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LOGISTICS & SUPPLY CHAIN MANAGEMENT By Dr Punit Sethi

Dr PUNIT SETHI

Profile of Dr Punit Sethi


Dr Punit Sethi is a very well known Techno-Commercial, Academician, infrastructure specialist in Global Corporate, Trade & Industry. He has in depth knowledge and experience (India/abroad) in Worlds best Education Practices, Engineering & Business Management. Dr Sethi is BTech, MTech, MBA with specialization in Public Private Partnership from IIM (A) & PhD. Due to his rich experience and qualification, he is on Board of Advisors of Euthenics Group, New Jersey, USA & Chamber of Indian Micro, Small & Medium Enterprise on matters related to Academics & Engineering/Business Management. He is also Fellow of Institute of Engineers, Fellow of Institute of Valuers, Chartered Engineer, Member of Indian Roads congress, Indian Buildings Congress, American Society of Civil Engineers, American Society of Quality Council, Lead Auditor ISO-9001, QMS, EMS-14001, OHSAS-18001. Dr Sethi is also a prolific writer with may engineering, Management and Social Networking books to his credit. His latest book on Social Media has got global appreciation. The book is on Amazon.com (digital copy), android, itune and in Google Books. The author is also associated with Reliance and ADDAX Bio-Energy (Belgium).

Dr PUNIT SETHI
B.Tech, M.Tech, M.B.A, PhD F.I.E, F.I.V, M.I.R.C M.I.B.C, CE(I), Lead Auditor ISO QMS 9001, IMS (EMS 14001, OHSAS 18001) Member American Society of Civil Engineers Member American Society of Quality Council

Foreword

CONTENTS
UNIT 1 : INTRODUCTION TO LOGISTICS AND SUPPLY CHAIN MANAGEMENT Structure 1.1 Objective 1.2 Introduction 1.3 Logistics and SCM 1.4 Evolution and Importance of Logistics 1.5 The Role, Objectives & Policies of Purchasing and Supply Chain 1.6 Customer Focus 1.7 Summary 1.8 Questions and Exercises 1.9 Further Readings

UNIT 2 : Strategic Issues in Supply Chain Management Structure 2.1 Objective 2.2 Introduction 2.3 Value Chain and Value Delivery System 2.4 Facilities Decision 2.5 Transportation Choices 2.6 Vendor Relationships 2.7 Distribution Channel Design 2.8 Strategic Alliances Communication Flow of Supply Chain 2.9 Inter-functional Coordination 2.10 Inter-Corporate Cooperation 2.11 Summary 2.12 Questions and Exercises 2.13 Further Readings

UNIT 3 : MANAGING THE SUPPLY CHAIN


Structure 3.1 Objective 3.2 Introduction 3.3 Benchmarking and Reengineering 3.4 IT Enabled Supply Chain Management 3.5 Application of ERP, JIT and Quality Management 3.6 Vendor Management and Development 3.7 Value Engineering/Analysis 3.8 Optimization of Supply Chain 3.9 Organization Design 3.10 Retail Management 3.11 Summary 3.12 Questions and Exercises 3.13 Further Readings UNIT 4 : GLOBAL PERSPECTIVE Structure 4.1 Objective 4.2 Introduction 4.3 Motives and Development of Global Markets 4.4 Managing the International Supply Chain Operations 4.5 Supply Chain Reconsideration 4.6 Risk Involved 4.7 Benchmarking Supply Chains 4.8 Summary 4.9 Questions and Exercises 4.10 Further Readings

UNIT 5: FUTURE TRENDS IN LOGISTICS AND SCM


Structure 5.1 Objective 5.2 Introduction

5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 5.14 5.15

Collaborative Strategies Vendor Managed Inventory Third Party Logistics Fourth Party Logistics Enterprise Resource Planning Internet and E-commerce Supply Chain Agents Green Supply chain Reverse Logistics World Class Supply Chain Summary Questions and Exercises Further Readings

UNIT 1 : INTRODUCTION TO LOGISTICS AND SUPPLY CHAIN MANAGEMENT


Structure 1.1 Objective 1.2 Introduction 1.3 Logistics and SCM 1.4 The Role, Objectives & Policies of Purchasing and Supply Chain 1.5 Evolution of Logistics 1.6 Importance of SCM 1.7 Customer Focus 1.8 Developing Supply Chain as a Competitive Factor 1.9 Summary 1.10 Questions and Exercises 1.11 Further Readings

1.1 OBJECTIVE
In this module the basic concepts and the evolution of the Logistics and Supply Chain Management are discussed in detail. Define Logistics and Supply Chain Management (SCM) Understand the Development of Logistics and its Role in the Economy Need to keep Customer Focused Customer Satisfaction and Corporate Profitability

1.2 INTRODUCTION
There is a great deal of material that is moved in any organization. Organizations collect raw materials from suppliers and deliver finished goods to the customers. It is

logistics that executes this function. In other words, logistics is the function that moves both tangible materials (e.g. raw materials) and intangible material (e.g. information) through the operations to the customers (as a finished product). In continuation to this explanation, we would introduce what a supply chain means. A supply chain consists of a series of activities involving many organizations through which the materials move from initial suppliers to final customers. There may be different supply chain for each product. The chain of activities and organizations is named differently as per the situation. If the emphasis is on operations then it is called process; if the emphasis is on marketing then it is called logistics; if the emphasis is on value-addition then it is called value-chain; if the emphasis is on meeting customer demand then it is called demand chain; if the emphasis is on movement of material then we use the most general term i.e., supply chain.

1.3 LOGISTICS AND SCM


Logistics is the management of the flow of resources between the point of origin and the point of destination in order to meet some requirements, for example of customers or corporations. The resources managed in logistics can include physical items such as food, materials, equipment, liquids, and staff as well as abstract items such as information, particles, and energy. The logistics of physical items usually involves the integration of information flow, material handling, production, packaging, inventory, transportation, warehousing, and often security. The complexity of logistics can be modeled, analyzed, visualized, and optimized by dedicated simulation software. Minimizing use of resources and time are common goals.

A supply chain may be considered as a group of organizations, connected by a series of trading relationships. This group covers the logistics and manufacturing activities from raw materials to the final consumer. Each organization in the chain procures and then transforms materials into intermediate/final products, and distributes these to customers.

The supply chain can be defined as the integral management (within the company and through other companies) of the companys various logistical stages such as materials procurement, production, storage, distribution and customer service. The Supply Chain concept should be seen as a whole, that is, the entire system from the origin of procurement to the final consumption of goods or services. In supply chain network we must include all the organizations involved in the production of certain goods or services (from the origin of procurement to final consumption), and each of the logistical stages within these organizations. Thus, the supply chain is a network linking

and interweaving different supply chains of all the companies involved in a production process. Supply chain management (SCM) is the process of planning, implementing and controlling the operations of the supply chain as efficiently as possible. Supply Chain Management spans all movement and storage of raw materials, work-inprocess inventory, and finished goods from pointof-origin to point-of-consumption. The objective of every supply chain is to maximize the overall value generated by an enterprise and it consists of all stages involved, directly or indirectly, in fulfilling a customer request. In other words, The purpose of supply chain management is to be lean by driving out excess inventory and unnecessary costs and by reducing cycle time. Supply chains run from suppliers through to customers or stores and require process, technology and people for success. This is true regardless of the industry. To achieve the overall value, the organization ''SCM' must haveIntegrated Behavior,Mutually Sharing Information, Mutually Sharing Risks and RewardsCooperationThe Same Goal and the Same Focus on Serving CustomersIntegration of ProcessesPartners to Build and Maintain LongTerm Relationships. To achieve the overall value, the organization ''SCM'' must establish front end network with the suppliers.back end ''network'' with the resellers/customers The supply chain activity therefore constitutes complex objects, as it involves decision-makers from many different

companies, who sometimes have no direct relationship and are place in very different geographical locations; yet the decisions they make are mutually dependent upon each other. Hence, there is a need for an information system capable of linking together the different members of the chain so that there is an open communication between them. The concept of supply chain is not new. Historically we have moved from physical distribution to logistics management and then to supply chain management. This major difference seems to be that supply chain management is the preferred name for the actualization of integrated logistics, with it acting as an enabler, it is now possible to have an integrated process view about the logistics and all allied processes related to business. *Logistics operation : Logistic operation can be basically clubbed into physical distribution management, materials management and internal inventory transfer. *Logistic coordination: Logistic coordination pertains to forecasting, order processing, operational planning and product procurement or MRP. This integration is effected through effective information flows. Definitions Forrester (1961) suggested that the five flows of any economic activity money, orders, materials, personnel and equipment are interrelated by an information network, which gives the system, which is now called as supply chain due to its own character. According to Christopher (1992) supply chain is network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer. Managing these linkages and delivering the product/service to the customer in a cost effective way is SCM. Supply chain management encompasses materials/supply management from the supply of basic raw materials to final product (and

possible recycling and re-use). Supply chain management focuses on how firms utilize their suppliers processes, technology and capability to enhance competitive advantage. It is a management philosophy that extends traditional intra-enterprise activities by bringing trading partners together with the common goal of optimization and efficiency. Supply Chain Management is a set of approaches utilized to efficiently integrate supplier, manufacturer, warehouse and stores so that merchandise is produced and distributed at the right quantities, to the right location and at the right time, in order to minimize system under costs while satisfying service level requirements (Levi (2000)). The common thread in these definitions is that supply chain management seeks to integrate performance measures over multiple firms or processes, rather than taking the perspective of a single firm or process. Supply chain management has provided the next logical stage in the evolution of competitiveness for the manufacturing organization and added, importantly, a concern for the flow of materials to and from the organization. Supply chain management integrated suppliers to the end consumers and emphasized the need for collaboration to optimize the whole system. As such, supply chain management is the process of designing, planning and implementing change in the structure and performance of the total material flow in order to generate increased value, lower costs, enhanced customer service and yield a competitive advantage. In effect, the addition of supply chain management to the marketing model created a truly systems approach to the organization and its direct and indirect trading relationships The content of supply chain management with in a firm varies considerably with the type of business.

Supply Chain Management : Basic Models

There are many decisions that must be taken, when a company organizes a channel or network of intermediaries, who take responsibility for the management of goods as they move from the producer to the consumer. Each channel member must be carefully selected and the company must decide what type of relationship it seeks with each of its intermediate partners. Having established such a network, the organisation must next consider how these goods can be efficiently transferred, in the physical sense, from the place of manufacture to the place of consumption. Physical distribution management (PDM) is concerned with ensuring the product is in the right place at the right time. It is now recognised that PDM is a critical area of overall supply chain management. Business logistical techniques can be applied to PDM so that costs and customer satisfaction are optimised. There is little point in making large savings in the cost of distribution if in the long run, sales are lost because of customer dissatisfaction. Similarly, it does not make economic sense to provide a level of service that is not required by the customer but leads to an erosion of profits. This cost/service balance is a basic dilemma that physical distribution managers face. The reason for the growing importance of PDM is the increasingly demanding nature of the business environment. In the past it was not uncommon for companies to hold large inventories of raw materials and components. Although industries and individual firms differ widely in their stockholding policies, nowadays, stock levels are kept to a minimum wherever possible. Holding stock is wasting working capital for it is not earning money for the company. To think of the logistical process merely in terms of transportation is much too narrow a view. Physical distribution management (PDM) is concerned with the flow of goods from the receipt of an order until the goods are delivered to the customer. In addition to transportation, PDM involves close liaison with production planning, purchasing, order processing, material control and

warehousing. All these areas must be managed so that they interact efficiently with each other to provide the level of service that the customer demands and at a cost that the company can afford. Components of PDM There are four principal components of PDM namely; Order processing, Stock levels or inventory, Warehousing and Transportation. Order processing Order processing is the first of the four stages in the logistical process. The efficiency of order processing has a direct effect on lead times. Orders are received from the sales team through the sales department. Many companies establish regular supply routes that remain relatively stable over a period of time ensuring that the supplier performs satisfactorily. Very often contracts are drawn up and repeat orders (forming part of the initial contract) are made at regular intervals during the contract period. Taken to its logical conclusion this effectively does away with ordering and leads to what is called partnership sourcing. This is an agreement between the buyer and seller to supply a particular product or commodity as and when required without the necessity of negotiating a new contract every time an order is placed. Order-processing systems should function quickly and accurately. Other departments in the company need to know as quickly as possible that an order has been placed and the customer must have rapid confirmation of the orders receipt and the precise delivery time. Even before products are manufactured and sold the level of office efficiency is a major contributor to a companys image. Incorrect paperwork and slow reactions by the sales office are often the unrecognized source of ill will between buyers and sellers. When buyers review their suppliers, efficiency of order processing is an important factor in their evaluation. A good computer system for order processing allows stock levels and delivery schedules to be

automatically updated so management can rapidly obtain an accurate view of the sales position. Accuracy is an important objective of order processing, as are procedures that are designed to shorten the order processing cycle. Inventory Inventory, or stock management, is a critical area of PDM because stock levels have a direct effect on levels of service and customer satisfaction. The optimum stock level is a function of the type of market in which the company operates. Few companies can say that they never run out of stock, but if stock-outs happen regularly then market share will be lost to more efficient competitors. The key lies in ascertaining the re-order point. Carrying stock at levels below the re-order point might ultimately mean a stock-out, whereas too high stock levels are unnecessary and expensive to maintain. Stocks represent opportunity costs that occur because of constant competition for the companys limited resources. If the companys marketing strategy requires that high stock levels be maintained, this should be justified by a profit contribution that will exceed the extra stock carrying costs. Warehousing Many companies function adequately with their own on-site warehouses from where goods are dispatched direct to customers. When a firm markets goods that are ordered regularly, but in small quantities, it becomes more logical to locate warehouses strategically around the country. Transportation can be carried out in bulk from the place of manufacture to respective warehouses where stocks wait ready for further distribution to the customers. This system is used by large retail chains, except that the warehouses and transportation are owned and operated for them by logistics experts. Levels of service will of course increase when number of warehouse locations increases, but cost will increase accordingly. Again, an optimum strategy must be established that reflects the desired level of service. Transportation

Transportation usually represents the bulk of distribution cost. It is usually easy to calculate because it can be related directly to weight or numbers of units. Costs must be carefully controlled through the mode of transport selected amongst alternatives, and these must be constantly reviewed. The patterns of retailing that have developed, and the pressure caused by low stock holding and short lead times, have made road transport indispensable. When the volume of goods being transported reaches a certain level some companies purchase their own vehicles, rather than using the services of haulage contractors. However, some large retail chains have now entrusted all their warehousing and transport to specialist logistics companies. For some types of goods, transport by rail still has advantages. When lead-time is a less critical element of marketing effort, or when lowering transport costs is a major objective, this mode of transport becomes viable. Similarly, when goods are hazardous or bulky in relation to value, and produced in large volumes then rail transport is advantageous. Rail transport is also suitable for light goods that require speedy delivery (e.g. letter and parcel post). Except where goods are highly perishable or valuable in relation to their weight, air transport is not usually an attractive transport alternative. For long-distance overseas routes air transport is popular. Here, it has the advantage of quick delivery compared to sea transport, and without the cost of bulky and expensive packaging needed for sea transportation, as well as higher insurance costs. The chosen transportation mode should adequately protect goods from damage in transit (a factor just mentioned makes air freight popular over longer routes as less packaging is needed than for long sea voyages). Not only do damaged goods erode profits, but frequent claims increase insurance premiums and inconvenience to customers, endangering future business. 1.6.2 The Systems or Total Approach to PDM

PDM has been neglected in the past; this function has been late in adopting an integrated approach towards it activities. Managers have now become more conscious of the potential of PDM, and recognize that logistical systems should be designed with the total function in mind. A fragmented or disjointed approach to PDM is a principal cause of failure to provide satisfactory service, and causes excessive costs. PDM is concerned with ensuring that the individual efforts that go to make up the distributive function are optimised so that a common objective is realised. This is called the systems approach to distribution management and a major feature of PDM is that these functions be integrated. To plan an efficient logistics structure it is necessary to be aware of the interaction between the different distribution costs and how they vary with respect to the different depot alternatives (number, size, type and location). Figure 1.7 demonstrates how the individual distribution and logistics cost elements can build up the total logistics cost. Storage Cost: Storage cost will increase as the number of depots will increase because there will be a need for more stock coverage, more storage space, more management etc. Delivery cost: This will concern with the secondary transportation cost i.e. cost of delivery from the depot to the consumer. The greater the number of depots, the lesser is the secondary mileage and the delivery cost. Trunking Cost: This is the primary transport cost in the supply of products in bulk to the depots from the central finished good warehouses or production points. As the number of depots increases this cost will also increases. Inventory Cost: The main elements of inventory holding costs are: Capital Cost: The cost of physical stock. This is the financing charge, which is the current cost of capital to a company. Logistics and SCM : An Introduction 15 Logistics and SCM : An Overview

Service Cost: That is stock management and insurance cost Risk Cost: Which occur through pilferage, deterioration of stock, damage and stock obsolescence. System Cost: These costs represent a variety of information or communication requirements ranging from the order processing to load assembly lists. The supply chain management (SCM) is viewed as a system that links an enterprise with its customer and suppliers. As shown in Figure 2.1 information flows from customer in the form of forecast and orders to both the enterprise and suppliers. This information is refined through planning into specific manufacturing and purchasing objectives. As materials and products are purchased, a value added inventory flow is initiated which ultimately results in ownership transfer of finished product to customers. SCM is an integrated approach that is highly interactive and complex and requires simultaneous consideration of many trade-offs. SCM is the management of all key business process across a number of the supply chains. Successful SCM requires a change from managing individual function to integrating activities into key supply chain processes. Operating an integrated supply chain requires continuous information flows, which in turn helps to create the best product flows.

1.4 THE ROLE, OBJECTIVES & POLICIES OF PURCHASING AND SUPPLY CHAIN
Logistics play a key role in the economy in two significant ways. First, logistics is of the major expenditures for business. Logistics expenditure accounts for around 15-20% of GDP. Thus by improving the efficiency, logistics make an important contribution to the economy as a whole. Second, logistics support the movement and flow of many economic transactions; it is an important activity in

facilitating the sale of virtually all goods and services. To understand this role from a system perspective, consider that if goods do not arrive on time, customer can not buy them. If goods do not arrive at the proper place or in the proper condition, no sale can be made. Thus all economic activities throughout the supply chain will suffer. Customer Service Management Increased and intense competitions all around have made customer service as the key differentiator in a marketing system. Customer service provides the single source of customer information. It provides the customer with real time information on promised shipping dates and product availability. Customer service is a valuable business activity governing both resources and top management attention. Customer service is being offered in many forms such as post warranty support, fast repairs, speedy response to service calls from customers, easy availability of spares, qualified, competent and customer friendly technicians. Demand Management Customer demand in the form of irregular order pattern is the largest source of variability. Given this variability in customer ordering, demand management is a key to an effective SCM process. Manufacturers are moving from a push system to make to order mode, in such case predicting or forecasting demand is the key driver on which all of the supply related decision will depend. The demand management process must balance the customers requirement with the firms supply capabilities. A good demand management system uses point of sales and key customer data to reduce uncertainty and provide efficient information flows through out the supply chain. Customer Order Fulfillment The key to effective SCM is to achieve high order fill rate. Order fill rate can be defined as % of order fulfilled before or on the due date set by the customer. Performing the order fulfillment process effectively requires integration of firms

manufacturing, distribution and transportation plans. Manufacturing Flow Management This functional area decides how production should be organized and managed. Traditionally production system uses push strategy but in a customer focus environment pull strategy is more effective. To implement pull system, manufacturing process must be flexible to respond to market changes. This requires the flexibility to perform rapid change over to accommodate mass customization; orders are processed on a just in time basis in minimum lot size. In a customer focused business world, production process has to optimize balance between customer satisfaction and efficiency. Procurement Procurement is concerned with buying and movement of materials, parts or finished inventory from supplier location to manufacturing or assembly plants, warehouse or retail stores. Traditionally procurement is carried out on the basis of bid and buys system whereas in new integrated concept long-term partnerships are developed with core group of suppliers. Suppliers are involved at the early design stage which can lead to reduction in product development cycle times. For quick response to customer demand purchasing activities are carried out with rapid communication mechanism such as EDI and interest linkages. This reduces the cost and time on the transaction portion of the purchase. Product Development and Commercialization In todays fast changing environment new products are life bloods of a company. For the firm to remain competitive it has to sharpen its product development times. This requires that customer and suppliers must be integrated into product development process. Return Channel Managing the return channel as a business process offers the same opportunity to achieve a sustainable competitive advantage as managing the supply chain from anout-bound perspective. Effective process management of return

channel enables the identification of productivity improvement opportunities and break through projects. Objectives of Logistics and Supply Chain Management: To make available the right quantity of right quality products at the right place and time in right condition. To offer best service to consumers. To reduce the cost of operations. To maintain transparency in operations. Functions of Logistics: Products are ordered, billed/invoiced, handled, packaged, packed, wrapped, bundled, sorted, crated, and braced. Products are assembled and stored, warehoused, loaded, unloaded, shelved, displayed and cross docked. Products are shipped by air, railways, waterways, pipelines, and containers. Products are exported, imported, documented marked and consolidated. Products are traced, tracked, recycled and disposed. Logistics customers service standards are set(time, availability, errors etc) Other Functions Breaking Bulks Accumulating Bulk Creating Assortments Transaction Efficiency Credit Facilities Risk Taking

Purchasing management (or policy) is the management of purchasing process, and related aspects in an organization. Because of production companies purchase nowadays about 70% of their turnover, and service companies purchase approximately 40% of their turnover, purchasing management is one of the most critical areas in the entire organization and needs intensive management. Purchasing management also covers the areas of outsourcing and insourcing. Models used to aid purchasing managers include the Newsboy model as well as the Order up To (OUT) model. Supply chain Policy may cover: POLICY STATEMENT. Introduction Goal Objectives Oversight Compliance with Ethical Standards GENERAL PROVISIONS AND APPLICATION OF POLICY Commencement and Review Application of Policy Delegations Competency Supply Chain Management DEMAND MANAGEMENT SYSTEMS ACQUISITION MANAGEMENT SYSTEM LOGISTICS MANAGEMENT SYSTEM. Introduction Setting of Inventory Receiving and Distribution of Goods Stores and Warehouse Management Expediting Orders Transport Management Vendor Performance Contract Management DISPOSAL MANAGEMENT SYSTEM

RISK MANAGEMENT SYSTEM PERFORMANCE MANAGEMENT SYSTEM CODE OF ETHICAL STANDARDS PREFERENTIAL PROCUREMENT

1.5 EVOLUTION OF LOGISTICS


The evolution of logistics and Supply Chain Management (SCM) in the 1990s can be traced back to physical distribution management in the 1970s when there was no coordination among the various functions of an organization, and each was committed to attain its own goal. This myopic approach then transformed into integrated logistic management in the 1980s that called for the integration of various functions to achieve a system-wide objective. Supply Chain Management (SCM) further widens this scope by including the suppliers and customers into the organizational fold, and coordinating the flow of materials and information from the procurement of raw materials to the consumption of finished goods. The objectives of Supply Chain Management (SCM) are to eliminate redundancies, and reduce cycle time and inventory so as to provide better customer service at lower cost. The focus has shifted from the share of the market paradigm to the share of the customer paradigm, wherein the goal is to create customer value leading to increased corporate profitability, shareholder value, and sustained competitive advantage in the long run. Logistics involves getting, in the right way, the right product, in the right quantity and right quality, in the right place at the right time, for the right customer at the right cost. The logistic network consists of the suppliers, the retailer and the users. The purpose of an integrated logistic network in a supply chain is to fulfill customer orders through providing place utility to deliver products and services to end users. The place utility is achieved by managing a number of key functions of a supply chain. The

functions include: Demand Management Inventory Management Transportation Warehousing Order processing Information Management Logistics is a key enabler of supply chain collaboration. Improving performance in this field allows supply chains to increase their efficiency significantly and help to create innovations in different areas. In this context, an important task is to find structures and approaches which enable all types of performance management in logistics and supply chains for a better fulfillment of customer needs. Supply chain management is a cross-function approach including managing the movement of raw materials into an organization, certain aspects of the internal processing of materials into finished goods, and the movement of finished goods out of the organization and toward the end-consumer. As organizations strive to focus on core competencies and becoming more flexible, they reduce their ownership of raw materials sources and distribution channels. These functions are increasingly being outsourced to other entities that can perform the activities better or more cost effectively. The effect is to increase the number of organizations involved in satisfying customer demand, while reducing management control of daily logistics operations. Less control and more supply chain partners led to the creation of supply chain management concepts. The purpose of supply chain management is to improve trust and collaboration among supply chain partners, thus improving inventory visibility and the velocity of inventory movement. There are four major decision areas in supply chain management: 1. Location 2. Production 3. Inventory 4. Transportation (distribution)

And there are both strategic and operational elements in each of these decision areas. Distinguishing Logistics and Supply Chain Management (SCM): In literature, logistics and Supply Chain Management (SCM) are often used interchangeably, though there is a subtle difference between the two. Supply Chain Management (SCM) is more strategic in nature whereas logistics is more operations-oriented. While Supply Chain Management (SCM) deals more with the linkages in the chain, contracts and relationships, supplier selection, information and financial flows besides materials flows, creating new facilities such as plants, warehouses and Distribution Centres, and broader issues such as society, economy, government and environment, the scope of logistics is more or less confined to the routine job of transportation and storage of goods. However, if one deeply ponders, one may realize that logistics is the core of Supply Chain Management (SCM), and if logistics fails, the whole chain snaps. Location SCM: Deciding where a company will locate its facilities constitutes a large part of the design of a supply chain. A basic trade-off here is whether to centralize to gain economies of scale or decentralize to become more responsive by being closer to the customer. Companies must also consider a host of issues related to the various characteristics of the local area in which the facility may be situated. These include macroeconomic factors, quality of workers, cost of workers, cost of facility, availability of infrastructure, proximity to customers and the rest of the network, tax effects, and other strategic factors. The efficient and effective movement of goods from raw material sites to processing facilities,

component fabrication plants, finished goods assembly plants, distribution centers, retailers and customers is critical in todays competitive environment. Approximately 10% of the gross domestic product is devoted to supply-related activities . Within individual industries, the percentage of the cost of a finished delivered item to the final consumer can easily exceed this value. Supply chain management entails not only the movement of goods but also decisions aboutwhere to produce,what to produce,how much to produce at each site,what quantity of goods to hold in inventory at each stage of the process,how to share information among parties in the process and finally,where to locate plants and distribution centers. Location decisions may be the most critical and most difficult of the decisions needed to realize an efficient supply chain. Transportation and inventory decisions can often be changed on relatively short notice in response to changes in the availability of raw materials, labor costs, component prices, transportation costs, inventory holding costs, exchange rates and tax codes. Information sharing decisions are also relatively flexible and can be altered in response to changes in corporate strategies and alliances. Thus, transportation, inventory, and information sharing decisions can be readily re-optimized in response to changes in the underlying conditions of the supply chain. Decisions about production quantities and locations are, perhaps, less flexible, as many of the costs of production may be fixed in the short term. Labor costs, for example, are often

dictated by relatively long-term contracts. Also, plant capacities must often be taken as fixed in the short-term. Nevertheless, production quantities can often be altered in the intermediate term in response to changes in material costs and market demands. Facility location decisions, on the other hand, are often fixed and difficult to change even in the intermediate term. The location of a multibilliondollar automobile assembly plant cannot be changed as a result of changes in customer demands, transportation costs, or component prices. Modern distribution centers with millions of dollars of material handling equipment are also difficult, if not impossible, to relocate except in the long term. Inefficient locations for production and assembly plants as well as distribution centers will result in excess costs being incurred throughout the lifetime of the facilities, no matter how well the production plans, transportation options, inventory management, and information sharing decisions are optimized in response to changing conditions. However, the long-term conditions under which production plants and distribution centers will operate is subject to considerable uncertainty at the time these decisions must be made. Transportation costs, inventory carrying costs (which are affected by interest rates and insurance costs), and production costs, for example, are all difficult to predict. Thus, it is critical that planners recognize the inherent uncertainty associated with future conditions when making facility location decisions. Vehicle routing and inventory decisions are generally secondary to facility location in the sense

that facilities are expensive to construct and difficult to modify, while routing and inventory decisions can be modified periodically without difficulty. Nevertheless, it has been shown empirically for both location/routing and location/inventory problems that the facility location decisions that would be made in isolation are different from those that would be made taking into account routing or inventory. Similarly, planners are often reluctant to consider robustness and reliability at design time since disruptions may be only occasional; however, large improvements in reliability and robustness can often be attained with only small increases in the cost of the supply chain network. What situations could result due to poor location?Late delivery of materialsCreate produc tion lagCost will increase in all areasCustomer Service will be affected.Creating customer dissatisfaction/ l oss of sales.Create an inefficiency in the organization. Create an ineffective organizationProductivity will go d own.Return on Assets will be poor.Quality will suffer.Drop in sales.Drop in profits.Share prices will go downDissatisfied Shareholders. Logistics and Product Life Cycle Product life cycle (PLC) is a key marketing concept that affects the relationship between logistics and marketing. For different stages of PLC i.e., introduction, growth, maturity and decline, different level of logistics support is required by marketing. In the introduction and growth stage timely cost effective fulfillment of order is a major requirement in

ensuring initial acceptance of the product. Later as sales slow down and the product moves into the maturity and decline stages, the company changes to trimming cost as the product faces stiff price competition and consequent pressure on margins. Hence there is need for a logistics manager to understand what marketing is trying to achieve with each product and what appropriate level of logistics support is required accordingly.

1.6 IMPORTANCE OF SCM


Supply Chain Management (SCM) is an essential element to operational efficiency. SCM can be applied to customer satisfaction and company success, as well as within societal settings, including medical missions; disaster relief operations and other kinds of emergencies; cultural evolution; and it can help improve quality of life. Because of the vital role SCM plays within organizations, employers seek employees with an abundance of SCM skills and knowledge. Supply chain management is critical to business operations and success. The three critical components of SCM are: Supply management Demand management Logistics management As discussed earlier that the logistics professionals play a vital role in shaping the success of SCM as regards management of transportation, storage and warehousing. We sometimes do tend to ignore the role of logistics but the supply and demand chain cannot be met without the integrated and close-knit support of the logistics. Logistics management deals with receiving, handling, movement, storage and delivery of material, services and finished product in an SCM system. Logistics is required both at the beginning and at the end of it.

Logistics planning has to be integrated with material and capacity planning in order to achieve maximum and optimum level of satisfaction. The needs and requirements of our customers is variable and never a constant factor, therefore, in order to serve them better and be profitable you got to tailor your logistics and ensure it to be more dynamic with passing time. The emphasis should be on reduction of cycle time and elimination of waste in order to increase customer satisfaction. You have to understand that movement of goods, warehousing of materials and delivery is time consuming and at times requires precision synchronization at all levels i.e. from supplier to manufacturer and from manufacturer to consumer.
Illustration

Can you visualize the effort involved in moving crackers from Shivakasi in Tamil Nadu to Kolkata? A child who burst these crackers only have to demand them, and you as the guardian have to procure them from the shop, which sells these. Where does the shopkeeper get it? He gets from the wholesaler, and the wholesaler from the distributor/stockiest of that area. How does the company X stock the stockiest? The crackers are packed at Shivakasi and loaded in carriers, depending upon the time it has to reach and the time in hand before it is required. In case the planning fails the crackers will land up after Diwali to the dismay of many. Thats dead stock and is of no use to the consumer. Therefore, logistics involves procuring and transporting of the raw materials required to make firecrackers from the source to the manufacturer and once again tran-shifting the finished products to the warehouses near to the target area, so that closer to the festival the crackers could be utilized at once. When this is happening another set of crackers are in the process of moving from Shivakasi for the target area to meet any contingency. What if the warehouse catches fire? That actually depends on the demand per se and supply thereof, which we shall see in the follow up unit.

From the above its seen, as to what all gets involved in movement of firecrackers, from the source to the consumer, and how logistics play a predominant role in assisting the products to reach the consumers in time. One has to continuously think and think rightly to get over the routine criticalities that are involved with logistics. Theory will surely help you to understand the guidelines involved in logistics, but unless you understand the practical aspects and device methods to tackle them, you will find yourself in a quandary each time, when faced with a criticality. Certain newer perspective in logistics planning and execution could be as enumerated below. Produce at Source: This will involve production near to the source of raw material and cheap labor. It will also involve lesser movement of transport and reduce double handling to a large extent. There are other disadvantages in this though, like distance from the target population, which will involve more number of stocking points and areas. But, this can reduce the basic cost of production considerably. Fleet Management: Can you think of managing your own set of transport? Yes, certainly you can. Thinking of additional costs and expenditure? Yes, there are. But, certainly not more than hiring and facing the problems of truckers strike, and incessant rise of carriage charges. Maintaining a fleet is cumbersome today, but if you can maintain a good sixty vehicles along with a minor repair organization, it will help you immensely on a rainy day. You have something to call your own. Integration of logistics network. Logistics have to be integrated with the others in the firm for a better coordination.

1.7 CUSTOMER FOCUS


Management of a supply chain means managing all the different processes and activities that produce value in the hands of the ultimate consumer. A supply chain can be viewed as the network of entities through which the material and information flow. Those entities may include suppliers, carriers, manufacturing sites, distribution centers, retailers and customers. Effective streamlining of the supply chain can improve the customer service levels dramatically, reduce excess inventory in the system, and cut excess costs from the network of the organization. [2]Supply Chain Management competency contributes to an organizations success by providing customers with timely and accurate product delivery. The customer is any delivery destination from consumers homes to retail and wholesale businesses to the receiving docks of a firms manufacturing plants and warehouses. The customer being serviced is the focal point and driving force in establishing Supply Chain Management performance requirements. It is important to clearly understand customer service deliverables when establishing Supply Chain Management strategies. The customer-focused marketing is built on three fundamental concepts. The essence of a marketing orientation to business policy Developing Supply Chain Management competency as strategic resource to customer service planning The changing nature of most desired Supply Chain Management practice to accommodate product life-cycle requirements. A customer-focused strategy needs to accommodate and develop a combination of products and services that satisfies customers. One of the key factors for successful marketing is the availability of products and services to the customers,

when and where desired by them. Basic customer service is defined in terms of availability, performance and reliability. Availabilityisthecapacitytoofferinventorywhendemandedbya customer. Normally this is achieved by stocking adequate inventory in anticipation of demand from customers. Inventory stocking plans take into consideration forecasted demand, sales popularity, importance of a product in the product line, profitability and the value of the merchandise. Safety stock is kept to take care of demand forecast error and any unanticipated operational or delivery problems. The availability depends on three performance measures: stock out frequency, fill rate and orders shipped. Operational Performance can be measured in terms of speed, consistency, flexibility and malfunction/recovery. Speed is the time taken for executing an order. With the level of development in information, communication and transportation technology/ systems, the lead-time will continue to be shorter. Consistency is reflected by execution of large number of orders in expected delivery time. Organizations ability to respond to unexpected situation or request for unique customer service shows the flexibility. Preventing malfunction and having contingency plans for prompt recovery can add value to customer service programme. Reliabilityisoneofthemostimportantdimensionsofcustomerse rvicequality. Customers confidence can be built by providing advanced accurate information on the status of their orders, rather than giving surprises. Customer service is a process for providing significant value-added benefits to the supply chain in a cost effective

way. Excellent customer service performance is likely to add value for members of the supply chain. A customer service programme needs to be evaluated of its performance through measures like goal attainment and relevancy. A primary reason for SCM becoming an important managerial issue in the nineties stems from increased national and international competition. Customers have multiple 28 sources from which to choose to satisfy demand; locating product throughout the distribution channel for maximum customer accessibility at a minimum cost becomes crucial. The dynamic nature of the market place makes holding inventory a risky and potentially unprofitable business. Customers buying habits are constantly changing and competitors are continually adding and deleting products. Demand changes only make it almost sure that the company will have the wrong inventory. Structure and Systems ECR has a long-term impact on the effectiveness of the value delivery system to the customers, by way of a collaborative relationship between manufacturers, wholesalers, retailers, brokers, and transporters through application of advancement in Information and Communication Technologies (ICT). Therefore, the structural changes may be necessary to enhance and focus on proper co-ordination and collaboration among channel partners. Many organizations have switched over from product focus to customer focus. Application of technology for data capturing and processing to help quick and accurate decision-making is a must. EDI and Bar Coding technology can only enable transfer of POS data to the channel partners and avoid losses due to over/under stocking of products throughout the channel. Through integrated EDI; purchase order, delivery order, Invoice, Shipping bill, Stock Information, Truck Movement Information can be exchanged between channel partners.

People, Skill, Values and Culture Based on the current status of the organization in terms of availability of human resources and skills, the firm has to review the needs for training of existing resources and acquiring required skill through recruitment. In case of adoption of advance technologies, one has to review its imperative for the organization to acquire new skills. As this new concept thrives on efficiency, speed, responsiveness and the customer satisfaction, the values and culture of the organization have to make necessary adjustment and proper realignment to meet the new challenges. Category Management requiring cross-functional skills to decide on product-mix, assortments (flavor, pack size, colour etc), co-ordination with manufacturing, purchases, shipping/transportation, accounts, contribution/profitability analysis, new product development, customer service etc, will require new skills. Resources Major investment will be necessary to acquire the new advanced technologies and the necessary skills required to operate it. Integrated Supply Chain Network demands adoption of similar relevant technologies by the channel partners. In a situation when some of these Channel Partners are not able to arrange for the resources, the manufacturer/marketer may be required to find financial resources with an objective to achieve total Supply Chain efficiency. It is very important to note that each partner and the links in the value delivery chain must perform efficiently and continuously strive for further improvement. Even one inefficient link can result in sub optimal performance for the total chain. There may be a serious need to improve transportation facility to improve on Speed to Market advantage. This can be done through owning additional trucks or by

outsourcing.

Leadership
In order to adopt ECR concept as a differentiator, sound leadership can play a very important role. To drive the organization and channel partners through the change process may not be an easy task. Therefore, success of implementation will depend on the leadership qualities. The leadership has to ensure executive support, commitment to change and empowerment, which are the key areas for successful ECR implementation. For example, wherever cross docking will be possible the tasks of and need for a distribution center will be minimum or nil. This may call for some unpleasant decisions from the leadership. Strategic Alliances can facilitate new product development/introduction and market access or ensuring timely delivery and is coming off age now. Rediff.com has created such alliances with the partners like product/service suppliers, transporters/couriers and payment facilitators to be successful in their e-commerce venture. Quick Response is a retail sector strategy, which combines a number of tactics to improve inventory management and efficiency, while speeding inventory flows. Most QRs are between manufacturers and retailers only. When fully implemented, QR applies JIT principles through the entire supply chain, from raw material suppliers through ultimate customer demand. Customers sales are tracked immediately using EDI with bar code technology. It allows manufacturer to notify raw material suppliers and schedule production and deliveries as required to meet replenishment needs. This allows inventory reduction, speeding response times, lowering number of out of stock products, reducing handling and obsolescence. QR was first implemented in Textile & Apparel industry and an adaptation called ECR was implemented in grocery industry.

In order to fully understand the role of supply chain management in an industry it is necessary to study in depth the complexity of the supply chains for specific product groups, number of constituents in each level of the chain, the impact of constituents performance in the value delivery system in general and to their customers of the chain in particular, their awareness of this impact and which are the areas that need performance improvement for overall efficiency and effectiveness of the value delivery system. With the application of advanced Communications and Information Technology in the system, now each of the constituents would be able to serve its customer better and improve the value delivery process. The partners in the chain must understand what kind of support need to be provided to each other to ensure overall cost and value optimization of the system. An effective marketing mix strategy integrates resources for these activities into an effort that maximizes impact on customers. SCM attempts to satisfy time and place utility by ensuring satisfactory performance of timing and location of inventory and other related services, as per customer requirements in a most cost effective manner. SCM competency is a tangible way to attract customers, who value performance on time and place. One of the successful implementation of SCM as a business strategy was the cooperative alliance of Wal-Mart and Procter & Gamble. Both the firms individually committed to build SCM competency before proceeding with their joint partnership. The inventory availability and customer response time of an organizations service program may vary based on the prevailing market opportunity and competitive situation. The SC problem is mainly a calendaring game, intimately tied to the time- phased nature of decision-making cycles in the business world. Therefore, one must examine the scope of the decision being made, as well as the authority of the

decision maker. Since decisions, made at each of the strategic, tactical and operational levels, differ significantly, the solution procedures embedded in these tools vary. These tools should be configured so that they are fully integrated, which will reduce implementation costs as well time-tobenefit.

1.8 DEVELOPING SUPPLY CHAIN AS A COMPETITIVE FACTOR


An effective marketing mix strategy integrates resources for these activities into an effort that maximizes impact on customers. SCM attempts to satisfy time and place utility by ensuring satisfactory performance of timing and location of inventory and other related services, as per customer requirements in a most cost effective manner. SCM competency is a tangible way to attract customers, who value performance on time and place. One of the successful implementation of SCM as a business strategy was the cooperative alliance of Wal-Mart and Procter & Gamble. Both the firms individually committed to build SCM competency before proceeding with their joint partnership. The inventory availability and customer response time of an organizations service program may vary based on the prevailing market opportunity and competitive situation. The SC problem is mainly a calendaring game, intimately tied to the time- phased nature of decision-making cycles in the business world. Therefore, one must examine the scope of the decision being made, as well as the authority of the decision maker. Since decisions, made at each of the strategic, tactical and operational levels, differ significantly, the solution procedures embedded in these tools vary. These tools should be configured so that they are fully integrated, which will reduce implementation costs as well time-tobenefit .

Managing SC means managing across traditional functional areas in the organization and also interacts with customers and suppliers. The cross -boundary nature of management called for incorporating SC goals and capabilities into the strategic plan of the company and use SC to achieve a sustainable competitive advantage Manufacturing and logistics are interrelated so no one can be considered in isolation. Decisions made in these two areas commit the organization to relatively long-lasting cost structures and also determine the manner in which the business competes in its chosen markets. To maintain its competitive position in a dynamic industry, the manufacturing and logistics functions must respond positively by considering the manufacturing/logistics network as whole and continuous improvement programmes coordinated across the various activities like delivery service, production priority control and purchasing to exploit the synergy available. There are two fundamental competitive strategies, which every organization has to decide to remain unbeaten in the competitive environment. Cost leadership i.e., be the lowestcost producer in the industry or meaningful differentiation i.e., to differ by competitor in some form, that can be in terms of service like delivery time, delivery reliability etc. or in terms of technical advantages like superior features, superior product etc. In new environment, where integration is the driver to achieve competitive advantage, organizations have evolved new approaches to develop interface between two functions.

Customer Service Issues at the LogisticsManufacturing Interface


Customer service strategy is an on-going process of increasing both the quality and number of links between the manufacturing organization and the customer. The whole emphasis in todays service intensified businesses are to

increase a series of both human and information based technological relationships between customer and the organization so that better customer services and satisfaction to the customer can be realized. The issues at the manufacturing/logistics interface for better customer service are as follows: Demand Forecasting The general function of product forecasting in the short to mid term is to contribute to the process of ensuring the availability of stock for customers. This includes the use of distribution requirements planning (DRP) wherever appropriate. For the longer term, forecasting at the product group level is crucial for manufacturing capacity and flexibility decisions. Customer and Supplier Oriented System Organizational systems will need to be directly related to the issues of how to bind the customer more tightly to the organization and how effectively integrate suppliers into the overall supply chain with the objective of enhancing customer service. The systems installed by organizations will need the capability to formally link the customer in a form that benefits both parties. Systems will also be required to link with suppliers in a manner that gives meaning to the concept of strategic alliances. In a strategic alliance the supplier and the manufacturer agree to a relationship that goes beyond the normal commercial relationship such that each obtains synergistic benefits similar to that obtained by forward/backward integration but with least associated risks and negative attributes.

Plant Configurations
The location, nature and operating performance of manufacturing facilities, central warehouses and branch warehouses impact heavily on both cost structure and service levels. In the longer term, and in conjunction with other factors (systems, supplies), the plant/branch

configuration is a major structural input to reducing overall supply chain costs. When the links between manufacturer and customer and manufacturer and supplier are complete, a rethink of the logistics (supply chain) network from supplier through to customer will be required, for two reasons: Availabletechnology,particularlyinformationtechnology,wil lallowcertain plant/branch configurations, previously ruled out, to be feasible. There will be an on-going need to reduce (in real terms) the cost of the network. A key feature of this process will be the requirement of involving in an appropriate manner both customers and suppliers. This will be new ground for many organizations and will force a re-evaluation of values and mission in some circumstances.

Master Production scheduling


The master production schedule (MPS) is an area where a number of parties (manufacturing, logistics, marketing, finance) have a vested interest. Often as not, though, it is done by one group in isolation from the others. In the operational sense the MPS is primarily concerned with stock availability within a set of constraints such as capacity.

Supply Chain: Growth


Enhanced customer expectation: Competition worldwide has led to maximum emphasis on customer service over the years. The value of the product can only be determined when the product reaches the customer in time and at the required place. The value of customer service has acquired such dimension that, if the product doesnt reach in time, the sale will be lost to a competitor who offers in time, an ideal substitute. This can further be classified under: Pre-transaction Elements: Relating to corporate policies and program.

Transaction Elements: These are those variables involved directly in physical distribution, i.e. product and delivery reliability. Post-transaction Elements: These are those aspects dealing with after sales service, warranty, repair, customer complaints and replacements. Pressure for Quick Response: Customers today expect a better and quicker response owing to the value added services being provided by the manufacturers. This is mainly due to shortened product life cycles, consumers drive and volatile markets, making reliance on forecasts difficult and dangerous. The key to quick response is pipeline management, i.e. a process where manufacturing and procurement procedures are linked to requirements of the market. It seeks to meet the competitive challenges of increasing the speed of response to the market needs. Impact of Globalization: Present global environment is forcing the organizations to incorporate the world in their strategies and analysis. Certain key factors like, economic trends, competitiveness, technological advances, the firms today cannot ignore them. Companies therefore must identify and analyse factors that differ across nations and determine the impact on the operations functions. Transportation and distribution therefore assumes greater importance in such scenario, and the companies have to rightfully integrate and manage the facilities and markets available in this backdrop. Logistics, therefore, assumes greater strategic significance. Organizational Integration: Organizations today need to be broad-based integrators, inclined towards the achievements of market place successes, based on managing systems and people that deliver the service. Generalists, therefore, assume greater importance to specialists to integrate materials and operation management with delivery. Today, IT is slowly proving to be a great integrator for various functions, spanning from supplier to the customers.

Trends in SCM
The major trends in SCM are: Co-maker Ship: It is defined as the development of a long-term relationship with limited number of suppliers on the basis of mutual confidence. The benefits are: Shorter delivery lead times Reliable delivery Lesser schedule disruption Lower stock levels Lesser quality problems Stable prices Higher priority to orders The basic philosophy of this alliance is that the supplier is considered to be the extension of customer relationship, with emphasis on continuity and a seamless end-to-end pipeline. With growth in outsourcing the trend towards co-maker ship also increases manifold. This principle can be extended both ways in the supply chain-upstream to customers and downstream to distributor, retailer and users. Third Party Logistics: Outsourcing operations like storage, transportation and delivery, improve service levels, reduce costs and increase flexibility. It also helps in reducing costs on trucks, warehouses and certain infrastructure requirements, and allows firms to acquire new technologies and enter newer markets. Yet, certain aspect does merit attention. These outside service providers may not at times perform up to the requirements of the manufacturer and would result in loss of image of the firm. Therefore though third party logistics could be cost effective, at times the firm should use these depending upon the organizations needs, capabilities of the service provider and the resulting pay off. Principle of Postponement: The time when the product is

ready for sale is known to the organisation, and consequent delay in labeling, packaging and pricing till the last moment is called principle of postponement. The sole objective is to minimize the risk of carrying finished product to the various points of the supply chain by delaying the product differentiation to the latest possible moment before customer purchase. The cost savings on transportation and storage are attained by keeping products at the highest level and by moving goods through the supply chain in large, generic quantities (Deshmukh & Mohanty 2004). Examples of postponement are: Delayed labeling Shipping in bulk Transferring to small containers at warehouses Delay final assembly Stocking fuel, oil & lubricants (FOL) in unblended state However, it has to be noted that postponement shouldnt compromise the desired service level.

Enterprise Resource Planning (ERP) & DRP: ERP


systems are basically information integrators and they help in binding various business processes in an enterprise. It also helps in streamlining and re-engineering of various processes, focusing on value activities and eliminating nonvalue added activities. Due to influx of IT, ERP has been able to provide a wide information base with an aim to optimize resources. This has further helped in in-bound logistics, transportation, material management and accounting at large. DRP on the other hand helps in estimating inventory requirements at stocking areas and ensures supply sources are able to meet the demand. It incorporates policies on safety stocks, information and relation between demand forecasts, inventory levels, manufacturing and distribution schedules. DRP helps in both short term and future production and distribution resources, in order to match both supply and demand.

Because of minimal inventory that is held, DRP can be called the key to logistics and JIT productions.

Strategic Decisions
Strategies are a set of important decisions derived from a decision making process of the top management in the organization. In order to ensure success, the strategic changes that are being incorporated in the supply chain, has to conform to well defined strategies formulated by the company from time to time. The top management in the company forms the strategic decisions and successful execution of these decisions should provide a cutting edge to the organization. Areas that require strategic decisions are warehousing, transportation, IT, and make versus buy. We will dwell on IT and makers versus buy. IT Solutions and Integration: IT solutions will play a significant role in information building all through the supply chain. However, companies should address several queries centered on proper alignment of information technology tools and the expected increase in productivity and services. Identifying the very scope of the business problem that is to be addressed is the most important in this complete exercise. This effort will help in identifying the best course available to the manufacturer and the area that it is to be applied, the core business issues. At the same time, it is also important to assess the effect of IT on the organization as a whole and its capabilities. More often than not, IT affects the business in 3 ways: The integrated process requires managers for restructuring the cultures and capabilities on values providing continuous improvement and teamwork. It enables the organization not only to rethink but also leverage new information, like graphics, computer integration and workstation technology. Application of new information requires redefinition of

goals and skills of the enterprises people resources. The response to the issue of managing the supply chain included having a fully integrated business, and some of the vehicle manufacturing companies were structured in a way where the input were raw materials and output the finished product. However, the driving forces for global manufacturers have ranged from becoming a tiered global supply system in the West to the Japanese Kereitsu based company supply system, although there are quite a few near fully integrated companies in the developing nations till date. The following are the reasons propounded by Christopher (1992) for not following the integrated supply chain: Few managers retain a grasp of a process from one end of the pipeline to the other. As a result, the way things get done can reflect convenience for doers, a desire to protect functional boundaries and a lack of understanding the related consequences, both up and down streams of individual processes. Initiatives of changes are functional in nature and seldom reflect the cost of the system. Their custodians as a means of providing breathing space and as ways of providing some hidden flexibility respond to protect lead times. The individual functional lead times contain slack and where these become embodied in a processing system, they are institutionalized. Actually, companies that have benefited from integration are pacing ahead with confidence, and IT as a whole have further aided in integration vigorously. Make versus Buy: The main organization focus today is on outsourcing of non-critical components. These decisions are arrived at after considering the factors like, capacity, leverage an organization gets and the quality and confidence in working with the vendor. Make buy decision is a strategic decision and the area that has to addressed in this is development of the total cost model (Deshmukh & Mohanty).

It has been seen that having a supplier that can work in a simultaneous engineering way with the company is the main aspect in order to avoid costs associated with unnecessary design complexity. This may also mean having a supplier who can provide the same support through IT rather than having an engineer in site, and achieve the same result. The next consideration is the aspect of labour elements. Here, once again the need for simultaneous engineering is required mainly in those off-shore areas with low labour rates, over and above issues like labour rate inflation and challenges of overseas sourcing. All these have to be considered in a structured manner and not in isolation.

Strategic Supply Management Activities


Environment Monitoring: Monitoring the supply environments to identify threats and opportunities, is an important task of supply managements, to include material shortages affecting both price and availability of purchased materials and services. They can further be classified as: Changes in legislation: affecting the workplace. This can affect both price and availability. Wars and conflicts that can affect availability of materials resulting in price increase. Consolidation among suppliers: to the extent of monopoly. A firm should change its strategy based on such changes. Integrated Supply Strategy: Supply management should develop and manage the firms supply strategy based on wholesome integration strategy and not in isolated strategies. Commodity Strategy: Must develop and update sound commodity supply strategy. The following activities have to be performed to ensure effectiveness of the strategies: Strategy Updating: Commodity teams must identify materials, items of equipment and services that are strategic

in nature or should formulate a strategic plan for obtaining them. Technology Access Control: All supply management organizations develop and update technology road maps, which lists critical current and future technologies to be pursued. Action should be at hand to protect these technologies that yield a competitive edge and ensure are not transferred to competitors. Supply Management Organization: The organization of the supply management system must enhance the effectiveness and efficiency of the system in attaining the primary objective. Risk Management: Actions should be taken to ensure minimum disruption of supplies and price increase. Data Management: Supply management, accounting and information technology must cooperate in the collection and application of supply data to facilitate the strategic supply planning. Corporate Strategic Plan: Supply management should join the marketing and operations as the key players in development of each of the firms corporate strategic plan. Supply management provides input to the strategic planning process on threats and opportunities in the supply world. It also provides inputs on constraints that may affect strategic initiatives. Its knowledge of the firms supply world may be a vital source of input for strategic planning. Strategic Sourcing: The firm should manage and develop its supply base in line with firms strategic objectives. Several actions that should be taken are: Periodic review of the active suppliers. Identification of the appropriate relationship (transactional, collaborative or alliance) for each commodity class. Optimization of supply base with coordination and combination with several forces to increase the importance of the firms supply base.

Strategic Supply Alliances: Developing and managing the supply alliances frequently are two of the most crucial and most strategic activities undertaken by any firm. Institutional trust is a key prerequisite to supply alliances. Rapid growth of American society of Alliance Professionals is a testimony to the industrys recognition of importance of these activities. Supply Chain/Networks: These help in developing and managing of supply alliances, but is more complex. IT & relationship skills are essential prerequisite for personnel assigned to the task. Charles Fine in his book Clock speed writes, the farther you look upstream in your technology supply chain, the more volatility you see. Customers are foolish if they dont spend any time or resources thinking of the health, survival, and possible independence of their core technology suppliers.4 Social Responsibilities: Supply management must develop and implement programs that will protect the environment, facilitating the inclusion of woman-owned, minority based and small business in our economy to promote values in the workplace. Understand Key Supply Industry: Its impact is directly proportional to the knowledge of related industries in which it buys. They study and understand the industries that provide the key materials, equipment, and services, cost structures, technologies, competitive nature and culture. The above provides the understanding of supply managements responsibilities both strategic and tactical, which if executed effectively and efficiently will be a key to the firms success and survival.

Supply Alliances
As seen above supplier alliances plays a key role in strategic supply chain management activities across the board. Therefore in order to develop and manage these relationship

and alliances a firm has to continuously endeavor to identify methods to facilitate these relations. Supplier is as important as the customer and that has to be realised in the true sense. Annual Supplier Meetings: Annual supplier meeting is a common phenomenon in maintaining direct relationship with the suppliers by the buyer firm. It is used both as a teaching and learning platform as well as the opportunity to distinguish ones organisation as a supply management leader. It dwells on the buyers management performance, learning and future goals. The main objective being learning of key strategies to support the buyers business. It requires extensive planning and is expensive, but it lays the foundation of a buyer supplier relationship in the long run. Supplier Discussions: Its an informal forum for gaining and sharing learning, between the representatives, like the chief executive, chief operating officer, and representatives from marketing, supply management and research divisions. It reviews the buyers progress and goals in the backdrop of shift in strategies and policies. Its a forum that builds trust and respect, towards a successful supplier relationship. Workshops and Seminars: These are aimed at creating opportunities for supply-stream innovations, which will benefit all the participants. It composes of members of supplier participants who provide material and services that are critical to the products made available at the marketplace. Such discussions open the door for newer set of goals and collaborations. It provides the base for continual improvement, concepts and innovations required to guide and organize discussion and work sessions. Collaborations/Partnership: This is supposed to be the most successful supplier buyer relationship in recent times. These are based on mutual interdependence and respect. These alliances begin with careful selection of source during

the product design process. This is the time when the buyer requires a dependable supplier who can provide the required process, design and technological support for a successful product. The supplier at the same time requires a responsible customer for its product and services. They both require each other and have to work hand in glove. Unexpected criticalities that may arise can be sorted out with a we shall overcome attitude. The most important in these relationships is the integration of the buyer and supplier as long as the relationship is beneficial to each other.

Developing and Managing the Relationship


Supply managers at all levels should ensure and tailor appropriate actions during the planning and management of such alliances mentioned above. Like: Instituting a Cross-Functional Team: A team so designated should be in place to handle such alliances, which is responsible for development, integration, and develop and manage appropriate measures for the alliance to be successful. Training: Teams from both sides as designated should undergo appropriate training in being constructive team players, and also in cross-functional team skills. Communication System: The teams should develop and integrate an effective communication system responsive to the needs and requirements of both the firms. Trust Building: Measures to improve trust between the two organizations have to be developed and implemented too. Visits: Periodic visits by the respective team members to each others site has to be resorted to for confidence building and co-location of key technical persons. Specialized Training: Plans have to be evolved and developed for specialized training involving variance of products, designing, value analyses, engineering, cost analysis and cost management.

Objectives: Certain objectives have to be established in areas, including quality, cost and time aspects. Monitoring: Results have to be continuously monitored and reported to the management level. Supportive: Inter-firm team members should realize the importance of such alliances and support the alliance goal in letter and spirit. Its in the interest of both the firms to support each others operations and their respective goals, ethics over expediency. Management of supply contract is a challenging responsibility and a critical too. Companies have to continuously generate and develop newer ideas and innovations to maintain these relations and work in unison to a common goal without jeopardizing each others interest in the overall gambit of supplier buyer alliances and relationship.

1.9 SUMMARY Supply chain is network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer. Logistics expenditure accounts for around 15-20% of GDP. Thus by improving the efficiency of logistics operations, logistics can make an important contribution to the economy as a whole. Factors contributing to the growing interest in logistics include advances in information system technology, an increased emphasis on customer service, growing reorganization of the system approach and total cost concept. Supply chain management seeks to integrate performance measures over multiple firms or processes, rather than taking the perspective of a single firm or process. Supply chain integration links a firm with its customers, suppliers and other channel members. As such it integrates their relationships, activities, functions, processes and locations.

Check your progress


Tick Mark () the most appropriate answer 1. Which of the following is not a characteristic of Supply Chan Management a) Planning b) Manufacturing c) Implementing Controlling 2. Which of the following is not a characteristic of logistics a) It ensures a smooth flow of all types of goods b) It has the ability to meet customer expectations and requirements c) It offers the best possible customer service at any cost d) It deals with movement and storage of goods in appropriate quantities 3. All of the following are the objectives of logistics except a) To make available the right quantity of material at right quality at right time, at the right place in right condition at right price b) To offer best possible customer service for competitive advantage c) To promote the product through the logistic channels d)To minimize total logistics costs 4. The functions of logistics include except a) Demand Management b) Finance Management c) Information Management

d) Transportation 5. Which of the following is not right statement a) SCM and logistics are related to each other b) Logistics is pat of SCM c) SCM is part of logistics d) Logistics and SCM can not be delinked

1.10 QUESTIONS AND EXERCISES


1. What is the difference in Logistics and SCM? 2. Discuss importance of SCM?

3. Define Role and Objectives of SCM? 4. Discuss reason to develop SCM as a competitive factor? 5. Write down salient aspects of remaining Customer Focus in Logistics & SCM?

1.11 FURTHER READINGS


1) Simchi Levi (2000), Designing and Managing the Supply Chain, Irwin/ McGraw-Hill, IL. 2) Christopher, M., 1992, Logistics and Supply Chain Management: Strategies for Reducing Costs and Improving Services, Pitman, London. 3) Croucher Phil, Rushton Alan and Oxley John, The handbook of Logistics and distribution Management 4) Douglas M. Lambert, 1998, Fundamental of logistics management, McGraw Hill. 5) Sahay B S, 1998, Supply Chain Management for Global competitiveness (Macmillan)

6) Chopra Sunil and Meindl P, 2001, Supply Chain Management: Strategy, Planning, and Operation, Prentice Hall. 7) Forrester J W 1961, Industrial dynamics, Cambridge, Massachusetts, The MIT press. 8) Waters Donald, 2003, Logistics: An Introduction to SCM, Palgrave McMillan (Indian Edition), NY

UNIT 2 : STRATEGIC ISSUES IN SUPPLY CHAIN MANAGEMENT


Structure 2.1 Objective 2.2 Introduction 2.3 Value Chain and Value Delivery System 2.4 Facilities Decision 2.5 Transportation Choices

2.6 Vendor Relationships 2.7 Distribution Channel Design 2.8 Strategic Alliances Communication Flow of Supply Chain 2.9 Inter-functional Coordination 2.10 Inter-Corporate Cooperation 2.11 Summary 2.12 Questions and Exercises 2.13 Further Readings

2.1 OBJECTIVE The key objectives of this module is a deeper understanding of strategic impacts of Supply Chain Management. To cover: Imperatives for supply chain strategy development. To be acquainted with Value Chain and Value Delivery System. Discuss Distribution Channel Design Illustrate importance of Strategic Alliances To bring out Inter-Functional Coordination and Inter-Corporate Cooperation INTRODUCTION

2.2

After having seen the various models for SCM integration,

integration of supply and demand chain, let us now take a closer look at the strategic supply chain management. The successes in the manufacturers of today revolve around certain basic services related to both product management and consumer satisfaction. The imperatives are: Shorter product life cycle. Quality control. Timely delivery. Low cost delivery options. Reduction in costs, both production and to the end user. Waste management. The imperatives above create a continuous pressure on the companies for frequent changes, both in terms of policies and strategies, and in a way force the companies to stay abreast of the latest. According to the world competitiveness report competitiveness is equal to multiplication of competitive assets and competitive process. The imperatives for supply chain strategy are: Global Sourcing Global Networking and Marketing Revolution in Global Business Process Customer Centric Management Activities Integrated Planning System Integration of Functional Activities in the Supply Chain towards a Common Goal for Competitive Advantage

2.3 VALUE CHAIN AND VALUE DELIVERY SYSTEM


The value chain is a concept from business management that was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.

Definition of 'Value Chain' A high-level model of how businesses receive raw materials as input, add value to the raw materials through various processes, and sell finished products to customers. Value-chain analysis looks at every step a business goes through, from raw materials to the eventual end-user. The goal is to deliver maximum value for the least possible total cost. Value Delivery : Whether you are working in a sales organization or a factory or an R&D lab, you are also a part of a larger system of delivering value to customers. This endto-end system that collaborates (at least in some fashion!) to deliver value to customers is called a Value Delivery System. The problem with such situations is that breakdowns and lack of alignment within the whole system can hinder you from optimizing the value that you create and deliver. The activity of improvement thus focuses on the whole system. In any VDS work, an early stage is in scoping out the system on which you are going to work. It can be soup-to-nuts stuff

or can be constrained within a single organization. Questions to ask of anyone in the system include: Who do you deliver value to? How do they evaluate it? What is their current evaluation? Who delivers value to you? How do you evaluate it? What is your current evaluation? It thus becomes a game of suppliers and customers, linking people and systems together. A neat trick in asking these questions is that you can match up what the suppliers and customers said: are perceptions the same? Usually not. With a little communication, there is scope for immediate improvements. Customers receive value every time they touch us or our products. This customer lifecycle has been characterized by the following stages, which spell the unforgettable word 'COILUSD': 5. Choosing 6. Ordering 7. Installing 8. Learning 9. Using 10. Supporting 11. Disposing Note: This is an archetype. Your customers may not use this exactly, but it is a good starting point for finding out what it actually it. There is a Value Delivery System aligned to each stage of your end customer's lifecycle, whether it is recognized or not. And it may be delivering great value or very poor value.

2.4 FACILITIES DECISION


In Facilities Management, there are four crucial Decision Areas: 1. How much capacity is needed? In total for the

company? At each unit, plant, office, ... 2. When is the capacity needed? 3. Where should the capacity be located? 4. What type of facilities/capacity are needed? Facilities Strategy : Facilities decisions are affected by these factors: 1. Predicted demand 2. Cost of facilities 3. Likely behavior of competitors 4. Business strategy 5. International considerations

2.5 TRANSPORTATION CHOICES


Economic uncertainty, fluctuating fuel prices, increased safety and social regulation, escalating customer expectations, globalization, improved technologies, labor and equipment shortages, a changing transportation service industrytodays managers are faced with an array of challenges and opportunities that contrast dramatically with those of a decade ago. It is not surprising, then, that many managers have failed to fully adapt to the changing environment, resulting in performance shortcomings and lost opportunities. Prominent among the list of lost opportunities is fully leveraging the transportation function as a critical strategic element within the supply chain. Transportation plays a central role in seamless supply chain operations, moving inbound materials from supply sites to manufacturing facilities, repositioning inventory among different plants and distribution centers, and delivering finished products to customers. Benefits that should result from world-class operations at the points of supply, production, and customer locations will never be realized without the accompaniment of excellent transportation

planning and execution. Having inventory positioned and available for delivery is not enough if it cannot be cost effectively delivered when and where needed. It could be: Long-Term Decisions: At the highest strategic decision level, transportation managers must fully understand total supply chain freight flows and have input into network design. At this level, long-term decisions related to the appropriateness and availability of transportation modes for freight movement are be made. Managers need to decide, for example, which primary mode of transportation is appropriate for each general flow (i.e., inbound, interfaculty, outbound) by product and/or location, paying careful attention to consolidation opportunities where feasible. Lane Operation Decisions : The second level of decision-making regards lane operation decisions. Where network design decisions are concerned with long-term planning, these decisions focus on daily operational freight transactions. At this level, transportation managers armed with realtime information on product needs at various system nodes must coordinate product movements along inbound, interfaculty, and outbound shipping lanes to meet service requirements at lowest total costs. Choice of Mode and Carrier: A third level of transportation decision-making involves the choice of mode and carrier for a particular freight transaction. Due to the blurring of service capabilities among traditional transportation modes, options that in the past would not be considered feasible may now emerge as the preferred choice. For example, rail container service may offer a cost-effective alternative to long haul motor transport while yielding equivalent

service. Similarly, package delivery carriers are competing with traditional LTL operators. Truckload carriers, on the other hand, are increasingly bidding for low-volume shipments as well as for overnight freight movements. For the shipper seeking 24-hour delivery, truckload carriers may offer an alternative to air carriers at significantly lower ratesand, quite possibly, higher reliability. Dock Level Operations: The final set of transportation decisions involves dock level operations, such as load planning, routing, and scheduling. Transportation BY DIFFERENT MODES OF TRANSPORT Basic Block Diagram to Understand Logistics Transportation happens to be the most fundamental part of strategic logistic management. Transport costs include all costs associated with movement of products from one location to another. The average transport costs ranges from 5 to 6% of the recommended retail price of the product. Transportation is the movement of products, materials and services from one area to another, both inbound and outbound. It can also be said as movement from one node of the supply chain to the other. As Deshmukh and Mohanty (2004) says, by providing for the swift and uninterrupted flow of products back and forth through the chain, transportation provides a sort of lubrication to run the chain smoothly. It also permits deeper penetration of newer markets far from the point of production.1 Therefore, in order to effectively manage this transportation system the first step would be to establish a cost effective transportation mode. In other words highest customer service in lowest price, leads to company growth. Considerations Influencing Transportation

Customer Communications: in order to obviate delays in transportation and handling of logistics both the suppliers and distributors are relying more and more on electronic transfer systems, IT & the internet. This will help in considerable reduction in time delays and effect better cooperation between the chains. Market Coverage: transportation costs influence the size of markets covered in a big way. The characteristics are: costs, flexibility, reliability and availability. The product per se will influence the economics of the decision. A low volume and high value product will be able to support higher costs, which means extended delivery distances and increase in delivery frequency. Sourcing Decisions: the geographical dimension of the source markets can be influenced by low cost transportation system, i.e. reliable bulk freight services could extend the source markets, says Mohanty & Deshmukh. Companies therefore have to consider a trade off between price & quality and the costs involved in delivering to the processing point, i.e. volume & cost of transportation. Manufacturing Operations: cost of transporting has a direct bearing on the location of the manufacturing market center. That is why, extraction based units are close to the source of raw materials and the products related to customer satisfaction are closer home, i.e. near to the customer hub center. Pricing Decision: transportation happens to be the important component of product costs. Therefore, selection of the appropriate transportation mode will have a direct bearing on the product costs per se, with more relevance to exports. Increase in transportation costs increases the product pricing. Customer Service Decisions: both customer service policy and transportation decisions go hand in hand and hence one cannot be considered in isolation of the other. Moreover, the type of market will also dictate the decision and will vary

considerably. Therefore, its pertinent to overrule the cost factor while servicing the medical customers, since speed is more important than cost in selecting the transport mode. An Effective Selection System Transport selection can effectively be resolved by adhering to the five stages of selection framework. A Decision Framework Determining an organizations transport requirement will be based on the following underlying considerations: From the above its evident that transportation is one of the important facets of logistics and equally important in the process of SCM, because they impact the customer services and other areas of cost. These decisions are prominent within the purview of company logistics decisions due to the factor of trade off potential that exists between alternative modes of transportation and other logistics functions within the firm. Therefore, an understanding of costs and benefits of alternative transport modes, together with an in-depth evaluation of overall corporate implications is mandatory. Transportation costs will always have a direct bearing on the product. Warehousing: This happens to be the other important facet of logistics chain and works side-by-side with transportation. It is that segment of logistics function that deals with storage and handling of inventories starting from supplier receipt to consumption point. The management of this includes the maintenance of accurate and timely information relating to inventory status, location and disbursement. Factors influencing the warehousing decisions are: Type of distribution. Value of the firm. Quantity and potential for obsolescence. Competitiveness. Economic condition. Warehousing perform a variety of roles as mentioned below: Documentationofthestoragefacilitiesandputforthrequiremen

tsoverthe planning horizon. Identifytheshortfallswithinthewarehousesthatareavailablei ncludingthe deficiencies. Update the warehouse strategic plan. With that as a backdrop to our study let us see the design and management of Supply Chain Management, since logistics happens to be the key of SCM. A simple definition would be; an integrated, synchronized and a closely knitted chain which links all the supply interacting organization in a two way communication system in order to maintain a high quality of inventory in the most effective manner. Managers at all levels should understand this, since this is related closely to world- class supply management. It can also be defined as: SCM is a system materials and services both inbound and outbound, i.e. from the supplier to manufacturer to the end customers. Itsastrategiccoordinationofalltherelatedbusinessfunctionswi thina particular firm and across businesses within the supply chain, in order to improve performance of the individual companies and of the supply chain. . SCM is integrating these activities under one control for better management and for attaining substantial and sustainable advantage. It can be better achieved through better coordination and relationship. Implement value added services towards ultimate customer satisfaction. Integrating men, technology, information, finances and material under one roof is the ultimate aim of this SCM system. These varied definitions placed above are to guide you to understand the concept of SCM better and can be used as per individual perception. The common factor to all this is one has to go beyond the realms of traditional functioning to include and integrate external entities to include customers

and suppliers. For better assimilation let us put it across this way. The Chocolate Way You manufacture a particular brand of chocolate, a popular one with all age groups. Now, in order to make your product responsive and hold fast into the competitive market you got to maintain a close link with suppliers who will provide the best milk for your money, the best coca powder for the flavor, an efficient product manager with an equally trained staff who will design and manufacture what the market requires, an effective marketing system and above all the vendor who will carry it and distribute it to my consumers. This is your supply chain and managing this to maintain a high quality at all times is called the supply chain management. It is a linkage, so designed, that one cannot function with out the other and all have to function in close unison and you, as the entrepreneur has to ensure this. It involves a well conceived strategic planning and long-term tactical orientation, and there is a world of difference between practicing and preaching. Internal functions and external suppliers constitute a companys supply system, which are involved in identification and fulfillment of requirement for equipment, materials and key services in an optimized manner. Supply management is the foundation to successful supply chain management. It can create a tremendous impact on any companys bottom line more than any other business function. In case the supply chain is not positively been addressed there is bound to be problems in the firm. Integration of these services and managing them under one head is therefore the key to an effective supply chain system in the organization. Let us now take a closer look at the logistics both inbound and outbound. Let me tell you this is the most intricate part of the system of SCM. If your goods dont reach in time and

they are of inferior quality you as an entrepreneur earn a bad name too. So why give the consumer a chance? Plan it in a way that you ensure both quality and quantity in a reasonable time frame. Take for example 7 days truckers strike in 2004. It was bad for economy of the country and above all worse for those manufacturers who couldnt deliver goods on time. A strike or a bandh as we call it in India is a happy situation for the fleet owners but a bad time for the drivers, mill owners, small timers, labourer, suppliers, manufacturers and the consumers. That is the reason contingency planning plays a predominant role in shaping our SCM system. Differences in Urban and Rural Areas India is one such country, which enjoys a rare mix of both urban and rural pockets at regular intervals. Rural areas require tremendous amount of logistics supply and coordination to make the SCM system effective. That is the lay of Indian society and hence one has to understand and be live to the problem. Actually most of our supplies move generally from these rural areas and hence you should be aware of these areas in a nutshell. Let us discuss them for a while. Considerations influencing transportation Customer communications: In order to obviate delays in transportation and handling of logistics both the suppliers and distributors are relying more and more on electronic transfer systems, IT & the Internet. This will help in considerable reduction in time delays and ensure better cooperation between the chains. Market coverage: Transportation costs influence the size of markets covered in a big way. The characteristics are: costs, flexibility, reliability and availability. The product per se will influence the economics of the decision. A low volume and high value product will be able to support higher costs, which means extended delivery distances and increase in

delivery frequency. Sourcing decisions: The geographical dimension of the source markets can be influenced by low cost transportation system, i.e. reliable bulk freight services could extend the source markets, says Mohanty & Deshmukh. Companies therefore have to consider a trade off between price and quality and the costs involved in delivering to the processing point, i.e. volume and cost of transportation. Manufacturingoperations:Costoftransportinghasadirectbear ingonthe location of the manufacturing market center. That is why, extraction based units are close to the source of raw materials and the products related to customer satisfaction are closer home, i.e. near to the customer hub center. Pricing decision: Transportation happens to be the important component of product costs. Therefore, selection of the appropriate transportation mode will have a direct bearing on the product costs per se, with more relevance to exports. Increase in transportation costs increases the product pricing. Customer service decisions: Both customer service policy and transportation decisions go hand in hand and hence one cannot be considered in isolation of the other. Moreover, the type of market will also dictate the decision and will vary considerably. Therefore, it is pertinent to overrule the cost factor while servicing the medical customers, since speed is more important than cost in selecting the transport mode. Depots/warehouses and storehouses define the distribution network of a manufacturing company. More the numbers, larger is the distribution networks. The network of depots will be defined by the numbers, size and location which, when combined, minimize the cost between ex-factory delivery and local distribution depot delivery for each order, (Deshmukh & Mohanty). Essentially, the distribution depots provide the resources to balance the cost to achieve optimum ex-factory loads and optimum local delivery loads. Once this is defined, it is possible to classify the transport operational

requirements into tasks, as under: Management of raw materials of factories Interfactory movements Delivery to warehouses Delivery to consumers based on normal, priority or emergent. A decision matrix approach helps in identifying the most appropriate transport option from the substantial range available. This approach uses the following steps: Selectionofinitialdecisionsrequiredbaseduponknownalternati ves;like, choice of transport mode, choice of equipment specification, choice of financial options and operational needs. To select two options (factors) so that a matrix can be formulated using one in vertical axis and the other on horizontal. This approach will require imagination to develop the selection of the initial decisions, to determine the important factors to use for the vertical and horizontal axes on the matrix, and to construct the matrix. Yet, the majority of the question could be answered by a combination of brainstorming, analysis and categorization of important factors, which affect the choice of transport selection.

Fleet sizing objective is to employ through ownership, hire, lease and or rental the fewest possible trucks to manage the companys load profile/shipping requirements. This decision is akin to the decision of how much inventory is to be made available to the consumers/customers. In fleet sizing, increased availability yields fewer lost sales, shorter customer cycle times, improved customer services but higher fleet costs. Fleet sizing projections should be developed a few times during the year and at any time when a major shift in demand pattern occurs. In certain cases, the cost of vehicle shortages can be estimated and a cost of shortages versus cost of ownership analysis can be made to determine the

optimal fleet size. India is one of the best examples of routing and rescheduling, wherein such activities are optioned in the shortest possible time. Roadblocks, damages to bridges and roads owing to natural calamities are the major reasons for such re-routing. We can plan our travel plans well in advance but then criticalities are criticalities and one has to accept such contingencies. Everything doesnt happen as planned and therefore every company should gear for alternative arrangements involving alternate routes, modes and schedules in case the movement of the shipment is emergent. Delay in delivery due to routing problems increase costs of goods manifold. Therefore, to tide over this the company has to plan these activities well in advance with detailed coordination and judicious and realistic planning. India is a versatile country with equally versatile terrain and climatic condition. Companies have to gear itself to such changing scenarios and terrain since the very inception. Efficient versus inefficient routing can save tremendous amount of money in fuel, labor, and capital expenditures and significantly enhance customer satisfaction. The objective should be to minimize: Total route costs Number of routes Distance traveled Route time The constraints are: Infrastructure constraints. Routing problems are some of the most difficult criticalities encountered, and cannot actually be solved optimally.

2.6

VENDOR RELATIONSHIP

Whatever the business, a predictable, honest and reliable relationship between a dealer and a vendor goes a long way toward helping both companies succeed. But what does it take to

successfully establish and manage a dealer/vendor relationship? Choose Carefully, Select Innovators, Establish Personal Relation Ship, Treat Vendors with Respect, Communicate, Stay Professional, Demand that Promises be kept, Demand Excellent Support, Make Trust a Priority. 2.7 DISTRIBUTION CHANNEL DESIGN Product distribution (or place) is one of the four elements of the marketing mix. Distribution is the process of making a product or service available for use or consumption by a consumer or business user, using direct means, or using indirect means with intermediaries. The other three parts of the marketing mix are product, pricing, and promotion. Distribution of products takes place by means of channels. Channels are sets of interdependent organizations (called intermediaries) involved in making the product available for consumption. Merchants are intermediaries that buy and resell products. Agents and brokers are intermediaries that act on behalf of the producer but do not take title to the products. Channel Design : A firm can design any number of channels. Channels are classified by the number of intermediaries between producer and consumer. A level zero channel has no intermediaries. This is typical of direct marketing. A level one channel has a single intermediary. This flow is typically from manufacturer to retailer to consumer. Distribution Types : Intensive distribution means the producer's products are stocked in the majority of outlets.[1] This strategy is common for basic supplies,

snack foods, magazines and soft drink beverages. Selective distribution means that the producer relies on a few intermediaries to carry their product. This strategy is commonly observed for more specialized goods that are carried through specialist dealers, for example, brands of craft tools, or large appliances. Exclusive distribution means that the producer selects only very few intermediaries. Exclusive distribution is often characterized by exclusive dealing where the reseller carries only that producer's products to the exclusion of all others. This strategy is typical of luxury goods retailers such as Gucci.

2.8 STRATEGIC ALLIANCES, COMMUNICATION FLOW OF SUPPLY CHAIN


A relationship formed by two or more organizations that share (proprietary), participate in joint investments, and develop linked and common processes to increase the performance of both companies. Many organizations form strategic alliances to increase the performance of their common supply chain. Communication Flow : Supply Chain Management transformation is a strategic imperative for any manufacturer. This new perspective, one that will continue to gain importance, sees all suppliers and customers as part of one complex supply chain network and understands that transforming that supply chain into a synchronized chain is the primary goal.

Supply chain management transformation provides fast access to relevant and accurate information. This timely supply chain information can pay off handsomely in lower costs, less inventory, improved throughput, shorter cycle times, and the highest levels of customer service. The very essence of supply chain management is effective information and material flow throughout a network of customers and suppliers. By using the Internet, companies simply have better and more far-reaching ways to speed up the information flow process and make it more effective. Logistics planning has to be integrated with material and capacity planning in order to achieve maximum and optimum level of satisfaction. The needs and requirements of our customers is variable and never a constant factor, therefore, in order to serve them better and be profitable you got to tailor your logistics and ensure it to be more dynamic with passing time. The emphasis should be on reduction of cycle time and elimination of waste in order to increase customer satisfaction. You have to understand that movement of goods, warehousing of materials and delivery is time consuming and at times requires precision synchronization at all levels i.e. from supplier to manufacturer and from manufacturer to consumer. Enhanced customer expectation: Competition worldwide has led to maximum emphasis on customer service over the years. The value of the product can only be determined when the product reaches the customer in time and at the required place. The value of customer service has acquired such dimension that, if the product doesnt reach in time, the sale will be lost to a competitor who offers in time, an ideal substitute. This can further be classified under:

Pre-transaction Elements: Relating to corporate policies and program. Transaction Elements: These are those variables involved directly in physical distribution, i.e. product and delivery reliability. Post-transaction Elements: These are those aspects dealing with after sales service, warranty, repair, customer complaints and replacements. Pressure for Quick Response: Customers today expect a better and quicker response owing to the value added services being provided by the manufacturers. This is mainly due to shortened product life cycles, consumers drive and volatile markets, making reliance on forecasts difficult and dangerous. The key to quick response is pipeline management, i.e. a process where manufacturing and procurement procedures are linked to requirements of the market. It seeks to meet the competitive challenges of increasing the speed of response to the market needs. Impact of Globalization: Present global environment is forcing the organizations to incorporate the world in their strategies and analysis. Certain key factors like, economic trends, competitiveness, technological advances, the firms today cannot ignore them. Companies therefore must identify and analyse factors that differ across nations and determine the impact on the operations functions. Transportation and distribution therefore assumes greater importance in such scenario, and the companies have to rightfully integrate and manage the facilities and markets available in this backdrop. Logistics, therefore, assumes greater strategic significance. Organizational Integration: Organizations today need to be broad-based integrators, inclined towards the achievements of market place successes, based on managing systems and people that deliver the service. Generalists, therefore, assume greater importance to specialists to integrate materials and operation management with

delivery. Today, IT is slowly proving to be a great integrator for various functions, spanning from supplier to the customers. As seen above supplier alliances plays a key role in strategic supply chain management activities across the board. Therefore in order to develop and manage these relationship and alliances a firm has to continuously endeavor to identify methods to facilitate these relations. Supplier is as important as the customer and that has to be realized in the true sense. Riggs & Robbins spelt out these relations in their book The Executive Guide to Supply Management Strategies, they are: Annual Supplier Meetings: Annual supplier meeting is a common phenomenon in maintaining direct relationship with the suppliers by the buyer firm. It is used both as a teaching and learning platform as well as the opportunity to distinguish ones organization as a supply management leader. It dwells on the buyers management performance, learning and future goals. The main objective being learning of key strategies to support the buyers business. It requires extensive planning and is expensive, but it lays the foundation of a buyer supplier relationship in the long run. Supplier Discussions: Its an informal forum for gaining and sharing learning, between the representatives, like the chief executive, chief operating officer, and representatives from marketing, supply management and research divisions. It reviews the buyers progress and goals in the backdrop of shift in strategies and policies. Its a forum that builds trust and respect, towards a successful supplier relationship. Workshops and Seminars: These are aimed at creating opportunities for supply-stream innovations, which will benefit all the participants. It composes of members of supplier participants who provide material and services that are critical to the products made available at the marketplace. Such discussions open the door for newer set of goals and collaborations. It provides the base for continual improvement, concepts and innovations required

to guide and organize discussion and work sessions. Collaborations/Partnership: This is supposed to be the most successful supplier buyer relationship in recent times. These are based on mutual interdependence and respect. These alliances begin with careful selection of source during the product design process. This is the time when the buyer requires a dependable supplier who can provide the required process, design and technological support for a successful product. The supplier at the same time requires a responsible customer for its product and services. They both require each other and have to work hand in glove. Unexpected criticalities that may arise can be sorted out with a we shall overcome attitude. The most important in these relationships is the integration of the buyer and supplier as long as the relationship is beneficial to each other. Developing and Managing the Relationship Supply managers at all levels should ensure and tailor appropriate actions during the planning and management of such alliances mentioned above. Like: Instituting a Cross-Functional Team: A team so designated should be in place to handle such alliances, which is responsible for development, integration, and develop and manage appropriate measures for the alliance to be successful. Training: Teams from both sides as designated should undergo appropriate training in being constructive team players, and also in cross-functional team skills. Communication System: The teams should develop and integrate an effective communication system responsive to the needs and requirements of both the firms. Trust Building: Measures to improve trust between the two organizations have to be developed and implemented too. Visits: Periodic visits by the respective team members to each others site has to be resorted to for confidence building and co-location of key technical persons.

Specialized Training: Plans have to be evolved and developed for specialized training involving variance of products, designing, value analyses, engineering, cost analysis and cost management. Objectives: Certain objectives have to be established in areas, including quality, cost and time aspects. Monitoring: Results have to be continuously monitored and reported to the management level. Supportive: Inter-firm team members should realize the importance of such alliances and support the alliance goal in letter and spirit. Its in the interest of both the firms to support each others operations and their respective goals, ethics over expediency. Management of supply contract is a challenging responsibility and a critical too. Companies have to continuously generate and develop newer ideas and innovations to maintain these relations and work in unison to a common goal without jeopardizing each others interest in the overall gambit of supplier buyer alliances and relationship.

2.9 INTER-FUNCTIONAL COORDINATION


An important characteristic of market-oriented companies is that they are effective in getting all business functions (Inter-Functional Coordination) working together to provide customer value. They are successful in removing the walls between business functions marketing talks with manufacturing and finance. Inter-Functional teamwork is how customer value targets are achieved The basic relationship between the supply manager and the buyer is like an agent for his/her firm and legallythisisdefinedandgovernedbythelawofagency.1 A purchase represent formation of a purchase contract between the buyer and the seller, and any dispute resulting from this the dispute may enter the realm of dispute resolution governed by the laws of contract, and can be categorized as under:

Negotiation Mediation Arbitration Litigation The basic responsibility of a firm is to ensure smooth procurement based on business requirements and judgments, rather than on legal considerations. Getting into litigation not only alienates a good supplier but leaves a scar on the buyer firm too. As a matter of fact litigation is generally the last order of the day, since most of the outcome of court cases are uncertain and delays the complete process. The very purpose of this unit is to give you a brief insight into legal concepts, as they relate to supply chain professionals across the board in just a nutshell. You should acquire in-depth knowledge of the commercial laws, as applicable both in India and internationally. Much of the work on ESCM conducted to date has concentrated on the upstream (supply side) relationships. This is as a consequence of a number of factors, namely: Influence is commonly greatest from customer to supplier (as opposed to vice versa). Environmental problems are best dealt with at source. Larger organizations potentially face the greatest risks (particularly in terms of corporate image) but tend to posses the most influence over the supply chain, both upstream and downstream. Organizations tend to come under greater scrutiny the closer in the chain they are to the end user. Buying power has been seen as a tool for encouraging environmental activity among smaller enterprises by governments. Potentially avoiding prescriptive requirements imposed by customers. .The first stages of ESCM are typified by environmental surveys and questionnaires of varying sophistication and levels of required detail. While potentially useful for assessment purposes the questionnaire has limitations and requires careful design and evaluation. In the majority of cases questionnaires concentrate almost exclusively on

environmental management activity, ignoring actual performance, aspects or impacts. The use of ISO14001 accreditation as a proxy for environmental probity in supply has become popular due to its international recognition and independent verification. However, the shortcomings of this approach are becoming realised and ESCM systems are being developed to move away from ISO14001 or EMAS as an all- encompassing measure. It is worth noting that this change is only just beginning and some industry sectors (e.g. the motor industry) are still requesting (and starting to request) accreditation to a formal EMS standard. Audit and independent verification of supply chain partners is commonly applied to substantiate information gathered, albeit that the extent of this activity will be governed by the level of perceived risk, and the availability of resources and competencies. Some organizations have built this process into existing health safety and quality audit processes to reduce resources requirements with varying degrees of success. This approach is highly resource intensive and not always practical or judicious. Beyond the techniques mentioned above some organizations are beginning to develop partnerships with key suppliers in line with the current supply chain management vogue. The thrust of these partnerships is to improve stability and understanding in the relationship linking to risk reduction and financial performance improvement. Meetings and seminars can prove useful tools for developing the partnership approach and facilitating subsequent action. There is evidence however that the tendency to develop partnership approaches is beginning to revert to more adversarial ones, particularly in the most competitive markets. This could well set the tone for ESCM strategy also. The most advanced organizations have taken ESCM beyond addressing purely commercial drivers in favour of looking at sustainability issues as embodied through product

stewardship, life cycle thinking, and design for the environment. The initiatives of such ground breaking organizations encompass social and ethical issues along with the environment, and support clearly defined corporate values relating to these issues.

2.10 INTER-CORPORATE COOPERATION In SCM, how industry leaders work together with their supply chain members, a suggest a model of inter-corporate cooperation from drivers, to prerequisites, to the outcome of successful cooperative relationships in supply chain context 2.11 SUMMARY
Strategic Level SCM Management is summarized as: Strategic network optimization, including the number, location, and size of warehousing, distribution centers, and facilities. Strategic partnerships with suppliers, distributors, and customers, creating communication channels for critical information and operational improvements such as cross docking, direct shipping, and third-party logistics. Product life cycle management, so that new and existing products can be optimally integrated into the supply chain and capacity management activities. Segmentation of products and customers to guide alignment of corporate objectives with manufacturing and distribution strategy. Information technology chain operations. Where-to-make and make-buy decisions. Aligning overall organizational strategy with supply strategy. It is for long term and needs resource commitment.

Check your progress


Tick Mark () the most appropriate answer 1. A Channel are classified by number of intermediaries between a) Customer and Financer b) Customer and Dealer c) Consumer and Producer d) Controller and Supplier 2. Which of the following is not a characteristic of inter-functional coordination a) It ensures market orientation b) Successful in removing walls between business functions c) It does not effect team work d) It provides customer value 3. For joint investments and developed links, we can go for a) Quality Control b) Strategic Alliance c) Quality Assurance d) Logistic Officer

4. The Value Chain has except a) Output b) Input c) Process d) Location 5. Which of the following is not right statement regarding Value delivery

a) Ensures value to manufacturer b) Ensures value to customer c) Ensures profit to supplier d) Ensures savings of material

2.12 QUESTIONS AND EXERCISES


1. Describe Value Chain and Value Delivery? 2. Illustrate importance of Inter-Functional Cooperation with example of your Company? 3. Why transportation choice plays important role in SCM? 4. Describe Facility decision? 5. Explain Inter-Corporate Cooperation in Logistics & SCM?

2.12 FURTHER READING


1) Burt, Dobler & Starling, World Class Supply Management, Tata Mc Graw- Hill 2) Deshmukh & Mohanty (2004), Essentials of SCM, Jaico Publishing House, Mumbai-23 (should be included in compulsory reading, since the text pertains to Indian context, simple and easy to comprehend) 3) Simchi-Levi, David Kaminsky, Philipsimchi-Levi, Edited (2004), Designing And Managing The Supply Chain,

Tata McGraw-Hill 4) Mentzer, Fundamentals of Supply Chain Management, Sage India Publishers 5) Gentry, J. J,(1999), The role of Carriers in buyersupplier strategic partnerships: a supply chain management approach, Journal Of Business Logistics pp. 35-53, cited in Amelia S. Carr & Larry Smeltzer, The relationship of strategic purchasing to supply management, European Journal of Purchasing and Supply Management 5 (1999) p. 44. 6) Kevin Werbach, Syndication: The emerging model for business in Internet era, Harvard Business Review, May-June 2000, pp. 85-93.

UNIT 3 : MANAGING THE SUPPLY CHAIN


Structure 3.1 Objective 3.2 Introduction 3.3 Benchmarking and Reengineering 3.4 IT Enabled Supply Chain Management 3.5 Application of ERP, JIT and Quality Management 3.6 Vendor Management and Development 3.7 Value Engineering/Analysis 3.8 Optimization of Supply Chain 3.9 Organization Design 3.10 Retail Management 3.11 Summary 3.12 Questions and Exercises 3.13 Further Readings

3.1 OBJECTIVE The objective of this Unit is to give comprehensive understanding to : Understand the role of Benchmarking and Reengineering in Business. Bring out use of IT Enabled SCM Recognize ERP, JIT, Quality Management and Vendor Management in SCM Comprehend Value Engineering, Optimization, Organization Design and Retail Management in SCM

3.2 INTRODUCTION
Organization that introduces benchmarking correctly can use it to make a quantum leap in their performance, and develop a culture in which managers and staff constantly searches for improvements. Within logistics and supply management, benchmarking can be used for a number of different purposes, from assessing the performance of the entire operation, through prioritizing improvements, to searching for the off-the-shelf improvement strategies in a specific area of a logistics or supply chain activity. In some senses, benchmarking is imitation and stealing creative swiping! At its best it is skillful appropriation and adaptation requiring imagination and innovation; at its worst it can be an expensive and time consuming piece of corporate tourism. It is a long-term process, requiring senior managements commitment, with the emphasis upon

continuous improvement and organizational learning. The focus is primarily upon the role, strategic issues, processes and practices, rather than on the bottom line and numeric measure of performance. The mere comparison of operations and costs is not sufficient; considerable attention must be paid to how the activities are organized and performed. This will provide good understanding of how superior performance has been achieved, rather than just the magnitude of the performance gap.

3.3 BENCHMARKING AND REENGINEERING


Benchmarking is the process whereby an assessment of an act or performance is measured by some means, whether this is by a measurement of time, value or quantity. For example, an assessment of moving items from one storage location to another can be measured by time for a single movement or by quantity if the performance is over a set period. A benchmarking project will gather the assessments and develop a plan of action to improve the process that was assessed. The popularity of benchmarking was spearheaded by the Xerox corporation in the 1980s and is now used in corporations throughout the world. Supply chain operations within an organization should be constantly reviewed to identify where improvements can be made or deficiencies eliminated. One method to help do this is to perform a series of benchmarking tests on their supply chain processes. Benchmarking or goal setting allows a company to assess the opportunities

they may have for improving a number of areas in their supply chain including productivity, inventory accuracy, shipping accuracy, storage density and bin-to-bin time. The benchmarking process can provide a company some estimate of the benefits achieved by the implementation of any improvements. Irrespective of the type and scope of benchmarking, the critical factors that are needed to be ensured are as follows: Seniormanagementsupportstheprocessofbenchmarkinganda recommittedto continuous improvement. The objectives are clearly defined at the outset. Thescopeoftheworkisappropriateinthelightoftheobjectives,re sourcesand time available and the experience levels of those involved. Sufficientresourcesareavailabletocompleteprojectswithinagi ventimeframe and that projects are selected based upon a prioritization linked to the achievement of competitive advantage. Benchmarkingteamshaveaclearpictureoftheirorganizationsp erformance before approaching others for comparisons. Stakeholders,particularlystaffandtheirrepresentativesarekep tinformedof the reasons for benchmarking and the progress made throughout the course of projects. Wherever practical, staff should be involved in undertaking benchmarking to make most of the opportunities for learning from other initiatives. As with many management techniques and processes, benchmarking provides organizations with problems as well as benefits. These occur as consequence of: The nature of the process Benchmarking applications may be limited by the management culture. 20 Benchmarking takes a normative approach to the management there are industrybest practices that can be generalized between sectors and

organizations. As with most programs that require major organizational change, considerable inertia may be experienced from individuals and departments, especially those with the most to loose. These are inevitable issues around the identification of best practices and the adoption of processes that are not valued by that particular organizations customers. There is however difficult judgment calls to make around the introduction of new practices where quantum jump is required. Incorrect benchmarking can often lead to wrong conclusions. Benchmarking may lead to a culture of imitation rather than innovation; to adopt rather than adapt and to achieve parity rather than superiority. This type of approach will never result in competitive advantage. When the process is approached for the first time, it is worthwhile learning from others who have built up experience of applying benchmarking within their own operations. This is where membership of benchmarking clubs and network proves invaluable. In general it is important to avoid: Benchmarking for benchmarking sake. Focusing entirely on comparisons of hard performance measures rather than the softer processes and activities that enable the attainment of good practice Spending too long on one part of the process at the expense of others Expecting that benchmarking would be quick or easy Expecting to find benchmarking partners comparable in all respects to your own organization Asking for information and adapt without being prepared to share it with others at conversely expecting organizations to share information that is commercially sensitive Supply Chain Management : A Re-engineering of the Supply Chain to Reduce Costs and Improve

Service.

Re-engineering is a business management strategy, originally pioneered in the early 1990s, focusing on the analysis and design of workflows and processes within an organization. BPR aimed to help organizations fundamentally rethink how they do their work in order to dramatically improve customer service, cut operational costs, and become worldclass competitors. In the mid-1990s, as many as 60% of the Fortune 500 companies claimed to either have initiated reengineering efforts, or to have plans to do so BPR (Business Process Re-Engineering) seeks to help companies radically restructure their organizations by focusing on the ground-up design of their business processes. According to Davenport (1990) a business process is a set of logically related tasks performed to achieve a defined business outcome. Re-engineering emphasized a holistic focus on business objectives and how processes related to them, encouraging full-scale recreation of processes rather than iterative optimization of sub-processes

The various strategies that has to be followed for an effective integration are: Push & pull Push-pull

Push Based Supply Chain


Long-term forecasts are the backbone of a push-based supply chain model, as regards the production and the distribution decisions are concerned. Typically though, the manufacturer bases demand forecasts in orders received from the retailers warehouses. Therefore, it takes much longer for the push based supply chain to react to the changing marketplace, which may lead to3 Inability to meet changing demand patterns. The obsolescence of supply chain inventory as demand for certain products disappears. Actually, the bullwhip effect leads to under utilization of resources, because planning and managing is (to be discussed later in this block) more difficult. For example a production manager is in quandary as to how to discern production capacity. Should it be based on peak demand or average demand? Similarly it is not clear as to how to

determine the transportation aspects, based on average or peak demand? Therefore, a push based chain we find extra transportation costs, higher inventory levels and higher manufacturing costs, due to need for emergency production change-overs.

Pull Based Supply Chain


In this type of supply chain the production and distribution is based on demands so that it can be effectively coordinated with true customer requirements rather than forecasts. Inventory in on firms following the pull system is negligible and it responds only to orders per se. This is further coupled with fast information flow mechanisms on customer demands to the various components of the supply chain. This system is more attractive in nature because, it leads to: A lesser lead-time, since better anticipation is made on customer demands and the retailers Lesser inventory with the retailers A decrease in variability due to reduction in lead-time Decreased inventory with manufacturer due to reduction in variability. In a pull based supply chain there is considerable reduction in inventory, enhanced resource management and a comparable reduction in system costs to push based system. At the same time, pull based systems are difficult to implement when lead-time are long and it is not practical to react to the demand information. Moreover, since the systems are not planned well in time its difficult to take advantage of economics of scale in manufacturing and transportation. Taking these advantages and disadvantages into consideration the companies have formulated a new system the push-pull system, i.e. an integration of push and pull system.

Push-pull Strategy
This is an ideal mix of both push and pull strategy in which the first half of the system is based on push method and the

remaining half as pull based. The interface between the two models is push-pull boundary. In order to comprehend the strategy better you have to consider the supply chain time line, that is, the time that elapses between procurement of raw materials and the delivery to the customer, the end of the time line. Why do we require demand management? Its primarily required since accumulation of inventories amounting to millions in the supply chain shows absence of demand management in the total system. Demand managements imperative of forecast error reconciliation with the actual order rate of an enterprise is one of the most overlooked potentials in the successful management of inventory levels, customer satisfaction, staffing strategies and facilities expansion or contraction.

3.4 IT ENABLED SUPPLY CHAIN MANAGEMENT


SCM is essentially an information-driven function. Time and responsiveness play a vital role in SCM and information technology has an important role to play toward this goal. The most critical task in any information-driven function is processing of large chunks of data and maintaining a large database. In the past, these records were maintained manually. Today, any global company cannot survive without thinking of integrating its supply chain. Another milestone has been the recent development of the Internet. All these developments are bringing the world closer and closer. SCM is a function that calls for extensive coordination with both external and internal environment. IT has a substantial role to play in customer

servicing. Cargo management companies like DHL, FedEx etc are using this medium extensively for better customer servicing and information flow. If a customer wants to know the status of his shipment, all he needs to do is to log on to the website and enter his airway bill number. Immediately, within seconds he gets the status. Many companies feel that their current information management systems do not provide adequate support for their supply chain initiatives. Consequently there is an ever-increasing need for fully integrated supply chain information management solutions which incorporate all the functionality of network strategy/ supply configuration, demand planning, transportation management and warehouse management.

The influence of Internet has been tremendous over a very short period of time. Changes are taking place rapidly and the emerging e-business has its inherent advantages and disadvantages. E-business strategies supposedly reduce costs, increase service level, increase flexibility and increase profits. But in reality very few have been successful. Many Internet companies have crashed due to their individual

logistic gray areas. On the other hand some of them have been successful in developing new business models and profited significantly by capturing a sizable market share. These companies use the Internet as the driver of business changes. Next is e-business and e-commerce. Now what is ebusiness? It is a collection of business models and processes motivated by the Internet technology and focuses on improvement of extended enterprise performance. Ecommerce is the ability to perform major commerce transactions electronically, and it forms the integral part of e-business. Companies have realized over a period of time that Internet can have a huge impact on supply chain performance. Internet can help in a big way to move away from the traditional push strategies to the pull system, but eventually most of the companies have landed up with the push-pull strategy.

The Bottom Line


Recently, many companies have improved performance, reduced costs, increased service levels, reduced bullwhip effect and improved responsiveness to changes in marketplace by integrating the supply chain. In most cases, this was facilitated by the push-pull model and by a focus on demand driven strategies, however, in effect the Internet has created a revolution in integrating the SCM and evolving supply chain strategies. At the same time the collapse of many such internet companies does send an alarm that ebusiness not only makes business but break them too. The key to these challenges lies in identifying the appropriate strategies for a particular company and individual product. The new supply chain paradigm, push-pull strategy, advocates holding inventory, though it pushes the inventory upstream. Most important is that the traditional companies are required to maintain and effective distribution system depending on environmental factors, warehouses, direct shipment, transshipment so as to ensure effective

management of inventory and reduction of distribution costs. Related to what we have studied earlier in integration of Supply chain, physical flow, virtual flow and cash flow could be seen in more detail. David N Burt in his book World Class Supply management says the supply chain extends from the ultimate consumer to the mother earth and has explained the same with an illustration, which we shall see later. The chain is viewed as a whole, a single entity rather than fragmented groups, each performing its own function.7 Only when an ultimate customer buys a product does the money enter the supply chain. Transactions help in allocating the customers money among the members of the chain. A firms supply system includes all the internal functions plus external suppliers involved in the identification and fulfillment of needs for materials, equipment and services in an optimized fashion. Supply system plays a key role in helping the firm satisfy its role in supply chain. Professor Charles of MIT writes, Supply chain design is the meta-core competency for organizations. The Internet today permits the supply chain managers to manage their supply chains collaboratively and also synchronizes their operations. Failure to accurately estimate demand and share information among supply chain entities can result in bloated inventory levels due to cumulative effect of poor information cascading up through a supply chain12 , says Burt in his book WCSM. This is in fact quite natural in a way. If a firm doesnt have information of the demand it will unnecessary carry a load of additional inventory or even increase the lead-time to cater for the uncertainty. Either ways the inventory gets bloated, if the lead-time increases so will the buyer increase order quantities (based on conventional recorder point calculations). This will result in the supplier interpreting this to be growing customer demand, with a cascading effect on the supplier who feels

the necessity to increase capacity to meet the trend. To add fuel to the fire, just as supplier has added additional capacity to meet the increase in demand, demand falls off because the buying firm has excessive stock available. The resultant is firing of employees, selling of assets in order to reduce the capacity. This phantom demand in SCM is called as bullwhip effect. In other words, the increase in variability as we travel upwards in the supply chain is referred to as the bullwhip effect. Therefore, in order to identify and control the bullwhip effect its pertinent to understand the main factors that contribute towards increase in variability in the supply chain.14 Demand forecasting: Traditional inventory management techniques practiced at each level in the supply chain lead to the bullwhip effect. As discussed earlier in unit 5, managers generally use standard forecast smoothing techniques to estimate average demand and demand variability. The important characteristics of forecasting are that as more data are observed, the more we modify the estimates of the mean and standard deviation in customer demands. Since safety stocks strongly depend on these estimates, the user is forced to change the order quantities, thereby increasing variables. Lead Time: Increase in variability is magnified with increase in lead-time. In order to calculate safety stock levels and recorder points, we in effect multiply the estimates of the average and standard deviation of the daily customer demands by the lead-time. Thus, with longer lead-times, a small change in estimate of demand variability implies a significant change in safety stock and recorder level, leading to a significant change in order quantities, which in effect leads to increase in variability. Batch Ordering: The impact of batch ordering is simple to understand. If batch ordering is used by the retailer, as

happens while using min-max inventory policy, then the wholesaler will observe a large order, followed by several period of no orders, followed by another large order, and so on. Therefore, the wholesaler sees a distorted and highly variable pattern of orders. Price Fluctuation: This can also lead to bullwhip effect. If prices fluctuate the retailers tend to stock up when the prices are lower. That is another reason why stocks vanish from the market prior to budget month. This is accentuated by certain manufacturers and companies of offering promotions and discounts at certain times on certain commodities. Inflated Orders: Inflated orders placed by the retailers during storage periods increase the bullwhip effect. Such orders are common when retailers and distributors suspect that a product will be in short supply, and therefore anticipate receiving supply proportional to the amount ordered. When the shortage period is over, the retailer goes back to the standard orders, leading to all kinds of distortions and variations in demand estimates. We have seen that bullwhip effect continues to stay in spite of our relentless efforts. Hence, why dont we put our minds together to find some solution to counter this effect and remove it almost completely? It can be considerably reduced, if we gave it a fair try. Let us take into cognizance of the various environmental factors, consumer behavior, market research and area study into effect to counter this problem. For a moment let us get into a model called direct information system (DIS), in which we allow the manufacturer to get direct information from the consumer bases rather than the retailers and wholesalers or the distributors. It will require the following: A thorough knowledge on the consumer behavior, to include peculiar habits as available in the Indian context and differs state-to-state, region-to-region A detailed market research An area study

compendium to know about the area per se, this will ease out transportation, warehousing and material handling activities Last two to three years consumption report analysis Last but not the least, an integration of these factors under one common head the DIS. SCM is indeed the most dominating paradigm in contemporary business and is slowly emerging as powerful creators of sales and revenue growth. In the 21st century, the rapidly exploding liberalized global market is creating enormously diversified customers, products and services. Organizational, informational and managerial demands are being redefined. The new millennium is creating conditions and an entirely different type of challenge, which are being manifested in innovative supply chain developments. The first driver is the behavioral changes in the top management of global companies. This has dramatically altered the way people think, learn, decide, act and believe in how they can improve their responsiveness towards their clientele groups. The second is concerned with making quality products to retain customers, the third driver is discipline of supply chain cost economics, fourthly is creation of a value innovation process and fifth the decision making process, so as to make every stage of the management accountable and responsive. Decision-making is a key activity for management. Unfortunately, the early information systems developed during the 1960s and 1970s often had few implications for decision-making. Today, firms routinely monitor a variety of activities, for examples, sales and production. A company is very likely to store information on its competitors sales as well. Given the wealth of information kept in corporate databases, there are many opportunities today to use intelligence information system to aid decision-making. Information is tangible and intangible entity that reduces uncertainty about some state or event. As an example,

consider a weather forecast predicting clear and sunny skies tomorrow. This information reduces our uncertainty about whether an event such as a cricket match will be held. Information that a bank has just approved a loan to our firm reduces our uncertainty about whether we shall be in a state of solvency or bankruptcy next month. Information derived from processing transactions reduces uncertainty about a firms order backlog or financial position. Information used primarily for control in the organization reduces uncertainty about whether the firm is performing according to plan and budget. In this unit, the paradigm shifts in manufacturing, the materials requirement planning, the enterprise resource planning, the distribution requirement planning and the supply chain planning are presented. All these planning capsules focus and make use of the intelligence information system for an effective and efficient business. Through these the organizations achieve the competitive advantage for global competitiveness. Since, 1950, global trade is growing at a faster pace than the overall growth Gross Domestic Product (GDP) of the world. Indian Government, with its new open policies towards foreign investments; overhauling of customs and duties; fewer stringent rules toward repatriation of profits; and open market policies through privatization are positioning it to harness the benefits in the new surge in globalization of economics. Increased global competition, informed customers, technology adaptation, and global trade will put pressure on Indian companies to become more efficient. This means, the Indian companies have to strive for manufacturing excellence by improving product quality, making their price competitive, promoting product delivery and enhancing flexibility to absorb markets varied needs. The manufacturing function is undergoing through a period of extra-ordinary revitalization. This requires attention on

customer oriented products, excellent processes, the best tools and equipment, efficient production goods flow, clear and transparent controls, carefully engineered job, renewed emphasis on productivity, vastly upgraded quality standards empowered with total quality programs and innovation experiments in the management of people in the organization. This revitalization is also seen new manufacturing technologies. These technologies are being accompanied by innovation in management of manufacturing systems. These innovations place greater emphasis on manufacturing excellence an important consequence of global competition in the global economy. These innovations are in effect answers to the challenges placed on the prominent manufacturing capability, by manufacturing enterprises who were caught up between high technology spurred by heavy investment, intelligent customers, new political and economic environments, demanding workforce and increasing competition. Every segment of manufacturing enterprise has gone through close scrutiny and as a result excellent and efficient new technologies emerged and earned their due place in the organization. The materials requirement planning system is a major element in a manufacturing company and is also the heart of MRPII (Manufacturing Resource Planning). MRP is a computer-based information system designed to order and schedule dependent demand inventories (raw materials, component parts, and subassemblies) in a coordinated manner. MRP is as much a philosophy as it is a technique, and as much as an approach to scheduling as it is an approach to inventory control. It views inventory from the vantage point of the stock-room, trying to insure that there will always be just enough on hand to meet projected demand. Until the 1970s, the materials planning process in manufacturing environment suffered from two problems.

The first was the enormous task of setting up schedules, keeping track of large numbers of parts and components, and coping with schedule and order changes. The second was the perception that a company had to choose between investing in high quantities of inventory or having excessive stock-outs. Practitioners used inventory-planning techniques that were designed for independent demand items, resulting in high inventories and frequent stock outs. Starting in the late 1960s and early 1970s, manufacturers recognized that planning dependent items differently from independent items (using MRP) could produce lower inventories and lower stock-out rates. Additionally, they enlisted the power of the computer to handle much of the burden of keeping records and determining material requirements. The main purposes of an MRP system are to control inventory levels and assign operating priorities for ordered items. These may be briefly expanded as follows: 1) Inventory - Order the right part - Order in the right quantity - Order at the right time (start data) 2) Priorities - Order with the right due date - Keep the due date valid The motto of MRP is getting the right materials to the right place at the right time. The operating philosophy of MRP is that materials should be expedited when their unavailability would delay the overall production schedule, and deexpedited when a schedule change postpones their need. To this end, MRP logic will always plan inventory to the lowest possible amount, unless instructed otherwise by order modifiers. Distribution Requirement Planning (DRP) is a management process that determines the need of inventory stocking locations (store, distribution center, regional distribution center, central DC, manufacturing DC, or warehouse that carries product for sale) and ensures that supply sources (third party supplier, a regional distribution point, or a

factory) will be able to meet the demand. This is accomplished in three distinct phases. First, DRP receives input from the following: a) Sales forecasts by stock keeping unit by stocking location. b) Customer orders for current and future delivery. c) Available inventory for sale by stock keeping unit (SKU) by stocking locations. d) Outstanding purchase orders and/or manufacturing orders by product purchased and/or manufactured. e) Logistics, manufacturing, and purchasing lead times. f) Modes of transport used as well as deployment frequencies. g) Safety stock policies by SKU by stocking locations. h) Normal minimum quantity of product to be purchased, manufactured, and distributed. Second, once all inputs are received, DRP generates a timephased model of resource requirements to support the logistics strategy. These include: a) Which product is needed, how much, and where and when it is needed. b) Transportation capacity needed by mode of transport by stocking locations. c) Needed space, manpower, and equipment capacity by stocking locations. d) Required inventory investment by stocking locations and in total. e) Required level of production and/or purchases by product and by supply source. Third, DRP compares the required resources to what is currently available at supply sources, and what will be available in the future. It then recommends what actions must be taken to expedite or delay purchases and/or production, thereby synchronizing supply and demand. This third phase forces integration and feedback into the system,

thus closing the loop among manufacturing, purchasing, logistics, and the customers.

ERP: Enterprise Resource Planning is company wide planning systems, which works around core activities of business and has all logical interfaces to achieve seamless flow of information within the supply chain context. Such systems can optimally plan and manage all the resources of enterprise to run the business with high level of customer services at lower costs and improved productivity. SCM: Supply Chain Management is the logistics of managing the pipe line of goods from contracts with suppliers and receipt of incoming material, control of workin-process, and finished goods inventories in the plant, to contracting the movement of finished goods through the channels of distribution. Supply Chain Planning (SCP) Managers responsible for supply chain process improvement planning, implementation, and measurement received a much-needed framework to guide their efforts in November 1996 when the 69 members Supply Chain Council introduced its Supply Chain Operations Reference Model (SCOR). The major benefit of SCOR is that it gives inter-organizational supply chain partners a basis for integration by providing them, often for the first time, with something tangible to talk about and work with. It turns out that the various departments are now talking in the same language, which is a notable achievement. The framework helped to break down functional silos and allowed people to look at real issues and practices supply chain management improvements. It gave people the chance to look at the supply chain with company-wide needs in mind. The development of software applications pertinent to

supply chain management is currently a hotbed of activity, promising continued growth into the future. A new software program developed by Ross Systems, Inc. called Supply Chain Planning (SCP) is an integrated suite of constraintbased planning tools that provide demand replenishment, and manufacturing tools for accurate planning and scheduling of various activities. This software provides an end-to-end enterprise- resource planning solution incorporating the most advanced supply chain planning capabilities available. SCP is just an example of hundreds of software titles that address some aspect of supply chain management. ERP Vs. SCP A supply chain is a network of facilities and distribution options that performs the function of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these products to the customers. Supply chain exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly form industry to industry. The most distinguishing characteristic of ERP systems is their comprehensiveness. We take SAPs R/3 package (refer unit 10 for details) and try to differentiate between ERP and SCP by taking this as a model. R/3 broadly covers Sales and Distribution, Business Planning, Production Planning, Shop Floor Control, and Logistics. On the surface, this would seem to cover anything that SCP claims to provide. Therefore, it helps to review the relevant functions of R/3 in detail, to be able to contrast to SCP software. First, Sales and Distribution covers order entry and delivery scheduling. This module also naturally checks on product availability to ensure timely delivery, and checks the customers credit line. Business Planning consists of demand forecasting, planning of product production and capacity, and the detailed routing information that describes where (in which work cells) and in what sequence the product is actually

made. The capacity and production planning gets very complex, therefore simulation tools are provided as part of R/3 that can help managers to decide how to overcome shortages in materials, labour, or time. Once the Master Production Schedule is complete, that data is fed into the MRP (Materials Requirements Planning) module. The MRP has three principle pieces of output: an exception report, an MRP list, and order proposals. The exception report brings to attention situations that need attention, such as late delivery of materials, and rescheduling proposals. The MRP list shows the details of shipments and receipts for each product and component. Order proposals are used to order materials and issue production orders. The context in which software has been developed is closely coupled to almost five decades of computer system evolution. Better hardware performance, smaller size, and lower cost have precipitated more sophisticated computer-based systems. We have moved from vacuum tube processors to micro-electronic devices that are capable of processing 200 million instructions per second. Computer users as well as computer specialists often refer to software packages when they discuss how a system will be used. Software is the general term describing programs of instructions, languages, and routines or procedures that make it possible for an individual to use the computer. In a general sense, software is any prepared set of instructions that controls the operation of computer system for computation and processing. The term is often applied only to commercially prepared packages, as opposed to user-prepared instructions. Commercially prepared programs are developed by manufacturers or companies that specialize in software. Their primary purpose is to control all processing activities and to make sure that the resources and power of the computer are used in the most efficient manner. Computer programs are sets of coded instructions that

cause the computer to perform a series of operations that accomplishes a specific purpose. The programs are written in programming languages specially developed languages or commands that make it possible to specify calculations and other processing in terminology that can be converted to particular operations by the computer system. Fourthgeneration languages are in wide spread use to supplement procedure oriented programming languages. Such language allows users to develop sophisticated programs for retrieval of data with only a fraction of the instructions needed when programs are written in procedure-oriented languages. Because they are much easier to use them traditional programming languages, fourth-generation languages are frequently utilized by non-programmers (such as managers). As we approach the year 2000 plus, we can no longer look to the past as a guide to the future. In the face of strong market forces created by electronic commerce and mounting competition, corporations can no longer plod along historical tracks or seek the preservation of the status-quos. Companies are discovering that old solutions do not work with new problems. The business parameters have changed, and so have the risks and payoffs. A new computing paradigm is quickly emerging. It is called network-centric computing, Intranets, or distributed objects. The aim of it is to provide highly configurable, more fault- tolerant, more scalable, and more easily used solutions for enterprises than traditional client/server systems that have been able to deliver. Despite its promise, supply-chain application software implementation is accompanied by the confusion and misconception that is inherent in any software and business method.

3.5 APPLICATION FOR ERP, JIT AND QUALITY MANAGEMENT

Many SCM applications are reliant upon the kind of information that is stored in the most quantity inside Enterprise Resource Planning (ERP) software. Theoretically you could assemble the information you need to feed the SCM applications from legacy systems (for most companies this means Excel spreadsheets spread out all over the place), but it can be nightmarish to try to get that information flowing on a fast, reliable basis from all the areas of the company. ERP is the battering ram that integrates all that information together in a single application, and SCM applications benefit from having a single major source to go to for up-to-date information. Most CIOs who have tried to install SCM applications say they are glad they did ERP first. They call the ERP projects putting your information house in order. Of course, ERP is expensive and difficult, so you may want to explore ways to feed your SCM applications the information they need without doing ERP first. These days, most ERP vendors have SCM modules so doing an ERP project may be a way to kill two birds with one stone. Companies will need to decide if these products meet their needs or if they need a more specialized system. Applications that simply automate the logistics aspects of SCM are less dependent upon gathering information from around the company, so they tend to be independent of the ERP decision. But chances are, youll need to have these applications communicate with ERP in some fashion. Its important to pay attention to the softwares ability to integrate with the Internet and with ERP applications because the Internet will drive demand for integrated information. For example, if you want to build a private website for communicating with your customers and suppliers, you will want to pull information from ERP and supply

chain applications together to present updated information about orders, payments, manufacturing status and delivery.

Developing and Managing the Relationship


Supply managers at all levels should ensure and tailor appropriate actions during the planning and management of such alliances mentioned above. Like: Instituting a Cross-Functional Team: A team so designated should be in place to handle such alliances, which is responsible for development, integration, and develop and manage appropriate measures for the alliance to be successful. Training: Teams from both sides as designated should undergo appropriate training in being constructive team players, and also in cross-functional team skills. Communication System: The teams should develop and integrate an effective communication system responsive to the needs and requirements of both the firms. Trust Building: Measures to improve trust between the two organizations have to be developed and implemented too. Visits: Periodic visits by the respective team members to each others site has to be resorted to for confidence building and co-location of key technical persons. Specialized Training: Plans have to be evolved and developed for specialized training involving variance of products, designing, value analyses, engineering, cost analysis and cost management. Objectives: Certain objectives have to be established in areas, including quality, cost and time aspects. Monitoring: Results have to be continuously monitored and reported to the management level. Supportive: Inter-firm team members should realize the importance of such alliances and support the alliance goal in letter and spirit. Its in the interest of both the firms to support each others operations and their respective goals,

ethics over expediency. Management of supply contract is a challenging responsibility and a critical too. Companies have to continuously generate and develop newer ideas and innovations to maintain these relations and work in unison to a common goal without jeopardizing each others interest in the overall gambit of supplier buyer alliances and relationship.

Quality Management
Quality management dates back to the 80s, wherein the Japanese companies developed a zero-defect program for their products, primarily based on quality of the raw materials they procured. This was resorted to by traditional methods of sampling of the incoming raw materials, which implicitly inferred that there will be some non-conforming parts, that will be used in the manufacturing operations resulting in lower material productivity and higher manufacturing costs. This was never a full proof system and the lacunas were too many, and resulted in longer lead-time to correct the specific problems or adjustments to the operating systems. This would generally lead to longer customer delivery time and cascading decrease in profits. Hence, precautions be taken for Quality Assurance and Quality Control.

Problems of Quality
The suppliers till late had been providing natural/semiprocessed materials to the manufacturers for their finished products. Under such circumstances, quality control was never a problem since it was dependent on the quality of raw materials. The buyer and suppliers were almost quasiindependent and had little interaction between them (Deshmukh & Mohanty, 2004). Today things have changed considerably and most of the companies are engaged in different type of purchases and procurements, particularly very complex and highly engineered sub- systems with

critical interfacing with other components. Therefore, some key features have to be evolved for a better buyer-supplier relationship and its effect on the quality assurances on the whole (we have seen this in the last unit of buyer-supplier relationship/alliances). However, for quality assurance, some activities that are to be followed are: Mission: The companys mission and policies on supplier quality relations have to be spelt out clearly (as for ISO9000). Identification: Identify and develop qualified and capable suppliers who can assure of quality, and weeding out the lesser variants. Communication: Communicating essential and helpful information, designs, and specifications and also engineering changes promptly. Development: Developing methods for detecting the deviations through reproduction and trials. Assistance: Provide assistance to the supplier on quality related problems and overcome them. Review: Periodic review of the performance of the supplier through supplies rating and follow up actions against poor suppliers. These activities are not sacrosanct and depend on the following: Nature of goods being purchased Volume of the purchase Total suppliers Repeat purchase Research, design and subcontract management.

Quality Management : Different Stages

A very tedious process and action at hand by the buyer firm is to find a suitable supplier who can generally meet the benchmark of the purchaser, i.e. the best from the best within the cost, under ideal conditions of course. However the following evaluation methods could be used to get the best from the best: Reputation: This is a variable factor and differs from company to company, big and small. For a big company it is of significance and for a smaller company its almost obscure. A detailed survey and market search will help in identifying the best that can deliver the best within the cost per se. The buyers generally maintain database on prior performance of these companies. Database: Maintaining a database in financial function has been very effective, however, it is in development stage for use in quality functions (Desmukh & Mohanty, 2004). Surveys: The purchasing and procurement division of a company is carrying out the selection of the appropriate supplier. Clarity of information is an important factor in this selection process, and such information on the supplier will provide the right weightage for the supplier selection. Trial & Error: Sometimes this procedure will also help in

choosing the correct supplier for the manufacturer. At times certain obscure suppliers qualify to the requirements of the manufacturer and provide the goods as required. The limiting factor is the right chance at the right time. Faith & Reliance: This is another aspect that will help in getting the right supplier when the company requires the most. No supplier would like to loose out/compromise on the aspects of faith and reliability that has been bestowed on it by the buyer unit. Opportunity: This is another factor because of which many small suppliers loose out on a buyers search radar. The buyer should carry out an in-depth selection of the supplier and provide a fair opportunity to even the smallest to prove its worth, sometimes, it does pay huge benefits in the long run.

Supplier Quality Management


We will now see the quality control aspects of supplier units. Quality management dates back to the 80s, wherein the Japanese companies developed a zero-defect program for their products, primarily based on quality of the raw materials they procured. This was resorted to by traditional methods of sampling of the incoming raw materials, which implicitly inferred that there will be some non-conforming parts, that will be used in the manufacturing operations resulting in lower material productivity and higher manufacturing costs. This was never a full proof system and the lacunas were too many, and resulted in longer lead-time to correct the specific problems or adjustments to the operating systems. This would generally lead to longer customer delivery time and cascading decrease in profits. The main objective of this unit is to discuss the problems of quality and how to generally overcome these issues. In every organization there is a wide diversity of functions and structures for quality planning and control, and hence the first step to quality assurance is a structural basis for the

procurement system that should be organic in character and reflect the concern for quality control in developing the relationship of the interdependent organization throughout the supply chain. With this as a preamble let us see the problems of vendor / supplier quality.

How to Find the Qualified Supplier?


A very tedious process and action at hand by the buyer firm is to find a suitable supplier who can generally meet the benchmark of the purchaser, i.e. the best from the best within the cost, under ideal conditions of course. However the following evaluation methods could be used to get the best from the best: Reputation: This is a variable factor and differs from company to company, big and small. For a big company it is of significance and for a smaller company its almost obscure. A detailed survey and market search will help in identifying the best that can deliver the best within the cost per se. The buyers generally maintain database on prior performance of these companies. Database: Maintaining a database in financial function has been very effective, however, it is in development stage for use in quality functions (Desmukh & Mohanty, 2004). Surveys: The purchasing and procurement division of a company is carrying out the selection of the appropriate supplier. Clarity of information is an important factor in this selection process, and such information on the supplier will provide the right weightage for the supplier selection. Trial & Error: Sometimes this procedure will also help in choosing the correct supplier for the manufacturer. At times certain obscure suppliers qualify to the requirements of the manufacturer and provide the goods as required. The limiting factor is the right chance at the right time. Faith & Reliance: This is another aspect that will help in getting the right supplier when the company requires the

most. No supplier would like to loose out/compromise on the aspects of faith and reliability that has been bestowed on it by the buyer unit. Opportunity: This is another factor because of which many small suppliers loose out on a buyers search radar. The buyer should carry out an in-depth selection of the supplier and provide a fair opportunity to even the smallest to prove its worth, sometimes, it does pay huge benefits in the long run.

Quality Survey of Suppliers


Its an evaluation process, which enables the buyer to select the appropriate supplier conforming to the buyers requirements. Does the supplier have the ability to respond to the buyers requirements? Does he require assistance in any form? This and many, can be answered by help of visits to the suppliers site by a team of specialists or through a balanced questionnaire. The following are the survey evaluation on the supplier. Policies/Practices on Quality: These are the basic guidelines based on which the quality assurance of the supplier can be determined. They are the real intentions that are to be implemented in a variety of degrees, the main problem is to evaluate the policies and determine the degree to which they are to be implemented. Facilities: These are related to tests and inspection that meet the quality requirement of the purchased product. Samples are taken and checked with the vendor and buyers gauge to compare the gauging systems. This kind of checking reduces the risk to both the supplier and the buyer. Procedures and Actions: These are the procedures for handling quality problems like gauge control deviations from existing specifications. The aim of the survey is to determine whether the procedures are in vogue or not.

Appraisal: Appraisal of personnel from viewpoint of quality is very difficult, but discovering the technical competence and attitude to quality can be established. But, this could be just subjective at times, due to turnover of key personnel. Yet, a general attitude of quality control can be found out through auditing, discipline, and maintenance and housekeeping records. For a new product line searching for a capable supplier is indeed a difficult task and this can well spell the difference between success and failure of any new product. Geographical location and close proximity is a reason to search for a supplier closer home, without a rating of sorts, but selection for a long-term supplier in high volumes is a tedious process and should start early. The prospective suppliers can be located by any methods, but the pertinent questions that should be addressed are: How well do the objectives of the quality program conform to the buyers needs? How well the practices of the quality control program conform to the objectives? The objective of this evaluation is to arrive at a judgment of how well suppliers programme operates, neither to tabulate the efficiencies nor rationalize the shortcomings. The areas for evaluation are: Quality Price Performance Production capabilities A supplier survey is analogous to a profit and loss statement, that is, it speaks of the status at any one point in time and will not guarantee of the status at any other time. Therefore, the communication of the survey must continue for a long time towards a good partnership. Increased competition in the economic scene worldwide results in heavy dependence on quality as both an endogenous and exogenous factor. This results in the other elements that aid in quality control to have an ever-

expanding role. Procurement function therefore plays a key role in getting the best from the best available in the open market. It plays a predominant role in the in ensuring quality in an organization. Improving quality therefore should shift from desire to compulsion in the quality assurance of supply agencies.

Just In Time (JIT) in SCM


Another term employed in Just in time is Kaizen. It means literally the continuous improvement of the process. In the realm of supply chain management Just in

time refers to an inventory strategy that it used to


improve a businesss return on investment through a

reduction of in process inventory and all related costs. Just in time is driven by a series of signals, referred to as Kanban, which tell production processes when it is necessary to make the next part. Kanban can be visual signals, but are generally tickets. When implemented in a correct fashion, Just in time can help a producer improve in such areas as quality, efficiency, as well as the return on investment. When stock drops to a certain level, new stocks have to be ordered. This helps maintain space in the warehouse and keeps costs down to a reasonable amount. One drawback of Just in time however is that the re-order level is determined by the previous demand. If the demand rises above that amount, then inventory will be depleted a lot faster than usual and might cause customer service problems. In order to maintain a ninety five percent service rate, the company should always carry two standard deviations of safety stock. Around the Kanban, shifts in demand should be forecast until trends are established to reset the correct Kanban level. Some feel that recycling Kanban at a quicker pace can help the system flex by up to thirty percent. Recently,

producers have started touting a thirteen week average as a better predictor than previous forecasts would provide.

3.6 VENDOR MANAGEMENT AND DEVELOPMENT


The term vendor originally represented property vendors. However, today it means a supplier of any good or service. A vendor, or a supplier, is a supply chain management term that means anyone who provides goods or services to a company or individuals. A vendor often manufactures inventorial items, and sells those items to a customer. The vendor management process begins by selecting the right vendor for the right reasons. The vendor selection process can be a very complicated and emotional undertaking if you don't know how to approach it from the very start. You will need to analyze your business requirements, search for prospective vendors, lead the team in selecting the winning vendor and successfully negotiate a contract while avoiding contract negotiation mistakes. Vendor Development can be defined as any activity that a Buying Firm undertakes to improve a Supplier's performance and capabilities to meet the Buying Firms' supply needs.

3.7 VALUE ENGINEERING/ANALYSIS


Value engineering (VE) is a systematic method to improve the "value" of goods or products and services by using an examination of function. Value, as defined, is the ratio of function to cost. Value can therefore be increased by either improving the function or reducing the cost. It is a primary tenet of value engineering that basic functions be preserved and not be reduced as a consequence of pursuing value improvements Value Analysis : Systematic analysis that identifies and selects the best value alternatives for designs, materials, processes, and systems. It proceeds by repeatedly asking "can the cost of this item or step be reduced or eliminated, without diminishing the effectiveness, required quality, or customer satisfaction?" Also called value engineering, its objectives are (1) to distinguish between the incurred costs (actual use of resources) and the costs inherent (locked in) in a particular design (and which determine the incurring costs), and (2) to minimize the locked-in costs. Continuous efforts are made in SCM to make use of Value Engineering and Value Analysis. It is a more accurate cost management methodology. It focuses on indirect costs (overheads). It identifies each expense category to the particular cost object and makes indirect expenses direct. It is based on the fact that cost objects consume activities and activities consume resources. It is this consumption of resources that drives costs. One can

use ABC when overhead is high, products are varied, cost of errors is high and competition is hard. ABC also makes it easier to understand variable cost behavior and cost-ofquality for activities and processes. Litt in one of his articles commented, Activity based costing (ABC) is an accounting technique that utilizes cost attachment rather than cost allocation to determine the actual cost of products and services. ABC has the ability to clearly define the critical attributes of todays business processes. The real beauty of an ABC model is that it forces organizations to adopt a cost management paradigm that focuses on understanding their processes. Once an organization accepts this paradigm, they soon recognize that their products or services are produced through crossfunctional business processes. These processes contain a wide variety of activities that not only define the process, but also more importantly, reflect how effectively the process performs. The ABC can be performed by: Identifying activities Determining cost for each activity Determining cost drivers (Cost drivers are the factors that affect the cost of an activity, e.g. poor quality) Collecting activity data Calculating product cost Activity based costing (ABC) highlights the customer characteristics in terms of the buying behavior and distribution requirements. It depicts the cost attached at each level of activity and thus decides about the true cost. ABC uses a more logical basis for allocating the costs. Let us take an example of a manufacturing company, which sells its products through a network of dealers to the industrial users. We would first use the traditional cost accounting method and then use ABC to demonstrate the difference. The performance of a supply chain can be illustrated with the help of total logistics cost. Since logistics begins from

start and continues till the end, the costs associated with it are of immense importance in the supply chain. There is a need of a trade-off based cost accounting system that is activity based and a change in any process is followed by a change in the costs. To define the logistics cost one must define the desired outputs from the logistics system and then seek to identify the costs associated with providing those outputs. Christopher (1998) defined the concept of mission. In context of logistics, a mission is a set of customer service goals to be achieved by the system within a specific product/market context. Missions are specific to the type of market served. The successful achievement of defined mission goals involves inputs from a large number of functional areas and activities. A good logistics costing system is thus based on the total systems cost of meeting desired logistic objectives (the output of the system) and the costs of the various inputs involved in meeting these outputs. This approach is called Mission Costing. The cost of logistics varies from industry to industry e.g. building material say bricks will have very high logistics costs as compared to Pharmaceuticals. It is generally believed that logistics costs are 15-20% of the turnover. Logistics becomes more and more expensive as the cost of fuel, land, safety, environmental conservation and human resources increase. However there is also a general belief that new productive models and good practices are effective in reducing the cost of logistics. Logistics has an impact on the overall financial performance of a company. It has an effect on return on assets (ROA). Let us discuss some expense saving strategies for the logistician (Ashcroft, 2004). Companies who have yet to squeeze all possible benefits from their supply chain, significant low hanging benefit opportunities may be waiting in the Logistics area. This is especially true with respect to mergers or acquisitions. For a Lowest Cost Logistics approach to succeed, it must begin by

addressing two key starting points, firstly, a clear identification of the firms Customer Service / Business Goals; and secondly a detailed, accurate and complete calculation of current Logistics costs. The task of identifying the customer service targets and business goals must be a collaborative effort including all stakeholders within the organization and even key customers, carried out on a participative basis to ensure consensus and buy-in on the results. Logistics costs identified by incorporating all business costs incurred due to logistics functions, support costs and transfer credits. Once these cost numbers are known to be accurate and truly representative, the next step is to Benchmark them against companies in similar business and industry areas (you will read it in more detail in the next unit). Another approach to drive these costs down is to utilize ABC Costing methodologies

3.8 OPTIMIZATION OF SUPPLY CHAIN


To ensure success in your supply chain operations, an important factor to consider is your organizational alignment. When the right organizational model is matched, for example, to the business model, strategy, culture, and governance, operational benefits will be realized.

3.9 ORGANIZATION DESIGN


More organizations are seeking new approaches to compete through a competitive supply chain strategy. Many of these strategies involve the following elements: Development of a centrally led supply chain organization that is not fragmented and aligned with corporate strategic initiatives, with the authority to collaboratively lead the behavioral

and cultural changes required across business units. Conscious development and modification of supply chain structures to meet business requirements Leveraging of corporate spend Building of cross-functional teams that reach across organizational boundaries to manage the supply chains to achieve strategic goals and provide exceptional value to stakeholders. Integration of key suppliers into cross functional teams to leverage suppliers skills, knowledge and capabilities for each organizations mutual benefit A disciplined focus on logistics excellence through the use of standard processes, practices, technology and sharing of information to ensure supply chains are effective, efficient and continuously striving for the next step in performance improvement Being a Customer of Choice through rapid payment, equitable and ethical treatment of our suppliers

Execution of these strategies is contingent on a supporting organizational structure. Recent research validates the fact that supply chain improvements are achieved when organizations recognize the importance of SCM at a senior level. Specifically, successful organizations are characterized by: A Senior executive responsible for SCM who reports to the CEO

A corporate committee that is actively involved in providing direction to the implementation of SCM strategies Coordination of strategic initiatives accomplished centrally with the active involvement of business units Ownership for operational aspects of SCM remaining with operational business units The focus of SCM operational aspects moving from transaction execution to coordination and synchronization Common services centralized for improved efficiency and control over strategic initiatives and coordinated process planning across all business units. Recent research suggests that leading organizations are adopting organizational structures with the following characteristics: A Senior executive responsible for SCM who reports to the CEO A corporate committee that is actively involved in providing direction to the implementation of SCM strategies Coordination of strategic initiatives accomplished centrally with the active involvement of business units Ownership for operational aspects of SCM remaining with operational business units The focus of SCM operational aspects moving from transaction execution to coordination and synchronization Common services centralized for improved efficiency and control over strategic initiatives

and coordinated process planning across all business units. To drive value into the organization, the supply chain management organization must report to the CEO. Supply chain transactions will become largely automated (80% of transactions) to allow Supply Chain Associates to focus their energy on valueadded supply chain strategies and processes. This organizational model is best described by Peter Druckers management concept of federal decentralization: Any organization requires both strong parts and a strong center. The term Decentralization is actually misleadingthough far too common by now to be discarded. Federal decentralization requires strong guidance from the center through the setting of clear, meaningful and high objectives for the whole. The objectives must demand both a high degree of business performance and a high standard of conduct throughout the enterprise. Organizational capabilities and effectiveness are significantly impacted by horizontal or collaborative practices such as cross functional teams, information sharing, and participation / involvement in decision making by customers and suppliers (including internal to the company but outside of the organization). These practices increase horizontal expertise and effectiveness. It will require significant changes to deploy this organizational model. Most company supply chain structures are fragmented and not aligned with senior management initiatives. However, structure must follow strategy, and not the other way around.

The main objective of the supply chain concept is to integrate and synchronize the service requirements of the consumer/customer with the flow of materials from suppliers in such a way that any conflicting or contradictory situation rising can be balanced out. These conflicts could be like, high customer service, low inventory investment and low operating cost. These have to be balanced or optimized, and therefore, various models have been proposed over the years in order to integrate the SCM systems, for example Stevens Model (1989), which proposes a balance in the supply chain involving functional trade-off. Supply chain management revolves around efficient integration of suppliers, manufacturers, warehouses and stores. The main challenge being coordination of the activities within the chain and across it for improved performance, reduced costs, increased service level, reduced bullwhip effect, resource utilization, and effective response to market changes. Companies have realized over a period of time that integrating the front-end of supply chain, customer requirements/demands, to the back-end of the supply chain, the production and manufacturing portions of the supply chain. Development of an integrated supply chain requires management of material and information flows to be viewed from three perspectives: Strategic Tactical Operational. At each of these levels, there has to be utmost coordination and harmonization between the finance, information, material, facilities, people and the system as a whole. Integration of Supply Chain & Demand Chain can be seen from three angles as follows: Strategic Level: What should be the focus at the strategic

level? What are the objectives and policies for the supply chain and how can they be developed to achieve competitive superiority? How to develop the physical components of the supply chain? How to develop the statement of customer service intent by the product market, customer group or by a large customer? Developing an organizational structure capable of bridging the functional hurdles, thereby ensuring an integrated value delivery based supply chain. Tactical Level: This focuses on the means by which the strategic objectives could be achieved. The various objectives for each element in the supply chain provide the directions for achieving the balance within the supply chain. It involves identifying the necessary resources with which the balance could be achieved. Operational Level: the implementation level in the model, and aims at converting the objectives and policies so formulated into workable solutions. This is also the supply chain development phase and the strategy and plans for implementation are evolved. Implementation plans require a time-phased program for allocation of resources all through the supply chain. Stevens comment concerning supply chain development is equally interesting, which says while the impetus for the development of the strategy may be a top- down approach; its success is likely to be achieved by a bottom-up approach. Stage 1 is a situation in which the company approaches the supply chain tasks in discrete decisions with a responsibility lodged in each of the task centers. The result is usually a lack of control across the supply chain function because of organizational boundaries preventing the coordinated decisions from achieving an overall customer

service objective. Stage 2 of development is denoted by the functional integration of the inward flow of goods through material management, manufacturing management and distribution. The emphasis is mainly on cost reduction rather than on performance achievement and is focused on the discrete business functions with certain attempts at achieving internal trade-off between purchasing discounts and inventory investment, and also plant operating costs and batch volumes. Customer service is reactive in this case. Stage 3 accepts the necessity of managing the flow of goods to the customer by integrating the internal activities. In this stage, the integrated planning is achieved by using the distribution requirement planning (DRP), JIT (just in time), manufacturing techniques, etc. This stage is essential before the company can consider integrating customer demand in an overall demand management activity. IT is an effective enabler for this process. Stage 4 extends the integration to external activities. While doing so, the company becomes customer oriented by linking the customer procurement activities with its own procurement and marketing activities. The concept of value chain/supply chain management approach enables a company to react effectively to market swings and changes. However, in order to get the optimum potential, a connection and inter-relationship between the components of the supply chain has to be established and an integrated chain formed for utmost customer satisfaction, i.e. cost-effective product.

demands to the various components of the supply chain. This system is more attractive in nature because, it leads to:

A lesser lead-time, since better anticipation is made on customer demands and the retailers Lesser inventory with the retailers A decrease in variability due to reduction in lead-time Decreased inventory with manufacturer due to reduction in variability.

Demand Management
Why do we require demand management? Its primarily required since accumulation of inventories amounting to millions in the supply chain shows absence of demand management in the total system. Demand managements imperative of forecast error reconciliation with the actual order rate of an enterprise is one of the most overlooked potentials in the successful management of inventory levels, customer satisfaction, staffing strategies and facilities expansion or contraction. Demand Driven Strategies Demands forecast and demand shaping are the two different processes, which helps in generating information for integrating demand information into the supply chain planning process, as enumerated below: Demand forecast: A process in which historical demand data are used to develop long-term estimates of expected demand, that is, forecast. Demand shaping: It is a process in which the firm determines the impact of various marketing plans such as promotions, pricing discounts, rebates, new product introduction and product withdrawal on demand forecasts.

In either case, the forecast is not completely accurate, and hence an important output from demand forecast and demands shaping processes is an estimate of the accuracy of the forecast, the so called forecast error, measured according to standard deviation. This information provides insight into the likelihood that demand will be higher (or lower) than the forecast. High demand forecast error has a negative impact on supply chain performance, resulting in obsolete inventory and underutilization of resources. Therefore, can the firm employ supply chain strategies to increase forecast accuracy and thus decrease error? Let us see with the following approaches: Select the push-pull boundary so that demand is aggregated over one or more of the following dimensions: Demand is aggregated across products Demand is aggregated across geography Demand is aggregated across time The objective is clear. Since aggregate forecasts are more accurate, the result is improved forecast accuracy. Use market research, demographic and economic trends to improve forecast accuracy Incorporate collaborative planning and forecasting processes with the customers for better understanding of demands. The next is to analyze the supply chain and see if it can support these forecasts. This process, called supply and demand management, involves matching supply and demand by identifying a strategy that maximizes profit or minimizes transportation costs, inventory costs and production costs. The firm also determines the best possible way to handle volatility and risks in supply chain. This is tactical planning, which is impact to demand planning. Therefore an iterative process must be used to identify the following:

The best way to allocate marketing budgets and supply and distribution resources The impact of deviation from forecast demand The impact of changes in supply chain lead-times The impact of competitors promotional activities on demand and supply chain strategies. Bullwhip Effect Failure to accurately estimate demand and share information among supply chain entities can result in bloated inventory levels due to cumulative effect of poor information cascading up through a supply chain12 , says Burt in his book WCSM. This is in fact quite natural in a way. If a firm doesnt have information of the demand it will unnecessary carry a load of additional inventory or even increase the lead-time to cater for the uncertainty. Either ways the inventory gets bloated, if the lead-time increases so will the buyer increase order quantities (based on conventional recorder point calculations). This will result in the supplier interpreting this to be growing customer demand, with a cascading effect on the supplier who feels the necessity to increase capacity to meet the trend. To add fuel to the fire, just as supplier has added additional capacity to meet the increase in demand, demand falls off because the buying firm has excessive stock available. The resultant is firing of employees, selling of assets in order to reduce the capacity. This phantom demand in SCM is called as bullwhip effect. In other words, the increase in variability as we travel upwards in the supply chain is referred to as the bullwhip effect. Therefore, in order to identify and control the bullwhip effect its pertinent to understand the main factors that contribute towards increase in variability in the supply chain. Demand forecasting: Traditional inventory management

techniques practiced at each level in the supply chain lead to the bullwhip effect. As discussed earlier in unit 5, managers generally use standard forecast smoothing techniques to estimate average demand and demand variability. The important characteristics of forecasting are that as more data are observed, the more we modify the estimates of the mean and standard deviation in customer demands. Since safety stocks strongly depend on these estimates, the user is forced to change the order quantities, thereby increasing variables. Lead Time: Increase in variability is magnified with increase in lead-time. In order to calculate safety stock levels and recorder points, we in effect multiply the estimates of the average and standard deviation of the daily customer demands by the lead-time. Thus, with longer lead-times, a small change in estimate of demand variability implies a significant change in safety stock and recorder level, leading to a significant change in order quantities, which in effect leads to increase in variability. Batch Ordering: The impact of batch ordering is simple to understand. If batch ordering is used by the retailer, as happens while using min-max inventory policy, then the wholesaler will observe a large order, followed by several period of no orders, followed by another large order, and so on. Therefore, the wholesaler sees a distorted and highly variable pattern of orders. Price Fluctuation: This can also lead to bullwhip effect. If prices fluctuate the retailers tend to stock up when the prices are lower. That is another reason why stocks vanish from the market prior to budget month. This is accentuated by certain manufacturers and companies of offering promotions and discounts at certain times on certain commodities. Inflated Orders: Inflated orders placed by the retailers during storage periods increase the bullwhip effect. Such orders are common when retailers and distributors suspect that a product will be in short supply, and therefore

anticipate receiving supply proportional to the amount ordered. When the shortage period is over, the retailer goes back to the standard orders, leading to all kinds of distortions and variations in demand estimates. After having seen the factors leading to the bullwhip effect we now go on to how to reduce the bullwhip effect by centralized information.

Impact of Centralized Demand Information


Centralizing demand information within a supply chain can reduce bullwhip effect considerably. This would entail providing information on customer demand in each stage of the supply chain. How and why? If demand information is centralized, each stage of the supply chain can use the actual customer demand data to create more accurate forecasts, rather than relying on the orders received from the previous stage, which can vary significantly more than the actual customer demand. To determine the impact of centralized demand information on the bullwhip effect, we have to distinguish between two types of supply chains: one with centralized demand information and a second with decentralized demand information, as described below. Supply Chain with Centralized Demand Information: In this type of supply chain the retailer (who is the first stage) observes customer demands and forecasts his demands with moving average method finds his target inventory level on the forecast mean demand, and places orders to the wholesaler. The wholesaler who forms the second stage of the supply chain, receives the order along with the retailers forecast mean demand, uses this forecast to determine its target inventory level, and places the order to the distributor. The distributor who finally places the demand to the factory, the fourth stage in the supply chain, follows the same process. In this particular chain, each stage of the supply chain receives the retailers forecast demand and follows an order-

up-to inventory policy based on this demand. Therefore, the demand information, forecast technique and inventory policy in this case has been centralized. Decentralized Demand Information: the second type of supply chain is the decentralized one. In this case the retailer doesnt make its forecast mean demand available to the remainder of the supply chain. Instead, the wholesaler must estimate the mean demand depending upon the orders received from the retailer. Here once again the wholesaler uses a moving average with p observations of the orders placed by the retailer in order to forecast the mean demand. Thereafter, it uses this forecast to determine the target inventory level and places an order with the distributor. The distributors target level is utilized to place orders in the fourth stage of the supply chain. Again, in this stage as we move up the supply chain the orders become larger and the variable increase with every stage. Actually, in both the types of the supply chain the variance of orders become larger as we go up the chain so that the orders placed by the wholesaler are larger than those placed by the retailer, and so on. The difference in the two types of supply chains is in terms of how much the variability grows as we move from stage to stage. It is seen that the orders move additively in the centralized system and multiplicative in the decentralized one. In other words in the decentralized system where only the retailer knows the customer demand can lead to higher variability than a centralized one, in which the customer demand is available at each stage, particularly when the lead times are large. Therefore more often than not the centralized system can effectively reduce the bullwhip effect. Its also important to note that even with the centralized system the bullwhip effect remains, since the complete system is based on demand predictions and this is a variable

factor. Therefore, it will be correct to say that it can only reduce the effect but not eliminate it completely. Bullwhip effect continues to stay in spite of our relentless efforts. Hence, why dont we put our minds together to find some solution to counter this effect and remove it almost completely? It can be considerably reduced, if we gave it a fair try. Let us take into cognizance of the various environmental factors, consumer behavior, market research and area study into effect to counter this problem. For a moment let us get into a model called direct information system (DIS), in which we allow the manufacturer to get direct information from the consumer bases rather than the retailers and wholesalers or the distributors. It will require the following: A thorough knowledge on the consumer behavior, to include peculiar habits as available in the Indian context and differs state-to-state, region-to-region A detailed market research An area study compendium to know about the area per se, this will ease out transportation, warehousing and material handling activities Last two to three years consumption report analysis Last but not the least, an integration of these factors under one common head the DIS.

SCM is indeed the most dominating paradigm in contemporary business and is slowly emerging as powerful creators of sales and revenue growth. In the 21st century, the rapidly exploding liberalized global market is creating enormously diversified customers, products and services. Organizational, informational and managerial demands are being redefined. The new millennium is creating conditions and an entirely different type of challenge, which are being manifested in innovative supply chain developments. The first driver is the behavioral changes in the top management

of global companies. This has dramatically altered the way people think, learn, decide, act and believe in how they can improve their responsiveness towards their clientele groups. The second is concerned with making quality products to retain customers, the third driver is discipline of supply chain cost economics, fourthly is creation of a value innovation process and fifth the decision making process, so as to make every stage of the management accountable and responsive.

3.10 RETAIL MANAGEMENT


While the retail sector has always been very competitive, in recent years, the competitive nature of the field has increased dramatically. Customers too have become more exacting, demanding everincreasing levels of service. Retailers have responded by increasing the variety of their products, becoming more price competitive, striving towards higher service levels, and utilizing advances in computing capabilities and information technologies to improve their supply chain efficiency. However, these developments have also greatly increased the complexity of managing the retail business environment. Consequently, most retailers have struggled to maintain profitability. Rigorous analytical methods have emerged as the most promising solution to many of these complex problems. Indeed, the retail industry has emerged as a fascinating choice for researchers in the field of supply chain management. In Retail Supply Chain Management, leading researchers provide a detailed review of cutting-edge methodologies that address

the complex array of these problems. A critical resource for researchers and practitioners in the field of retailing, chapters in this book focus on three key areas: (1) empirical studies of retail supply chain practices, (2) assortment and inventory planning, and (3) integrating price optimization into retail supply chain decisions.

3.11 SUMMARY
The concept of Supply Chain Management is based on two core ideas. The first is that practically every product that reaches an end user represents the cumulative effort of multiple organizations. These organizations are referred to collectively as the supply chain. The second idea is that while supply chains have existed for a long time, most organizations have only paid attention to what was happening within their four walls. Few businesses understood, much less managed, the entire chain of activities that ultimately delivered products to the final customer. The result was disjointed and often ineffective supply chains. Supply chain management, then, is the active management of supply chain activities to maximize customer value and achieve a sustainable competitive advantage. It represents a conscious effort by the supply chain firms to develop and run supply chains in the most effective & efficient ways possible. Supply chain activities cover everything from product development, sourcing, production, and logistics, as well as the information systems needed to coordinate these activities. The organizations that make up the supply chain are linked together through physical flows and information flows. Physical flows involve the

transformation, movement, and storage of goods and materials. They are the most visible piece of the supply chain. But just as important are information flows. Information flows allow the various supply chain partners to coordinate their long-term plans, and to control the day-to-day flow of goods and material up and down the supply chain.

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Tick Mark () the most appropriate answer 1. Just in Time is related to a) Finance Management b) Store Management c) HRD d) Controlling Employees 2. Optimization of SCM is not through a) Business Model b) Culture c) Storage d) Governance 3. Vendor Management benefits a) Short term goals b) Long term goals c) None d) Cause losses 4. IT enabled SCM facilitates a) Documentation b) Reduction in cost c) None of above d) All of above

5. Value Analysis assists in a) Reducing CTC of employees b) Best value of Travel c) Best value of processes d) None od above

3.12 QUESTIONS AND EXERCISES


1. What is the distinction between Value Engineering and Value Analysis? 2. Define JIT while correlating with an example from your company?

3. Describe IT enabled SCM? What advantages will it have over normal SCM? 4. Describe role of re-engineering and benchmarking in business? 5. Explain Quality Management in Logistics & SCM?

3.13 FURTHER READING


1) Bowersox, Closs & Cooper (2002), Supply Chain Logistics Management, McGraw-Hill (International Edition) 2) Bradley S. Litt(2001), Learning the ABCs of Cost Analysis, at http:// www.gantthead.com/article.cfm?ID=18628

3) Christopher Martin (1998), Logistics and Supply Cain Management: Strategies for reducing cost and improving Service, 2nd edition, Financial times, Pitman Publishing. 4) Gattorna J.L. & Walters D.W. (1996), Managing the Supply Chain: A Strategic Perspective, Palgrave Macmillan, Indian Reprinted ed. 2004. 5) Harrison, Hoek (2002), Logistics Management and Strategy, Pearson Education 6) Jeff Ashcroft(2004), Lowest Cost Logistics, http://logistics.about.com/od/ strategicmodeling/a/aa071604.htm 7) Waters Donanld (2003), Logistics: An Introduction to Supply chain Management, Palgrave Macmillan, Indian Reprinted ed. 2004.

UNIT 4 : GLOBAL PERSPECTIVE


Structure 4.1 Objective 4.2 Introduction 4.3 Motives and Development of Global Markets 4.4 Managing the International Supply Chain Operations 4.5 Supply Chain Reconsideration 4.6 Risk Involved 4.7 Benchmarking Global Supply Chains 4.8 Summary 4.9 Questions and Exercises 4.10 Further Readings

4.1 OBJECTIVE
The objective of this module is to highlight understanding of SCM at Global Level to include Describe SCM Management in Global Market Highlight Reconsideration for World Trade Analyze Risk while dealing at Global Level Performance Benchmarking in Wider Global Platform

4.2 INTRODUCTION
After having seen the strategic SCM, supplier alliances, quality management & SCM re-engineering let us see SCM as organized for global markets. This particular unit is focused on world-class supply chain management, which is spreading rapidly in almost all countries across the globe, and in most advanced economies. Broad product range, shorter product life cycle and growing changes in the market place are becoming the norm. More and more companies are coming forward to provide customized value based services to their clientele and at the same time maintaining a high volume of production. Internet, ebusiness and e-commerce have become the business drivers of today with companies able to converge geographically through the electronic media. At the same time data warehousing and data mining is allowing the companies to contact the customers over a wide front and at the same time maintain a one to one contact.

4.3 MOTIVES AND DEVELOPMENT OF GLOBAL MARKETS


The third movement of supply chain management development, the globalization era, can be characterized by the attention given to global systems of supplier relationships and the expansion of supply chains over national boundaries and into other continents. Although the use of global sources in the supply chain of organizations can be traced back several decades (e.g., in the oil industry), it was not until the late 1980s that a considerable number of organizations started to integrate global sources into their core business. This era is characterized by the globalization of supply chain management in

organizations with the goal of increasing their competitive advantage, value-adding, and reducing costs through global sourcing. World-Class Supply Chain Management (WCSCM). WCSCM is a result of the developments of the world-class manufacturing model and is to be capable of operating profitably in a competitive environment to the factors of uncertainty and unpredictability. The companies that are able to respond to the structural and functional changes in this changing market place can emerge profitable in the long run. WCSCM is a process that is value centric, and therefore all the processes like development, sourcing, movement, production and distribution of products and services are centered on value generating paradigm. It is an ongoing process from buying a product to buying a solution on a long-term basis. WCSCM can be conceptualized under three basic dimensions: Enrichment of Customers: Represents varying degrees of collaboration and interaction in defining products, services and concepts. Recognition of Company by the Customers: Quality speaks, and reduction in fixed price to shared risks and recognition. A Linkage between Suppliers, Company and Customers: Represents linked networks of workstations, shared databases, tools and facilities. In order to meet the challenges of globalization, economies that are liberal will require restructuring their operating policies and a complete reformulation of the systems to eliminate wastes and create a value base. Value for money is becoming a strategic necessity in this competitive world, i.e. high quality at reasonable prices at the appropriate time. But, for the manufacturer the realities like increase in costs of labor and energy continue to pressurize them. They have

to realize this aspect and identify what and how to do it, by servicing the existing customers, dealings with suppliers, opening new channels for newer customers, reduction in costs and adding to value added services. What is WCSCM? Before getting on with the various components of WCSCM, we must understand the working definition of this term. It has to be understood that every company aims to make profits, which further results growth. World-class denotes to be able to sustain oneself, in this competitive market and at the same time make profits in the long run. For profit, a company got to sell its product at a cost higher than its costs, and at the same time offer its product through the supply chain at the competitive market place with a value for money. In actuality, world- class denotes being able to provide the better value than the competition without going broke. Quality Control: They can further be divided as under: Organizing for Global Markets Customer Focus: These companies establish relationship and linkage with university systems, promoting research and educational activities for long- term competitive advantage. All these activities are aimed at customer focus and service. Customer Oriented Products: These companies aim at customer driven strategies for product development and marketing, organizing customer contact, and intellectual commitment for product concepts, performance and specifications. One has to continuously determine the customer requirements and expectations. Hearing the voice of the customer is the key issue. Its customer definition of value that counts for a faster and flexible supply chain. Cross-functional Teams for Product Design: These companies use design, manufacturing, marketing & distribution for responding and communicating the needs of the customer throughout the organization, and integrate the cross-

functional teams for a better quality product in a faster time frame. Team approach to product development and improvement has allowed many companies to achieve 4 to 6 fold improvements in product reliability, 70-90% reductions in warranty costs, 40-50% reduction in workmanship and 20-40% reductions in product costs. It is a key for becoming world-class manufacturers and the top management can influence this aspect more than anyone else, since It is more of cultural changes than technological. Quality Improvement: There is no compromise in quality as far as such companies are concerned. The quality improvement department continuously serves as a support and coordinate functions for quality improvements and excellence all through the organization. Process Control: These companies, control the products based on statistics and encourage decision making at operating level using local data sources on key variables for comparisons against customer needs. Innovation: These companies are innovators, who constantly experiment to improve existing products and processes, and develop new ones (Deshmukh & Mohanty 2004). Lesser variability and greater capability. Partnership: Vendor partnership provides a win-win situation as regards quality improvement and new product development efforts. These companies seek outwardly for such partnership like relationship, since suppliers are important to success and crucial too.

Integrated Operations/Production: They are further subdivided as under: Cellular Manufacturing: The main focus in standardizing and simplifying their manufacturing operations and related instructions, thereby, reducing complexity, and facilitating the effective use of continuous-flow processing concepts for reducing lead-times, process inventories and materials

handling. Continuous flow processing, often implemented through cellular manufacturing, provides quantum leaps. Improvements in manufacturing lead-time from 10-12 weeks, to one to three days are common along with corresponding reductions in work-in-process levels from weeks to days. These companies use multi-disciplined and multi-level work teams to standardize and simplify changeover procedures, thus reducing equipment downtime during job changeovers and allowing production in smaller lot sizes, a key requirement for flexible production. Demand-based Processing: These companies believe that by adopting an enlarged view of manufacturing operations even at the cost of allowing machines to sit idle can provide gains in plant efficiency and quality; whereas, pushing the machines to their optimum usage can yield poor quality products and longer manufacturing lead-time, over and above wear and tear of the machines. Standardization: World-class companies rely on high technology and automation more as complementary tools than as part of the manufacturing strategy, with focus on standardization, simplifying and proving the integrity of the manufacturing process before automating. Automation before standardization creates non-solving problems. It focuses on flexible changes and decisions and avoids making expensive changes and inflexible decisions. Shankar says, principal of USA (understand, simplify and automate) is extensively applied by these companies, in their organization. TPM (Total Productive Maintenance): In these organizations preventive and predictive maintenance are given importance, based on worker involvement so as to minimize occurrence of machine downtime. Technological Advances. Communication Systems: These companies recognize the importance of effective communication skills and strive to establish and maintain simple procedures so as to provide timely and accurate information flow throughout the

manufacturing enterprise (Chatterjee 2000). Information is the basic survival of any organization, both directional and feedback oriented. It is the managements responsibility to provide effective, simple and appropriate information to the workforce for better results. Information Technology (IT): It can be utilized in a big way to the competitive advantage of an organization. Data mining and warehousing and ERP are the technological solutions available today. The main purpose being shortening the lead-time and remove non-value added activities. Human & Technology Interface: These companies recognize and acknowledge the interface and importance of humanity and technology. It is the responsible of the top management to do so across the organization. The required resources are so deployed so as to make the interface more and more active. At every stage of technology deployment, the human issues are dealt in a serious manner. All these dont happen automatically, but with the interference of the managements leadership, and application of the policies to strive better to eliminate waste and creating better value for the customer, the end user. WCSCM is responsible for those actions and values responsible for continuous up gradation and improvement of the development, design & management process of a firms supply system. The main objective is to, improve the profitability, survival and mere existence of both the supplier and the customer. A world-class supply manager is not departmentally or internally focused, but concentrates in continuously improving the system with an ultimate goal of upgrading the competitive capability of the firm and its supply chain. Senior management must always recognize supply managements critical nature and support the required transformation, to see the firm grow to a world-class status. It is indeed necessary in that case to appoint a Chief Supply

Officer at the organizational level equated in stature and responsibility like the marketing, engineering and operations. The transformation has to be planned very carefully and executed well with the commitment of the top management and their involvement. Let us now take a look at the reasons for doing global sourcing. It requires additional efforts as compared to regional/domestic sourcing; but natural, but yields greater profits in the bargain. The biggest criticality or complexity of purchasing goods from foreign countries is the wide variability available in the open market. The difference comes in quality, services and the dependability factor. Quality could be very high in the products of a particular country and unacceptably low or inferior in another. With this in the backdrop let us now see the reasons for purchasing the goods and services from international sources. Superior Quality : A key reason to global supply management is to obtain the required level of quality. Although this is loosing its significance, yet the managers worldwide are still looking at international sourcing for the critical quality requirements. Better Timed : Another good reason for global tendering is to meet the schedule requirements. Lead-time between orders and delivery is lesser as compared to domestic sourcing and more reliable too. This aspect has in fact improved considerably over the years and so has the capability of the suppliers in meeting the growing requirements. Once the initial hiccups are stabled many international sources have proved more dependable than those closer home, specifically in meeting the time schedule. Lower Cost : There are a lot of add on expenditures that are involved during international sourcing compared to domestic ones. Communications, transportations, duties and investigation of potential suppliers add to these expenses,

however, cost of material being cheaper compensates these expenses. Yet, its very seldom that a companys total cost of material through global sourcing could be lowered. Advanced Technology : Globally this is more advanced as compared to domestic products and materials. Advantage will always be of the manufacturer who can identify the right source of the technologically superior material in order to maintain a monopoly in business. An entrepreneur who fails to identify this will loose out on the product competition too soon. Larger Supply Base : International sourcing increases the number of possible suppliers resulting in a choice among many. Competitiveness will enhance the chances for the firm to get the best deal keeping in mind reliability and low cost options. Broadening the supply base doesnt increase the quantity of suppliers but increases the options of finding better suppliers, so as to enable the purchaser firm to reduce the number of contracted suppliers and pursue collaborative or alliance relationship at the appropriate time.

4.4 MANAGING THE INTERNATIONAL SUPPLY CHAIN OPERATIONS


Global supply chains pose challenges regarding both quantity and value: Supply and value chain trends Globalization Increased cross border sourcing Collaboration for parts of value chain with low-cost providers Shared service centers for logistical and administrative functions Increasingly global operations, which require increasingly global coordination and planning to achieve global optimums Complex problems involve also midsized companies to an increasing degree,

These trends have many benefits for manufacturers because they make possible larger lot sizes, lower taxes, and better environments (culture, infrastructure, special tax zones) for their products. Meanwhile, on top of the problems recognized in supply chain management, there will be many more challenges when the scope of supply chains is global. This is because with a supply chain of a larger scope, the lead time is much longer. Furthermore, there are more issues involved such as multi-currencies, different policies and different laws. The consequent problems include:1. different currencies and valuations in different countries; 2. different tax laws (Tax Efficient Supply Chain Management); 3. different trading protocols; 4. lack of transparency of cost and profit. Larger Customer Base : Global sourcing can create opportunities to sell in countries where the buyers suppliers are based. With minimal trade restrictions sales opportunities could arise just out of interaction itself. Yet, some countries have arrangements like barter, offsets or counter trade, wherein there are tremendous trade restrictions. Here the international suppliers/non-domestic suppliers are required to procure materials in the buying country as part of sales transactions. This kind of tying makes both marketing and supply management far more challenging than when pure money transactions are involved. Such an arrangement of competing and selling in many countries makes it a necessity to enter into some kind of agreement to purchase items from that particular country, There are however certain criticalities in going global too, its not so easy as it seems and one has to keep this at the backdrop before setting out,

4.5 SUPPLY CHAIN RECONSIDERATION

The notion of global governance is widely studied in academia and increasingly relevant to politics and policy making. Yet many of its fundamental elements remain unclear in both theory and practice. A fresh perspective by analyzing global governance in terms of three major trends, as exemplified by developments in global sustainability governance: the emergence of non state actors; new mechanisms of transnational cooperation; and increasingly segmented and overlapping layers of authority force us to reconsider SCM in global market. Cultural Aspects : These are mostly in relation to beliefs and superstitions that are generally prevailing in Asian and African countries. These are real issues and shouldnt be ignored.10 These are generally due to the versatile regions available across the globe; every region has its belief and faith that revolve around their day-to-day dealings. Longer Timeframe : Longer lead-time in shipping of material and services from international sourcing creates a major problem. Generally through sea, which are prone to storm damage. Hence, there is a requirement to tap the aerial route; a much costlier option although. Inventory Increase : There could be an increase in inventory in such conditions, and this can never be determined. Therefore to obviate such criticalities inventory-carrying cost must be added to purchase price, the freight costs, and administrative cost to determine the actual cost of buying from global resources.11 Inferior Quality : As mentioned earlier, global sourcing is generally resorted to due to high level of quality control, however, there are chances that there is a risk of production outside the control of the domestic firm, resulting in offspec incoming material. Like for example, the United States is the only major non-metric country in a metric world, which frequently leads to manufacturing tolerance

problems for buyers of US products and vice versa.12 Labor Problems : This is a growing problems world over, mainly in the third world countries. This would entail stringent measures to be adopted by these countries to improve the labor laws to tide over this menace. Cost Factor : There are a considerable amount of add on costs due to the communication factor, translators cost, and distances involved. These increase the cost of doing business. Moreover, inadequate logistical support complicates communication and product distribution in the long run. High Opacity : Bankers, investors and supply managers involved in global activities have been aware that the risk of conducting business varies from country to country. Recently, a risk factor called the opacity index has been developed to address the risk costs associated with conducting business in a specific country. It addresses the following areas: Corruption at bureaucratic levels. Contract & property right laws. Economic policies. Accounting standards, Business regulations.

4.6 RISK INVOLVED


Risks in International Trade are the major barriers for the growth to the same. International trade has been a much debated topic. Economists have differed on the real benefits of international trade. The increase in the export market is highly beneficial to an economy, but on the other hand the increase in imports can be a threat to the economy of that country. It has been the worry of the policy makers to strike the right balance

between free trade and restrictions. International trade can develop an economy, but at the same time certain domestic players can be outperformed by financially stronger multi nationals and forced to close down or get merged. Sometimes these multinational companies become so powerful, especially in smaller countries, that they can dictate political terms to the government for their benefit. International trade is characteristically costlier in terms of domestic trade. There are a number of reasons such as, tariffs, cost of delay, cost related to differences in legal system, etc. The factors of production like labor and capital are more mobile within the territories of the country than across other countries. International trade is restricted to the exchange of goods and services. It does not encourage the exchange of production factors, which may be more beneficial in certain cases. The assessment of risks in the international trade plays an important role in deciding the modes of payment to be used for the settlement between buyer and seller.

4.7 BENCHMARKING GLOBAL SUPPLY CHAIN


Most companies are woefully inadequate in their automation and staff support for global trade. To keep up with global trade growth and increased competitive pressures, corporations are finding they must make significant changes

in how they run their global supply chain operations. According to Aberdeen best practice research, among the most critical areas that companies are revamping are: Supply chain visibility to increase the transparency and velocity of global activities Business-to-business collaboration to improve supply/demand synchronization Trade compliance to ensure undisrupted movement across borders and take advantage of preferential trade agreements to lower total landed costs Risk management to ensure resiliency in face of supply chain disruptions. Hence, Benchmarkings parameters of comparison need to be as per global standards (comparing one's business processes and performance metrics to industry bests or best practices from other industries).

4.8 SUMMARY
Moving towards a global market requires detailed planning, foresight, flexibility and integration. In order to achieve excellence and a competitive advantage in the global market the companies have to continuously modify their strategies in order to remain embedded in the international markets since, the competition level is much more. Foundation of a company will also play a leading role in establishing itself globally. A well-conceived and accepted strategic plan is to be evolved which has to be far-sighted and look after the long-term aspects of the company, and not be myopic in nature. Organizing for Global Markets A sound strategic plan, however, makes the ultimate difference in the amount of gains achieved in quality, quantity, productivity, cost reduction and manufacturing flexibility, the key components of value, which determine competitive advantage and profitability. Actually,

establishing the strategic plan is the first step towards achieving excellence.

Check your progress


Tick Mark () the most appropriate answer 1. Which of the following is not correct in regard to Global Benchmarking a) No benefit in risk management b) Improves Supply c) Synchronize Demand d) Trade compliance 2. Global SCM has become essential due to a) To reduce manpower b) Globalization c) Time saving d) Reduction in inventory 3. Risk is a) Of advantage b) Of disadvantage c) Routine matter d) Barrier 4. Difficulties in International SCM not due to a) Different currencies b) Different Policies c) Different Languages d) Different Laws 5. Which of the following is not right statement a) Global benchmarking and benchmarking are related to each other b) Global SCM is like routine SCM

c) Managing International SCM needs reconsideration d) None of above

4.9 QUESTIONS AND EXERCISES


6. Differentiate Global Benchmarking and benchmarking? 7. What are the reasons of Risk Analysis in International SCM?

8. Define motives and development of Global Market? 9. List out reasons for supply chain reconsideration? 10. Explain Management of International Supply Chain?

4.10 FURTHER READINGS


1) Krishnaveni Muthiah, (2003), Logistics Management & World Sea-borne Trade, by Himalaya Publishing House, Mumbai. 2) Deshmukh & Mohanty, Essentials of Supply Chain management, JAICO, Publishing House, Mumbai. 3) Design & Management of SCM, Simchi-Levi, David

Kaminsky, Philip Simchi-Levi, Edit (2004), Tata Mc GrawHill. 4) Burt, Dobler & Starling, (2002), World Class Supply Chain management, Tata Mc Graw-Hill. 5) Dr KK Khanna,Physical Distribution Management & Logistical Approach Himalaya Publishing House, (Eighth reprint)

UNIT 5: FUTURE TRENDS IN LOGISTICS AND SCM


Structure
5.16 5.17 5.18 5.19 5.20 5.21 5.22 5.23 5.24 5.25 5.26 5.27 5.28 5.29 5.30 Objective Introduction Collaborative Strategies Vendor Managed Inventory Third Party Logistics Fourth Party Logistics Enterprise Resource Planning Internet and E-commerce Supply Chain Agents Green Supply chain Reverse Logistics World Class Supply Chain Summary Questions and Exercises Further Readings

5.1 OBJECTIVE
In this Unit, emerging trends have been discussed. It explains: Trends and Issues in the Management of Supply Chains in the Future Collaborative Strategic Alliances Importance of Outsourcing Services

Integrating Supply Chain Logistics with IT and the Internet Green Supply Chain Logistics To have a vision of deploying World-Class Supply Chains in the Future

5.2 INTRODUCTION
Management of the supply chain has evolved over the last two decades from an emphasis on integrating logistics and lowering cost to providing better products and services that provide value to ultimate customers. Managing uncertainty and understanding customers in the global market is the challenge that current supply chain systems are facing the world over. Efforts are being made to manage demand flow, supplier collaboration and customer services using cuttingedge information technology. Traditionally, the focus of companies has been on the intraorganizational flows over which the organization had some control. However, companies are increasingly recognizing that supply chain management involves the management of the complete chain starting from inbound logistics, processing, outbound logistics, marketing and sales, customer service and also reverse flow of unused materials and waste for successful value reclamation through reuse, remanufacturing and recycling etc. This involves a large and complex network of suppliers, transporters, manufacturers, distributors and customers. Successful supply chain flow requires synchronization of operations through effective collaboration among the various channel players.

5.3 COLLABORATIVE STRATEGIES


In the future, supply chains must embark upon a collaborative strategy to manage demand flow and customer satisfaction through technology integration. Collaboration enables channel partners to jointly gain a better understanding of product demand flow and implement

effective programs to satisfy customers through collaborative product development, synchronized production scheduling, collaborative demand planning and logistic solutions. Down-stream collaboration with distributors, wholesalers and retailers can result in real-time flow of point-of-sales (POS) data across the supply chain. This can help in jointly formulating effective forecasting and replenishment schemes and smoothen demand variations along the supply chain. One of the crucial objectives of manufacturers is to meet in orders to reduce losses on account of inventory excesses or shortages. Collaborative forecasting strategy involving all channel partners can contribute to effective demand planning. Each partner in the supply chain should be able to plan demand based on a single, reliable source of demand data. However, this can be possible through seamless data interchange among channel partners. Reducing channel inventory pileups by reducing demand irregularities in the supply chain is an issue of primary concern as it can lead to improved efficiencies and lower cost. This can be tackled through collaborative efforts made through strategic partnerships (SP) or strategic alliances (SA). Retailer-Supplier Partnerships (RSP), Vendor Managed Inventory (VMI) and Distributor Integration (DI) are examples of strategic alliances that can prosper through collaborative efforts. Such strategic alliances can help both partners by: Adding value to products through collaborative efforts. Improving market access. Strengthening operations by lowering costs and cycle times. Increasing technological strength and flexibility Enhancing strategic growth by pooling the combined expertise of partners Enhancing organizational competencies through mutual learning.

Building financial strength by sharing costs and eliminating non-value added activities among partners. Collaboration can also enhance the logistics function in the supply chain. Transporters can better organize inbound, inter-facility and outbound transportation to optimize capacity utilization. Collaboration with third party (3PL) and fourth party (4PL) logistics organizations can also enhance supply chain effectiveness. Sustainable supply chain configurations can be established by trading off cost, revenues, profits, market share and adaptability to new products and technologies through a collaborative approach.

5.4 VENDOR MANAGED INVENTORY (VMI)


VMI has been recognized as an effective strategy for combating irregularities in the supply chain caused due to demand variability. In this system, the vendor plays an intermediate role between the manufacturer and the wholesaler/retailer. The vendor collects point-of-sales (POS) data from the wholesaler/retailer and accordingly plans their demand from manufacturers in order to manage the wholesalers inventory. This eliminates the wholesalers/retailers need for dual buffering against customer demands on one hand and supply disruptions on the other. In fact, by adopting a process of just-in-time or continuous replenishment, the inventory can be reduced to a bare minimum, thereby lowering both risks and costs. When the supplier plays the role of a vendor, this strategy is called Supplier Managed Inventory (SMI). This is an offshoot of the Retailer-Supplier Partnership (RSP) that can be used to synergies the flow inventory between the retailer and the supplier. Accordingly, suppliers like Shell, a company manufacturing automotive lubricants etc., integrate customers forecast, consumption data and inventory information to its own production and shipping capabilities for creating rolling production schedules. This

reduces inventory-carrying costs in the supply chain. This way, besides managing the inventory, Shell does not need to pad its own inventory in anticipation of varying demands from its customers. This technique can in-turn be carried upstream to Shells suppliers. Similarly, Shells customers can now emulate the strategy and reap benefits accruing out of reduced inventory in the supply chain.

5.5 THIRD PARTY LOGISTICS


Third-party logistics (3 PLs) is the use of an outside company to perform all or part of the companys materials management and product distribution functions. The competitive advantage for any company is to focus on their core competencies, and let the 3PL firm handle those supply chain functions in which they specialize. In order to provide truly value-added services, 3PL firms must interact with customers to understand their needs and then adjust their offerings to meet them. It is obvious that companies can parcel out numerous supply chain processes to entities that specialize in the efficient performance of those processes. Outsourcing a wide array of supply chain processes can generate greater value across the entire supply chain because specialized firms performing the selected processes enjoy a level of expertise and leverage, that would not be available to manufacturers, wholesalers or retailers. Transportation, warehousing, order processing and fulfillment, packaging, labeling, and bill payment are some of the key processes that can be outsourced to specialist firms called third-party logistics firms, or 3PLs. If these firms are efficient and effective, then the entire supply chain can benefit from improved capacity utilization, enhanced service levels and lower costs. 3PLs can provide technological and other flexibility to client companies. For instance, channel partners may need to

change their technology for implementing quicker systems. Similarly, they may have changing needs for warehousing and transportation facilities. Such changing demands can be easily taken care of by third-party logistics companies. Customers of 3PL companies look for four dimensions of value to be derived from outsourcing a process to a 3PL firm. These values include trust, information, capital utilization and cost control. The 3PLs customer orientation, level of specialization, asset ownership status and the price at which the service is offered form some of the main issues that a client will consider while selecting an appropriate service provider. 3PL companies must provide reliable services and solve channel problems so that smooth flow of goods and information can take place. This helps customers to trust 3PL companies. 3PLs can create value for their customers in the accuracy, quality and timeliness of the information that they provide their clients, different channel partners and to ultimate customers. This information can be electronically integrated into the customers MIS for direct access. 3PLs can help customers reduce inventory and fixed assets, such as buildings and equipment. This leads to better utilization and financial returns on both working and fixed capital. Although capital utilization is important to 3PL customers, reduction of supply chain costs and sharing the savings with customers is probably the most visible (though not the most important) value. Each supply chain will have firms with different levels of expertise and 3PL must customize their services according to their clients expectations. Firms using 3PL services are seeking performance levels where the overall net benefits exceed the amount paid to the 3PL. Improving servicerelated benefits also produces value, particularly when combined with the reduction of logistics costs. Many CEOs now see this value as critical to business survival. An important contribution of the 3PL is providing the

leverage that its customers cannot generate by themselves via the provision of information, cost reduction activities, service enhancements, or better asset utilization. In addition, by becoming more integrated into its customers operations, the 3PL will be able to recognize and understand changes in the logistic needs of the customers. An important disadvantage of third party logistics for companies is the loss of control faced by the company due to out sourcing a particular function. Engaging reliable 3PL service providers can offset this problem. Moreover, 3PL companies can assure their clients of their reliability by integrating their activities seamlessly with latters operations. Painting clients logos on transport vehicles etc. can signify close integration between the client and the 3PL service provider. All channel partners must be successful if meaningful and lasting value is to be achieved. This requires open communication and collaboration. If any element in this supply chain relationship is neglected, the chain is broken and the value is lost.

5.6 FOURTH PARTY LOGISTICS


The term fourth-party logistics provider is a trademarked term owned by Andersen Consulting. It refers to the evolution in logistics from suppliers focused on warehousing and transportation (third-party logistics providers) to suppliers offering a more integrated and value added solution. Among other services, fourth-party logistics providers include supply chain management and solutions, change management capabilities, and value added services as part of their offering. A 4PL company delivers a comprehensive supply chain solution and adds value by influencing the entire supply chain. A 4PL leverages a full range of service providers (3PLs, IT providers, contract logistics providers, call centers, etc.) along with the capabilities of the client and its supply chain partners. The 4PL acts as a single point of interface with the

client organization and provides the management of multiple service providers through a teaming partnership or an alliance. A 4PL adds value to the entire supply chain, through reinvention, transformation, and execution. Reinvention implies synchronization of supply chain planning and execution activities across all supply chain participants. This is achieved by: Leveraging traditional supply chain management skills, Aligning business strategy with supply chain strategy, and Creatively redesigning and integrating the supply chains of the participants. Transformation efforts focus on specific supply chain functions including sales and operations planning, distribution management, procurement strategy, customer support, and supply chain technology. This is done by: Leveraging strategic thinking and analysis, Process redesign, organizational change management, and Technology to integrate the clients supply chain activities and processes. Execution of the supply chain integration strategy leads to increased revenue, operating cost reduction, working capital reduction, and fixed capital reduction while traditional approaches tend to focus only on operating cost reduction and asset transfer. Revenue growth and customer satisfaction are driven by enhanced product quality and product availability due to the elimination of stock-outs and ship-complete. Dramatic customer service improvements can be attained as the 4PL focuses on the entire supply chain and is not limited to increasing efficiencies associated with warehousing and lowest-cost transportation. Operating-cost reductions are driven through operational efficiencies, process

enhancements and procurement savings. Savings are achieved through the complete outsourcing of the supply chain function instead of only a few components as in the case of a 3PL solution. Savings are also achieved due to the economies of scale that accrue due to the large size of the operations involved in the entire service chain. Synchronization of supply chain activities by channel partners leads to operating-cost reductions and a lower cost of goods sold, due to integration of processes, and improved planning and execution of supply chain activities. Technology is proactively used to manage order and inventory movement throughout the pipeline, thereby minimizing the amount of inventory required, and increases item availability to reduce cycle times. Thus, workingcapital reductions can be realized through inventory reductions and reduced order to cash cycle times. Fixedcapital reductions result from capital asset transfer and enhanced asset utilization. 4PLs can undertake the ownership of physical assets, thus freeing up assets held by various companies that form part of the supply chain. This allows the client organization to invest in its core competencies like research and design, product development, marketing and sales, etc. A 4PL can use any of the three operating models to deliver supply chain solutions. 1) A partnership can be forged between the 4PL organization and a third-party service provider to market supply-chain solutions that capitalize on the capabilities and market reach of both organizations. The 4PL provides a broad range of services to the 3PL including technology, supply chain strategy skills, capability to go to market, and program management expertise. 2) The 4PL can operate and manage a comprehensive supply chain solution for a single client. This arrangement encompasses the resources, capabilities, and technology of the 4PL and complementary service providers to provide a comprehensive integrated supply chain solution that delivers

value throughout a single client organizations supply chain components. 3) As a supply chain innovator, a 4PL organization can develop and run a supply chain solution for multiple industry players with a focus on synchronization and collaboration. The formation of industry solutions provides the greatest benefits; however, this model is complex and can challenge even the most competent organizations. The 4PL service provider needs to possess a comprehensive set of skills to effectively deliver an integrated supply-chain solution. Fourth Party Logistics is the next generation of supply chain outsourcing. Supply chain activities are information-rich, complex and increasingly global. At the same time, technology and e-enabled capabilities are racing ahead. To enable a firm to capture all the benefits of supply chain collaboration and synchronization, a new generation of integration must be deployed, which is currently beyond the capabilities of traditional outsourcing methods.

5.7 ENTERPRISE RESOURCE PLANNING


Information technology (IT) has an ever-increasing role to play in providing fully integrated supply chain management solutions that incorporate supply chain configuration, demand planning, logistics and warehouse management. The contribution of IT has become imperative for capturing point-of-sales (POS) data and calculating near-accurate demand forecasts. For instance, Modi Xerox uses IT to reduce their cash-to-cash cycle time through fast flow of order/demand data and their execution through shipment and delivery/installation confirmation. Various solutions are available ranging from enterprise resource planning (ERP) tools to Internet based e-commerce opportunities The SAP ERP application is an integrated enterprise resource planning (ERP) software manufactured by SAP AG that targets business software

requirements of midsize and large organizations in all industries and sectors. It is the successor product to SAP R/3. SAP ERP includes four individual solutions that support key functional areas:SAP ERP FinancialsSAP ERP Human Capital ManagementSAP ERP OperationsSAP ERP Corporate Services The SAP ERP Financials solution is a comprehensive financial management solution engineered for the most complex, multinational companies across a broad range of industries. As the leading enterprise software solution, SAP ERP Financials enables companies to thrive in a business environment characterized by intensified competition, uncertain market conditions, and increased regulatory oversight. A seamlessly integrated solution, SAP ERP Financials combines core accounting and reporting capabilities with financial supply chain, treasury, compliance, and performance management applications. These applications help streamline finance business processes, reduce operating costs, manage risk, ensure compliance, and provide robust and timely business insight. SAP ERP Financials simultaneously supports global financial reporting standards, multiple currencies, and languages with over 45 country-specific versions. The solution powers the highestperforming finance organizations in the world. Supporting a broad range of industry-specific processes, SAP ERP Financial's scalable and open architecture can help extend your existing financial system investments. SAP ERP Financials offers a unique advantage through market-leading financial

management applications that enables a company to become a best-run business and extend finance processes to encompass customers, suppliers, and financial institutions to optimize the financial value chain. The SAP ERP Human Capital Management (SAP ERP HCM) solution is a complete and integrated human capital management solution that delivers unmatched global capability. SAP ERP HCM gives organizations in all industries worldwide the tools needed to manage their most important asset: people. The solution equips executives, HR professionals, and line managers to hire the best talent, as well as train and cultivate the skills of their workforce. Using one unified software suite for all talent management processes, an organization can more readily understand where the workforce's talents lie and align the goals of its employees with the organization's overarching business strategy. Using real-time insight into the workforce, an organization can benefit fully from human-capital strategies and programs and measure the workforce's contributions to the bottom line. Automation of all core human resource processes, such as employee administration, payroll, and legal reporting, increases efficiency and supports compliance with changing global and local regulations. SAP ERP Operations: With SAP ERP Operations, an organization can realize its full efficiency and costeffectiveness potential. With smoother day-to-day operations, a company can maximize profitability, free up resources and budget so that it can invest

more in innovation. Gaining competitive advantage, it can look toward the future, and operate as a best-run business over the long term. With SAP ERP Operations, a company can:Automate and streamline operational processes with greater adaptability.Increase productivity in your operations with a role-based solution and centralized information.Extend collaboration to all value chain partners.Improve operations performance with strategic business insight. With the SAP ERP Corporate Services solution, a company can manage real estate; enterprise assets; project portfolios; corporate travel; environment, health, and safety compliance; quality; and global trade services more effectively. Real estate management SAP ERP Corporate Services supports the administration of commercial and residential real estate, enabling automation and process control to help you avoid vacancies and reduce the costs associated with real estate development, rentals, and property management. Real estate management is enabled by the SAP Real Estate Management application.Enterprise asset management SAP ERP Corporate Services supports preventive and predictive maintenance, maintenance cost budgeting, maintenance execution, and work-clearance management.Project and portfolio management SAP ERP Corporate Services provides a flexible and comprehensive solution for managing a portfolio of projects from strategic portfolio management to project planning, execution, and accounting.Travel management SAP ERP Corporate Services helps you reduce costs, streamline travel administration

processes, monitor compliance with travel policies, and manage changes in compensation and pricing models from suppliers, global distribution systems, and travel agencies. Travel management is enabled by the SAP Travel Management application.Environment, health, and safety compliance management Perform product safety management, hazardous substance and dangerous goods management, and waste and emissions management and manage product compliance, industrial hygiene and safety programs, as well as occupational health programs.Quality management SAP ERP Corporate Services enables a unified approach to total quality management, delivering efficiencies that result from fewer product returns and improved asset utilization.Global trade services With SAP software, you can secure your global supply chain, connect and communicate with government systems, and promote the use of shared data to streamline cross-border trade and gain sustainable competitive advantage.

5.8 INTERNET AND E-COMMERCE


In the concluding years of the last decade, the Internet, World Wide Web and electronic commerce (e-commerce) have grown extensively due to their open standards, rapid adoption, low cost and graphical user interface. Companies like FedEx, and Cisco have used the Internet to communicate with channel partners and maintain customer relationships. The Internet can be used for communicating information, accessing databases and automating transaction processing. The Internet can benefit a supply chain in the following ways: 1) Enhance collaboration among partners for quick

product development, logistics and marketing. 2) Help channel partners to log into each others ERP systems and data warehouses for receiving real-time transaction processing data. It can enable on- line and realtime receipt of downstream demand signals for accurate forecasting, inventory management and synchronizing production schedules. This can enhance capacity utilization and reduce channel blockages. 3) Reduce the time and cost of communicating, thereby enhancing customer service quality and customer relationships. Also helps in receiving valuable customer feedback for measuring supply chain effectiveness. 4) Increase the capability of reaching out to new customer segments and markets. 5) Purchase orders and shipping notices etc. can be received using the Internet. 6) Enables shipment tracking and tracing facilities thereby reducing uncertainties and ensuring better customer support. 7) Smoothen and speed up order processing by integrating order requests and availability modules thereby helping to send order confirmation, calculate lead times and shipment dates. Vendors, suppliers and manufacturers can be alerted about received orders. Payment can be routed via the Internet in the form of secure money transfers. 8) Duplication and paper use can be minimized and limited to legal requirements. 9) Increases the visibility of the supply chain and enhances operational transparency. All partners are able to conduct business on a level playing field and are not at a loss due to lack of information. 10) Enhance marketing, enhanced responsiveness to customer requirements leading to customer satisfaction, and lowering costs through synchronized production, channel efficiencies and process innovations. Channel partners can use the Internet to create a customercentric supply chain. This requires clear vision, strong

planning and technical insight into the Internets capabilities. The Internet is being increasingly used in order to bring the supplier and customers closer using the electronic media. This form of business over the electronic medium is popularly known as e-commerce. E-commerce proceeds through the following four stages: 1) Web presence 2) E-trading 3) Data delivery, and 4) Automation Web presence involves uploading relevant information on a server hooked on to the world-wide-web that allows browsing and downloading information anywhere and from any computer. Besides, company and product related information the web site should be good in appearance, be easy to use, allow search facilities within the web site, contain contact information and allow users to provide feedback for improvement and customization. It should also contain necessary links to useful information both related to the company and outside it. E trading involves using the companys web site on which product features are displayed. The web site should have features that allow customers to compare and see product previews, place orders, track their delivery and make payments. It should also allow them to provide suggestions, feedback and complaints. It should allow them to ask for after sales service and facilitate return of goods if desired. This stage is known as the e-commerce stage. Data delivery implies updating and delivery of information related to the customer on the latters computer. This includes updating customers inventory data, and generating re-order alerts based on the information of inventory on-line from various sources. In this way, the supplier and customers data are integrated to assist the customer in taking decisions regarding the supply chain.

All processes related to order placement and fulfillment between the supplier and customer are tightly integrated at this stage. Vital real-time information, like product rates, is available on the customers computer enabling it to support complex decisions like vendor selection, etc.

5.9 SUPPLY CHAIN AGENT


Software agents are being developed to be deployed by companies on the World Wide Web to gather necessary information and initiate action by themselves. Intelligent agents are software entities that can carry out operations on behalf of a user or another program, with some degree of independence or autonomy while using some knowledge or representation of the users behavior, goals or desires. COOL (COOrdination Language), Java, KQML (Knowledge Query & Manipulation Language), Telescript and Tcl (Tool Control Language) are some of the computer languages being used to create agents, define their jobs and establish coordination protocols for communication and collaboration among multiple agents. Some of the supply chain activities that e-Agents can take up include: Trading: e-Agents can collect required information on behalf of the supplier/ customer by contacting them and conducting a variety of online business transactions and functions including negotiations. It has been widely felt that human negotiation performance falls significantly short of optimal performance in real life while e-agent driven negotiations can offer significant benefits. Brokering: e-Agents can find information about products, sellers and prices, while providing privacy and protection. They can be instrumental in validating purchasers credit, billing, accounting, etc. Auction: e-Agents can help potential bidders search for specific auction items on the internet, automatically update the latest item bid prices and notifying users when an

auctions closes. Coordination: e-Agents can contact supply chain partners and conduct teleconferences etc. Managing Customer Relationships: e-Agents can facilitate on-line search and customer query handling. In a nutshell, e-agents can act as smart assistants performing complex and collaborative tasks. They reduce the amount of human-computer interaction. This can lead to considerable saving in time and cost for every partner in the supply chain. e- Agents can help channel partners collaborate and manage the supply chain to enhance customer satisfaction and reduce operational costs.

5.10 GREEN SUPPLY CHAIN


Green supply chain involves the management of materials and resources from suppliers to manufacturers, service providers to customers and back while protecting and conserving the natural environment. A green supply chain involves the implementation of appropriate strategies to reconcile the supply chain to environmental protection and conservation on a sustainable basis. Waste minimization and elimination of inessential non-value added activities is one of the most important strategies towards a green supply chain. Process wastage decreases efficiency and lowers productivity. Reduced output and blocked inventory decreases profitability and growth thereby making the business process unsustainable in the end. Such business processes ultimately end up firing fuel and energy without delivering value to the society. Another important green strategy is to automate processes by using the electronic media as far as possible. This reduces paper work, and eliminates non-value added activities involved in filing, storing, maintaining and retrieving documents.

5.11 REVERSE LOGISTICS

Reverse Logistics is the process of moving goods from the ultimate customer to another point, for extracting value that is otherwise unavailable, or disposing them properly. Goods returned to the supplier may be in the form of: Manufacturingreturnsfromtheproductionfloorconsistingof productshaving unsatisfactory quality or left over materials Commercial returns arising out of contracts for taking back obsolete stocks of short-life products Product recalls arising out of the detection that defective products have been released in the supply chain Warranty returns of defective products under warranty Service returns of products for servicing End-of-use returns for re-manufacturing or re-cycling End-of-life returns for appropriate disposal One of the main objectives of reverse logistics is to keep the cost of reprocessing returned/refused materials lower than that of new products in order to keep the venture profitable. Accordingly, transportation and handling costs have to be kept to a minimum. Often the extra cost incurred in reverse logistics is added to the products when they are first sold new. Moreover, recycling and disposal procedures must incorporate applicable government and environment protection laws.

5.12 World Class Supply Chain


World-class supply chains are capable of providing better value to customers than the competition while remaining financially healthy and environment friendly. They would be differentiated by the excellent quality of service that they provide to the customers. Their activities would be value driven, they would be responsive to customers and continuous learning, improvement and innovation would be their hallmark. There are many factors that influence the design of supply chain. Some of them are discussed in this section Rising Importance of Knowledge Work

In many industries knowledge work has become the primary condition that defines how well firms innovate and compete with one another. The shift towards knowledge work places a greater emphasis on how well managers can attract and retain talent. In places such as the Silicon Valley and other hot beds of innovation, the recruitment, training and development of knowledge workers shape a firms basis for future technologies and product ideas. Often firms attempt to recruit technical talent from their competitors, and from companies in other industries as well. This growing flow of people promotes rapid flow of ideas, insights and innovation. Growth of Substitute Products and Services Firms in related or neighboring industries often produce substitutes. The innovation of substitute products creates opportunities for new entrants and innovators to change the way firms must compete. For example, the rise of Internet based telephony, threatens traditional phone companies such as AT&T corp.; the growth of video on demand threatens the infrastructure of many entertainment and network-based firms. Rising Information Intensity The growing information intensive nature of many industries means that the costs of creating and disseminating information are steadily declining over time. The costs of creating and transmitting information on wider scale, appears to be declining as the information content becomes richer. For example, the value of E mail as a service to the users grows as it becomes more pervasive and easier to use. The costs of transmitting and delivering E-mail to the wider population is declining as new networking technology substantially lower the cost of each message. Impact of the Shifting Landscape As companies deal with the numerous changes and challenges posed by epicenters of massive change, it is important that managers broaden the scope of their skills to accommodate and learn new insights that will help them become more effective.

We should expect to see the impact of frequent and massive change on an industry in three ways. a) Commoditization of new technologies: One major trend reshaping a variety of industries is the growing availability of state of the art technology to any one who wants it. Todays innovations are becoming commodity like products. For example, new technology products like virus-scanning software and fast modems to connect with Internet are rapidly becoming standard features in many of todays computer and electronics products. b) Rapidly declining unit costs: Even some of the most sophisticated forms of knowledge are becoming widely available on the Internet for a very low cost, and in several cases for free. c) Burden of strategic commitment: Change often requires new managerial mindsets and a willingness to challenge assumptions about how to add value to emerging customer needs. Often established firms become wedded to ingrained patterns of behavior. Core competencies built and refined from an earlier time become shackles and blinders that constraint learning. It is important for firms to continue monitoring how their products and services are likely to evolve over time. From Physical To Virtual Value Chains The perspective can be illustrated by the revolutions shaking the music recording and distribution industry. Traditionally, the industry has been dominated by AOL TIME WARNER, Sony etc., who signed long term royalty contracts with artists and entertainers, managed their own CDs and controlled marketing programs to ensure steady sales. With the advent of digital media formats and new technical standards, music firms must reconfirm their value chain approaches, by forming an array of alliances with Internet service providers and Internet portals to reach preferred customers, digital retailers etc.

Rise Of Virtual Organizations Emerging organizational designs will increasingly be based on new configurations where information, knowledge, innovation and marketing all converge together along a shared network. This shared network brings together not only different parts of the firm, but also different firms that may be from different industries as well. These networks evolve and complete on the basis of fast innovation, sharing of ideas and rapid product development. The rise of the socalled Virtual Organisation is just one manifestation of this broader trend. As information, knowledge and value flow across many firms, any firm operating within the virtual organization is a potential source for future innovation, learning and inflection point that can dramatically change the skills and competencies needed to compete effectively. Every viable organization is built on a sound business model. A successful business model represents a better way than the existing alternatives. It may offer more value to a discrete group of customers. Or it may completely replace the old way of doing things and become the standard for the next generation of entrepreneurs to beat. Fargos business model changed the rules of the game, in this case, the economics of travel. Travelers cheques remained the preferred methods for taking money abroad for decades until a new technologythe automated teller machine granted travelers even greater convenience. But business model is not the same thing as a strategy, even though many people use the term interchangeably. Business models, however, do not factor in one critical dimension of businesscompetition. Sooner or later every enterprise runs into competitors. Dealing with that reality is strategys job. A competitive strategy explains how you will do better than your rivals by being different. The success of Wall Mart Stores and the success of Dell Computers are examples of superior strategies and timely changes in strategies to deal

with new competitive realities, the underlying business model remaining the same. Most companies either keep costs down at the expense of service or keep service levels up at the expense of costs. The tradeoff shows up most clearly in two key matrices. 1) Perfect order performance. (The percentage of orders that are complete, accurate, on time, and in perfect condition) 2) Supply chain cost. Companies dont have to trade cost for service or vice versa. The top companies keep their balance in the details, catapulting them to best overall. Top performers do three things differently than every one else. 1) Aim for Balance: The best performers in costs and service are not best at each of the sub components of costs or service, but are consistently good enough at each sub component to add up to the best in total. 2) Increase Demand Visibility: Across industries, increasing demand forecast accurately yields significant improvements in perfect order fulfillment. 3) Isolate High Costs: Top performers know where they hold their cost and focus their best practice, technology and investments there. To increase demand visibility, target the following best practices that connect you with your trading partners and connect supply and demand internally. Sharingitwithyoursuppliersandlogisticsprovidersasearlyaspo ssible. Using a sales and operations planning.(S & OP )process to connect demand with production internally .Use application technology to reduce your high cost areas , but make sure you dont just move costs around. Demand visibility is a major barrier in developing demand

driven supply networks. ( DDSNs). Demand Visibility is Everyones Top Concern in Moving Supply Chains Towards DDSNs. Improvement means attacking the problem at three levels. 1) Replenishment based demand. 2) Surge demand. 3) Future demand In perusing this DDSN model, the first step is improving this demand visibility. Demand visibility is the ability to see undistorted and accurate demand within the time frame necessary to react to it. Above three types of demand visibility must be conquered to achieve DDSN. 1) Replenishment Based Demand: The predictable demand that forms the base line for forecasting and planning. This may be electronic data interchange (EDI) orders or some other form of pull replenishment on steady run products. Visibility can be system to system or supported with manual planning and replenishment processes. For FMCG, replenishment level visibility is a definite technology issue that leaders are tackling with demand data hubs to consolidate and manage point of sale (POS) data. 2) Surge Demand: Sensing and managing events that change demand is more a matter of sophisticated demand modeling and forecasting and requires combining POS or other actual historical demand data with intelligence about customer behavior unique to events like weather, fashion, network effects, and promotions (yours and competitors). The role of technology is in the use of algorithm-based tools to model and prepare for such surge demand. Vendors with applications targeting this problem include specialists like DEMANTRA, TERRA TECHNOLOGY, and LOGILITY as well as larger supply chain suite vendors like i2 Technologies and MANUGISTICS, and enterprise resource

planning (ERP) vendors like SAP, PEOPLESOFT and ORACLE. 3) Future Demand: Strategic planning for future products and their effect on buying behavior is another important aspect to ponder upon. Planning for future demand especially as it relates to manufacturers with long lead-time component and processes is really a matter for Product Portfolio Management (PPM). With future products, demand planning depends mostly on working ways lead time realities against marketing intent and attempting to build a supply chain that is ready once orders starts rolling in. PPM applications are available from specialist like IDC or SOPHEON as well as with in the suits of most product life cycles management (PLM) and ERP vendors. DDSN starts with getting a handle on demand visibility. Supply chain professionals need to clearly define what demand visibility means to their organization on at least these three levels before buying tools to help improve forecast accuracy.

Key Skills
Following should fit into the skill set of modern supply chain design manager. 1) Define: integrated supply chain management, its components and how they are integrated. 2) Understand: the impact of demand on the supply chain and the considerable competitive advantages that can result from managing demand across companies. 3) Define Value: from the perspective of customers and learn how to manage the supply chain to deliver that value. 4) Learn: to manage the sourcing and information technology functions with in the global supply chain. 5) Understand: the importance of managing relationships with suppliers and customers to create differential advantage.

5.13 SUMMARY
Effective management of large and complex supply chains necessitates the implementation of new strategies in the ever-changing market space in the future. Keeping customers satisfied and happy by delivering greater value than the competitor would be the prime concern of organizations in the coming years. Supply chains having smooth product and information flow can continue to compete and grow in the market space. Strategic alliances among channel partners can be one way of enhancing supply chain effectiveness. Collaborative strategies like VMI, RSP etc. are gaining momentum. Companies can outsource supply chain services to third party and fourth party logistics companies in order to focus on their core-competencies. Information technology and the Internet have become indispensable for adding value to traditional supply chain services. Nations around the world are working towards the implementation of environment friendly supply chain activities. Reverse logistics closes the supply chain and can contribute to environmental protection and conservation.

Check your progress


Tick Mark () the most appropriate answer 1. Vendor Managed Inventory (VMI) is for a) Vendor Management b) Vendor Costing c) To avoid irregularities in demands d) Controlling Vendors 2. Green Supply Chain ensures

a) It ensures Green Colour of supplies b) Tax saving through Green Channel c) Protection of Environment d) It deals with movement and storage of goods in appropriate quantities 3. Enterprise Resource Planning is related to a) Storage b) Costing c) SAP d) Transportation 4. The Third Party Logistics is through a) Own Manpower b) Finance Management c) Outside Company d) Transportation 5. Supply Chain agent are a) Employees efficient in Supply Chain b) Software c) Spying over competitors d) None of the above

5.14 QUESTIONS AND EXERCISES


6. Describe Reverse Logistics? 7. What are the salient features of Vendor Managed Inventory?

8. Define internet and e-commerce while giving suitable example from your company? 9. Give out details of Enterprise Resource Planning?

10.

Explain World Class Supply Chain?

5.15 FURTHER READINGS


1) Bloomberg, D. J.; Lemay, S. and Hanna, J. B. (2002) Logistics, Prentice Hall, New Jersey. 2) Burt. D. N.; Dobler, D. W. and Starling, S. L. (2002) World Class Supply Management: The Key to Supply Chain Management, Irwin McGraw-Hill, Singapore 3) Mohanty, R. P. and Deshmukh, S. G. (2001) Essentials of Supply Chain Management, Phoenix Publishing House, New Delhi. 4) Monczka, R.; Trent, R. and Handfield, R. (2002) Purchasing and Supply Chain Management, 2nd edition, Thomson, Singapore. 5) Rogers, D. S. and Tibben-lembke, R. S. (1999) Going Backwards: Reverse Logistics Trends and Practices, Reverse Logistics Executive Council, USA. 6) Sahay, B. S. (Ed.) (2000) Supply Chain Management in the Twenty-first Century, Macmillan, New Delhi. 7) Simchi-Levi, D; Kaminsky, P. and Simchi-Levi, E. (2000) Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies, Irwin McGraw-Hill, Singapore.

AMITY SCHOOL OF DISTANCE LEARNING Post Box No. 503, Sector 44, Noida 201 303 MATERIAL HANDLING & LOGISTICS MANAGEMENT (ADL-137) ASSIGNMENTS Subject Name & Code : Material Handling & Logistics Management (ADL-137) Study Centre Enroll No. Term/Semester : : : Jan ./ July

Date

ASSIGNMENT INSTRUCTION Total weightage given to these assignments in over all evaluation is 30%. (40% when no PCP*) 1. All assignments are to be completed preferably in your own hand writing. 2. All questions are required to be attempted. 3. Three assignments i.e A, B & C are to be answered. Assignments A will carry Five subjective questions (10 marks). Assignment B will carry three subjective questions with a Case Study (10 marks) and Assignment C will carry Forty objective type questions (10 marks) 4. All the three assignments are to be completed by 30 May and 30 November and mailed / given by hand for evaluation at the ASoDL office Noida / your Study Centre. 5. The evaluated assignments can be collected from your study center / ASoDL Office after Eight weeks. These will be destroyed at the end of each semester if not collected. Pledge I declare on my honour that I have neither copied these assignments nor downloaded through any other source, I further declare that this is totally my own effort. Signature : Name Date : :

() Tick mark in front of the assignments submitted Assignment A Assignment B Assignment C

* Assignment A & B each 15 marks Assignment C-10 marks

AMITY SCHOOL OF DISTANCE LEARNING Post Box No. 503, Sector-44 Noida 201303 LOGISTICS AND SUPPLY CHAIN MANAGEMENT Assignment A Marks 10 Answer all questions.

1. a) Define SCM and Logistics. Discuss and elaborate various components of logistics management and differentiate between SCM and Logistics? b) Describe the concept of Value Analysis to logistics. 2. a) What is Value Engineering? What are the various flows in a supply chain? b) What are the steps of developing Supply Chain as a Competitive Factor? 3. a) What are the aims of supply chain management? Why is it said, The new supply chain game is becoming a competition between effective supply networks rather than individual corporations? b) What are different elements of customer service costs? Explain its fundamental trade-offs.

4.

a) What are the various modules of SAP ERP? Briefly discuss the content of each module? b) What are various components of Logistics Information System architecture? How does LIS facilitate improvement in logistics decision making?

4. a) Define Role, Objective & Policies of Purchasing and Supply Chain. 5. b) Define the concept and objectives of MRP and DRP.

Assignment B Marks 10 Answer all questions.

1.

a) Discuss IT enabled Supply Chain Management? b) Discuss Distribution Channel Design and Strategic alliance?.

2.

a) Describe the role of transportation in the success of logistics and supply chain. b) What are the issues that should be considered by a logistics manager Value Engineering and Value Analysis

3.

a) What are the risk involved in Global Market?

b) What are the motives and development of Global Market?

4. Case study: Please read the case study given below and answer questions given at the end

Case Study
AMERICAN CHEMICAL COMPANY

In 2002 a major American chemical company had completed a year of supply chain reengineering and decided upon a number of best practices that should be implemented. One element of the reengineering was that they decided upon creating a shared service function at their headquarters which rationalized the purchasing and accounts functions of seven separate businesses already located at the site. The creation of the shared services function was estimated to produce a cost saving of 10%, or $20 million, of their purchasing budget each year. The problem that they faced was overwhelming. The seven companies had overlapping vendors, items, numerous contracts with the same vendor

with different pricing structures and a variety of payment terms. The company created a task force to develop and implement a plan to create the shared services function.

Questions: 1) What are the reasons of such overlapping? 2) What are the tools or support system could be used? 3) Discuss the kind of relationship adopted with its vendors. And inter-functional coordination? 4) Suggest strategies and with your most economical recommendations to the MD of the Company?

Assignment C Marks 10 Answer all questions. Tick Marks () the most appropriate answer 1. Which of the following is not correct in regard to Global Benchmarking a) No benefit in risk management b) Improves Supply c) Synchronize Demand d) Trade compliance 2. Global SCM has become essential due to a) To reduce manpower b) Globalization c) Time saving d) Reduction in inventory 3. Risk is a) Of advantage b) Of disadvantage c) Routine matter d) Barrier 4. Difficulties in International SCM not due to a) Different currencies b) Different Policies c) Different Languages d) Different Laws 5. Which of the following is not right statement a) Global benchmarking and benchmarking are related to each other b) Global SCM is like routine SCM c) Managing International SCM needs reconsideration

d) None of above

6. Which of the following is not a characteristic of logistics a) It ensures a smooth flow of all types of goods b) It has the ability to meet customer expectations and requirements c) It offers the best possible customer service at any cost d) It deals with movement and storage of goods in appropriate quantities 7. All of the following are the objectives of logistics except a) To make available the right quantity of material at right quality at right time, at the right place in right condition at right price b) To offer best possible customer service for competitive advantage c) To promote the product through the logistic channels d) To minimize total logistics costs 8. The logistics costs in India is ___ percentage of GDP a) 20% b) 13% c) 18% d) 7% 9. Which of the following does not provide a way to create competitive advantage a) Low cost b) Low flexibility c) Superior customer service

d) Value added services 10. All of the following are primary activities in a value chain except a) In bound logistics b) Operations c) Technology development d) Service 11. Which of the following is not a desired flow in a supply chain a) Forward flow of value b) Flow of goods in both the directions c) Backward flow of cash d) Flow of information in both the directions 12. Which of the following is not a feature of customer service a) It is reactive process b) Ensures a trade-off between cost and service c) Creates a competitive advantage d) Brings about harmonious relationship with supply chain members 13. All of the following are post transactional customer service elements except a) Installation, warranty, repairs, etc b) Customer claims, complaints and returns c) Stock out level d) Temporary replacement of products 14. Freight charges depends on all of the following except a) Nature of the product b) Value of the product c) Distance to be covered d) Volume/quantity to be shipped

15. Carrier performance measures does not include a) Speed b) Claim settlement ratio c) Area of ware house owned d) Frequency 16. Physical distribution in terms of logistics is known as a) Inbound logistics b) Outbound logistics c) In plant logistics d) Reverse logistics 17. Which of the following is not a feature of supply chain a) Supply chain is a network of entities b) The more the number of stages in a supply chain the more will be its complexity c) Supply chain efficiency and effectiveness are the same d) Supply chain profit should be shared equitably by all the chain members e) 18. Supply chain conflicts can be reduced by all of the following except a) Use of power by the dominant partner b) Involvement by investment c) Information sharing d) Transfer of technology and skills 19. Which of the following is not a key output of the logistics system a) Creating Competitive advantage b) Time & Place utility

c) Creating Proprietary asset d) Increased cash flow 20. Logistics stand for a) Whatever is logical and reasonable b) Movement of materials to destinations c) Putting together conclusions logically d) Moving, supplying and warehousing materials and information in an enterprise Supply Chain Management covers a) Management of suppliers and vendors b) Management of inventories, warehousing, transportation and documentation relating to all suppliers c) Management of demand and supplies at minimum cost but greater customer satisfaction d) Warehousing management Transportation management is a) A small and significant part of SCM b) Too specialized and should be managed separately c) Does not affect customer service d) Forms a major component of costs and should be synchronized to enhance customer satisfaction A fourth party logistics provider is a) An organization that provides transportation b) An organization that provides warehousing facility c) An organization that manages inventory and information d) An organization that provides comprehensive supply chain solution

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24. Which of the following does not fit into the features of customer service a) Providing customer service at any cost b) Strategic processes that provides value added services c) Creates competitive advantage in the market place d) It reflects corporate vision 25. The internal web of an organization that allows only the internal users to access and share data is called a) Intranet b) EDI c) Extranet d) Internet 26. Which of the following is not an inventory related cost a) Receivables b) Ordering cost c) Carrying cost d) Stock-out cost 27. Which of the following is not an assumption of basic EOQ model a) Annual demand, carrying cost and ordering cost can be estimated and is constant b) Half of order quantity is considered as safety stock c) Stock out has no effect d) Quantity discounts does not exist 28. Inventory analysis based on the annual consumption value is called a) ABC analysis

b) VED analysis c) FSN analysis d) XYZ analysis 29. All are inputs to MRP system except a) Bill of materials b) Inventory status file c) Master production schedule d) ABC analysis file 30. All are features of Distribution Resources Planning except a) DRP Deals with finished goods inventory b) DRP operates in an independent demand situation c) DRP is an explosion process d) Inputs to DRP is the distribution networks 31. Which of the following is not associated with JIT system a) Waste elimination b) Mass production c) Single piece flow d) Pull system 32. All are economic function of warehouse except a) Stock piling b) Receiving c) Breaking bulk d) Consolidation 33. The charges levied by a municipal corporation a) Sales tax b) VAT c) Octroi

d) Excise 34. Mode of economic surface transportation for bulk solid material over a long distance is a) Rail b) Road c) Rope ways d) Conveyors 35. Intermodal transportation system arising out of the coordination between roadways and railways is known as a) Piggyback b) Fishy back c) Tran-ship d) Express cargo 36. All are principles of material handling except a) First principle b) Mechanization principle c) Flexibility principle d) Energy principle 37. Which of the following is not true for Air Way Bill a) Receipt of goods b) Contract for affreightment c) Negotiable document d) Issued by carrier 38. Which of the following is not a carrier selection determinant a) Transportation cost b) b) Transit time c) Reliability d) Vehicle cost

39. A bonded warehouse is: a) An open stockyard with high walls and other security measures for extra protection of goods stored b) A warehouse in the premises of airport where goods imported by air are kept c) A warehouse where goods on which customs or excise duties have not been paid are kept d) A government warehouse used for storing confiscated goods 40. LCL stands for a) Less than normal Cargo Load b) Less than Container Load c) Low Cargo Load d) Less Costlier Load

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