives for the improvements you
want to achieve. For example, you might aim to reduce lead times by a certain
percentage or decrease the amount of excess inventory on hand.
3. **Plan Changes:** Develop a plan to implement the improvements. This might involve
reconfiguring workstations, optimizing supply chain processes, or training employees in
new techniques.
4. **Implement Changes:** Put your improvement plan into action. Ensure that everyone
involved understands their roles and responsibilities in the implementation process.
5. **Monitor Progress:** Continuously monitor the changes you’ve implemented to track
their impact. Use key performance indicators (KPIs) to measure progress toward your
objectives.
6. **Collect Feedback:** Gather feedback from employees, suppliers, and customers to
identify any issues or further opportunities for improvement.
7. **Adjust and Refine:** Based on the feedback and progress data, make adjustments to
your processes and plans as necessary. This might involve fine-tuning workflows,
addressing bottlenecks, or making further changes to reduce waste.
8. **Standardize Best Practices:** Once you’ve achieved successful improvements,
standardize the best practices across your organization to ensure that the gains are
sustained over time.
9. **Repeat the Cycle:** Continuous improvement is an ongoing process. Regularly revisit
your production processes, identify new areas for improvement, and repeat the cycle to
maintain efficiency and reduce waste.
10. **Share Successes:** Communicate the successes and lessons learned from your
continuous improvement efforts with your team and stakeholders. This can help foster a
culture of continuous improvement throughout the organization.
By following this simple cycle, you can continuously enhance your JIT practices and achieve
greater efficiency and effectiveness in your operations.
Kanban:
Kanban, in its simplest terms, is a visual system that helps teams manage work tasks by using
cards or boards to track and prioritize their work. It provides a clear and easy-to-understand
way to see what needs to be done, what’s in progress, and what’s completed.
Kaizen:
Kaizen, in its simplest terms, is a Japanese concept that means “continuous improvement.” It
involves making small, incremental changes and improvements in processes, products, or
services to enhance efficiency, quality, and effectiveness over time.
Advantages of JIT Inventory Management
**Waste Reduction: The JIT inventory management model eliminates over ordering and excess
of all kinds.
Reduce Obsolete Inventory and Dead Stock: Low inventory levels significantly reduce the risk of
inventory going unsold and sitting in the warehouse obsolete.
Reduce Defective Product Loss: Defective inventory items are easier to identify and fix when
production levels are low, which reduces scrap costs.
**Improved Efficiency: JIT eliminates the costs that come with extra raw materials, unneeded
inventory and product storage.
Raise Inventory Turnover Ratios: Greater efficiency brings higher inventory turnover.
Minimal Inventory Obsolescence: The high inventory turnover rate keeps items from sitting in
your facility for too long and becoming obsolete.
Minimize Raw Materials on Hand: Receiving deliveries in the smallest possible quantities —
sometimes multiple times per day — virtually eliminates raw material inventories.
Local Sourcing: When suppliers are located near a company’s production facility, the shortened
distances contribute to timely deliveries. On-time, reliable delivery of goods reduces the need
for safety stock.
**Greater Productivity: JIT enhances productivity by reducing the time and resources involved
in manufacturing processes.
Faster Product Turnaround: Manufacturers can more quickly produce products.
Shorter Production Runs: With JIT, manufacturers can deliver new products more quickly and
easily.
Simplify Change Orders: Having less raw material stock to draw down before product changes
makes it easier to implement engineering change orders to existing products.
**Smoother Production Flow: JIT can eliminate bottlenecks and delays across the entire
production process.
Shorter Production Cycles: JIT shortens manufacturing time, which decreases lead times for
customers.
Reduce Product Defects: Production mistakes can be spotted faster and corrected, which results
in fewer defective products.
Shorter Production Runs: Fast equipment setup times reduce production runs, lowering
investment in finished goods.
More Functional Production Cells: Employees walk individual parts through the processing steps
in a work cell, which reduces scrap levels. Cell models also eliminate work-in-process queues
that build up at more specialized workstations.
Compressed Operations: Arranging production work cells near each other limits the amount of
work-in-process inventory moving between cells.
**Lower Costs: Receiving goods on an as-needed basis reduces inventory costs.
Reduce Working Capital: The low inventory levels that come with JIT limit the amount of
working capital needed.
Lower Holding Costs: Inventory holding costs (like those for warehousing) are minimal because
less space is used.
Lower Cash Investment: Companies invest less cash in inventory because JIT doesn’t require
having a lot of stock on hand.
Reduce Large Raw Material Spends: In JIT, businesses order raw material when needed, so cash
is available for other uses that could be more valuable to the company.
Reduce Labor Costs: Labor expenses are lower since the number of person-hours required to
fulfill orders is usually fewer than full-time production.
**Improve Quality: A flexible workforce can focus on making quality products with lower defect
rates. Better outcomes increase customer satisfaction and reduce the cash outlay for
production.
Reduce Work-in-Progress Goods: Fewer items moving on the shop floor allows teams to focus
on building high-quality products.
Less Damage: Since minimal inventory is on hand, storage-related accidents decline.
Certified Quality: Suppliers guarantee quality in advance. So, deliveries go straight to production
areas instead of being held in receiving to await inspection.
Disadvantages of JIT
Potential Risks of Just-in-Time Inventory
The primary risk of JIT comes from its philosophy. JIT inventory management requires everyone
in an ecosystem and supply chain to commit and work cohesively. If any part of that
arrangement breaks down, it risks the entire infrastructure.
Lack of Preparedness: The business’s entire workflow needs to convert to a lean framework.
These actions affect the organization and the supply chain, which may need to change its
procedures and practices.
Supply Chain Disruptions: Disruptions in the supply chain can stall the production process.
Missed Opportunities: With few or no finished goods on hand, a company may not be able to
meet massive and unexpected orders immediately.
Unexpected Price Changes: In JIT, the cost for parts is constant. When costs rise, profit margins
drop.
Overreliance on Forecasts: Adapting to sudden surges or declines is difficult because of the
reliance on forecasting.
Order Issues: Shortages and stock-outs can disrupt inventory systems.
Local Sourcing Costs: JIT relies on local sourcing, which can cost more for a number of different
reasons. This dependency can also affect profitability in the pursuit of reliability.
Time Pressure: Scheduling may increase the cost of goods sold (COGS) because there’s no
guarantee a company will always have the best price for raw materials from a supplier.
Undisciplined Staff: Team members that are not on board with JIT can affect productivity,
quality and other issues.
Supplier Dependence: A supplier who does not deliver goods on time and in the right amounts
can disrupt the entire production process.
Acts of Nature: A natural disaster that interferes with a vendor’s flow of goods can halt
production.
JIT 2
JIT II is similar to JIT with a difference that SUPPLIER-CUSTOMER relations are further
strengthened.
The supplier keeps track of customer needs by checking in on a regular basis, then placing
orders for the customer as needed. In JIT II, suppliers and customers become business partners,
often trading benefits like long-term contracts for the supplier in return for free incentives for
the customer. Conflict and problems are often eliminated due to frequent communications and
long-term relationships.
JIT PHILOSOPHIES
Just-in-Time is a philosophy and approach to manufacturing and supply chain management
aimed at minimizing waste, reducing inventory levels, and improving efficiency. The core idea of
JIT is to produce, order, or deliver only what is needed, when it is needed, and in the exact
quantity required.
Just-in-Time (JIT) and Lean are closely related concepts in the world of manufacturing and
supply chain management.
***Lean:
Lean manufacturing, often referred to as “Lean,” is a broader management philosophy and
methodology that encompasses the principles of JIT but extends beyond manufacturing to
various industries and processes. Lean focuses on creating value for customers while eliminating
waste and inefficiency throughout an organization.
The following are the lean principles:
1. Defining Value
Identifying value in a lean project is always defined by what the customer needs for the product.
This might mean the time to market, pricing or other expectations that must be met. This is the
core principle and must be shared with everyone involved in the project so they always work
with the customer’s needs in mind.
2. Value Stream Mapping
After you’ve defined the value for your end-user, next you need to map the value stream. This
means defining all of the steps and related processes that take your product from raw material
to final deliverable. You can also identify the actions to produce your product in design,
procurement, HR, administration, delivery and customer service. The map should be on only
one page and you should remove any steps that offer no value to the customer.
3. Respect for People (Respect for Humanity – Respect for Employees)
Lean emphasizes the importance of empowering and respecting employees, involving them in
decision-making, and recognizing their contributions to continuous improvement.
4. Waste reduction (MUDA)
Lean identifies and categorizes various types of waste, such as overproduction, defects, waiting,
and excessive inventory, with the goal of eliminating or reducing these wastes.
5. Create Flow
Once you’ve removed the waste from your value stream, it’s time to ensure those steps flow
smoothly from one to another. You don’t want any interruptions, delays or bottlenecks that can
slow down production and threaten your schedule and budget. To do this, you want the value
stream steps to be in a tight sequence. This leads to cross-functional teams that work together
across departments to create greater productivity.
6. Establish Pull
“Pull” means that the customer can pull the product with a shorter production cycle, often
turning what could have been months into weeks. This lets you avoid having to build in advance
or stockpile materials, which saves on inventory costs that can be passed on to your customers.
This is all dependent on the flow you created in the previous step.
Lean uses pull systems to align production with customer demand, ensuring that work is
performed only when there is demand.
7. Continuous Improvement (Kaizen)
If the first step is the most important of the five lean principles, this step is a close second. It
means approaching perfection in all aspects of your corporate culture. Specifically, you want to
use this step to loop you back to the first step. Yes, you should never stop following these steps.
This continuous improvement, also referred to by the Japanese word kaizen, is essential to lean
project management.
Lean promotes standardizing processes to reduce variation and continually improving them to
enhance efficiency and quality.
Overall, Lean principles and practices are applied not only in manufacturing but also in areas
such as services, healthcare, and administrative processes. The Lean approach seeks to create a
culture of continuous improvement, where all employees are engaged in identifying and
eliminating waste to enhance value for customers
***Agile
The Agile methodology is a project management approach that involves breaking the project
into phases and emphasizes continuous collaboration and improvement. Teams follow a cycle of
planning, executing, and evaluating.
At its simplest, Agile simply means continuous incremental improvement through small and
frequent releases.
Agile methodology is all about approaching project management and product development
with a flexible and customer-centric mindset.
Agile methodology is an approach to software development and project management that
emphasizes flexibility, collaboration, and customer satisfaction. It was originally formalized in
the Agile Manifesto in 2001 by a group of software developers. Here are some key principles
and concepts of Agile:
1. **Iterative and Incremental:** Agile projects are divided into small increments or
iterations, typically 2-4 weeks long, called sprints. Each sprint results in a potentially
shippable product increment, allowing for regular feedback and adaptation.
#Iterative: This means that work is broken down into small, repeatable cycles or
iterations. In each iteration, a subset of the project’s features or tasks is completed. The
team then reviews and refines the work before moving on to the next iteration. This
iterative approach allows for regular assessment and adaptation, which is particularly
useful when dealing with evolving requirements or uncertainties.
#Incremental: Incremental development involves building a project in small, incremental
steps. Instead of waiting until the entire project is complete to deliver it, the team
delivers parts of the project incrementally. Each increment typically adds new features or
functionality to the existing product. This approach ensures that value is delivered to the
customer early and frequently, and it allows for feedback and adjustments throughout
the project.
In combination, the iterative and incremental approach of Agile allows for continuous
improvement, adaptability, and the ability to respond to changes in customer needs or
project requirements.
2. **Customer-Centric:** Agile focuses on delivering value to the customer early and
frequently. Customer feedback is essential, and requirements can evolve throughout the
project.
3. **Collaborative Teams:** Cross-functional teams, including developers, testers, and
business representatives, work closely together. Communication and collaboration are
prioritized.
4. **Embracing Change:** Agile is adaptive and welcomes changes in project
requirements, even late in development. This allows for responding to emerging
customer needs.
#Agile embraces change by recognizing that project requirements can evolve, even late
in development. This flexibility allows teams to adapt to new information or shifting
customer needs without resistance. Changes are considered opportunities for
improvement, not disruptions, ensuring that the final product better aligns with the
customer’s vision.
5. **Working Software:** The primary measure of progress is a working product. Agile
encourages the frequent delivery of functional software.
#Agile prioritizes the delivery of working software as a measure of progress. Instead of
focusing solely on planning and documentation, Agile encourages regular releases of
functional product increments. This approach ensures that customers receive tangible
value early in the project, allowing for real-world testing and feedback.
6. **Continuous Improvement:** Teams regularly reflect on their processes and seek ways
to improve efficiency and quality.
7. **Transparency:** Agile promotes transparency in project progress and challenges. This
is often achieved through daily stand-up meetings and visual project boards.
#Transparency in Agile is achieved through open communication and visibility of project
progress and challenges. Daily stand-up meetings, visual project boards, and other tools
enable team members to share updates, discuss obstacles, and track work collectively.
This transparency fosters a shared understanding of project status and promotes
collaboration and problem-solving among team members. It also helps stakeholders stay
informed and engaged throughout the project.
Common Agile frameworks and methodologies include:
**Scrum:
-It is a type of agile technology that consists of meetings, roles, and tools to help
teams working on complex projects collaborate and better structure and manage
their workload.
**Kanban:
-
-
A visual method for managing work, often used for continuous delivery and
support processes.
The Japanese word “kanban”, meaning “visual board” or a “sign”.
Kanban is a popular Lean workflow management method for defining, managing,
and improving services that deliver knowledge work. It helps you visualize work,
maximize efficiency, and improve continuously.
Work is represented on Kanban boards, allowing you to optimize work delivery
across multiple teams and handle even the most complex projects in a single
environment.
**Extreme Programming (XP):**
-Emphasizes engineering practices like pair programming, test-driven
development, and continuous integration.
-(XP) is an agile software development framework that aims to produce higher
quality software and higher quality of life for the development team.
**Lean Agile:**Combines Lean principles with Agile to minimize waste and maximize value.
Agile has been widely adopted beyond software development and is used in various industries
to manage projects with changing requirements and customer expectations effectively. It
promotes adaptability, customer satisfaction, and the delivery of high-quality products.
What are the 12 principles of agile?
The Agile Manifesto also enacted 12 principles in reference to software development and was
later reconfigured to fit a wider perspective of users:
1.Customer satisfaction
2.Early and continuous delivery
3.Embrace change
4.Frequent delivery
5.Collaboration of businesses and developers
6.Motivated individuals
7.Face-to-face conversation
8.Functional products
9.Technical excellence
10.Simplicity
11.Self-organized teams
12.Regulation, reflection and adjustment
Leagile…
It is a hybrid of lean and agile
This strategy aims to obtain flexibility and competitiveness in a cost-effective manner. The
leagile SC strategy is decoupled upstream and downstream.
The decoupling point : the point in the material flow which the customer order gets in.
Upstream can adopt lean manufacturing approach to drive down costs upstream while
downstream agile can respond and deliver with flexibility and speed in the unpredictable
market
**Just In Case (JIC)
Just in case (JIC) is an inventory strategy where companies keep large inventories on hand.
This strategy minimizes the probability that a product will sell out of stock.
A company that uses this strategy typically has difficulty predicting consumer demand or
experiences large surges in demand at unpredictable times.
The main disadvantage of this strategy is higher storage costs and wasted inventory if all stock
does not sell.
How Just in Case (JIC) Works
The JIC inventory strategy differs from the more recent “just in time” (JIT) inventory strategy,
where companies try to minimize inventory costs by producing the goods after the orders have
come in.
The JIC strategy Is more common in less industrialized countries where poor transportation
infrastructure, natural disasters, poor quality control, and vulnerability to other suppliers’
production problems are concerns.
Such instabilities in the supply chain could lead to costly production inefficiencies. Therefore, a
manufacturer may decide to pay for excess inventory to avoid production shutdowns.
For JIC, manufacturers reorder stock before it reaches the minimum level to continue to sell
inventory while the suppliers are supplying the goods.
The time from when the firm reorders the stock to the time the supplier provides the new stock
is known as lead time. A JIC inventory system tries to keep a minimum level of inventory in case
of emergencies.
JIC is typically more costly than JIT because it can lead to waste if not all of the inventory is sold
and there are additional storage costs due to the additional inventory.
Why Choose the More Costly JIC Strategy?
One major reason for practicing a more costly JIC system is the potential losses, such as
permanent loss of major customers, loss of suppliers, and supply-chain collapse.
If the JIT response contingencies are too slow or fail to keep production flowing, additional costs
may be incurred. The additional costs due to maintaining extra storage and resources may be
more cost effective than using a more efficient JIT system.
In a recent turn of events, some companies have started understocking their inventories on
purpose. Makers of particular popular items for which buyers are not willing to accept
substitutes can use this strategy.
The “just in case” strategy is used by companies that have trouble forecasting demand. With
this strategy, the companies have enough production material on hand to meet unexpected
spikes in demand. Higher storage costs are the main disadvantage of this strategy.
Real World Examples of Just In Case (JIC)
An example of JIC buyers are the military or hospitals. These types of organizations must
maintain large inventories because waiting for JIT producers to ramp up production for needed
supplies may result in lost lives and even wars.
**Total Quality Management (TQM)
Total quality management (TQM) is an ongoing process of detecting and reducing or eliminating
errors.
Total quality management is used to streamline supply chain management, improve customer
service, and ensure that employees are properly trained.
The focus Is to improve the quality of an organization’s outputs, including goods and services,
through the continual improvement of internal practices.
Total quality management aims to hold all parties involved in the production process
accountable for the overall quality of the final product or service.
Understanding Total Quality Management (TQM)
Total quality management is a structured approach to overall organizational management. The
focus of the process is to improve the quality of an organization’s outputs, including goods and
services, through the continual improvement of internal practices.
Example of Total Quality Management
Perhaps the most famous example of TQM is Toyota’s implementation of the kanban system. A
kanban is a physical signal that creates a chain reaction, resulting in a specific action. Toyota
used this idea to implement its just-in-time (JIT) inventory process.
The company decided to keep just enough inventory on hand to fill customer orders as they
were generated to make its assembly line more efficient. All parts of Toyota’s assembly line are
therefore assigned a physical card that has an associated inventory number.
The card Is removed and moved up the supply chain right before a part is installed in a car,
effectively requesting another of the same part. This allows the company to keep its inventory
lean and not overstock unnecessary assets. Effective quality management resulted in better
automobiles that could be produced at an affordable price.
Primary Principles of Total Quality Management
TQM is considered a customer-focused process that focuses on consistently improving business
operations management. It strives to ensure that all associated employees work toward the
common goals of improving product or service quality, as well as improving the procedures that
are in place for production. There are several guiding principles that define TQM ;
Focus on Customers
Under TQM, your customers define whether your products are high quality. Customer input is
highly valued because it allows a company to better understand the needs and requirements in
the manufacturing process. Customer surveys may reveal insufficient durability of goods. This
input is then fed back into TQM systems to implement better raw material sourcing,
manufacturing processes, and quality control procedures.
Commitment by Employees
Employees must buy into the processes and system if TQM is going to be successful. This
includes clearly communicating across departments and leaders what goals, expectations,
needs, and constraints are in place. A company adopting TQM principles must be willing to train
employees and give them sufficient resources to complete tasks successfully and on time. TQM
also strives to reduce attrition and maintain knowledgeable workers.
Improve Continuously
A company should gradually evolve and strive for incremental, small improvements as it learns
more about its customers, processes, and competition. This concept of continuous
improvement helps a company adapt to changing market expectations. It allows for greater
adaptability to different products, markets, customers, or regions. Continuous improvement
also drives and widens the competitive advantage that a company has built over related
companies.
Adherence to Processes
TQM’s systematic approach relies heavily on process flowcharts, TQM diagrams, visual action
plans, and documented workflows. Every member engaged in the process must be aware and
educated on their part of the process to ensure proper steps are taken at the right time of
production. These processes are then continually analyzed to better understand deficiencies in
the process.
Strategic and Systematic Approach
A company’s processes and procedures should be a direct reflection of the organization’s vision,
mission, and long-term plan. TQM calls for a system approach to decision making that requires
that a company dedicate itself to integrating quality as its core component and making the
appropriate financial investments to make that happen.
Data Utilization
The systematic approach of TQM only works if feedback and input is given to evaluate how the
process flow is moving. Management must continually rely on production, turnover, efficiency,
and employee metrics to correlate the anticipated outcomes with the actual results. TQM relies
heavily on documentation and planning, and only by utilizing and analyzing data can
management understand if those plans are being met.
Integrate Systems
One way to utilize data is to integrate systems. TQM strategies believe systems should talk to
each other, conveying useful information across departments and making smart decisions.
When goods or inventory are used in one area, another department should have immediate
access to that ERP information. TQM strives to allow everyone to be on the same page at the
same time by linking data sources and sharing information across systems.
Communication
Data may transfer between departments freely, but there is a human element to coordinating
processes and making sure an entire production line is operating efficiently. Effective
communication plays a large part in TQM to motivate employees, educate members along a
process, and avoid process errors whether it is normal day-to-day operations or large
organizational changes.
Pros
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Delivers stronger, higher quality products to customers
Results in lower company-wide costs
Minimizes waste throughout the entire production and sale process
Enables a company to become more adaptable
Cons
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May require substantial financial investment to convert to TQM practices
Often requires conversion to TQM practices over a long period of time
May be met with resistance to change
Requires company-wide buy-in to be successful
MANUFACTURING TECHNIQUES
In today’s fast-paced and competitive manufacturing landscape, technology integration has
become paramount for businesses striving to stay ahead.
Computer Aided Design (CAD)
It is a manufacturing process that enables manufacturers to create 2D drawings or 3D models of
future products digitally. This allows designers and engineers to visualize the product’s
construction before fabricating it. CAD empowers designers and engineers with sophisticated
software and techniques to create, modify, and optimize product designs in a virtual
environment.
Instead of drawing and designing by hand, CAD has revolutionized the drafting process by using
computers to develop, modify, and optimize product designs. Designs are now more detailed,
accurate, and efficient using CAD software. Plus, professionals can adjust and optimize the
designs and eventually manufacture goods more efficiently and intelligently.
At its core, CAD utilizes geometric modelling techniques to represent and manipulate objects
digitally. These models can range from simple 2D drawings to complex 3D representations,
enabling designers to visualize and explore their concepts in a virtual environment.
CAD plays a vital role in various industries, including:
Automotive
Aerospace
Architecture
Product design
Advantages of CAD:
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Saves time: When you are using the computer-aided design software, it will save your
time and you can make better and more efficient designs in shorter time duration.
Easy to edit: When you are making designs, you may find the need to make alterations.
When you are using computer-aided design software, it will be much easier to make any
changes because you can fix the errors and modify the drawings easily.
Decrease in error percentage: As the CAD software makes use of some of the best tools,
the percentage of error that occurred because of manual designing is significantly
reduced.
Decrease design effort: When it comes to the amount of effort that was needed for the
sake of designing the different models, it has been reduced significantly because the
software automates most of the task.
Code re-use: As the entire task is carried out with the help of computer tools, it removes
the problem of duplication of labor, you can copy the different parts of code and design
which can then be reused multiple times over and over again.
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Easy to share: The CAD tools make it easier to save the files and store it in a way that you
can use it time and again and send it without any unwanted hassles too.
Improved accuracy: There is absolutely no doubt about the fact that the kind of accuracy
that CAD software will offer can never be achieved by opting for manual drawings. You
have tools to measure the precision, skill and accuracy level of the designs.
Design optimization: More advanced CAD design software is actually smart enough to
even suggest design changes/improvements based on simulation results. It can even
generate design features automatically. It helps the optimization of a design in a better
way.
Reduced cost: This is because there’s the verification of a design before it’s actually built.
This helps in designing first time right products and reducing overall costs.
Reduced product design timeline: In the past, when an engineer what’s to modify a
product they’d have to start that design from scratch. Now, they can make any
modification to a design on top of an already existing design. The modified part gets
easily updated to the existing one. As a result products can get to the market faster.
Easy to use to convert thoughts/ideas into reality.
Disadvantages of CAD:
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Work can be lost because of the sudden breakdown of computers
Work is prone to viruses
Work could be easily “hacked”
Time taking process to know how to operate or run the software
High production or purchasing cost for new systems
Time and cost of training the staff which will work on it
Need of regular updating of software or operating systems
Needs less employment because of CAD/CAM systems
High initial cost
You’d need to buy a license, which is very expensive
CAD can be used in dental, fashion industry, automotive industry, interior design, for building
furniture, architecture and in 3D printing.
Overall, CAD has become an indispensable tool in the manufacturing industry. Its ability to
automate complex tasks and facilitate collaboration has revolutionized the sector, making CAD
an invaluable asset for manufacturers striving for competitiveness and success.
(CAD) is a crucial field in product engineering and the industrial sector. It allows engineers to
develop, test, and optimize their design in a safe environment, without having to build
expensive prototypes.
COMPUTER AIDED MANUFACTURE (CAM)
It is the use of software and computer-controlled machinery to automate a manufacturing
process.
CAD to CAM Process
Without CAM, there is no CAD. CAD focuses on the design of a product or part. How it looks,
how it functions. CAM focuses on how to make it. You can design the most elegant part in your
CAD tool, but if you can’t efficiently make it with a CAM system, then you’re better off kicking
rocks.
The start of every engineering process begins in the world of CAD. Engineers will make either a
2D or 3D drawing, whether that’s a crankshaft for an automobile, the inner skeleton of a kitchen
faucet, or the hidden electronics in a circuit board. In CAD, any design is called a model and
contains a set of physical properties that will be used by a CAM system.
A CAM tool uses a product model created in CAD software. The former converts the computer
models into a language understood by the machining tool and undertakes the production.
BUT…
The statement “Without CAM, there is no CAD” is not entirely accurate. CAD (Computer-Aided
Design) and CAM (Computer-Aided Manufacturing) are related but distinct processes in product
development.
CAD focuses on the creation of digital 2D or 3D models and designs of objects or products. It’s
primarily used for design and prototyping, allowing engineers and designers to create detailed
models, perform simulations, and visualize concepts.
CAM, on the other hand, deals with the process of converting these digital designs into
instructions for automated machinery like CNC (Computer Numerical Control) machines, 3D
printers, or robotic systems. CAM software generates toolpaths and instructions for
manufacturing processes, turning the digital design into a physical product.
While CAD and CAM often go hand in hand in modern product development, especially in
industries like manufacturing and engineering, you can have CAD without CAM. CAD software is
used independently to create and refine designs, and these designs can be stored, shared, or
used for various purposes beyond manufacturing.
So, while CAM complements CAD by enabling the physical production of designs, it’s not a strict
prerequisite for CAD. CAD can exist and be valuable on its own for design and modeling
purposes.
Advantages
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Fast and accurate production; fast production with each finished product being exactly
the same
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Machines can run constantly on repetitive tasks; they don’t need a break
Good for producing on a mass/flow production line
Less material wastage
Disadvantages
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Expensive to set up
Needs a skilled workforce of engineers
Not every kind of product can be manufactured using this system. E.g. custom made
items like custom jewelry of food and beverages(their process can be automated to an
extent but the preparation and presentation of certain foods and drinks rely on the skill
and ability of a human)
Downtime required for maintenance
Computers and machines can fail
Flexible Manufacturing System (FMS)
(FMS) is a production method that is designed to easily adapt to changes in the type and
quantity of the product being manufactured. Machines and computerized systems can be
configured to manufacture a variety of parts and handle changing levels of production.
Understanding a Flexible Manufacturing System (FMS)
A flexible manufacturing system (FMS) can improve efficiency and reduce production costs,
which are crucial concerns in the process of business development. Flexible manufacturing also
can be a key component of a make-to-order strategy that allows customized products and keeps
inventories low. Such flexibility can come with higher up-front costs. Purchasing and installing
the specialized equipment that allows for such customization may be costly compared with
more traditional systems
An FMS may include a configuration of interconnected workstations with computer terminals
that process the end-to-end creation of a product. Functions may include loading and
unloading, machining and assembly, storing, quality testing, and data processing. The system
can be programmed to run a batch of one set of products in a particular quantity and then
automatically switch over to another set of products in another quantity.
(FMS) offers several advantages and disadvantages:
Advantages of FMS:
1. Increased Flexibility: FMS can quickly adapt to changes in production
requirements, making it ideal for small batch or custom manufacturing.
2. High Efficiency: FMS can operate 24/7 with minimal downtime, resulting in
higher production rates and lower production costs per unit.
3. Reduced Labor Costs: Automation in FMS reduces the need for manual labor,
saving on labor expenses and minimizing the risk of human error.
4. Improved Quality Control: FMS can consistently produce high-quality products
with precise tolerances, reducing defects and rework.
5. Quick Changeovers: FMS can switch between different products or processes
rapidly, reducing setup times and increasing overall productivity.
6. Inventory Reduction: With just-in-time production capabilities, FMS can minimize
inventory levels and associated holding costs.
7. Scalability: FMS can be easily expanded or modified to accommodate changing
production demands, making it a long-term investment.
Disadvantages of FMS:
1. High Initial Costs: Implementing an FMS can be expensive due to the cost of automation
equipment, software, and integration.
2. Complex Maintenance: FMS requires regular maintenance, and breakdowns can lead to
costly production interruptions.
3. Skilled Workforce: Operating and maintaining an FMS requires a skilled workforce, which
can be a challenge to find and train.
4. Technology Obsolescence: Rapid advancements in technology can lead to the
obsolescence of FMS components, requiring expensive upgrades.
5. Limited Adaptability: FMS may not be suitable for all types of products or manufacturing
processes, limiting its applicability. E.g., higher customized/one of a kind products, very
large and heavy products, products with highly variable shapes and perishable goods.
Also limited when production requirements changing very rapidly/unpredictably
6. Initial Learning Curve: Transitioning to an FMS may require time for employees to learn
and adapt to new technologies and processes.
7. Vulnerability to Cybersecurity Risks: As FMS relies on interconnected digital systems, it
can be vulnerable to cyberattacks if not adequately secured.
Overall, FMS can provide significant advantages in terms of flexibility and efficiency, but the
initial costs and complexity of implementation should be carefully considered in the context of
the specific manufacturing needs and constraints.
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The main benefit of an FMS is that it makes production more efficient. Delays are
reduced, as production doesn’t have to be shut down to set up for a different product.
Drawbacks include higher up-front costs and the greater time required to design the
system specifications for a variety of future needs. There is also an additional cost for the
special
Materials Requirements Planning (MRP1)
MRP1 keeps track of a manufacturer’s inventory of incoming raw materials and supplied
components. The MRP system uses this information along with production orders and bills of
materials (BOMs) to calculate the quantity and timing of purchases of additional incoming
goods.
How Material Requirements Planning (MRP) Works
MRP helps businesses and manufacturers define what is needed, how much is needed, and
when materials are needed and works backward from a production plan for finished goods.
MRP converts a plan into a list of requirements for the subassemblies, parts, and raw materials
needed to produce a final product within the established schedule. MRP helps manufacturers
get a grasp of inventory requirements while balancing both supply and demand.
Using MRP, managers can determine their need for labor and supplies and improve their
production efficiency by inputting data into the MRP scheme such as:
Item Name or Nomenclature: The finished good title, sometimes called Level “0” on BOM.
Master Production Schedule (MPS): How much is required to meet demand? When is it
needed?
Shelf life of stored materials.
Inventory Status File (ISF): Materials available that are in stock and materials on order from
suppliers.
Bills of materials (BOM): Details of materials and components required to make each product.
Planning data: Restraints and directions like routing, labor and machine standards, quality and
testing standards, and lot sizing techniques.
MRP and Manufacturing
Manufacturers manage the types and quantities of materials they purchase strategically and
cost-effectively to ensure that they can meet current and future customer demand. MRP helps
companies maintain appropriate levels of inventory so that manufacturers can better align their
production with rising and falling demand.
The MRP process:
• Estimates demand and required materials. After determining customer demand and utilizing
the bill of materials, MRP breaks down demand into specific raw materials and components.
• Allocates Inventory of materials. MRP allocates inventory into the exact areas as needed.
• Schedules Production. Time and labor requirements are calculated to complete manufacturing
and a timeline is created.
• Monitors the process. MRP automatically alerts managers of any delays and even suggests
contingency plans to meet build deadlines.
Pros
Assures that materials and components are available when needed
Minimized inventory levels and associated costs
Reduced customer lead times
Increased manufacturing efficiency
Increased labor productivity
Cons
Heavy reliance on input data accuracy
Expensive to implement
Lack of flexibility in the production schedule
Tendency to hold more inventory than needed
Less capable than an overall ERP system
Streamlined manufacturing processes
Elimination of clerical tasks
Data accuracy risk as a disadvantage(the data you have to put into the system needs to be
consistent and accurate, otherwise it could produce underwhelming or even detrimental
results. This, however, is not a disadvantage that is only specific to MRP/ERP systems. When you
manage your business with a pen and paper, you can still make errors – and even more so.)
Manufacturing Resource Planning (MRP2)
Manufacturing resource planning is a system that is used to effectively plan the use of a
manufacturer’s resources. It enables manufacturers to develop a precise production schedule
for the future that minimizes costs and maximizes the use of the resources available at their
disposal.
It’s an information system that is used by businesses involved in manufacturing goods. The
integrated information system facilitates the decision-making process for management by
centralizing, integrating, and processing information related to the manufacturing process.
It enables management to make an accurate visualization of the scheduling and inventory
process and design engineering and to effectively employ cost-control measures.
This computer-based system designs precise production schedules and provides a target
production level using real-time data to organize the labor and machine availability with
materials for a particular production cycle. You can use MRP II to determine what resources you
require, how much to allocate and when to use the resources to fulfill demand.
MRP II also helps you find the optimal order quantity and raw materials frequency by adding
average use for a planned restock lead time and safety stock. The system depends on the quality
of data to work efficiently, making it essential to keep clean records and precise and updated
data entering. You can make informed decisions in scheduling, inventory management and cost
control using MRP II.
It's important because…
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Allows companies to accelerate their production record processes with timely
availability of materials
Improves customer experience by fulfilling orders on time
Increases efficiency by facilitating communication and eliminating manual processes
Helps with purchasing and production planning and minimizes inventory levels and
carrying costs
Prevents delays in the production cycle and increases production yield
Enhances work scheduling to align with labor time
Leads to more competitive pricing
Optimizes a company’s manufacturing resource and machinery usage
MRP I vs. MRP II
While MRP II developed from MRP I, or materials requirements planning, there are several
differences between the two systems. MRP I focuses mostly on short-term manufacturing
capabilities. This includes managing a company’s schedule and controlling inventory for raw
materials and other components. MRP I has three major functionalities:
Bill of materials (BOM): The bill of materials compiles an inventory of all raw materials and other
components to build a product. It can help you plan for purchases of raw materials, estimate
material costs, track and plan material requirements, improve inventory control and reduce
waste.
Inventory tracking: MRP I monitors where the inventory is in the supply chain process to ensure
the right amount of supply is available. It’s essential to keep current records and document each
receipt and disbursement for efficiency.
Master production scheduling (MPS): Master production scheduling assists manufacturing
companies in determining when to make certain products. You can know pending outstanding
work orders because it takes all requirements and plans for labor, machine usage and
workstations.
MRP II provides a more realistic representation of a company’s operating capabilities. It has
similar functionalities as MRP I and includes factors related to the long-term performance of a
business. MRP II, like a closed-loop system, can provide feedback on a specific operation. The
additional capabilities MRP II includes are:
Demand forecasting: Demand forecasting uses historical data from a company to estimate the
potential customer demand for a product. You can make better-informed supply decisions that
estimate revenue and total sales ahead of time.
General accounting: Manufacturing companies monitor their accounting activities that include
account charges. These activities help determine whether the company makes a profit or a loss.
Machine capacity scheduling: You can use this to determine how much work a company can
accomplish in a period. Proper use and implementation of MRP II can help you plan for capacity
needs and allocate production time.
Quality assurance: This is the maintenance of a company’s standards through every stage of
production. It’s an important part of manufacturing that can result in better management and
higher production and profitability.
Advantages
1. Maximum Efficiency:
The top advantage of MRP II is that it is an overall strategy rather than a proprietary software
program. It helps manufacturing leaders plan their resources for maximum efficiency.
2. Production on a Day-to-Day Basis:
Manufacturing Resource Planning ensures that manufacturers have the needed materials and
human resources to manage production on a day-to-day basis. This strategy also decreases
waste as it allows management to only order what they require.
3. Create Standards:
MRP II creates standards that can be acted across all areas of operations. If those standards are
accurately put in place, then leaders can regularly observe performance and highlight areas
where improvements should be made.
4. Provide Guidelines:
MRP II also provides guidelines to the employees charged with doing the work every day, since
their job expectations will be clearly outlined from the beginning.
Disadvantages
1. Risk in Implementing:
MRP II is a technology-driven or software-based process so one mistake or misinformation can
throw things off. Maybe its’ a software-based system but that is operated by humans, so, any
time mistakes could take place.
2. Loss of Productivity:
If teams depend heavily on software, the system goes down for a few hours sometimes. In this
way, the operations can come to a halt.
3. Not for All:
Those manufacturers who specialize in engineer-to-order products may find that the framework
isn’t as valuable as it would be for make-to-stock manufacturers. It is also not perfect for small
manufacturers or manufacturers with low investments.
4: Data Accuracy Risk:
The most significant risk of a Manufacturing Resource Planning (MRP II) system is that the data
you have to put into the system must be consistent, valid, and accurate, otherwise, it could
deliver bad or underwhelming results.
Optimized Production Technology (OPT)
The OPT (Optimized Production Technology) is a method of production flow management. It is
essentially based on the identification and the removal of bottle necks, origin of useless stocks
(mudas) in the production line. The aim of this method is to put a maximum just-in-time flow
through the whole chain, without creating any additional stocks.
OPT is a methodology that is used to improve the production processes of manufacturing
businesses. It is a comprehensive and integrated approach to planning and scheduling, which
aims to improve production efficiency, reduce lead-times, and increase profitability.
OPT is based on the principle that reducing bottlenecks in a system while optimizing and
scheduling non-bottlenecks maximizes the throughput (movement/production) of a system
which in turn increases profits.
Production bottlenecks
To better understand the OPT principles, it is important to define two concepts:
Bottleneck resource: is the name given when a resource interferes with the production flow,
that is, when it has less availability than other stations on the production line, generating a
productive bottleneck.
*A bottleneck resource is like a traffic jam in a production line. It happens when one resource
can’t keep up with the others, slowing down the whole process. This is a problem because it
limits how much can be produced.
Non-bottleneck resource: It is when there is no variation in the production rhythm, since the
availability is equal to or greater than necessary, without interfering in the production capacity.
*A non-bottleneck resource is like a smoothly flowing river in a production line. It works at a
pace that matches what’s needed, so it doesn’t slow down production.
Non-bottleneck resources should never be operated at full (i.e. 100%) capacity because this
would lead to increased inventory and potential wastage
This statement is generally true in the context of production and operations management.
When non-bottleneck resources are operated at full capacity all the time, it can lead to
increased inventory and potential wastage. Here’s what it means:
1. **Increased Inventory**: If non-bottleneck resources are producing at their maximum
capacity, they might be making more products than are immediately needed
downstream in the production process. This excess production leads to a buildup of
inventory, which can tie up capital and storage space.
2. **Potential Wastage**: The excess inventory generated by running non-bottleneck
resources at full capacity can become obsolete or spoil if it’s not used promptly. This can
result in wastage and financial losses.
To optimize production efficiency, it’s often recommended to balance the flow of resources in a
way that matches the pace of the bottleneck resource (the slowest part of the process). This
helps prevent overproduction, excessive inventory, and potential wastage while maximizing
overall production capacity.
**Key Features:**
1. **Focus on Constraints:** OPT identifies and manages constraints or bottlenecks in the
production process. It emphasizes optimizing the utilization of these bottleneck
resources to maximize overall production output.
2. **Drum-Buffer-Rope:** OPT uses the Drum-Buffer-Rope (DBR) approach, where the
“drum” represents the bottleneck resource, the “buffer” is used to protect against
disruptions, and the “rope” controls the release of materials into the system to match
the pace of the drum.
3. **Scheduling:** It provides a scheduling mechanism that ensures non-bottleneck
resources do not overproduce, preventing excess inventory buildup.
**Pros:**
1. **Increased Efficiency:** OPT can lead to increased production efficiency by focusing
efforts and resources on the bottleneck areas, which have the most significant impact on
overall throughput.
2. **Reduced Inventory:** By synchronizing production with the bottleneck resource, OPT
helps reduce excess inventory and associated carrying costs.
3. **Improved Delivery Times:** Optimized production scheduling can lead to shorter lead
times and improved delivery performance to customers.
**Cons:**
1. **Complex Implementation:** Implementing OPT can be complex, as it requires a deep
understanding of the production process, accurate identification of bottlenecks, and the
development of an effective scheduling system.
2. **Resistance to Change:** Introducing OPT may face resistance from employees who
are accustomed to existing production methods and schedules.
3. **Not Always Applicable:** OPT may not be suitable for all types of manufacturing
processes. It’s most effective in situations where there are clear bottlenecks limiting
production. OPT works best when there are clear production problems (like bottlenecks).
But it won’t work for every type of manufacturing, so you need to pick the right
situations for it to be effective. E.g. A real-life example of when OPT may not be
applicable is in the fast-fashion retail industry. In this industry, clothing retailers often
respond rapidly to changing fashion trends and customer preferences. Demand for
specific clothing items can vary significantly from one week to the next, and new designs
need to be quickly introduced to meet market demands.
In such a scenario, implementing OPT, which relies on stable and predictable production
schedules, may not be practical. The fluctuating and unpredictable demand for fashion
items makes it challenging to maintain the consistent flow of work required by OPT.
Instead, the fast-fashion industry often uses flexible and agile manufacturing approaches
that can quickly adapt to changing product lines and customer preferences, even at the
expense of some production efficiency. It’s suitable for automotive, aerospace,
electronics and pharmaceuticals production.
4. **Maintenance Challenges:** Maintaining the balance between bottleneck and nonbottleneck resources can be challenging, as changes in the production environment or
demand fluctuations may require constant adjustments.
In summary, OPT is a production management approach that focuses on optimizing the use of
bottleneck resources to improve overall efficiency. While it has the potential to deliver
significant benefits, its successful implementation requires careful planning and ongoing
monitoring to adapt to changing conditions.
Strategic lead time management
Six Sigma
Six Sigma is a quality improvement methodology for businesses that counts the number of flaws
in a process and aims to systematically fix them. Businesses utilize it to get rid of flaws and
enhance any of their procedures in an effort to increase earnings.
Six Sigma is a set of methodologies and tools used to improve business processes by reducing
defects and errors, minimizing variation, and increasing quality and efficiency. The goal of Six
Sigma is to achieve a level of quality that is nearly perfect, with only 3.4 defects per million
opportunities. This is achieved by using a structured approach called DMAIC (Define, Measure,
Analyze, Improve, Control) to identify and eliminate causes of variation and improve processes
The term “Six Sigma” refers to a statistical measure of how far a process deviates from
perfection. A process that operates at six sigma has a failure rate of only 0.00034%, which
means it produces virtually no defects. Six Sigma was developed by Motorola in the 1980s, and
it has since been adopted by many other companies around the world, including General
Electric, Toyota, and Amazon. It is used in industries such as manufacturing, healthcare, finance,
and service industries to improve customer satisfaction, reduce costs, and increase profits.
DEFINE
The Six Sigma process begins with a customer-centric approach.
Step 1: The business problem is defined from the customer perspective.
Step 2: Goals are set. What do you want to achieve? What are the resources you will use to
achieve the goals?
Step 3: Map the process. Verify with the stakeholders that you are on the right track. Process
mapping is used in business and project management to visually represent the steps involved in
a process.
MEASURE
The second phase is focused on the metrics of the project and the tools used in the
measurement. How can you improve? How can you quantify this?
Step 1: Measure your problem in numbers or with supporting data.
Step 2: Define performance yardstick (a standard or measure used to asses and evaluate
performance. It's a clear and objective way to gauge how well something is performing, if goals
have been met and established where improvements can be made). Fix the limits for “Y.”
Step 3: Evaluate the measurement system to be used. Can it help you achieve your outcome?
ANALYZE
The third phase analyzes the process to discover the influencing variables.
Step 1: Determine if your process is efficient and effective. Does the process help achieve what
you need?
Step 2: Quantify your goals in numbers. For instance, reduce defective goods by 20%.
Step 3: Identify variations using historical data.
IMPROVE
This process investigates how the changes in “X” impact “Y.” This phase is where you identify
how you can improve the process implementation.
Step 1: Identify possible reasons. Test to identify which of the “X” variables identified in Process
III influence “Y.”
Step 2: Discover relationships between the variables.
Step 3: Establish process tolerance, defined as the precise values that certain variables can have,
and still fall within acceptable boundaries, for instance, the quality of any given product. Which
boundaries need X to hold Y within specifications? What operating conditions can impact the
outcome? Process tolerances can be achieved by using tools like robust optimization and
validation set.
CONTROL
In this final phase, you determine that the performance objective identified in the previous
phase is well implemented and that the designed improvements are sustainable.
Step 1: Validate the measurement system to be used.
Step 2: Establish process capability. Is the goal being met? For instance, will the goal of reducing
defective goods by 20 percent be achieved?
Step 3: Once the previous step is satisfied, implement the process.
Simplified steps…
1. **Define:** In this initial phase, you define the problem or opportunity for
improvement. Clearly state the problem’s scope, goals, and objectives. Establish what
the project aims to achieve and why it’s important. Create a project charter to document
these details.
2. **Measure:** Once you’ve defined the problem, focus on gathering data and metrics
(Measure your problem in numbers or with supporting data) to measure the current
state of the process or system. Identify the key performance indicators (KPIs) and collect
relevant data. This step provides a baseline for Understanding the process's current
performance.
3. **Analyze:** With data in hand, analyze it to identify root causes of the problem. Use
tools like data analysis, process maps, cause-and-effect diagrams (Fishbone diagrams),
and statistical analysis to pinpoint the factors contributing to the issue.
4. **Improve:** After understanding the root causes, work on developing and
implementing solutions to address them. Generate ideas for improvement, test them,
and implement the changes in the process. This phase aims to optimize the process to
achieve the project’s goals.
5. **Control:** The final phase involves creating a control plan to ensure that the
improvements made in the “Improve” phase are sustained over time. Establish
monitoring and feedback mechanisms to track performance, and put in place preventive
measures to avoid reverting to the old ways of doing things.
Throughout the DMAIC cycle, there’s an emphasis on data-driven decision-making and a
systematic approach to problem-solving. It's a continuous improvement process, and lessons
learned from one project can inform and improve future projects. DMAIC is a valuable
methodology for organizations seeking to enhance processes, reduce defects, and achieve
better overall performance.
Six Sigma Techniques
The Six Sigma methodology also uses a mix of statistical and data analysis tools such as process
mapping and design and proven qualitative and quantitative techniques, to achieve the desired
outcome.
Brainstorming
Brainstorming is the key process of any problem-solving method and is often utilized in the
“improve” phase of the DMAIC methodology. It is a necessary process before anyone starts
using any tools. Brainstorming involves bouncing ideas and generating creative ways to
approach a problem through intensive freewheeling group discussions. A facilitator, who is
typically the lead Black Belt or Green Belt, moderates the open session among a group of
participants.
Root Cause Analysis/The 5 Whys
This technique helps to get to the root cause of the problems under consideration and is used in
the “analyze” phase of the DMAIC cycle.
In the 5 Whys technique, the question “why” is asked, again and again, finally leading up to the
core issue. Although “five” is a rule of thumb, the actual number of questions can be greater or
fewer, whatever it takes to gain clarity.
Voice of the Customer
This is the process used to capture the “voice of the customer” or customer feedback by either
internal or external means. The technique is aimed at giving the customer the best products and
services. It captures the changing needs of the customer through direct and indirect methods.
The voice of the customer technique is used in the “define’ phase of the DMAIC method, usually
to further define the problem to be addressed.
The 5S System
This technique has its roots in the Japanese principle of workplace energies. The 5S System is
aimed at removing waste and eliminating bottlenecks from inefficient tools, equipment, or
resources in the workplace. The five steps used are Seiri (Sort), Seiton (Set In Order), Seiso
(Shine), Seiketsu (Standardize), and Shitsuke (Sustain).
Kaizen (Continuous Improvement)
The Kaizen technique is a powerful strategy that powers a continuous engine for business
improvement. It is the practice continuously monitoring, identifying, and executing
improvements. This is a particularly useful practice for the manufacturing sector. Collective and
ongoing improvements ensure a reduction in waste, as well as immediate change whenever the
smallest inefficiency is observed.
Benchmarking
Benchmarking is the technique that employs a set standard of measurement. It involves making
comparisons with other businesses to gain an independent appraisal of the given situation.
Benchmarking may involve comparing important processes or departments within a business
(internal benchmarking), comparing similar work areas or functions with industry leaders
(functional benchmarking), or comparing similar products and services with that of competitors
(competitive benchmarking).
Poka-yoke (Mistake Proofing)
This technique’s name comes from the Japanese phrase meaning “to avoid errors,” and entails
preventing the chance of mistakes from occurring. In the poka-yoke technique, employees spot
and remove inefficiencies and human errors during the manufacturing process.
Value Stream Mapping
The value stream mapping technique charts the current flow of materials and information to
design a future project. The objective is to remove waste and inefficiencies in the value stream
and create leaner operations. It identifies seven different types of waste and three types of
waste removal operations.
Advantages of Six Sigma
Enhanced quality
Implementing Six Sigma leads to a significant improvement in the quality of products and
services. Organizations can consistently meet or exceed customer expectations by identifying
and eliminating defects. This focus on quality enhances customer satisfaction and helps build a
strong reputation for the organization.
Process optimization
Six Sigma emphasizes process optimization by identifying and eliminating waste and
inefficiencies. By streamlining processes and reducing variation, organizations can achieve
higher levels of productivity and efficiency. This, in turn, leads to cost savings and improved
overall performance.
Data-driven decision making
Six Sigma relies heavily on data analysis to drive decision-making. This approach ensures that
decisions are based on proper facts and data rather than opinions or gut feelings. Organizations
can minimize the risk of making incorrect or biased judgments by making data-driven decisions.
Increased customer satisfaction
Six Sigma plays a crucial role in enhancing customer satisfaction. Moreover, satisfied customers
are more likely to become repeat customers and recommend the organization to others,
contributing to long-term success. It does this by:
a) Improving quality: Six Sigma focuses on quality improvement by systematically
identifying and addressing defects, errors, and process variations.
b) Reducing defects: Implementing Six Sigma leads to fewer errors, rework, and
customer complaints, ultimately improving the overall quality of products and
services.
c) Fulfilling customer needs: It improves customer satisfaction by delivering services
and products that align with customer needs and expectations.
Cost reduction
By eliminating defects, reducing waste, and optimizing processes, Six Sigma helps organizations
achieve cost savings. It streamlines operations and makes them more efficient, thereby reducing
unnecessary expenses:
a) Rework: Six Sigma focuses on identifying and addressing the root causes of
defects, aiming to eliminate the need for rework.
b) Scrap: Six Sigma emphasizes waste reduction, including minimizing scrap
materials and thereby minimizing expenses related to that.
c) Customer complaints: Six Sigma aims to enhance client satisfaction by delivering
high-quality products and services.
Employee engagement and skill development
Implementing Six Sigma involves training employees in problem-solving methodologies and
statistical analysis. This investment in employee development leads to increased engagement
and empowerment. Employees become more involved in process improvement initiatives,
contributing their knowledge and skills to drive positive organizational change.
Competitive advantage
Six Sigma provides organizations with a competitive edge in the market. Organizations can
differentiate themselves from competitors by consistently delivering high-quality products and
services. This competitive advantage can attract new customers, retain existing ones, and open
up opportunities for business growth.
Sustainable improvement
Six Sigma is not a one-time fix but a continuous improvement process. It establishes a culture of
ongoing organizational improvement, where processes are regularly reviewed, analyzed, and
optimized. This commitment to continuous improvement leads to sustainable long-term results
and ensures that the organization stays ahead of its competitors.
Continuous improvement culture
Six Sigma fosters a culture of continuous improvement within the organization. It encourages
employees to seek opportunities for improvement consistently and empowers them to make
data-driven decisions. This culture of continuous improvement becomes ingrained in the
organization’s DNA, leading to a mindset where everyone is focused on driving positive change.
Application in various industries
Six Sigma has proven effective in many industries, including manufacturing, healthcare, finance,
telecommunications, and more. Its principles and methodologies can be adapted to suit the
specific requirements of each industry. This versatility makes it a valuable tool for organizations
across different sectors.
Disadvantages of Six Sigma
Time-intensive
Implementing Six Sigma requires a significant investment of time and resources. It can be
lengthy, and organizations must allocate adequate time and resources to ensure successful
implementation. It involves the following tasks:
1) Training employees
2) Conducting data analysis
3) Implementing improvement projects
Complex methodology
Six Sigma is a rigorous and complex methodology that requires a deep understanding of
statistical analysis and problem-solving techniques. This complexity can make adopting and
implementing it is challenging for organizations without proper training and support.
Resistance to change
Introducing Six Sigma may face resistance from employees who are accustomed to existing
processes and methodologies. Change management becomes crucial to overcome resistance
and ensure the smooth adoption of Six Sigma throughout the organization.
Overemphasis on metrics
While metrics are an essential component of Six Sigma, there is a risk of overemphasizing
metrics and becoming solely focused on meeting numerical targets. This can lead to a neglect of
other important aspects like:
a) Customer Satisfaction
b) Employee engagement
c) Innovation
Overreliance on experts
Six Sigma often relies on the expertise of trained professionals known as Black Belts and Green
Belts. While their knowledge and skills are valuable, an overreliance on these experts can create
a dependency and hinder the organization’s ability to sustain improvement efforts in the long
run.
Lack of flexibility
The structured nature of Six Sigma can sometimes limit flexibility in responding to rapidly
changing business environments. Organizations need to strike a balance between
standardization and the ability to adapt to evolving market conditions.
Implementation challenges
Implementing Six Sigma across an entire organization can be a complex task. It requires strong
leadership, effective communication, and collaboration across different departments and
functions. Failure to address these implementation challenges can hinder its successful
adoption.
Overemphasis on defect reduction
While defect reduction is a crucial goal of Six Sigma, organizations should not solely focus on
eliminating defects at the expense of other important factors such as customer experience,
employee satisfaction, and organizational growth.
SCHEDULING TECHNIQUES
JIT
MRP
MRPII
(ERP)-Enterprise Resource Planning
(ERP) refers to a type of software that organizations use to manage day-to-day business
activities such as accounting, procurement, project management, risk management and
compliance, and supply chain operations.
(ERP) is a platform companies use to manage and integrate the essential parts of their
businesses.
Enterprise Resource Planning (ERP) is like a central hub that connects various computer systems
within a large organization. Instead of each department having its specialized system, ERP
software allows all departments to access their systems through a unified application with a
single interface.
What does ERP do?
ERP enables departments to communicate and share information seamlessly within a company.
It gathers data from various divisions and makes it accessible to other parts of the organization
for productive use.
Benefits of Enterprise Resource Planning
Businesses employ enterprise resource planning (ERP) for various reasons, such as expanding,
reducing costs, and improving operations. The benefits sought and realized between companies
may differ; however, some are worth noting.
Improves Accuracy and Productivity
Integrating and automating business processes eliminates redundancies and improves accuracy
and productivity. In addition, departments with interconnected processes can synchronize work
to achieve faster and better outcomes.
Improves Reporting
Some businesses benefit from enhanced real-time data reporting from a single source system.
Accurate and complete reporting help companies adequately plan, budget, forecast, and
communicate the state of operations to the organization and interested parties, such as
shareholders.
Increases Efficiency
ERPs allow businesses to quickly access needed information for clients, vendors, and business
partners. This contributes to improved customer and employee satisfaction, quicker response
rates, and increased accuracy rates. In addition, associated costs often decrease as the company
operates more efficiently.
Increases Collaboration
Departments are better able to collaborate and share knowledge; a newly synergized workforce
can improve productivity and employee satisfaction as employees are better able to see how
each functional group contributes to the mission and vision of the company. Also, menial and
manual tasks are eliminated, allowing employees to allocate their time to more meaningful
work.
ERP Weaknesses
An ERP system doesn’t always eliminate inefficiencies within a business or improve everything.
The company might need to rethink how it's organized or risk ending up with incompatible
technology.
ERP systems usually fail to achieve the objectives that influenced their installation because of a
company's reluctance to abandon old working processes. Some companies may also be
reluctant to let go of old software that worked well in the past. The key is to prevent ERP
projects from being split into smaller projects, which can result in cost overruns.
SUPPLY CHAIN MANAGEMENT
At the most fundamental level, supply chain management (SCM) is management of the flow of
goods, data, and finances related to a product or service, from the procurement of raw
materials to the delivery of the product at its final destination.
Supply chain activities span procurement, product lifecycle management, supply chain planning
(including inventory planning and the maintenance of enterprise assets and production lines),
logistics (including transportation and fleet management), and order management. SCM can
also extend to the activities around global trade, such as the management of global suppliers
and multinational production processes.
The Internet, technology innovation, and the explosion of the demand-driven global economy
have changed SCM. Today’s supply chain is no longer a linear entity. Rather, it’s a complex
collection of different networks that can be accessed 24 hours a day. At the center of these
networks are consumers expecting their orders to be fulfilled―when they want them, the way
they want them.
Today’s SCM is all about the customer
SCM has historically been about increasing efficiency and reducing costs. Although those needs
haven’t changed, what has changed is that the customer is now playing a front-and-center role
in setting SCM priorities. It’s been said that “customer experiences live and die in the supply
chain.”
Customer loyalty is predicated on an enterprise being able to quickly and accurately fulfill
customer expectations. Raw materials, manufacturing, logistics, and trade and order
management must all be coordinated to get a given item to the customer within a reasonable
timeframe. To accomplish this, companies must look at their supply chains through their
customers’ eyes. It’s not simply about getting the order to the customer on time; it’s about
doing everything at the right time—before, during, and after order delivery.
The upstream supply chain includes all activities related to the organization’s suppliers: those
parties that source raw material inputs to send to the manufacturer. The downstream supply
chain refers to activities post-manufacturing, namely distributing the product to the final
customer.
Downstream supply chain can also be thought of as the “demand” while upstream supply chain
is the “supply.” Supply chain managers seek to balance demand and supply to make sure that
there are no lost sales, inventory shortages, or over-ordering.
The three main flows that happen in the creation and distribution of a product are;
1. the flow of materials
2. The flow of money
3. The flow of information.
1. In essence, material flow isn’t solely a one-way journey from raw materials to finished
products. It also involves handling returns and establishing efficient processes for both
downstream partners and customer exchanges within distributor agreements.
2. Money in the supply chain generally flows from downstream to upstream. Retailers pay
distributors, who, in turn, pay manufacturers. Effective controls and record-keeping
systems are crucial for avoiding waste, delays, and ensuring partners comply with their
agreements.
3. Lastly, the exchange of information plays a crucial role in overall performance.
Collaborative communication between partners at different stages of the supply chain is
essential for optimizing productivity and refining their operations. Ensuring transparency
across the entire supply chain can foster and strengthen enduring, mutually beneficial
relationships.
COMMON SUPPLY CHAIN MODELS
An important distinction to make is that each model will focus on achieving one of two larger
ideal goals:
Efficiency
Responsiveness
That said, the reality is that each type of supply chain management philosophy includes
elements of both efficiency and responsiveness. And that makes sense if you think about it. If
your supply chain is extremely efficient, it won’t be able to respond to disruption. On the other
hand, if the supply chain does nothing but respond to individual or small requests, it won’t be
very efficient at turning out much volume.
As such, let’s take a deeper look a the pros and cons of each model.
The Continuous Flow Model
The continuous flow model is built around efficiency. It offers stability in high-volume
environments. This classic model is best suited for manufacturers who produce the same
product repeatedly, with little design fluctuation or alteration.
This model is ideal for commodity manufacturing. Its high level of efficiency is reflected in low
product prices. For manufacturers, margins are based on raw material prices. That sounds like
science to me.
The Fast Chain Model
The fast chain model is built for responsiveness. It’s ideal for manufacturers who change their
product line frequently. This model is the best suited for trendy products with short life spans.
In this example, the manufacturer that can flood the market before the trend cycle ends is the
manufacturer that wins.
This model emphasizes the competitive advantage of the first adopter. But the true driver of the
fast chain is the designer—and the marketing department. Put another way, if you can create
your own trend, you’ll be the first to market. In short, this model is driven by art.
The Efficient Chain Model
The efficient chain model is for hypercompetitive industries where end-to-end efficiency is the
ultimate goal. This model relies heavily on production forecasting in order to properly burden
and sweat machinery assets.
The efficient model also relies heavily on commodity and raw material prices. In the postpandemic world, efficient chains are struggling with capacity issues. Drivers for this are labor
shortages, material shortages, and delays.
The bottom line Is this. When you miss a forecast, it can create a ripple effect. This can result in
lengthy lead times and inflated prices for manufacturers up and down the supply chain. And
that’s when you hear a lot of artful language.
The Agile Model
The agile model is ideal for manufacturers that deal in specialty items. This model is finely tuned
for small batches of product. That requires less automation and more expertise. And that
additional value-add in turn allows businesses using this model to command higher prices.
Agile-model businesses can ramp up volume. But past a certain volume threshold, they typically
prove uncompetitive. Compared with efficient-chain-model businesses, at higher volumes agile
businesses get blown out of the water from a pricing standpoint.
The Custom-Configured Model
The custom-configuration model focuses on providing custom setups during production and
assembly. Most often, this setup time occurs at the beginning of a lengthier production and
assembly run process. For example, certain prototype or limited-production builds fall into
custom-configured manufacturing.
This is a higher-touch model that can include quicker turnaround times and small batches of
products. In essence, the custom-configuration model is combination of the agile and
continuous flow models.
The Flexible Model
The flexible model tries to be the best of all worlds. It can react to high volume demands during
a peak season. On the other hand, flexible model businesses can manage and absorb stretches
of low or no demand. This model is like a light switch. Flip it on or off as needed.
To pull off the flexible supply chain model, a business requires the right tool (or automated
machinery) for the job. This model also requires a broad supplier network or personnel who
have a broad knowledge base.
The Lean Model
A lean supply chain model is a business approach focused on minimizing waste and maximizing
efficiency in the flow of materials, information, and processes. It aims to deliver products or
services to customers with minimal inventory and resources, reducing costs and improving
responsiveness. Key principles of a lean supply chain include just-in-time (JIT) inventory
management, continuous improvement, and a strong emphasis on eliminating non-value-added
activities. This model is often associated with Toyota’s production system and has been widely
adopted across various industries to enhance competitiveness.
Parts of a supply chain
Planning
To get the best results from SCM, the process usually begins with planning to match supply with
customer and manufacturing demands. Firms must predict what their future needs will be and
act accordingly. This relates to raw materials needed during each stage of manufacturing,
equipment capacity and limitations, and staffing needs along the SCM process. Large entities
often rely on ERP system modules to aggregate information and compile plans.
Sourcing
Efficient SCM processes rely very heavily on strong relationships with suppliers. Sourcing entails
working with vendors to supply the raw materials needed throughout the manufacturing
process. A company may be able to plan and work with a supplier to source goods in advance.
However, different industries will have different sourcing requirements. In general, SCM
sourcing includes ensuring:
*The raw materials meet the manufacturing specification needed for the production of goods.
*The prices paid for the goods are in line with market expectations.
*The vendor has the flexibility to deliver emergency materials due to unforeseen events.
*The vendor has a proven record of delivering goods on time and in good quality.
Supply chain management is especially critical when manufacturers are working with perishable
goods. When sourcing goods, firms should be mindful of lead time and how well a supplier can
comply with those needs.
Manufacturing
At the heart of the supply chain management process, the company transforms raw materials
by using machinery, labor, or other external forces to make something new. This final product is
the ultimate goal of the manufacturing process, though it is not the final stage of supply chain
management.
The manufacturing process may be further divided into sub-tasks such as assembly, testing,
inspection, or packaging. During the manufacturing process, a firm must be mindful of waste or
other controllable factors that may cause deviations from original plans. For example, if a
company is using more raw materials than planned and sourced for due to a lack of employee
training, the firm must rectify the issue or revisit the earlier stages in SCM.
Delivering
Once products are made and sales are finalized, a company must get the products into the
hands of its customers. The distribution process is often seen as a brand image contributor, as
up until this point, the customer has not yet interacted with the product. In strong SCM
processes, a company has robust logistic capabilities and delivery channels to ensure timely,
safe, and inexpensive delivery of products.
This includes having a backup or diversified distribution methods should one method of
transportation temporarily be unusable. For example, how might a company’s delivery process
be impacted by record snowfall in distribution center areas?
Returning
The supply chain management process concludes with support for the product and customer
returns. Its bad enough that a customer needs to return a product, and its even worse if its due
to an error on the company’s part. This return process is often called reverse logistics, and the
company must ensure it has the capabilities to receive returned products and correctly assign
refunds for returns received. Whether a company is performing a product recall or a customer is
simply not satisfied with the product, the transaction with the customer must be remedied.
Many consider customer returns as an interaction between the customer and the company.
However, a very important part of customer returns is the intercompany communication to
identify defective products, expired products, or non-conforming goods. Without addressing the
underlying cause of a customer return, the supply chain management process will have failed,
and future returns will likely persist.
Importance of Supply Chain Management
Reduced Costs – Supply chain managers are often focused on reducing the costs incurred at all
steps within the supply chain. Improving production processes, relationships with suppliers, and
inventory management are some of the ways that supply chain managers can attempt to further
reduce costs. The overall benefit of reducing costs throughout the supply chain is an increase in
firm profits. Even reducing the cost of items by a few cents can result in millions of dollars saved
if you
Interconnected Supply Chain – Supply chains can appear like independent strings of a few
companies working together to reach a common goal of delivering products to consumers.
However, it is much more complex than that as the world can easily be viewed as one large
supply chain. Consumers, distributors, producers, and suppliers are consistently communicating
with each other as materials and components are transformed into finished goods that
ultimately end up in the hands of consumers. It is therefore crucial for supply chain managers to
focus on visibility and communication between all components as well as on the growth of their
organization, partnerships, and outsourcing.
Information Transfer and Communication – Supply chain management (SCM) is a necessity for
the foundation of all societies. Effective communication and information transfer in real-time is
a necessity for the foundation of a robust supply chain. This starts by building strong
relationships between all components of the supply chain and ensuring that communication is
easy and that all parties are aligned towards a common goal. As information flows backwards
from the end-consumer to the supplier, supply chain managers must reduce any delays or errors
in the information that is transferred from one chain link to another. Many modern
manufacturers are relying on advanced technology that can increase the visibility of order
statuses to both consumers and suppliers in real-time to meet everyone’s needs.
Better Customer Service – Effective supply chain management can provide direct improvement
to your customer service. This is because SCM processes will ensure that the correct quantity of
the correct items will be delivered in a timely manner. Having an interconnected network of
suppliers and distributors will reduce delays and improve customer satisfaction. In addition,
supply chain management will usually increase visibility and allow both customers and
customer service personnel to know of the status of each order at all times.
Agility – To be agile is to be able to move quickly and easily. Supply chain management is
important to allow organizations to remain agile and be able to handle any unexpected issue or
variability that may occur. By streamlining supply chain processes and increasing visibility,
businesses will be able to diagnose problems and find appropriate solutions more quickly. In
addition, having contingency plans and what-if scenario analyses of your production schedule
will allow you to quickly evaluate your options and find the best solution for your company.
TRANSPORT IN THE SUPPLY CHAIN
Freight Forwarders
A freight forwarder is a company or an individual who arranges the transportation of goods on
behalf of a shipper or a consignee (a consignee is the intended recipient of goods, while a
consignor is the sender, they initiate the shipping) (could be a company or individual). Freight
forwarders act as intermediaries between shippers and transportation providers, such as
carriers (E.g. FedEx), trucking companies, and shipping lines.
They do not move the shipment but arrange for the transport by entering into contracts with
carriers who might use single or multiple modes of transport. The freight forwarder services are
proficient in logistics and ensure that the cargo is picked and dropped from and to the right
place and time, at the correct price, and in original condition.
Freight forwarders provide a range of services, including negotiating freight rates, booking cargo
space, preparing shipping documents, arranging customs clearance, and coordinating the
movement of goods from origin to destination. They also provide advice and guidance to
shippers on transportation options, shipping regulations, and documentation requirements.
Freight forwarders can work with different modes of transportation, such as air, sea, road, or
rail, and can handle a variety of cargo types, including general cargo, hazardous materials,
oversized or heavy goods, and perishable items. They can also offer specialized services, such as
door-to-door delivery, warehousing, and distribution.
In summary, freight forwarders are intermediaries that help shippers and consignees to
transport goods from one place to another by coordinating with transportation providers and
providing a range of logistics services. They play a crucial role in international trade by ensuring
the efficient movement of goods and compliance with shipping regulations.
Roles
A freight forwarder works out the logistics and makes sure all bases are covered in the process
of transporting goods from A to B. Typical responsibilities include:
*Considering and planning the most effective route for freight
*Organizing the transportation of freight between intermediate destinations – usually cargo
terminals, port facilities or railway yards
*Tracking the movement of freight using software and satellite technology
*Reporting back to clients, keeping them up-to-date with the progress of goods
*Deciding on the best way to package stock, taking into account factors such as weather, terrain
and type of goods
*Taking appropriate measures for the movement of delicate goods
*Checking countries’ legal requirements to make sure all the appropriate documentation (e.g.
insurance and customs forms) is filled out
*Staying up-to-date with relevant political activities and legislation that might impact the
transportation of freight
*Organizing payments or processes transactions on behalf of the client, such as freight charges.
Why is freight forwarding so important?
Freight forwarding makes the import and export process easier. Specialized services in freight
forwarding provide efficient and stress-free dealing in context to transportation of commodities.
Extremely Knowledgeable
Freight forwarders are experts in the supply chain who have the potential to accomplish tight
deadlines and are able to build an organized system for the timely delivery of goods to avoid
unexpected difficulties like delayed goods or rerouted services. They do all the necessary
paperwork, pay the required tariffs, and handle other taxes.
Excellent Customer Services
They provide excellent customer service and build relationships with global agents in order to
ensure a streamlined process.
Activities involved in customer service
It entails offering assistance to both potential and existing customers. In addition to answering
client inquiries via in-person, phone, email, chat, and social media interactions, these experts
may also be in charge of developing documentation for self-service support.
Cost Saving
If there are high-volume goods to be transported, then there are 90% chances that freight
forwarders will negotiate on lower terms. After getting agreed on lower terms, they consolidate
smaller shipments with other shipments from various businesses to save your money as well as
to create a full load.
Insurance Filing
Freight forwarders possess expertise in getting coverage for shipments as well as providing
insurance whenever anything goes wrong with a shipment.
They work on contract
Freight forwarders often enter into contracts with their clients and various service providers as
part of their operations. These contracts help define the terms, conditions, and responsibilities
of all parties involved in the transportation and logistics process.
There’s different types of entities involved in the management and execution of logistics and
supply chain services.
1st Party Logistics (1PL):
-
1PL refers to a company that handles its own logistics and transportation needs
internally. In other words, the company manages its own warehousing,
transportation, and distribution without outsourcing these services to other
organizations.
2nd Party Logistics (2PL):
-
2PL refers to a company that provides logistics and transportation services
exclusively to another company, typically under a long-term contract or
partnership. This is often seen in industries where a manufacturer or distributor
contracts with a transportation company to handle their shipping needs.
3rd Party Logistics (3PL):
-
3PL refers to companies that specialize in providing logistics and supply chain
services to other companies. They offer a wide range of services, including
transportation, warehousing, order fulfillment, inventory management, and
more. 3PL providers are independent entities that can serve multiple clients and
are often hired to optimize supply chain operations and reduce costs.
4th Party Logistics (4PL):
-
A 4PL provider is a higher-level logistics entity that typically serves as a supply
chain integrator. They often manage multiple 3PLs on behalf of a client or
company. A 4PL provider takes on a more strategic role, coordinating and
optimizing the entire supply chain, including the selection and management of
3PLs and other service providers. They focus on providing comprehensive supply
chain solutions and strategic guidance.
Documents
Bill of Lading
*A bill of lading is a legal document issued by a carrier to a shipper that details the type,
quantity, and destination of the goods being carried.
(A “shipper” is a person or entity that is sending or shipping goods. A “transportation
company/carrier” is a business or organization that provides the means and services for
transporting those goods, such as a trucking company, a shipping line, or a courier service.)
*A bill of lading is a document of title, a receipt for shipped goods, and a contract between a
carrier and a shipper.
*This document must accompany the shipped goods and must be signed by an authorized
representative from the carrier, shipper, and receiver.
*If managed and reviewed properly, a bill of lading can help prevent asset theft.
Airway bill
An air waybill, or an AWB, is a receipt from your air carrier when shipping by air. It is a contract
between the business or individual who is shipping and the carrier organization.
Customs papers
Customs papers, also known as customs documents or customs forms, are a set of paperwork
and declarations required when goods are being imported or exported across international
borders. These documents provide information to customs authorities about the nature, origin,
value, and quantity of the goods being transported. E.g. bill of lading, certificate of origin,
import export license etc.
Certificate of Origin
A certificate issued by an authorized party, typically a chamber of commerce, that confirms the
country of origin of goods. It may be required for customs purposes and to determine eligibility
for trade agreements.
Exchange Control Forms
Documents used by governments to regulate and monitor foreign exchange transactions, often
required for international payments and financial transactions.
Insurance Certificate
A document issued by an insurance company that provides evidence of insurance coverage for
shipped goods. It includes details of the insured items and coverage terms.
Shipping Note
Also known as a shipping order or packing slip, it is a document accompanying a shipment of
goods, listing the contents, quantity, and other relevant information for both the shipper and
receiver.
Collection Order
A financial document instructing a bank to collect payment from a buyer on behalf of a seller. It
ensures the seller receives payment before releasing goods to the buyer.
Port Rate Form
A document used in shipping and logistics that outlines the rates and charges associated with
the use of a specific port’s facilities and services.
Invoice:
A document issued by a seller to a buyer, providing a detailed account of the products or
services sold, their quantities, prices, and payment terms. In international trade, it’s essential
for customs, tax, and payment purposes.
GLOBAL LOGISTICS STRATEGY
Global logistics is the process of planning, coordinating, and executing the movement of goods,
services, and information across borders and boundaries. It involves managing complex
networks of suppliers, distributors, carriers, customs, and regulations.
A global logistics strategy is a comprehensive plan developed by a company to efficiently
manage the movement and distribution of goods and services across international borders. It
involves making strategic decisions related to sourcing, transportation, distribution, and
warehousing to optimize supply chain operations on a global scale. This strategy typically
considers factors such as cost-effectiveness, risk management, regulatory compliance, and
customer satisfaction to achieve the company’s objectives in the global marketplace.
Location Analysis
Location analysis is the process of evaluating and selecting the most suitable physical or
geographical location for a business, facility, or operation. It involves checking the requirements
of specific industries and companies against the prevailing site conditions.
This analysis is crucial for businesses in various industries, as the choice of location can
significantly impact the success and efficiency of their key operations.
Given that every company has different requirements in terms of what makes a location
suitable, the first step is to identify the strategic objectives of the new site.
Factors to consider:
Market Proximity:
Market proximity is a critical consideration in location analysis within the context of a global
logistics strategy. It refers to the closeness or accessibility of a chosen location to the target
market or customer base. Market proximity is particularly important for businesses that rely on
timely deliveries and want to minimize transportation costs and lead times.
-Local Market Access: Being near your target audience will help you market and sell your
products and services with ease.
-Global Market Access: If you’re planning to go global, proximity to transportation hubs like
airports and ports can give you a strategic advantage.
Here's why market proximity matters in global logistics strategy:
1. Reduced Transportation Costs: When a facility, such as a distribution center or
manufacturing plant, is located close to the target market, transportation costs are
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generally lower. This is because shorter distances result in reduced fuel expenses, lower
shipping costs, and fewer transportation-related overheads.
Faster Delivery Times: Proximity to the market allows for quicker delivery of products to
customers. This not only enhances customer satisfaction but also enables businesses to
compete more effectively, especially in industries where rapid delivery is a competitive
advantage.
Inventory Management: Being near the market allows for better inventory management.
Businesses can maintain lower safety stock levels since replenishing inventory is quicker
and more predictable. This can lead to cost savings by reducing excess inventory carrying
costs.
Responsiveness: Closer proximity makes it easier for businesses to respond to market
fluctuations, changes in customer demand, and emerging trends. Quick response times
can be a significant advantage in industries with dynamic market conditions.
Environmental Considerations: Reducing transportation distances is also environmentally
friendly, as it reduces carbon emissions associated with long-haul transportation.
However, it’s important to note that market proximity might not be the sole deciding factor in
location analysis for global logistics strategy. Other considerations, such as labor costs,
regulatory factors, infrastructure, and the competitive landscape, also play a crucial role. The
ideal location strikes a balance between market proximity and these other factors to optimize
overall logistics and supply chain operations.
Access to Skilled Labor
Skilled labor is essential for various aspects of a business, including manufacturing, distribution,
and supply chain management.
-This could mean being closer to an education system like a university. A firm can partner with
the university for R&D, can send it’s workers there for skill development and he school in turn
can produce graduates that may do their internship from the firm
-It could also mean being located near an industry cluster. Being close to an industry cluster is
indeed a consideration under location analysis when it comes to having access to skilled labor.
Industry clusters are geographic areas where a particular industry or sector is concentrated.
These clusters often have several advantages related to skilled labor like:
1. Talent Pool: Industry clusters attract skilled professionals due to concentrated job
opportunities.
2. Networking and Collaboration: Proximity facilitates networking and collaboration with
industry peers.
3. Training and Education: Clusters offer specialized training and educational institutions
tailored to meet industry needs. This can help nurture skilled talent.
4. Knowledge Spillover: Close proximity fosters knowledge sharing and exposure to
industry trends.
5. Supplier Base: Clusters often have established suppliers for supplying specialized
components or materials which further adds to the efficiency of their operations.
6. Competitive Advantage: Businesses in industry clusters have an advantage in recruiting
skilled labor. The reputation and presence of a cluster can attract people looking for
employment.
Here’s why Access to skilled labor matters:
1. Workforce Competency: Access to a skilled labor pool ensures that a business can find
and retain employees with the expertise and experience needed to perform specific
tasks effectively. This is particularly important in industries that require specialized skills,
such as technology, engineering, or logistics.
2. Productivity and Quality: Skilled workers tend to be more productive and capable of
maintaining high-quality standards. Their expertise can lead to improved efficiency and
better output, ultimately benefiting the overall supply chain.
3. Innovation and Problem Solving: Skilled labor can contribute to innovation within the
company. These employees are more likely to come up with creative solutions to
challenges, leading to process improvements and cost savings.
4. Training and Adaptation: In a global logistics strategy, businesses may need to adapt to
changing market conditions and technologies. Skilled workers can more easily acquire
new skills and adapt to evolving requirements, making the company more agile.
5. Competitive Advantage: Having access to a skilled labor force can be a competitive
advantage in the global marketplace. It can enable a company to offer specialized
products or services and meet customer demands more effectively.
When conducting location analysis, businesses often consider the availability of skilled labor in
the potential locations under consideration. Factors to assess include the local education
system, the presence of universities or vocational training institutions, and the historical
availability of skilled workers in the area. Additionally, labor costs and the overall labor market
conditions, such as wage rates and labor laws, should also be taken into account.
Ultimately, the optimal location for a business under a global logistics strategy will balance
access to skilled labor with other factors like market proximity, transportation infrastructure,
regulatory considerations, and cost-efficiency to ensure the most effective and competitive
operations.
Culture Fit
Consider the cultural values of the location and ensure they align with the culture of your
company to attract and retain the best employees.
Culture refers to the shared beliefs, values, customs, behaviors, and social norms of a group of
people within a specific community or society. It encompasses the way people interact,
communicate, and perceive the world around them. In the context of location analysis, culture
is important for several reasons:
1. Workforce Compatibility: The cultural attributes of a location can impact how well
employees fit within a company’s organizational culture. A harmonious alignment
between the local culture and the company culture can lead to better employee morale,
engagement, and productivity.
2. Communication and Collaboration: Understanding the local culture is crucial for effective
communication and collaboration, both within the company and with external
stakeholders. Different cultures have varying communication styles and expectations,
and misinterpretations can lead to misunderstandings or conflicts.
3. Employee Satisfaction and Retention: A location with a cultural environment that aligns
with employee values and preferences is more likely to lead to higher job satisfaction
and lower turnover rates. This is especially important for attracting and retaining skilled
talent.
4. Legal and Regulatory Considerations: Cultural norms can influence local laws and
regulations. A thorough understanding of the cultural context is essential to ensure
compliance with local rules and avoid potential legal issues.
5. Customer and Market Understanding: Understanding the culture of the target market is
crucial for marketing and sales efforts. Products, services, and marketing campaigns may
need to be adapted to align with local cultural preferences and expectations.
6. Reputation and Brand Image: The cultural perception of a company can impact its
reputation and brand image. Being culturally sensitive and respectful can enhance a
company’s standing in the eyes of customers and the local community.
7. Risk Assessment: Cultural factors can influence political stability and social dynamics in a
region. Analyzing these factors is important for risk assessment, especially in locations
with potential cultural or social tensions.
In summary, culture plays a significant role in location analysis because it can affect workforce
dynamics, communication, legal compliance, customer relations, and overall business success.
Businesses need to consider cultural factors when evaluating potential locations to ensure that
their operations align with local norms and values while also promoting a positive and
productive work environment.
Infrastructure Availability
-Utilities: Availability of power, water, and internet connection is critical for running a business.
Choose locations where the utilities are well-maintained and reliable.
-Transportation: Location with access to a sophisticated transportation network like highways,
railroads, etc., can reduce logistics costs and improve efficiency.
-Facility Size: Consider the size and condition of the facilities, warehouses, and office buildings
available (for you to rent out or buy) in the location to determine if they are suitable for your
business operations.
Cost Considerations
Cost considerations are crucial in location analysis and can significantly impact a company’s
profitability and competitiveness. Here are some key cost considerations when evaluating
potential locations:
1. Labor Costs: Analyzing labor costs, including wages, benefits, and labor market
conditions, is essential. Lower labor costs can be an attractive factor, but it's important
to balance this with the availability of skilled labor and workforce quality.
2. Real Estate and Rental Costs: The cost of acquiring or leasing property, office space,
manufacturing facilities, or warehouses varies by location. Businesses should assess
these costs in relation to their budget and space requirements.
3. Taxes: Different regions have varying tax structures, including income taxes, property
taxes, and sales taxes. Understanding the tax implications of a location is crucial for
financial planning and cost management.
4. Utility and Operating Costs: Utilities such as electricity, water, and gas can vary
significantly by location. High utility costs can impact operational expenses. Additionally,
consider other operating costs like transportation, logistics, and maintenance.
5. Regulatory and Compliance Costs: Compliance with local regulations, permits, and
licensing requirements may involve additional costs. Ensuring full compliance is essential
to avoid penalties.
6. Transportation and Distribution Costs: Proximity to suppliers, customers, and
transportation hubs affects transportation costs. Efficient transportation networks can
reduce shipping expenses and lead times.
7. Exchange Rates and Currency Risks: For international locations, exchange rates can affect
costs when dealing with foreign currencies. Currency fluctuations can impact
profitability and financial stability.
8. Risk Mitigation Costs: Locations prone to natural disasters, political instability, or other
risks may require additional investments in risk mitigation measures, such as insurance
or security.
9. Cost of Living: If the location is for employee relocation, consider the cost of living for
employees and whether it aligns with their compensation packages.
10. Supply Chain Costs: Evaluate how location impacts the efficiency of your supply chain.
Costs related to sourcing materials, transportation, and inventory management can vary
significantly.
Balancing these cost considerations with other factors like market access, skilled labor
availability, and cultural alignment is essential in making informed decisions during location
analysis. The goal is to find a location that optimizes overall operational efficiency and costeffectiveness while aligning with the company’s strategic objectives.
Regulatory Environment
Regulatory environment considerations are critical in location analysis for businesses. The
regulatory framework of a location can significantly impact a company’s operations, compliance
requirements, and overall business success. Here are key regulatory environment
considerations:
1. Legal and Business Regulations: Analyze the local, regional, and national laws and
regulations that apply to your industry and business activities. Consider factors such as
business registration, licensing, permits, and zoning requirements.
2. Labor Laws: Review labor laws and employment regulations, including minimum wage
laws, working hour restrictions, and labor union requirements. Ensure that your
employment practices comply with local labor regulations.
3. Environmental Regulations: Evaluate environmental regulations related to your industry.
Compliance with environmental standards and permitting requirements is crucial, as
violations can result in fines and reputational damage.
4. Intellectual Property Protection: Assess the strength of intellectual property (IP)
protection in the location. Strong IP laws are crucial for businesses that rely on patents,
trademarks, copyrights, and trade secrets.
5. Health and Safety Standards: Ensure that the location complies with health and safety
regulations to provide a safe working environment for employees and minimize the risk
of accidents or legal liabilities.
6. Product Safety and Quality Standards: Understand product safety and quality standards
applicable to your industry. Complying with these standards is essential to avoid product
recalls and legal issues.
7. Export Control and Sanctions: Be aware of export control laws and sanctions, especially
when dealing with sensitive technologies or international markets. Violating export
controls can lead to severe penalties.
8. Political Stability: Assess the political stability of the location and the potential for
regulatory changes. Political instability can lead to sudden regulatory shifts and business
disruptions.
9. Compliance Costs: Consider the cost of compliance with local regulations, including legal
fees, permits, and ongoing compliance monitoring. Ensure that these costs align with
your budget.
Comprehensive due diligence and legal consultation are essential when considering a new
location. Engaging with local legal experts and regulatory authorities can provide valuable
insights and guidance to navigate the regulatory environment effectively and avoid legal and
operational risks.
Other things to consider are supply and distribution points, production points, warehouse and
storage points.
Time Horizons
Time horizons in logistics refer to specific planning and decision-making periods that logistics
professionals and organizations consider when managing their supply chains. These time
horizons help in aligning logistics strategies with short-term and long-term goals, optimizing
operations, and ensuring the efficient flow of goods and services. The key time horizons in
logistics include:
1. Short-Term Horizon:
- Focuses on immediate operational concerns within a time frame of days to a few months.
- Addresses daily logistics activities such as order fulfillment, inventory management, and
transportation scheduling.
- Aims to ensure the smooth and efficient execution of daily logistics operations.
2. Medium-Term Horizon:
- Spans several months to a few years.
- Involves tactical planning to optimize logistics processes and adapt to changing market
conditions.
- Activities may include supplier management, contract negotiations, and capacity planning.
3. Long-Term Horizon:
- Typically covers several years or more.
- Encompasses strategic planning to align logistics with overall business objectives.
- Focuses on areas such as market expansion, global sourcing, and major infrastructure
investments.
4. Continuous Improvement:
- An ongoing time horizon integrated into all planning stages.
- Emphasizes the continual optimization of logistics processes, technology, and strategies.
- Involves the adoption of best practices, implementation of new technologies, and the pursuit
of cost reduction and efficiency gains.
5. Event-Driven:
- Not a fixed time horizon but rather a response to unexpected events, such as natural
disasters, geopolitical shifts, or supply chain disruptions.
- Involves rapid decision-making and contingency planning to mitigate the impact of
unforeseen circumstances on the supply chain.
Time horizons in logistics help organizations make informed decisions at various stages of their
supply chain operations, balancing short-term operational efficiency with long-term strategic
objectives. These horizons allow for flexibility, adaptability, and the ability to respond effectively
to both routine logistics challenges and unforeseen disruptions.
1. **Preparation**:
- **Short-Term Horizon**: In the short term, preparation involves immediate operational
activities. This includes day-to-day tasks such as order processing, inventory management, and
ensuring products are ready for shipment.
2. **Finalization**:
- **Medium-Term Horizon**: The finalization phase typically spans several months and
involves tactical planning. This may include quality checks, order consolidation, and
documentation, aligning with medium-term logistics goals.
3. **Shipment**:
- **Short-Term Horizon**: Shipment activities occur in the short term, focusing on the
immediate transportation and movement of goods. Short-term decisions include selecting
transportation modes and scheduling shipments.
4. **Delivery**:
- **Short-Term Horizon**: Delivery is also a short-term activity as it involves the physical
transfer of goods to the customer or destination. Real-time tracking and ensuring timely
delivery are short-term goals.
- **Planning Activities:
- **Long-Term Horizon**: Planning activities, which are essential for shaping the logistics
strategy, typically have a long-term perspective. This includes decisions related to sourcing,
facility location, market expansion, and technology investments. These decisions lay the
foundation for how logistics operations will unfold in the future.
- **Control Activities:
- **Continuous Improvement**: Control activities are ongoing and integrated into all time
horizons. They involve monitoring and managing logistics processes to ensure they align with
the planned strategy. Continuous improvement efforts focus on optimizing processes, reducing
costs, enhancing quality, and mitigating risks throughout all phases of the logistics cycle.
In summary, your diagram illustrates a logistics cycle that spans short-term activities like
preparation, shipment, and delivery, with some medium-term elements in the finalization
phase. Meanwhile, planning activities have a long-term horizon, and control activities are
continuous and applied across all time frames to ensure efficient and effective logistics
operations. This combination of time horizons allows for strategic alignment, adaptability, and
continuous improvement in global logistics strategy.
The Changing Role of Distribution Centers
A distribution center is a product storage and shipping building that stores goods a company
produces. Distribution centers are a key part of the distribution chain for products, order
fulfilment, and storing produced goods prior to their shipment to wholesale, retail or
customers.
Distribution centers (DCs), serve as strategic points in the movement of goods from
manufacturers to retailers or directly to customers. They play a vital role in inventory
management, order fulfillment, and ensuring that products reach their final destinations
efficiently.
New Distribution Center Technologies:
- This central element represents the core of technological advancements that are driving the
transformation of distribution centers in global logistics strategy.
1. **Voice Picking**:
- Voice picking is a technology that enables warehouse workers to receive picking instructions
through voice commands via wearable devices like headsets. It enhances order accuracy and
efficiency by providing hands-free guidance, reducing errors, and speeding up the picking
process.
Voice picking is a hands-free and eyes-free system that utilizes an intelligent voice agent and
speech recognition software to direct associates through their tasks. As the phrase “voice
picking” suggests, organizations initially used these solutions to improve picking operations with
voice-only technology.
2. **Vision Picking**:
- Vision picking involves the use of computer vision and augmented reality (AR) to assist
warehouse personnel in identifying and selecting items. AR displays visual cues to guide
workers, making the picking process faster and more accurate.
Vision picking is a technology-enabled process used in logistics and warehouse operations,
where computer vision and augmented reality (AR) are employed to guide workers in accurately
selecting and picking items from inventory.
3. **Adaptive Robots**:
- Adaptive robots are designed to collaborate with human workers in a warehouse
environment. They can handle tasks like materials handling, sorting, and even working alongside
humans in a shared workspace. These robots improve productivity and flexibility in distribution
centers.
Adaptive robots are robotic systems designed to work collaboratively with human workers in
various environments, adapting to the tasks at hand while maintaining safety and efficiency.
4. **Semi-Autonomous Machines**:
- Semi-autonomous machines include equipment like forklifts, drones, and autonomous
guided vehicles (AGVs) that can operate with varying levels of autonomy. They assist in material
handling, transportation, and inventory management, increasing efficiency and reducing manual
labor.
5. **Fully Automated Picking**:
- Fully automated picking systems use robotics and automated storage systems to pick and
pack items without human intervention. These systems are highly efficient and ideal for highvolume, repetitive tasks, improving order accuracy and speed.
6. **Distribution Systems**:
- Distribution systems encompass a range of technologies and equipment for streamlining the
movement of goods within a distribution center. This includes conveyor systems, sortation
equipment, and automated material handling systems, all of which contribute to efficient order
processing.
7. **Facility Management**:
- Facility management technologies focus on controlling and optimizing the infrastructure
within distribution centers. This includes energy management systems, HVAC (Heating,
Ventilation, and Air Conditioning) controls, and lighting systems that enhance energy efficiency,
sustainability, and the overall working environment.
8. **Detection Systems**:
- Detection systems consist of technologies such as RFID (Radio-Frequency Identification) and
IoT (Internet of Things) sensors. These systems provide real-time visibility into inventory, asset
tracking, and security monitoring, enhancing inventory accuracy, theft prevention, and
operational efficiency.
Each of these technologies contributes to the modernization and efficiency of distribution
centers, enabling them to meet the evolving demands of global logistics by improving accuracy,
speed, and adaptability while reducing operational costs.
Supply Chain Volatility
Supply chain volatility is defined as unplanned variation of upstream and downstream material
flows resulting in a mismatch of supply and demand at the focal firm.
Managing supply chain volatility is often identified as one of the major challenges of modern
supply chain management, as even the most accurate calculations cannot prepare you for the
completely unforeseen.
When volatility exists, processes across the supply chain are being challenged. Failure to adapt
can lead to demand being unmet – and unmet demand translates into lost sales, lost profit, lost
customers and eventually loss in market share, especially when competition surfaces.
What causes volatility?
Volatility is a reality in many supply chains. Not only are retailers serving end consumers facing
volatile demand. This volatility is being passed on to manufacturers and distributors at different
stages of the industry value chains. Many factors contribute including:
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Increased customer choices,
Product customization
Rapid technological improvements
Global competition
Promotion policies
Supply chain bullwhips.
However, one of the most common sources of volatility in global supply chains is the fluctuation
of demand and supply across different markets, regions, and seasons. This can affect your
inventory levels, production capacity, transportation costs, and customer satisfaction.
How is Volatility Calculated?
Calculating is often done by using complex systems and formulas, that rely not only on the
company’s own numbers, but also factor in external influences like e.g. weather. Here, several
forms of volatility have to be accounted for and calculated individually:
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Organizational volatility: occurs within the company itself
Behavioral volatility: changes in demand
Market-related volatility: changes in the market
Institutional volatility: changes in regulations
Environmental volatility: changes in the environment, such as natural catastrophes
Why managing volatility is important
Managing volatility in a cost-effective manner can lead to significant benefits for a company
from lower supply chain costs to improved customer service levels. Managing volatility
effectively can be a huge competitive differentiator for companies, for example by being
prepared for a sudden surge in demand by having the right amount of inventory stored.
Competitors that do not have enough inventory to deal with the increase in demand will have to
face unsatisfied customers and lost revenue.
Managing volatility efficiently in a demand driven environment is a significant challenge and
requires companies to employ robust supply chain tactics. Often, the focus tends to be on one
area of the supply chain (e.g. inventory optimization). Without the consideration of all aspects
of the supply chain, this may result in sub-optimal results. A holistic system approach is more
effective. This holistic approach contains:
Complexity reduction: Complexity has increased due to a growing number of products,
channels, customers, and geographies – managing this complexity is crucial in addressing
potential volatilities.
Lead time reduction: Lead time is the amount of time that passes from the start of a process
until its conclusion. The less time passes between start and finish, the smaller are the chances
for something to go wrong.
Cycle time reduction: Having shorter cycle times allows information to flow more quickly
throughout the whole organization, enabling businesses to react to changes swiftly.
Postponement: While there are numerous postponement strategies, one strategy is to store
inventory at sub-assembly level and only assemble the product after an order has been placed.
This allows for more flexibility.
Buffer management: This can include inventory buffers. If you have sufficient stock, volatility will
not damage your supply chain as immediately.
Visibility and collaboration: Collaborating with customers, suppliers, and partners allows for
more open and clear communication and increased flexibility should demand suddenly change.
The right mix of the above strategies depend on the specific context of a company.
In the context of supply chain volatility, various types of networks and structures are used by
organizations to manage and respond to uncertainties and disruptions effectively. These
network types are designed to address specific challenges and demands posed by volatile
supply chain environments. Here are some key types of networks in supply chain volatility:
1. **Virtual Networks**:
- Virtual networks are characterized by a high degree of collaboration among supply chain
partners, facilitated by digital communication and information-sharing technologies.
- They enable real-time data exchange and decision-making, enhancing adaptability to volatile
conditions.
2. **Hollow Networks (Hub-and-Spoke)**:
- Hollow networks feature a central hub that coordinates supply chain activities with multiple
spokes or satellite entities.
- The central hub often manages critical functions such as demand forecasting, inventory
control, and risk mitigation, making it well-suited for addressing disruptions.
3. **Flexible Networks**:
- Flexible networks are designed to reconfigure quickly in response to changing market
conditions or disruptions.
- They encompass multiple sourcing options, production facilities, and distribution channels,
offering agility in adjusting to supply chain volatility.
4. **Value-Added Networks (VANs)**:
- Value-Added Networks provide secure and efficient data exchange services between trading
partners, enhancing supply chain communication and transaction reliability.
- While they are transaction-focused, VANs help in maintaining stable data flow during
disruptions.
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Collaborative Networks- Collaborative networks involve strategic alliances and
cooperative relationships among organizations within a supply chain or value chain.
- They promote shared objectives, information sharing, and resource pooling to address
common challenges, including volatility.
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Transactional Networks- primarily focuses on the exchange of specific transactions, data,
or information between various entities within the supply chain. Unlike collaborative
networks, which emphasize cooperation and shared objectives, transactional networks
may not involve extensive collaboration.
-Transactional networks often include processes related to data transfer, financial
transactions, purchase orders, invoices, and other supply chain-related documents. They
aim to ensure the smooth and efficient flow of information and transactions but may not
have the same level of active collaboration and shared decision-making found in
collaborative networks.
-These networks are typically designed to facilitate specific supply chain activities and
transactions efficiently, making them valuable for managing transactional aspects of
supply chains, such as data exchange and financial transactions.
The choice of network type depends on an organization’s specific supply chain characteristics,
risk tolerance, and market dynamics. Often, a combination of network types and strategies is
employed to create a resilient and adaptive supply chain capable of navigating volatile
conditions.
Characterization of the networks:
Collaborative Networks:
1.Virtual Networks – Virtual networks are highly collaborative in nature, relying on digital
communication and information sharing among participants. They are effective in handling high
supply chain volatility due to their real-time capabilities and adaptability.
2.Flexible Networks – Flexible networks involve collaboration among supply chain partners to
adjust sourcing and production, making them suitable for addressing high supply chain volatility.
Transactional Networks:
1.Value-Added Networks (VANs) – VANs primarily serve a transactional role by facilitating secure
data exchange. They are less influenced by supply chain volatility as their primary focus is on
data transmission.
2.Hollow Networks (Hub-and-Spoke)– While they can have transactional elements in terms of
managing inventory and logistics, hollow networks are also collaborative. They are effective in
addressing supply chain disruptions.
In summary, collaborative networks, such as virtual networks and flexible networks are
characterized by a high degree of collaboration and are well-suited for addressing high supply
chain volatility. Transactional networks, like VANs and hollow networks, primarily focus on
specific transactions but also involve collaboration and can effectively handle volatility. A
balance of collaborative and transactional elements to manage supply chain volatility effectively
is important.
Disruption Events
A supply chain disruption is any event that causes a disruption in the production, sale, or
distribution of products. Supply chain disruptions can include events such as natural disasters,
regional conflicts, and pandemics.
1. **Weather Events**:
- Weather events include natural disasters like hurricanes, floods, earthquakes, and severe
storms. These events can disrupt transportation, damage infrastructure, and impact the
production and distribution of goods.
2. **Corruption**:
- Corruption in supply chains can involve unethical practices, bribery, and fraud. It can lead to
inefficiencies, increased costs, and compromised product quality, affecting the integrity of the
supply chain.
3. **Border Delays**:
- Border delays occur when goods face extended wait times at international borders due to
customs inspections, documentation issues, or geopolitical factors. These delays can disrupt
supply chain timelines and increase lead times.
4. **Restrictions on Particular Products**:
- Restrictions on specific products can include regulatory barriers, trade sanctions, or bans on
certain goods. Such restrictions can hinder the movement and trade of affected products,
impacting supply chain planning.
5. **Currency Fluctuations**:
- Currency fluctuations refer to changes in exchange rates between currencies. These
fluctuations can affect the cost of imported and exported goods, impacting supply chain costs
and pricing strategies.
6. **Volatility in Commodity Prices**:
- Commodity price volatility relates to unpredictable changes in the prices of raw materials or
commodities used in manufacturing. Price swings can affect production costs and supply chain
budgets.
7. **Labor Shortages**:
- Labor shortages occur when there is an insufficient workforce available to meet production
and operational demands. Shortages can disrupt manufacturing schedules and lead to delays in
supply chain activities.
8. **Information and Communication Breakdowns**:
- Information and communication breakdowns refer to disruptions in data flow and
communication channels within the supply chain. These breakdowns can result in
misunderstandings, delayed responses, and errors in decision-making.
Each of these factors represents potential disruptive events that can impact the global supply
strategy. Supply chain professionals need to anticipate and mitigate these disruptions through
risk management, contingency planning, and adaptive strategies to maintain supply chain
resilience and continuity in the face of such challenges.
Security Threats
Cyber risk commonly refers to any risk of financial loss, disruption or damage to the reputation
of an organization resulting from the failure of its information technology systems.
Cyber risk could materialize in a variety of ways, such as:
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Deliberate and unauthorized breaches of security to gain access to information systems.
Unintentional or accidental breaches of security.
Operational IT risks due to factors such as poor system integrity.
1. **Data Fraud**:
- Data fraud involves unauthorized access or manipulation of sensitive data within the supply
chain. This can include theft of confidential information, tampering with product specifications,
or altering financial records. Data fraud can compromise the integrity of supply chain data,
leading to misinformed decision-making and financial losses.
2. **Malware Attack**:
- A malware attack refers to the deployment of malicious software, such as viruses, trojans, or
worms, to infect computer systems and disrupt supply chain operations. Malware can lead to
data breaches, system downtime, and compromised data integrity within the supply chain.
3. **Ransomware**:
- Ransomware is a specific type of malware that encrypts critical data and demands a ransom
for its decryption. Supply chain organizations falling victim to ransomware attacks can face
extensive downtime, data loss, and financial extortion, affecting the continuity of operations.
4. **Phishing**:
- Phishing involves deceptive emails or messages designed to trick recipients into divulging
sensitive information, such as login credentials or financial data. Supply chain personnel
targeted by phishing attacks may inadvertently compromise the security of supply chain systems
and data.
5. **Denial of Service (DoS)**:
- Denial of Service attacks disrupt the availability of supply chain systems and websites by
overwhelming them with traffic, rendering them inaccessible to users. DoS attacks can disrupt
order processing, communication, and customer service.
6. **Password Attack**:
- Password attacks involve attempts to gain unauthorized access to supply chain systems by
cracking or stealing user passwords. Weak or compromised passwords can lead to unauthorized
access, data breaches, and system vulnerabilities.
These cyber threats pose significant risks to the security and integrity of global supply chains.
Organizations need robust cybersecurity measures, employee training, intrusion detection
systems, and incident response plans to protect against these threats. Supply chain security is
critical to ensuring the confidentiality, availability, and reliability of supply chain data and
operations.
WAREHOUSE AND INVENTORY MANAGEMENT
INTERNATIONAL BUSINESS: COMPETIING IN THE GLOBAL
MARKETPLACE
Globalization
Refers to the process in which a business operates on an international scale.
Globalization is the movement of people, goods, and services around the world — or when
referring to the supply chain — globalization is how a business operates internationally.
It is used to describe how trade and technology have made the world into a more connected
and interdependent place.
Globalization refers to the spread of the flow of financial products, goods, technology,
information, and jobs across national borders and cultures.
Globalization means the speedup of movements and exchanges (of human beings, goods, and
services, capital, technologies or cultural practices) all over the planet. One of the effects of
globalization is that it promotes and increases interactions between different regions and
populations around the globe.
Globalization of Markets and Production
Globalization of Markets
First of all, markets exist on a variety of levels. There are local markets, regional markets,
national markets, and international markets. Likewise, markets can be internal or external.
Businesses need to figure out which market they want to operate in as they launch.
Globalization of Markets refers to the process of integrating and merging of the distinct world
markets into a single market.
It refers to the merging of historically distinct and separate national markets into one huge
global marketplace.
Instead, there is the “global market”;
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Falling trade barriers make it easier to sell globally
Consumers’ tastes and preferences are converging
Firms promote the trend by offering the same basic products worldwide
Globalization of Production
Globalization of production is an easy flow of capital, movement of labor, trade, and other
components of economic production across the globe. It defines the production of goods in
more than one location.
It refers to the sourcing of goods and services from locations around the globe to take
advantage of national differences in the cost and quality of factors of production like land, labor,
and capital.
Companies can;
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Lower their overall cost structure
Improve the quality or functionality of their product offering
**Globalization of markets. Refers to convergence in buyer preferences in markets around the
world. Globalization of production. Is the dispersal of production activities worldwide to
minimize costs or maximize quality.**
Global institutions include:
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World Trade Organization (WTO)
International Monetary Fund (IMF)
The United Nations (UN)
The World Bank (WB)
General Agreement on Tariffs and Trade (GATT)
*They are needed to help manage, regulate, and police the global marketplace
*And promote the establishment of multinational treaties to govern the global business system
Drivers of Globalization
1. Technological drivers
Technological Changes: Advances in technology
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Fast spread of latest technology globally
Development in Information Technology
Spread of internet worldwide
Transportation & logistics technologies
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Microprocessors and telecommunications
The Internet and World Wide Web
Transportation technology
Artificial Intelligence
Rapid advancements in technology, especially in communication and transportation, have made
it easier and faster for people, goods, and information to move across borders. This has led to
an increase in international trade, investment, and cultural exchange.
The Internet and digital communication have made it easier for people and businesses to
connect with each other across borders, leading to increased trade, investment, and the
transfer of knowledge and ideas. These are the technological drivers of globalization.
2. Political Drivers
Regional Integration
Regional integration is a process in which neighboring countries agree to improve cooperation
through shared institutions and rules.
Regional integration helps to –
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Increase the size of market
Increases demand
Generates employment
Increases production quantity
Cost affordability
Government policies
Governments around the world have played a role in driving globalization by adopting policies
that promote free trade, foreign investment, and economic liberalization.
Reduced Trade Barriers
This is an another important driver of globalization. Many countries have reduced tariffs and
other trade barriers, making it easier for businesses to sell goods and services across borders.
Advanced countries after world war II reduced tariffs to encourage free flow of goods &
services.
Example: General Agreement on Tariffs and Trade (GATT)
These reduced trade barriers & tariffs contributed a lot in Globalization.
Declining Investment Barriers
After 1990s various countries started removing foreign investment barriers in order to
encourage the growth of international business. Companies can invest in other countries or set
up operations there, and investors can buy stocks or bonds from companies located in different
countries.
3. Economic Drivers
Economic liberalization
Many countries have adopted policies that promote free markets and open economies, which
has encouraged foreign investment and trade.
Globalization of financial markets
The globalization of financial markets has made it easier for businesses to access capital from
around the world and has facilitated the flow of investment across borders.
4. Market drivers
Changing consumer preferences
Consumers are becoming more global in their tastes and preferences, and businesses are
responding by developing products and services that can be sold in multiple markets.
Access to new markets
Globalization has provided businesses with access to new markets, which has helped them to
grow and expand their operations.
Global supply chains
Companies can now source raw materials, components, and labor from different countries to
create a final product, leading to increased efficiency and cost savings.
5. Competitive Drivers
Increased competition
Globalization has led to increased competition, which has driven businesses to innovate and
become more efficient in order to remain competitive.
Growth of Multinational Companies (MNCs)
MNC is a company or organization doing business in more than one country. Growth of MNCs
contributed to internationalization of businesses.
Implications of Globalization
Pros of Globalization
1. Access to New Markets
Globalization gives businesses the opportunity to expand into new markets, reach international
buyers, and increase revenue.
Over time, companies can experience saturation for demand of their products or services
domestically. By expanding globally, they can continue growing by meeting foreign demand.
2. Spread of Knowledge and Technology
In order to cooperate globally, companies must share similar technology and a technological
structure. E-commerce, for example, allows companies to sell products worldwide through
Amazon.com.
Similarly, a centralized base of knowledge allows companies to quickly transfer information and
develop innovative solutions. For example, in the healthcare sector that means new
medications and medical devices can go to market faster in different countries.
3. Enhanced Global Cooperation and Tolerance
Globalization enhances cooperation by enabling countries to specialize. This allows them to
leverage their economic strengths and trade those products for other resources. For example, a
country in South America that specializes in sugar cane can export it to a developed country in
exchange for manufactured goods.
4. Promotes Economic Growth
Globalization helps countries grow their economies by making it easier for them to specialize in
what they’re good at and share resources with other countries. This also encourages economic
growth by encouraging improvements in things like money and investments.
Cons of Globalization
1. Increased Competition
Although free trade can increase a nation’s wealth, it also increases competition. Local
businesses must compete with multinational corporations that produce cheaper goods at lower
costs, which puts them at a disadvantage.
At the same time, the increase in choices impacts buying behaviors, as customers expect high
quality products at low prices. That means companies must continuously adapt to meet
demands.
2. Exploitation of Labor and Resources
Wealthy, industrialized nations sometimes enter trade agreements with developing countries in
order to exploit weak labor and environmental laws. For example, the United States has been
known to use foreign sweatshop labor to produce cheaper goods.
Lack of environmental regulations in some developing countries also allows developed countries
to import resources such as precious metals at lower prices. This results in both lasting
environmental damage and human rights abuses.
3. Imbalanced Trade
A trade imbalance, also known as a trade deficit, occurs when a country spends more on
imports than it makes on exports. This creates a shortfall in capital that the country must make
up for either by borrowing money from foreign lenders or permitting foreign investments in its
assets.
While lending and investment help promote economic growth, these strategies can be risky—
especially for a developing country. Throughout the 1990s, Thailand, Indonesia, and Malaysia
ran large trade deficits and relied on foreign capital to make up for it. Yet when the Asian
financial crisis hit in 1997, foreign investors backed out, leaving these countries in a precarious
financial position.
4. Domestic Job Loss
When industrialized countries outsource labor, it causes a shortage of jobs domestically.
Laborers whose skills are no longer in demand experience higher unemployment, and struggle
to adapt to the changing labor market.
Multi National Enterprises (MNC’s)
An enterprise producing goods or delivering services in more than one country.
A multinational corporation (MNC) is a company that has business operations in at least one
country other than its home country.
Also called a multinational enterprise, transnational enterprise, transnational corporation,
international corporation, or stateless corporation
Advantages
1. Employment
Both locally and worldwide, multinational firms help to create work opportunities. MNC inward
investments generate foreign money, which is essential for developing and rising countries.
Additionally, they help raise the bar for what is possible in less developed nations and offer
employment opportunities.
2. Decreased Labour Costs
MNCs set up offices in low-cost countries to produce goods and services more affordable.
Offering low-cost, top-notch goods and services, it obtains a cost advantage. Locally based
smaller businesses are ineligible for this.
3. Arrival Of Capital
The majority of multinational corporations have their corporate headquarters in industrialised
nations. They rely on the resources of developed markets to maintain their stable revenue
streams. To enjoy investments in the developing world, these companies must move there. To
increase their production capacity abroad, multinational firms build factories. They invest in
training centres, and give financial support to educational institutions. These businesses are an
important source of foreign investment in developing nations.
4. They Assist Other Businesses
By permitting well-managed companies to get managed enterprises through mergers and
acquisitions. Multinational corporations can assist other commercial organisations in achieving
economies of scale in marketing and distribution.
5. Consumer Accessibility
Access to clients is one of the key advantages MNCs have over companies with operations
limited to a smaller region. The MNCs’ have higher accessibility to more significant geographic
regions. It may enable them to reach a larger pool of potential customers and grow more than
other businesses.
Disadvantages
1. Threat To Domestic Industries
MNCs pose a threat to local industries that are still growing due to their tremendous economic
power. MNCs are too powerful for domestic industries to compete with. Threats from MNCs
have forced the closure of some local businesses. MNCs impede the host countries’ economic
progress as a result.
2. Loss Of Natural Resources
MNCs rely on their home countries’ natural resources to make great profits. Yet doing so
depletes those resources, which hurts the economy by limiting the number of natural resources
available.
3. No Benefit To The Poor
MNCs only make products for the wealthy because the poor cannot afford them. As a result,
MNCs often do not aid the Impoverished in host countries.
4. Insufficient Technology
Technology transfer by multinational firms might not be appropriate for the host nation. It
might not be current. It might be too sophisticated. They can also fail to impart new technology
skills to the people. As a result, unemployment rises.
5. Uncertainty
Multinational firms cut back on or shut down their manufacturing facilities during unstable
economic times. Because they hire and fire people, MNC employees experience job loss.
The Globalization Debate
*Supporters believe that increased trade and cross-border investment mean:
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lower prices for goods and services
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greater economic growth
higher consumer income, and more jobs
*Critics worry that globalization will cause:
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job losses
environmental degradation
the cultural imperialism of global media and MNEs
*Anti-globalization protesters now regularly show up at most major meetings of global
institutions
Globalization, jobs and income
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Critics argue that falling barriers to trade are destroying manufacturing jobs in advanced
countries
Supporters contend that the benefits of this trend outweigh the costs
countries will specialize in what they do most efficiently and trade for other goods—and
all countries will benefit
Globalization, Labor Polices and the Environment
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Critics argue that firms avoid costly efforts to adhere to labor and environmental
regulations by moving production to countries where such regulations do not exist, or
are not enforced
Supporters claim that tougher environmental and labor standards are associated with
economic progress
as countries get richer from free trade, they implement tougher environmental and
labor regulations
Globalization and National Sovereignty
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Is today’s interdependent global economy shifting economic power away from national
governments toward supranational organizations like the WTO, the EU, and the UN?
Critics argue that unelected bureaucrats have the power to impose policies on the
democratically elected governments of nation-states Supporters claim that the power of
these organizations is limited to what nation-states agree to grant
the power of the organizations lies in their ability to get countries to agree to follow
certain actions
Globalization and the World’s Poor
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Is the gap between rich nations and poor nations getting wider?
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Critics believe that if globalization was beneficial there should not be a divergence
between rich and poor nations
Supporters claim that the best way for the poor nations to improve their situation is to;
reduce barriers to trade and investment
implement economic policies based on free market economies
receive debt forgiveness for debts incurred under totalitarian regimes
Managing the Global Market Place
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Managing IB differs from managing a domestic business because;
countries are different
the range of problems confronted in IB is wider and the problems more complex than
those in a domestic business
firms have to find ways to work within the limits imposed by government intervention in
the international trade and investment system
international transactions involve converting money into different currencies
The scope of Physical Distribution Management is complex
Scope of Materials Management is complex
The scope of focus broadens when conducting due diligence of firms located in other
countries far from your Business Operations Expenditure on Risk management activities
is a priority
Category management commonly practiced
OVERSEAS BUYING
Refers to buying materials, products or services from manufacturers or suppliers that are
located outside of your home country. While domestic sourcing typically allows for quicker
logistics, better production control and shorter time to market, sourcing overseas is generally
considered cheaper.
Major reasons for buying from overseas:
The main reason for buying from overseas is to obtain some form of competitive advantage.
Reasons for international sourcing include:
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Changes in the business environment and
Factors relating to the needs or competitiveness of the enterprise
Changes in the business environment
Intense international competition
Pressure to reduce costs
The need for manufacturing flexibility
The need for shorter product development cycles
Stringent quality standards Ever-changing technology
2. Factors relating to the needs or competitiveness of the enterprise
• Domestic non-availability of say; commodities such as rubber, cotton or copper or oil
• Insufficient domestic capacity to meet the demand Insurance reasons, such as buying
abroad to maintain continuity of supplies when domestic sources are threatened by
shortages or strikes
• Competitiveness of overseas sources, including lower prices, improved delivery and
better quality
• Reciprocal trading and countertrade resulting from policy reasons or
• government pressures due to balance of payments considerations
• Access to worldwide technology
• To obtain penetration of a growth market- Toyota, for example, sources from the Pacific
Rim not only to achieve lower costs but also to enter markets with restrictive quotas by
increasing the local content component of the cars
Information Regarding Buying Overseas
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Professional contacts
Trade journals
Directories
Trading companies
Import brokers. A company new to importing may be wise to use the services of an
importer until some expertise in buying overseas has been established
*Other sources include…
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Visits to the proposed overseas supplier
References furnished by the proposed overseas supplier
Commercial attaches and other government departments of foreign nations
The Ministry of Trade Commerce and Industry
The Official Journal of the European Communities [EU]
Shipping and forwarding agents
The banks The World Bank Chambers of commerce, especially the London Chamber of
Commerce
Specialist enquiry agents
Professional and trade organizations, including the CIPS and other national professional
purchasing organizations
Customs and excise departments
The internet
Difficulties when buying overseas
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Difficulties in supplier communication – time zones- religion
Political and ethical factors- country risk- child labor
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Logistics support for longer supply links
Culture and language differences
Duty and customs regulations
Fluctuations in currency exchange rates
Knowledge of foreign business practices Nationalistic attitudes and behavior
Legal difficulties