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PRIYANKA SHETTY
9, AMBIKA CO-OP HSG SOCIETY
SECTOR-19, NERUL
NAVIMUMBAI-400706
DECLARATION
I PRIYANKA SHETTY of H.R College of Commerce and Economics, TYBMS
(Sem5), hereby declare that I have completed this project on SUPPLY CHAIN
AND LOGISTICS MANAGEMENT in the Academic Year 2008-2009, the
information submitted is true and original to the best of my knowledge.
(PRIYANKA SHETTY)
CERTIFICATE
I Mr. INDRANATH BANERJEE hereby certify that Ms. PRIYANKA SHETTY
of H.R College of Commerce and Economics of TYBMS (SEM 5) has completed
the project on SUPPLY CHAIN AND LOGISTICS MANAGEMENT in the
academic year 2008-2009. The information submitted is true and original to the
best of my knowledge.
Project Co-ordinator
INDRANATH BANERJEE,
Supply Chain Analyst
Logistics Consulting Asia, Malaysia
Principal
H.R College of Commerce and
Economics, Churchgate
ACKNOWLEDGEMENT
I take this opportunity to express my deep sense of gratitude to Dr.Mrs.Indu Shahani &
Prof. Gehna Hingorani for giving me an opportunity to undertake this project.
I would also like to sincerely thank my project guide Mr. Indranath Banerjee for his
invaluable guidance and support whenever required, without which this project would not
have been successfully completed.
Executive Summary
Title of the Project: Supply Chain And Logistics Management.
About the Project:
Though Supply Chain concept is very old, but with the help of up coming
technology and IT revolution supply chain concept has got a boost. Supply Chain is
not a concept alone but also is a methodology of doing business in todays business
scenario. Effective control of the flow of components and materials to the
manufacturing or assembly line is a key to cost effective manufacturing. In an optimal
supply chain, materials and components are received just-in-time to enable lean
manufacturing, i.e., the right product, in the right place, at the right time, at the lowest
possible cost. In other words, the wrong product, in the wrong place or at the wrong
time, at higher than expected cost.
The main objective of this project is to enable me to know and understand the
various aspects of Supply Chain and Logistics Management.
Research Methodology:
The methodology used for carrying out this study was by means of secondary data.
The secondary data was collected from various articles, magazines, books and
websites. The research underlying this study that the Supply Chain and Logistics
Management concept have entered the mainstream and in some cases, are the leading
edge of the rapid changes transforming the business economy.
Constraints:
The major constraint faced during making the project was that adequate information
about the concept of Supply Chain and Logistics Management, the technicality of its
operations. Though the concept is very old but very few companies have adopted it with
complete efficiency, hence it was the part of the difficulties I faced while collecting the
data.
Table of Contents
1. INTRODUCTION ...........................................................................1 - 2
2. Distinguish between Logistics and Supply Chain Management ....... 3
3. The Evolution ................................................................................. 3 - 17
Table 1 - Chronological Dates
16
16
Basics of Logistics
12
12
13
20
22
31
Transportation
32
Facilities
34
34
b) Material Handling
35
c) Packaging
35
Information
36
Order Processing
36
Planning
37
38
41
44
45
49
50
52
52
52
Production preconditions: 53
Postponement benefits .......................................................................... 54
The Postponement Strategy Examples ................................................. 54
Paints Insta Color 54
Hewlett Packard
55
61
20. CONCLUSION..........................................................................................69
21. BIBLIOGRAPHY......................................................................................71
22. ANNEXURE..72
INTRODUCTION
Since the early 1980's, supply chain management has developed rapidly as companies
have been seeking to improve their competitiveness in respect of cost and service levels,
and to attain sustainable growth.
Supply chain management has gained increasing recognition in business, both as a
function in its own right and as a cross-functional discipline. At the same time, supply
chain management has moved from operational level to broad level within the corporate
organization. Never before, the supply chain management played such an important role
in the corporate strategy of many companies as it is today. This development has led to a
much broader scope in supply chain management in the 1990's as compared to that of the
1970's.
With the logistics industry becoming more crucial as its relevance ever increasing it
moved into new areas, involved in outsourcing projects and design and implements
supply chain management strategies and enable enormous increase in output. Given the
growing importance of supply chain and logistics management, one has to determine how
the calculation of transport and logistics costs has changed over the last decades as a
consequence of improved supply chain management and the increasing significance of
supply chain management.
The concept of Supply Chain Management has recently stepped into the limelight of
corporate professionals and academia. However, its roots can be traced with the evolution
of trade itself. Evidences show that supply chains were present right from the time when
mankind understood the need of merchandising and distribution.
In fact now one of the strategies is to choke all the supply feeder lines, which either
harbour or encourage terrorism of any variety. This is referred to as 'Operation Endurance
Freedom' in the recent times.
We can characterize the significant events that reflect the evolution of the supply chain
management in a chronological manner. However, it is to be observed that the impact of
each event on Supply Chain Management (SCM) is varied. Change can be implemented
easily when tough times reign. Companies in India have been looking at ways of cutting
costs and improving process efficiencies, in their quest to become globally competitive.
One such initiative is Supply Chain Management (SCM). SCM recognizes that distinct
1
SCM
encompasses
of
all
those
services where they are required and activities associated with movement of
when they are desired.
production
scheduling,
processing,
inventory
transportation,
order-
management,
warehousing
and
customer service.
It
involves
the
integration
activities
into
seamless
warehousing, material handling and process. It embraces and links all the
packaging.
Logistics add value when inventory is The best SCM practice is when it
correctly positioned to facilitate sales.
asset
productivity
and
by itself.
to
achieve
between
linkage
processes
and
of
and
customers
and
the
organization.
Supply Chain management (SCM), has now became a very vital part of management.
Good Supply Chain Management can result in
-
Suppliers
Manufacturers
Distributors
Retailers Customers
The goal of supply chain is to move material quickly while maintaining the lowest
possible levels of inventory.
What is a supply chain?
A supply chain is the link that moves products between suppliers, manufacturers,
wholesalers, distributors, retailers and finally consumers. For most of the last century, the
supply was an inflexible series of events that some-how managed to get products out the
door. A paper-heavy adventure, it often involved questionable inventory forecasts,
ironclad manufacturing plans and hypothetical shipping schedules.
What is supply chain management (SCM)?
Supply chain management is a way to supervise the flow of products and information as
they move along the supply chain. Supply chain management is the combination of art
and science that goes into improving the way your company finds the raw
components it needs to make a product or service, manufactures that product or
service and delivers it to customers. The following are five basic components for
supply chain management.
1. Plan - This is the strategic portion of supply chain management. You need a
strategy for managing all the resources that go toward meeting customer demand
for your product or service. A big piece of planning is developing a set of metrics to
monitor the supply chain so that it is efficient, costs less and delivers high quality
and value to customers.
2. Source - Choose the suppliers that will deliver the goods and services you need to
create your product or service. Develop a set of pricing, delivery and payment processes
with suppliers and create metrics for monitoring and improving the relationships. And put
together processes for managing the inventory of goods and services you receive from
suppliers, including receiving shipments, verifying them, transferring them to your
manufacturing facilities and authorizing supplier payments.
3. Make - This is the manufacturing step. Schedule the activities necessary for
production, testing, packaging and preparation for delivery. As the most metric-intensive
portion of the supply chain, measure quality levels, production output and worker
productivity.
4. Deliver - This is the part that many insiders refer to as "logistics." Coordinate the
receipt of orders from customers, develop a network of warehouses, pick carriers to get
products to customers and set up an invoicing system to receive payments.
5. Return - The problem part of the supply chain. Create a network for receiving
defective and excess products back from customers and supporting customers who have
problems with delivered products.
The ultimate goal of SCM is to optimize the supply chain, which can not only reduce
inventories, but may also create a higher profit margin for finished goods by giving
customers exactly what they want (and of course charging for it).
Basics of Logistics
Logistics is unique. It never stops! Logistics is concerned with getting products and
services where they are needed and when they are desired. Most consumers in highly
developed nations take a high level of logistical competency for granted. When they go to
the store, they expect goods to be available and fresh. It is difficult to visualize
accomplishing any marketing or manufacturing without logistical support.
Logistics and distribution are being accorded high priority in Supply Chain Management.
The priority arises not only due to possible costs savings but also because of their impact
on responsiveness and services levels. In-fact, the latter would be more important reasons
since logistics costs per se are not very. Not all organizations seem to share the view that
Logistics and distribution is a strategic function. Few companies seem to be adopting
leading SCM practices in the area though can be substantial.
Logistics and distribution are the nuts and bolts of SCM.
A leading-edge supply chain program can create competitive advantage for your
company. The service and cost benefits can distinguish you from competitors. Customers
have strong requirements on how they want their orders and shipments handled. Your
compliance with those requirements can enhance your status as a supplier. Whether for
company-wide or selected portion, we will analyze the key logistics elements-movement
of product (inbound, outbound, intra-company), movement of information, service/time,
cost and integration-within your company, with customers, and with your suppliers.
The scope of your supply chain organization can be complex- imports, exports, diverse
market requirements, differing customer expectation, shortened lead times, and more.
Organization, teamwork and information technology are among the issues that impact
supply chain effectiveness. It is no longer distribution, not shopping and receiving; it is
supply chain management.
In the global market where competitors and suppliers are worldwide, firms want to have
supply chain operations. Asia is a key area for product sourcing, the start of the logistics
process-the suppliers. Today companies are also seeking out 3rd party Logistics providers
(3PLs), who handle not just physical distribution but also functions like warehousing,
billing, tracking and insurance. But outsourcing of Inventory Management has not caught
yet.
increasing cost competition from cheaper countries around the world, companies
undertook a serious bit of sole searching. Thus originated for, Third Party services
providers. The business activity of farming out identified non core activities to external
agencies came to be known as outsourcing. In Logistics and Supply Chain Management
too, companies have been outsourcing the activities of transportation, warehousing,
clearing and forwarding to different operator.
The future shape of business is being redefined through outsourcing
Benefits of Outsourcing
A key question that a company has to ask before considering the outsourcing option is:
What is it in there for us? Here we list some potential reasons that may argue in favour of
outsourcing.
Improve company focus: More organizations are eliminating internal functions that
are not considered core competencies.
Access to world-class capabilities and new technology: Often these third party
logistics companys capabilities are the results of extensive investments in
technology, methodologies and people, over a considerable period of time.
Sometimes, these capabilities include specialized industry expertise gained through
working with many clients facing similar challenges. Therefore, this expertise is
translated into skills, processes, or technologies uniquely capable of meeting these
needs.
Share (pool) risks: There are tremendous risks associated with the capital
investments an organization makes. A 3PL can share these risks across the many
companies that it serves. This allows a 3PL to lower risk relative to a company
performing the function itself.
Cash infusion: Sometimes, outsourcing involves the transfer of assets from the
company to the 3PL. These assets have a value, and in fact are sometimes sold to the
3PL.
Reduce and control operating costs: Outsourcing to a 3PL most likely will give
access to a lower cost structure, which may be the result of a greater economy of
scale or some other advantage based on specialization. When calculating the cost
benefits it is very important to consider total costs since coordination costs often
increase when all or part of a function is outsourced.
Resources not available internally: Companies might simply not have access to the
required resources within the company.
Eliminate labour problems: While companies are rarely willing to concede this fact,
many view outsourcing as a way to eliminate labour problems. This is a two edged
sword and one has to be extremely careful here. Perceived benefits do not always
materialize.
11
Use Product Data Management (PDM) to manage product development data from
design through manufacturing and maintenance.
Take part in collaborative product design (CPD), the joint development of new
products by supply chain members.
Engineering / R&D
Unit cost
Market share
Functions/features
Labour cost
Revenue
Labour productivity
Sales growth
Time-to-market
Award-winning designs
Plant utilization
Customer satisfaction
Design for
manufacturability,
production
assembly, etc.
12
13
The Evolution
The evolution of the SCM has moved from disparate functions of logistics,
transportation, purchasing and supplies and physical distribution to focus on integration,
visibility, cycle time reduction and streamlined channels. The new integration has a
variety of activities such as, Integrated Purchasing Strategy, Supplier Integration, BuyerSupplier Partnerships, Supply Base Management, Strategic Supplier Alliances, Supply
Chain Synchronization, and finally simply SUPPLY CHAIN MANAGEMENT.
The activities of logistics are centuries old as discussed earlier. During World War II,
military forces made effective use of logistics models and forms of systems analysis to
ensure that the required material was at the right place on time every time. The term
logistics is widely used in military and military type applications even today.
Until about mid 1950's, the field of supply chain management was in a state of dormancy.
The piecemeal and isolated fragmented set of activities was rampant. Production and
manufacturing were given uppermost attention. The inventory was the responsibility of
the marketing, accounting and/or production areas and order processing was an
accounting or sales responsibility.
During the Ethiopian famine relief efforts of the 1980's, the term logistics was applied to
the food-supply activities. World Vision International, one of the many relief
organizations at work there, produced a manual entitled Getting It There- A Logistics
Handbook for Relief and Development.
SCM formerly known as logistics management now includes more aspects apart
from the logistics function. SCM is one of the most powerful engines of business
transformation that basically means delivering the right product to the right place at
the right time and at the right price. SCM is the one area wherein much operational
efficiency can be gained, thereby reducing organizations costs and enhancing
customer service. Gradually, the marketing people started giving greater emphasis to
distribution, giving rise to physical distribution management or in today's parlance
'outbound transportation'.
14
A supply chain is, in fact, a network of facilities and distribution options that necessarily
performs the functions of procurement and acquisition of material, processing and
transformation of the material into intermediate and finished tangible products and finally
the physical distribution of the finished tangible products to the customers, whether
intermediate or final ones. As already indicated, supply chains exist in both
manufacturing as well as in service organizations.
Supply Chain Management is a set of approaches utilized to efficiently integrate
suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and
distributed at the right quantities, to the right locations, and at the right time, in order to
minimize system wide cost while satisfying service level requirements.
15
Ancient
Times
300 BC
1151
1305
1621
1904
1956
1960-1975
1975-1990
1980
1981
1985
19851990
199619982000-
Earlier
Companies
Today
17
18
Inventory
Decisions in this area affect all stages of the supply chain. The inventories through out
the chain will probably be at differing stages of development. For instance the inventories
at the beginning of the chain will be raw materials, at the end they will be the finished
products. These inventories, no matter what stage they are at have a value that is not yet
being realized. In order to minimize the unrealized value of the goods efficient
management of the inventories must take place.
Most of the issues involved with inventory are operational, for instance the maintenance
of stock levels within safety boundaries. On a strategic level management set the goals
that are to be achieved in this area and determine the reorder strategies (i.e. JIT).
Distribution
The key decisions in the distribution area involve the trading-off of inventory levels of
buyers with the costs of freight. Another matter to be considered is the nature of the
product. It is no good sending a shipment of perishable goods via sea or rail to save
money if the goods are not in a suitable condition once they reach their destination. On
the other hand shipping by sea or rail is cheaper but necessitates higher inventory levels
to counter the uncertainty associated with these methods (i.e. bad weather when shipping
by sea).
Strategically, forecasts of the demand for the product allow for the co-ordination between
the distribution by various methods and the buyers inventory levels.
19
2.
Replenishment Cycle
Retail order trigger
Retail order entry
Retail order fulfillment
Retail order receiving
3.
Manufacturing Cycle
Order arrival
Production scheduling
Manufacturing and Shipping
Receiving
4.
Procurement Cycle
Supplier / Manufacturer interface
Sources
Converter
s
Product and Service Flow
Retailers
Information Flow
Funds Flow
Suppliers
Distributors
Consumers
20
21
Pull Process:
Push Process:
Push-Pull Boundary:
Push Systems
MRP supported
Pull Systems
Cycles
Customer
Order
Pull
Customer arrival
Customer order entry
Customer order fulfillment
Customer order receiving
Replenishmen
t
Manufacturi
ng
Push
Procurement
22
model requires that all members of the supply chain act as a part of one seamless
fulfillment process. So now we have our marching orders: Increase logistics productivity
while radically transforming the supply chain. Impossible tasks? You don't really have a
choice, since your competitor will be doing the same. Besides, the two goals are
compatible. As in e-commerce, the trivial is eliminated and channels are made more
efficient, adding up to less cost and better customer service.
Defining Web-based systems is controversial and there is no one right answer.
However, one point is clear: Systems built using Web technologies offer significant
advantages over the green-screened UNIX systems common with SCE vendors today.
Navigation is vastly improved, application integration is simplified, and with component
architectures, benefit realization should be much quicker with less complex system
installs. Reductions in the cost of ownership should come, as functionality is more
centralized on servers. Web-based technologies are generally regarded as superior. The
real question becomes, "What is my migration path and what vendors should I be looking
at?"
Stage One: Internet Presence Is Established
Four levels of system evolution exist for the Web-based supply chain. The vast majority
of today's users are in the first stage - Internet Presence Established - while a growing
percentage are moving to the second - Commerce Is Initiated. As trading partner
integration grows toward collaborative execution, performance is greatly enhanced. The
third stage - Demand-Centered E-Business - represents a very real target for the near
term. The fourth - Demand Web Fulfillment - is a conceptualised view of how Web-based
systems will work together across companies and enterprises, given current technology
direction.
Most companies start on the Internet at this stage. Establishing an Internet presence is a
one-way flow of information, generally providing product and service information to
customer inquiries; its value comes from informing the customer. Users can access order,
inventory, or transportation status. Third Party Logistics (3PL) has made it a common
service offering. Companies afraid of channel cannibalization caused by selling directly
on the Internet are often frozen here. SCE vendors extended their applications out to the
Web to satisfy the demand for the capability.
24
25
26
keeping the long-term vision, the end-state objective, in view at all times. The scope of
collective experiences a real advantage in planning and executing a Supply Chain
implementation, for sourcing and procurement, through manufacturing integration, into
Transportation and Network Design, and Warehousing and Distribution operations.
Customers focus
A well-functioning supply chain staff consciously strives to anticipate and satisfy
customers' need. Supply chain managers, in addition to their primary customers, also
have important intermediate customers, each with special needs and expectations.
Service providers are the final link in the long supply chain that stretches from
manufacturers to customers. Because they directly link logistics operations to the ultimate
customer, service are the most important "intermediate customer." service providers must
be given the products they need. Their fundamental concern is quality of care, and they
understand the supply chain system's contribution to their ability to provide quality care.
Service providers need the logistics system to deliver a dependable supply of quality
products and other supplies for their client, which means they need convenient and
regular re-supply with minimal additional work.
Warehouses and stores in the distribution chain are also intermediate customers that
demand logistics systems resources (staff, storage space, and transport); regular and
predicable re-supply of all products from the next higher level, and technical support and
problem-solving assistance, when needed.
28
Policymakers and senior program managers, as representatives of the program, also need
to be treated as customers by the next highest level in the system: donors, lenders, or
other suppliers of products. They want the same thing as every other customer along the
supply chain: reliable availability of the right products at the right time. They also need
the supply chain system to provide accurate data on stocks levels and strict accountability
for materials, and to provide cost effective logistics operations. Policymakers are
particularly important internal customers, because they control the allocation of funds and
other resources for the supply chain. International donors are the customers of their own
suppliers. But, they also have expectations from the in-country logistics system: they
want the system to ensure accountability for donated products; and accurate and timely
data on products consumed, quantities needed. Above all, donors want the logistics
system to ensure the availability of products to all current and potential customers.
When developing a customer culture within a supply chain, it is essential to identify all
the system's customers and their respective needs and expectations. The primary
customer, however, is always the client. While a supply chain may be required to satisfy a
variety of internal or intermediate customers, the most successful supply chain
unswervingly focus on satisfying end users.
29
Increasing
variety of
products
Difficulty in
Decreasing
Executing New
Product Life-
Strategies
cycles
Supply
Chain
Obstacles/
Challenges
Fragmentation
Increasingly
of Supply Chain
demanding
Ownership
customers
Globalization
30
Inventory
This refers to means by which inventories are managed. Inventories exist at every stage
of the Supply Chain as, raw materials, semi-finished goods or finished goods. They can
also be in process between locations. Their primary purpose to buffer against any
uncertainty that might exist in the Supply Chain. Since, holding of inventories can cost
anywhere between 20 to 40 per cent of their value, their efficient management is critical
in Supply Chain operations. It is strategic in the sense that top management sets goals.
However, most researchers have approached the management of inventory form an
operational perspective. These include deployment strategies (pull verses push), control
policies the determination of the optimal levels of order quantities and reorder points,
and setting safety stock levels, at each stocking location. These levels are critical, since
they are primary determinants of customer service levels.
The keys to effective Inventory Management lie in shortening the lead-time throughout
your Supply Chain:
Understanding how your order frequencies and quantities drive inventory and
its consequent effect on warehouse sizing and slotting,
Integrating and coordinating the silos in your organization, for optimum inventory
strategies across the entire Supply Chain,
Being bold, and confident, enough to make inventory decisions for operational
improvements in the face of negative accounting issues; and building a Supply
Chain and inventory strategy to evaluate your customers expectations and
anticipate their genuine needs.
31
Includes:
1.
Raw Materials
2.
Component parts
3.
4.
Finished goods
Transportation
The mode choice aspects of these decisions are the more strategic ones. These are
closely linked to the inventory decisions, since the best choice is often found by
trading off the costs of using the particular mode with the indirect cost of inventory
associated with that mode. While air shipments may be fast, reliable, and want
lesser safety stock, but they are expensive. Meanwhile shipping by sea or rail may
be much cheaper, but they necessitate holding relatively large volumes of
inventories to buffer against the inherent uncertainty associated with them.
Therefore, customer service levels, and geographic location play vital roles in such
decision. Since, transportation is more than 30% of the Logistics costs, operating
efficiency makes good economic sense. Shipment sizes (consolidated bulk shipment
versus lot-for-lot), routing and scheduling of equipment are key in effective
management of firms transport strategy.
The estimated Rs 65,000crore Indian trucking industry has been in existence before
SCM as a concept came into vogue. Trucking plays a vital role in SCM in the flow
of material. The success of the entire exercise of planning and investing in ERP and
Supply Chain software depends on whether goods reach on time. Timely
movement of goods is primary concern of any Supply Chain, says Vishal Gupta,
director Total Logistics. The traditional transport companies are now transforming
into a fleet manager offering value-added services like track and trace, specialized
trucks for certain goods, warehousing and other facilities, and serving user specific
industries.
The need to provide value-added services has also resulted in strategic tie-ups by
truckers, say with specialized operators to serve specific industries. For e.g. TCI
32
has tied-up with Mitsui to form trans-system that offers logistics services to the
auto industry.
Transportation includes the following:
i.
ii.
Impact on
(1) Responsiveness
(2) Efficiency
The future of the Indian trucking industry depends on various factors like economic
growth and investments in infrastructure. At present a number of organised
transport operations are leveraging on their strength in trucking by combining
allied services like clearing and freight forwarding, warehousing and customer
relationship Management to become complete Logistics players. This is taking the
form of tie-ups, acquisition. The future will see similar consolidation happening in
this arena, especially in the organised segment that makes about 15% of the market.
Finished goods to
warehouses
Secondary
Key Feature
Long distance, bulk
movement
Mechanical handling
Operational economy
Convenient batches
Warehouse to
Safe transportation
wholesaler/retailer
Timely distribution
Optimum turnaround
Door delivery
Tertiary
Wholesaler / retailer to
consumer
Timely delivery
City Operations
Frequent start-stops
High manoeuvrability
33
Facilities
a) Warehousing/Storage
Warehouse is the quiet key to effective service. Review whether the warehouses are
in the right locations to effectively serves the customers. With the speed that is
required to manage orders and inventory, companies must have timely, accurate
information of inventory on-hand. Warehouses must be located in the proper areas
to effectively meet customers delivery requirements.
i.
Where inventory
(1) Stored
(2) Assembled
(3) Fabricated
ii.
Types
(1) Storage
(2) Production
(3) Marketing
34
b) Material Handling
It is concerned with movement of product at the stocking point and it involves decisions
such as:
c) Packaging
It is concerned with design of packaging of product that ensures damage free movement
of the product and is conductive to efficient handling and storage.
35
Information
A must for successful implementation of Logistics functions. Developing proper
Data Base, IT system, such as ERP and DI methods.
Accurate forecasting
Just-in-time (JIT)
Order Processing
The order processing system undergoes various checks to determine if:
(1) the desired product is available in inventory in the quantities ordered,
(2) the customers credit is satisfactory to accept the order, and if
(3) the product is scheduled for production if not currently in inventory.
Management can also use the information on daily sales as an input to its sales
forecasting package. Order processing next provides information to accounting for
invoicing, acknowledgement of the order to send to the customer, picking and packing
instructions to enable warehouse withdrawal of product, and shipping documentation.
The primary function of the order processing system is to provide a communication
network that links the customer and the manufacturer.
36
M
A
R
K
E
TI
N
G
Product
Promotion
Price
Place/
Customer service
levels
Transportation
costs
Inventory
Carrying costs
Lot Quantity
costs
Warehousing
costs
Order processing
and information
costs
37
L
O
GI
ST
IC
S
customer:
Understanding the
supply chain:
Responsiveness
Respond to wide range of quantities demanded
Meet short lead times
Handle a large variety of products
Build highly innovative products
Meet a very high service level
Efficiency
Economies of scale
Low capacity (excess costs)
Low cost transport
38
Responsiveness
Zone of
Spectrum
Strategic Fit
Efficient
Supply Chain
Certain
Demand
Uncertain
Implied
Uncertainty
Spectrum
Demand
Competitive Strategy
Product
Development
Strategy
Marketing and
Sales Strategy
Transportation
Information Technology Strategy
Finance Strategy
Customer Service
39
41
43
44
Table 1:
Causes of
Channel
Operational
Alignment
Efficiency
Information Sharing
Bullwhip
Demand
Forecast
Update
Order
Understanding
system dynamics
Use point-ofscale (POSI data)
Electronic data
Interchange
(EDI)
Internet
Computerassisted ordering
(CAO)
EDI
Internet
ordering
Batching
fluctuation
Sharing sales,
Lead-time
reduction
Echelon-based
inventory control
Discount for
truck-load
assortment
Delivery
appointments.
Consolidati
on
Logistics
outsourcing.
Continuous
replenishment
program (CRP)
Everyday
low cost (EDLC)
Price
Shortage
Vendor
managed
inventory
Discount for
information
sharing
Customer
direct
Reduction in
fixed costs of
ordering by EDI or
E-commerce.
CAO
Everyday low
price (EDLP)
Activity-based
costing (ABC)
Allocation
We contend that the bullwhip effect results from rational decision making in the
Supply Chain. Companies can effectively counteract the effect by thoroughly
understanding its underlying causes. Industry leaders like Proctor & Gamble are
implementing innovative strategies that pose new challenges organizational
relationships, and implementing new incentive and measurement systems. The
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choice of companies is clear: either let the bullwhip effect paralyse you or find a
way to conquer it.
2. Work with vendors to create smaller order increments and reduce order batching.
Order batching exacerbates demand fluctuations.
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4. Allocate demand among customers based on past orders, not present orders to
reduce hoarding behaviour when shortages occur.
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network.
Intelligent
Decision
Support
using
advanced
decision
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In the absence of trust and partnership, organizations are not able to share
information. It sometimes doesnt happen even within Supply Chain activities. This
leads to amplification of demand of the Supply Chain, leading to the bullwhip
effect. Firms are caught in a tricky situation: even when the total demand
variability is low, the variability in orders is very high. This increases the Supply
Chain cost, rendering these firms uncompetitive. The solution of this problem is a
centralised information system. A few organisations have taken the initiative to
integrate their distribution network by implementing enterprise resource planning
and electronic data interchange across branches networks.
However, their work is incomplete without their suppliers and channel partners.
These organisations do not have centralised information, which could lead to large
variability in orders due to smoothening at various levels of the Supply Chain.
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systems,
Customer
Relationship
Management
(CRM)
and
Transportation Management
ERP systems integrate the key execution functions across the business
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Advantages
EDI is an automated method for exchanging data and therefore it eliminates most of
the errors and time delays associated when people are involved.
Disadvantages
The disadvantage of this is that it requires two companies to use compatible
hardware and communications software.
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gain economies of scale in manufacturing and logistics operations, and limit the number
of stock outs.
Demand Preconditions:
Unpredictability (e.g. demand for high tech products with a short product life)
Negative correlation for the products in the product line (e.g. success of one
line of printers can have an adverse impact on the demand for the remaining
lines of printers)
High product value - products with high unit value have high inventory
holding cost and high cost of oversupply. The postponement concept is best
applied if there is one particular component (or step in operations) that has a
significantly high value added. It makes intuitive sense to delay it. (for
example, in assembling a notebook computer, it would make sense to delay
the installment and production of different LCD displays until the last minute
rather than the casing of the keyboard since an LCD display is much more
expensive than a keyboard casing).
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Production preconditions:
Postponement benefits:
Increased sales by being able to postpone the production to the point when the
demand is better known, the company can greatly improve its forecasting abilities
and will run a lower risk of losing sales, because the product is not available. Not
only can the company improve its performance in its existing business; the newly
gained flexibility capabilities can translate into dramatic improvements in meeting
the customer requirements, which can attract business that was previously not
attainable.
Lower inventory holding cost
Lower cost of obsolescence
Lower scrap cost
There are two sources of these benefits:
Improved forecasting
Delaying expensive operations and point of product differentiation this enables
the company to maintain the bulk of its inventories in the cheaper and/or precustomized form. As a result, company will achieve the benefits of a larger
inventory buffer (pooling effect) without having to carry the full cost of it.
Hewlett Packard
Overview: Hewlett Packard is known as a leader in the application of postponement
techniques. One of the areas where they have done this most effectively is in customizing
their printers close to the local markets where they are actually being sold. The idea they
use is to postpone commitment of a printer to a certain geographic market by producing
universal printers and then applying power supplies and labels (the parts that differentiate
printers for local markets) at the last stage once demand is more certain. This allows
them to gain pooling effects and therefore, to better match supply and demand.
Traditionally, most computer peripheral manufacturers have built one plant for a major
market, such as the Americas, Asia, or Europe and then shipped product from this plant to
regional Distribution Centers (DCs) around that market. In many instances, only one
worldwide plant existed with shipments made from this plant to Distribution Centers
around the world. These Distribution Centers provided quick response to customer orders
for products and were needed in a major market to reach customers within a certain time
window. This supply chain seemed to make sense since there were some economies of
scale to having a centralized plant supplying an entire major market.
Problem: However, there are certain problems with the traditional system that
necessitated looking at the policy again. The first problem is the amount of finished
goods inventory that must be carried in the local Distribution Centers. Since shipments
come from a distant plant, not only did these Distribution Centers need to stock a large
amount of inventory to compensate for the lead-time, they also had to stock additional
inventory to handle all of the product proliferation that took place. For example, in
Europe, many different versions of a single printer model must be made due to the
different power sources and sets of languages. Compounding this problem is the
increasing emphasizes placed on speed. The lead time from when a customer orders a
product to when they received it is being squeezed and HP had to find ways to reduce
55
cycle time while trying to keep inventory costs low. This squeeze on lead times means
that postponing back at the plant level is not an option. Local Distribution Centers are
needed to meet this short lead-time demand. So how can the apparently contradictory
goals of increasing service and reducing inventory be met?
Management Decision and Outcome: The solution, following the postponement
philosophy, was to actually build some assembly functions into their Distribution
Centers. This way, the plant could send generic printers to the Distribution Centers and
they could be customized there for the local markets. This allowed HP to take advantage
of inventory pooling at the DC level which dramatically cut inventory. Certainly, it
seemed that this would increase costs since there are economies of scale to these
manufacturing processes. However, the decrease in inventory more than made up for the
increased cost in creating some assembly functions at the DC level. Essentially, what HP
did was postpone the customization of the printer until the printer was actually in the
geographic area where the demand was coming from and until orders were more certain.
Implementing this type of supply chain is not easy because it takes coordination and
investment, but the payoffs can be quite large.
Motorola
Overview: Motorolas Land Mobile Products Sector/Radio Products Americas Group
(RPAG) has recently adopted a postponement manufacturing and distribution strategy for
its two-way radio (pager) business. The shift towards postponement allows RPAG to
carry more variety without increasing inventory. But on the other hand, the shift in
strategy also requires additional investment in its warehouse system.
Problem: RPAG builds radios for many national, regional, and local retailers. These
retailers often demand many different varieties in packaging, housing, and frequency
because the ultimate end users demand variety. In the past, products would be
manufactured to stock from different plants and then sent to the Atlanta DC.
Management Decision and Outcome: The recent shift in strategy is making to order.
The most expensive part of the radio, the circuit board, is still manufactured at various
plants and sent to the Atlanta DC. At the DC level, pre-manufactured circuit boards are
now put in different housing, label, and packaging only after an order is received. With
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the new strategy, the DC can carry more variations of finished good products without
tying up additional money in inventory. Furthermore, customer service also improves
because the DC no longer needs to rely on the factory to ship special ordered products.
The DC is able to customize packaging for short runs of special products.
However, the new strategy also requires the DC to take on additional responsibilities.
RPAG has evolved from a push to a pull operation. Consequently, the DC must now be
able to track and move inventory more efficiently to meet customer demands. Thus,
RPAG had to install a warehouse management system (WMS) to control the flow of
inventories. Furthermore, RPAG also adopted vendor-managed inventory (VMI) for
retail customers to better manage its inventory.
INBOUND
SUPPLY
CHAIN
Outsourcing
Inbound
Transportation
Production
Planning
(For Outsourcing &
In-house)
STORAGE
Warehousing
Inventory Control
OUTBOUND
SUPPLY
CHAIN
Order
Processing /
Inventory
Outbound
Transportation
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Performance Measurement
Delivery
Order fill rate
Lost Sales
Service
On time
Cost
Inventory
Freight
Overheads
Time
Order cycle time
Replenishment leadtime
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Purchase
Inventory Management
Production Planning
Warehousing
Transportation
Channel Management
As an Industry
Shipping Companies
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CASE: Dinesh Shah, 30, a distributor of Marico Industries (flagship brand: Parachute
oil) in central Mumbai, remembers the old bad days with a shudder. Around month-end,
he would literally be stuck with loads of inventory, with goods being stored even in his
office-corridors. The go downs would be overflowing with stocks, and trucks often had to
wait for a day or two to unload additional consignments. The reason for this nightmare?
The companys sales-team was required to meet its monthly targets in terms of primary
sales i.e. sales dispatched to distributors. To achieve primary targets, the team pushed
out goods to distributors month after month even though the latter may have failed to
liquidate last months stocks.
This became a kind of vicious cycle because distributors spend the first part of the month
trying to liquidate old stocks, and by the tie the managed to do that, another dreaded
month-end would rear its ugly head, threatening to inundate them with fresh stocks.
Today, Mr. Shah is breathing easier thanks to Maricos Midas touch. With Midas an
acronym for Marico Industries distribution application software, which allows the
generation of uniform sales data from distributors the company is now able to track
secondary sales data more effectively. Earlier, the company only new how much sales had
been pushed to distributors. It had little idea about how much stock the distributor was
holding, and what he may need to stock up for future sales. But even if the goods were
overflowing, the company would lose sales due to stock-outs stock of items that are
moving in the market would not get replenished fast enough.
Not surprisingly, distributors like Shah ended up incurring high inventory costs, now
using Midas and MI-Net, a web based software, the company has effectively made its
ERP system available to distributors. And Shah says he has to keep only 15 days stocks,
and in future he may be able to get by with just four days worth. That will bring his
capital needs to almost zero, since Marico works only a four-day credit cycle.
Result: Marico expects its Rs 4crore investment in MI-Net to pay back in two years time.
Results (achieved during 3Q01 to 1Q02):
Decreased stock-outs associated with distributor sales to retailers by 33%
Reduced lost sales due to stock-outs by 28%, thereby improving total revenue by 1.5%
Lowered excess distributor inventory by 33%
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CASE STUDY
A note of envy creeps into Peter Gerhardt's voice when he talks about supply chain
technology. A privately held shoe retailer with 49 stores across Canada, Town
Shoes lacks the size and clout to impose supply chain mandates on its suppliers, all
of which are bigger companies. "We don't have the buying power to dictate to our
suppliers," says Gerhardt, senior vice president in charge of information systems,
real estate, finance and administration for the 1,000-employee Toronto retailer.
"We're not that great at supply chain when I look at companies like Wal-Mart,
which
have
nailed
it
down
from
end
to
end."
access to actual stock information at each store as well as the distribution center.
This information allowed him to develop a product model: the standard number and
size distribution of a particular shoe projected to be sold by each store. Gerhardt
figured if he sent each store only 80 percent of the full model, it would cut down on
the need to balance (that is, shift stock) between stores. It costs about $2 per pair to
replenish shoes from the central distribution center rather than the $4 charge to
send individual shoe boxes in the mail from one store to anothera savings of 50
percent.
Town Shoes has spent $1 million, including software and services on the new
Essentus system, and expects its investment to pay off within two to three years.
The modest initiative is already beginning to prove its worth. Sales for fiscal 2000,
ended in January, were up 12.8 percent, while in-store inventory was down 20
percent as a result of the Merchandising Express implementation. "We sold more
goods out of a smaller inventory. We did more with less, which was the whole goal
of the supply chain project," Gerhardt says. He expects an even bigger payoff when
he begins to replenish stores twice a week rather than just once a week as this will
enable him to further decrease inventory. Gerhardt believes his company's future
well-being may well rest on this project. "Anyone who thought retail was about
selling things missed the boat," he says. "We're in the information business. If we
don't have the right kind of information, we're not going to be around."
Future Trends Percentage of buyers, sellers and distributors in the industrial supply
industry that are developing and incorporating e-commerce strategies
2000
34%
2001
67%
2005
83%
Source: Harris Interactive and Industrial America, based on an e-mail survey of 981
individuals responsible for buying, selling or distributing industrial supplies in the
manufacturing industry.
ROI
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Inventory being held across the retail supply chain at any one time amounts to $1
trillion, according to a report by Benchmarking Partners, based on U.S. Dept. of
Commerce data. The Cambridge, Mass.-based consulting firm estimates 15 percent
to 20 percent of those inventories ($150 billion to $200 billion worldwide; $40
billion to $50 billion in the United States) could be eliminated through improved
planning, forecasting and replenishment.
Hot Quests Dr. Yossi Sheffi, MIT Professor of Engineering Systems; Director
Center for at MIT & Logistics.com. answers supply chain management
questions.
Question: What is the current state of integration between web based
exchanges (either public or private) and legacy supply chain solutions?
Reply: We need to distinguish here between public exchanges and private
ones. Public exchanges, by and large, are not doing well currently. They
originally did not require or offer good integration capabilities, assuming only
browser-level interactions, but the survivors are moving in the direction of
offering integration with certain ERP systems. Private exchanges, by their very
nature, started with good integration with host systems, typically on the buyer
side. Many do not require supplier integration and can operate with browserlevel interaction on the supplier side. All this is changing as systems are
scaling. Note, however, that in most cases, supplier integration does not lead to
fully automatic actions since whenever suppliers are required to quote prices,
they want a person in the loop. Similarly, many buyer system do not relinquish
the actual the supplier choice to an automated system. Finally, note that
integration is getting easier since there are many products on the market that
include pre-integrated modules that can work well with most popular ERP
systems.
Question: Supply Chain Management seems to have two measurable
objectives: 1. Increase revenues (via time to market or improved product
availability)
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procurement). What are companies doing to meet those objectives in the area
of Culture (behaviours within the organization) and technology too?
Reply: Supply chain management, is distinct from logistics management in
that it involves the management of multi-company channels rather than the
individual enterprises, as well as cross-functional processes within the
enterprise. Changes in culture are usually the result of changes in the
measurement and reward system. To achieve better channel coordination
across functions the performance metrics need to be channel-wide and
encompass more than individual functions. Thus metrics like time to market
or cash-to-cash time have been used (typically in addition to functional
metrics) to capture and reward process mindset and performance. The
technologies that are now available to optimise and enhance logistics and
supply chain planning and execution are too numerous to list here. The
important ones involve better communications across the functions and the
channels, better accounting software to capture activity costs, better decision
support and better procurement systems.
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CONCLUSION
SUPPLY CHAIN TECHNOLOGY: Whats Next?
Are Major Technology Breakthroughs Looming?
In late 1990s, the field of supply chain technology exploded with new innovations such
as e-Procurement, reverse auctions, and more. The bursting of the dot-com bubble slowed
the pace of innovation but in 2006, one could see the return of innovative technology in
the supply chain field as well as the Internet in general.
Todays Purchase tips explore three emerging supply chain technology innovations:
software delivery, community intelligence, and buyer-supplier collaboration.
Software Delivery:
One cannot shop the supply chain technology market without noticing the buzzword On
Demand. On Demand is the delivery of software functionality over the internet from a
single application instance thats shared across all clients. On Demand solutions require
only a Web browser for access, eliminating hardware an software installation and
maintenance , reducing costs, and speeding implementation.
Community Intelligence:
Todays supply chain technology providers are oriented to create a virtual community
thats constantly transacting and collaborating and exchanging information.
Community Intelligence includes inter-company information about supplier capabilities
and performance, benchmarking data, and best practices that are accessible to the
Community of users of a supply chain system.
Some speculate that supply chain systems will someday feature Community-wide access
to peer-input suppler ratings ,not unlike a corporate purchasing version of e-Bays seller
feedback functionality.
Buyer-Supplier Collaboration:
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A casualty of the dot-com bust was the buzz-word C-Commerce for collaborative
Commerce- a vision of the future that buyers and suppliers will collaborate seamlessly
online.
With collaborative tools like wikis now populating other portions of todays cyberspace,
the buyer-supplier collaboration envisioned earlier is likely ready for prime time. Three
particular examples of technology-facilitated collaboration can be cited:
1. Both buyers and sellers will be able to expose and share their excess inventory
across the Community .
2. Community members will engage in collaborative supply chain planning and
logistics route sharing.
3. Buyers will grant suppliers access to buy from their contracts where pricing or
availability is more favorable, thereby reducing total supply chain costs.
Cash-to-cash cycle
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BIBLIOGRAPHY:
Not only does this site have information including SCM benchmarking and
case studies, it also contains some of SCM's major players, consultants,
research, forecasts and more.
About.com - Logistics/Supply Chain
http://logistics.about.com/?once=true&
The Logistics/Supply Chain page from About.com features news, discussion
groups, consultants, associations, definitions and glossaries, among many other
SCM topics.
Supply Chain.org
http://www.supply-chain.org/ .
This site is non-profit Supply- Chain Council's website, which gives a detailed
outline of the benefits of SCM at Marico.
SupplyChainManagement.com
http://www.supplychainmanagement.in/scm/
This site offers various articles and news on supply chain management.
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ANNEXURE
Supply Chain risk is rising on the back of greater complexity of products and services,
higher energy prices and increasing financial volatility, among other factors but relatively
few companies are acting on these challenges, according to the findings of Mc Kinsey &
Co. survey of 273 executives around the world.
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From the above graphs we can see that Increasing complexity of products tops the
reasons influencing the Supply Chain Strategies globally and it indicates that Europe has
seen the highest increase in the segment also the Supply Chain risk faced by companies is
increasing gradually. It is indicated that this increase has not been too much in the last
five years.
Thus, Companies should act on these complexities as soon a possible before the risk
faced by these Companies increases to a large extent.
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