Logistics Management
SECTION -V
Logistics Management
 The term Logistics Management is the part of Supply Chain
Management that plans, implements, and controls the
efficient, effective, forward, and reverse flow and storage
of goods, services, and related information between the
point of origin and the point of consumption in order to
meet customer's requirements.
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Planning implementing and controlling the
physical flow of material and finished goods
from point of origin to point of use to meet
customer`s need at a profit-“Philip Kotler”
 The
word logistic has originated from Greek word
‘Logistikos’ and the Latin word ‘Logisticus’ which
means science of computing & calculating
 In ancient times it was used more in connection
with moving armies.
 During World War II logistics gained importance
in army operations covering the movement of
supplies , men & equipment across the border
 Today It has acquired the wider meaning and is
used in the business for the movement of material
from suppliers to the manufacturer and finally the
finished goods to the consumers
Scope of Logistic
 It
is of critical importance to the organization how it
delivers products & services to the customer , whether
the product is tangible or intangible.
 Effective & efficient Physical movement of the tangible
product will speak of intangible services associated with
the product and the organization which is delivering it.
 In Case of intangible product , the delivery of tangibles
at the right place & right time will speak about its
quality.
Logistic –A system approach
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Logistic recognizes that all the activities of material movement across
the business process are interdependent and needs close coordination
and these are to be maintained as a system and not as individual
functions.
System is shown as logistic Mix including following functional Areas
Order Processing
Information Flow
Warehousing
Inventory control
Packaging
Transportation
Order Processing
 Involve following activities…………………
Order checking for any deviation in agreed term
 Technical details; price; delivery period; payment terms; taxes etc
 Checking the availability of material in stock (material requisition)
 Production & material scheduling.
 Acknowledging the order, indicating deviation if any
 It is routine operation but require great deal of planning training of
people involved and investment to bring about efficiency & accuracy
 In a large organization a system capable of handling thousands of
voluminous orders with minimum human involvement or without
human involvement is a must, involving shortened order fulfillment
cycle to have edge over rivals.
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Information Flow
 It is basically information based activity of inventory
movement across the supply chain. Hence role of
information system plays a vital role in delivering superior
customer service.
Warehousing
 A warehouse is a commercial building for storage of goods.
 Warehouses
are used by manufacturers, exporters, wholesalers,
retailers, transport businesses, exporters, Importers, etc.
 They are usually large plain buildings, equipped with loading docks to
load and unload consignment from trucks.
 Based upon the size of the goods and volume of operation they also
often have cranes and forklifts for moving goods.
In simple words, warehouse is a facility where the supply chain holds
or stores goods, until they are needed by the customers. Warehouse
can be owned by manufactures, wholesalers, retailers to store the
goods.
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A warehouse is typically viewed as a place to store inventory. However,
in many logistical system designs, the role of the warehouse is more
properly viewed as a switching facility as contrasted to a storage
facility. The function of warehouse is getting focused from storage-
dominance to transaction dominance.
General Functions /
Roles of Warehouses
The warehousing functionality today is much more than the traditional function of
storage. The following are main function that warehousing serves today:
• Receiving goods – receive and accept responsibility by updating records
• Identifying goods – place, label, color code (Normal stocks, Promotional stocks,
Special customer stocks like CSD, Price changes, Batch etc).
• Sorting goods- sort out the received goods based on identification for appropriate
storage area. For example Special customer goods , Revised price goods,
Promotional goods should be sorted out separately.
• Dispatching/ put away the sorted goods to appropriate storage place- for
temporary storage with easy accessibility
• Holding goods- security against pilferage and deterioration
 Selecting, retrieving, packing - items are retrieved and grouped
according to customer order for dispatch
• Marshalling goods- check the items of a single order for
completeness and order records are updated.
• Dispatching goods- consolidated order is packaged and directed
to right transport
• Preparing records- of stocks and replenishment requirements
Economic benefits of Warehousing(Cost Savings):
Consolidation: Reduction in transportation cost by consolidating movement. Several plants
supply their products for the same customer through a warehouse and from this warehouse
the products are sent in bulk shipment to the customer. Instead of transporting the products
as small shipments from different sources, it would be more economical to have a
consolidation warehouse.
Break-bulk: The warehouse in this case serves the purpose of receiving bulk shipments
through economical long distance transportation from plant and breaking of these into small
shipments for local delivery to various customers. This enables small shipments in place of
long distance small shipments.
Cross-dock: This type of facility enables receipt of full shipments from a number of suppliers,
generally manufacturers, and direct distribution to different customers without storage. As
soon as the shipments are received, these are allocated to the respective customers and are
moved across to the vehicle for the onwards shipments to the respective customers at these
facilities.
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Stock piling: This function of warehousing is
related to seasonal manufacturing or
demand. In the case of seasonal
manufacturing, certain raw materials are
available during short periods of the year.
Hence, manufacturing is possible only during
these periods of availability, while the
demand is full year around. This requires
stockpiling of the products manufactured
from these raw materials. An example is
mango pulp processing. On the other hand,
certain products like woolens are required
seasonally, but are produced throughout the
year, and thus need to be stockpiled as such.
Service benefits:
 Spot stocking: stocking of products in strategically located
warehouses during demand sensitive period is called spot
stocking. Agricultural implements are spot stocked during the
growing season.
 Safety Stocking : In order to meet contingencies like stock
outs, transportation delays, receipt of defective or damaged
goods, and strikes, safety stocks have to be maintained. This
ensures that, on the inbound site production stoppages do not
occur, and, on the outbound side customers are fulfilled on time.
Warehousing Decision
 Type
of Ownership- Private , Public or
Contractual.
 Private- owned by the company for their
exclusive use for storing the goods
manufactured or traded by them for
onward selling
 Cost involved- fixed capital invested on
building , maintains, insurance
Private warehouse –
advantage & disadvantage
 Better
control on storage & movement of
goods.
 Disadvantage-lack of geographical
flexibility,
 Requires high & constant demand
throughout
 permanent liability & high large
investment
Public
 Hired from other
agencies goverment or private for storing the goods
for specific period of time by paying the rent.
 Advantages- strategically located near ports/market places
 Low initial investment
 Greater flexibility in terms of location change
 Disadvantage- not good for specialized services
Contract
 Special
kind of warehouse managed by
third party for giving all warehousing
facility against a agreed rent.
 Advantage-extensive geographical
coverage
 Availabilty of expert manpower
Disadvantage- performance of company
depends on the performance of 3rd party
Warehousing Location
 Location
of a warehouse has a
considerable impact on customer service
as it Provides a edge on the competitors
 Reduces the cost of distribution
Considerations for selecting a
warehouse location
 Closer to market/customers.
 Production oriented (closer to plant)
 Cost of warehouse
 Nature of the product – perishable & seasonal
 Market service area & cost of distribution
 Availability of transport facility
 Location of competitors warehouse
 Availability of infrastructure
facility
 Labor supply situation and wage structure
 Potential of further expansion of warehouse
 Resale value in future
Inventory Management
Defining Inventory
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Inventory is an idle stock of physical goods that contain economic value, and are held in various forms
by an organization in its custody awaiting packing, processing, transformation, use or sale in a future
point of time.
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Any organization which is into production, trading, sale and service of a product will necessarily hold
stock of various physical resources to aid in future consumption and sale. While inventory is a
necessary evil of any such business, it may be noted that the organizations hold inventories for various
reasons.
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From the above definition the following points stand out with reference to inventory:
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All organizations engaged in production or sale of products hold inventory in one form or other.
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Inventory can be in complete state or incomplete state.
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Inventory is held to facilitate future consumption, sale or further processing/value addition.
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All inventoried resources have economic value and can be considered as assets of the organization.
Type of Inventory
1.RAW MATERIAL: -They are required to carry out production activities
uninterruptedly.
2.WORK-IN-PROGRESS:-It is a stage of stocks between raw material & finished
goods.
3.CONSUMABLES:These are needed to smoothenthe process of production
4.FINISHED GOODS: These are the goods whichare ready for the consumers
5.SPARES:
Purpose/ Benefits of Holding Inventory
 Transaction Motive-to facilitate Continuous
Production.
 Speculative Motive-for taking advantage of price
fluctuations, saving in re-ordering costs and
quantity discounts, etc.
 Precaution Motive-for meeting unpredictable
changes in demand and supplies of materials
Objectives Of Inventory Management
 To ensure continuous
supply of raw material, spares and
finished goods
 To avoid both overstocking and under stocking of inventory.
 To maintain investments
in inventories at optimum level.
Inventory management
 Inventory
management is the process of efficiently
overseeing the constant flow of units into and out of an
existing inventory. This process usually involves controlling
the transfer in of units in order to prevent the inventory
from becoming too high, or dwindling to levels that could
put the operation of the company into jeopardy. Competent
inventory management also seeks to control the costs
associated with the inventory
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Inventory management includes the understanding how long it takes for a
supplier to process an order and execute a delivery.
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Inventory management also demands that a solid understanding of how long it
will take for those materials to transfer out of the inventory be established.
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Knowing these two important lead times makes it possible to know when to
place an order and how many units must be ordered to keep production running
smoothly.
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Calculating what is known as buffer stock is also key to effective inventory
management.
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Essentially, buffer stock is additional units above and beyond the minimum
number required to maintain production levels. For example, the manager may
determine that it would be a good idea to keep one or two extra units of a given
machine part on hand, just in case an emergency situation arises or one of the
units proves to be defective once installed.
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Creating this cushion or buffer helps to minimize the chance for production to
be interrupted due to a lack of essential parts in the operation supply inventory.
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Inventory management is not limited to documenting the delivery of raw materials and the movement of
those materials into operational process. The movement of those materials as they go through the
various stages of the operation is also important. Typically known as a goods or work in progress
inventory, tracking materials as they are used to create finished goods also helps to identify the need to
adjust ordering amounts before the raw materials inventory gets dangerously low or is inflated to an
unfavorable level.
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Finally, inventory management has to do with keeping accurate records of finished goods that are ready
for shipment. This often means posting the production of newly completed goods to the inventory totals as
well as subtracting the most recent shipments of finished goods to buyers.
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When the company has a return policy in place, there is usually a sub-category contained in the finished
goods inventory to account for any returned goods that are reclassified as refurbished or second grade
quality.
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Accurately maintaining figures on the finished goods inventory makes it possible to quickly convey
information to sales personnel as to what is available and ready for shipment at any given time.
Inventory costs are basically
categorized into three headings:
 Ordering Cost
 Carrying Cost
 Shortage or stock out Cost & Cost of Replenishment
Ordering Cost
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Cost of procurement and inbound logistics costs form a part of
Ordering Cost.
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Ordering Cost is dependant and varies based on two factors - The
cost of ordering excess and the Cost of ordering too less.
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Both these factors move in opposite directions to each other.
Ordering excess quantity will result in carrying cost of inventory.
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Where as ordering less will result in increase of replenishment
cost .
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These two above costs together are called Total Stocking Cost.
 Carrying Cost- Inventory storage and maintenance involves various types
of costs namely:
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Inventory Storage Cost
Cost of Capital
Inventory Storage Cost
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Inventory storage costs typically include Cost of Building Rental and facility
maintenance and related costs. Cost of Material Handling equipments, IT
Hardware and applications, including cost of purchase, depreciation or rental
or lease as the case may be. Further costs include operational costs,
consumables, communication costs and utilities, besides the cost of human
resources employed in operations as well as management.
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Cost of Capital-Includes the costs of investments, interest on working
capital, taxes on inventory paid, insurance costs and other costs
associate with legal liabilities.
The inventory storage costs as well as cost of capital is dependant
upon and varies with the decision of the management to manage
inventory in house or through outsourced vendors and third party
service providers.
Packaging is…………..
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Packaging is the science, art and technology
of enclosing or protecting products for
distribution, storage, sale and use.
Packaging is a coordinated system of
preparing goods for transport, warehousing,
sale and use.
Packaging helps the consumer quickly
understand what the product is all about
Packaging is a silent sales man
Transportation
 For the
movement of goods from supplier to
buyer , transportation is the most fundamental
and important component of logistic.
 transportation cost component is 20% - 40%of
the product cost.
 Transportation management includes the
decisions of: Mode of transportation ( Cost & time factor)
 Own fleet or Outsourcing
 Route Planning
 Vehicle scheduling
Importance of Transportation
 Ensures
Speedy & timely movement of
goods.
 Protective storage during transit
 Prevents stock outs.
 Cost efficient & better customer service
 Is the link between various supply chain
activities.
Cost of transportation
 Tariff
of mode of transport
 Transit time cost
 damage & deterioration cost
 Protective packaging cost
 Transit insurance cost
 Miscellaneous cost
REVERSE LOGISTICS
The process of planning, implementing, and controlling the
efficient, cost effective flow of raw materials, in-process
inventory, finished goods and related information from the
point of origin to the point of consumption for the purpose of
conforming to customer requirements.
Reverse logistics includes all of the activities that are
mentioned in the definition above. The difference is that
reverse logistics encompasses all of these activities as they
operate in reverse. Therefore, reverse logistics is:
The process of planning, implementing, and controlling the
efficient, cost effective flow of raw materials, in-process
inventory, finished goods and related information from the
point of consumption to the point of origin for the purpose of
recapturing value or proper disposal.
Classifying Reverse Logistics Activities
Reverse logistics can include a wide variety of activities.
These activities can be divided as follows:
 whether the goods in the reverse flow are coming from the
end user or from another member of the distribution
channel such as a retailer or distribution centre ;
 and whether the material in the reverse flow is a product
or a packaging material.
If a product enters the reverse logistics flow from a
customer, it may be a defective product, or, the consumer
may have claimed it was defective in order to be able to
return it. The consumer may believe it to be defective even
though it is really in perfect order. This category of returns
is called “non-defective defectives.”
Reasons for reverse logistics
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Products that have failed, but can be repaired or reused.
Products that are obsolete but still have value.
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Unsold products from retailers.
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Recalled products.
Items that have secondary usage, i.e. items that have
another usage after they have exhausted their original use.
Waste that must be accounted for and disposed of or used
for energy production.
Containers that must be returned to their origin
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In a celebrated case a few years ago, the McNeil Laboratories division of
Johnson & Johnson experienced a very serious threat when someone
poisoned several people by placing cyanide inside unopened bottles of
Tylenol, a Johnson &Johnson flagship product. This horrible act
happened twice in the space of a few years. The second time, Johnson &
Johnson was prepared with a fine-tuned reverse logistics system and
immediately cleansed the channel of any possibly tainted product.
Because Johnson & Johnson acted so quickly and competently, a mere
three days after the
crisis, McNeil Laboratories experienced an all-time record sales day.
Undoubtedly, the public would not have responded so positively had
Johnson & Johnson not been able to quickly and efficiently handle its
recalled product through its existing system in reverse. Clearly, the
Tylenol
incident is an extreme example, but it illustrates how reverse logistics
capabilities can be strategic, and how they can dramatically impact the
firm.
Strategic Use of RL
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Competitive Reasons-Most retailers and manufacturers have
liberalized their return policies over the last few years due of
competitive pressures. Part of satisfying customers involves taking
back their unwanted products or products that the customers believe
do not meet needs. Generally, customers who believe that an item
does not meet their needs, will return it, regardless of whether it
functions properly or not.
Good Corporate Citizenship-Another set of competitive reasons
are those that distinguish a firm by doing well for other people.
Some firms will use their reverse logistics capabilities for
altruistic reasons, such as philanthropy.
 Clean
Channel
Reverse logistics competencies are also
used to clean out customer inventories, so
that those same customers can purchase
more new goods.
Recapture Value and Recover Assets
Legal Disposal Issues