Notes Logistics Supply Chain Management

Indira Gandhi National Open University MS-55
School of Management Studies

LOGISTICS AND SUPPLY
CHAIN MANAGEMENT
Logistics and SCM : An Overview 1

Indira Gandhi National Open University
MS-55
CHAIN MANAGEMENT
Design and Management of SCM 2

CHAIN MANAGEMENT
IT Enabled SCM 3
CHAIN MANAGEMENT
Cost and Performance

Measurement in SCM 4
CHAIN MANAGEMENT
Distribution Network Planning 5

CHAIN MANAGEMENT
Emerging Trends 6
MS-55: LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Course Components
BLOCK 1 LOGISTICS AND SCM : AN OVERVIEW

Unit 1 : Logistics and SCM : An Introduction
Unit 2 : Principles of Supply Chain Management
Unit 3 : Customer Focus in Supply Chain Management
BLOCK 2 DESIGN AND MANAGEMENT OF SCM

Unit 4 : Logistics : Inbound and Outbound
Unit 5 : Models for SCM Integration
Unit 6 : Strategic Supply Chain Management
Unit 7 : Organizing for Global Markets
BLOCK 3 IT ENABLED SCM

Unit 8 : Information Technology : A Key Enabler of SCM
Unit 9 : Intelligence Information System
Unit 10 : IT Packages in SCM
BLOCK 4 COST AND PERFORMANCE MEASUREMENT IN SCM

Unit 11 : Cost Analyses and Measurement
Unit 12 : Best Prictices and Benchmarkin for SCM
Unit 13 : Performance Measurement and Evaluation of SCM
BLOCK 5 DISTRIBUTION NETWORK PLANNING

Unit 14 : Transportation Mix
Unit 15 : Locational Strategy
Unit 16 : Logistics and SCM Environment
BLOCK 6 EMERGING TRENDS

Unit 17 : Future Trends and Issues
Unit 18 : Design for SCM and Greening the Supply Chain
Unit 19 : SCM in Service Organization/Non-Manufacturing Sector
MS-92 : MANAGEMENT OF PUBLIC ENTERPRISES
Course Components
BLOCK 1 PUBLIC ENTERPRISE: AN OVERVIEW

Unit 1 : Public Enterprise: Concept and Policy
Unit 2 : Public Enterprise Scenario National and International
Unit 3 : Nature and Scope of Public Enterprise
Unit 4 : Forms of Public Enterprises
BLOCK 2 PUBLIC ENTERPRISE: ACCOUNTABILITY AND GOVERNANCE
Unit 5 : Concept and Policy of Accountability and Autonomy
Unit 6 : Government - Public Enterprise : Interface
Unit 7 : Accountability to Legislature
Unit 8 : Relationship with other Agencies
Unit 9 : Corporate Governance and Corporate Social Responsibility
BLOCK 3 PUBLIC ENTERPRISE: PERFORMANCE AND EVALUATION
Unit 10 : Appraisal of Public Enterprise Performance-I
Unit 11 : Appraisal of Public Enterprise Performance-II
Unit 12 : Sickness and Public Enterprise and Turnaround Strategies
Unit 13 : Dimensions and Methods of Evaluating Enterprise Performance
BLOCK 4 ORGANISATION AND MANAGEMENT
Unit 14 : Board of Directors: Constitution and Functioning
Unit 15 : Personnel Management Issues in Public Enterprises
Unit 16 : Project Management
Unit 17 : Management of Finance, Marketing and Production, Issues
BLOCK 5 PRIVATISATION AND DISINVESTMENT
Unit 18 : Concept, Policy and Dimensions
Unit 19 : Privatisation: International Experience
Unit 20 : Disinvestment : Experience and Strategies
Unit 21 : Implications of Disinvestment
BLOCK 6 CASE STUDIES
Case 1 : State Bank of India, 19981
Case 2 : Corporate Planning at SAIL, 1989—93
Case 3 : Gloom to Glory: The Successful Turnaround of the Singareni Colleries
Company Limited
Case 4 : HR Initiatives for Turnaround of Visakhapatnam Steel Plant
Indira Gandhi
National Open University MS-55
School of Management Studies Logistics and Supply
Chain Management
Block
1
LOGISTICS AND SCM : AN OVERVIEW
Unit 1
Logistics and SCM : An Introduction 5
Unit 2
Principles of Supply Chain Management 18
Unit 3
Customer Focus in Supply Chain Management 27
Expert Committee (as on 24th March, 2000)
Prof. D.K. Banwet Prof Sadananda Sahu Dr. Sanjay S. Gaur
Dept of Management studies, Dept. of Industrial Engineering Shailesh J. Mehta School of
IIT, Delhi & Management, IIT, Kharagpur Management, IIT Bombay, Mumbai
Prof. B.S.Sahay, Prof. Atanu Ghosh Prof N. V. Narasimhan
Management Development Shailesh J. Mehta School of Director, SOMS,
Institute, Gurgaon Management, IIT Bombay, IGNOU
Mumbai New Delhi
Prof. Amarlal H. Kalro Mr. Satish Kumar Dr. Himanshu Kumar Shee,
IIM Kozhikode Director (Movement), (Coordinator)
Calicut Dept of Fertilizers, Ministry School of Management Studies,
of Chemical & Fertilizers, IGNOU
Krishi Bhawan, New Delhi
Prof. J.L.Batra Mr. Deepak Jakate,
FORE School of Management General Manager - Logistics,
New Delhi United Phosphorus Limited,
Mumbai
Prof. N. Sambandam Dr. Kaushik Sahu
NITIE, Xavier Institute of
Mumbai Management, Bhubaneswar
Course Preparation Team (2004)

Prof. Sushil (Course Editor) Dr. Ravi Shankar (Course Editor) Dr. Biplab Dutta
Dept. of Management Studies Dept. of Management Studies Vinod Gupta School of
Indian Institute of Technology Indian Institute of Technology, Management
New Delhi New Delhi IIT, Kharagpur
Prof. N. Sambandam Prof .Karuna Jain Lt Col. Kaushik Sircar
NITIE, Shailesh J. Mehta School of Assistant Quarter Master
Mumbai Management, Indian Institute of General Operations & Logistics,
Technology Bombay, Mumbai Headquarter 4 Corps
Prof Sadananda Sahu Mr. D N Srivastava Mr. Sandeep Biswas
Dept. of Industrial Engineering Advisor ( Training & Safety) & Institute for Integrated
and Management Head of Distribution Deptt. ) Learning in Management
IIT, Kharagpur (Retd.) in Cement Group (IILM), New Delhi
M/S Larsen & Toubro Ltd,
Jharsuguda
Prof. Atanu Ghosh Mr. Deepak Jakate Prof. B. B. Khanna
Shailesh J. Mehta School of General Manager - Logistics, Director,
Management, Indian Institute United Phosphorus Limited,
of Technology Bombay, Mumbai IGNOU, New Delhi
Mumbai
Dr. Anurag Saxena Dr. Himanshu Kumar Shee

(Course Co-ordinator) (Course Co-ordinator)-On leave
School of Management Studies School of Management Studies,
IGNOU, New Delhi IGNOU, New Delhi
Print Production: Tilak Raj, S.O.(P), SOMS, IGNOU
December, 2004
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BLOCK 1 LOGISTICS AND SCM : AN
OVERVIEW
Unit 1: Logistics and SCM - An Introduction discusses about definition of Logistics

& Supply Chain Management It discusses the process of development of logistics
and its role in the economy. It also converse about Physical Distribution Management
(PDM) and its components.
Unit 2: Principles of SCM defines how the supply chain works. It highlights the key
processes required to integrate the supply chain. It further examines the critical areas
of Logistics-Marketing Interface and critical areas of Logistics-Manufacturing
Interface
Unit 3: Customer focus in SCM comprehends the key processes required to

enhance customer focus in the supply chain. It delineates with the concept of
Efficient Customer Response (ECR), Quick Response (QR) and Accurate Response
(AR). It further scrutinizes chain relationship within and beyond organization
Logistics and SCM : An
Overview
4
UNIT 1 LOGISTICS AND SCM : AN Introduction
INTRODUCTION
Objectives
After going through this unit, you should be able to:

· define Logistics and Supply Chain Management (SCM);
· understand the development of logistics and its role in the economy; and
· discuss Physical Distribution Management (PDM) and its components.
Structure
1.1 Introduction
1.2 Logistics and SCM
1.3 Development of Logistics
1.4 The Role of Logistics in the Economy
1.5 Logistics and Competitive Performance
1.6 Physical Distribution Management (PDM)
1.6.1 Components of PDM
1.6.2 The Systems or “Total” Approach to PDM
1.7 Summary
1.8 Self Assessment Exercises
1.9 References and Suggested Further Readings
1.1 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. This unit will introduce you with
the concept of a supply chain.
1.2 LOGISTICS AND SCM
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.
5
Logistics and SCM : An The supply chain can be defined as the integral management (within the company
Overview and through other companies) of the company’s 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. A diagram depicting the typical supply
chain is shown in Figure 1.1.
Raw Semi-Finished Finished End

Material Products Products Distributors Consumer
Figure1.1: Typical Supply chain
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. Ideally the supply chain should be a “seamless” chain as shown in Figure 1.2.
Raw Material Product Ordering

Channel
Seamless Supply
Chain
Material
Flow channel End Customer
Figure 1. 2: Seamless Supply Chain

6
Source: Sahay B.S., 1998
The importance of logistics can be gained from the fact that logistics and supply chain Logistics and SCM : An
management costs are in range of 10 to 15 of the GDP for developing countries while Introduction
it is around 18 to 20 per cent for developed countries. The concept of integrated
logistics consists of two interrelated efforts:
· 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. Figure 1.3 shows the different components of logistics
management.
7
Overview MANAGEMENT ACTIONS
Planning Implementation Control
INPUT INTO OUTPUT OF

LOGISTICS LOGISTICS
Natural Resources (Land, Marketing Orientation

Facilities and Equipment) (Competitive Advantage)
CUSTOMERS
SUPPLIERS
Human Resources Raw In process Finished Time, Place, Utility

Material Inventory Goods
Efficient movement to
Financial Resources
Customer
Information Resources Proprietary Asset
LOGISTICS ACTIVITIES
· Customer Service · Plant and Warehouse Site
· Demand Forecasting Selection
· Distribution Communication · Procurement
· Inventory Control · Packaging
· Material Handling · Return Goods Handling
· Order Processing · Salvage and Scrap Disposal
· Parts & Service Support · Traffic and Transportation
Figure 1.3: Components of Logistic Management

(Source: Douglas M. Lambert, 1998, Pg-5)
A representative list of logistic element for a firm is given in Table 1.1.

Table 1.1: Logistic Element
Facility Location Determining location, number and size of facilities needed,

Allocation demand to facilities
Transportation Mode and service selection
Carrier routing
Vehicle scheduling
Inventories Finished goods stocking policies
Record keeping
Supply scheduling
Short term sales forecasting
Customer Service Cooperate with marketing in:
determining customer needs and wants for service
determining customer response to service
Order Processing and Information Sales order procedure
Flows Information collection, storage and manipulation
Data analysis
Warehousing and Material Handling Space determination
Stock layout
Material handling equipment selection
Stock storage and retrieval
Equipment replacement policies
Protection Packaging Design for: handling, storage, protection
Product Scheduling Co-operate with production in :
specifying aggregate production quantities
8 sequencing and timing of production
1.3 DEVELOPMENT OF LOGISTICS Introduction
Logistic activity is literally thousand of years old, dating back to the earliest form of
organized trade. As this area of study however it first began to gain attention in the
early 1990s. More emphasis has been given to logistics after the Gulf war in 1990-91
when the efficient and effective distribution of store supplies and person were the
key factors for success. With rising interest rates and increasing energy cost logistics
received more attention as a major cost driver. Logistics cost became a more critical
issue for many organization because of globalization of industry. This has affected
logistics in two primary ways. First, the growth of world-class competitors from other
nations has caused organization to look for new way to differentiate their
organizations and product offerings. Second, as organizations increasingly buy and
sell offshore, the supply chain between the organizations becomes longer, more costly
and more complex. Excellent logistics management is needed to fully leverage global
opportunities. Information technology input has given a next boom to logistics
management. This gave organization the ability to better monitor transaction
intensive activities such as ordering movement and storage of goods and materials.
Combine with the availability of computerized quantitative models; this information
increased the ability to manage flows and to optimize inventory levels and movement.
Other factor contributing to the growing interest in logistics include advances in
information technology, increased emphasis on customer service, growing
reorganization of the system approach and total cost concept. The profit leverage
from logistics and realization that logistics can be used as a strategic weapon in
competing the market place.
The system approach is a critical concept in logistics. Logistics is in itself a system.
It is a network of related activities with the purpose of managing the orderly flow of
material and personal with in the logistic channel. The system approach simply states
that all functions or activities need to be understood in terms of how they effect and
are affected by other elements and activities with which they interact. The idea is
that if one looks at action in isolation, he or she will not understand the big picture or
how such action affects or are affected by other activities. In essence the sum or
outcome of a series of activities is greater than its individual parts.
Activity 1
Every organization has to move materials to support its operations. What do service
companies like Internet Service Providers move? Is the concept of supply chain
relevant for these companies?
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1.4 THE ROLE OF LOGISTICS IN THE ECONOMY
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.
9
Logistics and SCM : An Second, logistics support the movement and flow of many economic transactions; it is
Overview 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.
One of the fundamental ways that logistics add value is by creating utility. From an
economic stand point utility represent the value or usefulness that an item or service
has in fulfilling a want or need. There are four types of utilities namely; Form,
Possession, Time and Place. Form utility is the process of creating the good or
service or putting them in proper form for the customer to use. Possession utility is
value added to a product or service because the customer is able to take actual
possession like credit arrangement and loans. These two utility are not directly related
to logistics but these are not possible without getting the right item needed for
consumption or production to the right place at the right time and in the right condition
at the right cost. The time and place utility are directly related to logistics. Time utility
is the value added by having an item when it is needed. Place utility is the item or
service available where it is needed. The five rights of logistics are the essence of the
two utilities provided by logistics time and place utility.
1.5 LOGISTICS AND COMPETITIVE

PERFORMANCE
Today logistics department appears on the organization charts of many large
organizations. Linking logistics activities directly to organization strategic plan can
work effectively to support their organization for achieving competitive advantage.
Porter user a tool called the value chain as shown in the Figure 1.4 to separate
buyers, supplier and a firm into the discrete but interrelated activities from which
value stems. The value chain concept may be used to identify and understand the
specific source of competitive advantage and how they related to buyer value. Value
is the amount a customer is willing to pay for the products, services provided by an
organization. Value added is the difference between what the customer pays and the
cost to the organization in providing that product or service. Porter defines the five
categories of primary activity involved in competing in any industry.
Inbound logistics: Activities associated with receiving, storing and disseminating
input to the product.
Operation: Activity associated with transforming input into the final product form.
Outbound logistics: Activity associated with collecting storing and physical
distribution of the product to buyers.
Company Infrastructure
Support Organization, People

Activity
System & Technology
Procurement
Inbound Operation Outbound Marketing

Logistics Logistics & Sales Service
Primary Activity
Figure 1.4: Porter Value Chain
10 Source: Porter, Michael E., “Competitive Advantage”. 1985, the Free Press. New York)
Marketing and Sales: Activities associated with providing a means by which Logistics and SCM : An
buyers can purchase the product and inducing them to do so such as advertising, Introduction
promotion etc.
Service: Activity associated with providing service to enhancer maintain the value of
the product such as installation, repair etc.
The effective logistics management can provide a major source of competitive
advantage. The source of competitive advantage is found firstly in the ability of the
organization to differentiate itself in the eyes of the customer from its competitor and
secondly by operating at a lower cost and hence at greater profit. There are two
bases of success in any competitive context. One is the cost advantage and second is
the value advantage. Cost advantage is achieved through greater productivity and
value advantage is pursued through a different plus over competitive offerings.
Hi
Va l u e A d v a n t a g e
Service Leader Cost and Service

Leader
Commodity
Cost Leader
Market
Lo
Lo Productivity Advantage Hi
Figure 1.5: Competitive Matrix

Source : Christopher, M., 1992, Logistics and Supply Chain Management
From the matrix shown in Figure 1.5 it is clear that successful companies will often
seek to achieve a position based upon both a productivity advantage and a value
advantage. Logistics management can play a critical role to gain both advantages. In
many industries logistics cost represents such a significant proportion of total cost that
it is possible to make major cost reduction through fundamentally reengineering
logistics process. In term of value advantage, companies can gain through service
differentiation. Today markets have become more service sensitive. Customer in all
industries are seeking greater responsiveness and reliability from suppliers, they are
looking for reduced lead time, just in time delivery and value added services that
enable them to do better job of serving their customers.
Traditionally most organizations have viewed themselves as entities that exist

independently from others and indeed need to compete with them in order to survive.
However such a philosophy can be self-defeating if it leads to an unwillingness to
cooperate in order to compete. Behind this seemingly paradoxical concept is the idea
of supply chain integration. 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. The purpose is to improve the
effectiveness and efficiency of SC for ultimate consumers.
A model of the evolution of supply chain is shown in Figure 1.6 Integration starts with
the ‘baseline’ organization (Stage 1) with a reasonably informal approach to
management by departments. This level of evolution involves the processing of
material requirements and planning routines that are short term in nature. The
material inventories simply arise in response to reactive management practices. The
key requirement of employees is to react to failure and manage as best that they can.
The Stage 2 organization reflects the traditional form of supplier management. The
business departments tend to operate autonomously. The Stage 2 organization is 11
Logistics and SCM : An focused on the annual budget allocation and departmental cost management. For the
Overview purchasing function this implies seeking out the lowest price provider of material
requirements often through a process of tendering, the use of ‘power’ and the
constant switching of supply sources to prevent ‘getting too close’ to any
individual source.
The Four stage of Development
Stage 1: Baseline
Purchasing Material Production Sales Distribution

Control
Stage 2: Functional Integration
Materials Manufacturing Distribution

Management Management Management
Stage 3: Internal Integration
Materials Manufacturing Distribution

Management Management Management
Stage 4: External Integration
Suppliers Internal Supply Customers

Chain
Figure 1. 6: Supply Chain Integration
The Stage 3 organization is internally integrated and has a much greater level of
interest in material flow processes from suppliers to customers rather than the
‘grenade over the all’ approach of the earlier two forms. The organization has
integrated the aspects of the internal supply chain that it can influence and control. In
parallel, planning systems operated throughout the organization are integrated and
demand information, production schedules and material requirements are
synchronized by teams of individuals that were once subordinates of separate
departments. For this company, the demand and material flow drive the entire
system in an end-to-end supply chain and the organization makes use of Just in time
materials management techniques.
The Stage 4 company has begun to realize the benefits of true supply chain
management and the ability to synchronize all activities within the factory and to
interface the factory with its suppliers and customers. Under these conditions, the
collaborative and participative internal environment is extended upstream and
downstream and the planning of supply chain management is recognized formally.
The factory is ‘customer oriented’ instead of product oriented and seeks to partner
with key customers and suppliers in order to better understand how to provide value
and customer service. This form of company has full improvement processes within
the organization that are encapsulated in medium term plans for the organization and
its supply chain. The organization makes most use of information systems to enhance
12 the responsiveness of the organization and supply chain to deliver products and has
also developed a capability in terms of product design that includes customer and Logistics and SCM : An
supplier involvement. To enhance the nature of collaboration the organization Introduction
rewards supplier partnerships with sole sourcing agreements in return for a greater
level of support to the business and a commitment to on-going improvement of
material flow and relationship management. The model provides a useful means of
analyzing the current state of the organization and understanding where the
next interventions would be needed in order to improve performance.
Activity 2
Describe the Supply Chain for a paper manufacturing organization.
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1.6 PHYSICAL DISTRIBUTION MANAGEMENT (PDM)
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.
1.6.1 Components of PDM
There are four principal components of PDM namely; Order processing, Stock levels
or inventory, Warehousing and Transportation. 13
Logistics and SCM : An Order processing
Overview
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 order’s receipt and the precise
delivery time. Even before products are manufactured and sold the level of office
efficiency is a major contributor to a company’s image. Incorrect ‘paperwork’ and
slow reactions by the sales office are often the unrecognised 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 company’s limited resources. If the company’s
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
14 holding and short lead times, have made road transport indispensable. When the
volume of goods being transported reaches a certain level some companies purchase Logistics and SCM : An
their own vehicles, rather than using the services of haulage contractors. However, Introduction
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. 15
Logistics and SCM : An · Service Cost: That is stock management and insurance cost
Overview
· 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.
Cost
Total Distribution Cost
Trunking Cost
Inventory Cost
Storage Cost
System Cost
Local Delivery
Cost
No. of Depots
Figure 1.7: Total Logistics Cost
Source: Croucher Phil et al, The handbook of Logistics and distribution Management Page No .123
The top line on the graph shows the overall distribution cost in relation to the
number of depots in the network. The minimum point on this curve represents the
lowest cost solution. The result will depend on a number of factors –product
type, geographical area of demand, service level requirements etc.
1.7 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
16
such it integrates their relationships, activities, functions, processes and locations. Logistics and SCM : An
Physical distribution management (PDM) is concerned with ensuring the right Introduction
item needed for consumption or production to the right place at the right time and
in the right condition at the right cost
1.8 SELF ASSESSMENT QUESTIONS

1) “Logistics is the function that is responsible for the flow of materials into,
through and out of an organisation”. Elaborate?
2) “These are many possible structures for SC, but the simplest view has
materials converging on an organising through tiers of suppliers and products
diverging through tiers of customers”. Elaborate.
3) It is said that the overall aim for logistics is to achieve high customer
satisfaction or perceived product value. This must be achieved with
acceptable costs. How would you find the best balance?
4) What is Physical Distribution Management? Describe its components? Also,
elucidate the “total approach” to PDM.
5) Describe the evolution of Supply Chain concept. What in your opinion is the
most important stage?
1.9 REFERENCES AND SUGGESTED 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
17
Overview UNIT 2 PRINCIPLES OF SUPPLY CHAIN
MANAGEMENT
Objectives
After reading this unit, you would be able to:
· define how the supply chain works;
· understand the key processes required to integrate the supply chain;
· examine critical areas of Logistics-Marketing Interface; and
· examine critical areas of Logistics-Manufacturing Interface.
Structure
2.1 Introduction
2.2 How does SCM Work?
2.3 The Logistics-Marketing Interface
2.3.1 Logistics and Product Life Cycle
2.3.2 Areas of Logistics and Marketing Interaction
2.4 The Logistics-Manufacturing Interface
2.4.1 Customer Service Issues at the Logistics-Manufacturing Interface
2.5 Summary
2.6 Self Assessment Questions
2.1 INTRODUCTION
Now you are aware of what Logistics and SCM mean. You have appreciated the
role of Logistics and SCM in the economy. SCM is basically a system that connects
an organization with its customers and suppliers. SCM is the management of all key
business processes across a number of supply chains. It is important to know about
different supply chain processes for having an integrated SCM.
Also there is a strong relation between Logistics group and Marketing group in an
organization. Similarly, Manufacturing and Logistics are also interrelated. This unit
will take you through to these concepts.
2.2 HOW DOES SCM WORK?
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
18
information flows, which in turn helps to create the best product flows.
VALUE ADDED Introduction
INVENTORY FLOW
Enterprise
Physical Manufacturing
Customers Support Purchasing Suppliers
Distribution
REQUIREMENT
INFORMATION FLOW
Figure 2.1: Supply Chain System

Source: Logistics Management, Bowersox et al., 1986
The customer remains the primary focus of the process. However, improved
linkages with supplies are necessary because controlling uncertainty in customer
demand, manufacturing processes and supplier performances are critical for effective
SCM. The key processes for the integrated SCM (Figure 2.2) are as follows:
Customer Relationship Management
This is the process to identify the key customers. With customer moving to centre
stage, more companies have begun to treat a customer as a value independent entity.
The companies no longer view sales as selling of their products, but as selling of
relationships, solutions, support and care. Customer relationship teams develop and
implement partnering program with key customer. Product and service agreements
specifying the level of performance are established with these key customers.
Demand Management
Customer Service Management
Order Fulfillment
Manufacturing Flow Management
Procurement
Product Development and Commercialization
Return Channel
Performance Metrics
Figure 2.2: Supply Chain Process for Integrated SCM

Source: Lambert 1998
19
Logistics and SCM : An Customer Service Management
Overview
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 customer’s requirement with the firm’s 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 today’s 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
20
achieve a sustainable competitive advantage as managing the supply chain from an
out-bound perspective. Effective process management of return channel enables the Logistics and SCM : An
identification of productivity improvement opportunities and break through projects. Introduction
Focusing effort on improvement in key business process is the foundation of SCM

philosophy. Thus the goals of these processes are to:
a) Develop customer focused teams that provide beneficial product and service
agreement to strategically significant customers
b) Provide a permit of contact for all customers, which efficiently handle their
inquiries.
c) Continually gather, compile and update customer demand to match requirement
with supply.
d) Develop flexible manufacturing system that responds quickly to changing market
conditions.
e) Manage supplier partnership that allows for quick response and continuous
improvement.
f) Fill 100% of customer order accurately and on time
g) Enhance profitability by managing the return channel (reverse logistics)
Activity 1
Take the case of an organization where you are working or about which you know of
and identify the key processes within that organization vis-à-vis those proposed by
Lambert.
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2.3 LOGISTICS-MARKETING INTERFACE
Traditionally logistics group assumed primary responsibility for warehousing, inventory

and transportation within many organizations while marketing group is responsible for
negotiation, promotion and selling. As neither group had responsibility for over all
channel management, conflicts arose at the expense of overall organization goal. The
organizations had realized that functional interdependence, not internecine conflicts, is
the key to satisfy customer needs. Despite the realization by logistics and marketing
manager that cooperation is essential marketers often criticize logistics department
for being cost minimizers having no concern for customer needs while logistics
department accuses marketers of chasing sale at any cost. Therefore it is essential
that organizations identify area of agreement and potential conflict. Senior
management must be keen to actively support cooperation between the two groups.
This can be assisted by performance measurement that rewards cooperation and a
spirit of interdependence that actively discourages parochial behaviour.
21
Logistics and SCM : An 2.3.1 Logistics and Product Life Cycle
Overview
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.
2.3.2 Areas of Logistics and Marketing Interaction
In today’s competitive environment organizations are utilizing the benefits of their

established logistics/marketing interface to be competitive not in terms of product
and price but also logistics services tailored to meet individual customer needs.
These organizations are able to differentiate themselves from their competitors by
offering a total service with logistics forming an essential part of the total value
chain.
The major area of interaction between logistics and marketing includes (Gattorna
1995):
· Product Design: This can have a major effect on warehouse and transportation
utilization (and therefore costs).
· Pricing: This is the means by which logistics services customer demand
affects the overall cost of the product and in turn the organization’s pricing
policies.
· Market and Sales Forecasts: Marketing forecasts will largely dictate the level
of logistics resources needed to move products to customers.
· Customer Service Policies: If marketing opts to offer a very responsive level
of service to customer, logistics resources, in the form of facilities and inventory,
will need to be very considerable.
· Number and Location of Warehouses: This is one of the greatest areas of
contention and can only be satisfactorily resolved if marketing and logistics
develop the policy jointly.
· Inventory Policies: This is another area of contention, as these decisions have
a significant bearing on operational costs and the extent to which desired levels
of customer service are achieved. It is another key area where policy should be
developed jointly.
· Order Processing: Responsibility for who receives customer’s orders and the
speed and efficiency with which they are processed has a major impact on
operational costs and customer’s perceptions of service levels. This is another
area where joint policy-making is preferable.
· Channels of Distribution: Decisions to deliver direct to the customer or
through intermediaries will greatly influence the level of logistics resources
required. As channels change, so will the resources required. Marketing should
definitely consult with logistics when making channel decisions.
22
2.4 THE LOGISTICS-MANUFACTURING INTERFACE Introduction
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
lowest-cost 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. The differences in these perspectives are shown in
Tables 2.1 and Table 2.2 when organizations decide to compete on the basis of cost
leadership and differentiation respectively.
Table 2.1: Manufacturing / logistics approach when the basis for competing is cost leadership
(Source: Gattorna 1995)
Basis for Competing: Lowest – Cost Competitor
Old Approach New Approach
Cost-reduction programmes Eliminate all non-value adding activities/procedures/

tasks etc
Reduce inventory Reduce the need to buy capacity by shortening
internal lead times
Trim 10% all budget allocations Reduce the material conversion cost by simplifying
processes through integration and technology
Defer capital expenditure Emphasize product and process quality so as to
reduce costs associated with rework, breakdowns
etc.
Emphasize control on expenses Reduce need for inventory through superior planning
particularly direct labour systems, shortened internal lead times; linking
processes etc
Which also results in: Which also results in:
· Inadequate support · Improved product performance

· Poor product quality · Reduced product variability
· Ageing equipment/processes · Improved flexibility
· Poor customer service · Improved responsiveness to market
· An image of being unreliable
· Poor product availability
· Poor delivery service
23
Logistics and SCM : An Table 2.2: Manufacturing / logistics approach when the basis for competing is differentiation
Overview (Source: Gattorna 1995)
Basis for Competing: Product Availability and delivery time
Old Approach New Approach
Increase inventory to act as a buffer Shorten internal lead times to improve responsiveness
to market
Increase number of branch warehouses Emphasize schedule performance to ensure reliable
supply
Increases capacity to provide flexibility Emphasize product and process quality so as to
reduce delays caused by rework, breakdowns etc.
Release orders early to production Utilize express transport and centralized distribution
to prevent misallocation of stock
Emphasize production output Initial superior customer service and order entry
systems to enhance customer communication
Which also results in: Which also results in:
Higher costs Lower costs
Negatives cause by the complexity of Improved product performance

the system and poor product quality Reduced product variability
caused by emphasis on ‘getting the
product out’
Long internal lead times caused by An image of reliability

early release of works orders to give
the plant ‘plenty of time’
Stock-outs due to work order overload, Improved flexibility in volume and product mix
confused priorities and difficulty in
allocating stock to many warehouses
Logistics link the manufacturing both from characteristics of inputs i.e., suppliers of
raw materials and characteristics of market i.e., customers. For a given
manufacturing organization there is a production/branch warehouse configuration,
which satisfies most constraints or pressures imposed by the inputs or the markets.
For effective operation of manufacturing/logistic interface there are two primary
determinants i.e., Capacity and Location.
Capacity is related to location and logistics in the following way. First, production
capacity must be matching in some sensible way to the market demand then in
accordance with the production capacity matching is required for the logistics
network i.e., procurement, storage, order entry and processing, outbound transport,
branch warehouse and final customer delivery.
The capacity issues are very crucial decision and are required to change as per the
market demand and demand locations. Short-term solutions can be capacity
enhancement by overtime, second and third shifts, third party contracting, extension
of the existing facility and long-term solution are additional facility in a new location
or extensive capacity in new location. Short term decisions possess the least risk, and
impact on the logistics network only in terms of the additional capacity requirement
where as long term solution demand a re-evaluation of the manufacturing/logistics
network not only in terms of the capacity of each component but also the strategic
necessity and location of each facility (factory, warehouse) in terms of its contribution
to the effectiveness of the total network. In other words, a change in location and
capacity of any one facility requires a review of the location and capacities of all
other facilities. Clearly, the issues involved in location, capacity and logistics are
inextricably linked.
24
2.4.1 Customer Service Issues at the Logistics-Manufacturing Logistics and SCM : An
Introduction
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 today’s 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:
· Available technology, particularly information technology, will allow certain
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. As such, it is the single instrument, which demonstrates the plan for:
a) Finished goods inventory levels 25
Logistics and SCM : An b) Customer service in terms of stock availability
Overview
c) Machine utilization
d) Capacity utilization
e) Labor productivity
f) Output
g) Need for overtime/casual employees and so on.
The real power of the MPS, however, is its potential to involve all interested parties.
In practice, when people from marketing, logistics and manufacturing get together
and agree on a schedule, the result is a superior schedule. Clearly the MPS may be
used as a vehicle to integrate a number of parties into the planning and decision-
making process with the result being a superior plan which, when executed, results in
superior customer service.
2.5 SUMMARY
In this unit, we have discussed how the supply chain works and what are the key
processes required to integrate the supply chain. We have also examined the critical
areas of logistics-marketing interface and logistics-manufacturing interface. These
interfaces are critical for enhancing supply chain performance. Finally we have
discussed how manufacturing-logistics interface could provide better customer
service.
2.6 SELF-ASSESSMENT QUESTIONS

1) Explain various supply chain processes for an integrated SCM. Are there any
other processes that you can think of?
2) What are the primary responsibilities of logistics group and marketing group
within an organization? Why there is a conflict between the two? What
measures can be taken to enhance cooperation?
3) What are the differences between manufacturing/logistics approach when the
basis for competing is
i) Cost leadership
ii) Differentiation

READINGS
1) Bowersox D. J., Closs D. J. and Helferich O K, 1986, Logistical Management,
Macmillan.
2) Chopra S. and Meindl P, 2001, Supply Chain Management: Strategy,
Planning, and Operation, Pearson Education Inc.
3) Christopher M., 1992, Logistics and Supply Chain Management: Strategies
for Reducing Costs and Improving Services, Pitman.
4) Lambert D. M., 1998, Fundamental of Logistics Management, McGraw Hill.
5) Gattorna J, 1995, Handbook of Logistics and Distribution Management,
Ashgate Publishing Company.
6) Gattorna, J. L. & Walter P. W., 1996, Managing the Supply Chain : A strategic
26 Perspective, Plagrave Macmillan Indian Reprinted Ed., 2004
UNIT 3 CUSTOMER FOCUS IN SUPPLY CHAIN Introduction
MANAGEMENT
Objectives

· understand the key processes required to enhance customer focus in the supply
chain;
· define Efficient Customer Response (ECR);
· define Quick Response (QR) and Accurate Response (AR); and
· examine chain relationship within and beyond organization.
Structure
3.1 Introduction
3.2 Customer Service
3.3 Functional vs. Innovative Products: SCM Issues
3.4 Efficient Consumer Response
3.5 Quick Response and Accurate Response
3.6 Chain Relationship within and Beyond the Organization
3.7 SCM as a Core Strategic Competency
3.8 Summary
3.1 INTRODUCTION
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. [1]. 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 organization’s 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 firm’s 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.
This unit will discuss the customer focus in Supply Chain Management.
27
Overview 3.2 CUSTOMER SERVICE
A customer-focused strategy needs to accomodate 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.

· Availability is the capacity to offer inventory when demanded by a 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.
— Organization’s 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.
· Reliability is one of the most important dimensions of customer service quality.
Customers’ confidence can be built by providing advanced accurate information
on the status of their orders, rather than giving surprises.
A customer-focused firm will do well to state the level of basic service commitment
in terms of availability, operational performance and reliability to all customers.
The common interpretations for customer service are easy to do business with and
sensitive to customer needs. LaLonde and Zinszer suggested three dimensions of
customer service [5]:
i) As an activity – that can be managed.
ii) In terms of performance levels – can be accurately measured
iii) As a philosophy of management – showing the importance of customer focused
marketing
They defined: “ 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 Logistics and SCM : An
crucial. The dynamic nature of the market place makes holding inventory a risky and Introduction
potentially unprofitable business. Customer’s 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.
3.3 FUNCTIONAL VS. INNOVATIVE PRODUCTS:

SCM ISSUES
Marshall L. Fisher observed [4] that in some cases, costs have risen to
unprecedented levels because of adversarial relations between SC partners as well
as dysfunctional industry practices such as an over reliance on price promotions. A
framework was devised for deciding which SC is the best for a particular company’s
situation. Products can be classified into two categories, either primarily functional or
primarily innovative based on their demand patterns. It helps a manager to understand
the nature of demand for their products and devise the SC that can best satisfy that
demand. The root cause of the problems faced by many SCs is a mismatch between
the type of product and the type of SC.
Functional products are the staples, which satisfy basic needs, don’t change much
over time, have stable, predictable demand, long life cycles and available at a wide
range of retail outlets/grocery stores. Their stability invites competition and leads to
lower profit margins. (See Table 3.1)
Fashion apparel and personal computer manufacturers introduce innovations to avoid

low margins and to give customers reason to buy their products. But, the demands for
these products are unpredictable, life cycle is short and profit margin is high. They
also require a fundamentally different SC than functional products. (See Table 3.2)
SC performs two distinct types of functions: a physical function and a market

mediation function. Physical function includes converting raw materials into parts,
components and finished goods, and transporting all of them from one point to the
next in the SC. Market mediation function is less visible but equally important and
ensures matching of offerings with customer’s preferences.
Each of these two functions incurs physical costs (costs of production, transportation,
inventory storage) and market mediation costs arising out of marked down or lost
sales opportunities and dissatisfied customers.
Table 3.1: Functional Versus Innovative Products: Differences in Demand
Functional Innovative
(Predictable Demand) (Unpredictable Demand)
Aspects of Demand
Product Life Cycle More than 2 years 3 months to 1 year
Contribution margin 5% to 20% 20% to 60%
Product Variety Low (10 to 20 variants High (often millions of
per category) variants per category)
Average margin of error in the forecast 10% 40% to 100%
at the time production is committed
Average stock out rate 1% to 2% 10% to 40%
Average forced end of season markdown 0% 10% to 25%
as percentage of full price
Lead time required for made-to-order 6 months to 1 year 1 day to 2 weeks
products
29
Logistics and SCM : An Table 3.2: Physically Efficient Versus Market-Responsive Supply Chains
Overview
Physically Efficient Process Market-Responsive Process
Primary Purpose Supply predictable demand Respond quickly to
efficiently at the lowest unpredictable demand in order
possible cost to minimize stock outs, forced
markdowns and obsolete
inventory
Manufacturing focus Maintain high average Deploy excess buffer capacity
utilization rate
Inventory Strategy Generate high turns and Deploy significant buffer
minimize inventory stocks of parts or finished
throughout the chain goods
Lead-time focus Shorten lead time as long as Invest aggressively in ways to
it doesn’t increase cost reduce lead time
Approach to choosing suppliers Select primarily for cost Select primarily for speed,
and quality flexibility, and quality
Product Design Strategy Maximize performance and Use modular design in order to
minimize cost postpone product
differentiation for as long as
possible
A global brand can be greatly benefited by having gathered knowledge of customers

and their choices, through channel partners; and can create global products, which
may need to be adapted as per local preferences.
Activity 1
Define Customer Service for two organizations– one offering a product (Colour
Television) and another one offering a service (Personal Banking). What are the
targets you will set for these organizations for achieving a high image on customer
service and evaluating the performance level?
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3.4 EFFICIENT CONSUMER RESPONSE
Since 1980s, many organizations have been going through, the job of reengineering
their business process and it involved revisiting their supply chain. One Efficient
Consumer Response study estimated that 42 days could be removed from the typical
grocery supply chain, freeing up $30 bn in current costs and reducing inventory by
41% in USA. A study by A.T.Kearney estimated that supply chain costs represent
more than 80% of the cost structure in a typical manufacturing company. For
retailers, this figure is 70 to 80 %. These numbers indicate that even slight
improvements in the process can translate into millions of dollars on the bottom line.
Some of the critical success drivers to achieve improvements have been suggested
and these are:
· Well-defined processes with well-defined guidelines for decision making;
· Removal of the organizational and functional barriers;
30
· Early visibility to changes in demand all along the supply chain; Logistics and SCM : An
Introduction
· A single set of plans that drives the supply chain operations and integrates
information across the supply chain.
Some of the learning from case studies on SCM
a) ABC Foods Company:
· Materials common across businesses are purchased centrally to take advantage

of economies of scale, other items exclusive to a given business unit are
purchased by the unit,
Supply strategy includes four key practices:

i) Consolidation of the supplier base,
ii) Development of supplier partnership,
iii) Penetration into supplier performance,
iv) Commitment to Quality.
· Manufacturing plants are strategically located throughout the US, based on
supplier or customer base,
· Distribution network includes facilities strategically located based on customer
demographics, as well as transportation efficiencies. Some of these facilities are
self owned and third parties operate others.
· Main focus in distribution was to establish customer partnerships, which was
based on ECR concepts including continuous replenishment.
The ECR includes the following strategies:
1) Widespread implementation of EDI (Electronic Data Interchange), up and down
the supply chain; both between Supplier and Manufacturer, Manufacturer and
Distributor, Distributor and Customer.
2) Greater use of POS (Point of Sales) data obtained by greater and more
accurate use of bar coding.
3) Co-operative Relationship between Manufacturer, Distributor, Suppliers, and
customers.
4) Continuous Replenishment of inventory and flow through distribution.
(Like JIT (Just-in-time), Cross Docking)
5) Improved Product Management and Promotions.
6) Could be the best source of Competitive Advantage.
One of the most beneficial aspects from ECR could be building relationship with the
Customers:
· Customer satisfaction improves, as customer gets what he wants
· Capturing database of customer through a smart card device and link it to his
purchase patterns in terms of item, quantity, size and time-offering volume or
value bases incentive scheme.
· Make use of such database to forecast future demand and thereby achieving
better customer service and less stock out situations.
· Inform customers of new arrivals – through direct mailers.
31
Logistics and SCM : An Since the ECR is a strategic option for an organization, we first need to understand
Overview what factors have driven a firm to re-look at their current strategy and what are the
options an organization has to respond to such factors, keeping in mind past
performance and internal capabilities and resources.
Once a strategic option has been chosen after evaluating possible alternatives, firm is
required to go through the process of implementation, which includes structure and
systems, people, skills, values and culture, resources and leadership.
The Efficient Consumer Response concept popularly known as ECR is a strategic

choice for many organizations to survive/grow in the current business environment,
which is driven by competition, speed, technology, customer satisfaction and ever
changing customer preferences. ECR provides a competitive advantage to
differentiate from other players.
ECR movement, which followed another movement called Quick Response in textile/
apparel industry, initially started in grocery industry to respond to the following
customer service expectations, most efficiently and effectively.
· They get what they want, when they want it, and as much quantity as they
need.
· They get it at the most competitive price
· They achieve satisfaction or delight, through customer value addition.
· They feel good of having received attention.
· They feel happy being cared for.
· They enjoy being listened to and being served quickly.
In order to fulfill these expectations organizations will be required to re-orient and
review the areas like structure and systems; people, skills, values and culture;
resources and leadership.
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.
Earlier firms used to produce goods as per their capacity and convenience to achieve
economy of scale and profitability. Now the manufacturing plans are customer driven
and there is major dependence on POS data at SKU level (stock keeping unit) for
forecasting, in many organizations. New product introduction system will be required
to draw major inputs from customer feedback or customer survey. It has to be done
at a faster speed than the competitors and frequency has to be improved due to
shortening of PLC. Even an innovation can’t assure a very long-term stay and
benefits. Moreover, failure rates are also to be reduced.
32
Another important system change necessary for more meaningful decisions, is to Logistics and SCM : An
introduce Activity Based Costing (ABC) instead of using full cost allocation systems. Introduction
The Internet revolution will create a new dimension in achieving ECR. Channel
partners can share data through common sites and consolidate/ process the same, for
useful decision making and information sharing, in a most cost effective way.
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.
33
Logistics and SCM : An Activity 2
Overview
What are the learning inputs you could get from the example of ABC Foods
Company for implementation of ECR?
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3.5 QUICK RESPONSE AND ACCURATE RESPONSE
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.
Customer’s 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.
Some learning experience from case studies

a) Apparel Manufacturer
· The company sells lower priced brands to discount stores and upscale line to
department stores. It has 20000 SKUs and sold through 6000 different accounts.
· Their efforts were on reducing costs within their exiting SC instead of producing
overseas and utilizing time as a speed -to-market advantage.
· Apparel manufacturing is done at 2 units in US and another one offshore. All
products are finished at one site and then shipped to two distribution centers.
· Implemented flow replenishment along with EDI connections with several major
customers. It replenished inventory at the retailer without a purchase order from
the retailer. Products are replenished daily or in economical batches, based on
34 POS transactions transferred from the retailer on a daily or weekly basis,
b) Electronico – An Electronics Company Logistics and SCM : An
Introduction
One division produced corporate computer networks and secondary storage for
desktop computers. With ever-changing electronics trends, products are short lived
and often engineered to order.
· SC is a global network that delivers products and services from the supply base
to the end customer through an engineered flow of information and material.
· SC comprises of: mining concerns, component manufacturers, assemblers,

distributors, resellers/integrators, retail, end users, return depots and recycling
Partners.
· Information is communicated across nodes using various methods to assure

delivery of marketing programs. An engineering change order initiates an
implementation process, which involves all departments affected by it.
Information and communication must flow within predetermined normal
response times and these are critical in maintaining strong vendor relationship
and assuring delivery of programs within marketing requirements.
The uncertain market reaction to innovation increases the risk of shortage and excess
supplies. High profit margins and the importance of early sales to capture market
share for new products, increase the cost of shortages. At the same time short life
cycle increases the risk of obsolescence and thus costs of excess supplies. So, most
important is to read early sales indication or other market signals and to react
promptly. Crucial flow of information occurs not only within the chain but also from
the marketplace to the SC. The critical decisions about inventory and capacity are as
to where in the SC to position inventory and available production capacity in order to
hedge against uncertain demand. Suppliers should be chosen for their speed and
flexibility, not for their cost alone.
A leading Japanese apparel manufacturer produces its basic styles in low cost
Chinese plants keeping production of high fashion styles in Japan, where the
advantage of being able to respond quickly to emerging fashion trends more than
offsets the disadvantage of high labour costs.
A lean, efficient distribution channel is exactly right for functional cars, but totally
inappropriate for innovative cars, which require inventory buffers to absorb
uncertainty in demand. The most efficient place to put buffers is in parts, but doing so
directly contradicts the just-in-time system that automakers vigorously adopted.
Mass Customization
National bicycle’s success of a responsive supply chain was part of new movement
called mass customization – building ability to customize a large volume of products
and deliver at close to mass-production prices.
Accurate Response System
Sport Obermeyer, manufacturer of fashion skiwear, adopted a blending of three
strategies of reducing, avoiding and hedging against uncertainty [4].
· To reduce uncertainty, company solicited early orders from 25 largest retailers.
This enabled them to forecast national demand with a margin of error of just
10%.
· Once employees were told of the benefits of shaving off each day in lead time
by way of saving the cost of air-shipment, they found many ways to shorten the
lead time.
35
Logistics and SCM : An · Company asked six members of a committee to forecast for all products and
Overview selected those styles when all six individual forecast agreed. Using this average
forecast as well as data on the cost over and under production, it developed a
model for hedging against the risk of both problems. The model worked out the
quantity of each style to make in the early production season (which begins a
year before the retail season) and how much to make in February, after early
orders are received. This approach, called “accurate response”, has cut the cost
of both over and under production in half – enough to increase profits by 60%. It
also resulted in 99% product availability.
The “accurate response” system distinguishes those products for which demand is
relatively predictable from those for which demand is relatively unpredictable, using
blend of historical data and expert judgment.
The relatively predictable category should be made furthest in advance in order to

reserve more manufacturing capacity for making unpredictable products closer to the
selling season. This enables companies to make smaller quantity in advance, see how
well is the response for different items early in the selling period and then based on
that information, decide which products to make more of.[6].
Unpredictable demand and short-lived products are the hallmarks of the world market
for apparel. Demand for fashion apparel, being a function more of taste than of
objective consumer needs, long range forecasts tended to be highly inaccurate. Thus
resulting shortages (stock outs) represent lost sales opportunities, surpluses represent
lost revenues consequent to successive reductions (Markdowns), often to a point
below the cost of production.
Due to growing demand uncertainty, retailers discontinued the practice of ordering

large quantities of products in advance of the selling season and warehousing them
until sold. Instead they ordered goods much closer to the selling season, in small initial
quantities that could be replenished as the season progressed. Retailers essentially
looked at indirect costs such as those associated with high inventory levels and long
lead times.
This pushed the manufacturers to expand product variety, shorten order- fulfillment
lead times and achieve higher order-fill rates. These trends drove the Quick
Response movement.
The Quick Response Movement
“Quick Response” was the term used by textile and apparel manufacturers and
retailers to describe buyer-seller partnership relationship in which the buyer
transmitted orders via EDI and the seller promised to fill orders quickly. Many other
features, as listed below could be added to these two basic elements, depending on
the preferences and capabilities of the partners.
· UPC code symbols attached to product by the manufacturer, and scanned at
POS by the retailer
· Electronic Purchase Orders transmitted to vendor
· Vendor marking of retail prices on garments (Pre-retailing)
· POS data by store, transmitted to vendor
· Advance Shipping Notices received from vendor in advance of shipment
· Electronic Invoicing
· Electronic Funds Transfer
The quick response movement had grown with the objective of strengthening the
competitive position of the domestic manufacturing industries in the “fiber-textile-
36 apparel” chain.
By April 1993 industry standards had been widely adopted by textile producers, Logistics and SCM : An
apparel manufacturers, retailers, and transport companies. This enabled the retailers Introduction
and suppliers to develop partnerships with the objective “ to have the right quantities
of the right goods in the right place at the right time”[8].
Operating on a Quick Response System apparel and textile retailing operations are
tied up to the manufacturing operations, to provide the flexibility needed to quickly
respond to shifting markets. The strategy consists of a combination of business
practices and technology which are aimed at capitalizing on domestic manufacturers’
strongest competitive advantage – proximity to the domestic markets – by providing
more suitable and acceptable products, higher customer service levels, and shorter
lead times than those offered by foreign competitors. QR is intended to reduce
overall inventory levels, increase inventory turns and avoid forced markdowns as well
as stock outs [9].
Under QR mode, retailers and apparel manufacturers eliminate much of the risk
inherent in the current system. Forecast error is reduced by planning assortments
much closer to the selling season, performing consumer preference tests, limited
introductions to pre-test and fine-tune specific style, colour, size options. Inventory
risk is reduced by producing smaller initial orders and re-ordering more frequently
throughout the season based on actual sales data from the POS, which is collected at
the full SKU level.
Although imported goods may cost the retailer much less initially, foreign
manufacturers generally require long order lead times (often nine months or more)
that may result in larger and more risky inventory investments and consequently more
chances of forced markdowns and stock outs at the retail level.
Estimates of the average length of time it takes for a new style of garment to make
its way through the traditional apparel pipeline, from fiber production to retail
presentation of a finished piece range from 56 to 66 weeks, with garments in actual
production only 6% to 17% of that time.
Most important element of QR strategy is an effective information pipeline,

characterized by shared information and efficient information flows. Kurt Salmon
Associates has outlined a two-step implementation procedure for achieving an
effective QR system. The first step is to establish QR partnerships with customers
and suppliers and implementing the VICS (Voluntary Inter-Industry Communication
Standards)-endorsed standards of the following technologies: UPC product marking,
EDI computer-to-computer communication of transactions and shipping container
marking with bar codes to streamline distribution.
The second step aimed at developing real-time merchandising and short-cycle,

flexible manufacturing, involves the use of point –of-sale data analysis to identify
trends, CAD to make important product design decisions closer to the retail selling
season, and flexible manufacturing technologies to allow the timely, economical
production of small lot sizes.
Though it is contended that a quick response of 30 working days is achievable with

currently available technologies, but typically it takes over four times as long,
requiring 8days for placement of store order, 32 days for fabric sourcing and planning,
7 days for cutting, 20 days for sewing and a staggering 58 days for the goods to make
onto the sales floor, for a total of 125 days [9].
Impact of Technology
Never has so much technology and brainpower been applied to improving supply
chain performance. Point-of–Sale scanners allow companies to capture the
37
Logistics and SCM : An Customer’s voice. Electronic Data Interchange lets all stages of the supply chain
Overview hear that voice and react to it by flexible manufacturing, automated warehousing, and
rapid logistics. And new concepts such as quick response, efficient consumer
response, accurate response, mass customization, lean manufacturing, and agile
manufacturing offer models for applying the new technology to improve
performance [4].
3.6 CHAIN RELATIONSHIP – WITHIN AND BEYOND

THE ORGANIZATION
Organizations that work without functional barriers are likely to achieve coordination
within the various components of the supply chain. This also necessitates the
integration of data across the enterprise so that all planners in the SC share common
information. It is important for organizations to have horizontal and vertical visibility
into their SCs.
Advanced Manufacturing Research, a Boston-based consulting firm, developed a

supply chain model, which emphasizes material and information flow between
manufacturers and their trading partners [1].
The changes required by the management, are due to the following changes:
· Greater sharing of information between vendors and customers
· Horizontal business processes replacing vertical departmental functions
· Shift from mass production to customized products
· Increased reliance on purchased materials and outside processing with a
simultaneous reduction in the number of suppliers
· Greater emphasis on organizational and process flexibility
· Necessity to coordinate processes across many sites
· Employee empowerment and the need for rules-based, real-time decision
support systems
· Competitive pressure to introduce new products more quickly.
Most product supply systems are out of balance with customer requirements. Each
link in the product supply system should be individually capable of producing and
delivering what customers order each day. The entire supply chain is only as capable
as the weakest link in the system.
Having pursued cost cutting measures aggressively, many companies have reached
the point of diminishing returns within their organization’s own boundaries and believe
that better coordination across corporate boundaries- with suppliers and distributors –
presents the greatest opportunities. This has coincided with the emergence of
electronic networks that facilitate closer coordination.
Uncertainty is inherent in innovative products and requires efforts to find how to cope
with it by creating a responsive SC. A company can employ three coordinated
strategies to manage uncertainty:
· Striving to reduce uncertainty by finding sources of new data that can serve as
leading indicators or by having different products share common components to
the extent possible so that demand for components becomes more predictable.
· Avoid uncertainty by cutting lead times and increasing the SC’s flexibility to
produce to order or at least make it at a time closer to when demand materializes
38 and can be accurately forecast.
· Hedge against the remaining residual uncertainty with buffers of the inventory or Logistics and SCM : An
excess capacity. Introduction
Dispersed Manufacturing – Dissected Value Chain- Management of Chain

Relationship
As companies focus on their core activities and outsource the rest, their success
increasingly depends on their ability to control what happens in the value chain
outside their own boundaries. In 1980s, the focus was on supplier partnership to
improve cost and quality. In today’s faster-paced markets, the focus has shifted to
innovation, flexibility and speed [7].
Li & Fung is Hong Kong’s largest export trading company and innovator in the
development of SCM. On behalf of it’s customers, mostly retailers of US and EU,
they work with an ever expanding network of thousands of suppliers around the
globe, sourcing clothing, toys, fashion accessories, luggage. It draws on Hon Kong’s
expertise in distribution-process technology – a host of information intensive service
functions including product development, sourcing, financing, shipping, handling and
logistics.
This group’s one breakthrough was dispersed production and dissecting the value
chain- Labour intensive middle portion is done in southern China and the front and
back ends of the value chain in Hong Kong.
Instead of considering which country do the best job overall, they adopted an idea of
doing it globally by way of pulling apart the value chain and optimizing each step. For
an example when it received an order from a US buyer to produce 10000 pcs of
garments, they might decide to buy the yarn from a Korean producer but get it woven
and dyed in Taiwan. The buttons and zippers might come from Chinese plants. Then,
because of quota and labour conditions, make the garments in Thailand. If buyer
needs quick delivery, divide the orders to five factories in Thailand. Effectively it was
customizing the value chain to best meet the customer’s needs. Five weeks after the
receipt of the order 10000 garments arrived on the shelves in US, all looked like
coming from one factory, with colours and everything perfectly matched. This is a
new type of value added, a truly global product. Though the level would show “ Made
in Thailand”, but it’s not a Thai product. The manufacturing process was dissected
and looked for the best solution at each step. The benefits outweigh the costs of
logistics and transportation [7].
Similarly, it may be observed that the main pillars of success for ECR are the
Integration, Collaboration, Co-ordination, Trust, Openness, and Sharing of information
as well as benefits among all the channel partners, supported by advanced
Information & Communication Technologies.
Forming close, ongoing relationships even with the carriers or logistic service
providers can help to have distinctive competitive advantage in speed to customer,
reliability, availability or other customer service factors.
The efficiency and effectiveness of customer service is possible through dedicated

and motivated channel partners, which partly comes through a well-maintained
relationship at each level. Suppliers, Distributors and Retailers need to trust each
other to establish long-term relationships and provide optimum value to the customer.
Efficient new product introduction and sales promotion can be explored by way of
collaborative relationships among trading partners.
Relationship Marketing is the practice of building long term satisfying relations with
suppliers, distributors, retailers and customers – with an objective to have their long-
term preference and business. This is achieved by delivering high quality on time,
39
Logistics and SCM : An good service and fair prices to other parties over a period of time. It also results in
Overview strong economic, technical, and social ties among them and reduce transaction cost
and time.
The ultimate outcome could be building a unique company asset called a Marketing
Network, consisting of all stakeholders: customers, employees, suppliers, distributors,
retailers, advertising agencies, university scientists, transporters and any other service
providers. The competition, in future, will be between whole networks- rather than
between the companies.
The company’s challenge is to reactivate the dissatisfied customer through customer

win- back strategies. It is easier to retract lost customers than to find new ones. The
cost of attracting a new customer is estimated to be five times the cost of keeping a
current customer happy. The emphasis is now shifting from making sales to building
relationship. Apart from use of computers, information and communication
technologies, fundamental changes in operational relationship are required. High tech
without high touch may not provide a long-term differentiator.
Strategic Issues
The strategy of differentiation to satisfy specific customer requirements based on

logistics performance/competency is becoming increasingly popular. In the present
century, there is a pressing need of clear strategies to be distinctly different and
unique, offering something different from their rivals.
Organizations have been rushing to implement the latest ideas on management and
struggling to fit all the pieces together: TQM, TPM, Reengineering, Time-based
Competition, Benchmarking, Restructuring, Downsizing, Cost Reduction, ERP
Implementation and Supply Chain Management.
All these improvements are necessary just to stay in the game. But, that is not
sufficient because, if everybody is competing on the same set of variables, then the
standard gets higher but no company gets ahead. Therefore, organizations need to
create distinctive competitive advantages continuously [3].
Manufacturers will have to increasingly think in terms of delivering value to

customers/end-users, and this will require a complete rethinking in the way a
company would need to operate it’s supply chain in the future.
Activity 3
“Li and Fung of Hong Kong has been very successful in a complex and competitive
business environment by way adopting dispersed manufacturing, dissected value
chain and effective management of chain relationship” - do you agree with the
statement. How do you implement a similar system for an international book publisher
based in Delhi? What are the technological advances that can be useful for this
business situation?
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40
3.7 SCM AS A CORE STRATEGIC COMPETENCY Introduction
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 organization’s 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-to-benefit [2].
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 [1].
3.8 SUMMARY
Supply Chain Management competency contributes to an organization’s success by

providing customers with timely and accurate product delivery. Excellent customer
service performance is likely to add value for members of the supply chain. Many
organizations have switched over from product focus to customer focus. It is
important to clearly understand customer service deliverables when establishing
Supply Chain Management strategies. This unit has discussed the customer focus in
Supply Chain Management. It had deliberated on the key processes required to
enhance customer focus in the supply chain

1) How can customer service be improved by proper implementation of SCM?
2) What are the fundamental concepts on which customer focused marketing is
built on?
3) Can you define Basic Customer Service?
4) Why SCM became an important managerial issue during 1990s?
5) Do you see any difference between a functional and an innovative product?
How these differences influence the supply chain design and its performance
objectives?
41
Logistics and SCM : An 6) State some of the strategies that are followed in implementation of Efficient
Overview Consumer Response (ECR).
7) How ECR can facilitate building customer relationship?
8) In order to achieve benefits of ECR, which are the organizational issues, a firm
has to review and re-orient it?
9) What are the salient features of Quick Response System? For what kind of
product it has been found to be beneficial and why?
10) Briefly explain the “Accurate Response System”?
11) Which are the technological advances, which have made possible the application
of concepts like ECR and QR?
12) How the chain relationship can contribute to the success of SCM. Is it necessary
to extend this relationship beyond the chain, to further achieve the objectives of
SCM?
13) Do you think that there is a linkage between SCM and CRM (Customer
Relationship Management)?
14) Can SCM be considered as a strategy for differentiation? If yes, why and how
this should be exploited.

READINGS
1) Bowersox Donald J. and Closs David J., “Logistical Management- The
Integrated Supply Chain Management”, McGraw-Hill International Editions,
1996
2) Janice H. Hammond and Maura G. Kelly, “ Quick Response in the Apparel
Industry”, Harvard Business School Publishing, Case No.9-690-038, Rev
April 24,1991, pp1-19
3) Joan Magretta, “ Fast, global and entrepreneurial: Supply Chain Management,
Hong Kong style An Interview with Victor Fung”, Harvard Business Review,
September-October 1998, pp103-114
4) Marshall L.Fisher, Janice H.Hammond, Walter R. Obermeyer, and Ananth
Raman. “Making supply meet demand in an uncertain world”, Harvard
Business Review, May-June 1994, pp83-93
5) Marshall L.Fisher. “What is the Right Supply Chain for your product?” Harvard
Business Review, March-April, 1997, pp: 105-116.
6) Rhonda R. Lummus, Robert J. Vokurka and Karen L. Alber. , “Strategic
Supply Chain Planning”, Production and Inventory Management Journal,
Third Quarter, 1998, APICS, pp: 49 – 58
7) Robert D. Buzzell, “Vanity Fair Mills- Market Response System”, Harvard
Business School, Case no.9-593-111, Rev October 12,1993,pp1-31
8) Satyabir Bhattacharya. “Integrated Supply Chain Management – A key to
Effective Manufacturing in the next Millennium”, www.indiatoday.com/btoday/
200010/plus/.html, 1/1/00, pp: 1-7
9) Sumantra Sengupta and John Turnbull. “ Seamless Optimization of the entire
supply chain”, IIE Solutions, October 1996, pp: 28-33
42
Indira Gandhi
Chain Management
Block
2
DESIGN AND MANAGEMENT OF SCM
Unit 4
Logistics : Inbound and Outbound 5
Unit 5
Models for SCM Integration 25
Unit 6
Strategic Supply Chain Management 40
Unit 7
Organizing for Global Markets 56
Mumbai New Delhi
Mumbai

Jharsuguda
Mumbai

December, 2004
ISBN-81-
BLOCK 2 DESIGN AND MANAGEMENT OF
SCM
Unit 4: Logistics - Inbound & Outbound begins with defining Logistics. It portrays
the facets of Logistics i.e. Transportation & Warehousing. It renders Logistics as a
key to supply chain management. A talk on the subject of Inbound & Outbound
Logistics is initiated. Finally it describes Logistics from supplier to manufacturer &
manufacturer to consumers
Unit 5: Models for SCM integration delineates SCM integration & describes
strategies involved in SCM integration. It illustrates models for integrating supply and
demand chain. It characterizes demand management & visualizes real demand. The
unit highlights the relationship between material flow, information flow and cash flow.
It finally elucidates Bullwhip effect and illustrates measures to counter them.
Unit 6: Strategic Supply Chain Management thrash out the imperatives for supply
chain strategy development. It helps you to be acquainted with the issues in supply
chain domain and strategic decisions in the supply chain. It discusses supplier
alliances and illustrates supplier quality management and related problems. It also
gives explanation of supply chain re-engineering concept.
Unit 7: Organizing for global markets begin with defining World Class Supply
Chain Management (WCSCM) and International SCM. It discusses international
logistics and globalization. The unit tries to identify the steps to be initiated before
going global. It also has a discussion about organization for global markets & global
sourcing. It closes by explaining world-class logistics management & interfacing of
logistics.
Design and Management of
SCM
4
Organizing for Global
UNIT 4 DESIGN AND MANAGEMENT OF SCM Markets
Objectives
After reading this unit you would be able to:

· define Logistics;
· describe the facets of Logistics i.e. Transportation & Warehousing;
· portray Logistics as a key to supply chain management;
· discuss about Inbound & Outbound Logistics; and
· describe Logistics from supplier to manufacturer & manufacturer to consumers.
Structure
4.1 Introduction
4.2 Logistics: Definition
4.3 What is Supply Chain Management (SCM)?
4.4 Design and Management of SCM
4.5 Logistics: Inbound and Outbound
4.5.1 Suppliers to Manufacturers
4.5.2 Manufacturers to Consumers
4.6 Logistics Management
4.7 Integrating Logistics
4.8 Perspectives in Logistics
4.9 Summary
4.1 INTRODUCTION
The role of logistics has for long been perceived by many senior managers and chief
executives, as nothing more than getting the right product at the right place in time
and within costs. However, in recent times to be successful logisticians a wider
perspective has to be developed with due consideration to the strategic role played by
logistic management in an organization. Strategic management of acquisitions,
movement, storage of raw materials, production and shipment to delivery to end-users
are some of the significant tasks of logistics management. Cost-effectiveness and
speed are the inherent requirements to make the operation a successful one.
Logistics is a very intricate yet a very simple subject to learn about, but a very
complicated subject in case the channels of logistics are not in place and not
integrated. Logistics per se, require a lot of coordination and integration at the highest
and the lowest of levels. Rightly said, a logisticians phone never stops ringing, he
moves from crisis to crisis, and from one criticality to another.
4.2 LOGISTICS: DEFINITION
We will begin with an illustration. Take the case of a small time businessman who
manufactured and marketed jam, those were the days when it had only a few brands
to reckon with. It entailed traveling long distances from Calcutta (now Kolkata) to the
remotest parts of Bengal & Bihar (some areas of Jharkhand). The load used to be 5
Design and Management of huddled up at the rear (body of the vehicle) neatly packed in bright colored cardboard
SCM packages. The manufacturer processed the guavas/mangoes/pine-apple etc into a
jelly like substance, bottled them carefully under his eyes, sealed them with molten
wax (that was the practice those days), labeled them, packed them into neat
containers careful enough to prevent breakages, marked them for the consignor and
dispatched them to their destination. The surplus were sent to a badly lit room and
stacked neatly by placing bricks under the packages to prevent against damp. You
must have observed how meticulous he was and so concerned about his products.
One must admit here that one learn logistics in a very practical way. Right from the
time you used your tri-cycle to lug the loads your friends carried. When you played as
children, unknowingly, stacking your belongings neatly and carefully, inadvertently,
and later delivered them to another friend and took a few marbles in return of those
proud possessions. Till date one is doing almost the same thing; mobilizing men,
material, equipment and supplies over long distances across the length and breadth of
this country, and stocking them for a further use. That is what is logistics in short.
Coming to the proper definition, the term logistics could be used to cover all aspects
of movement, storages of material and to deliver the material to the user. For a
manager the definition would mean involving movement of goods both in the inbound
and outbound sides. It is responsible for both incoming goods and distribution of goods
to the next member of the supply chain and to the end consumer per se. In almost all
cases, the logisticians design and manage the company’s distribution system, which
consists of warehouses, distribution points and transport systems. Logistics can play a
major role in shaping and determining the nature of the overall corporate response to
exploit market opportunities (Deshmukh & Mohanty, 2004). Marketing forecasts
precede exploration of market opportunities, since, overall potential of the market,
customer profiles, price/volume combinations and resellers profile is to be identified
before the best suited infrastructure is utilized to maximize the opportunities available.
A logistic activity enables a broader view that has to be undertaken on how the
available opportunity can at best be approached. This would further enable the
management to review the number of production options available whether it is
manufacturing of components, assembly operations or a combination approach. The
important characteristics of this decision process concern the relationship between
fixed and variable costs ab-initio and also through the product life cycle. This will
require a view of the markets, the response of the product competitors and an
assessment of market risk.
Logistics can make or break a company. How? Once a logistics decision is taken, the
implications of that will be, high level of services in terms of product availability and
delivery. Failure of logistics will affect your company repute and overall affect the
market share. Therefore, in a nutshell one has to understand the importance of
logistics and its related decision, since it’s the key to effective supply chain
management, and also the first step towards building a strong market position.
Let us see this through an illustration fig 4.1:
Once you have generally understood the basics of logistics we can now inch forward
to the intricacies involved in making this logistics happen and what helps in a
successful logistics activity. Like in the army it is said that no war can be won without
the foresight and planning of an expert logisticians. A soldier can fight a battle in the
adverse of conditions, only when, the logistician ensures timely supply of stores, ration
and ammunition in all weather and terrain conditions. The two major aspects of
logistics are transporting and warehousing, without which logistics is seriously
affected.
6
Markets
DIRECT
OUTLETS
MOVE OF RAW
MATERIALS BY DIFFERENT MODES OF TRANSPORT
PRODUCT WAREHOUSING CONSUMERS

IN-DIRECT
PROCESSING & STORAGE
MOVE OF RAW BY DIFFERENT MODES OF TRANSPORT

MATERIALS
OUTLETS
Fig 4.1: Basic Block Diagram to Understand Logistics
Transportation
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 (Fig 4.2).
40
35
COMPANY GROWTH
30
TRANSPORTATION SYSTEM
25 CUSTOMER
COST SATISFACTION
20
15
PRODUCT
10
PRICE LEVEL COMPANY OPTIMUM
05 EXPANSION
00 05 10 15 20 25 30 35 40
Fig 4.2 Transportation Cost Factor and it’s bearing on the Company and Customer
1
Mohanty & Deshmukh in Essentials of Supply chain Management, chapter 7, pp. 118-119.
7
Design and Management of Where, numerical 40 is a variable factor representing the optimum level in terms of
SCM costs & growth in X & Y axis. With the transportation costs coming down from 40 to
30 the product costs lowers to even between 10 and 5, which is directly proportional
to the customer satisfaction, which rises to 30 to 35 and affects company growth
to 40.
Transportation system has a strategic bearing on operation of a company. Therefore,

failure to identify the best transportation mode can directly affect the growth of a
company. Higher transport costs will raise prices, which will directly affect the
customer satisfaction in a negative way. The three factors as mentioned by Gattoma
& Walters required to consider are:
· Customer
· Environment
· Product & company.
Organization, which involves physical movement of goods require transport services

that varies from mode to mode. The best suitable mode is required to be identified
depending upon the nature of product that has to be moved.Therefore, in order to
identify the right transport system the following have to be considered:
· Impact of the transport system on the supply chain.
· Factors that determine the choice of transport mode.
· Who are the customers to your product per se?
· What are the environmental factors?
· What is the product?
· What is your company profile?
· Feedback and reporting both from within and the environment on the choice of
transport, and rectify in case you went wrong the first time.
· Your foresight, flexibility & integration of available resources in planning stage
will be one of the crucial factors that will dictate the choice of transport.
Next we have to see as to what are the considerations that influence transportation?2
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.
2
Mohanty & Deshmukh in Essentials of SCM, chapter on Transportation in SCM, pp. 119-121.
8
· Manufacturing Operations: cost of transporting has a direct bearing on the Organizing for Global
location of the manufacturing market center. That is why, extraction based units Markets
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:3
· Stage I: identification of those factors affecting the choice of transport selection.
· Stage II: categorize the significant factors and identify the potential risks.
· Stage III: determination of the distribution network depending upon the number
and size of the depots.
· Stage IV: application of matrix analysis for selecting the right transport.
· Stage V: measure and monitor costs continuously.
A Decision Framework
Determining an organization’s transport requirement will be based on the following

underlying considerations:
· The available depots, their sizes including movement requirements of raw
materials to manufacturing units and finished products to the warehouses and on
to the consumers.
· The best choice of mode available depending on the distance involved.
· Product characteristics that will further dictate the type of transport mode to be
employed.
· The choice of equipment in terms of type of transport for each requirement.
· The financial option that could be employed in terms of individual type of
equipment.
· The operation needs in terms of usage of the equipment for maximum utilization
and minimum operational costs.
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
3
Deshmukh & Mohanty in Essentials of SCM, pp130-131.
9
Design and Management of costs, i.e. increased transport costs will have risen prices and vice versa. Therefore,
SCM appropriate selection of the right transport mode is necessary for optimum customer
satisfaction and for a balanced logistics system of the firm.
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:
· Material handling. It consists of receiving, storing and shipping.
· Storage. This maximizes customer services by improving product and location
positioning.
· Transfer of information. This ensures timely and accurate information on
inventory status, space utilization, equipment and manpower availability and
transport capacity.
In order to develop an effective warehousing strategy the following areas have to be
addressed:
· Documentation of existing warehouses operations.
· Documentation of the storage facilities and put forth requirements over the
planning horizon.
· Identify the shortfalls within the warehouses that are available including the
deficiencies.
· Alternate warehousing plans to meet contingencies in strategy.
· Selection of the best alternative.
· 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.
4.3 WHAT IS SUPPLY CHAIN MANAGEMENT (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:
· An integrated system that helps in managing the flow of distribution channel
from supplier to the consumers.
· SCM is a systematic method designed to manage the flow of information,
materials and services both inbound and outbound, i.e. from the supplier to
10 manufacturer to the end customers.
· It’s a strategic coordination of all the related business functions within a Organizing for Global
particular firm and across businesses within the supply chain, in order to improve Markets
performance of the individual companies and of the supply chain.
· It is associated with all the activities encompassing the upward and downward
movement of goods and materials from the nascent stage to the production
stage and to the consumer. 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.
· It’s a concerted effort of all in the channel to develop, design, manage and
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
COMPANY MANAGEMENT
SUPPLIERS PRODUCT DESIGNER
PRODUCT MANAGER
MILK
SUGAR MANUFACTURER
WORK FORCE
COCOA TRANSPORT
SYSTEM PROCESSING
BUTTER FAT UNIT
SALT
FINISHED PRODUCT
CHOCOLATES
LABELLERS
TRANSPORT SYSTEM
PRICING
CONTROL
WAREHOUSES
STOCKISTS
TRANSPORT SYSTEM
DISTRIBUTORS DISTRIBUTORS DISTRIBUTORS
CONSUMERS CONSUMERS CONSUMERS
Fig. 4.3 : A Layout of An Ideal Processing Unit Explaining the Supply Chain 11
Design and Management of for your money, the best coca powder for the flavor, an efficient product manager
SCM 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.
A few flow diagrams have been placed for your better understanding. Once you
have understood this part of the unit the associated and related matters to supply
chain will follow suit, (figure 4.3).
Activity 1
Visit a nearby industry and understand the SCM system being followed in that
organization and co-relate the same with what you have learnt theoretically.
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4.4 DESIGN AND MANAGEMENT OF SCM
Internal functions and external suppliers constitute a company’s 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
company’s 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.
The principle phases of supply chain management are:

· What are the requirements and its generation?
· Sourcing
· Pricing
· Post-award activities
These phases are all interrelated and interdependent and cannot function in isolation.
The generation of requirement phase is the most important of all the phases, since;
almost 85% of the cost of materials, services and equipment is designed during this
phase. However, the irony is that supply management is not a contributor to this
phase in particular but assumes greater role for the next three phases, i.e. sourcing,
pricing and post award activities4 .
1
World Class Supply management by Burt, Dobler & Starling Tata Mc Graw-Hill page 2.
12
Let us now see the four phases of supply management and how best can this be Organizing for Global
obtained by interfacing each one of them with the other. Markets
Generation of Requirements
As an entrepreneur what is your requirement, and how do you get them? It is a
question that is continuously lingering in the minds of all managers involved with this.
It is a critical activity that terminates in identifying the right and the best material
along with development of specifications and statements of work that describe these
requirements. The exodus of materials, services and equipments are ‘designed in’
during this particular phase5 , to the tune of almost 85%. Therefore in order to ensure
appropriate consideration to the services, raw materials and costs per se, supply
management should be involved right from the word go during generation of
requirement phase.
Sourcing
When one decides to go shopping just try and visualize what all plays up in one’s
mind? Say, you have to buy a Music System for example. Then what? The mental
appreciation quickly says thems following:
· Budget: How much money can you spend on a system?
· Brand: Which is the best brand available in the market for the budget you have?
· Availability: Is it readily available too?
· Services: In case it is available how are its after sales services?
· Final selection: What is the best that suits all the above?
That is exactly the appreciation one got to do before sourcing. Identifying and
selection of the best supplier available in the market, whose costs, materials,
dependability, quality and services suits the manufacturers requirements. Sourcing is
development of a supply alliance, and it is an activity by itself.6
Pricing
It’s a two way traffic aimed both at the supplier and the manufacturer. It’s done in
such a way that it benefits the supplier for its effort and also results in lowest cost for
the firm who buys the supplies. Keeping in mind inflationary trends, pricing forms
part of the on-going process in supply management with inbuilt negotiations, to arrive
at the best deal possible. If the supplies are costly the price of the commodity also
rises. Therefore, in order to strike a balance the job of supply management is to
continuously monitor this aspect so as to keep the prices from rising. For example,
when the prices of diesel goes up, the transportation cost increases leading to
increase in prices of supply. Foresight and planning on the part of the manufacturer
plays a leading role in assessing and reacting to such eventualities in a big way.
Post pricing
This is another important phase which ensures that the firm receives what it
demanded, and that too timely. It also ensures that the prices are in check and that
quality is being maintained. This also includes supplier developments, criticalities
management, technical assistance and management of the complete contract.
That is what are the principal phases of supply chain management (SCM). All the
sub phases are inter-related and managed under one head the SCM systems. Let us
see this more closely with this block diagram.
5
“Manufacturing by Design” by D Whitney, Harvard Business Review, July 1988, pp. 83-91
6
‘The Foundation’, chapter 1 of WCSM, by Burt, pp. 16. 13
SCM
GENERATION OF REQUIREMENT SOURCING
MATERIALS SERVICES COSTS
QUALITY TIME
STATEMENTS OF WORK SPECIFICATIONS
TECHNOLOGY
POST-PRICING PRICING
QUALITY LOWEST COST TO FIRM APPROPRIATE COST TO SUPPLIER
QUANTITY
TIMELY PRICE CONTROL
Fig 4.4: The Principles and Phases of SCM
4.5 LOGISTICS : INBOUND AND OUTBOUND
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 don’t
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 trucker’s strike in 2004. It was bad for economy of the country and
above all worse for those manufacturer’s who couldn’t 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. How, let us see.
4.5.1 Suppliers to Manufacturers
The most complicated, yet, the most important phase in any production is the
movement of raw materials from the supply point by the suppliers to the
manufacturing unit. Identification of the right type of suppliers is therefore the
key to effective SCM system.
Can you envisage the various agencies and steps that are involved in this total
system? Let us see them one by one.
· What is the raw material that has to be moved?
· What is the cheapest and the best available with the suppliers?
· Where is it available?
· What are the credentials of the supplier?
· What is the mode of transport being utilized for the move?
14
· Is it cost effective?
· What is the time factor involved in the movement? Organizing for Global
Markets
· Does weather and climate play a predominant role in moving the raw
material?
· What are the terrain conditions in the areas from where it has to be
moved?
· What is the distance involved?
· Is it of acceptable quality?
All these have to be addressed before one plans for movement of these raw
materials, that too in great detail. That is what is an effective SCM system to be
followed by every firm. Let us see this with an illustration.
An Illustration
A material ‘X’ has to move from Bihar, which is famous for lot of ores and raw
materials responsible in shaping our products. Let me be more specific in saying
so. Some minerals from Sasaram have to be moved to Surat in Gujarat for
making some product ‘Y’. The road distance works out close to approximately
1600 kilometers, quite a lot as per Indian standards. A truck loaded with X
leaves Sasaram on D-day (where D is 1). As per Indian road conditions it could
take anything between 3 to 4 days for the material to reach. Therefore the total
time works out to D+3/D+4, i.e. 4th/5th day the truck will reach Surat. Unloading
time ½ a day, running time works out to 4 ½ /5 ½ days. Thereafter quality
checks and various processes to place these raw materials on the production line
will take another 2 days works out to 6 ½ /7 ½ days. Production time of 1 to 2
days depending on the type of product works out to 7 ½ / 8 ½ days. Keeping a
cushion of 1 day the time taken for the finished product will be anything between
9 to 10 days. That is the planning involved in making a finished product and
achieving your target. That is under absolute ideal conditions. India is subjected to
numerous disruptions in form of natural calamities, man made obstacles, disasters,
accidents and unrest. One has to cater for these criticalities and therefore
foresight in planning is must. Suppose there is flood like situation at Sasaram,
then what? One has to plan for warehousing near Surat where certain stocks
catering to these kinds of contingencies have to be catered for, ab-initio. Like
floods there could be strikes and bandh too. These are the gray areas that have
to be addressed in totality, apart from the fact that the vehicle could also break
down en-route. There could be a number of examples related to movement of
stocks and supplies, be it rail, water, road or air. All have their complexities and
peculiarities, but the underlying basics are the same one has to plan ahead come
what may, to avoid irregularities.
Table 4.1: Terrain-wise Criticalities
Criticalities Mountains Plains Desert Link Roads
Going Hilly roads, Smooth Going, A mix of good and Rough and slow
Conditions Bends & Zigs Faster mode bad going
Time Factor Slow Fastest Medium Very slow
Prone To Severe Lesser Rare but at times Loots, bandh and
accidents, magnitude, but over speeding results Strike, Accidents
Losses in Cannot be ruled In damages Related to
supplies out population
Repair & Difficult, Available in Repair facility Rare, prone to
Recovery Frequent plenty restricted to severe breakdowns
breakdown highways only
Calamities Road Blocks, Floods, bandhs, Very rare, since Frequent

Slides, Flash riots & strikes population centers disruptions owing
Floods are far apart to congestion of
population centers
15
Design and Management of Movement of supplies from suppliers to manufacturers differs from place to
SCM place. Terrain plays a predominant role in this aspect and you have to realize this
point. In mountains the criticalities are far too many and you can understand the
aforesaid through this chart in a better way.
From the above it’s evident that criticalities in any form disrupts movement in a big
way irrespective of the terrain but you got to plan your time schedule depending on
the terrain on which your supplies are moving. Therefore, knowledge on these areas
is very important so that the suppliers cannot take you for granted on these counts.
Studies on geography and layout of an area of responsibility and related aspects are
therefore important for a manager dealing with logistics.
Activity 2
Study the aspects of terrain and its implications on logistics management. Visit a few
places in the hilly and mountainous terrain and understand the implication of these
areas on logistics management.
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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.
The various criticalities pertaining to logistics in rural areas are:
· Large quantities and more number of collection points.
· Distance between the manufacturers and users are large.
· Materials are bulky, perishable, and expendable and have inferior packaging.
· Certain places have to be communicated through handcarts, tractors, boats,
cycles and bullock carts.
· Trips are generally one-way and hence not cost effective.
· Uniformity in work is missing, since; logistics are restricted to peak seasons
only.
· A mix of intermediaries and direct delivery.
· Storage, movement and packaging of agro products are difficult and time
consuming.
There are many more to this depending upon the nature of terrain and climatic
conditions too, but these are the salient ones and you as a manager have to
understand this aspect. Trading in rural areas is difficult and risky too.
Storage in rural areas is another criticality due to restriction in storage areas and
because the agro produces are seasonal in nature. These are to be consumed round
the year, both in season and off-season. Storage starts right from the time the harvest
is ready till its distributed to the consumers. The various storage places available are:
16
· At the farm itself. Organizing for Global
Markets
· Village collection centers/collection points.
· With the processor.
· Wholesaler.
· Bins and self-help store rooms under stringent conditions.
· Retailer.
· Market place/selling points.
The shelf life of these items generally the farm produce are very less and hence
planned infrastructure has to be developed for proper storage facility like the cold
rooms.
Transport in these areas is still primitive in nature; starting from bullock carts,
cycles, hand carts, rickshaw van, boats, animal transport and even stragglers.
This is due to bad roads and roads connectivity. India has one of the largest road
networks in the world with approximately 2.5 million kilometers of road network.
National highway accounts to nearly 5200 km, which is barely 2% of the total
roads in the country. Actually movement of goods from rural areas becomes
expensive due to its handling costs and number of organizations involved in it. Let
us see it with an illustration.
ROADS
SOURCE WAREHOURSES
PRODUCE FACTORIES GOODS
MARKETPLACE CENTRAL POINTS
CONSUMERS
A RURAL AREA SCM SYSTEM: DEPICTING MOVES OF GOODS

EX SOURCES TO THE MARKET PLACE
Fig 4.5: Rural Area SCM System

Activity 3
As a student of Logistics suggest a few practical viewpoints, which differs urban
from rural logistics, both in terms of management and maintenance. Organize a
visit to a rural area factory and carry out a feasibility study on how logistics can
be improved for better response.
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17
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Design and Management of Urban Areas
SCM
Coming on to urban areas, the process is certainly different since; it doesn’t have
to go through the exercise of moving through bad roads too often and poor
storage system. Things move more systematically and less time consuming,
though at times the carriers perforce move through difficult stretches of rural
areas, generally a mix of urban and rural areas. What happens in urban areas?
Let us see.
· The procurement is done generally closer home and very near to the towns
and cities.
· The supplier’s job is to supply the goods in the time frame and price that is
fixed initially.
· The company management generally contacts the supplier who has nominated
go-downs close to the place of manufacture, for better and even time
management.
· Unlike rural areas the suppliers in the fastest mode deliver the material and
services in order to save on time; a combination of rail, air and road at
places even waterways.
· Manufacturing takes lesser time in production and distribution thereafter.
· A better market available to the manufacturer for his goods.
From the above it’s evident that a manufacturer in the rural area stands at a
disadvantage visa-vie his urban counterpart for the following reasons:
· Movement of raw materials.
· Transport system.
· Storage facility.
· Production.
· Preservation.
· Distance from source to market area.
· Availability of market.
In a nutshell the SCM involved in managing a rural enterprise is more cumbersome
than the urban one.
4.5.2 Manufacturers to Consumers

Let us now visualize the various stages involved in moving the finished products
from the manufacturing units to the consumers. They are:
· Packaging of goods.
· Stocking them in warehouses/containerization.
· Loading into carriers/transportation.
· Delivery to the nearest wholesalers.
· Wholesalers to retailers.
· Retailers to market places/stores.
· To consumers.
These 7 steps are like any of those 7 days. It’s difficult to skip one to save on
another. Yes, there are direct marketing that the companies are following these
days, but they are numbered. But the basic stages of these companies too move
through pre-designated franchises and not directly. Hence, the time taken or cost
18 per se generally remain the same.
Problems envisaged in movement of products from manufacturing units to Organizing for Global
consumers are many and can be listed as under: Markets
· Perishable products.
· Losses in transit.
· Accidents and calamities.
· Unavoidable delays in terms of strikes and bandh.
· Labor unrest.
· Rats and rodents.
· Breakages during handling.
· General costing since at times even double handling is involved.
Let us see this with the help of a diagram, (figure 4.6).
TRANSPORT
PILFERAGE
SYSTEM
MANUFACTURING UNITS WAREHOUSES RIOTS & STRIKES
DISTRIBUTORS PERISHABLE
ULTIMATE AIM LABOUR UNREST WHOLESALERS BREAKAGES
LOSSES
RATS & RODENTS
MARKETS/STORES NATURAL
CONSUMERS RETAILERS CALAMITIES
RESPONSE OF THE EFFECT ON

CONSUMERS COSTING
Fig. 4.6: Problems Involved in Logistics Support
From the above it’s evident that labor’s unrest is generally common in the
complete process and an effective SCM in position can only help reducing these
miscalculations and criticalities. Natural calamities and strikes do pose a problem
for the manufacturer and indirectly increases the cost of items ultimately
available to the consumers. What is therefore your ultimate aim in this process of
SCM? It’s the response of the consumer for whom you made this happen, and
side-by-side what is the effect of the problems and criticalities on your product?
It affects the costing per se, and this is what is shown in the diagram above
(Fig.4.6).
Logistics both inbound and outbound is very intricate in nature. A consumer

sitting at the comfort of the room cannot virtually visualize how a packet of
toothpaste reaches him every time he uses it. What actually happens on ground
can only be realized by him who makes it happen that way. Once you start
thinking on it the various questions that arise are:
19
Design and Management of · Where does the raw material come from?
SCM
· Who supplies it to you?
· What is the best course available to you in procuring the right material with
in the cost per se from the available options? Who decides on that? You
and the management.
· How is the material moved and where to?
· How do you store this?
· What are the various contingencies involved in this?
· What if the stores don’t reach on time? What is the option available to you?
· What would be the losses in production?
· What would be the losses in packaging?
· If the production channel breaks down, then what?
· How do you transport the finished goods in the time frame available to you?
· How will your marketer’s distribute or market the products?
· What will be the response of the consumers to your product, your ultimate
aim?
All of the above are interlinked and have a direct bearing on the net output of
the firm. An effective SCM system in place wards off any such minor
shortcomings that can run into problems and criticalities later.
4.6 LOGISTICS MANAGEMENT
Before we went on to this let us see the triangle that is formed in the supply
chain management (SCM).
DEMAND
MANAGEMENT
LOGISTICS
MANAGEMENT
Fig. 4.7: Three Components of SCM
The three critical components of SCM are:

· Supply management
· Demand management
· Logistics management
You would learn about the supply and demand part of SCM in next unit and
would discuss on logistics part of it now. As discussed earlier that the logistics
20 professionals play a vital role in shaping the success of SCM as regards
management of transportation, storage and warehousing. We sometimes do tend Organizing for Global
to ignore the role of logistics but the supply and demand chain cannot be met Markets
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. (Fig 4.8)
RECIEPT HANDLING MOVEMENT STORAGE
TO
DELIVERY
MANUFACTURER
TO
CONSUMERS
Fig 4.8: Domain of Logistics
As Coyle puts it, “ logistics is the part of supply chain process that plans,
implements and controls the efficient, effective flow & storage of goods, services
and related information from point of origin to point of consumption for the
purpose of conforming to consumer requirements”. Logistics include the following
role (Fig 4.9)
ROLE
OF LOGISTICS
TRAFFIC CONTROL & WAREHOUSING &

TRANSPORT STORAGE TO INCLUDE
MANAGEMENT INFRASTRUCTURE
INVENTORY MATERIALS
CONTROL & MANAGEMENT &
MANAGEMENT HANDLING
DEMAND FORECAST SERVICE SUPPORT
SALVAGE
MANAGEMENT &
DISPOSAL
Fig 4.9: Role of Logistics
An effective SCM system will never be possible without the integration of

logistics, since logistics is the foundation of SCM discipline and is responsible for
its activities. Needless to mention here is that the transportation cost is the 21
Design and Management of heaviest in the entire chain, and even more than product selling prices. Therefore,
SCM in order to maximize customer satisfaction and meeting firm’s goal it is
mandatory to ensure that effective storage facilities for goods and services are in
place.
4.7 INTEGRATING LOGISTICS
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. That’s 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 it’s 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.
4.8 PERSPECTIVES IN LOGISTICS
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
22
in this though, like distance from the target population, which will involve Organizing for Global
more number of stocking points and areas. But, this can reduce the basic Markets
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
trucker’s 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. How? Let us see with the help of a figure.
DY MANAGING DIRECTOR /CEO
CHIEF LOGISTICS OFFICER (CLO)
MANAGER STORES TRANSPORT MANAGER SUPPLY OFFICER
COSTING FINANCES SPARES & SERVICES PROCUREMENT WING
INVENTORY CONTROL DELIVERY CONTROL WING
Fig. 4.10: Showing An Integrated Logistics Organization And Inherent Reporting
Activity 4
Suggest a new perspective to logistics management keeping in mind the present

changing logistics scenario.
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4.9 SUMMARY
Logistics plays a predominant role in designing and shaping of SCM in a firm.

Without an effective logistics system the effectiveness of the firms SCM channel
is questionable. Logistic activity helps in enabling a broader view to be taken for
handling the best available opportunity and how it is to be approached. If we
understand and know the economics of logistics activities it is possible to review
a number of production options that may include individual production
(manufacturing of all components), assembling, or an ideal combo approach. The
key players of logistics activity that is transportation and warehousing has been
amply discussed and will enable you to understand the nuances of selecting the
right transport mode for the right product and equipment within the overall gambit
23
Design and Management of of cost effectiveness. We have discussed the issues pertaining to move of
SCM logistics both in-bound and out-bound in the Indian scenario, within the scope of
this unit per se. Last but not the least, we have understood the designing and
management of SCM and the key to effective SCM, the logistics.

1) Define logistics and elucidate with appropriate examples in the Indian
context.
2) Explain the various factors of logistics with special reference to
transportation.
3) What are the stages for selection the appropriate transport mode and why?
4) Why is transportation important in a firm’s supply chain?
5) What is more important-inbound or outbound logistics in a supply chain?
6) Give relevant examples of the problems involved in logistics activity. How
can we overcome them?
7) What is a supply chain and what is effective SCM?
8) What are the factors that link supply chain?

READINGS
1) Krishnaveni Muthiah (2003), Logistics Management & World Sea-borne

Trade, Himalaya Publishing House, Mumbai (for basics of Logistics &
marketing interface)
2) Deshmukh & Mohanty(2004), Essentials of SCM , Jaico Publishing House,

Mumbai (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, Edith (2004), Designing

And Managing The Supply Chain, Tata McGraw-Hill
4) Mentzer, Fundamentals of Supply Chain Management, Sage India

Publishers
5) Burt, Dobler & Starling, World Class Supply Management, Tata Mc Graw-
Hill
6) D Whitney (1988), Manufacturing by Design, Harvard Business Review,

July 1988, pp. 83-91.
24
UNIT 5 MODELS FOR SCM INTEGRATION Markets
Objectives
· define SCM integration & describe strategies involved in SCM integration;
· illustrate models for integrating supply and demand chain;
· define demand management & visualize real demand;
· highlight the relationship between material flow, information flow and cash
flow; and
· elucidate Bullwhip effect and illustrate measures to counter them.
Structure
5.1 Introduction
5.2 Integrated Supply Chain/ Value Chain
5.3 Supply Chain Strategies
5.3.1 Push Based Supply Chain
5.3.2 Pull Based Supply Chain
5.3.3 Push-Pull Strategy
5.4 Demand Management
5.5 Internet and SCM
5.6 Physical Goods Flow, Virtual Flow and Cash Flow
5.7 Bullwhip Effect
5.8 A New Perspective to Counter Bullwhip Effect
5.9 Drivers of SCM
5.10 Summary
5.1 INTRODUCTION
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.1
1
Designing and managing the Supply Chain by Simchi Levi etal, TMH, p. 120
25
Design and Management of Development of an integrated supply chain requires management of material and
SCM 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. Let us see these perspectives one by one.
5.2 INTEGRATED SUPPLY CHAIN/VALUE CHAIN

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?
Stage 1: Baseline, Elevation Principally Technology Based
Material Flow Customer Service
Purchasing Material control Production Sales Distribution
Stage 2: Functional Integration Elevation Organization Based
Material Flow
Material Management Manufacturing Management Distribution
Stage 3 Internal Integration - Elevation Attitude Based
Material Management Manufacturing Management Distribution
Stage 4 External Integration
Suppliers Internal Supply Chain Customers
26
Fig 5.1: Steven’s Model of Supply Chain Integration
· Developing an organizational structure capable of bridging the functional Organizing for Global
hurdles, thereby ensuring an integrated value delivery based supply chain. Markets
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. (Fig 5.1).
Steven’s 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.
The same is highlighted in the fig 5.1 (Stevens 1989):
· 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.2
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.
5.3 SUPPLY CHAIN STRATEGIES
The various strategies that has to be followed for an effective integration are:
· Push & pull
· Push-pull
2
Mohanty & Deshmukh in Essentials of SCM, JAICO, 2004, pp. 8-10.
3
Supply chain integration by Kaminsky, TMH pp. 120-122 27
Design and Management of 5.3.1 Push Based Supply Chain
SCM
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
retailer’s 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.
5.3.2 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 it’s 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.
5.3.3 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. The push-pull boundary, exists somewhere in
between this time line and denotes the time when the company switches from
one strategy to the other as illustrated in figure 5.2.
3
28 Supply chain integration by Simchi Levi etal, TMH pp. 120-122
Consider a computer manufacturer, who builds to stock and thus makes all Organizing for Global
production and distribution decisions based on forecast. This is a push system. Markets
Whereas, push-pull strategy is one in which manufacturer builds to order, which
implies that component inventory is based on forecast and final assembly is in
response to specific customer request. Therefore, the push system is prior to
assembly and the pull system starts with assembling till delivery of the product.
The push-pull boundary is prior to assembly.
PUSH-PULL
START TIME BOUNDARY END TIME
PUSH STRATEGY PULL STRATEGY
PROCUREMENT OF RAW DELIVERY TO

MATERIALS CUSTOMER
Fig. 5.2: The Push-Pull Supply Chain System
Activity 1
Visit a company and analyze the SCM strategy being followed in the light of
present trends worldwide and justify your observation, with suitable case studies.
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5.4 DEMAND MANAGEMENT
Why do we require demand management? It’s primarily required since

accumulation of inventories amounting to millions in the supply chain shows
absence of demand management in the total system. “Demand management’s
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”.4
An Example to Elucidate Forecast Accuracy

You are part of a counseling class on SCM at IGNOU that meets every day
between 1800 hours to 2000 hours. Let the topic of discussion be forecast
accuracy. The counselor asks you approximately as to where will you be one
week from now at 2130 hours. You respond by saying 90% you will be here for
the class, with a 10% possibility of getting tied down to family commitments.
4
WCDM, from World Class Supply Management by Burt, Dobler & Starling, TMH, Chapter 8, pp. 624-626. 29
Design and Management of The next question of the counselor will be, with that in mind where will you be
SCM 4 years from now, at the same time?
You are partly speechless, and say “well one cannot be too sure and probably I
will graduate from IGNOU with a degree in SCM and will be trying to cope
with a job in hand.” The counselor adds on by saying, how sure can you be of
that? “ Not to sure perhaps I will be where I presume to be at that point in
time.”
So that is what it is just try and visualize how difficult it is for the firms to
forecast future demand for their product and services. It is quite akin to the
policy on trees plantation adopted by certain firms a few years back, where you
purchased trees today and expect a hike 20 years from now, without actually
forecasting what is going to be the condition of the sapling planted today after 20
years. The firms actually utilized the concept of forecast demand in a reversing
order and made the consumer/customer go in circles over own probability errors,
which they miscalculated. The company had done their homework pretty well to
convince you on this aspect, but you as the customer didn’t predict the future too
well. That is forecast accuracy, very difficult to predict in actuality but easy to
talk appreciate, with a may/could be factor, a gamble better avoided.
What is Demand Management?
Let us now see what is demand management per se? “It seeks to estimate,
control, smooth, coordinate, balance and influence the demand and supply for a
firm’s products and services in an effort to reduce total costs for the firm and its
supply chain.”5 It recognizes that forecasts are developed at several points
through out an organization, but doesn’t develop forecast. It accepts forecast
from other functions and updates these based on real time demand. It is also
directly related to supply in order to adjust the flow of raw materials and
services. So, how can we establish control in demand management?
By:
· Execution of effective production schedule
· Calculation of inventory levels
· Capabilities and capacity
· Developing of customer service strategies
It is also responsible for smoothing and streamlining production after the master
production schedule is in place and been released to internal production and
external suppliers. Demand keeps on changing on a day-to-day basis. Therefore
the demand managers should have contingencies in place in coordination with the
supply chain members so that necessary modifications could be affected well in
time. “Demand management also balances the total costs of not meeting the
demand against the total costs of adding additional resources required to meet the
growing demand,” says Burt in his book WCSM. Actually, without a forecast of
demand, supply channels tends to get cluttered and all this can effectively be
overcome through a comprehensive demand management.
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.6
5
Demand Management from WCSM by Burt, TMH, pp. 326.
6
Demand driven strategies in designing and managing supply chain, Simchi Levi et. al,
30 pp. 126-128
· Demand shaping: It is a process in which the firm determines the impact of Organizing for Global
various marketing plans such as promotions, pricing discounts, rebates, new Markets
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
· Determining the optimal assortment of products by store so as to reduce
the number of SKUs competing in the same market
At the end of it the firm has a demand forecast by SKU by location. 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
5.5 INTERNET AND SCM

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
31
Design and Management of successful in developing new business models and profited significantly by
SCM 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 e-
business? It is a collection of business models and processes motivated by the
Internet technology and focuses on improvement of extended enterprise
performance. E-commerce 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 e-business 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.
5.5 PHYSICAL GOODS FLOW, VIRTUAL FLOW AND

CASH FLOW
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 customer’s money among the members
of the chain. “A firm’s 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”.8 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”.9
The Internet today permits the supply chain managers to manage their supply
chains collaboratively and also synchronizes their operations. The net result is:
7
Gentry, J. J, “The role of Carriers in buyer-supplier 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.
8
Burt, Dobler & Sterling WCSM by Tata Mc Graw Hill 7th edition, p. 7 in Supply chain & networks.
9
Charles H. Fine, Clockspeed: Winning Industry Control in the Age of Temporary advantage. (as
32 specified by Burt in his book WCSM by Mc Graw-Hill, p. 7.)
· Reduced costs. Organizing for Global
Markets
· Time management.
· Competitiveness.
· Profitability.
Success of an organization in the near future will be driven by its ability to
compete effectively as a contributing member of a dynamically connected supply
chain management and not in isolation. Connectivity with customers, suppliers and
other partners and be able to interact quickly is critical to survival. Tomorrow, a
tightly connected e-chain will be a necessity.”10
MOTHER EXTRACTORS/ SUPPLIERS/

OEM
EARTH MINERS CONVERTER
CONVERTER
DISPOSAL END DISTRIBUTOR

CUSTOMER
SOURCE OF
FUNDS
MATERIALS & SERVICES PHYSICAL
INFORMATION VIRTUAL
FUNDS/CASH FLOW
Fig 5.3: Supply System’s Role in helping the Firm satisfy its role in its Supply Chain (Adapted
from ‘The Supply Chain’ By Burt In WCSM, 7th Edition, TMH)
Supply chains are relatively easier to describe and visualize, but the terminology is
already dated. “Traditionally, companies have connected with one another in
simple, linear chains, running from raw material producers to distributors to
retailers.”11 But the day is not far off that most companies will be an integral
part of the supply networks worldwide. Networks optimize the flow of goods
(physical flow) and services, virtual flow (information) and money (cash flow). It
focuses on the ultimate customer, who is once again the generator of funds.
They are so designed that one member doesn’t benefit at the cost of the other,
the networks are therefore:
· Adaptive
· Speedy
· Innovative
· Integrated
SCM in essence is based on creation of values. It is a network of business
processes used to deliver products and services from raw materials to end
customers through an engineered flow of information, physical distribution and
cash flow. It oversees the organizational relationships in order to get the
information necessary (virtual flow) to run the business, to get the products
delivered (physical flow) and get the finances that generate the business profits
10
Lisa L. Henriott, “Transforming Supply Chains into e-chains,” Supply chain management
supplement, Spring 1999, p.16 (Burt and Dobler in WCSM Tata Mc Graw-Hill pp. 7-9.)
11
Kevin Werbach, “Syndication: The emerging model for business in Internet era”, Harvard Business
Review, May-June 2000, pp. 85-93. 33
Design and Management of (cash flow). This is an integrated and extended enterprise concept and includes
SCM not only relationships with internal business functions, but also with those outside
the firm. What has been explained above is just the tip of the iceberg, since
SCM strategies are changing rapidly with growing involvement of IT and
electronic media.
END
CUSTOMERS
DISTRIBUTORS
EXTRACTORS CONVERTORS OEMs
MOTHER
EARTH AN IDEAL SUPPLY NETWORK
Fig 5.4: An Ideal Supply Network (Adapted From Supply Networks, Chapter 1 WCSM By Burt,
Dobler & Starling)
With this as a backdrop we come to bullwhip effect, which happens to be the

basic benchmark in understanding the supply, demand and inventory management,
and reasons why companies fall pray to this effect and how best can they
reduce it if not eliminate.
5.7 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 doesn’t 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.13
12
‘The Bullwhip Effect’ Chapter 27 towards world-class supply chain management, WCSM by Burt,
Dobler & Starling, TMH, pp. 627-628
13
34 Value of information, in Designing & managing the SC by Samchi Levi et. al, second edition, 2004,
TMH
Therefore, in order to identify and control the bullwhip effect its pertinent to Organizing for Global
understand the main factors that contribute towards increase in variability in the Markets
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.
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.
14
Value of Information in Designing & Managing Supply Chain, pp. 104-106.
35
Design and Management of · Supply Chain with Centralized Demand Information: In this type of
SCM 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.
FACTORY
DISTRIBUTORS
DEMAND FLOW/
STOCK/GOODS
FLOW INFORMATION
WHOLESALER FLOW
Observe Customer Demand.

RETAILER
Forecast Mean Demand.
Find Target Inventory.
Place Orders.
CASH FLOW
CONSUMERS
Fig 5.5: Supply chain with centralized demand information
· Decentralized Demand Information: the second type of supply chain is

the decentralized one. In this case the retailer doesn’t 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
36 system and multiplicative in the decentralized one. In other words in the
decentralized system where only the retailer knows the customer demand can Organizing for Global
lead to higher variability than a centralized one, in which the customer demand is Markets
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.
It’s 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.
Activity 2
Understand the aspects of Bullwhip effect and analyze the same with a practical
case study. Try and visit a firm to understand the effect of Bullwhip on SCM
systems and how does the company plan to negate the effect to some extent.
..............................................................................................................................
..............................................................................................................................
..............................................................................................................................
..............................................................................................................................
5.8 A NEW PERSPECTIVE TO COUNTER BULLWHIP

EFFECT
We have seen that bullwhip effect continues to stay in spite of our relentless
efforts. Hence, why don’t 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.
Let us see this with a live example
An area ‘X’ has a vibrant population and uses 2 popular brands of toothpaste
‘Y’ & ‘Z’. Say 50% uses ‘Y’ and the other 50% uses ‘Z’. Keeping the trends
of our present day advertisements people can sway from Y to Z and vice versa.
How do you find that out? Through your retailers/wholesalers who tell you this
month people are asking for more number of Y to Z? Can you actually believe
them? Since you believe them you aggravate your problems of existing Bullwhip
effect. Resultant to this is over stocking and if not sold you land up with a
clogged inventory, since the demands were more predictive than actuality. In
37
Design and Management of order to nullify this effect you could get your DIS activated and find out the
SCM actual on ground situation and believe your ‘eyes to the ears’. Let us see this
mathematically. Out of 1000 customers in an area, 700 under presumed ideal
conditions uses ‘Y’ and the balance 300 uses ‘Z’. That has been the trend for
the last 3 months plus minus 10% here and there. This month things were
different and you find your brand ‘Y’ has dipped to a low of 300, i.e. this month
you got 400 toothpastes that never sold. What do you do now? Think of a sale
gimmick and rush out your stock? Under ideal conditions, Yes! But how long
could you afford to do that? Another 3 months? It’s better you tide over this
persistent problem once for all by activating the DTC (direct to consumers)
method, wherein your own representatives are on the move continuously taking
direct feedback from the consumers, in site. This will give a more realistic figure
than a predictive one. These inputs can then be compared with that you received
from the retailers/wholesalers/distributors, and you reach a common average of
demands from one particular area. Looks simple on paper, requires tremendous
coordination to implement. Let us see this with a figure to remove any ambiguity
of sorts.
DIRECT INFORMATION MANUFACTURER

SYSTEM
ENVIRONMENTAL DISTRIBUTORS
REALITIES
DIRECT TO
AREA STUDIES WHOLESALER CONSUMERS.
A TWO WAY TRAFFIC
CONSUMER RETAILER
BEHAVIOUR
MARKET RESEARCH FEEDBACK/DEMAND

TECHNIOUES
CONSUMERS CONSUMERS CONSUMERS
Fig 5.7 : DIS model for negating bullwhip effect by DTC link (Direct to Consumer)
5.9 DRIVERS OF SCM
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
38
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 Organizing for Global
improve their responsiveness towards their clientele groups. The second is Markets
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.
5.10 SUMMARY
In this unit we have focused on the concepts like models for SCM. You have
learnt about value chain system. You deliberated the stages of integration of
supply chain and learnt about integrating supply and demand chain to include
demand management. You discussed the relationship of goods flow, information
and cash flow. Bullwhip effect and measures to reduce this effect were also
deliberated.

1) Integration of supply and demand chain will go a long way to build and
effective SCM system. Discuss with examples.
2) Explain with examples demand and demand management.
3) Explain the various models of SCM.
4) Explain push-pull model with relevant examples.
5) Discuss the role of Internet in SCM. Explain e-business and e-commerce.
6) What is Bullwhip effect? Explain the various permutations and combinations
to reduce this effect in SCM.
7) What are the reasons for variability in the supply chain? Explain in detail
with relevant examples.
8) How do you link goods flow, information flow and cash flow in SC
integration? Explain with appropriate diagram.

READINGS
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 buyer-supplier 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
39
era”, Harvard Business Review, May-June 2000, pp. 85-93.
SCM UNIT 6 STRATEGIC SUPPLY CHAIN
MANAGEMENT
Objectives
· discuss the imperatives for supply chain, strategy development;
· be acquainted with the issues in supply chain domain and strategic decisions
in the supply chain;
· discuss supplier alliances;
· illustrate supplier quality management and related problems; and
· explain supply chain re-engineering.
Structure
6.1 Introduction
6.2 Supply Chain: Growth
6.2.1 Trends in SCM
6.2.2 Strategic Decisions
6.2.3 Strategic Supply Management Activities
6.3 Supply Alliances
6.3.1 Developing and Managing the Relationship
6.4 Supplier Quality Management
6.4.1 Problems of Quality
6.4.2 How to Find the Qualified Supplier?
6.4.3 Quantity Survey of Suppliers
6.5 Supply Chain Re-engineering
6.6 Summary
6.1 INTRODUCTION
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
40
companies to stay abreast of the latest. According to the world competitiveness Organizing for Global
report competitiveness is equal to multiplication of competitive assets and Markets
competitive process (Deshmukh & Mohanty).
Where, competitive assets include technology, infrastructure, people and

government institutions, and competitive process include quality, speed,
customization and services.1 Logistics has always been the backbone to
infrastructure for the manufacturers. Within the purview of SCM logistics has
been the art and science of procuring, producing and delivering products and
services at the right time, in right quantity and at the appropriate place. As we
have seen earlier, SCM involves planning, implementation, controlling, storage, and
transportation and end delivery from the point of origin to the point of
consumption as part of consumer/customer requirements. It is a network of
facilities that perform the tasks of procuring the raw materials, transport them,
transformation of materials to finished products and further distribution of goods
to the end user, the customers. During initial evolution it was felt that logistics
that involved transporting and warehousing couldn’t effectively influence the
strategic goals and hence, extensive investment needn’t be done. Activities
relating to customer services, warehousing, order processing, inventories and sales
were also ignored. Production, marketing and finance operated independently, and
inventories and sales ignored. It was in the seventies that the management
explored the scope of reducing the distribution costs. The concept of total cost
management was evolved in order to optimize the total costs rather than costs of
activities taken in isolation. A centralized logistics function was given the
responsibility of controlling costs with emphasis on maximization of service level.
Slowly but steadily the aspects of logistics got integrated with the other functional
activities of the supply chain, and the functional chain emanating from supplier to
the delivery options to the end user, were formulated and incorporated with the
operational and strategic plans. In the final stage logistics were accorded due
importance in the strategic planning. 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
6.2 SUPPLY CHAIN: GROWTH
According to Hicks, the imperatives for growth of supply chain are:

· 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 doesn’t 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.
1
Deshmukh & Mohanty in Essentials of Supply Chain Management, p 13 41
Design and Management of · Transaction Elements: These are those variables involved directly in
SCM 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,
consumer’s 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.
6.2.1 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.2 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
2
Essentials of SCM by Deshmukh & Mohanty pp. 16-18
42
also helps in reducing costs on trucks, warehouses and certain infrastructure Organizing for Global
requirements, and allows firms to acquire new technologies and enter newer Markets
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 organization’s 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 shouldn’t 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 non-value
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.
6.2.2 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 have already seen warehousing and transportation in detail
in unit-4 and 5, and hence 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 43
Design and Management of address several queries centered on proper alignment of information
SCM 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:3
· 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 enterprise’s 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
3
Deshmukh & Mohanty in Essentials of supply chain management, pp. 20
44
elements. Here, once again the need for simultaneous engineering is required Organizing for Global
mainly in those off-shore areas with low labour rates, over and above issues Markets
like labour rate inflation and challenges of overseas sourcing. All these have
to be considered in a structured manner and not in isolation.
6.2.3 Strategic Supply Management Activities
As per Burt and Dobler, supply management focus on ten strategic 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 firm’s 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 organization’s
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 firm’s
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 firm’s 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 firm’s 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. 45
Design and Management of · Optimization of supply base with coordination and combination
SCM with several forces to increase the importance of the firm’s 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 industry’s recognition of importance of these activities.
DATA
MANAGEMENT
SUPPLY SOCIAL
CHAIN/ RESPONSIBILITIES
NETWORK
INTEGRATED UNDERSTANDING
STRATEGY KEY SUPPLIERS
STRATEGIC
ENVIRONMENT SOURCING
MONITORING
STRATEGIC
SUPPLY
ALLIANCES
· Legislation changes COMMODITY · Periodic review

· Wars & conflicts STRATEGY · Identify relation
· Consolidation among · Optimize supply base
suppliers
· Strategy updating
· Technology access
· Supply management
organisation
· Risk management
FIRM`S SURVIVAL AND SUCCESS
Fig 6.1 Strategic Supply Management

46
· Supply Chain/Networks: These help in developing and managing of supply Organizing for Global
alliances, but is more complex. IT & relationship skills are essential Markets
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 don’t
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 firm’s success and survival, fig 6.1.
Activity 1
Understand the difference in strategies in supply managements and how it builds

up a company to be successful in the international arena?
..............................................................................................................................
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6.3 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.
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 one’s organisation as a supply management leader.
It dwells on the buyer’s management performance, learning and future goals.
The main objective being learning of key strategies to support the buyer’s
business. It requires extensive planning and is expensive, but it lays the
foundation of a buyer supplier relationship in the long run.
· Supplier Discussions: It’s an informal forum for gaining and sharing
learning, between the representatives, like the chief executive, chief
operating officer, and representatives from marketing, supply management
4
Fine, Clockspeed, p. 95. 47
Design and Management of and research divisions. It reviews the buyer’s progress and goals in the
SCM backdrop of shift in strategies and policies. It’s 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.
6.3.1 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. It’s in the interest
of both the firms to support each other’s operations and their respective
goals, ethics over expediency.
48
Management of supply contract is a challenging responsibility and a critical too. Organizing for Global
Companies have to continuously generate and develop newer ideas and Markets
innovations to maintain these relations and work in unison to a common goal
without jeopardizing each other’s interest in the overall gambit of supplier buyer
alliances and relationship.
6.4 SUPPLIER QUALITY MANAGEMENT
After having seen the supplier-buyer relationship, we will now see the quality
control aspects of supplier units. Quality management dates back to the 80’s,
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.
6.4.1 Problems of Quality
The suppliers till late had been providing natural/semi-processed 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 quasi-independent 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 company’s mission and policies on supplier quality relations
have to be spelt out clearly (as for ISO-9000).
· 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.
49
Design and Management of · Review: Periodic review of the performance of the supplier through
SCM 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.
6.4.2 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 it’s 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 buyer’s 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.
6.4.3 Quality Survey of Suppliers
It’s an evaluation process, which enables the buyer to select the appropriate
supplier conforming to the buyer’s requirements. Does the supplier have the
ability to respond to the buyer’s requirements? Does he require assistance in any
form? This and many, can be answered by help of visits to the supplier’s site by
a team of specialists or through a balanced questionnaire. The following are the
survey evaluation on the supplier:5
5
50 Assuring the Quality Procurement System in Essentials of SCM by Desmukh & Mohanty
· Policies/Practices on Quality: These are the basic guidelines based on Organizing for Global
which the quality assurance of the supplier can be determined. They are the Markets
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 buyer’s 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 buyer’s
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 supplier’s
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.
51
SCM 6.5 SUPPLY CHAIN RE-ENGINEERING
Business structure is continuously changing from one phase to another, and today
has reached the stage of professionalism where it is revolving around customer
focus in a big way. These changes have shown remarkable improvement in
company performance measures such as quality, costs, services and lead times.
Hammer & Champy in 1993 identified these changes and improvements and
packaged these ideas into concept of ‘business re-engineering’, which was later
termed as ‘business process re-engineering’ (BPR).
The areas in common between BPR and SCM seems to be very few at a
cursory glance, but SCM is not a traditional improvement technique, but a
philosophy that helps in improvement not involved with functional reviews, as
highlighted by Stevens’ model of supply chain integration, which we have seen in
our earlier units. However, in an introspection of BPR & SCM reveals that there
is more than one common link between the two. Business transformation from
the concept ‘what we make we sell’ to a more flexible concept of ‘what the
market want us to sell’ can effectively be achieved after a competitive analysis
and a supply chain diagnostic review. It is well understood, that effective
transformation is only possible after a series of phased step involving
technological reorganization, attitudinal and organizational attribute, and integration
between the competition and customer demands.
The comparison between SCM & BPR is as shown in the table 6.1
Table 6.1 : As Adopted from Deshmukh & Mohanty, 2004 (Essentials of SCM)
Business (Process) Re- The fundamental rethinking and radical redesign of business
Engineering process to achieve dramatic improvements in critical,
contemporary measures of performance, such as cost, quality,
(Hammer & Champy, 1993) service and speed.
Supply Chain Management The management of material suppliers, production facilities, and
(Stevens’ 1989) distribution services and customer linked together via the feed
forward flow of material and the feedback flow of information.
Achieving internal integration is a desirable stage, however, performance of

pockets of excellence is generally downgraded (from customer’s viewpoint) due
to poorly performing suppliers and customers in the supply chain. In order to
understand this further a wider perspective of the supply chain needs to be taken
keeping in mind the 12 steps of BPI, as evolved by Harrington, to streamline the
process. They are:
· Elimination of bureaucracy
· Eliminating duplication
· Value added assessment
· Simplification
· Process cycle time reduction
· Error proofing
· Upgrading
· Simple language
· Standardization
· Supplier partners
· Broader picture improvement
52 · Automation
From the above its evident that the first 9 steps are operational, step 10 is for Organizing for Global
supplier side, and step 11 is for the customer satisfaction. Therefore, to attain this Markets
step, if a radical redesign is taken, business process integration turns to business
process re-engineering, in the supply chain scenario. Side by side in the Stevens’
model step 3 moves to step 4, i.e. full integration is achieved. Therefore, this
integration involves extending the internal management to supplier focus and
customer orientation in order to create a strategic partnership, by reducing the
suppliers. Customer understanding will in a big way change the entire philosophy
from pushing products to selling goods as per customer requirements. Backward
integration is a very difficult process in supply chain integration, since; it involves
a change in inter-company attitudes from adversarial to that of mutual support,
which is in fact very crucial to a successful supply chain integration.
We should as a matter of fact, never lose sight of the fact that business in the
supply chain, is directly dependent on customer finances which enables the
continuity of the supply chain. Therefore, the strategies in the supply chain should
have common aim of improving the performance of the chain from the
perspective of the consumer/customer. Stevens’ integration, in stage 4 of the
supply chain is generally successful because of the financial position enjoyed by
the big companies. Such companies generally bend rules of supply chain
integration and manipulate smaller members of the chain to their financial ends, in
order to benefit the most. Therefore, backward integration is a contentious issue.
Both internal and external integration is required to be achieved for improving
performance in the supply chain management, under ideal conditions. Yet, internal
or external or a combination approach may be the goal depending upon product,
industry, market conditions or where advantage could be gained for the supply
chain. Though, Stevens’ model suggests that external integration, without internal
reorganization does not exploit all the benefits of true supply chain integration.
Now, let us see whether BPR internal re-engineering is equivalent to the

functional and internal integration stages in the Stevens’ model? Actually, the first
and the final stages are similar in both BPR & Stevens’ model. Initially, non-
existent planning and control structures across departments are optimized to
departmental goals resulting in customer necessities not being catered to, but the
final structure is customer centric with major changes in culture, structure and
technology. The intermediate steps are different, since BPR calls for one-leap
changes on a process-by-process basis. Whereas, Stevens’ model opts for
functional integration, followed by internal integration. Functional integration in
BPR is not necessary, only the process should be sought and redesigned. Efforts
to optimize a function are considered a waste in this system. The functional
integration stage, does bring together a trans-departmental view which, if
performed correctly, will lead to improved operating performance (Deshmukh &
Mohanty). Improvement in the overall performance level and integrating of the
core functional areas as one single function does negate the poor performance of
the surrounding functions. Therefore, It is mandatory to initially bind the functions
along a process line, and then integrate the appropriate cross-functional processes
at a later stage.
Therefore in spite of BPR being a later model, Stevens’ model is still valid in the
light of BPR concept, though more details of reorganization stages are required.
Therefore, cross-relationship between both the stages is to be highlighted more
vigorously. This can be achieved by examining the pre-requisites and techniques
used in integration stages of SCM and in virtuality, i.e. by philosophy.
Let us now see the various categories covering the parallels of essentials
between SCM & BPR, through this table:
53
Design and Management of Table 6.2: Parallels of Essentials between SCM & BPR (excerpts from Hammer &
SCM Champy, Davenport, Grover et al, Stevens & Deshmukh & Mohanty, 2004)
Area for change BPR (Business Process Re- Supply Chain Management
engineering) Terminology
Process · Elimination of wastes · Reduce non-value added activities

· Speed up process · Lead time reduction
· Concentration on core · SCM positions each firm to do
processes what it does best
People · Board level commitment · Board level commitment with a

· A management that questions logistics champion at board
· A workforce that questions · A management that questions
· Multi-skilled workforce · A workforce that questions
· Attitudinal changes · Multi-skilled workforce
· Attitudinal changes
Technology · Technological changes · Technological changes
· IT a key to BPR · IT a key to SCM
· Break the rule · Partnership sourcing
· Treat vendors as adversaries · Deep penetration to customers
bases
Innovation · Customer focus · Constant innovation at the
· Constant innovation interfaces of the company
· Constant · Streamline processes
· product/process innovation
Analysis · Analysis by paralysis is not · Aggregate modeling can aid the
beneficial redesign strategy and take a
· Take a holistic view systems view
6.6 SUMMARY
This unit highlights the common foundations, which underlie both SCM & BPR
philosophies, which are indicative of the important difference between the two,
the drive for improved business operations. Those who follow the SCM
philosophy would have traversed the path as BPR after having re-engineered
own processes. The existing philosophies such as SCM (integrated) as mentioned
in this unit covers a large portion of the BPR ideas, yet a few ideas have to be
added to the model:
· Radical approach for internal integration.
· Continuity in step changeover improvements, and strategic placements of
these ideas on the marketplace.
The various points for learning in SCM re-engineering are:
· SCM is not a traditional improvement technique but that which facilitates
improvement, not associated with functional/departmental reviews that focus
internally.
· Transforming a business from inward looking to outward looking.
· Integration being the mainstay between the customers and competition.
· Inquisitiveness throughout the organization will facilitate re-engineering.
· This is applicable at the higher echelons as these positions give a wider
perspective, seeking core processes and creating leaner structures, a must
for SCM integration through re-engineering.
· The change management associated with re-engineering has to be handled
smoothly and skillfully.
Sustaining the spirit of re-engineering throughout the corporate culture is a big
issue that requires serious attention. Continual re-engineering allows a company’s
quality initiatives and re-engineering to be completely and effectively integrated,
with an added advantage of the involvements of the high teams for continual re-
engineering.
54
6.7 SELF ASSESSMENT QUESTIONS Markets
1) Explain in detail the process of re-engineering.

2) What are the benefits of re-engineering in supply chain?
3) Explain the benefits of integrated approach for implementation of SCM.
4) It is a fact; SCM and BPR have a common goal and are interrelated.
Explain the sentence with examples.
5) Explain the parallels between the BPR & SCM philosophy.

READINGS
Burt, Dobler & Starling, World Class Supply Management, Tata Mc Graw-Hill
Deshmukh & Mohanty (2004), Essentials of SCM, Jaico Publishing House,
Mumbai-23.
Simchi-Levi, David Kaminsky, Philipsimchi-Levi, Edith(2004), Designing And
Managing The Supply Chain, Tata McGraw-Hill
Mentzer, Fundamentals of Supply Chain Management, Sage India Publishers
55
SCM UNIT 7 ORGANIZING FOR GLOBAL MARKETS
Objectives
· define WCSCM and International SCM;
· discuss international logistics and globalization;
· identify the steps to be initiated before going global;
· talk about organization for global markets & global sourcing; and
· describe world-class logistics management & interfacing of logistics.
Structure
7.1 Introduction
7.2 Strategies for WCSCM
7.2.1 What is WCSCM?
7.2.2 Features of World –Class Companies
7.3 Globalization
7.3.1 Organizing for Global Markets
7.3.2 Stages to Global SCM
7.3.3 Supply Channels
7.4 International Logistics
7.4.1 Integrating Logistics
7.4.2 World Class Logistics Management (WCLM)
7.5 Summary
7.1 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, e-business
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.
World-class is a wide term extending over a vast spectrum of correlated

developments, which together define a comprehensive change in the prevailing
environment of hyper-competition.1 They are:
· At the marketing level, customer satisfaction, and integration of product and
services, characterizing a world-class supply chain.
· At the organizational level, world-class supply chain is defined by the
integration of new productive capabilities out of available resources. It refers
1
Essentials of SCM by Deshmukh & Mohanty, p.282
56
to the physical facilities and knowledge base irrespective of the location Organizing for Global
within one group or cooperating companies. Markets
· At the individual (people) level, the development and emergence of a

flexible, skilled and knowledgeable workforce as the ultimate differentiators.
· At the management level, world-class supply chain is governed by a
philosophy of leadership, empowerment, motivation and productive
performance (White, 1994).
The world-class manufacturing model is summed up by Schonberger’s agenda
that included:2
· Design & organization.
· Operations.
· Human resources development.
· Quality and problem solving.
· Accounting and control.
· Capacity.
· Marketing.
The Cranfield Competitive Manufacturing Model (New, 1987) has identified the
performance characteristics of manufacturing systems through seven fundamental
objectives for step change, they are:
· Reduction of inventory by 50% or even more.
· Reduction in manufacturing lead-time by 50% or more.
· Introduction of new products at 2 to 3 times the rates.
· 50% of the current design/development lead-time.
· Reduction in costs by 30% or more.
· Reduction in support labor by 50% or more.
· Improve quality to parts per million.
With this as a backdrop let us now see the strategies for World-Class Supply
Chain Management (WCSCM).
7.2 STRATEGIES FOR 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:3

· Enrichment of Customers: Represents varying degrees of collaboration
and interaction in defining products, services and concepts.
2
Schonberger, 1990 as also in Deshmukh & Mohanty in Essentials of SCM p 282
3
WCSCM Chapter 17, in Essentials of SCM by Deshmukh & Mohanty, 2004, p 283 57
Design and Management of · Recognition of Company by the Customers: Quality speaks, and
SCM 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.
7.2.1 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.
7.2.2 Features of World –Class Companies
The world-class companies as compared to non-world-class companies are

featured by a set of different characteristics as under:
Management Level: The various tasks performed by them are:

· Visionary: Has a set of managers who are continuously improving
performance through leadership, coaching, vision, and motivation. They work
towards eliminating of wastes and create competitiveness. The top
management in such circumstances performs the role of a visionary force
and the middle management involve in coaching and training the
subordinates. The supervisory staff executes the role of facilitator and
supporter of the employees in eliminating waste.
· Policy Making: These companies use benchmarking methodologies to seek
and evaluate the best policies and practices for setting agendas to tide over
the old traditions and new set of thinking, to strive towards previously
unreachable goals (Senge, 1990).
· Long-term Strategies: They generally have a long-term strategic plan,
defining the corporate activities, objectives, goals, and operational plans to
add value to company’s products and services. The Tata Group is one such
living example.
· Human Resource Development: They generally involve their employees
and their staff through extensive training programs for providing them the
skills and knowledge base to achieve these policies and goals. It is a proven
fact that if the employees are treated equally and with respect, is provided
meaningful jobs and is involved intimately in decision-making and problem
solving the company will develop, because it satisfies personal goals and
58
company objectives. Tata group is once again one such example of human Organizing for Global
resource development. The Sahara Group has of late started to show Markets
results.
· Holistic Approach: The management policies and practices are so tuned
that it provides a holistic approach, which helps in integrating the objectives
and activities of different functional areas. These developments of common
corporate goals are necessary for competing successfully. Providing
leadership by the top management in an eventuality can obviate losses in
certain circumstances.
· Measurement and Rewards: It is recognized that what gets measured and
rewarded gets done (Deshmukh & Mohanty 2004). Simple performance
related policies are used towards human resource improvement, team efforts
and selected key variables necessary for adding value to its product, thereby
avoiding short term dictates, evolving from financial controls and dictated
standards.
Quality Control: They can further be divided as under:
· 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. It’s
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.
59
Design and Management of Integrated Operations/Production: They are further sub-divided as under:
SCM
· 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
management’s 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 don’t happen automatically, but with the
interference of the management’s leadership, and application of the policies
to strive better to eliminate waste and creating better value for the customer,
the end user.
60
ROLE OF TOP MANAGEMENT AND ITS BEARING ON SCM Markets
TECHNOLOGY LEADERSHIP, HOLISTIC DEVELOPMENT VENDOR INTEGRATION

ADVANCES/ VISION & OBJECTIVES OF INTERFACE OF
DEVELOPMENT STRATEGIC & SYSTEMS HUMAN PRODUCTION
PLANNING THINKING RESOURCES & OPERATIONS
CUSTOMER FORESIGHT QUALITY REWARD SOCIETAL WORKER

SATISFACTION IN PLANNING CONTROL SYSTEM CHANGES SATISFACTION
LEVEL
MARKET COMPANY BRAND

GROWTH ULTIMATE COMPANY AIM PROFILE NAME
Fig 7.1.: A Model for Supply Chain Excellence

Activity 1
Identify the role of management in integration of SCM and its positive implication
on the organization through a case study you have encountered.
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7.3 GLOBALIZATION
WCSCM is responsible for those actions and values responsible for continuous up
gradation and improvement of the development, design & management process of
a firm’s 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 it’s supply chain.
Senior management must always recognize supply management’s 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.4
7.3.1 Organizing for Global Markets
Before going global you got to answer the set of six questions, which needs to
be addressed as a candidate of global sourcing:5
4
WCSM, chapter 1 by Burt, Dobler & Starling, pp. 6-7.
5
Raul Casillas, “Foreign Sourcing: Is it for you?” Pacific purchaser, November-December 1988, p.9 61
(Burt & Dobler in WCSM Tata Mc Graw-Hill pp. 361-369.)
Design and Management of · Does it qualify as high-volume in your industry?
SCM
· Does it have a long life (two to three years)?
· Does it lend itself to repetitive manufacturing or assembly?
· Is demand for the product fairly stable?
· Are specifications and drawings clear & well defined?
· Is technology not available domestically at a competitive price and quality?
If the answer to all the six questions is yes, then the supply manager may want
to evaluate the support network within his/her firm, asking the following questions:
· Does sufficient engineering support exist to efficiently facilitate engineering
change orders (ECOs) when they occur?
· Will the buyer be able to allow sufficient time to phase out existing “in the
pipeline” inventory?
· Will the supply managers firm take the responsibility for providing the
necessary education and training for those that will have to interact with and
support foreign suppliers?
· Is the firm ready to make a financial commitment for expensive trips to the
supplier?
· Is the management willing to change the approach, in some cases even
policy matters of how business and related transactions are conducted?
· Is the buyer aware of the environment?
If the answer is positive to both sets of these questions, global sourcing is
possible.6
Activity 2
Visualize the impact of globalization and its effect on Indian companies and how
they could effectively gear up to the international order?
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7.3.2 Stages to Global SCM
Most of the firms today are replacing the term international sourcing by a
broader philosophy of “global supply management”.7
The three stages of world class wide sourcing is as follows, as suggested by

Joseph Carter:8
· Stage One: International Purchasing : Organizations focus on leveraging
volumes, minimizing prices, and managing inventory costs. These areas are
the characteristics of an organization first entering the global purchasing
arena.
6
Burt & Dobler in WCSM by Tata Mc Graw-Hill pp. 369-370 (7th edition)
7
Robert M. Monczka & Robert J. Trent, Global Sourcing: A development Approach”’ International
Journal of purchasing and materials Management, Spring 1991, p. 3 (Burt & Dobler in WCSM by Tata Mc
Graw-Hill pp. 365-366)
8
Joseph R Carter, PhD, “The Global Evolution”’ Purchasing today, July 1997, p. 33 (Burt & Dobler in
62 WCSM by Tata Mc Graw-Hill p. 365)
· Stage Two: Global Sourcing : Organizations focused on global Organizing for Global
opportunities will put more emphasis on supplier capability, supporting Markets
production strategies, and servicing customer markets. Of those that have
sourced offshore for some time, most are at this stage.
· Stage Three: Global Supply Management : Organizations optimizes
supply networks through effective logistics and capacity management. These
organizations have effectively minimized risks in offshore sourcing and have
sourced worldwide for technology leadership.
(As enumerated by Burt, Dobler & Starling in their book World Class Supply
Management)
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.9
· 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 supplier’s add to these
expenses, however, cost of material being cheaper compensates these
expenses. Yet, it’s very seldom that a company’s 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 doesn’t 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.
9
“World Class Supply Management,” Burt, Dobler & Starling Tata Mc Graw-Hill pp. 366-367, 7th edition. 63
Design and Management of Larger Customer Base : Global sourcing can create opportunities to sell in
SCM countries where the buyer’s 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,
Fig 7.2 (a).
SUPERIOR QUALITY TIMELINESS
ADVANCED
TECHNOLOGY
GLOBAL TENDERING LOWER COST
LARGER SUPPLY LARGER

BASE CUSTOMER BASE
Fig 7.2(a): Global Tendering
There are however certain criticalities in going global too, it’s not so easy as it
seems and one has to keep this at the backdrop before setting out, fig 7.2.2(b).
· 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 shouldn’t 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
“off-spec” 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.
10
Chapter Strategic Sourcing: WCSM by Burt & Dobler Tata Mc Graw-Hill, pp. 368-369.
11
‘Additional Inventory’ paragraph 3 of Potential Problems, WCSM, and p. 368.
12
“Lower Quality”, paragraph 4 of Potential Problems, WCSM, p. 368.
64
· Cost Factor : There are a considerable amount of add on costs due to the Organizing for Global
communication factor, translators cost, and distances involved. These Markets
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.13 It addresses the following areas:
· Corruption at bureaucratic levels.
· Contract & property right laws.
· Economic policies.
· Accounting standards.
· Business regulations.
CRITICALITIES IN GOING
GLOBAL
CULTURAL LABOUR HIGH INFERIOR LONGER INVENTORY COST

ASPECTS PROBLEMS OPACITY QUALITY TIMEFRAME INCREASE FACTOR
· Corruption at bureaucratic levels

· Contract & property right laws
OPACITY · Economic policies
INDEX · Accounting policies
· Business regulations.
Fig 7.2.2 (b): Criticalities in going Global
China for example has a higher opacity in comparison to USA. US have fewer
hurdles of types mentioned above and very less corruption.
7.3.3 Supply Channels

After having decided to go global the next step is to infer the supply channels
that are to be used. Direct procurement is the easiest and lowest cost option to
procure goods globally. It entails dealing with all the associates in procurement by
the buying firm along with the facilities. However, limited resources in supply
management may make direct procurement infeasible more often than not.
Therefore, intermediaries will play a key role in streamlining the efforts of
procurement through international sources, in fact, the simplest way to procure
globally.14
Though sourcing through the intermediaries is costly option, yet, in most of the
cases it avoids many unforeseen problems. The supply manager venturing into
global sourcing is advised to solicit the advice of the contemporaries from the
local supply management association. Certain, typical intermediaries are as
mentioned below:15
13
“The Opacity Index: Launching a new measure of the effects of opacity on the cost and availability of capital
in countries World-wside (Executive Summary)”, Price Waterhouse Coopers, London, January 2001, pp.
1-3. http://www.opacityindex.com/. Burt, Dobler & Starling in WCSM, Tata Mc Graw-Hill, p. 369.
14
‘Supply Channels’ Strategic sourcing in WCSM by Burt, p. 370.
15
N. A. DiOrio, “International Procurement”, Guide to Purchasing 1987, p. 7, & Strategic Sourcing WCSM,
TMH, pp. 370-371.
65
Design and Management of · Import Merchants: They buy the goods for their own account and sell
SCM through their own outlets. They including all intermediary activities carry out
all the risks of clearing.
· Commission Houses: They generally act for exports abroad, like selling in
USA & receiving commission ex foreign exporters. Bills are generally never
billed to them, though they handle all clearing of shipping and customs.
· Agents: These are representatives or firm that carry out the selling. They
handle all the clearing and handling of material but hold no financial
responsibility of the principal. They receive their commission from the seller
and hence their primary interest is the exporter.
· Brokers: Just like the marriage brokers, they mediate between the buyer &
the seller from different nations. They receive the commission from both the
buyer & the seller, but are not involved in clearance/shipment of the material.
They often do act as special purchasing agent against commission, for pre-
designated material. They don’t have any fiscal responsibility of the seller,
just like the import brokers.
· Trading Companies: These are large companies that generally perform all
functions like the agents/groups listed above. They have an added advantage
over the others and are listed in directories and trade publications.
· Subsidiaries: They are established by MNCs in countries where a physical

presence is required to improve competitive capability and/or meet host
government restrictions. Akin to most of the publishing houses that carry out
reprint of the popular titles worldwide from established publishing house and
also act as their subsidiary in India. Hitachi America is also such an example
that was created primarily to look after the interest of North American
market. Subsidiaries can increase sales and lower employment costs by the
principal of sons of the soil concept. They slowly develop the host managers
over a period of time and train them according to their requirements. Most
of the MNCs in India are following this principle, like Citibank, HSBC and
Alcatel. These subsidiaries offer to set prices in the local currency and
deliver material to buyers with all duties paid. However, at times they could
block flow of technical information since they are remote from manufacturing
and marketing decision.
The above are the intermediaries for global trade and an organization interested
in going global should perforce follow the proper channel, lest you fall prey to the
upheavals of the host country. Various offices like the IPO (international
procurement offices) are set worldwide to tide over these intricacies. These
offices facilitate business transactions and interactions in the foreign country and
surrounding areas.
7.4 INTERNATIONAL LOGISTICS
‘Logistics management includes the design and administration of systems to

control the flow of material, work in progress and finished inventory to support
business unit strategy’, (Krishnaveni Muthiah 2003). Logistics is a strategic
resource and its importance has to be understood by one and all (the functional
members in the supply chain). But, in order to achieve this strategic influence, a
good amount of competency has to be achieved and a well-defined logistical
mission and objective has to be committed to, by everyone in the firm, especially
by the top management.
66
As brought out earlier in unit 4, international logistics can be well comprehended Organizing for Global
with this figure, the triangle that is formed in the supply chain management Markets
(SCM), fig 7.3 (a).
W
T
EN
OR
EM
LD
AG
CL
AN
AS
S
M
LO
D
AN
GI
ST
EM
IC
SD
S
M
AS
AN
CL
AG
LD
EM
OR
EN
W
Fig. 7.3 (a) World class supply chain management
The Three Critical Components of WCSCM are:

· World class Supply management
· World class Demand management
· World class Logistics management
As discussed earlier, the logistics professionals play a vital role in shaping the
success of WCSCM as regards management of transportation, storage and
warehousing is concerned. 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.
International Logistics management deals with receiving, handling, movement,

storage and delivery of material, services and finished product in a WCSCM
system, at a global level. Logistics is required both at the beginning and at the
end of it, Fig7.3 (b).
RECIEPT HANDLING MOVEMENT STORAGE
TO
DELIVERY
MANUFACTURER
TO
CONSUMERS
Fig. 7.3(b): International Logistics management

67
Design and Management of As Coyle puts it, “ logistics is the part of supply chain process that plans,
SCM implements and controls the efficient, effective flow & storage of goods, services
and related information from point of origin to point of consumption for the
purpose of conforming to consumer requirements”. Logistics include the following
role, Fig 7.3 (c).
ROLE
OF LOGISTICS
TRAFFIC CONTROL & WAREHOUSING &

TRANSPORT STORAGE TO INCLUDE
MANAGEMENT INFRASTRUCTURE
INVENTORY MATERIALS
CONTROL & MANAGEMENT &
MANAGEMENT HANDLING
DEMAND FORECAST SERVICE SUPPORT
SALVAGE
MANAGEMENT &
DISPOSAL
Fig. 7.3 (C): Role of Logistics
An effective SCM system will never be possible without the integration of

logistics, since logistics is the foundation of SCM discipline and is responsible for
its activities. Needless to mention here is that the transportation cost is the
heaviest in the entire chain, and even more than product selling prices. Therefore,
in order to maximize customer satisfaction and meeting firm’s goal it is
mandatory to ensure that effective storage facilities for goods and services are in
place.
7.4.1 Integrating Logistics
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 (unit 4). But things at the international level are much
complicated. The coordination aspects required are tremendous and detailed
planning is required before execution of the logistics movement.
68
7.4.2 World Class Logistics Management (WCLM) Organizing for Global
Markets
The third side of WCSCM triangle, is the WCLM include the following:
· Value-added Activity: WCLM ‘tailors’ products to the consumers/customers
needs and requirements. Logistics characteristics for each type of customer
are incorporated into each product’s specifications. Product testing prior to
delivery, packaging for unique storage related to the type of product being
shipped, specialized marking and labels, and tracking of products through the
supply chain are some of the events involved in WCLM. These are the
value added activities that take place and are enhanced as per the customer
requirements.
· Real Time Trace Ability of Materials and Product: WCLM organizations
employ paperless inventory status and movement in real time, through out the
supply chain.
· Enhanced Logistics Competency: Logistic competencies of the supply chain
members are continuously being gauged by survey and related activities.
Effort is on to reduce waste and continuous improvement in all spheres.
Focus is generally ‘outward’ towards extended enterprise.
· Collaborative Cross-functional Teams: (as discussed earlier in same unit):
They involve both the customers and the suppliers and integrate their
respective functions under one head. Actually, more often than not the
changing pace of market and technological advances mandate the
requirement of a team based effort and a collaborative approach to logistics
planning and execution.
Each of the functional areas in SCM is important to each other and together they
serve an important role in achieving WCSCM. The professionals in logistics,
finance, marketing, accounting, engineering, IT, and other functional areas are
never geared adequately both in skills and know how to manage the
interrelationship based on which the successful supply chains are built. The
integration of these functional areas is what separates the excellent from the
lesser ones.
It is quite unfortunate that supply management and logistics don’t collaborate the
way it should in many companies, and hence, effort should be there to
collaborate these functional areas and integrate them to perform better. This
would not only gather efficiency but at the same time will eliminate wastes in a
big way.
7.5 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.
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. 69
Design and Management of More often, a firm’s approach to global supply management progresses from a
SCM reactive mode to a proactive one. Therefore, in order to remain in this
competitive world the supply management professionals must have the following
ability:
· Develop a strategic point of view with relation to global supply
management
· Deal with continuous changing scenario
· Dealing with diversity in culture
· Work with and within distributed organizational structures
· Work with others as team members and leaders
· Communication aspects.
Keeping the above in mind we can conclude by saying that this will not only help
us to become successful supply chain professionals but also help us in becoming
better human beings in this far reached professional and busy environment.

1) Explain in brief international SCM.
2) How can you organize your company for global markets? Give relevant
examples to elucidate your point.
3) Explain the interfacing between logistics and functional members of the
supply chain, with examples.
4) Logistics is a strategic resource; discuss the same in the global context.
5) Explain global sourcing and its advantages and disadvantages. How can you
arrive at the best course of action for global sourcing?
6) Explain world-class management model in respect to SCM.

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 Graw-Hill.
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)
70
Indira Gandhi
Chain Management
Block
3
IT ENABLED SCM
Unit 8
Information Technology : A Key Enabler of SCM 5
Unit 9
Intelligence Information System 22
Unit 10
IT Packages in SCM 46
Mumbai New Delhi
Mumbai

Jharsuguda
Mumbai

December, 2004
ISBN-81-
BLOCK 3 IT ENABLED SCM
Unit 8: Information Technology: A Key enabler of SCM enables one to be on
familiar terms with the importance of information in Integrated Supply Chain
Management. It discusses the categories of information and their role in Inter
organizational setup. It describes the methods of determining the information
requirements for a supply chain. Finally, it describes Information Technology and its
applications in Supply Chain Management for increasing efficiency.
Unit 9: Intelligence information system deliberates the recent developments in the

information system, particularly in the supply chain context. It discusses about
Materials Requirement Planning (MRP), Enterprise Resource Planning (ERP), and
Distribution Resource Planning (DRP/DRP-II). It ends with comparing ERP and
Supply Chain Planning (SCP).
Unit 10: IT packages in SCM highlights the importance of software packages in

Business. It portrays the advantages and limitations of software packages of SCM. It
describes a few software packages such as BaaN, SAP, i2/RHYTHM. It also had a
discussion on a few success stories of software packages to the SCM.
IT Enabled SCM
4
IT Packages in SCM
UNIT 8 INFORMATION TECHNOLOGY: A KEY
ENABLER OF SCM
Objectives

· recognize the importance of Information in Integrated Supply Chain
Management;
· discuss the categories of information and their role in Inter organizational
setup;
· describe the methods of determining the information requirements for a
supply chain; and
· be familiar with the Information Technology and their applications in Supply
Chain Management for increasing efficiency.
Structure
8.1 Introduction
8.2 Information and Technology in the Integrated Supply Chain
8.3 Importance of Information in Integrated Business
8.4 Inter Organizational Information Systems (IOIS)
8.5 Information Requirements Determination for a Supply Chain
8.6 Information and Technology Applications for SCM
8.7 Summary
8.1 INTRODUCTION
To survive, thrive and beat the competition in today’s brutally competitive world,
one has to manage the future. Managing the future means managing information.
In order to deliver quality information to the decision-maker at the right time and
in order to automate the process of data collection, collation and refinement,
organizations have to make Information Technology an ally, harness its full
potential and use it in the best possible way.
Information technology is revolutionizing the way, in which we live and work. It

is changing all aspects of our life style. The digital revolution has given mankind
the ability to treat information with mathematical precision, to transmit it with high
accuracy and to manipulate it at will. These capabilities are bringing into being, a
whole world within and around the physical world. The amount of calculation
power that is available to mankind is increasing at an exceptional rate. Computers
and communication are becoming integral parts of our lives.
IT has a major role to play in any organization. All organizations have certain
objectives and goals to achieve. For any organization to succeed, all business
units should work towards this common goal. But each department or business
function in the organization will have its own goals and procedures. The success
of an organization rests in resolving the conflicts between the various business
functions and making them do what is good for the organization as a whole. For
this, information is critical. Everybody should know what is happening in other
parts of the organization. 5
IT Enabled SCM IT has a major role to play both at the organizational level and at the
departmental level. At the organizational level, IT should assist in specifying the
objectives and strategies of the organization. IT should also aid in developing and
supporting, and procedures to achieve them. At the departmental level, IT must
ensure a smooth flow of information across departments, and should guide
organization to adopt the most viable business practices. At this level, IT ensures
seamless flow of information across the different departments and develops and
maintains an enterprise – wide database. This database will eliminate the need of
the isolated data islands that existed and in each department and make the
organization’s data accessible across the departmental boundaries. This
enterprise– wide sharing has many benefits likes automation of procedures,
availability of high quality information for better decision-making and faster
response times.
In this unit, we will learn the importance of the information required for effective
supply chain management and a number of information technologies and the
application of the information that organizations are using to make information
readily available across the supply chain.
8.2 INFORMATION AND TECHNOLOGY IN THE

INTEGRATED SUPPLY CHAIN
As discussed in the earlier Blocks, the supply chain management is concerned

with the flow of products and information between the supply chain members
that encompasses all of those organizations such as suppliers, producers, service
providers and customers (See Figure 8.1). These organizations linked together to
acquire, purchase, convert/manufacture, assemble, and distribute goods and
services, from suppliers to the ultimate and users.
6
By 1980, the information revolution was well accepted in the world’s advanced IT Packages in SCM
economics. During this period, many standard business processes and functions
such as customer order processing, inventory management, and purchasing were
altered through the use of computer technology. These technologies and
capabilities began to grow exponentially since 1985, providing means for multiple
organizations to coordinate their activities in an effort to truly manage a supply
chain.
Today, information and technology must be conceived of broadly to encompass

the information that businesses create and use as well as a wide spectrum of
increasingly convergent and linked technologies that process the information with
the emergence of the personal computer, optical fiber networks, the explosion of
the Internet and the world wide web. The cost and availability of information
resources allow easy linkages and eliminate information-related time delays in any
supply chain network. This means that organizations are moving toward a
concept known as Electronic Commerce, where transactions are completed via a
variety of electronic media, including electronic data interchange (EDI), electronic
funds transfer (EFT), bar codes, fax, automated voice mail, CD-ROM catalogs,
and a variety of others. The old “paper” type transactions are becoming
increasingly obsolete. Leading-edge organizations no longer require paper
purchase requisitions; purchase orders, invoices, receiving forms, and manual
accounts payable “matching” process. All required information is recorded
electronically, and associated transactions are performed with the minimum
amount of human intervention. Recent developments in database structures
allowed part numbers to be accumulated, coded, and stored in databases, and
electronically ordered. With the application of the appropriate information systems,
the need to constantly monitor inventory levels, place orders, and expedite orders
will soon become a thing of the past.
8.3 IMPORTANCE OF INFORMATION IN

INTEGRATED BUSINESS
Information is the key to the decision making in Business. Prior to the 1980s, a
significant portion of the information used to flow between functional areas within
an organization, and between supply chain member organizations, were paper-
based. In many instances, these paper-based transactions and communications
were slow, unreliable, and error prone. Conducting business in this manner was
costly because it decreased firms’ effectiveness in being able to design, develop,
procure, manufacture, and distribute their products. During this period, information
was often overlooked as a critical competitive resource because its value to
supply chain members was not clearly understood. However, firms that are
embarking upon supply chain management initiatives now recognize the vital
importance of information and the technologies that make this information
available.
In a sense, the information systems and the technologies utilized in the supply
chain represent one of the fundamental elements that link the organizations into a
unified and coordinated system. In the current competitive climate, little doubt
remains about the importance of information and information technology to the
ultimate success, and perhaps even the survival, of any supply chain management
initiative. Cycle time reduction, implementing redesigned cross-functional
processes, utilizing cross-selling opportunities and capturing the channel to the
customer underpin the competitive positioning of business.
Timely and accurate information is more critical now than at anytime. Three
factors have strongly impacted this change in the importance of information.
7
IT Enabled SCM 1) Satisfying, in fact pleasing, customers have become something of a corporate
obsession. Serving the customer in the best, most efficient, and effective
manner has become critical, and information about issues such as order
status, product availability, delivery schedules, and invoices has become a
necessary part of the total customer service experience.
2) Information is a crucial factor in the managers’ abilities to reduce inventory
and human resources requirements to a competitive level.
3) Information flows play an essential role in the strategic planning for and
deployment of resources.
The need for virtually seamless bonds within and between organizations is a key
notion in the essential nature of information systems in the development and
maintenance of successful supply chain. That is, creating inter-organizational
processes and link to facilitate delivery of seamless information between
marketing, sales, purchasing, finance, manufacturing, distribution and transportation
internally, as well as inter organizationally, to customers, suppliers, carriers, and
retailers across the supply chain will improve fill rates of the customers service,
increase forecast accuracy, reduction in the total inventory and savings in the
company’s’ transportation costs - goals which need to be achieved.
Clearly, the need to share information across the supply chain is of paramount
importance. In fact, inaccurate or distorted information from one end of a supply
chain to the other can lead to tremendous inefficiencies such as excessive
inventory investment, poor customer service, lost revenues, misguided capacity
plans, ineffective transportation, and missed production schedules. This is termed
to be bullwhip effect, which is commonly being experienced by the consumer
goods industries. Suitable technologies such as bar codes and scanners have been
developed and applied in the portions of supply chain and remove inaccurate or
distorted information.
Activity 1
Develop procedures to elicit and define information needs for making a decision
for an organization of your choice. How would you implement your plan? What
are the problems?
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8.4 INTER ORGANIZATIONAL INFORMATION

SYSTEM
In supply chain management, the suppliers, producers, retailers, customers, and

service providers are the members and are linked through the ultimate level of
integration. These members are continuously supplied with information in real
time. The foundation of the ability to share information is the effective use of
Information Technology within the supply chain. Appropriate application of these
technologies provides decision makers with timely access to all required
information from any location within the supply chain. Recognizing the critical
importance of information in an integrated supply chain environment, many
8 organizations are implementing some form of an inter-organizational information
system (IOIS). IOISs are the systems based on information technologies that IT Packages in SCM
cross organization boundaries.
An IOIS is an integrated data-processing/data-communication system utilized by

two or more separate organizations. These organizations may (buyer-supplier) or
may not (credit clearing house) have a preexisting business relationship. What
must exist is a computer-based electronic link between the two organizations that
automates some element of work, such as order processing, order-status
checking, inventory-level review, shipment tracking information or, minimally,
transaction transfer, which would previously have been performed manually or
through other media, such as the mail.
Among the earliest forms of IOISs were those developed by time-sharing

services and on-line database vendors. The potential impact of such systems on
the way business is conducted was recognized as early as the 1960s. Since that
time, new technologies have been integrated to produce systems of increasing
capability. Examples of such implementations include electronic funds transfer
(EFT) systems, the Treasury Department’s decision support system, a variety of
buyer-supplier order-processing systems, and on-line professional tool support
systems. Existing implementations serve the grocery industry, the drug wholesaling
industry, the insurance industry, and the transportation industry, with more systems
coming into existence each year.
The development of an IOIS for the supply chain has three distinct advantages:
cost reductions, productivity improvements, and product/market strategy. Five
basic levels of participation for individual firms within inter organizational system
are:
1) Remote I/O node, in which the member participates from a remote location
within the application system supported by one or more higher-level
participants;
2) Application processing node, in which the member develops and shares a
single application such as an inventory-query or order-processing systems;
3) Multi participant exchange node, in which the member develops and shares a
network inter-linking itself and any number of lower-level participants with
whom it has an established business relationship;
4) Network control node, in which the member develops and shares a network
with diverse applications that may be used by many different types of lower-
level participants; and finally
5) Integrating network node, in which the member literally becomes a data-
communications/data-processing utility that integrates any number of lower-
level participants and applications in real time.
The participant shares a network of diverse applications with any number of
participants with whom it has an established business relationship. IOIS
participants may therefore be at a level lower, higher, or equal to the IOIS
sharing organizations. As organizations explore development of IOISs to support
their supply chain management efforts, they will be faced with several challenges.
Developing a common language in terms of planning, format, and priority across
several vastly different constituencies. Information sharing requirements are well
beyond those of a manufacturer, and its distributor’s need to process orders in a
consistent way. All relevant information ultimately must circulate to and among all
organizations between the supply chain’s point of origin and its point of
consumption, such as ordering (i.e., orders for component parts, services, and
finished products), inbound transportation, manufacturing, warehousing, inventory
management, outbound transportation, sales, marketing, forecasts, and customer-
service information. Although organizations recognize the importance of an IOIS 9
IT Enabled SCM for effective supply chain management, no one standard approach is being utilized
in terms of technology or information.
Activity 2
Consider your organization or an organization with which you can freely access
for information. What are the most frequent indicators for evaluating the
performance of lower, middle, and top managers in the considered organization?
Compare these indicators with that of another organization.
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8.5 INFORMATION REQUIREMENTS

DETERMINATION FOR A SUPPLY CHAIN
It is important to ensure that the right information are captured and used to
manage the supply chains effectively (doing right things) and efficiently (doing
these things well). Four fundamental mistakes are commonly made when
determining information requirements and these are:
1) Viewing systems as functional instead of cross-functional
2) Interviewing managers individually instead of jointly
3) Not allowing for trial and error in the detail design process
4) Asking the wrong questions during the interview.
Viewing systems as functional instead of cross functional is a very narrow and
inappropriate perspective to take in the information requirements determination
process. Much of the information needed to make decisions within a given
function will come from sources outside the function. Therefore, it is necessary
to include all of the functions involved in an information system in order to
facilitate the development of the system that allows information to flow cross-
functionally. When developing information systems to support an integrated supply
chain, this cross-functional perspective needs to be extended to be cross-
functional and inter-organizational, because the information required to make
decisions within one organization may come from another supply chain member.
To properly determine information requirements across organizations, it is

important to use appropriate method that ensure all information requirements are
identified. Therefore, a cross-organizational session using several structural-
interviewing techniques, including business systems planning, critical success
factors, and ends/means analysis are suggested for this purpose.
1) Business Systems Planning (BSP) is a structured interview technique

developed by IBM. It focusses on the identification of problems and
decisions associated with an organizational process and determine what
information is needed to address them. For a supply chain management,
analysts must identify supply chain management problems and decisions for
the member organizations. The result of this process is a set of tables listing
the problems that must be addressed, the decisions that must be made across
10
the supply chain, and the information required to address them. Tables 8.1 IT Packages in SCM
and 8.2 present Business Systems Planning examples.
Table 8.1: BSP–Problems/Solutions/Information
Problems Solutions Information

· Reduce order fulfillment · Need to understand current · Order fulfillment performance
cycle times between supply order fulfillment performance for each organization
chain member organizations between supply chain · Total supply chain
while maintaining or reducing members and logistics logistics cost
total supply chain logistics cost/performance trade-offs · Order history between
cost. across the supply chain. supply chain members
· Inventory carrying cost per
item for each organization
· Transportation cost and
lead times by different
modes and carriers.
Table 8.2 : BSP–Decisions/Information
Decisions Information
· How to transport product X · Carrier and mode used by competition

· Transportation cost and performance by mode
and carriers.
2) Critical Success Factors (CSF) focus on key performance areas that must
function effectively for the organization to be successful and associated
information requirements. For the supply chain, CSFs have to be identified
for each of the member organizations. As one might imagine, most of the
organizations have common CSFs. Once the CSFs are determined, the
information needed to address the CSFs is then identified. Table 8.3 presents
critical success factors (CSF) example.
Table 8.3 : CSF–CSF/Information
Critical Success Factors Information
· Integrated supply chain performance · Performance measures for integrated supply

measurement system chain.
· Performance measures for individual member
organization.
· Actual performance for supply chain and
organizational measures.
· Targets/goals for measures.
· Historical performance for measures.
3) Ends/Means (E/M) analysis focuses on what it takes for an organization to

be both effective (doing the ‘right’ things) and efficient (doing these things
well) and on the information needed to manage it. This interview technique
consists of two phases. First, the analyst identifies the ends that the supply
chain members consider important, the effectiveness issues associated with
the ends, and the information needed to address them. The second phase
deals with means, their associated efficiency issues, and the information
needed to address them. Table 8.4 and 8.5 present Ends and Means analysis
examples, respectively.
11
IT Enabled SCM Table 8.4 : Ends/Means Analysis – Ends/Effectiveness/Information
Ends Effectiveness Information

· Reduce order-fulfillment · Minimize total supply · Customer preferences
cycle times across the chain logistics cost (features, cost, time)
supply chain in a way · Activity-based cost · Profit by supply chain
that improves customer accounting information member organization
satisfaction. · Maximize profit · Supply chain performance
(order fulfillment cycle time,
inventory levels, capacity,
customer satisfaction).
Table 8.5 : Ends/Means Analysis – Means/Efficiency/Information

Means Efficiency Information
· Monitor inventory · Minimize cost required · Actual cost for measuring
performance: to measure inventory each factor
- Total supply chain performance
inventory levels (days,
Rs.)
- Organization inventory
levels (days, Rs.)
- Turns
- Service levels
- Costs.
The result of each of the structured interview techniques is a set of tables that
identifies areas of concerns across the organizations and the associated
information needed to address these concerns. There will be some redundancy in
the information requirements identified when using multiple structured interview
techniques. This helps to ensure that the analyst has a comprehensive and
accurate set of information requirements.
Traditional systems development also does not allow for trial and error when
designing information systems. The outcome of this approach to systems
development has resulted in systems that need to be changed the day they are
implemented and, in a worst-case serve as systems that are totally unusable.
Prototyping was introduced as a way to overcome these problems by validating
systems requirements through experimenting, refining, and testing the system until
the development team and users are satisfied that they have identified all of the
information requirements for the system being developed. The specific information
identified for the supply chain consists of ten primary categories. These categories
and examples of information contained within them are shown in Table 8.6.
Table 8.6 : Supply Chain Information Categories
Information Categories Examples of Information contained in Categories
1. Production information Product specifications, price/cost, product sales history
2. Customer information Customer forecasts, customer sales history, management team
3. Supplier information Product line, product lead times, sales term & conditions.
4. Production Process information Capacities, Commitments, production plans.
5. Transportation information Carriers, lead times, cost
6. Inventory information Inventory levels, inventory-carrying costs, inventory
locations.
7. Supply chain alliance information Key contacts for each organization, partner roles and
responsibilities, meeting schedules.
8. Competitive information Benchmarking information, competitive product offering,
market share information.
9. Sales and marketing information Point of-sale information, promotional plans.
10.Supply chain process and Process descriptions, performance measures, cost, quality,
performance information delivery, time, customers’ satisfaction, etc.
12
Activity 3 IT Packages in SCM
Select a typical manufacturing organization and describe the dependencies that

exist among the departments. Prepare a dependency chart showing information
and material flows.
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8.6 INFORMATION AND TECHNOLOGY

APPLICATIONS FOR SCM
Many innovations on technology-based approaches are well suited to the

enhancement of supply chain management, including Just-in-Time, Quick
Response, Efficient Consumer Response, and Continuous Replenishment – all rely
heavily on the information made available through the latest technological
advances. In the development and maintenance of the supply chain’s information
systems, both hardware and software must be addressed. Hardware includes
computers, input/output devices, and storage media. Software includes all of the
system and application programs used for processing transactions, management
control, decision-making, and strategic planning. A few examples of software
titles that address some aspect of supply chain management are presented below:
1) Base Rate, Carrier Select, and Match Pay (Version 2.0) developed by
Distribution Sciences, Inc., with which users can compute freight costs,
compare transportation mode rates, analyze cost and service effectiveness of
carriers, and audit and pay freight bills;
2) A new software program developed by Ross Systems, Inc., called Supply

Chain Planning is an integrated suite of constraint-based planning tools that
provide demand, replenishment, and manufacturing tools for accurate
planning and scheduling of those activities. This software provides an end-to-
end enterprise-resource planning solution incorporating the most advanced
supply chain planning capabilities available.
3) A technology partnership between Procter & Gamble Distributing Co. and

Sabre Decision Technologies resulted in a software system called
Transportation Network optimization, which allows shippers to give bidding,
in twin streamlining the bidding and award process.
4) Logistility Planning Solutions was recently introduced to provide a program

capable of managing the entire supply chain from demand to supply by
synchronizing customer demand and supply constraints through the provision
of Internet enabled communications about forecasts, inventory, and
replenishments for all members of the chain.
Several technologies have gained popularity recently, due to their ability to

facilitate the flow of information across the supply chain. Electronic commerce,
Electronic Data Interchange, Bar coding and Scanning, Data Warehouse, Internet,
Intranet/Extranet, World wide Web, Decision Support systems are a relatively 13
IT Enabled SCM recent phenomenon for supply chain management applications. These are
discussed in the following sections.
Electronic Commerce
Electronic Commerce is the term used to describe the wide range of tools and
techniques utilized to conduct business in a paperless environment. Electronic
commerce therefore includes electronic data interchange (EDI), e-mail, electronic
founds transfers, electronic publishing, image processing, electronic bulletin boards,
shared databases, and magnetic/optical data capture (such as bar coding), the
Internet, and Web sites. Electronic commerce is having a significant effect on
how organizations conduct business. Companies are able to automate the process
of moving documents electronically between suppliers and customers in such a
manner that the entire process is handled electronically; no paperwork is involved.
With the rise of the Internet and the ability to transfer information cheaply and
effectively over the whole world, electronic commerce is becoming a major focus
for many organizations and represents a significant opportunity for integrated
supply chain management efforts.
Electronic Data Interchange
Electronic data interchange, commonly referred to “EDI”, is the computer to
computer interchange of business documents and/or information between trading
partners in standard data format. Where, trading partners means, cooperation
between companies is required to get the EDI systems running properly.
Computer-to-computer and standard data format mean information must be
precisely formated so that a computer can process the information without human
assistance. EDI replaces the traditional forms of mail, courier, or fax. It is being
utilized to link supply chain members together in terms of order processing,
production, inventory, accounting, and transportation. It allows members of the
supply chain to reduce paperworks and share information on invoices, orders,
payments, inquiries, and scheduling among all channel members. The benefits of
EDI are numerous: quick access to information, better customer service, reduced
paperwork, better communications, increased productivity, improved tracing and
expediting, cost efficiency, competitive advantage, and improved billing.
EDI improves productivity through faster information transmission as well as

reduced information entry redundancy. Accuracy is improved by reducing the
number of times an individual is involved in data entry. The use of EDI results in
reduced costs on several levels, including:
1) Reduced labour and material cost associated with printing, mailing, and
handling paper-based transactions;
2) Reduced telephone and fax transmissions; and
3) Reduced clerical costs.
EDI is also tremendously beneficial in counteracting the bull whip effect
described earlier in this unit. Through the use of EDI, supply chain partners can
overcome the distortions and exaggerations in supply and demand information by
using technology to facilitate real-time sharing of actual demand and supply
information. Although about 20 percent of all retailer orders for consumer
products were placed via EDI in 1990, that percentage had grown to well over
60 percent by the end of 1995. Clearly, firms are realizing that the use of EDI to
facilitate information sharing throughout the supply chain is beneficial.
In general, EDI is used for communication of business information such as

purchase orders, invoices, bills of lading, shipping instructions, production
sequences, inventory or order status, fund remittances, and point-of-sale
14 information (in the case of retailers).
EDI cuts down time delays, labor costs, errors, inventory and uncertainty. IT Packages in SCM
Business with EDI reduces the paper work, which is about 4 to 7% of the value
of the goods traded. The EDI activities are the following:
1) Sales return could be analyzed and fed into the ordering process;
2) Orders could be raised to reflect both demand and known stock availability;
3) Instruction could be sent to distributors in parallel with the orders to ensure
fast delivery;
4) Carriage by road, rail, sea, or air could be booked simultaneously;
5) Customs clearance documents could be available in advance of goods
arriving, avoiding hold ups;
6) Payment instructions could be issued to banks to ensure prompt payment.
Bar Coding and Scanning
At its most basic level, bar coding refers to the placement of computer readable
codes on items, cartons, containers, and even railcars. This particular technology
application drastically influenced the flows of product and information within the
supply chain. As noted throughout this unit, information exchange is critical to the
success of supply chain management. In the past, this exchange was conducted
manually, with error-prone and time-consuming paper-based procedures. Bar
coding and electronic scanning are identification technologies that facilitate
information collection and exchange, allowing supply chain members to track and
communicate movement details quickly with a greatly reduced probability of error.
The critical point-of-sale data that organizations such as Wal-Mart provide to their
supply chain partners is made possible through the use of bar coding and
scanning technology. This same technology is critical to transportation companies,
such as FedEx, by enabling them to provide their customers with detailed tracking
information in a matter of seconds.
Bar code scanners are most visible in the checkout counters of the supermarket.
They scan the black-and-white bars of the Universal Product Code (UPC). This
code specifies the name of the product and its manufacturer. Bar codes are used
in hundreds of situations, ranging from airline stickers on luggage to blood
samples in laboratories. They are especially useful in high-volume tracking where
keyboard entry is too slow and/or inaccurate. Other applications are the tracking
of moving items, such as components in PC assembly operations, railroad cars at
various locations, and automobile in assembly plants. The general benefits of Bar
Code technology in the supply chain environment are: Speeds data entry,
Enhances data accuracy, Reduces material-handling labour, Minimizes on-hand
inventory, Monitors labour efficiency, Improves customer service, Reduces product
recall, Verifies orders at receiving and shipping, Reduces work-in-process idle
time, Monitors and controls shop floor activity, Improves shop floor scheduling,
Optimizes floor space, and Improves product yield/reduces scrap.
Data Warehouse
Generally, a data warehouse is a decision support tool for collecting information
from multiple sources and making these information available to end users in a
consolidated, consistent manner. The concept originated in the 1970s, when
corporations realized they had many isolated information systems “islands” that
could neither share information nor provide an enterprise-wide picture of
corporate activities. Recently, there has been a renewed interest in this concept,
as organizations adopt distributed computing architectures while they leverage
their isolated legacy systems. Rather than trying to develop one unified system or
linking all systems in terms of processing, a data warehouse provides a means to
combine the data in one place and make it available to all of the systems.
15
IT Enabled SCM In most cases, a data warehouse is a consolidated database maintained separately
from an organization’s production system databases. It is significantly different
from a design standpoint. Production databases are organized around business
functions or processes such as payroll and order processing. Many organizations
have multiple databases, often containing duplicate data. A data warehouse, in
contrast, is organized around informational subjects rather than specific business
processes. The data warehouse, then, is used to store data fed to it from multiple
production databases in a format that is readily accessible by end users. Data
held in data warehouses are time-dependent, historical data and may also be
aggregated.
For example, separate production systems may track sales and coupon mailings.
Combining data from these different systems may yield insights into the
effectiveness of coupon sales promotions that would not be immediately evident
from the output data of either system alone. Integrated within a data warehouse,
however, such information could be easily extracted.
One immediate benefit of data warehousing is the one previously described in the
example about sales and marketing data. Providing a consolidated view of
corporate data is better than many smaller (and differently formatted) views.
Another benefit, however, is that data warehousing allows information processing
to be off-loaded from individual (legacy) systems onto lower-cost servers. Once
done, a significant number of end-user information requests can be handled by
the end users themselves, using graphical interfaces and easy-to-use query and
analysis tools. Accessing data from an updated information warehouse should be
much easier than doing the same thing with older, separate systems. Furthermore,
some production system reporting requirements can be moved to decision support
systems – thus freeing up production processing.
Internet
In terms of advancement in technology and communications capabilities, perhaps
the most influential development over the past decade has been the adaptation of
the Internet from strictly government and research applications into the areas of
commerce and mass communications. At the most basic level, a network of
networks, the Internet provides instant and global access to an amazing number
of organizations, individuals, and information sources. Through systems like the
popular World Wide Web (the web), Internet users are able to conduct organized
searches on specific topics as well as browse various web sites to discover the
vast resources available to them through their computer.
The Internet offers tremendous potential for supply chain members to share
information in a timely and cost-effective manner, with relative case. Many
organizations are now exploring the numerous opportunities provided by the
Internet. For example, the Internet provides opportunities for the development of
EDI systems. It also provides an incredible source of information about
potential suppliers of products and services. A few examples of the type of
information available on the Internet are provided under the World Wide Web
heading.
Although the potential benefits of supply chain applications on the Internet are
substantial, as with any emergent technology, certain issues must be resolved. A
key Internet concern is the issue of privacy, the level of security for information.
Privacy of information transmitted on the Internet is an issue for all users,
particularly in the use of credit-card members and other sensitive information. For
supply chain members already struggling with the challenge of freely sharing
information, these issues only add to their concerns.
16
These issues may soon be resolved. Currently, web software called ‘merchant’ IT Packages in SCM
server is in advanced stages of development. Although present applications are
being developed to assist with consumer transactions, such as providing secure
conduits for payment information and transactions, other applications are not far
behind. One approach for such security problems is the development of the
supply chain’s own Internet.
Intranet/Extranet
Intranets are networks internal to an organization that use the same technology
that is the foundation of the global Internet. Many industry analysts expect such
corporate networks to provide most of the revenue for computer hardware and
software vendors over the next few years as an increasing number of business
expand their internal networks to improve efficiency.
By using Web browsers and server software with their own internal systems,
organizations can improve internal information systems and link otherwise
incompatible groups of computers. Internal networks often start out as ways to
link employees to company information, such as lists, product prices, or benefits.
Because internal networks use the same language and seamlessly connect to
the public Internet, they can easily be extended to include customers and
suppliers, forming a supply chain “Extranet” at far less cost than a proprietary
network.
World wide Web
The World Wide Web is the Internet system for hypertext linking of multimedia
documents, allowing users to move from one Internet site to another and to
inspect the information available without having to use complicated commands
and protocols.
The implications of the Web for business applications are obvious and far-
reaching. Web-based technology and tools have been developed in virtually every
industry and forms of commerce. Supply chain functions are no exception. For
instance, Enterprise Transportation management was recently launched by
Metasys Inc. through the Oracle Web Applications Server; this system deploys a
variety of critical information about transportation and distribution applications
throughout the supply chain. Further, the system can be accessed with any Java-
enabled browser. Access may be controlled through a corporate network, via the
Internet or an Intranet Web site.
The number of Web sites relevant to supply chain management is growing at a

rapid pace. From specific sites providing information about the capabilities and
fees of potential supply chain partners to educational sites developed primarily on
reference tools, the number of sites and variety of information available on the
Web is impressive. Examples of the Web sites available include the following:
1) www.con-waynow.com provides information about the expedited motor-

carrier arm of Con-Way Transportation Services, providing information about
the company’s services, market coverage, and truck fleets, as well as direct
e-mail links to Con-Way NOW’s sales, operations, and human resources
departments.
2) www.gebn.bus.msu.edu provides access to Global Procurement and Supply

Chain Benchmarking Initiative home page. The Global Procurement and
Supply Chain Benchmarking Initiative is a third-party procurement and supply
chain benchmarking effort housed in The Eli Board Graduate School of
Management at Michigan State University. The primary mission of this group
17
IT Enabled SCM is to collect and disseminate information concerning the best procurement and
supply chain strategies, practices, and processes being employed by
companies across a wide range of industries worldwide.
3) www.supply-chain.com developed by the Supply Chain Council provides a

valuable reference source introducing shippers to the Council’s mission and
supply-chain reference model, a leading edge benchmarking tool being
developed for specific supply chain applications.
Most of the supply chain related professional societies have highly informative
home pages. These Web sites typically provide information about the
organization’s objectives, educational and training opportunities, educational
products, reference libraries, job placement services, discussion forums,
conferences, and membership requirements.
Decision Support Systems
By the early 1970’s the demand for all types of Industrial Software started to
accelerate. The increased capabilities and reduced costs justified computerized
support for an increased number of non-routine applications. At that time, the
discipline of decision support systems (DSS) was initiated. The basic objective of
a DSS is to provide computerized support to complex non-routine and partially
structured decisions.
At first, the cost of building a DSS prohibited its widespread use. However, the
availability of low-cost personal computer around 1980 changed this situation.
Desktop PCs, which are easily programmable, made it possible for a person with
limited programming ability to build useful DSS applications (e.g., spreadsheets
with built-in-macros). This was the beginning of the era of end-user computing.
Analysts, Managers, many other professionals, and Secretaries began building
their own systems.
Given the complexity of supply chains, development of DSS to assist decision-

makers in terms of both the design and operation of integrated supply chains is
likely to increase. These DSS will help decision-makers identify opportunities for
improvements across the supply chain, far beyond what even the most
experienced manager could provide through intuitive insight. Supply chain-wide
DSS will allows management to look at the relationships across the supply chain,
including suppliers, manufacturing plants, distribution centers, transportation options,
product demand, relationships among product families, and a host of other factors
to optimize supply chain performance at a strategic level.
Supply chain DSS requires large amounts of both static and dynamic information
from the member organizations. The static information includes production rates
and capabilities for all supply chain entities, bills of material, routings, and facility
preference. The dynamic information includes forecasts, orders, and current
deliveries. Using all of this information to solve, for example, a quick-response
scheduling problem across the supply chain is virtually impossible with a single
technology. However, all the data can be readily obtained from existing
information systems through Structured Query Language (SQL) using various
relational databases or the “supply chain data warehouse” if one exists.
Specific technologies that may be utilized for an effective supply chain

management DSS include: SQL interface, Expert system rules, Scheduling
algorithms, optimization (Linear programming capabilities), Blocked scheduling,
Multisite/multistage scheduling, Graphical user interface, User definable database,
Available-to-promise, and Demand management.
18
Activity 4 IT Packages in SCM
Examine the suitability of e-commerce, Electronic Data Interchange and Bar

Code System practices of Indian Organizations. For this, refer National/
International Journals or select an organization known to you.
..............................................................................................................................
..............................................................................................................................
..............................................................................................................................
..............................................................................................................................
..............................................................................................................................
8.7 SUMMARY
The sharing of information among supply chain members is a fundamental

requirement for effective supply chain management. At the ultimate level of
integration, decision makers at all levels within the supply chain members
organizations are provided with the information they need, in the desired format,
when they need it, regardless of where within the supply chain this information
originates. Providing the decision-makers within the supply chain with the ‘right’
information, in the necessary format, and in a timely manner is a major challenge.
The information requirements determination approaches presented in this unit have
been effective in ensuring that these information requirements are met.
The information systems and the technologies utilized in these systems represent
one of the fundamental elements that “link” the organizations of a supply chain.
The range of technologies available to support supply chain management efforts
is vast and ever changing. Unfortunately, there is not a single “right” IT solution
to supply chain management. Organizations need to explore various options to
arrive at a solution that provides the functionality required for their specific supply
chain management initiative. Towards this end, benchmarking integrated supply
chain efforts to identify “best practices” is essential.
Supply Chain Management initiatives are unlikely to succeed without the

appropriate information systems and the technology required to support them.
These important decisions should be made by a cross-functional, inter
organizational management group that can afford to manage the constraints
related to the time and resources required to develop a supply chain information
systems strategy. The team should implement the strategy, and ever see its
ongoing performance.

1) Define Information Technology. What are the advantages and disadvantages
of adoption of IT in Indian Manufacturing Organizations?
2) What is the value of information? How would you try to assess the value of
information to a decision-maker?
3) Explain briefly the Inter Organizational Information system. How is IOIS
important for effective supply chain management?
4) What are the fundamental mistakes commonly made while capturing
information? How would these mistakes be eliminated in SCM? 19
IT Enabled SCM 5) Give various supply chain information categories. Give examples of
information contained in these categories.
6) What are the major advantages and disadvantages of inquiry systems in
which data are captured on-line but files are updated later – say at night?
7) How would you measure the extent of unemployment created by the
implementation of IT? What factors tend to mitigate the problem of increased
unemployment if it actually occurs?
8) Does IT have an impact beyond the organization, for example, on
stockholders or customers? What kinds of effect occur and what problems
are created for these groups?
9) What is the IT enabled organization design variables? How do they
supplement or replace conventional design variables?
10) What are the risks for a small company connecting itself electronically with
major customers?
11) What kinds of employees are most likely to be replaced by Information
Technology? Does your answer depend on the type of system? Are the
decision levels affected?
12) Write a brief note on the following:
i) Electronic commerce
ii) Electronic Data Interchange
iii) Bar Coding and Scanning
iv) Data Warehouse
v) Internet
vi) Intranet/Extranet
vii) World Wide Web
viii) Decision Support System
13) What are the advantages and disadvantages of using Bar Code and Scanning
System in the Manufacturing Organizations?
14) Give a list of potential benefits of using Electronic Data Interchange (EDI).
Who are the service providers of EDI in India and their terms and
conditions?
15) Compare and contrast EDI, Internet, and Intranet/Extranet. How are they
applied in SCM?

READINGS
1) CAPS Logistics, Inc., Atlanta, Georgia, USA, or http://www.Caps.com, 1999.
2) Copacino, W.C., : Supply Chain Management: The basics and beyond,
St. Lucie Press, 1997.
3) Handfield, R.B. and Nichols, E.L. Jr., : Introduction to Supply Chain
Management, Prentice Hall, 1999.
4) Jonathan Blain, et. al., : Using SAP R/3, Prentice-Hall of India Pvt. Ltd.,
1998.
5) Lambert, D.M., Stock, J.R., and Ellram L.M., : ‘Fundamentals of Logistics
Management’ Mc-Graw Hill- Irwin, 1998.
20
6) Lucas, H.C., Jr., : ‘Information Technology for Management’, The IT Packages in SCM
McGraw-Hill Companies, Inc. 1997.
7) Martinich J.S., : ‘Production and Operations Management: An Applied
Modern Approach’, John Wiley & Sons, Inc., 1999.
8) Oden, H.W., Langen Walter, G.A., and Lucier, R.A., Hand Book of
Material and Capacity Requirement Planning, McGraw Hill, Inc., 1993.
9) Pressman, R.S., : ‘Software Engineering: A Practitioner’s Approach’,
Mc-Graw Hill, Inc., 1992.
10) Rosen, K.T. and Howard A.L., : E-Retail: Gold Rush or Fool’s Gold?,
E-Commerce, California Management Review, Vol.42, No.3, Spring, 2000.
11) Senn, J.A., : ‘Information Systems in Management’, Wadsworth Publishing
Co., 1990.
12) Stevens, G.C., : Integrating the Supply Chain, International Journal of
Physical Distribution and Materials Management, Vol.19, No.8, 1989.
21
IT Enabled SCM
UNIT 9 INTELLIGENCE INFORMATION SYSTEM
Objectives
The objectives of this unit are to enable you:
· to learn about the recent developments in the information system, particularly
in the supply chain context;
· to learn about Materials Requirement Planning (MRP), Enterprise Resource
Planning (ERP), and Distribution Resource Planning (DRP/DRP-II); and
· to compare the ERP and Supply Chain Planning (SCP).
Structure
9.1 Introduction
9.2 Changing Paradigm of Manufacturing
9.3 Materials Requirement Planning (MRP)
9.4 Manufacturing Resource Planning (MRP-II)
9.5 Enterprise Resource Planning (ERP)
9.6 Distribution Requirement Planning (DRP)
9.7 Distribution Resource Planning (DRP-II)
9.8 ERP vs. SCP (Supply Chain Planning)
9.9 Summary
9.1 INTRODUCTION
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 firm’s 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.
22
IT Packages in SCM
9.2 CHANGING PARADIGM OF MANUFACTURING
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.
Table 9.1: Changing Paradigm of Manufacturing
Old Rules of Manufacturing New Rules of Manufacturing
Produced to forecast Produced to order
Uniform/standardized Highly variable/customized
Low on information content High information content
Characterized by a specific market niche. Characterized by multiple market niche
Expected to have a larger market life. Expected to have a shorter market life
Self-contained Open ended platform for upgrades/information/services
Line personnel shouldn’t challenge The person closet to the problem is the world’s best
current practices. expert
Layout the factory by function Cellular layout
Always keep people busy and Make only as such as you need only when you need
equipment humming.
Inventory is an asset. Inventory is liability
Traditional performance measures Measurements focus on improvement rates in cost,

such as labor and machine efficiencies, quality, flexibility and value-added activities and
purchase price variance and overhead customers satisfaction.
absorption rates.
Quality is inspected at the end of line. Building quality in throughout entire process.
Large lot sizes are better because we Constantly try to economically reduce lot size and
amortize setup and change – over setup times.
times over more units.
23
IT Enabled SCM The new rules of manufacturing that cause the changing paradigm of
manufacturing are compared against the old rules of manufacturing – shown in
Table 9.1. The intelligence information systems consisting of MRP. ERP, DRP
and SCP are a few solutions that gained significance to meet the current
business challenges.
9.3 MATERIALS REQUIREMENT PLANNING (MRP)
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 de-
expedited 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. Order modifiers, including safety stock and lot sizes
are discussed later in this unit.
Material Requirements Planning Inputs
Figure 9.1 illustrates the five major sources of information required for MRP to
operate:
24
IT Packages in SCM
Bill of Materials
Master Production
Action Report
Schedule
MATERIAL
REQUIREMENT Primary (orders)
Item Master Report
PLANNING
Orders Pegging Report
Requirements
Figure 9.1: MRP Inputs and Outputs
Production Plan
Demand Data
Rough Cut
MPS
Capacity Planning
Inventory Status
Planning Data
Figure 9.2: Inputs to Master Production Schedule
Master Production schedule states which end items (items that are sold to
customers) are needed, in what quantities, on which specific dates, and when
these items will be produced. The MPS has five major inputs, as shown in
Figure 9.2.
The production plan provides a set of constraints on the MPS. The MPS must
take into account all types of demand data for the items being scheduled
including: sales forecasts, customer orders, distribution warehouse requirements,
interplant requirements, service demand forecasts, and safety stocks. The MPS
must know how much is available to accurately determine how much to orders.
This requires the inventory status information on hand inventory, allocated stock,
released production and purchase orders, and firm planned orders. The item
master file provides planning data on each item to guide the MPS planning
process, such as: lot-sizing rule to be used, shrinkage factor, safety stock, and
lead-time. Rough cut capacity planning determines the capacity requirements to
implement the Master Production Schedule, verifying the schedule’s feasibility or
causing the master schedules to revise the schedule.
1) The Bill of Materials (BoM), also called a product structure or parts list, is a
list of all the materials, and the quantity of each, required to produce one unit
25
IT Enabled SCM of a manufactured product, or parent. MRP uses the bill of materials, as the
basis for calculating the amount of each raw material required for each time
period. The engineering Bill of materials (often called the parts list) for a
simple product (ball-point pen) is as shown in Table 9.2.
Table 9.2: Engineering Bill of Materials (Parts List) for ball-point pen
Item No. Description Quantity Make or Buy Drawing File No.
1 Barrel 1 Make 26079

2 Tip 1 Buy 26080
3 Spring 1 Buy 20091
4 Refill 1 Buy 20026
5 Cap 1 Make 26048
6 Plunger 1 Buy 26032
7 Clip 1 Buy 26054
In an MRP system, a Bill of Materials (BOMs) file is an up-to-date

computerized file that contains a single record for each individual parent-
component relationship. The BOMs represent the actual sequence of fabrication
and assembly.
2) Item Master in an MRP system is a computerized file with a complete
record for each item, or part. Because MRP systems are part-oriented, the
Item Master File is the heart of the system. Each item, no matter at how
many levels it is used in a product, or in how many products, and no matter
whether it is currently stock-on-hand or not, has one and only one record.
The item master record for a part contains many types of information,
including: static data, such as part description, unit of measure, and MRP
planning factors (lot sizes, lead times, safety stock, and scrap rates); plus
dynamic data, such as various costs, current quantities on hand and on
order.
3) Requirement is a computerized record of a future stockroom issue that will
diminish stock-on-hand. There are two types of requirements: Internal (which
will be used within the plant to make other products), and External (which
will be sent outside the plant, such as customer orders and service parts.
A typical requirements record contains the item number of the part required,
the quantity required, the date on which it is needed, and the quantity already
issued from the stock room. Customer orders also contain such additional
information as the customer name and ship to address, the date on which
the customer wants delivery, and the date we promised to ship.
4) Orders are computerized record of a future stockroom issue receipt that will
increase stock-on-hand. Just as there are two types of requirements, there
are two types of orders:
a) Shop orders (or work orders or manufacturing orders), which will be
manufactured within our own plant. These are similar to our internal
requirements, because they will be procured internally.
b) Purchase orders, which will be procured from outside our plant. These
are similar to our external requirements, because they will come into our
plant from external sources.
We can also categorize the incoming orders (both shop orders and purchase
orders) in a different manner, which tells whether the order has been
26
released, or whether it is still planned. The categories are:
a) Scheduled receipts (or open order, or released order), which is an order IT Packages in SCM
that has been officially released, either in the shop or to a supplier. A
scheduled receipt commits our company to take action and spend money.
b) Planned order, which exists only in the computer, and perhaps some
printouts at this point. Our company has not yet been authorized to
spend money; no supplier or shop has been authorized to start work on
this order.
Planned order can become scheduled receipts only when a human expressly
takes action, this is one of the primary responsibilities of a materials planner. An
MRP order record contains considerable data, including item number being
ordered, order quantity, original due date, actual received quantity, revised due
date, quantities in MRB (Material Review Board) and scrap, supplier (if purchase
order), and other information.
Activity 1
Identify and discuss the different Bill of Material Database in an organization.
Does the Bill of Material Database vary from department to department? Why?
Draw a Bill of Material “tree” for one of a typical product that you know.
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Material Requirement Planning Logic and Mechanics
The logic underlying MRP is to use the product structure (BOM) and lead time
information to determine when purchase and production orders should be released
so that materials are obtained just when they are needed.
1) Exploding the Product
The first step is to use the BOM to ‘explode’ the product into a production (or
assembly) time chart. Figure 9.3 is a production time chart for the spider climber
(It is the playing implement that kid uses in the children’s park).
The explosion begins with the time the end product is needed and then works
backward through each production or purchasing activity that must be done to
make each succeeding item. For example, consolidating and packing a spider
climber requires one day of lead time, so if a supply of climbers is required at
time T, shells, leg supports, ladders, and bolts and nuts must be available one
day earlier, at time T-1. Welding and coating a shell requires three days of lead-
time, so an order to begin welding shell quads must be released three days
earlier, or at time T-4. Casting and demolding shell quads also has a three-day
lead-time, so an order to cast shell quads must be issued and aluminum ingots
must be available at time T-7. Figure 9.3 shows that the cumulative lead time
for producing a spider climber is eight days, so the company would have to
initiate production or purchase activities at least eight days before climbers are
required.
27
IT Enabled SCM
Pack
Products
Order
Aluminum Cut leg
pipe support
Weld
Obtain Cast and
Aluminum shell coat
ingots* quads shell
8 7 6 5 4 3 2 1 0
Days before End
shipping of Product
End-product Order point Available
* Items not ordered by the MRP system, materials are always in stock.
Figure 9.3: Production Time Chart for the Spider Climber.
2) Developing the Material Requirements Plan

The next step is to construct a material requirements plan for each item in the
BOM, as illustrated in Figure 9.4.
Master Production Schedule
Day 1 2 3 4 5 6 7 8 9 10 11
Quantity 0 0 0 0 0 0 0 0 20 0 30
Spider Climber
Gross requirements 20 30
Projected on hand 0 0
Scheduled receipts 0 0
Net requirements 20 30
28
Planned order release 20 30
Shells IT Packages in SCM
Shells Quads (× 4)
Leg supports (× 4)
Pipe (× ¼)
Ladders (× 4)
Ladder Legs (× 2)
29
IT Enabled SCM Figure 9.4: (Contd..)
Pipe (× 4)
Ladder Steps (× 7)
Figure 9.4: Material Requirements Plans for Spider Climber
A material requirements plan is a production or purchase schedule for an item

that makes up the end product. The procedure begins by converting the gross
product requirements in the MPS into net product requirements. The gross
requirements are the number of units actually required (desired) at the beginning
of each time period. The requirements are the gross requirements less any
available inventories and any scheduled receipts, where the available inventories
are total inventories for the item at the beginning of the period less any desired
safety stock (in the MRP, available inventories are normally labeled as projected
on hand). The scheduled receipts are replenishment orders that have already
been placed, either in our plant (shop orders) or at a supplier (purchase orders).
These will increase the inventory on hand. Hence,
(net requirements)t = (gross requirements)t – (projected on hand + scheduled receipts)t
(projected on hand)t = (total expected inventory)t – (safety stock)t
Gross product requirements are transferred from the MPS to the material
requirements plan for the end product, and the net requirements are computed,
as shown in figure 9.4. The next line in the material requirements plan is the
amount of product or material planned to be received through production or from
a vendor at the beginning of the time period. Under lot-for-lot ordering
(production) we order or produce exactly what is needed in a time period so that
the planned order receipts will equal the net requirements. (It may be noticed
that in Figure 9.4, the planned order receipts is combined with the net
requirements).
The final lines in the material requirements plan for an item is the planned order
releases. This is the amount that must be ordered (internally through production
or externally from a vendor) at the beginning of a time period so that the planned
order receipts occur when needed. Therefore, the planned order releases equal
the net requirement (or planned order receipts), except that they are offset by
the lead-time. For example, in figure 9.4 the net requirements for the spider
climber are 20 units on day 9 and 30 units on day 11. The lead-time for final
consolidation and packing is one day, so the planned order releases for the
climber must be 20 on day 8 and 30 on day 10.
30
IT Packages in SCM
9.4 MANUFACTURING RESOURCE PLANNING
(MRP-II)
As we have noted, MRP is a production planning system that converts an MPS

into planned order releases. Manufacturing resource planning (MRP-II) is a
philosophy that attempts to incorporate the other relevant activities of the firm
into the production planning process. In particular, the financial, accounting, and
marketing functions of the firm are tied to the operations function. As an
example of the difference between the perspectives offered by MRP and MRP
II, consider the role of the master production schedule. In MRP, the MPS is
treated as input information. In MRP II, the MPS would be considered a part of
the system and, as such, would be considered a decision variable as well. Hence,
the production control manager would work with the marketing manager to
determine when the production schedule should be altered to incorporate revisions
in the forecast and new order commitments. Ultimately, all divisions of the
company would work together to find a production schedule consistent with the
overall business plan and long-term financial strategy of the firm.
Another important aspect of MRP II is the incorporation of CRP (capacity

resource planning). Capacity considerations are not explicitly accounted for in
MRP. MRP-II is a closed-loop cycle in which lot sizing and the associated shop
floor schedules are compared to capacities and recalculated to meet capacity
restrictions. An MRP-II system may convert information from the material
requirements plans into specific work schedules for departments and machines,
evaluate department workloads and capacity conditions, generate shipping
documents and customer invoices, and produce management reports on production
and financial performance. Typically, these systems have feedback mechanism
(and therefore called closed-loop MRP systems) so that if department, machine,
or personnel capacity limits are exceeded, the material requirements plans and
corresponding production schedules are revised to stay within capacity limits.
9.5 ENTERPRISE RESOURCE PLANNING (ERP)
In the past, most of the planning covered only limited routine operational
requirements, with focus on historical record keeping and accounting. The
business functions in the enterprise were using information technology to
automate the departmental activities, to fulfill only individual and departmental
needs and objectives, not realizing the effect on other functions.
However, the enterprise is the group of people with a common goal, which has
certain resources at its disposal to achieve this. The group has some key
functions to perform inline with the goals. Resources are anything, which cost
money. Resources include raw materials, purchased parts, and produced parts,
personnel, processing machine capacity, material handling capacity, tools, fixtures,
NC programs and such others as needed to produce the end items. Planning is to
ensure that nothing goes wrong and also putting necessary functions in place.
ERP is the method of effective planning of all resources in an organization.
Every organization committed to making and selling goods and services has three
major objectives:
· To provide maximum customer service
· To minimize inventory carrying cost
· To optimize plant operation
31
IT Enabled SCM Unfortunately, these objectives are basically conflicting in nature and represent
certain trade-offs. Sales department requires all the inventory necessary to
service their customers and at the same time production flexibility to meet
changing demands. Factory desires a constant production schedule with long runs
and less overtime. Finance insists on keeping the capital investments to a
minimum. More often they end up with the managers nightmare:
· More was bought than required
· More was used than essential
· More was produced than sold
ERP is an attempt to bridge the gap. It is defined to be a company wide
planning system which works around core activities of business and has all logical
interfaces to achieve seamless flow of information within the supply chain and
value stream. Such systems can optimally plan and manage all the resources of
enterprise to run the business with high level of customer service at lower cost
and improved productivity.
The evolution of ERP took over three decades, during which the continuous
improvement for integration and planning with creative thinking by innovators
developed this comprehensive planning and control framework. Three ancestors
of ERP serve as milestones:
· 1960’s Material Requirement Planning (MRP)
· 1970’s Closed Loop MRP
· 1980’s Manufacturing Resource Planning.
During this it also absorbed the new techniques proven to produce business
benefits from Just-in-Time (JIT) and Business Process Reengineering (BPR).
In 1960’s the computerized production and inventory control systems began to

provide better methods of ordering materials and control inventory. It uses master
production schedules (What are we going to make?), bills of material (What does
it take to make it?), and inventory records (What do we have?) to determine
future requirements (What do we have to get?), which is called as Material
Requirement Planning (MRP). In the changing conditions of manufacturing
environment, the priority planning and capacity planning were tied in with MRP to
accommodate the variations in demand and supply using feedback from tactical
plans and execution levels. This closed structure is called as closed loop MRP.
The next generation, Manufacturing Resource Planning (MRP-II), plans to
forecast sales, to set production rates and resources levels integrated with
investments decisions before translating the business plans to Master Production
Plans (MPS).
In the new generation ERP, the whole supply chain management concept is
incorporated extending the planning concept to trading partners where the
complete visibility throughout the enterprise is possible and the concept of virtual
enterprise is supported using electronic commerce.
This incorporates the techniques, Just-in-Time (JIT) and Business Process
Reengineering (BPR), particularly in the areas of work empowerment, human
engineering and waste reduction. The benefits of JIT are never fully realized
unless it is being applied within the rational framework without which one could
easily make wrong part at wrong time with utmost efficiency. The drawback of
MRP II was the planning based on lead times, which never asked for
improvement and taken as it is. The BPR is becoming an essential tool before
and while ERP implementation concentrating on reduction in non value adding
32 activities and work simplification causing reduction in cycle time.
ERP consists of different modules integrated into one system. The modules are: IT Packages in SCM
1) Distribution and transportation which serves day-to-day logistics using

forecasting tools, extensive planning, comprehensive sales, purchasing,
warehousing, packaging, inventory management and electronic commerce.
2) Order management integrates customer order processing into master
production schedule, supports multiple sites and currencies, electronic
commerce for real time information.
3) Manufacturing module supports master production schedule, material
requirement planning, capacity planning, supplier scheduling and shop floor
control.
4) Finance module delivers high level of visibility of financial transactions,
supports accounts payable, accounts receivable, different costing
methodologies, general ledger and electronic commerce.
5) Human resource module integrated with pay-roll track skills, capabilities,
experience and training needs of an organization, prepares and maintains
organization structure.
6) Quality management lets user tap collect, distribute and analyze critical
quality information and uses powerful statistical tools to monitor and control
products and processes.
7) Maintenance management calls for optimal schedules for personnel,
availability of spares, and effective maintenance tasks. It handles all types of
maintenance, keeps details of equipments, generates spare parts and
maintenance requirements automatically.
8) Project module supports cost management of projects includes estimates, bids,
scheduling, planning, budgeting, purchasing, tracking, billing, and integration
with finance, manufacturing and distribution operations.
Why a Company Pursues a New ERP Solution
a) The company wants to achieve performance improvements, such as reducing
operational costs, gaining competitive advantage, improving customer service,
and improving or reengineering business processes.
b) The existing system in the company is not able to support its needs and
requires significant information system resources for maintenance and
support.
c) The system uses multiple points of input, often with duplication of effort.
d) Staff members are unable to answer questions easily or respond to
information requests by key customers or suppliers.
e) The enterprise has grown through mergers and acquisitions and contains a
variety of incompatible systems
f) Key information is updated on a batch basis instead of in real time.
A few ERP software modules and their features are presented in Unit 10.
9.6 DISTRIBUTION REQUIREMENT PLANNING

(DRP)
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
33
accomplished in three distinct phases.
IT Enabled SCM 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 time-phased 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.
DRP Logic
Consider a company manufactures distributes and sells pharmaceuticals and
supports a network of six retail stores. Specifically, we will track the planning for
vitamin C tablets packaged in bottles of 100. The store at Mumbai has 500 of
this product on hand, 200 as a safety stock, and a forecast that varies between
80 and 120 per week (see Figure 9.5).
On-hand Balance : 500 Mumbai Store

Safety Stock: 200 Vitamin C Tablet 100/Bottle
Lead Time: 2 weeks Past Week
Order Quantity: 300
Due 1 2 3 4 5 6 7 8
Forecast 100 120 90 110 120 100 80 120
In Transit
Projected on hand 500 400 280 190 80 -40
Planned Shipments.–
Receipt. Date
Planned Shipments.–
Ship Date
34 Figure 9.5: DRP Logic for a Mumbai Store

In Figure 9.5, the projected on-hand balance is determined by means of the IT Packages in SCM
simple computations. This logic reduces the on-hand balance by the quantities
forecast for each week. In the beginning of the first week, for example, 500 are
on hand. Forecast sales for the week are 100; they are subtracted from the 500
on hand, leaving a projected balance of 400 at the beginning of the next week.
The same mechanism ripples through the schedule. The projected on-hand
balance dips below the safety stock of 200 in week 3 (projected on-hand balance
of 190), at which point the store will probably run out of stock and go on back
order in week 5. In the example in Figure 9.5, no product is in transit. If that
were the cases, the product in transit would be added to the projected on-hand
balance in the week that it is due to arrive.
The situation shown in Figure 9.5 will occur if nothing is shipped from the supply
source. The store manager needs more of the product delivered in week 3 to
keep the balance from dropping below safety stock, which means that more
product must arrive by week 5 to keep the product from going on back order.
On-hand Balance : 500

Mumbai Store
Safety Stock: 200
Vitamin C Tablet 100/Bottle
Order Quantity: 300
Due 1 2 3 4 5 6 7 8
Forecast 100 120 90 110 120 100 80 120
In Transit
Projected on hand 500 400 280 490 380 260 460 380 260
Planned Shipments.– 300 300
Receipt. Date
Planned Shipments.– 300 300
Ship Date
Figure 9.6: DRP Logic for a Mumbai Store with Planned Shipment
The replenishment lead-time for vitamin C at the Mumbai store is two weeks,
and normally 300 bottles, or four full cases, are shipped at a time. Therefore, a
shipment of 300 units must arrive in week 3 to prevent the inventory from
dropping below the desired safety-stock level. Since the replenishment lead-time
is two weeks, the shipment should be ordered from the supply source in week 1.
Figure 9.6 includes this planned shipment (i.e., future order) from the supply
source in the two lines labeled planned shipments. One shows the planned
shipments on the date they are due to arrive at the store (planned shipments –
receipt date). The other shows the planned shipments on the day they are due to
be shipped from the supply source (planned shipment – ship date).
The planned shipments provide enough stock to last until week 8, although the
store will drop below safety stock in week 6. Therefore, another order must
arrive in week 6. This order should be sent from the supply source in week 4.
Figure 9.6 shows the complete picture of the Vitamin C product at the Mumbai
store.
Now that we have seen how DRP functions in one store, let’s expand it to all
the stores for the Vitamin C product. The following examples (Figure 9.7) show
DRP displays for the other stores and are similar to the DRP display shown for
the Mumbai store.
In the case of the Indore store in Figure 9.7, an order of 150 is in transit. The
order was shipped because the lead-time is two weeks; and it is due to arrive in 35
IT Enabled SCM week 2. The in-transit quantity is added to the projected on-hand balance in the
week the order is due to arrive. The store manager can now see what material
is in route and when it should be expected.
In the case of Calcutta store (Figure 9.7), a planned order is overdue for
shipment. This is the planned shipment for 300, which appears in the past-due
time period. There could be several reasons for the past-due order. Perhaps sales
were greater than forecasted, so the product was needed in Calcutta earlier than
anticipated. Or, the shipment might not have been sent from the supply source on
time. In that case, because of the visibility that DRP affords, the manager of the
store could determine whether the supply source is shipping on time. Moreover,
the manager could determine the problem well before a stock out occurs.
The situations at the New Delhi, Chennai and Bangalore stores, as shown in
Figure 9.7, are similar to the Mumbai store. Nothing is in transit, but there are
several planned shipment from the supply source to the stores. The Bangalore
store is in the same city as the supply source, so its lead-time for product is only
one day.
The lead-time (LT), order quantities (OQ), and safety stock (SS) are different for
each store, so each store can be scheduled independently if desired. In addition,
the lead times, order quantities, and safety stocks can be different for different
products at the store. (This is not apparent in the figures 9.6 and 9.7 because
only one of many products is shown. Each product at each store, however, is
scheduled independently). DRP gives the people operating the system complete
flexibility in scheduling any item at any stocking locations.
Indore, Calcutta, New Delhi, Chennai & Bangalore Store Vitamin C

Tablet 100/Bottle
Safety Stock: 75 Indore Store
Order Quantity: 150
Due 1 2 3 4 5 6 7 8
Forecast 40 50 45 50 40 45 40 50
In Transit 150
Planned Shipments. 150
– Receipt. Date
– Ship Date

Safety Stock: 75 Calcutta Store
Order Quantity: 150
Due 1 2 3 4 5 6 7 8
Forecast 120 130 115 125 140 110 125 105
In Transit
Planned Shipments. 300 300 300
– Receipt. Date
Planned Shipments. 300 300 300
– Ship Date
36 Figure 9.7: Indore, Calcutta, New Delhi, Chennai & Bangalore Store
IT Packages in SCM
Safety Stock: 50
New Delhi Store
Order Quantity: 150
Due 1 2 3 4 5 6 7 8
Forecast 20 25 15 20 30 25 15 30
In Transit
– Receipt. Date
– Ship Date

Safety Stock: 50 Chennai Store
Order Quantity: 150
Due 1 2 3 4 5 6 7 8
Forecast 25 15 20 25 20 20 25 15
In Transit
– Receipt. Date
– Ship Date

Safety Stock: 150 Bangalore Store
Lead Time: 1 day Past Week
Order Quantity: 300
Due 1 2 3 4 5 6 7 8
Forecast 105 115 95 90 100 110 95 120
In Transit
Planned Shipments. 300 300
– Receipt. Date
Planned Shipments. 300 300
– Ship Date
Past Week
Due 1 2 3 4 5 6 7 8
Mumbai 300 300
Indore 150
Calcutta 300 300 300
New Delhi 150
Chennai 150
Bangalore 300 300
Total 300 300 150 750 450 300 300 0 0
37
Figure 9.8: Summary of Planned Shipments to the Stores
IT Enabled SCM In figure 9.7, forecasts for New Delhi and Chennai stores are nearly the same
from week to week. Based on this, you might expect that the demand on the
supply source would be smooth as well, with demand in any one-week nearly the
same as demands in other weeks. Yet, the opposite is true. The demand on the
supply source is lumpy. Figure 9.8 illustrates this point very well. For example, in
week 2 the demand is only 150, but in week 3 it jumps to 750.
Lumpy demand is one of the reasons why it is so important to have visibility in
the supply chain system. Because the demand on the supply source can vary so
much from one week to another, a planner or buyer needs to be able to see
what product is needed and when it must be shipped to meet the needs of the
stores in the systems without DRP, buyers must use averages – hence, the
inevitability of lumpy demand. With DRP, however, buyers see the true needs of
the supply chain system. This gives tremendous visibility into the distribution
network, and enables buyers to realistically plan for the needs of the stores. The
better buyers see what the stores need in the future, the better they are able to
meet those needs and resolve problems before they occur.
9.7 DISTRIBUTION RESOURCE PLANNING (DRP-II)
Distribution Requirements Planning (DRP) has been defined as the application of

MRP principles to the distribution environment, integrating the special needs of
distribution networks of retailers, etc. It is a dynamic model that looks at a time-
phased plan of events that affect inventory.
Order Entry Forecasting Invetory

Control
Bill of
Open PO`s/MO`s
Distribution
Transportation Resources
Planning Requirements
& Planning
Scheduling &
Scheduling
Yes
Sales Purchase
& & / or
Operations Buy Inventory
Make
Planning Planning
(MPS)
= DRP plans/cchedules
& Key Output Interface
= Key Input Interface
PO = Purchase Order
MO = Manufacturing Order
38
Figure 9.9: Distribution Resource Planning Process
Distribution Resource Planning (DRP-II) is an extension of distribution IT Packages in SCM
requirements planning. DRP applies the time-phased logic to replenish inventories
in multiechelon warehousing systems. DRP-II extends DRP to include the
planning of key resources in a distribution system – warehouse spaces,
manpower levels, transport capacity (e.g., trucks, railcars), and financial flows.
Figure 9.9 depicts the DRP-II system schematically. It is to be noticed that the
accurate forecasts are essential ingredients for successful DRP-II systems. A
DRP-II system translates the forecast of demand for each stock keeping unit
(SKU) at each warehouse and distribution center into a time-phased
replenishment plan, transportation plan, financial plan and budgeting, predicting
warehouse space requirements and predicting labour requirements and equipment
needs, and more importantly manufacturing plan such as master production
schedule. More details may be found in reference on MRP-II.
Activity 2
Prepare a feasibility report for the recommendation of MRP, MRP-II, DRP,
DRP-II, ERP, and SCM that suits your organization or an organization of your
choice.
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9.8 ERP VS. SCP (SUPPLY CHAIN PLANNING)
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
work-in-process, and finished goods inventories in the plant, to contracting the
movement of finished goods through the channels of distribution.
From the above definitions of ERP and SCM one may understand that there is a
great deal of commonality. However, the software designers consider the key
process shown in Table 9.
Table 9. : Comparison of key processes of ERP & SCM
ERP Key Processes SCM Key Processes
1. Sales and Distribution 1. Customer relationship management
· Order entry 2. Customer service management
· Delivery scheduling
2. Business planning 3. Demand management
· Demand forecasting 4. Order fulfillment
· Planning of product production & capacity 5. Manufacturing flow management
· Detailed routing 6. Procurement
3. Production planning 7. Product development and
· Master production schedule commercialization
· Material requirement planning 8. Returns channel (reverse logistics) 39
IT Enabled SCM
ERP Key Processes SCM Key Processes
4. Shop Floor Control
· Production orders
· Scheduling, dispatching & job costing.
5. Logistics
· Inventory management
· Warehouse management
· Delivery management
· Purchasing management
Supply Chain Management Pitfalls

Supply chain management faces the following 14 key pitfalls:
1) No supply chain strategy
2) Inadequate definition of customer service
3) Inaccurate delivery status data
4) Inefficient information systems
5) Ignoring the impact of uncertainties
6) Simplistic inventory stocking policies
7) Discrimination against internal customers
8) Poor coordination
9) Incomplete analysis of shipment methods
10) Incorrect assessment of inventory costs
11) Organizational barriers
12) Product-process design without supply chain consideration
13) Separation of supply chain design from operational decisions
14) Incomplete supply chain strategy.
There are however excellent ways to overcome these problems. The suggested
approaches deal with design and measurement. First, the design of the product or
service should give consideration to the cost and service implications for the
existing or proposed supply chain. Second, database should be integrated
throughout the supply chain to ensure operational control. Appropriate data
include past performance, current inventory levels, positions and schedules, as
well as forecast data. This system would support the opportunity for improved
supply chain performance: the integration of control and planning support systems.
This in turn would reduce independent decision making, which ignores the
systems approach. Thus, the fourth point-to expand the view of the supply chain
is critical. Supply chain members should embrace the systems approach with the
realization that each member’s activities have an impact on the others.
The last two issues concern internal and external measurement. The organization
must redesign its incentives, so that individuals, divisions, and sites are rewarded
for taking a system-wide, supply chain approach. In addition, the organization
should institute supply chain performance measurement. For example,
inventory measurement should be viewed across the supply chain instead of local
assessments.
40
Supply Chain Planning (SCP) IT Packages in SCM
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 constraint-based 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 SAP’s 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 customer’s 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.
This naturally leads to Shop Floor Control. The planned orders from the MRP
are converted to production orders. This leads to production scheduling,
41
IT Enabled SCM dispatching, and job costing. Finally, the Logistics system takes care of rest,
assuring timely delivery to the customer. Logistics in this case consists of
inventory and warehouse management, and delivery. The purchasing function is
also usually grouped under logistics. The overall process summary looks like:
Sales & Forecasting Data, Production & Capacity Planning, Production Execution,
and Logistics.
This functionality is representative of all the major ERP vendors, including SAP,
Oracle, Baan, and PeopleSoft. However, it also seems to be very close in
functionality to SCP products such as those from i2 and Manugistics. So what’s
the difference?
The Manugistics web site (http://www.manugistics.com) has the following

description of supply chain management: “Effective supply chain management
enables you to make informed decisions along the entire supply chain, from
acquiring raw materials to manufacturing products to distributing finished goods to
the consumer.”
This sounds a lot like what R/3 does. R/3 has detailed functionality to order
needed materials, schedule and track the manufacture of products, and to
schedule and track distribution. So really, what’s the difference? The description
of i2’s Rhythm product line (found at http://www.i2.com) is slightly different:
“RHYTHM’s Supply Chain Planner provides advanced planning capabilities to
leading companies in many industries. RHYTHM plans and optimizes the supply
chain as a continuous and seamless activity that integrates all planning functions
across the supply chain. RHYTHM goes beyond traditional planning solutions like
MRP (Manufacturing Resource Planning) and DRP (Distribution Resource
Planning) by simultaneously considering demand, capacity and material
constraints”. This provides a better idea of the chief differences between ERP
and SCP systems.
Enterprises with multi-echelon distribution networks that have aggregation, dis-

aggregation, balancing or echelon-skipping requirements within the distribution
network will need to augment their existing ERP applications with advanced SCP
functionality or risk incurring distributions costs that are at least 10 percent higher
due to expediting, low order fill rates and inventory imbalances. This is caused by
the static sourcing tables used in ERP systems. While ERP systems provide a
great deal of planning capabilities, the various material, capacity, and demand
constraints are all considered separately, in relative isolation of each other. The
more leading edge SCP products are able to consider all the relevant constraints
simultaneously, and to perform real-time simulations of adjustments in the
constraints. ERP systems have a harder time adding this more dynamic
functionally because they are chiefly concerned with transaction processing, and
also have many more jobs to do than just SCP. Getting answers from an
overloaded ERP systems may take hours, whereas getting them from a separate
SCP system may take minutes or seconds.
The leading SCP products generally have many other enhancements as compared
to the ERP packages. Many employ visible maps of the entire supply chain,
showing where problems are. Here is a description of Manugistics latest version:
“Navigating your way through mountains of supply chain information is made
easier with Supply Chain Navigator’s state-of-the-art graphical user interface.
This intuitive GUI gives you complete visibility into the inner-workings of the
supply chain – through demand, supply, manufacturing scheduling, and
transportation – all at your fingertips.” Just recently, SAP has added similar
functionality. But that functionality is actually a SAP version of the SCP product
made by i2, which SAP is selling as a separate module. This is a relatively
42
simplistic explanation of the key differences between the ERP vendors’ SCP IT Packages in SCM
modules and the leading SCP only products, but it hits the main points.
Now, since these products have many naturally overlapping features, how is data
kept consistent between them? i2 uses SAP’s ALE (Application Link Enabling) to
exchange data between R/3 and Rhythm (i2’s SCP product suite). Oracle and
the other ERP vendors also have APIs that i2 and other vendors can use as
common denominator middle-ware to interface to. However, this means that each
vendor has to change their middle ware interface software quite often, which is
often a trial and error process, doesn’t usually perform well, and often turns into
a nightmare. A newer, and possibly better solution to this problem is SIS
(Specialized Integration Software). This software is designed specifically to allow
ERP and other systems to share processes and data. This removes the core of
developing an interface to every other vendors software. The major company in
this area is Cross Worlds Software Inc., although more are appearing. This
software, which runs on Windows NT, claims to work by simply pointing and
clicking on a sending application (such as SAP) and a receiving application (such
as Manugistics) and then selecting the processes to link together. No
programming is required.
One other key development that should be noted is the rapid convergence that is
happening between ERP and SCP software. The ERP vendors have awaken,
and are rushing to add more sophisticated supply chain functionality to their ERP
products. And the SCP vendors are also expanding their functionality, further
encroaching on the area inhabited by the ERP vendors. Although it seems that all
the leading SCP vendors are partnered with the all the leading ERP vendors, this
is only a temporary relationship if SAP, Oracle, etc. have their way. Following
SAP’s example, Oracle has also added a SCP module, and Baan and People
Soft both have recently acquired smaller SCP vendors to integrate into future
releases of their ERP products. As the ERP vendors move heavily into the mid-
size market with their new supply-chain bolstered products, they should push a lot
of the smaller SCP and ERP vendors out of business. With the industry shakeout,
implementations should become somewhat simpler and thus shorter and less
expensive, since there will be less products to integrate, and more experienced
implementers in job market.
Activity 3
Select a case study from a National/International Journal, which discusses the
selection and implementation of either ERP or SCM. Discuss the suitability of the
selected case study in Indian context.
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9.9 SUMMARY
How to best extract value from information technology resources is a major

challenge facing both business and IT managers, particularly as they turn their
focus on searching for competitive benefits of strategic information systems and
striving for benefits beyond process reengineering. This search becomes
increasingly complex for those organizations attempting to operate in supply
chains with multiple participants.
43
IT Enabled SCM In this unit, the recent development in the information system, particularly in
supply chain context, has been reviewed. The changing paradigm of
manufacturing from old rules to new rules of manufacturing required an
intelligence information system. The sets that include MRP, ERP and DRP are a
few business intelligence that automate the enterprise activities. This application
makes use of recent developments in information technology. However, the supply
chain planning (SCP) emerged as a new tool for an integrated business. The
benefits of this tool includes, reduction of lead-time, inventory cost reduction,
reduction in operating costs, cycle time reduction, and improved productivity. A
comparison of ERP and SCP reveals that there exists a great deal of similarity
between these two approaches. However, the key processes vary and hence the
differences are reflected in the software. Additional features are being handled in
the SCM. Supplier reliability, supplier lead time, process reliability, change
overtime, schedule attainment, perfect order completion, replenishment lead time,
delivery days on hand, total supply chain and total cycle time are the key
performance indicators that need to be continuously measured and monitored for
competitive advantage. SCM software product developers keep these indicators
for benchmarking their products.
1) “Making changes in a manufacturing company is probably the hardest thing

that civilized man has ever set out to achieve” – give your comment on this
statement in context with the organization switching to supply chain
management.
2) Distinguish between independent and dependent demand inventory system.

Why inventory control system is not practiced for dependent item material
planning?
3) Give major inputs of MRP. Identify the sources through which these inputs
are obtained. Give your answer for both Make to Stock (Make to Forecast)
and Make to Order situations.
4) Prepare a flow chart for Material Requirement Planning logic. Illustrate the
basic mechanics of the logic for a simple product like a ballpoint pen.
Assume all the necessary data for your selected product.
5) Each year Sputter Sports, Inc., receives orders for footballs from the
Paramutuel Foot ball League (PFL). Because of the destructive left foot of
Transylvanian superstar Vladimir ‘Toze’ Kickofski, the PFL orders a single
quantity of balls, so Sputter Sports wants to determine when the materials
necessary to produce the order should be obtained. Sputter Sports plans to
ship 300 footballs in week 8, 200 in week 10, and 200 in week 12. Sputter
has no other customer for footballs.
A football is composed of a leather cover, a rubber bladder, and a string to
lace the leather cover after the bladder has been inserted. Sputter purchases
bladders already molded with the inflation valve as an integral part of it. The
lead-time to obtain bladders is five weeks and they cannot be purchased in
orders of less than 250. Sputter purchases pigskin in sheets large enough to
make four footballs. Records of past purchases indicate that it takes two
weeks from the time of order until the skins are delivered. It takes one
week to cut and stitch 100 footballs with the current work force, and
Sputter does not plan to enlarge its facilities or work force for this order.
One hundred strings for the footballs are cut from on cowhide, which takes
only one week to purchase. It takes one week to assemble an order of
44 footballs up to 500 units.
Show (a) the master production schedule, (b) a product structure tree, and (c) IT Packages in SCM
plan Sputters’ material requirements for this product.
6) What is MRP-II? How is it different from MRP?
7) Define ERP. Give its tangible and intangible benefits.
8) Why a company pursues a new ERP solution?
9) What are the three distinct phases of Distribution Requirement Planning?
10) Explain the DRP logic for a medium size soft-drink manufacturing company.
How is the safety stock decided in such distribution system?
11) Compare and contrast DRP and DRP-II.
12) Give the key processes considered in both ERP and SCM. How are these
processes different from one another?
13) What are the supply chain management pitfalls? How are these pitfalls being
eliminated?
14) Briefly explain the supply chain planning and a few software for SCP.
15) “The leading SCP products generally have many features as compared to
ERP software packages” – Give your elaborate remarks on this statement.

READINGS
2) Copacino, W.C., : Supply Chain Management: The basics and beyond,
St. Lucie Press, 1997.
3) Dave Garwood, : Bills of Material: Structured for Excellence, Dogwood
Publishing Company, Inc., 1997.
5) Jonathan Blain, et. al., : Using SAP R/3, Prentice-Hall of India Pvt. Ltd., 1998.
6) Lambert, D.M., Stock, J.R., and Ellram L.M., : ‘Fundamentals of Logistics
7) Lucas, H.C., Jr., : ‘Information Technology for Management’, The
8) Martin, A.J., : ‘Distribution Resource Planning: The Gateway to true Quick
response and continual replenishment’, John Wiley and Sons, Inc., 1995.
10) Oden, H.W., Langen Walter, G.A., and Lucier, R.A., Hand Book of Material
and Capacity Requirement Planning, McGraw Hill, Inc., 1993.
Co., 1990.
Physical Distribution and Materials Management, Vol.19, No.8, 1989. 45
IT Enabled SCM
UNIT 10 IT PACKAGES IN SCM
Objectives
The objectives of this unit are to enable you:
· to know the importance of software packages in Business;
· to know the advantages and limitations of software packages of SCM;
· to know a few software packages such as BaaN, SAP, i2/RHYTHM; and
· to know a few success stories of software packages to the SCM.
Structure
10.1 Introduction
10.2 Role, Advantages and Limitations of Software Packages
10.3 Architecture of ‘SAP R/3 ERP’ Solution
10.4 Architecture of BaaN ERP Solution
10.4.1 BaaN IV
10.4.2 BaaN ERP
10.5 Selecting the Right ERP Package
10.6 i2 Technology
10.7 Contribution of the Software Packages to the SCM
10.8 Summary
10.9 Self –Assessment Questions
10.1 INTRODUCTION
Organizations have the opportunity to become more efficient and competitive.

Skilled and creative managers are required to accomplish these goals. Today’s
MBAs need the knowledge and confidence to deal with issues related to
technology. They must apply technology aggressively if they are to compete
successfully in our global economy. They must take advantage of the ability that
Manufacturing and Information Technology give them to change the way work is
done.
During the past five years computers and communications technologies have
proliferated in offices and homes. Organization distributes the responsibility for
technology to all levels of management and to different geographic locations. As
a result, managers from supervisor to CEO encounter information technology on
a daily basis. Managers have to take advantages of the technology; they must
make decisions about how to use the technology.
One of the most important parts of using the technology is the design of
information systems. Much of the distribution of technology to end-users results
from the rapid diffusion of personal computers or workstations. Users now would
like to access a number of different applications on different computers through a
LAN and probably the Internet as well.
Users may design systems for themselves alone, or they may be one of many
users of a system designed by others. The design of multi-user applications is
much more complex than the design of a personal computer system for an
individual user. Many more people are involved in the process, each with unique
46
and often conflicting needs and expectations. Package programs are software IT Packages in SCM
written by a vendor to be sold to multiple customers. Packages have been
available since the first days of computers, but there has been an explosion in
their sale and use. One of the reasons for this proliferation is that the technology
has matured. There are packages around today in their respective forth or fifth
(or more) version, each new version improving with earlier version. The other
reason why the packages are going in popularity is the standards set by personal
computer packages.
10.2 ROLE, ADVANTAGES AND LIMITATIONS OF

SOFTWARE PACKAGES
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. Fourth-generation 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. 47
IT Enabled SCM The questions range from:
· What software is best suited for supply chain management?
· How can the costs involved and return on investment of a sofrware be
estimated?
· What are the key design issues in developing information architecture?
· How can software and management issues be aligned to gain the maximum
value?
Of these, the most pressing question-facing companies is: what is the right
technology that protects investment in a changing environment? The answer
appears to lie in network-centric computing discussed in the following sections.
Activity 1
Get access to the following Web sites in the Internet and update your Knowledge
on IT software packages in Supply Chain Management:
· www.manufacturingsystems.com
· www.mrp3.com
· www.sap.com/solutions
· www.i2.com
· www.lean-e-business.com
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10.3 ARCHITECTURE OF ‘SAP R/3 ERP’ SOLUTION
A SAP product is a suite of standard software made up of individual programs

that have been written to carry out computing tasks in the most efficient manner
possible. SAP R/2 is a system for mainframes. The SAP R/3 has open system
architecture and applies the client/server concept across multiple levels.
The SAP R/3 Basis (R/3 Standard System)
All R/3 installations include a set of components that form the core of the system
and are referred to as R/3 Basis. It provides the users with a set of tools to
build a suite of integrated programs that can be fitted exactly to the requirements
of the company and modified as the company develops. Every implementation
will need a SAP R/3 Basis module that provides the elements of the SAP R/3
runtime system. It includes the fundamental tools and functions of the R/3 Data
Dictionary, the SAP R/3 Reference Model. The ABAP/4 Development
Workbench and R/3 Customizing Component. When designing an implementation,
the R/3 Reference Model is used to select which module components will be
needed in the target system.
The SAP R/3 Applications
A SAP R/3 application is a set of programs that has been designed for a
specific types of business data processing. Each application addresses a main
sector of business activity, ranging from financial accounting to human resources.
Under each application are grouped the modules most likely to be associated with
48 the title of the application. However, the fully integrated design of all SAP
standard business programs allows great flexibility in the assembly of modules to IT Packages in SCM
form a specific implementation.
MM SD FI CO
Materials Sales and Financial Controlling
Management Distribution Accounting
PP AM
Production Fixed Assets
Planning Management
R/3 BASIS
CLIENT/SERVER
ABAP/4
QM PS
Quality Project
Management System
PM HR IS WF
Plant Human Industry Workflow
Maintenance Resources Solutions
Figure 10.1 : Major SAP Application
Each application is fully integrated with the R/3 Basis. This allows each
application to communicate with any other application. Some application modules
depend on other applications. For example, the Controlling (CO) module depends
on the Financial Accounting (FI) module. Some of the components of a module
may be optional. Some of the functions within a component may be optional. This
flexibility allows each R/3 installation to be built to fit exactly the unique
requirements of the Client Company.
MAJOR R/3 APPLICATIONS AND THEIR MODULES

1) Financial Accounting (FI)
· General Ledger (FI-GL) · Legal Consolidation (FI-LC)
· Accounts Receivable (FI-AR) · Special Purpose Ledger (FI-SL)
· Accounts Payable (FI-AP)
2) Controlling (CO)
· Overall Cost Control (CO-OM) · Sales & Profitability Analysis (CO-PA)
· Product Cost Controlling (CO-PC) · Project Control (CO-PRO)
· Activity-Based Costing (CO-ABC)
49
IT Enabled SCM 3) Fixed Asset Management (AM)
4) Project System (PS)
· Basic Data (PS-BD) · Approval (PS-APP)
· Operational Structure (PS-OS) · Project Execution/Integration (PS-EXE)
· Project Planning (PS-PLN · Information System (PS-IS)
5) Workflow
Workflow refers to the movement of work items through a series of operations

that add value to these items. It also refers to the flows of information that must
take place if this added value is to be optimized. A workflow management
system is intended to manage business processes automatically or semi-
automatically by controlling the sequence of activities. It should ensure that the
appropriate steps are carried out at the right moment by specific people or
groups, or by particular data processing programs and the machinery they control.
SAP Business Workflow is devoted to developing and managing the flows of
work and information that will make a business as effective and efficient as
possible.
6) Industry Solutions (IS)

An Industry Solution is an enhancement of the standard R/3 system that may
include some or all of the components of any R/3 applications, according to the
sector of industry for which it has been designed. Some of the industry solutions
offered by SAP are for the following sectors:
· Public Sector (IS-PS) · Hospital (IS-H) · Banks (IS-B)
· Oil (IS-OIL) · Telecom (IS-T) · Real Estate Management (IS-IS)
7) Human Resources (HR)
This application provide an integrated human resource management system

through the use of the components of the Personnel Planning and Development
(PD) module and Personnel Administration (PA) module.
Personnel Planning and Development (HR-PD) Personnel Administration (HR-PA)
· Organizational Management (PD-OM) · Employee Management (PA-EMP)
· Seminar and Convention Management (PD-SCM) · Benefits (PA-BEN)
· Personnel Development (PD-PD) · Compensation Administration (PA-COM)
· Workforce Planning (PD-WFP) · Applicant Manager (PA-APP)
Personnel Planning and Development (HR-PD) Personnel Administration (HR-PA)
· Room Reservation Planning (PD-RPL) · Time Management (PA-TIM)
· Incentive Wages (PA-INW)
· Travel Expenses (PA-TRV)
· Payroll (PA-PAY)
8) Plant Maintenance (PM)

· Equipment and Technical Objects · Maintenance Projects (PM-PRO)
(PM-PRM)
· Preventive Maintenance (PM-PRM) · Service Management (PM-SMA)
· Maintenance Order Management · Plant Maintenance Information
(PM-WOC) System (PM-IS)
9) Quality Management (QM)
· Planning Tools (QM-PT) · Quality Certificates (QM-CA)
· Inspection Processing (QM-QC) · Quality Notifications (QM-QN)
50
10) Production Planning (PP) IT Packages in SCM
· Basic Data (PP-BD) · Kanban/JIT Production (PP-KAB)

· Sales & Operations Planning · Repetitive Manufacturing
(PP-SOP) (PP-REM)
· Master Planning (PP-MP) · Assembly Orders (PP-ATO)
· Capacity Requirements Planning · Production Planning for Process
(PP-CRP) Industries (PP-PI)
· Material Requirements Planning · Plant Data Collection (PP-PDC)
(PP-MRP)
· Production Orders (PP-SFC) · Information System (PP-IS)
· Product Costing (PP-PC)
11) Materials Management (MM)
· Materials Requirements Planning · Invoice Verification (MM-IV)

(MM-MRP)
· Purchasing (MM-PUR) · Information System (MM-IS)
· Inventory Management (MM-IM) · Electronic Data Interchange
(MM-EDI)
· Warehouse Management (MM-WM)
12) Sales and Distribution (SD)
· Master Data (SD-MD) · Billing (SD-BIL)

· Basic Functions (SD-GF) · Sales Support (SD-CAS)
· Sales (SD-SLS) · Information System (SD-IS)
· Shipping (SD-SHP) · Electronic Data Interchange
(SD-EDI)
SAP Configuration and Customization by Applications Programmes

By itself the SAP program will not be very friendly to an individual user. It will
not know what sort of business is to be conducted or exactly how the User
Company wants to invoice and conduct other interactions with its customers. If
the SAP implementation is to look and behave as if it really understands the
company it is working for, it will have to be configured and customized. Naturally
the SAP software expects to be told how to behave in a specific company and
has standard routines, which help the company experts to set out what has to be
done in a format that SAP can accept. The experts who do this are referred to
as Applications Programmers or Applications Developers.
Development of SAP Product Range in Three Directions
1) A function within a SAP component may be elaborated so as to become a
complex module. For example, the requirements of enterprise controlling can
be met by the components of the Controlling (CO) module, but in addition,
the Enterprise Controlling (EC) product is available as a separate module and
includes functions not available in the Controlling (CO) module.
2) Extra integrating functions can be provided to interact with a group of SAP
application modules. For example, the Logistics General (LO) module is
designed to provide integrating functions for the following modules:
· Sales and Distribution (SD) · Production Planning (PP)
· Materials Management (MM) · Plant Maintenance (PM)
· Quality Management (QM)
3) Where there are many companies in a particular sector of business that
share a specialized requirement, a SAP partner may develop a specialized
enhancement of the R/3 system that can be marketed as an “Industry
Solution”.
51
IT Enabled SCM
10.4 ARCHITECTURE OF ‘BAAN’ ERP SOLUTION
Baan company’s ERP solutions are available as BaaN IV (the older version) and
BaanERP (the latest version). The architecture of both versions is described
here.
10.4.1 BaaN IV
The BaaN IV software can run on many platforms, for example, it can run on
various UNIX platforms supplied by HP, IBM, Sun, Digital, etc. It is also
available on Windows NT. The software can use database provided by the
software manufacturer, or, third-party databases such as Oracle or Ingress can
also be used. Figure 10.2 shows the menu browser displayed to the user having
access to all the packages of BaaN IV.
Menu Browser [User:]
· BAAN IV Common
· BAAN IV Finance
· BAAN IV Project
· BAAN IV Manufacturing
· BAAN IV Distribution
· BAAN IV Process
· BAAN IV Transportation
· BAAN IV Service
· BAAN IV Enterprise Performance Manager
· BAAN IV Enterprise Modeler
· BAAN IV Constraint Planning
· BAAN IV Tools
· BAAN IV Utilities
· Distributed Data Collection
Figure 10.2 BaaN IV Menu Browser
BaaN IV Common
The BaaN IV common package allows you to maintain the common master data.
This data is used by all the BaaN IV packages. All the files that are used in
more than one module are stored in this package. The BaaN IV common
contains the following tables:
1. Logistic Tables 4. Customer Master
2. Financial Tables 5. Supplier Master
3. Employee Master
BaaN IV Finance
The finance package allows users to extract financial transactions from the sales
and manufacturing areas and post them to the general ledger without having to
key any transaction. It also has a budget system, and an activity base module.
52 Following modules are included in the finance package:
1. General Ledger 6. Financial Statement IT Packages in SCM
2. Accounts Receivable 7. Financial Budget System

3. Accounts Payable 8. Cost Allocation
4. Cash Management 9. Electronic Data Interchange (EDI)
5. Fixed Assets
BaaN IV Project
BaaN IV project is designed to support the management of projects through all
stages, from estimating tenders to delivery and throughout the guarantee period. It
is especially suited to project-driven companies for the coordination of multiple
projects. The goal is cost-effective management of each project according to the
time schedule, within the specified budget and to the required quality.
Furthermore, allocation of personnel and equipment to projects is critical in cost-
effective operation, which will maximize company profits. The project package
provides all the tools necessary to control project accounting and planning. A
planning requirement process accurately tracks costs for the project-related
industries. This package is linked with all the software’s other functions to
provide the information necessary to successfully manage the project within the
enterprise environment. It includes following modules:
1. Project Estimating 6. Hours Accounting
2. Project Definition 7. Project Progress
3. Project Budget 8. Project Monitoring
4. Project Planning 9. Project Invoicing
5. Project Requirements
BaaN IV Manufacturing
The manufacturing package provides all the manufacturing planning functions

such as, MPS, MRP-I, and CRP. It can also provide control for all operations
related to product’s fabrication, labour management, and capacity required. The
following modules are included:
1. Engineering Data Management 9. Repetitive Manufacturing
2. Item Control 10. Shop Floor Control
3. Bill of Material Control 11. Hours Accounting
4. Routing 12. Project Budget
5. Cost Accounting 13. Product Configuration
6. Master Production Schedule (MPS) 14. Product Classification
7. Material Requirements Planning (MRP) 15. Project Control
8. Capacity Requirements Planning (CRP) 16. Quality Management System
BaaN IV Distribution
The Distribution package is designed to take care of day-to-day logistical
management in production and trade companies. The package is fully integrated
with all other packages of BaaN IV. This package contains all the programs to
create and manage the sales orders. It is a reliable source of information on
market trends and developments. It also includes all the inventory related
functions such as inventory control, location control, distribution requirements
planning (DRP I), and replenishment control.
53
IT Enabled SCM BaaN IV Distribution Package Contains the following Modules:
1. Item Control 8. Inventory Control
2. Cost Accounting 9. Lot Control
3. Purchase Control 10. Location Control
4. Sales Control 11. Distribution Requirements Planning
5. Sales and Marketing Information 12. Tables
6. Electronic Data Interchange (EDI) 13. Common Data
7. Replenishment Order Control 14. Distribution Parameters
Characteristics of BaaN IV Distribution

1. Simple and fast data input and control
2. Extensive purchase and sales statistics
3. Comprehensive forecasts and planning techniques
4. Interface with the graphical module enterprise performance manager
5. Interface with EDI
6. Use of multiple currencies
7. Use of multiple warehouses
8. Multi-company solution including supply chain management.
BaaN IV Process
The Process package is designed to help manage the entire supply chain of any
company operating in a process environment, such as the chemical industry. It
helps manufacturers of identical product in different containers. It also helps to
keep track of the various batches processed. It is able to account for the
potency, the acidity, and the grade of items. Following are the modules provided
in the process package:
1. Item Control 5. Capacity Requirements Planning
2. Formula Management 6. Production Management
3. Routing 7. Hours Accounting
4. Cost Accounting 8. Quality Management System
BaaN IV Transportation
The Transportation package helps in managing transportation orders and to

maximize equipment use. It can handle all types of transportation modes. It has
powerful modules for managing warehousing and packaging. It keeps track of
transportation costs and determines cost trends. It includes the following modules:
1. Employee Control 7. Transport Control
2. Address Control 8. Invoicing Control
3. Transport Fleet Management 9. Packing Control
4. Transport Fuel Control 10. Electronic Data Interchange
5. Hours and Expense Control 11. Warehouse Control
54 6. Central Data Entry 12. Distribution Requirements Planning
BaaN IV Service IT Packages in SCM
The Service package can be used to manage all the repair and warranty
information for supporting installations in the field. With this package:
1) You can register at which customers and locations specific installations are
situated.
2) An installation bill of material that lists the components requiring servicing
including their serial numbers and service history can be linked to each
installation.
3) This data helps in analyzing the causes of malfunction in the fastest possible
way.
4) You can create maintenance contracts and record warranties together with
associated warranty terms for each customer.
5) Calls reporting malfunctions can be recorded even as you are on the phone.
6) Based on periodic maintenance obligations and calls a service plan is drawn
and service job sheets are printed.
7) Finally, the service activities can be invoiced and a detailed service history is
built up.
The modules included in this package are:
1. Service Tables 5. Service Analysis Control
2. Installation Control 6. Item Control
3. Contract Control 7. Cost Accounting
4. Service Order Control 8. Inventory Control
BaaN IV Enterprise Performance Manager
The enterprise performance manager (EIS) incorporates tools that are designed to
given various levels of management access to the data in the BaaN IV tables.
The data of the distribution, finance, and manufacturing modules are available in
this module and they can be displayed using various formats.
· The tool can be used interactively to get an overview of the overall business
performance by using Ishikawa fishbone diagrams.
· Via a flexible user interface the enterprise performance manager can drill
down to the basic figures. These figures can be fetched from the integrated
BaaN IV repository and can be linked to the persons responsible in the
organization. A set of predefined performance indicators is available and
new indicators can be defined very easily. The EIS module is fully
integrated with the manufacturing, finance, and distribution modules.
· The enterprise performance manager is especially meant for middle and top
management. It can be used as a business-benchmarking tool during BaaN
IV implementation and optimization cycles (business process reengineering)
and as a management and reporting tool at tactical and strategic level.
BaaN IV Enterprise Modeler (formerly known as Orgware)
Enterprise modeling is a process in which customers can map all the processes
used and then develop an accurate and complete implementation plan.
BaaN IV Constraint Planning
The constraint-planning package provides planning functionality that takes into
account capacity and materials constraints. This package currently provides MPS
functionality with both finite and infinite planning methods. 55
IT Enabled SCM BaaN IV Tool
The Tools package consists of all the programs designed to maintain and
customize the application. The form manager, report writer, and sessions manager
are the options that allow the developers to tailor BaaN IV to user’s needs. It
also includes programs to manage the database, devices, and user profiles.
Following modules are included in the Tools package:
1. Software Installation 11. Business Objects
2. Application Configuration 12. Application Customization
3. User Management 13. Application Development
4. Device Management 14. Terms and Definitions
5. Job Management 15. Translation
6. Database Management 16. Documentation
7. Audit Management 17. Conversion
8. Text Management 18. Software Distribution
9. Menu Management 19. Desktop Management
10. SQL Queries
BaaN IV Utilities
The existing utilities allow users to easily import or export information between
BaaN IV and any other system. This package facilitates the implementation of
the software by helping in creation of master files imported from other software.
This package has tools to facilitate the communication between BaaN IV and
other databases, spreadsheets, etc. This module can also be used to convert data
of older versions of the application to new versions. The exchange module can
be very useful for multi-site applications as it facilitates the communication
between two sites. In short this package provides the needed bridge between all
other sources and BaaN IV and includes following modules:
1. Import Module 2. Export Module 3. Generate Exchange Scheme
Distributed Data Collection
This package allows the users to interface between BaaN IV and third party
data collection such as vendor’s data collection systems. This allows for the
collection of data through the use of devices such as laser scanners etc. with the
real time update of the interfacing BaaN IV module. The data collection vendor
must supply an interface to BaaN IV to create a functional solution.
10.4.2 BaaN ERP
Baan ERP, the successor to BaaN IV has the following enhancements, as

claimed by Baan Co., over the older version:
1) Order to Cash foundation for all Baan business solutions.
2) Open Component Architecture
3) Fully integrated allowing for consistency and visibility across the enterprise
4) Comprehensive international capabilities, supporting multiple languages, tax
structures and currencies including the Euro.
5) Modular components that allow for incremental implementation and migration.
56
BaaN ERP Includes the Following five Components: IT Packages in SCM
(a) Manufacturing (b) Finance (c) Project

(d) Distribution, and (e) Tools.
A. BaaN Manufacturing
BaaN ERP Manufacturing Module Includes:
1. Bills of Material 10. Project Budgeting
2. Cost Price Calculation 11. Project Control
3. Engineering Change Control 12. Repetitive Manufacturing
4. Engineering Data Management 13. Routings
5. Hours Accounting 14. Shop Floor Control
6. Product Classification 15. Tool Requirements, Planning
and Control
7. Product Configuration 16. Capacity Requirements Planning*
8. Production Control 17. Master Production Scheduling*
9. Production Planning 18. Material Requirements Planning*
* These modules come with extensive enterprise planning capabilities
Benefits
1) Open architecture design allows for a seamless and simplified integration with
popular CAD packages via “BaanEngineering” elements.
2) Graphical simulations help analyze a ‘what if’ impact on financial
requirements, capacity and inventory.
3) The system’s object orientated configurator supports different production
strategies.
4) Planning is integrated at every level and across multiple sites allowing smooth
and consistent operational activity.
5) Within a dynamic environment, enterprise planning simulates alternative plans
and reactive planning.
6) Planning and tracking capabilities are extended to improve production resource
management issues such as inventory.
7) The integrated quality management tool enables a wide range of statistics
(from raw material to finished goods) to be monitored resulting in continuous
improvement in manufacturing quality.
8) Multiple valuation methods help the company identify cost drivers and reduce
product costs.
B. BaaN Finance
BaaNERP Finance module is designed to meet dynamic financial management

and reporting requirements around the world. It includes:
1. Accounts Payable 6. Fixed Assets
2. Accounts Receivable 7. General Ledger
3. Financial Budgets System 8. Cost Accounting
4. Cash Management 9. Sales Invoicing
5. Financial Reporting System 57
IT Enabled SCM Benefits
1) This independent system allows for easy solution configuration to meet
changing business strategies.
2) Integration with Hyperion financial software provides advanced budgeting,
consolidation, reporting and analysis.
3) BaaN Accounts Payable streamlines vendor payments. It supports checks,
electronic banking and payment on consumption.
4) Accounting operations are simplified and duplicate data entry is eliminated
with parameter-driven posting and updating tools.
5) Superior visibility enables the company to immediately focus and act on
financial information to help increase margins, revenue and cash flows.
6) International business requirements are met with the use of multi-dimensional
ledger and dual sets of books.
7) Provides cost analysis and cost allocation functionality on both at detailed
and summarized levels.
8) Costs can be proactively tracked via budget links.
9) Multi-currency functionality allows the company to hold up to 3.home
currencies therefore complementing and complying with the Euro regulations.
10) Central point invoicing.
C. BaaN Project
The project module provides the control and visibility the company needs for
profitable operations from estimates and bids through site installation and
maintenance. In addition the system supports project invoicing for all the different
contractual agreements found in project environments. Baan Project Module
includes:
1. Project Budget 5. Project Monitoring
2. Project Definition 6. Project Planning
3. Project Estimation 7. Project Progress
4. Project Invoicing 8. Project Requirements Planning
Benefits
1) Real time control of all aspects of project management
2) Integration of project management and manufacturing resource enhancing
visibility and timely consolidated reporting.
3) The link with Baan Manufacturing allows all the relevant, cross functional
information about each project to be easily accessible for effective enterprise
resource management.
4) An integrated planning and scheduling system environment results in activity
networks to be defined, resources to be allocated, and ‘what if’ analysis to
be conducted.
5) Organizational, logistical and contractual structures can be modeled and the
resulting project activities report, which results in effective cross-functional
management.
D. BaaN Distribution
To help develop the best solution for meeting customer requirements and
58 balancing business constraints, this component manages the entire spectrum of
distribution, sales, and logistics for manufacturers and distributors. BaaNERP IT Packages in SCM
Distribution modules includes:
1. Sales Management 2. Purchase Management 3. Warehouse Management
Benefits
1) Extensive simulation capabilities optimize purchasing and internal inventory
decision making.
2) Top-down planning supports any distribution strategy.
3) With integrated workflow management and order templates, order processing
is speeded up.
4) Shipping constraints, order blocking algorithms and multi-level ATP component
checks are supported by the system.
5) Integration with the Aurum Front-Office suite enhances the capabilities of
Baan Sales solution.
6) Purchasing is simplified with online requisitioning.
7) Sophisticated supplier contract and release management enable your company
to take advantage of economies of scale.
8) EDI is key in enhancing the speeds of communication with trading partners
as well as providing a solid link between distribution operations and
manufacturing planning.
E. BaaN ERP Tools
All Baan applications are built using flexible BaaNERP Tools to handle business
needs that require software or configuration changes. BaaNERP Tools includes:
1. Open System Tools 2. Client/Server Tools
3. End User Tools 4. Developer Tools
5. Documentation Tools 6. Translation Tools
7. Software Distribution 8. Implementation Tools
Benefits
1) BaaNERP enables quick reaction to new trends in the marketplace that
require software or software configuration changes.
2) Helps in developing the Baan applications in such a way that they are kept
independent of third party products.
3) Helps create tailored applications to meet special requirements.
4) Facilitates integration of Baan applications with third-party products.
10.5 SELECTING THE RIGHT ERP PACKAGE

1. The selection and implementation of ERP is primarily an operations
management initiative and decision, not an IT or MIS project, hence it is
critical that the chief executive officer (CEO), the vice president of
manufacturing, and other key players be involved and support the chief
information officer (CIO) in the ERP selection and implementation process.
The selection team must have top-level representation from all major
functional areas including production, distribution, finance and accounting,
human resources, sales, marketing, customer service, and information
systems.
59
IT Enabled SCM 2. A project leader must be selected from among the team members.
3. The team must develop consensus on several critical issues that will shape
the entire project budget, time frames, goals, and deliverables.
4. A tentative schedule should be prepared for the selection process and
implementation.
5. The team should determine what critical business needs/problems the
company is trying to address and what benefits are to be gained from ERP,
some possible needs, problems, and benefits are:
· Reducing inventory investment · New product planning and introduction
· Increasing fulfillment rate · Customer service programs
· Lowering transportation costs · Company downsizing
· Simplifying the manufacturing process · Company expansions into new areas
or markets
· Gaining market share · Potential acquisitions
6) The team should then develop a document containing:
· Total number of customers · Company goals
· Company’s most significant ·
A narrative on how the company
business process – areas conducts its business
that set it apart
7) By putting these business processes in the form of key (transaction)
scenarios, potential vendors can prepare scripted demonstrations. This
document helps in focusing the internal team’s efforts and also becomes a
valuable tool for potential ERP provides to understand the business and its
needs.
8) The project team must determine its differentiating points to ensure that a
vendor’s product plays to those strengths.
9) The team should also find out which ERP packages the competitors are
using or implementing.
10) After narrowing down the choices, the top two or three vendors should be
invited to demonstrate how their products could be tailored to the specific
work environment. The vendor should be asked to build and demonstrate
business processes and transaction scenarios based upon the company needs.
11) Once the scripted demos narrow down the alternatives, team members must
conduct site visits of the top ERP candidates’ solutions to see the vendors
working environments, gauge the vendors’ commitment to training and
customer services, and get a sense of their overall business philosophies.
12) Finally the project team must visit the sites of other companies that are using
the particular ERP product to see how the software system functions in
actual applications and assess vendor support, both during and after initial
implementation.
10.6 i2 TECHNOLOGY
i2 Technology is the recognized leader in supply chain planning and optimization

with more than ten years of experience in optimizing business process.
i2 emerged in 1988 as a supply chain management leader with innovative new

products that streamlined the entire supply chain management process. Through
consistant innovation and dedication to providing value, i2 has created the latest
60
business to business e-commerce applications that have changed the way IT Packages in SCM
companies are doing business. i2 is the established leader in SCM and intelligent
eBusiness. For the second consecutive year, i2 has been named one of Forbes
ASAP’s Dynamic 100 software companies. i2 is the only company in the
Leader’s Quadrant in Gartner Group’s “Supply Chain Planning Magic Quadrant.
i2’s forward-thinking solutions consider the real conditions of companies to

optimize every key business process-from product design to customer
relationships. With industry leading customers and partners; i2 recently launched
TradeMatrix, a collection of electronic market places dedicated to delivering
advanced Business to Business solutions. TradeMatrix offers a full breadth of
services that range from procurement, commerce, fulfillment, customer care,
retail, product development and planning. i2’s mission is to create $50 billion in
audited value and serving for its customers by the year 2005. The organization is
well on its way to meeting its goal of $50 billion in value, with an audited $7
billion of value already documented as of October 1999. With i2 solutions,
customers are able to attract and retain new clients, bringing the right products to
market quickly and efficiently, and streamlining their entire supply chain.
Rhythm Solutions
i2 RHYTHM solutions offer the intelligent answer for decision-making across the
enterprises. RHYTHM software optimizes and integrates Key business processes,
while delivering intelligent e-Business through collaboration with trading partners.
RHYTHM offers a complete solution for Business Process Optimization (BPO)
by offering the optimization, integration, and forward visibility required for high-
velocity business. The RHYTHM solution has delivered billions of dollars in
measurable value for major companies in a wide range of industries. Historically,
leading companies have achieved success by mastering one of the three core
business disciplines:
i) Product Leadership: Developing and launching innovative products at the
right time, while managing the product life cycle from concept to phase-out.
ii) Operational Excellence: Manufacturing and delivering the right products at
the right time, while collaborating with trading partners at maximum
efficiency.
iii) Customer Intimacy: Engaging the right customers, managing their
relationships and providing superior customer service.
In the past, a company could succeed by pursuing excellence in just one of these
areas. Most e-Business solutions today focus on making promises with little or no
consideration of integration across business process.
Rhythm Software Solutions
i2 consistently creates the standards that others adopt. Their thought leadership is
evident in the innovations they have established over last decade. RHYTHM’s
holistic end-to-end solution provides the ability to segment the market on a
product level, help buyers make sound decisions based on real-time availability of
information, as well as personalize the entire shopping experience. These aspects,
combined with i2’s proven supply chain planning and optimization solutions, can
transform any organization into a high-velocity eBusiness enterprise.
However, the terms of engagement have changed. Globalization, increasing

competition and the Internet have added incredible velocity and complexity to
today’s business landscape. Velocity, or the ability to make intelligent decisions at
high speed, is necessary in this real-time economy. What type of decision
intelligence will give your company the velocity to achieve excellence in all areas 61
IT Enabled SCM of your business. Representing a natural extension of i2’s recognized leadership
in optimizing business processes RHYTHM provides advanced planning and
optimization of the following key processes:
i) Product Life Cycle Management: Rhythm product life-cycle management

solution ensures product innovation for maximum market share and
profitability. Companies that use their product lifecycle management solution
will increase market share, increase profit margins and will reduce research
and development costs.
ii) Supply Chain Management: Rhythm’s supply planning optimizes the match
of supply to demand. Their SCM customers are able to reduce unnecessary
expenses, improve revenue and meet fulfillment commitments.
iii) Customer Management: Rhythm’s customer management enables
personalized, full-service eBusiness by managing all customer issues through
one solution. Customer management offers companies the opportunity to
maximize revenue, increase market share, reduce cost-of-sale and increase
customer satisfaction.
iv) Inter Process Planning: to integrate the above three processes, maximizing
resource utilization and profitability.
v) Strategic Planning: for accurate long-term decision-making and scenario-
based analysis of competitors.
Tradematrix Solutions
Success in connecting the participants in a supply chain has been the driving
force behind i2’s most exciting solutions. TradeMatrix participants are able to
harness the power of the Internet, create a competitive advantage and deliver on
their promises to the customer.
With innovative solutions and core competencies, i2 is uniquely qualified to deliver

the most robust eMarket places to the industry. TradeMatrix offers the following
solutions.
1) TradeMatrix Procurement Solutions
TradeMatrix Procurement services is a hosted procurement service that reduces
the cost of purchasing and procurement effort, while lowering inventory and
decreasing the time-to-market for new products.
2) TradeMatrix Commerce Solutions
TradeMatrix commerce service enables personalized service. eBusiness by
managing all customer issues through one solution. The commerce service allows
participants to maximize revenue, increase market share, reduce cost-of-sale and
ensure customer satisfaction.
3) TradeMatrix Fulfillment Solutions
TradeMatrix Fulfillment solution optimally responds to customer requests and
intelligently manages customer orders. Its fulfillment solution allows participants to
improve customer service and increase margins and profitability.
4) TradeMatrix Customer Care Solutions
The TradeMatrix Customer Care solution allows participants’ customer to assess
information quickly, resolve problems and receive support instantly.
62
5) TradeMatrix Retail Solutions IT Packages in SCM
The TradeMatrix retail solution gives companies an opportunity to capture more

demand, minimize product obsolescence and maximize storage effectiveness.
6) TradeMatrix Planning Solutions
TradeMatrix Planning solution is a service that enables companies to make better
decisions across the entire value chain, increase revenues, decrease costs and
improve ROA.
7) TradeMatrix Product Development Solutions
TradeMatrix Product Development solution allows companies to accelerate
product innovation for maximum market share and profitability. Companies gain
product margins, increase market share and show a reduction in R&D costs.
Activity 2
Fix an appointment with marketing personnel of either SAP, BaaN, or TCS
software companies. Discuss in detail about ERP, i2, and SCM software
products. This discussion may enlighten your knowledge on the price,
implementation strategies, training, features and limitations of the software
packages, and hardware requirements to run the applications for a company.
Now, prepare a report on how to select software for a company’s applications?
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10.7 CONTRIBUTION OF THE SOFTWARE

PACKAGES TO THE SCM
On the front lines between manufacturers and their customers, competition for
market share has never been fiercer. In the past, strategies for improving corporate
profitability and competitiveness have shifted from marketing-focused (1960’s) to
finance-focused (1970’s) to operations-focused (1980’s) methods. But in each case,
as these methods were adopted and gained widespread acceptance, companies
gradually reached parity, and these methods generated diminishing returns.
Today, corporations are looking beyond their “internal enterprise” to the extended
“virtual enterprise” – the collection of trading partners who cooperate to provide
products to customers – as the new frontier for improving responsiveness to
customers and increasing market share. Pioneering efforts adopted in the early
1990’s in the apparel industry (Quick Response) and grocery industry (Efficient
Consumer Response) are now being applied in other industry segments, such as
industrial machinery, metals, paper, automotive, and consumer electronics.
Competitive initiatives are being formed between the members of extended supply
channels to protect their position against alternative competing channels.
In order to enhance the competitiveness of its customers, the software developing

companies intend to establish a leadership position as the premier provider of
supply chain management software. Among many, i2, BaaN, SAP, etc. are the 63
IT Enabled SCM few companies committed for the contribution of the software packages to the
SCM. For example, BaaN’s vision of supply chain management extends for
beyond traditional enterprise requirements planning (ERP) or advanced planning
and scheduling (APS) capabilities, and includes customer interaction, sales force
automation, demand management, vendor managed inventory (VMI),
transportation planning, and web enablement applications.
It may therefore, be expected that the supply chain solutions provides the ability
to optimize supply chain activities, monitor events based on actual execution,
proactively visualize potential problems, and determine corrective action using
advanced simulation and evaluation capabilities. The results of this analysis are
then propogated upstream and downstream throughout the supply chain to keep
material, production and transportation resources synchronized.
Activity 3
Visit any Manufacturing Organization, which proposes to go for ERP or

equivalent software package. Discuss with the systems Manager to find out what
preparations are required before implementation of software package. Prepare a
report of your discussion.
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10.8 SUMMARY
For a company experiencing accelerated growth, increasing the efficiency and

visibility of the supply chain is the key to increasing productivity. Company
pressures are creating significant impact on today’s manufacturer. There are
concerns for providing the customer with quality service, competitive prices, and
timely product. More than ever, the company’s competition is driving to find
alternative ways to achieve these goals without sacrificing the quality of product.
The supply chain solutions discussed in this unit will completely integrate multi-
plant planning and scheduling, and provide the ability for both centralized and
collaborative planning and scheduling. This will enable supply-chain planning to
exceed beyond the boundaries of a single corporation, and will feature “total
scalability and configurability” which will address in a single solution the
requirements of large manufacturers as well as those of mid-tier and small
manufacturers. Technologies such as publish-and-subscribe over the Internet, as
well as message passing are utilized.
Finally, the anticipated benefits of IT packages in SCM include:

1. Enterprise Benefits:
· Better management of complexity across the entire supply chain.
· Improved visibility and decision support for long-term capacity planning
and capital investment.
64
2. Financial Benefits: IT Packages in SCM
· Reduced inventory costs.
· Reduced operating costs through better utilization of resources.
· Less waste, with better alignment of production with demand.
3. Shop floor Benefits:
· Improved inventory management and control
· More efficient production through optimized scheduling, enabling longer
runs and fewer changeovers.
1) What are the deciding factors for a manufacturing organization to switch

from the current work practice to that of IT based?
2) What is the right technology that protects investment in a changing

environment? Give your answer specific to an Indian Manufacturing
Organization.
3) Identify suitable IT packages to suit small, medium, and large manufacturing

organizations. Give your choices with justifications – both technical and
economical.
4) What are the various modules of SAP R/3? Briefly discuss the content of
each module.
5) Explain briefly each module of BaaN IV.
6) Compare and contrast ERP software products of at least two established

brands.
7) Give important benefits of Manufacturing, Finance, and Distribution modules

of BaaN IV.
8) How is the Project module of SAP R/3 comparable to that of BaaN IV?
9) How is the right ERP Package selected for a medium sized manufacturing
organization?
10) Can ERP software package be applied in (i) Process Industry (ii) Service
Industry? Why and why not?
11) Discuss i2 Technology software products for manufacturing applications.

What salient features are found in i2 products?
12) Compare and contrast ERP software package of either SAP or BaaN with
i2 package.
13) BaaN and SAP have ventured to enhance their software products for supply
chain management environment. Is this a right approach? Why and why not?
14) What steps are to be followed while implementing IT software packages for
supply chain management? Do these steps vary from package to package?
How are they standardized?
15) In the IT based supply chain management, what criteria can be

recommended to measure the performance of manufacturing organization?
Explain the merits and demerits of your recommendations.
65
IT Enabled SCM
READINGS
2) Copacino, W.C.: Supply Chain Management: The basics and beyond, St.
Lucie Press, 1997.
3) Dave Garwood: Bills of Material: Structured for Excellence, Dogwood

Publishing Company, Inc., 1997.

5) Jonathan Blain, et. al., : Using SAP R/3, Prentice-Hall of India Pvt. Ltd.,
1998.
6) Lambert, D.M., Stock, J.R., and Ellram L.M.: ‘Fundamentals of Logistics

7) Lucas, H.C., Jr.: ‘Information Technology for Management’, The

8) Martin, A.J.: ‘Distribution Resource Planning: The Gateway to true

Quick response and continual replenishment’, John Wiley and Sons, Inc.,
1995.

10) Oden, H.W., Langen Walter, G.A., and Lucier, R.A., Hand Book of Material
and Capacity Requirement Planning, McGraw Hill, Inc., 1993.


Co., 1990.

Physical Distribution and Materials Management, Vol.19, No.8, 1989.
66
Indira Gandhi
Chain Management
Block
4
COST AND PERFORMANCE MEASUREMENT IN SCM
Unit 11
Cost Analyses and Measurement 5
Unit 12
Best Prictices and Benchmarkin for SCM 13
Unit 13
Performance Measurement and Evaluation of SCM 25
Mumbai New Delhi
Mumbai

Jharsuguda
Mumbai

December, 2004
ISBN-81-
BLOCK 4 COST & PERFORMANCE
MEASUREMENT IN SCM
Unit 11: Cost analyses & measurement discusses about Cost analyses &
measurement in terms of Logistics. It describes cost drivers and Activity Based
Costing (ABC) etc. It illustrates the costs that are incurred due to logistics. It also
gives some insights on customer profitability analysis
Unit 12: Best practices & Benchmarking for SCM comprehends the role of
benchmarking in business. It identifies the reasons for the requirement of
benchmarking. It recognizes the process in which benchmarking can effectively be
brought about. It also addresses the challenges faced in bringing about benchmarking
process. Finally it comprehends what elements are involved in bringing about change
management.
Unit 13: Performance measurement & evaluation of SCM deliberates the need
for performance measurement in a supply chain. It makes you familiar with the
underlying performance measurement concepts. It draws out the potential benefits of
performance metrics exercise. It also describes various methods and techniques that
could be employed for the performance measurement of Supply Chain Management.
Finally it illustrates barriers to effective Performance Measurement and explores
future directions in performance measurements.
Cost and Performance
Measurement in SCM
4
Cost Analyses and
UNIT 11 COST ANALYSES & MEASUREMENT Measurement
Objectives
· discuss Cost analyses & measurement in terms of Logistics;
· define Cost drivers and Activity Based Costing (ABC) etc.;
· illustrate Logistics cost; and
· have an insight from customer profitability analysis.
Structure
11.1 Introduction
11.2 Cost Drivers
11.3 Activity Based Costing (ABC)
11.4 Logistics Cost
11.5 Customer Profitability Analysis
11.6 Summary
11.1 INTRODUCTION
Many a times it so happens that even if a company has good products, it offers good
service like delivering the products on time. It has plethora of satisfied customers.
The company has sufficiently good productivity and growth levels. Even then it fails
to achieve sufficiently good profitability levels. Many reasons are cited for this like
lack of sales, harder times, competitiveness etc. However in reality, the main reason
for this is the lack of knowledge of possible losses. It is here that one finds the need
for determining the “true” cost for a cost object (product, job, service, or customer).
This is important in order to generate opportunities for cost improvement for probable
objects that are generating losses. It is also important to prepare a business plan and
improve strategic decision-making. Major factors for determination of market price
are competitors (those who are offering a similar product) and customer value. There
are many ways to determine object cost like intuition, guessing, traditional cost
accounting and activity based costing. Total cost for a cost object is determined by
the direct cost (e.g. labor, material, transportation etc.) and the overhead cost.
In this unit we will discuss about cost drivers and Activity Based Costing (ABC). We
will also study about the logistics cost and ways to reduce them.
11.2 COST DRIVERS
As businesses have become more complex, the elements of cost also have become
complex. Overhead costs are replacing the direct costs of labor and purchased
materials. These overhead costs are incurred on technology and the managers who
maintain productivity and production. As managers attempt to understand and
manage cross-functional business processes, organizations are finding that traditional
approaches for managing these costs are ineffective.
5
Cost and Performance Business processes need to be mapped so that the activities and associated drivers
Measurement in SCM are identified and their relationships analyzed. Analysis like ABC helps to understand
variable cost behavior and cost-of-quality for activities and processes.
The most useful way to analyze costs is to do it in terms of the various stages of the
overall value chain of which the firm is a part. Gattorna (1998) defined cost driver as
factor that creates of influences cost. Cost-driver analysis identifies the cause of
cost, e.g. the number of customer orders received in a specific period. A positive cost
driver results in a revenue, production or support related activities that generate
profit. A negative cost driver causes unnecessary work and reduces profitability. A
cost pool is a grouping of costs caused by related cost drivers and activities. Gattorna
illustrated the concept of cost drivers with an example (Figure 11.1), which comprised
of identifying activities and the cost drivers & cost pool associated with them.
The need of identifying the cost drivers arose due to the dissatisfaction with the
conventional cost accounting. These problems were summarized by Christopher
(1998) as follows:
· There is general ignorance of the true costs of servicing different customer
types/channels/market segments.
· Costs are captured at too high a level of aggregation.
Cost Pool: Order Administration

Activities Cost Driver
COST DRIVERS
Order Generation No. of orders received
Order Entry No. of orders processed
Inventory Checking No.of items PRIMARY ACTIVITES (LOGISTICS)
Credit Check No. of customer accounts Product Service Customisation
Order (Backorder) No. of orders processed Cost Allocated to
Design and Development
Acknowledgement No. of picking documents Specific Customers
Specific Services
Generate picking instructions No. of invoices Specific Equipment
Invoicing No. of items per invoice
Payment Processing No. of cheques, etc.
Credit Adjustments No. of credits.
Cost Pool: Order Assembling

Activities Cost Driver
Cost Pool: Marketing Order Picking No. of items picked
Order Packing No. of items packed
Activities Cost Driver Order Checking No. of items returned
Promotions & Advertising No. of enquiries Returns (Handling)
Selling Activities No. of Sales calls
Cost Pool: Order Delivery

Cost Pool: Service Activities Cost Driver
Activities Cost Driver Order Scheduling No. of Orders
Installation No. of Installations Order Loading No. of Customers Deleveries
Maintenance No. of Maintenance Calls Order Delivery No. of Unit Loads
Rectification No. of visits Retrurns (Pickup) Distance/ Delivery
No. of Return Journeys
COST DRIVERS
SECONDARY ACTIVITIES
Cost Driver
Cost Pools
* No. of items held in "stock"
* Inventory
*No. of Order movements
* Facilities
through the facility
Figure 11.1: Identifying activities, cost drivers and cost pools within the value chain
6 Source: Gattorna & Walters (1996)
· Full cost allocation still reigns supreme Cost Analyses and
Measurement
· Conventional accounting systems are functional in their orientation rather than
output oriented.
· Companies understand product costs but not customer costs- yet products don’t
make profits, customers do.
The above discussion highlighted lack of visibility in costs as they are incurred in
various stages in logistics. Christopher(1998) stressed the need for capturing the
costs as products and orders flow towards the customer. It is here that Activity
Based Costing (ABC) comes into picture and the key to ABC is to define the “cost
drivers” from the logistics point of view.
11.3 ACTIVITY BASED COSTING
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-of-quality 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 today’s 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 cross-functional
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.
7
Cost and Performance Table 11.1: Traditional Cost Accounting Method
Measurement in SCM
Sno. Traditional Cost Bases Cost (in thousands)
1 Salaries 889
2 Wages 926
3 Depreciation 400
4 Rent/Electricity/Telephone 1100
5 Maintenance 225
6 Fuel 375
Total 3915
You can see that in table 11.1 that the costs are functional in their orientation rather
than output oriented. There is a lack of visibility of the costs across from the logistics
point of view. In the table 11.2, you will see the difference. This costing is based on
costs of each activity and thus a representative of the true cost.
Table 11.2: Activity Based Costing (ABC)
S.No. Activity Cost Bases Cost Drivers Cost (in thousands)

1 Order Administration No. of orders received 525
No. of orders processed
No. of items
No. of customer accounts
No. of orders processed
No. of picking documents
No. of invoices
No. of items per invoice
No. of cheques, etc.
No. of credits.
2 Order Assembling No. of items picked 425

No. of items packed
No. of items returned
3 Order Delivery No. of Orders 1075

No. of Customers Deliveries
No. of Unit Loads
Distance/ Delivery
No. of Return Journeys
4 Marketing No. of enquiries 625

No. of Sales calls
5 Service No. of Installations 485

No. of Maintenance Calls
No. of visits
6 Inventory/ Facilities No. of items held in “stock” 950

No. of Order movements through
the facility
Total 4085
One can see that once you got the idea of true-costs you can save a possible loss of
Rs 170,000/- as shown in the table 11.1 and table 11.2. The ABC model thus forces
organizations to adopt a cost management paradigm that focuses on understanding
their processes and prevent losses.
8
Activity 1 Cost Analyses and
Measurement
IGNOU is a service industry in its own right. One can visualize this organization from
a supply chain perspective also. Its Material Production and Distribution Division
(MPDD) prints and dispatches the study material to the students, Schools develop the
course material, Regional Services Division (RSD) supports the students and Student
Registration and Evaluation Division (SRED) keeps the students records and
evaluations. Do an activity based costing (ABC) for the fees of a course for the
management program of IGNOU.
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
11.4 LOGISTICS COST
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 firm’s 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
9
Cost and Performance customers, carried out on a participative basis to ensure consensus and buy-in on the
Measurement in SCM 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 (as discussed earlier).
11.5 CUSTOMER PROFITABILITY ANALYSIS
Earlier accounting systems were unable to add value to a particular customer. As

customer profitability was calculated on the basis of gross profit only. These systems
were based on the formula given below:
Customer Profitability = Net sales revenue generated by the customer in a given

period – Costs of goods sold for actual product mix purchased.
To derive the real profitability of customers many other things are to be taken into
account. Customer profitability analysis illustrates the cluster of customers who are
not worth serving or in other words are not providing profits. Many of the costs like
cost of service, order processing costs and transport costs, material handling costs,
inventory and warehousing costs that depends on the customer characteristics. The
basic principle of customer profitability analysis thus depends on identifying the cost
saving opportunities if business is done only with ‘good’ customers only. Christopher
(1998) gave a checklist of costs, which should be included when doing an analysis.
Table 11.3: The Customer Profit and Loss Account (source: Christopher (1998))
Revenues · Net Sales Value

Less
Costs
(Attributable costs only) · Cost Of Sales (Actual Product Mix)
· Commissions
· Sales Calls
· Key Account Management Time
· Trade Bonuses and Special Discount
· Order Processing Costs
· Promotional Costs (Visible And Hidden)
· Merchandising Costs
· Non-Standard Packaging/ Unitization
· Dedicated Inventory Holding Costs
· Dedicated Warehouse Space
· Material Handling Costs
· Transport Costs
· Documentation/Communications Costs
· Returns/Refusals
· Trade Credit (Actual Payment Period)

Christopher (1998) also presented a model for customer profitability analysis. The
model is presented in figure 11.2. It explains the deductions from the gross sales
10
value of the order like the discounts, direct costs, attributable indirect costs etc. After Cost Analyses and
all these steps one gets the customer’s gross contribution. Any other customer Measurement
related costs like trade credit, returns etc are subtracted to give a net contribution to
overheads and profit.
The main purpose of doing this exercise is to get an idea of the less profitable
customers vis-à-vis more profitable customers. It can guide the managers to derive
strategies for managing customers with high servicing costs. Customer profitability
matrix is another approach for getting some generalized guidance for making
strategic decisions. The main idea behind all these approaches is to develop an
accounting system that routinely collects data on customer’s profitability.
GROSS SALES
VALUE
TRADE DIRECT
DISCOUNT INDIRECT
NET SALES
VALUE
PRODUCTION
COSTS CUSTOMER
RELATED
PRODUCTION COSTS(DIRECT)
CONTRIBUTION
*SALES CALLS
*IN-STORE
PROMOTIONS
*BONUSES
MARKETING *MERCHANDISING
COSTS
OVERHEAD
COSTS(INDIRECT)
MARKETING
*SALESFORCE
CONTRIBUTION
MANAGEMENT
*NATIONAL AD
CAMPAIGN
CUSTOMER
DISTRIBUTION RELATED COSTS
SERVICE COST (DIRECT)
*TRANSPORTATION
*PACKAGING
CUSTOMER GROSS
*STOCKHOLDING
PROFITABILITY
*WAREHOUSING
*TRADE CREDIT
*ORDER
PROCESSING
CUSTOMER
CONTRIBUTION TO
COMPANY OVERHRAD
PROFIT
Fig 11.2: Customer Profitability Analysis: A Basic Model

source: Christopher (1998)
11.6 SUMMARY
It is evident from the discussions in the sections of this unit that logistics costs have a
huge impact on the total costs. It is therefore important to manage them well. It has
been proved over a period of time that the traditional approaches to costing results in
business losses. This unit has highlighted another approach to costing that is activity
based costing (ABC). By ABC one can generate opportunities for cost improvement
for probable objects that are generating losses. We have studied about cost drivers in
logistics. A positive cost driver results in a revenue, production or support related
activities that generate profit. A negative cost driver causes unnecessary work and
reduces profitability. Finally this unit has touched upon logistics cost and customer 11
Cost and Performance profitability analysis. In the subsequent unit you will be studying about the
Measurement in SCM benchmarking and best practices and methods of measuring the performance of a
supply chain.
1) “Logistics Management impacts not only upon the profit and loss account of
business but also upon the balance sheet?” Comment!
2) When Christopher says that “supply chains compete, not companies” what
exactly does he mean. Evaluate this statement from the cost point of view.
3) What were the reasons for the fall of management accounting? Explain activity
based costing and mention the benefits it had over the management accounting.
4) What are cost drivers in a supply chain? Take the case of a paper
manufacturing company and portray all its cost drivers.
5) What is Customer Profitability Analysis? Why it has gained importance in the

recent times. Is it ethical to deny a customer that is not profitable?

READINGS
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.
12
Cost Analyses and
UNIT 12 BEST PRACTICES & BENCHMARKING Measurement
IN SCM
Objectives

· understand the role of benchmarking in business
· empathize reasons why benchmarking is required.
· recognize the process in which benchmarking can effectively be brought about
· address the challenges faced in bringing about benchmarking process
· comprehend what elements are involved in bringing about change management.
Structure
12.0 Objectives
12.1 Introduction
12.2 Importance and Role of Benchmarking
12.3 Methodology for Benchmarking
12.4 Change Management and Benchmarking
12.5 Challenges Faced in Implementation of Benchmarking
12.6 Case Studies
12.7 Summary
12.1 INTRODUCTION
David T Kearns, CEO: Xerox Corporation once said, “Benchmarking is the

continuous process of measuring product, services and practices against the toughest
competitors, or those companies recognized as industry leaders”. Benchmarking is an
external focus on internal activities, functions or operations in order to achieve
continuous improvement. Starting from an analysis of existing activities and practices
within an organization, the objectives are to understand existing processes, or
activities and then to identify an external point of reference, or standard, by which
each activity can be measured or judged. A benchmark can be established at any
level of the organization, in any functional area. The ultimate goal is to be better than
the best i.e. to attain a competitive edge.
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 management’s
commitment, with the emphasis upon continuous improvement and organizational
learning. The focus is primarily upon the role, strategic issues, processes and
13
Cost and Performance practices, rather than on the bottom line and numeric measure of performance. The
Measurement in SCM 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.
Benchmarking targets the critical success factors (CSF’s) of a specific

organization. What needs to be done to ensure long-term success? Where do
management see the potential for competitive advantage? Benchmarking helps to
identify those features critical to ongoing success, as well as those parts of the
organization that are less important and from which resources may be diverted. In
Benchmarking, a “role” describes in essence what a person or function does for an
organization. What responsibilities, services and tasks are offered to a customer or
client by the organization? How do these compare with other organizations in terms
of process architecture, structure or capability? Roles, in this instance are bundles of
services provided either to external customer or to an internal customer. Questioning
the roles within an organization leads to the question, “ Are we doing the right
things?” – in other words, the question of effectiveness – while assessing processes
raises concerns about whether things are being done right – in other words, the
question of efficiency. Every process within any organization consumes resources. To
leverage the most value from processes, an organization must eliminate Non-Value-
Adding Activities (NVA) in the process itself. Benchmarking supports the targeting
of processes or process elements, that are of high importance to the business, but are
perceived to be operating sub-optimally. While every process can be improved, an
often-overlooked issue is getting the most value out of every rupee spent on process
improvement. Only through the process of continuous benchmarking a process
against itself, and with other external sources, can this be truly assessed.
The identification and the setting of new goals, projects or ventures are fundamental
to the long-term success of any business. The environment within which any
organization operates changes rapidly; cost reduction targets that were deemed
aggressive months ago can quickly become the Industry norm. Benchmarking then
can be used to target strategic issues, gain enough information to prioritize competing
projects and establish an overall program of events geared towards achieving
optimum economic value added.
12.2 IMPORTANCE AND ROLE OF BENCHMARKING
Benchmarking provides the basis for meeting and exceeding stakeholder

expectations. Understanding its potential benefits requires understanding the type of
benchmarking to be deployed and the purpose of conducting such an exercise. While
benchmarking can be performed at any time, it is often undertaken as a response to
an information need associated with a project or issue within the organization. The
situations that may trigger the benchmarking process are:
· Operations / Logistics and Supply Chain improvement efforts.
· Management / Organizational changes
· Merger & Acquisitions
· Competitive Threats
· Cost Reduction Initiatives
Benchmarking in any of these situations is a logical step in developing new objectives,
setting new performance standards and metrics and redesigning process and
procedures.
14
A company benchmarks because it wants to be the best. To this end, benchmarking Cost Analyses and
should not be considered as an optional activity. It is more so a call of the day for Measurement
companies to maintain their competitive advantages.
Internal Benchmarking is the analysis of existing processes and practices within

various departments or divisions of an organization. The objective is to identify and
analyze best performance within the confines of the organization’s own boundary, and
drive performance to this level or beyond. The process will facilitate an understanding
of the basic activities that constitute the processes within the organization and the
drivers associated with these. Drivers are the causes of work, the triggers that set in
motion a series of activities. In conducting Internal Benchmarking, the management is
looking at itself first before thinking about comparisons outside. Significant
improvements are often made through Internal Benchmarks and these are often the
first steps in a benchmarking process.
While Internal Benchmarking focuses on specific functions or processes,

Competitive Benchmarking looks outwards in order to understand how direct
competitors are performing. Knowing the strengths and weaknesses of competitors is
important to strategic decision-making. Competitive benchmarking helps to level the
playing field, but it is less likely to provide that innovative, step-out improvement that
so many organizations are searching for today. Industry Benchmarking looks
beyond the competitive relationship and looks for trends.
The technique of benchmarking can be focused on specific processes, activities or

functions, but this is only part of the answer. An associated issue is the depth to
which the analysis is to be performed. Studies can be focused vertically upon
functions and department, or horizontally upon specific processes or activities. While
early forays into the world of benchmarking might be constrained to functional or
departmental performance, the goal has to be a cross-functional view of the value
chain needed to meet customer expectations in an efficient and effective manner.
A well-planned, systematic and structured benchmarking program can provide

organizations with a number of important benefits. In essence, the search for industry
best practices and subsequent efforts to maintain competitive superiority effectively
provide the basis for superior performance. Almost any study that requires detailed
examination of the organization’s operations results in a greater understanding of how
the business works; it’s critical success factors (CSF’s) and the key performance
indicators (KPI’s). But here again it is important to bear in mind that any form of
continuous improvement in one part of the business does not just push to another area
of operation – a phenomenon known as the “waterbed effect”.
Most organizations can learn from the experience of others, even though they may
have very different customer requirements and competitive environments. Much can
be gained by making comparisons with organizations that have to adopt a
fundamentally different approach to the same or a similar task.
12.3 METHODOLOGY FOR BENCHMARKING
In most companies traditional measures are based on fiscal and legal requirements.
These are then often used for planning purposes to facilitate comparison. The
problem with these measures is that they are based upon derived information and
have no clear relationship to the organization’s operational data. On the other hand,
operations develop their own set of KPI’s and measures – that may be unrelated to
the financial results – to identify levels of customer satisfaction and market needs.
This division often leads to conflict in the evaluation of performance. This has led to
the development of the Balanced Score Card Concept (Kaplan & Norton, 1996)
15
Cost and Performance Measurements can either be quantitative (numeric) or qualitative (opinion based).
Measurement in SCM Quantitative and qualitative benchmarks are not being viewed as isolated categories,
though.
At one end of the continuum are highly qualitative measurements, for example
assessment of customer or employee satisfaction. At the other end of the range are
highly quantitative measurements such as cost per unit, or productivity measures.
There are many tools for approximating qualitative characteristics with numbers, but
these techniques will never have precision to back them up. As part of the continuum
of measures it is important to recognize that qualitative measures are a mid- point in
terms of ‘hardness’ or reality. Hard measures make the user feel as though they are
real. Facts with numbers attached to them take on a life of their own; they appear to
possess certain “magic” and people tend to believe these hard numbers. But, with
each gain in precision, relevance is sacrificed. Therefore in developing benchmark
measurement the goal is to develop a metric that is as “hard” as it can get without
losing vital insights provided by the “softer” more intuitive qualitative indices.
A Systemic Approach
Many organizations have developed their own process. All approaches are
fundamentally the same and are based on Deming’s Plan–Do–Check–Act (PDCA)
cycle.
Step 1: Prioritize what to Benchmark
The first step focuses on the processes and activities that the organization believes
will yield the maximum benefit. In any supply chain there are too many activities and
processes to benchmark all of them in one go, therefore improvement effort cannot
be spared too thinly, and all areas cannot be addressed simultaneously.
Step 2: Identify Comparable Companies
Benchmark partner selection can be determined by a benchmarking mechanism, for

example through an existing benchmarking network or through an industry trade
association. When this is not done, a number of issues need to be considered:
· Should competitors be approached? If so, how will confidentiality be addressed?
Are they likely to have significantly better activities and operations?
· Can best–in-class organization be easily identified and what can be offered to
them in exchange which is of interest to them?
· How many benchmark partners are required?
· Which organizations have similar requirements for operational processes, but are
likely to have developed better processes to deal with them?
· How should the different areas of interest of partner organizations be
accommodated within the process?
Step 3: Data and Information Collection
Once it has been decided what to benchmark, and the organization is identified and
gained agreement from partners, the next step is to determine the process for data
and information collection. The key here is to achieve commonly agreed
understanding of the activities, processes, definition, terminology and time periods.
Failure to achieve this will result in major problems in both the analysis and
comparison activities, which ultimately may lead to rejection of the output by key
managers.
All the participants must sign off the common understanding and a forum needs to be
established to discuss and resolve any queries that arise during the process.
16
Deadlines for each stage of the data and information collection need to be set, Cost Analyses and
monitored and adhered to otherwise it would be considered a lengthy process. Measurement
Step 4: Determine current performance gap
Once the data and information have been collected, the analytical stage needs to
be converted into useful outputs. High-level analysis should be used to sense-
check the data and information provided. Queries should be addressed to the
supplying organization and resolved quickly. Data might be aggregated and
particular attention should be paid to the following:
· Data normalization methods;
· Root cause analysis;
· Best practice characteristics identification;
· Identification of relevant process enablers.
When all the data and information have been accepted and analyzed,
comparisons need to be made and gaps analyzed. The analysis should utilize an
agreed framework, focusing on the key areas of interest. These could be points
of greatest difference or similarity and should be presented in a way that will
focus the recipients upon the required actions. The output should:
· Assess the overall comparisons in the areas of interest;
· Seek to explain whether there are broader business reasons for some of the
differences;
· Identify the major performance gaps where the real opportunities for major
improvements lie;
· Set targets and realistic time-scales;
· Outline what is required to close the gaps.
Step 5: Project future performance levels
Analyzing the benchmark performance gap can be done as a snapshot or as a

trend over a period of time. Either method may be appropriate for the function or
process being studied. Indeed, both may be applied simultaneously. When cost,
productivity or quality is the metric under study, sometimes it is useful to look at
the historical trend as well as the current gap. Additionally, projecting future
performance levels of productivity within your own organization against that of
the benchmark partner’s – given the current rate of improvement for each
creates projected targets for improvement. This approach helps the intent to
increase the rate of innovation and improvement within the organization.
Step 6: Communicate findings and gain acceptance
It is a known fact that people do not like change, especially change that appears
to be for ‘change sake’. In order to ensure the success of any benchmarking
program it is imperative that a detailed communication plan is created and revised
regularly during the course of the initiative.
Even with the support of senior management, there may be resistance to change
from lower organizational levels. This resistance to change primarily stems from
fear; fear of job losses, loss of status, control, resources and so on. In order to
plan for and mitigate against such events, a stake-holder or field analysis might be
used to identify potential areas of resistance and methods of overcoming any
such concerns.
17
Cost and Performance Step 7: Establish functional goals
Measurement in SCM
Once outline targets have been drawn up, detailed functional (or cross-functional)
goals can be established. The secret in using benchmarking to achieve breakthrough
change is to synthesize key actions taken after consideration of all information
available, to generate innovative approaches. After the enablers of performance
within a specific organization environment have been assessed, careful consideration
should be given to the adaptability of these enablers to the organization’s
circumstances.
Step 8: Develop action plans
The action plans describe each of the key actions at a functional level required to
achieve the desired goals. Action plans can be as detailed as required; in some
instances they can even identify the core tasks, the desired levels of performance
required, and the changes in the process, behavior or systems required to support
their achievement.
Step 9: Implement and monitor
All the time and effort expended to this stage is worth very little if the output does not
provide clear plans for change, and these are not implemented in real and lasting
improvements. Having achieved a successful implementation, the organization must
continue to monitor the operational performance, and assess whether there are other
organizations that have now developed superior processes or practice.
Step 10: Recalibrate benchmarks
The continuous search for improvement will inevitably result in further development
of the processes and practices, and some revisiting of benchmarking efforts.
Activity 1
Many organizations have developed their own methodology for benchmarking

process. Visit an organization of your choice and study its benchmarking process. Do
their process is also based on Deming’s Plan–Do–Check–Act (PDCA) cycle?
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12.4 CHANGE MANAGEMENT AND BENCHMARKING
Clearly the process of benchmarking focuses on customers and performance

improvement with the potential for significant advances in efficiency and
effectiveness. Benchmarking is used extensively by many organizations to help
understand their relative positioning and efficiency of operations. Benchmarking
networks; full time benchmarking manager and consulting assignments are evidence
of the continuing interest in this area.
Benchmarking raises an organizations consciousness. It provides an external focus on

18 the internal activities and derives an organization to the conclusion that there are
always opportunities within every organization to learn something new. To achieve Cost Analyses and
operational excellence an organization needs to experiment in all parts of the Measurement
business. Everyone – from top management to down below – has to be willing to roll
their sleeves up and get their hands dirty, constantly asking ‘why?’ The role of
benchmarking in this environment is to provide the creative spur and to unearth a path
that has worked for others in achieving operational excellence.
Benchmarking is about learning from others as well as learning by doing. It cannot be

learned from a book or a seminar; it has to be practiced. The more the practice the
greater is the potential for innovation within your business.
As described earlier Benchmarking has four distinct phases:
· Phase 1: Planning
Identifying what to benchmark, selecting comparative companies or indeed parts
of your business and determining how the data collection activities are to be
performed.
· Phase 2: Analysis
Analyzing internal levels of performance and comparing these with the target
organization’s performance. Also, projecting future performance levels and
setting targets in order to attain less time–perishable levels of competitive
advantage.
· Phase 3: Integration
Communicating benchmark findings and helping the organization come to terms
with what needs to change in order to achieve new and lasting levels of
performance. Developing realistic and achievable functional goals to enable this
vision.
· Phase 4: Action
Managing Change and developing specific action plans in order to make the
desired levels of change a reality. Once implemented, the monitoring of progress
via a set of clear KPI’s is of paramount importance, allaying any drift back to old
habits. Finally a recalibration of benchmarks is required in order to lead the
business to the next level of operational excellence.
Good benchmarking is about managing continuous improvement strategically;

identifying stakeholders and ensuring their interests are being met by any benchmark
based initiative and managing change. Benchmarking is a tool for enacting change.
The critical success factor for any change is the creation of additional value in the
eyes of the stakeholders of the business. Benchmarking is all about finding new ways
of enacting business processes and using companies precious resources to serve its
stakeholders needs in a better way. To achieve this change benchmarking studies
have to be very specific, comparable and have a predefined set of performance
drivers and KPI’s. Without any one of these a benchmarking study cannot hope to be
effective.
In putting benchmarking to work in the supply chain it is worth keeping in mind that
change will occur once the process has started. By its very nature it will cause
participants to look at their new world with a new set of eyes. Problems will be
uncovered and new and creative solutions will be developed.
Benchmarking removes some of the politics and guesswork out of the development
of continuous improvement targets within organizations. This is due to the external,
politically neutral, nature of the analysis. Some people like to know exactly where
they stand and what is expected of them. If measures are used to guide or assess 19
Cost and Performance performance these must not be vague or non-descript. Metrics without clarity can
Measurement in SCM lead to individuals incorporating these into a workable framework of their own. The
problem is that this framework might not be what management had in mind!
Effective continuous improvement starts with a rigorous analysis of process flows –

what work is done where and why is it done in way it is done. Report outputs are
analyzed and the ‘why’ question is repeated many times. Continuous improvement
must be managed strategically with all those involved clearly understanding why a
particular course of action is being followed, where improvement targets have come
from and how and by whom it is expected that the improvements will be
implemented.
Benchmarking solves this problem. It develops a set of objective measures within an

organizational framework, stabilizes the improvement program and provides all parties
with a clear understanding of why a particular course of action is being followed,
customer surveys, completed as a part of a benchmarking exercise, will point
specifically to the areas that need improvement. Benchmarking if managed
effectively holds the key to unlocking an individual’s defenses. It creates a logical,
prioritized and importantly achievable path to good practice and operational
excellence. Unlocking the power vested in individuals and teams in this fashion is the
catalyst for organizational creativity and innovation.
12.5 CHALLENGES FACED IN IMPLEMENTATION OF

BENCHMARKING
Irrespective of the type and scope of benchmarking, the critical factors that are
needed to be ensured are as follows:
· Senior management supports the process of benchmarking and are committed to
continuous improvement.
· The objectives are clearly defined at the outset.
· The scope of the work is appropriate in the light of the objectives, resources and
time available and the experience levels of those involved.
· Sufficient resources are available to complete projects within a given timeframe
and that projects are selected based upon a prioritization linked to the
achievement of competitive advantage.
· Benchmarking teams have a clear picture of their organizations performance
before approaching others for comparisons.
· Stakeholders, particularly staff and their representatives are kept informed of
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 existing organizational culture
· Incorrect application of the techniques
· 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 industry
best practices that can be generalized between sectors and organizations. As with Cost Analyses and
most programs that require major organizational change, considerable inertia may be Measurement
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 organization’s 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
12.6 CASE-STUDIES – BENCHMARKING IN ACTION
· Case 1: Supply Chain structures and responsibilities

As a part of the broader organizational change program, a multinational fast
moving consumer goods (FMCG) manufacturer, XYZ Inc. wanted to investigate
different approaches to the management of its supply chain activities across the
country. The company had developed a country-based structure but recognized
that there were significant opportunities to be gained from changing at least
some of this structure. The company wanted to look at how businesses in
different sectors approached the fundamental management issues that were key
to their success. These included:
· Division of responsibilities
· Central versus regional management structures
· Support for customer facing operations
· Information systems
· Implementation and change management
Given the sensitivity of the area of interest and the need to assure potential
partners of confidentiality, a consultancy was engaged to act as the intermediary
and run the process. Initial discussions produced a preliminary document; this
was then developed into a questionnaire that could be used in face-to-face
interviews. A number of potential partners were identified, approached and
subsequently engaged. All participants were taken through the same interview
21
Cost and Performance process to ensure consistency of approach, terminology interpretation and
Measurement in SCM response. At the conclusion of the process, all data was analyzed, comparisons
were drawn and the key finding identified. The summary report was than
circulated to all participants and a presentation given to the FMCG
manufacturer’s management group of XYZ Inc.
This process allowed the company’s management group to compare and gain
insights into how companies with similar challenges had developed different
roles, responsibilities and structures. The management group then prepared an
evaluation of strategic options and gained agreement to conduct follow-up.
Face-to-face benchmarking meetings with the two most benchmarking partners.
The output of this second stage process formed major part of the proposals to
change the supply chain responsibilities and structures. The proposal was
accepted and gradual implementation process provided for progressive
centralization of responsibilities.
· Case 2: Outsourcing logistics – Benchmarking for success
A major sportswear and accessories manufacturer was considering outsourcing
its logistics operations to a third party logistics (3PL) service provider. One of
the key concerns held by the management team was the achievement of
improved levels of operational performance at lower cost. How was this going
to be assessed, how should the 3PL service provider be selected and how could
its performance be measured on an ongoing basis? In order to gain answers to
these questions the manufacturer engaged a consultancy to develop an
assessment framework. The brief was to design a set of processes to enable the
organization to construct and manage a sourcing relationship based on a number
of balanced, benchmarkable, metrics Initially a model describing the logistics
function and its associated activities was developed. This covered activities such
as:
Goods receiving inspection
Warehouse operations
Dispatch inspection
Shipping
Distribution planning and control
Transportation management
Support
Management and administration
Data was then requested internally covering cost drivers, resources consumed –
including FTEs (full time equivalents), capital equipment and volumes – and quality
and performance metrics. This data, once harvested and validated, enabled and
development of detail set of performance metrics characterizing the organizations
current logistics function performance. These measures were both quantitative and
qualitative, covering unit costs, productivity, cycle times and quality and performance
metrics.
The next step was to compare these data with a reference group of data from
organizations with a similar set of operational characteristics. The consulting
organization engaged to support this initiative already had a significant database from
previous engagements and was therefore able to provide reference group data to
support this phase of the project.
The analysis that followed identified the areas where the organizations performance
22 was better than that of the reference group mean and where there was opportunity
for improvement. This latter set became improvement challenges for the chosen 3PL Cost Analyses and
service provider. This exercise also provided the base case upon which to assess and Measurement
select the appropriate 3PL service providers offering. It also enabled a framework
upon which a set of ongoing, balanced performance metrics could be developed in
order to manage the sourcing relationship over time.
Negotiations with the selected 3PL service provider led to a three-year sourcing
contract, with clearly identified performance improvement objectives agreed between
both parties at the outset. The manufacturer also had a management framework in
place that could be used to assess the competitiveness of the service providers
offerings on an ongoing basis, providing information to ensure full value was achieved
from the service provider / service recipient relation they had created.
12.7 SUMMARY
Benchmarking is designed for action, rather than just to answer the question “How
are we doing?” It is a means to an end and not the end itself and is most powerful
when used as a tool to develop best practices rather than to solve a specific problem.
To benefit from this approach, organizations must first recognize that always there
are others who can perform activities and tasks better than they currently do and that
lessons can be learnt from how they do this. Ultimately the greatest benefits may
come from a better understanding of the business and a change in culture to a
proactive, creative organization that strives for supply chain excellence and
continuous improvement.
When used correctly, benchmarking is a powerful management tool that provides a

much-needed external view of the organizations environment and especially the
requirements of its customers. Above all else, the application of benchmarking
process can lead to competitive advantage through cost-leadership and differentiation
based upon excellent customer service.

1) Define Benchmarking. Define it’s role in improvement of organizational
efficiencies
2) What are various kinds of challenges faced during the process of
benchmarking?
3) Benchmarking is a continuous process. Express your opinion in favor or against
it giving reasons.
4) What the various challenges especially in the area of Human Resources faced
during Benchmarking process?
5) Highlight the Key issues in Benchmarking Case 1.
6) Highlight the Key issues in Benchmarking Case 2.

READINGS
1) Handfield Robert B & Nichols Jr. Earnest L (1999), “Introduction to Supply
Chain Management” Prentice Hall.
23
Cost and Performance 2) Christofer Martin (1999), “Logistics and Supply Chain Management:
Measurement in SCM Strategy for reducing cost & improving service”, 2nd Ed., Pitman Publishing,
London.
3) Sahay, B.S., “Supply Chain Management”, Asian Books Publication.
4) Kaplan, R.S. and Norton, P.D. (1992), “The balanced scoreboard-measures that
drives performance’’, Harvard Business Review, January-February, pp. 71-9.
5) Stewart, G. (1995), “Supply chain performance benchmarking study reveals
keys to supply chain excellence”, Logistics Information Management, Vol. 8
No. 2, pp. 38-44.
6) Hausman Warren H. (2000), “Supply chain performance metrics”, The Practice
of Supply Chain Management, Dec.
24
Cost Analyses and
UNIT 13 PERFORMANCE MEASUREMENT AND Measurement
EVALUATION OF SCM
Objectives
· Justify the need for supply chain performance measures
· Describe supply chain performance measurement systems
· Compare supply chain performance measurement systems
· Select measures for measuring the supply chain performance
Structure
13.1 Introduction
13.2 Need For Supply Chain Performance Measures
13.3 Measurement Systems
13.4 Supply Chain Performance Measurement Systems
13.4.1 Supply Chain Balanced Scorecard
13.4.2 Hierarchy Based Measurement System
13.4.3 Function Based Measurement System
13.4.4 Perspectives Based Measurement System
13.4.5 Supply Chain Operations Reference Model
13.4.6 Dimension Based Measurement System
13.4.7 Interface Based Measurement System
13.5 A Comparison of Measurement Systems
13.6 Selecting Measures
13.7 Methods for Setting Performance Targets
13.8 Total Cost of Ownership
13.9 Summary
13.10 Self-Assessment Questions
13.1 INTRODUCTION
In today’s world, Supply Chain Management (SCM) plays a key strategic role in
increasing organizational effectiveness and accomplishment of organizational goals
such as enhanced competitiveness, better customer service and increased
profitability. Today’s management can’t afford to focus only on company’s
performance in a vacuum; there is an emerging requirement to focus on the
performance of the extended supply chain or network in which company is a
partner. An extended supply chain is one that involves not only tier one buyers
and suppliers, but also the end supplier (suppliers’ suppliers) to end buyers
(buyers’ buyers). The competition is at a chain or network level, i.e. supply chain
vs. supply chain, with emphasis on continuous improvement across the extended
supply chain.
There is a shift in focus from an intra organizational performance to inter

organizational integrated supply chain performance. Firms have now realized the
potential of SCM, but many of them still lack in selecting the proper performance
measures for a fully integrated supply chain.
25
Cost and Performance In a supply chain the problem lies at the interfaces that is at the boundary of
Measurement in SCM two organizations. The reason for this is the high level of interdependence
intermingled with independence and autonomy of the firms in an integrated SC.
Every member is fully autonomous but highly dependent on the performance of
other members. Supply chain performance measures differ from traditional
performance measures as it crosses company boundaries i.e. it includes suppliers
and distributors. Supply chain performance also crosses all functional links like
procurement, manufacturing, sales and distribution etc. This makes the choice of
supply chain performance measure(s) difficult.
Single performance measure for entire supply chain is not adequate for effective
supply chain because it will not cover all pertinent aspects of the supply chain. In
many companies, the metrics that management refers to, as supply chain metrics
are primarily internally focused functional measures like lead-time, inventory levels
etc. In many instances, these measures are purely financial (for example return
on assets, overall profits etc.), but they do not indicate how well key processes
have been performed or how effective the supply chain is in meeting the primary
objective like customer satisfaction.
In an increasing number of instances, the organizations have started measuring

performance beyond the traditional boundaries of firm, but it is limited to
measuring the performance of immediate SC i.e. tier one buyers and suppliers.
These measures do not capture how the extended supply chain has performed
and fail to identify areas of improvement in competitiveness, stakeholders’ value
for each firm in the extended supply chain.
Like in any other case, in order to evolve an efficient and effective supply chain,
SCM needs to be assessed for its performance. However, there is often lack of
insight for the development of effective performance measures and measurement
system needed to achieve a fully integrated extended supply chain. The process
of choosing appropriate supply chain performance is difficult due to the
complexities of supply chain. This complexity is due to many factors and one of
them is the objective of SC itself. The objective of managing the supply chain is
to synchronize the needs or demands of the customers with the flow of materials
from suppliers to achieve a balance between the conflicting goals of customer
service and satisfaction and low supply chain cost. These conflicting goals cannot
be accomplished together at a time and hence there is a need to strike a balance
between them, which makes the decision of selecting the right performance
measures more difficult.
Supply Chain Performance refers to the extended supply chain’s activities in

meeting end-customer requirements, including product availability, on-time delivery,
and all the necessary inventory and capacity in the supply chain to deliver that
performance in a responsive manner.
Supply chain performance crosses organizational boundaries since it include raw

material components, subassemblies and finished products and distribution through
various channel to the end customer. Supply chain performance also crosses
traditional functional linkages such as procurement, manufacturing, distribution,
marketing &sales and R&D etc. Figure 13.1 shows the evolution of performance
measures for SC from single enterprise single measure to multiple enterprises
multiple measures.
26
Cost Analyses and
Measurement
Organizational boundary
Single Enterprise Cross Enterprise
Single
Dimensions
Multi
Source: Warren H. Hausman (2000)

Figure13.1: Evolution of performance measures for supply chain
13.2 NEED FOR SUPPLY CHAIN PERFORMANCE

MEASURES
To excel and win in the today’s competitive environment, supply chain need
continuous improvements. To achieve this goal, performance measures that support
global supply chain performance measurement and improvement are needed, rather
than narrow company-specific or function-specific measures, which inhibit chain-
wide improvement.
Several factors that contribute to management’s need for new types of measures for
managing the supply chain include:
· The lack of measures that capture performance across the entire supply chain.
· The requirement to go beyond internal metrics and take a supply chain
perspective.
· The need to determine the interrelationship between corporate and supply chain
performance.
· The complexity of supply chain management.
· The requirement to align activities and share joint performance measurement
information to implement strategy that achieves supply chain objectives.
· The desire to expand the “line of sight” within the supply chain.
· The requirement to allocate benefits and burdens resulting from functional shifts
within the supply chain.
· The need to differentiate the supply chain to obtain a competitive advantage.
· The goal of encouraging cooperative behavior across corporate functions and

across firms in the supply chain.
27
Cost and Performance Recent studies indicate that supply chain performance affects more than 85 percent
Measurement in SCM of a manufacturer’s costs and a large percent of its revenues (Supply chain council
1998). Monitoring SC performance through proper measurements is, therefore,
necessary and can help the organizations to identify opportunities for optimization.
The successful companies are reengineering their supply chains to decrease costs
and improve customer satisfaction. Effective reengineering requires an in-depth
understanding of the supply chain processes and their linkages. An in-depth
understanding can only permit the development of a performance system and the
setting of improvement goals against benchmarks.
13.3 MEASUREMENT SYSTEMS

Management veterans argue that measurement is a key to continuous improvement.
And this lead to variety of maxims like “ you can’t manage what you don’t
measure “ and “anything that gets measured gets done”.
Measurement systems have been used in process management, and Ljungberg
(1994), who focused on the order process in his work, has suggested the following
definition of a measurement system:
A set of related measures – described by rules and procedures for the collection,
compilation and communication of data—that in combination reflect key performance
aspects and characteristics of the process in question effectively enough to admit
intelligent analysis, if called for to action.
Characteristics of effective measurement system
An effective measurement system is one that has following characteristics (Beamon
1996):
· Inclusiveness: measurement of all pertinent aspects
· Universality: allow for comparison under various operating conditions
· Measurability: data required are measurable
· Consistency: measures consistent with organization goals
13.4 SUPPLY CHAIN PERFORMANCE

MEASUREMENT SYSTEMS
A performance measurement system can be defined as the set of metrics used to

quantify both the efficiency and effectiveness of action. Following questions must be
addressed to create a sound performance measurement system.
· What to measure?
· How are multiple individual measures integrated into a measurement system?
· How often to measure?
· How and when measures re-evaluated?
In recent past quite a few supply chain performance measurement system are
reported in literature, some of the important ones are discussed in the next section.
13.4.1 Supply Chain Balanced Scorecard

A measurement system based on balance scorecard (Kaplan and Norton 1992) uses
four perspectives, namely financial perspective, customer perspective, innovation and
learning perspective, internal business perspective.
28
When a supply chain point of view is embedded within the balance scorecard Cost Analyses and
framework the internal perspective of the scorecard is extended to include both the Measurement
inter-functional and inter-organizational partnership perspectives. The balance
scorecard incorporates integrated measures, in addition to nonintegrated measure,
that motivate employees to view their firm’s success as dependent upon the success
of entire supply chain of which they are part, rather then solely upon their firm itself.
SC balance scorecard emphasizes the interdependent as well as independent nature

of supply chain and reorganizes the need to ascertain the extent to which firms
effectively work together and functions are coordinated and integrated. It also
stimulates management to create other measures appropriate to their unique
circumstances but it lacks in aligning overall supply chain objectives with objectives
for companies.
Brewer and Speh (2000) have developed a model for a balance scorecard in the
supply chain context, which is shown in figure 13.2. This model describes the links of
different perspective to goals of SCM and then what are the measures to be adopted
in each perspective.
Customer Perspective
Goals Measure
1) Customer view of 1) Number of customer
product/services contact points
2) Customer view of 2) Relative customer
timeliness order response time
3) Customer view of 3) Customer perception of
flexibility flexible response
4) Customer values 4) Customer value ratio
Internal business perspective Innovation and learning Perspective

Goals Measure Goals Measure
1) Waste reduction 1) Supply chain 1) Product/process 1) Product finalization
Cost of ownership innovation Point
2) Time compression 2) SC cycle efficiency 2) Partnership 2) Product category
3) Flexible response 3) No. of choices/ management commitment ratio
avg response time 3) Information flows 3) No. of shared data
4) Unit cost reduction 4) % of SC target set/ total data set
4) Threats and 4) Performance trajectories
Cost achieved of competing
substitutes technologies
Financial Perspective
Goals Measure
1) Profit Margin 1) Profit margin by
SC partner
2) Cash flow 2) Cash to cash
cycle
3) Revenue growth 3) Customer growth
and profitability
4) Return on assets 4) Return on SC
assets
Figure 13.2: Supply Chain Balanced Scorecard Framework (Brewer and Speh, 2000)
29
Cost and Performance 13.4.2 Hierarchy Based Measurement System
Measurement in SCM
Under hierarchical framework measures are classified into strategic, tactical and
operational levels of management. This is done to assign them where they can be
best dealt with by the appropriate management level, and fair decisions can be made.
As shown in table 13.1, the accuracy of forecasting techniques, assigned to the
tactical level based on an overall system decision in a supply chain, can be used and
managed by the middle management. A similar explanation can be given for the rest
of the metrics given in table 13.1.
Table 13.1: Hierarchical Based Measurement System (Gunasekaran 2001)
Level Performance metrics Financial Non-
financial
Strategic Total supply chain cycle time *
Total cash flow time * *
Customer query time * *
Level of customer perceived value of product *
Net profit vs. productivity ratio *
Rate of return on investment *
Range of product and services *
Variations against budget *
Order lead time *
Flexibility of service systems to meet particular customer needs *
Buyer supplier partnership level * *
Supplier lead time against industry norm *
Level of supplier’s defect free deliveries *
Delivery lead time *
Delivery performance * *
Tactical Accuracy of forecasting techniques *
Product development cycle time *
Order entry methods *
Effectiveness of delivery invoice methods *
Purchase order cycle time *
Planned process cycle time *
Effectiveness of master production schedule *
Supplier assistance in solving technical problems *
Supplier ability to respond o quality problems *
Supplier cost saving initiatives *
Supplier’s booking in procedures *
Delivery reliability * *
Responsiveness to urgent deliveries *
Effectiveness of distribution planning schedule *
Operational Cost per operation hour *
Information carrying cost * *
Capacity utilization *
Total inventory as:
- Incoming stock level
- Work in progress
-Scrap level
-Finished goods in transit *
Supplier rejection rate * *
Quality of delivery documentation *
Efficiency of purchase order cycle time *
Frequency of delivery *
Driver reliability for performance *
Quality of delivered goods *
Achievement of defect free deliveries *
The metrics are further distinguished as financial and non-financial so that a suitable
costing method based on activity analysis can be applied. In some cases, a metric is
classified as both financial and non-financial. For example, the buyer-supplier
relationship can be quantified in terms of financial performance achieved, such as
cost savings, and in terms of tangible and intangible benefits, like improved quality,
flexibility and deliverability.
30
Hierarchy based measurement system ties together the hierarchical view of supply Cost Analyses and
chain performance measurement and maps the performance measure specific to Measurement
organization goal. A clear guideline can’t be made in such a system to put the
measures into different levels that can lead to low level of conflicts among the supply
chain partners.
13.4.3 Function Based Measurement System
In this system the measures are aggregate to cover the different processes in the
supply chain. The figure 13.3 below shows the customer order path and then it
covers what are the measure available in each process.
Sales and Customer Ship

marketing order status customer
function order
Purchasing Accounting
Back order Invoice

Inventory
available
Customer Credit Inventory Process Warehouse

order check file order withdrawal
Production
schedule
Production Shipping Transporting

documentation schedule
Figure 13.3: Customer Order Path (Christopher 1992)
Function based measurement system covers the detailed performance measures

applicable at different linkages of supply chain. Approach is easy to implement and
targets can be dedicated to individual departments. It doesn’t provide the top-level
measures to cover the entire supply chain with the company strategy. Looks at the
entire chain in isolation, which gives the localized benefits that may harm the total
supply chain benefits.
13.4.4 Perspectives Based Measurement System
This system presents six unique sets of metrics to measure performance of SCM.
The different approaches to SCM lead to different awareness of what should be
measured to assess performance. The six different perspectives as shown in table
13.2 are: System Dynamics, Operations Research/Information Technology, Logistics,
Marketing, Organization and Strategy.
31
Cost and Performance Table 13.2: Six perspectives of SCM (Otto and Kotzab 2002)
Measurement in SCM
Perspective Purpose of SCM Performance measures
System Dynamics Managing the trade-offs along Capacity utilization, inventory level,
the complete supply chain. stock-outs, time lag for demand
information, time to adapt change in
demand
Operation Research Calculating optimal solutions with Logistics cost per unit, service level,
a given set of degree of freedom time to deliver
Logistics Integrating generic processes Integration, lead times, order cycle time,
sequentially, vertically and flexibility
horizontally
Marketing Segmenting products and markets Customer satisfaction, distribution cost
and combine both using the right per unit, market share, channel cost
distribution channel.
Organization Determining and mastering the need Transaction cost, density of
to coordinate and manage relationship
relationships
Strategy Merging Competencies and ROI, Time to market
relocating into the deepest
segment of the profit pool
P1.1
Perspective based measurement system looks the supply chain in all possible
Identify, Pictureize &
aggregate SC
Requirements
perspectives and provides measures to evaluate each perspective. It also provide a
different vision to look supply chain .How to link different perspective to optimize
global supply chain perspectives and there can be trade off exist between measure of
one perspective with the measure of other perspectives.
13.4.5 Supply Chain Operations Reference Model
One way to understand a supply chain is to use a process model. The Supply Chain
Council created the SCOR model which is a framework for examining a supply chain
in detail, defining and categorizing the processes that make up the supply chain,
assigning metrics to the processes, and reviewing comparable benchmarks. Many
companies use the SCOR model to understand and improve their supply chains.
These companies include aerospace and defense manufacturers, large consumer
product manufacturers, and third-party logistics providers. The SCOR model is the
only supply chain framework that links performance measures, best practices, and
software requirements to a detailed business process model.
SCOR models integrate the well-known concepts of business process reengineering,

benchmarking, and process measurement into a cross-functional framework.
SCOR defines supply chain as the integrated process of plan, source, make, deliver
and return spanning suppliers’ supplier to customers’ customer, aligned with
operational strategy, material, work and information flows.
The heart of the SCOR system is a pyramid of four levels (Figure 13.4) that
represent the path a company takes on the road to supply-chain improvement.
SCOR spans:
All customer interactions, from order entry through paid invoice
All product (physical material and service) transactions, from your supplier’s
supplier to your customer’s customer, including equipment, supplies, spare parts,
bulk product, software, etc.
All market interactions, from the understanding of aggregate demand to the
32 fulfillment of each order
Cost Analyses and
Measurement
Description Comments
Level 1 defines the scope and content

Top Level for the Supply Chain Operations
(Process Types) Reference-model. Here basis of
competition performance targets are set.
A company’s supply chain can be

Configuration “configured-to-order” at Level 2 from
Level (Process core “process categories”. Companies
implement their operations strategy
Categories)
through the configuration they choose
for their supply chain.
Level 3 defines a company’s ability to

Process Element compete successfully in its chosen
Level markets, and consists of:
(Decompose · Process element definitions
Processes) · Process element information inputs,
P1.1
and outputs
Identify, Picturize &
Aggregate SC
· Process performance metrics
Requirements P1.3
Balance Production
P1.4
Establish and · Best practices, where applicable
Resources with SC Communicate SC
P1.2
Identify, Access &
Requirements Plans · System capabilities required to
Aggregate SC
Resources
support best practices
· Systems/Tools
· Companies “fine tune” their
Operations Strategy at Level 3
Implementation
Companies implement specific supply-
Level
chain management practices at this
Decompose level. Level 4 defines practices to
Process achieve competitive advantage and to
Elements) adapt to changing business conditions.
Figure 13.4: Three levels of SCOR

Source: Supply Chain Council)
SCOR does not attempt to describe following business process or activities:

· Sales and marketing (demand generation)
· Research and technology development
· Product development
· Some elements of post-delivery customer support
· Links can be made to processes not included within the model’s scope, such as
product development etc.
SCOR assumes but does not explicitly address:
· Training
· Quality
· Information Technology (IT)
SCOR provide the detailed and exhaustive list of performance measure for each
activity and process, aligns the detailed performance measures with the strategic
objectives and provides the best practices and IT sources for each measurement. It
requires a well-defined infrastructure, resources and project based completion
approach. Implementation of such an exhaustive system requires fully dedicated
managerial resources and continuous business process reengineering to align the
business with the best practices.
33
Cost and Performance 13.4.6 Dimension Based Measurement System
Measurement in SCM
This system suggests that any supply chain can be measured on three key dimensions
(source: Hausman 2000)
A) Service
B) Assets
C) Speed
Service relates to the ability to anticipate, capture and fulfill customer demand with
personalized products and on-time delivery; Assets involve anything with commercial
value, primarily inventory and cash; and Speed includes metrics which are time
related, they track responsiveness and velocity of execution.
Every supply chain should have at least one performance measure on each of these
three critical dimensions.
A) Service Metrics
The basic premise for service metrics is to measure how well the company is serving
(or not serving) its customers. Generally it is difficult to quantify the cost of stock
outs or late deliveries, so the targets are set on customer service metrics. Also, the
build-to stock situation differs from the build-to-order situation, so related but different
metrics are used in these environments. Table 13.3 contains some common service
metrics used in these two environments. These are time-tested measures, which
continue to be valuable customer service metrics for supply chains.
The Line Item Fill Rate is the percentage of individual “lines” on all customer orders,
which are filled immediately, while the Order Fill Rate counts as a success only those
customer orders in which all “lines” have been filled.
“Aging” refers to maintaining data on how long it takes to fill a backorder, or how
long it takes to complete an order, which is late. Tracking this data and maintaining it
in an accessible database enables its periodic recall.
Table 13.3: Customer Service Metrics (Hausman 2000)
Build to stock (BTS) Build to order (BTO)

Line item fill rate Quoted customer response time
Complete order fill rate % on-time completion
Delivery process on time Deliver process on time
$ Backordered/Lost sales $ of Late Orders
No. of backorders No. of late orders
Aging of backorders Aging of late orders
Freq.
Freq.
Duration Duration
In the IT and especially Internet era, extensions of the customer order response time
include the on-line service response time of a website as well as the response time
required to complete delivery of the product or service.
B) Assets Metrics
The major asset involved in supply chains is inventory throughout the chain. Two
metrics generally used for inventory are:
34
1) Monetary Value ($, Yen, Euro, et cetera) Cost Analyses and
Measurement
2) Time Supply or Inventory Turns
Inventory can be measured as a time supply, for example a 3-week supply of
inventory, or as inventory turns, defined as
Turns = (Cost of goods sold)/(Inventory Value)
The Time Supply or Turns measures relate to inventory flows; the Value of inventory
relates to inventory as an asset on the firm’s Balance Sheet. Inventory Turns are
calculated in isolation, by accountants with access to financial and inventory data but
without corresponding access to customer service data.
C) Speed Metrics
There are a series of metrics related to timeliness, speed, responsiveness and
flexibility
· Cycle (flow) Time at a Node
· Supply Chain Cycle Time
· Cash Conversion Cycle
· “Upside” Flexibility
Cycle Time Reduction- i.e. lowering lead-time and WIP inventory levels.
The Supply Chain Cycle Time - measures the total time it would take to fulfill a new
order if all upstream and in-house inventory levels were zero. It is measured by
adding up the longest (bottleneck) lead times at each stage in the supply chain.
The Cash Conversion Cycle (or Cash to Cash cycle time) attempts to measure the
time elapsed between paying the suppliers for material and getting paid by the
customers. It is estimated as follows, with all quantities measured in days of supply:
Cash Conversion Cycle = Inventory + Accounts Receivable - Accounts Payable
Upside flexibility refers to requirements in high-tech industry, that a vendor be
prepared to provide say 25% additional material above and beyond the committed
order, in order for the buyer to be protected when the buyer’s demand is higher than
forecasted.
Dimension based measurement system tries to cover the different dimension of the
supply chain and also provide the detailed measure for each dimension. The system
has limitation to provide the strategic alignment of different dimension and to measure
the effect of different trade off between the dimensions.
13.4.7 Interface Based Measurement System
This framework aligns performance at each link (supplier customer pair) within the
supply chain. The framework begins with the linkages at the focal company and
moves outward a link at a time. The link-by-link approach provides a means for
aligning performance from point-of-origin to point-of-consumption with the overall
objective of maximizing shareholder value for the total supply chain as well as for
each company. (Pohlen and Lambert 2001)
The framework consists of seven steps:
· Map the supply chain from point-of-origin to point-of-consumption to identify
where key linkages exist.
· Use the customer relationship management and supplier relationship
management processes to analyze each link (customer supplier pair) and
determine where additional value can be created for the supply chain. 35
Cost and Performance · Develop customer and supplier profit and loss (P&L) statements to assess the
Measurement in SCM effect of the relationship on profitability and shareholder value of the two firms.
· Realign supply chain processes and activities to achieve performance objectives.
· Establish non-financial performance measures that align individual behavior with
supply chain process objectives and financial goals.
· Compare shareholder value and market capitalization across firms with supply
chain objectives and revise process and performance measures as necessary.
· Replicate steps at each link in the supply chain.
Interface based measurement system looks at the supply chain as a series of
different links and to optimize the total supply chain a win-win approach is required at
all linkages. Conceptually it looks good but in actual business setting it requires
openness and total sharing of information at every link of the chain, which seem to be
difficult to implement.
13.5 A COMPARISON OF MEASUREMENT SYSTEMS
Different measurement systems described above have different views for integrating
the supply chain performance measures. These systems can be compared using five
dimensions (1) Hierarchy (Strategic, Tactical and Operational), (2) Results (Financial
and Non-financial), (3) Linkages (Integrated and Isolated), (4) Determinants (Quality,
Flexibility and Time), and (5) Stability (Static and Dynamic). It is evident from the
above explanations that supply chain balanced scorecard covers all the parameters.
The system is easy to implement if the company strategy is well defined. Hierarchical
based measurement system encompasses all parameters but at one time it tries to
cover only one perspective, so a hybrid model of balance score card and hierarchical
can be an another alternative i.e. at each hierarchical level we define the measure for
each perspective. Perspective based system also sees the measures in isolated
manner but it covers some unique perspectives which are not covered in balance
scorecard like system dynamics and operation research which provides a great help
in measuring dynamic capability of supply chain. SCOR covers all relevant
parameters required in the system and tries to cover the whole supply chain in
standard set of processes. It also covers the different dimensions at each level of the
supply chain. The model applicability is easier where ERP and BPR practices are in
progress and large set of data collection software’s are already in place. In SMEs
and especially in Indian context applicability is questionable due to extra cost of
maintaining such an exhaustive system. Interface based measurement system doesn’t
cover the non-financial measures and strategic links to different linkages is not
possible. The system gives more emphasis on strengthening the internal and external
linkage to improve the overall supply chain.
13.6 SELECTING MEASURES
While the approaches described above provide guidance for supply chain
measurement, they provide less help in assessing specific metrics to be used. In this
regard, a key driving principle is that measures should be aligned to strategic
objectives. Supply chain strategy depends upon its current competencies and strategic
direction, which differs for every company. Companies, for example, can generally
fall into the following developmental stages that will dictate the types of measures
and the degrees to which they will need to focus:
· Functional Excellence - a stage in which a company needs to develop excellence
36 within each of its operating units such as the manufacturing, customer service, or
logistics departments. Metrics for a company in this stage will need to focus on Cost Analyses and
individual functional departments. Measurement
· Enterprise-Wide Integration - a stage in which a company needs to develop

excellence in its cross-functional processes rather than within its individual
functional departments. Metrics for a company in this stage will need to focus on
cross-functional processes.
· Extended Enterprise Integration - a stage in which a company needs to develop
excellence in inter-enterprise processes. Metrics for a company in this stage will
focus on external and cross-enterprise metrics.
Most companies have focused their performance measurement on achieving

functional excellence. With the advent of Supply Chain Management (SCM)
principles aimed at integrating their supply chains, many have objectives to increase
their degree of enterprise-wide integration and extended enterprise integration. In
order to achieve these types of objectives, their performance measurement systems
will need to align to them.
13.7 METHODS FOR SETTING PERFORMANCE

TARGETS
An important issue in performance measurement is how a company can use

measures to gauge its supply chain’s performance. To do this effectively, a target for
each measure needs to be established, providing the framework for determining the
answer to three questions that arise when evaluating a performance metric:
· Has the metric improved from the last time it was reviewed?
· By how much?
· How close is the metric to where it should be?
In order to make this evaluation more meaningful the direction of improvement needs
to be established. Also, performance targets need to be jointly, not individually,
developed. To achieve objectives some metrics may need to increase and others may
need to decrease. Each metric in the set has to be viewed in relation with the others
to determine its proper target. Hence, while there a variety of ways in which
performance targets can be set, they should always be jointly set in the context of
strategic objectives. Generally, there are four methods that can be used to set
performance targets (1) Historically based targets, (2) External benchmarks, (3)
Internal benchmarks, (4) Theoretical targets.
13.8 TOTAL COST OF OWNERSHIP
The concepts of total cost, life cycle costing, product life cycle costs, and total cost of
ownership are all related constructs for procurement valuation, which suggest that
supply managers adopt a long-term perspective, not a short-term, initial-price
perspective, for the accurate valuation of buying situations. There are three ideas that
support all of these procurement valuation constructs. First, cost must be examined
from a long-term perspective and should include elements other than initial purchase
price. Second, supply managers must consider the impact of other business functions
on the valuation of a specific purchase. Third, to value a purchase situation
accurately, a supply manager must understand, and measure, the cost impact of all
the activities associated with the purchase. (Ferrin and Plank 2002)
37
Cost and Performance Total cost of ownership (TCO) was originally developed in the late 1980s by the
Measurement in SCM research firm Gartner to determine the cost of owning and deploying personal
computers. Their initial findings, that PCs cost an enterprise nearly $10,000 per year,
raised a serious concern in the technology community and among CFOs. Their
methodology was carefully examined and has now been accepted as a standard
method of evaluating costs. In simpler words, TCO consists of the costs (direct as
well as indirect), incurred throughout the life cycle of an asset, including acquisition,
deployment, operation, support and retirement.
TCO in Supply Chain
Cavinato (1991, 1992) used the total cost concept to examine cost structures across
the supply chain. Ferrin and Plank (2002) examined cost indicators and suggested 13
cost driver categories (shown in bold words in figure 13.8). Comparing supply chain
entities based on these cost indicators can provide a basis for assigning specific
supply chain processes and the firms can reduce their total supply chain costs by
assigning specific supply chain processes to those firms in the supply chain whose
cost structures are well suited to support the assigned processes.
13.9 SUMMARY
In this unit, the performance measurement and evaluation of SCM has been
discussed with special focus on various common SC measurement systems used in
practice. The discussion brings out the need for SC performance measurement and
shows that managers need to understand the SCM properly in order to choose and
adapt a particular measurement system and the performance metrics. A short
comparison of various methods is also given along with a guideline to select measures
and set performance targets. Finally the concept of TCO as applied to SC is
discussed.
Table 13.4: Categorization of identified TCO cost drivers (Ferrin and Plank 2002)
Operations Cost Quality Logistics Technological advantage
Manufacturing Durability Freight Design Obsolescence
Machine Efficiency Replacement Packaging Suitability for intended use
Production to Field Failure Customer Service Flexibility for new use
Schedule
Labor savings Customer Downtime Availability Technology
Assembly Cost Inspection Handling Changing Technology
Operating Supplies Cost of Quality Instability in freight rates Long term advantage
Long-Term Operating Calibration Cost Outbound Cost Supplier Ability to Change
Costs technology
Capacity Utilization Rework Tariffs
Scrap Lead time
Increase In Customer Returns On-Time Delivery Supplier Reliability and
Production Output Capability
Equipment Speed Rejection Cost Supplier managed
inventory
Cost In Use Quality Inventory Partnering Costs
Improvement
Line speed Unplanned Time to Schedule Team costs
Downtime
Out-of-Service Warehousing Trust
Costs Duties
Area of the country
customer must order from
Import fees
Entry and harbor
maintenance fees
38
Maintenance Inventory cost Life cycle Initial price Cost Analyses and
Measurement
Supplies Safety stock Long term usage Unit cost
Training Design/procurement Projected life cycle Initial purchase price
for inventory
reduction
Downtime Storage Life of product Long term price stability
Costs Perishability Life cycle stability Initial capital expenditure
Labor Turnover Cost savings over life Customer related
of product
Parts Transaction cost Useful life User satisfaction
Spare parts Administration of Redesign cost Customer perceptions
post purchase
agreements
Long term Ease of transaction Life cycle obsolescence Customer specifications
maintenance costs cost
Repair frequency Supplier conversion Opportunity cost
cost
Reliability Small orders Cost of money
Preventive Procurement Overhead
maintenance
schedule
Transactional activity
Long term savings
Miscellaneous
Taxes Salary, benefits Installation Total installed price
Value chain Indirect labor Ease of operation Lease rate factors
Warranty Product use Noise level Flexibility of the supplier
Product design Depreciation Technical support Tooling and fixtures
Availability Lease or buy Validation/registration Environmental issues
from supplier cost
Disposal costs Supplier cost Overall competition
drivers (from
requisition to
receipt)
Liability and Safety Service cost
indemnification
Obsolescence cost Support costs Disposal value
Utility costs Currency exchange rates
Direct labor

1) Why is Supply Chain Performance required to be measured?
2) “Today’s management can’t afford to focus only on company’s performance in
a vacuum; there is an emerging requirement to focus on the performance of the
extended supply chain or network in which company is a partner”. Comment!
3) What is the need for Supply Chain Performance Measures? What are the
factors that contribute to management’s need for new types of measures for
managing the supply chain?
4) Discuss in detail about the supply chain performance measurement system.
Highlight the similarities/ dissimilarities in any two of these measures.
39
Cost and Performance 5) What is the essence of the Balance Scorecard method of Performance
Measurement in SCM Measurement?
6) Compare different measurement systems described in the unit by using five
dimensions discussed in Section 13.5.

READINGS
1) Andreas Otto and Herbert Kotzab (2002), “Does supply chain management
really pay? Six perspectives to measure the performance of managing a supply
chain”, European Journal of Operational Research, Volume 144, Issue 2,
Pages 306-320.
2) Beamon, B.M. (1996), “Performance measures in supply chain management ”,
Proceeding of the 1996 conference on agile and intelligent manufacturing
systems, Rensselaer Polytechnic Institute, Troy, New York, NY, 2-3 October.
3) Beamon, B.M. (1998), “Supply Chain Design and Analysis: Models and
Methods”, International Journal of Production Economics, 55, pp.281-294.
4) Brewer P. C. and Speh T. W. (2001), “Adapting the Balanced Scorecard to
Supply Chain Management,” Supply Chain Management Review.
5) Brewer, P. C. and Speh T.W. (2002), “Using the Balanced Scorecard to
Measure Supply Chain Performance”, Journal of Business Logistics, Vol.21,
No.1, No. 1, PP. 75-93.
6) Cavinato, J.(1991), “Identifying interfirm total cost advantages for supply chain
competitiveness”, International Journal of Purchasing and Materials
Management, 27 (4), pp. 10-15.
7) Cavinato J. (1992), “A total cost/value model for supply chain competitiveness”
Journal of Business Logistics, Vol. 13, No. 2, pp. 285–301.
8) Christopher, M. (1992), “Logistics and Supply Chain Management”, Pitman
Publishing, London.
9) Christopher M (1999), “Logistics & supply chain management strategies for
reducing cost and improving performance”, 2nd edition , Pitman Publishing,
London.
10) Ferrin, Bruce G. and Plank, Richard E. (2002), “Total Cost of Ownership
Models: An Exploratory Study”, The Journal of Supply Chain Management:
A Global Review of Purchasing and Supply, Volume 38, Number 3, pp. 18-29.
11) Forrester Jay W. (1958), “Industrial dynamics – a major breakthrough for
decision makers”, Harvard Business Review, July-August, pp 37-66.
12) Gunasekaran A. (2001), “Performance measurement and metrics in a supply
chain environment”, International journal of operations and production
management, Vol 21,No 1/2, pp71-87.
13) Kaplan, R.S. and Norton, P.D. (1992), “The balanced scoreboard-measures that
drives performance’’, Harvard Business Review, January-February, pp. 71-9.
14) Ljungberg A., (1994), “Measurement of Service and Quality in the Order
Process thesis for the degree Licentiate in Engineering”, Department of
Engineering logistics, Lund University, p. 56.
40
15) Mapes, J., New, C. and Szwejczewski, M. (1997), “Performance trade-offs in Cost Analyses and
manufacturing plants”, International Journal of Operations and Production Measurement
Management, Vol. 17 No. 10, pp. 1020-33.
16) Neely A.D. (1995), “Performance measurement system design”, International
Journal of Operations and Production Management, vol No.15, No.4, pp 80-
116.
17) Pohlen, Torrence L. and Lambert, Douglas M. (2001), “Supply chain metrics”,
International Journal of Logistics Management, Volume 12. No.1.
18) Slack, N., Chambers, S., Harland, C., Harrison, A. and Johnston, R. (1995),
“Operations Management”, Pitman Publishing, London.
19) Stevens (1989), “Integrating the supply chain”, International Journal of
Physical Distribution and Materials Management, Vol 19, No. (8), pp3-8.
20) Stewart, G. (1995), “Supply chain performance benchmarking study reveals keys
to supply chain excellence”, Logistics Information Management, Vol. 8 No. 2,
pp. 38-44.
21) Warren H. Hausman (2000), “Supply chain performance metrics”, The Practice
of Supply Chain Management, Dec.
22) Wild, R. (1995), “Production and Operations Management”, Cassell
Educational Limited, London.
23) “Supply Chain Operations Reference Mode (SCOR)”, Supply Chain Council,
http://www.supply-chain.org/public/scorbasics.asp
41
Indira Gandhi
Chain Management
Block
5
DISTRIBUTION NETWORK PLANNING
Unit 14
Transportation Mix 5
Unit 15
Locational Strategy 22
Unit 16
Logistics and SCM Environment 34
Mumbai New Delhi
Mumbai

Jharsuguda
Mumbai

December, 2004
ISBN-81-
BLOCK 5 DISTRIBUTION NETWORK
PLANNING
Units 14: Transportation Mix explains the tools, techniques of cost reduction and
depicts the modes of transportation. It elucidates MTO (multi-modal transport
operation) and describes methods of selection of carrier. It throws light on routing,
scheduling & fleet sizing. It also discuss about the futuristic trends & achieving
transportation efficiency
Unit 15: Location Strategy talks about the steps in location planning. It discusses
the interdependence of location decision and distribution decision. Finally it describes
various measures for warehouse location
Unit 16: Logistics and SCM Environment thrashes out the commercial and legal
issues concerning logistics. It describes the sales laws in detail. It illustrates
warehouse operations and renders documentation procedures such as Insurance,
Octroi and Sales tax
Distribution Network
Planning
4
Transportation Mix
UNIT 14 TRANSPORTATION MIX
Objectives

· describe the tools, techniques of cost reduction;
· depict the modes of transportation;
· elucidate MTO (multi-modal transport operation);
· describe methods of selection of carrier;
· throw light on routing, scheduling & fleet sizing; and
· discuss the futuristic trends & achieving transportation efficiency.
Structure
14.1 Introduction
14.2 An Illustration
14.3 Transportation Briefly
14.4 Warehousing
14.5 Tools & Techniques of Reducing Costs
14.6 Transportation Costs
14.7 Method of Selection
14.8 A Transportation Decision
14.9 Number & Size of Depots
14.10 Fleet Sizing & Configuration
14.11 Routing and Scheduling
14.12 Futuristic Direction in Transportation
14.13 Summary
14.1 INTRODUCTION
Transportation happens to be the most fundamental part of strategic logistic

management (unit 4). 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.
‘The ideal organization following the MTO is the Indian Army; with the principle,
wherever you are we reach you, in time, and in the best and cheapest mode
available’. Indian Army is a typical example of ideal transportation mixes in our
country. It uses the aerial, land, sea and rail routes to maintain its forces strewn all
over the country and abroad. The logistics is enormous and the various modes of
transport are, aircraft, train, trucks, animals, and human beings. It transports supplies,
ration, fuel, oil lubricants, arms, ammunition, clothing and personal loads over vast
distances and over varied terrain and climatic conditions.
5
Planning 14.2 AN ILLUSTRATION
Assume the movement of kerosene oil from one of the central depots in Central India
to the Northern sector, say, Jammu and Kashmir at a place called Kupwara. The
initial movement is by rail to the nearest railhead and that is Jammu. From there the
bulk is transferred to BPL lorries and moved to the forward depots by road.
Depending upon where it has to go the same is further broken at the depots and
distributed as per demand and requirement to the forward areas, either by trucks or
animal transport, human labor or by airdrops; a versatile mix of transport system,
which is unique in being. One got to see it to believe it, and experience it, to realize it
too. Such a shift does take time, but within the available resources and time
constraints this the best that can be organized to maintain an even logistics chain
down to the end user. It is a time-tested system in vogue since pre-world war days.
Let us see this with the help of a figure 14.1.
EX CENTRAL
DEPOTS BY RAIL RAIL BY ROAD
HEAD
FUEL, OIL &
LUBRICANTS
INTERMEDIATE
CONTAINERISATION BULK BREAKING DEPOTS
BY ROAD
ANIMAL, HUMAN,
HALF TRUCKS
AERIAL DROPS
END USER
AIR LANDED
WATERWAYS
Figure 14.1 : An Ideal Transportation Mix Network
This can also be validated by an advertisement of Indian Oil, which shows elephants
carrying oil barrels to the consumers at unreachable areas. Therefore, before we
start with the theoretical aspects of transportation and its nuances and applicability,
you as a supply chain manager must understand the practical side of it too. As
discussed in unit 4 and 5 earlier, transportation plays an important role in the
logistics channel and will continue to do so. Selecting the right transport for the
right material, time factor, demand per se, cost and related factors of urgency is the
ultimate aim of the supply chain manager. He has to deliver, and how he does it
within the constraints of environmental realities is his job too. Therefore, let us
see a rundown on the transportation in general even at the cost of repetition, since;
if you understand transportation in the SCM, you have understood 75% of the
system.
6
Transportation Mix
14.3 TRANSPORTATION BRIEFLY
You have already studied in unit 4 that transportation is 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 & 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.
Transportation system has a strategic bearing on a company’s operation efficiency.

Therefore, failure to identify the best transportation mode can directly affect the
growth of a company. Since, higher transport costs will raise prices, which will
directly affect the customer satisfaction in a negative way. The three factors as
mentioned by Gattoma & Walters required to consider are:
· Customer
· Environment
· Product & company
Organization, which involves physical movement of goods require transport services
that varies from mode to mode. The best suitable mode is required to be identified
depending upon the nature of product that has to be moved. Like if coal or carbon
has to be moved use the railways from the source to the production unit directly, so
as to minimize losses, time & cost factor. Therefore, in order to identify the right
transport system the following have to be considered:
· Impact of the transport system on the supply chain.
· Factors that determine the choice of transport mode.
· Who are the customers to your product per se?
· What are the environmental factors?
· What is the product?
· What is your company profile?
· Feedback and reporting both from within and the environment on the choice of
transport, and rectify in case you went wrong the first time.
· Your foresight, flexibility & integration of available resources in planning stage
will be one of the crucial factors that will dictate the choice of transport.
Activity 1
Visit a carrier company and document your understanding about the practicalities of
employing these carriers.
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
1
Mohanty & Deshmukh (2004) in Essentials of Supply chain Management, chapter 7, 7
pp. 118-119.
Distribution Network Considerations influencing transportation
Planning
· 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.
· 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, 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.
Activity 2
Correlate the practical problems and factors influencing transportation of a company

or a carrier.
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
An effective selection system
Transporter selection can effectively be resolved by adhering to the five stages of

selection framework:2
· Stage I: identification of those factors affecting the choice of transport selection.
· Stage II: categorize the significant factors and identify the potential risks.
· Stage III: determination of the distribution network depending upon the number
and size of the depots.
8 2
Deshmukh & Mohanty in Essentials of SCM, pp130-131.
· Stage IV: application of matrix analysis for selecting the right transport. Transportation Mix
· Stage V: measure and monitor costs continuously.

Before we move further, let us see warehousing as a part of recapitulation what we
have studied in Unit 4.
14.4 WAREHOUSING
This happens to be another 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 performs a variety of roles as mentioned below:
· Material handling: It consists of receiving, storing and shipping.
· Storage: This maximizes customer services by improving product and location
positioning.
· Transfer of information: This ensures timely and accurate information on
inventory status, space utilization, equipment and manpower availability and
transport capacity.
In order to develop an effective warehousing strategy the following has to be
addressed:
· Documentation of existing warehouses operations.
· Documentation of the storage facilities and put forth requirements over the
planning horizon.
· Identify the shortfalls within the warehouses that are available including the
deficiencies.
· Alternate warehousing plans to meet contingencies in strategy.
· Selection of the best recommendation.
· 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.
14.5 TOOLS & TECHNIQUES OF REDUCING COSTS
As a logistics manager one has to dwell considerably on the correct selection of the
fleet, which will further aid in reducing costs and indirectly help in reducing the cost
of the product to the end user. The following functions are the domain of the logistics
manger:3
3
Deshmukh & Mohanty, pp. 124 in Essentials of SCM 9
Distribution Network · Negotiating routes and rates
Planning
· Selecting route and fleet
· Evaluation of the carrier performance
· Analyze transport costs and services
· Operating company owned means of freight and transportation
· Filing loss and damage claims
· Auditing freight bills
The ultimate choice depends upon such factors as financial policy, customer service
policy, the control required by the company and the competition intensity of the
markets.
Table 14.1 gives the characteristics of transport infrastructure in India.
Table 14.1: Transport Infrastructure of India
Transportation Characteristics
Types
Railways 62,000 Kms. of network, with 7000 stations, 3 gauges, 12 million

passengers, 1 million tonnages of freight/day
Road 34,000 Kms. of primary roads (NH), 1,28,000 Kms. of State

Highways, 27,00,000 Kms of miscellaneous roads and tracks and
30 million vehicles approximately.
Water A coastline of 6000 Kms, with 11 major and 139 minor ports
handling 230 million tonnages of cargo/day
Air A massive cargo service with 6 International airports and 86

domestic ones, in addition there are a hoard of transport aircrafts
of Indian air force catering to emergencies and natural calamities,
which can effectively be pressed into service in contingencies.
Actually the entire selection process is a very complex one and should aim at
identifying the right attributes required to implement the company’s customer service
policy. The main attributes are (Deshmukh & Mohanty):
· Current performance as regards delivery accuracy and reliability
· Responsibility acceptance to guarantee the service product offered
· Offering flexibility so as to respond to criticalities and emergencies
· Information for purpose of controlling
· Financial stability to ensure continuity of service and for up gradation of
equipment
· Integration to the maximum into customer business, sharing confidence, problems
and capabilities
What is therefore the significance of this choice factor? Actually, transport costs
include all costs directly associated with the movement of product from one location
to the other, therefore, to identify the choice of transport mode, it is mandatory to
determine the impact of transport upon the overall supply chain. This could well be
achieved by analyzing the existing transport cost, realization of the profit leverage
effect and analysis of the impact of transport upon other elements of the distribution
system.
10
Transportation Mix
14.6 TRANSPORTATION COSTS
Transport costs vary from less than 1 per cent (for machinery) to over 30 per cent
(for food) of the recommended selling price of products, depending upon the nature
of the product range and its market. However, the average transport costs is between
5 to 6 per cent of the recommended retail price of a product.4 With inflation transport
costs also rise because the major components are the workforce (labor), fuel &
maintenance, spares, drivers cost. Similarly, transport represents a direct cost added
to the price of the product and any reduction in transport costs would lead to an
increase in profit, with price remaining constant. The impact of reducing transport
costs is as shown below:
Assumption: that a company X has a 10 per cent profit margin on sales turnover
and with fixed prices.
· A cost reduction in transport expense of Rs. 1,00,000 is equivalent to increase in
sales turnover of Rs. 1,00,000;
· If transport costs are estimated at 20% of total costs, in that case a 1 per cent
reduction in transport costs will correspondingly give a 2 per cent increase in
profits.
Transportation rates are almost linear with distances and not with volume, be it road,
rail, water or air. We distinguish here the transportation costs associated with both an
internal and external fleet. Transportation costs for company owned fleet is simple
and is evolved by annual cots per truck, annual mileage, amount delivered and trucks
effective capacity. All this information could be effectively utilized to calculate cost
per mile per SKU. Whereas, incorporating transportation cost for external fleet is
complicated, since; hiring of transport in India is different to that of USA. In India,
transport rates are governed by respective RTO (Road Transport Office) of every
state and differ from state to state. It ranges anything between Rs 5/- to 32/-, with
different rates for commercial and private vehicles. For example, hiring of a private
taxi in Kolkata/Delhi could be Rs 6/- but at Ooty it would be anything between 8 to
10 owing to the type of terrain in that region. Similarly, hiring of a full truck from
West Bengal to Assam could be ranging from 14000/- to 25000/- depending upon the
delivery point, lower Assam/Upper Assam. That is how it differs. In USA, the TL
(truckload carriers) subdivides the country into zones, with every zone conforming to
a state. Except for Florida or New York, which are partitioned into two zones. For
example, to calculate TL cost from Chicago, Illinois, to Boston, Massachusetts, one
needs to get the cost per mile for this pair and multiply it by distance from Chicago to
Boston. An important property of the TL cost structure is that it is not symmetric;
that is, it is typically more expensive to ship a full loaded truck from Illinois to New
York than from New York to Illinois. In the LTL (less than truck load) industry, the
rates are classified under class, exception and commodity. The class rates are
standard rates that can be found for almost all products or commodities shipped.
They are found with the help of classification tariff that provides each shipment a
rating or class.
Once the rating is established, it is necessary to identify the rate basis number. This is
the approximate distance between the load’s origin and the destination. With
commodity rating or class and the rate basis number the specific rate per hundred
pounds can be obtained from a carrier tariff table or freight tariff table.
In India, the rates are fixed and are reviewed every 3 months depending upon the
petrol and diesel prices prevailing in the country at that point in time. A truck moving
from Meghalaya to Delhi will charge lesser than from Delhi to Meghalaya, why? The
primary reasons could be:
4
Deshmukh & Mohanty 2004, Essential of SCM, pp 124-125 11
Distribution Network · Assam is a troubled state and incoming traffic to the state faces problems in
Planning entering the state, one has to cross Assam before entering Meghalaya.
· Certain parts of the state are hilly and rates are fluctuating.
· Return load for the trucker ex Meghalaya is more difficult visa vie Delhi.
· Most of the truckers moving towards Northeastern areas of the country charge
for the return trip ab-initio.
Such aspects and rules are pre-mentioned in the contract documents and the
companies and the trucker based on environment factors sign up for a minimum term
of one year extendable to 2 years or more.
India is a very versatile country. One trucker could agree to take your load for 30
grand while the other for 45 at the same time, from and to the same place. Many
other factors like reliability and reputation aspects are to be considered before hiring,
we have seen this earlier on.
Supply chain systems
Transport is vital to the overall gambit of SCM operation and therefore cannot be
considered in isolation. The entire transportation process is to be monitored, in order
to gauge the exact location and state of the materials being transported. Transport, is
the process, which transports materials between 2 or more stations, and therefore,
the form of transport to be used should not only be responsive and compatible to the
terminal stations, but also with the operating environment through which the product
moves. In order to achieve the best, it is therefore mandatory that sufficient
information be made available to enable the movement to be monitored by the
producer, consumer, agencies, financial institutions and relevant groups.
Transport profile
Operating characteristics dictate the transport requirements of an organization. The
transport requirement depends on the different and versatile nature of tasks that are
to be performed. Therefore, to generalize, an organization, which doesn’t have
versatility and varieties in operating its transport for varied tasks, will operate much
below the optimum level of efficiency.
Operational factors
Operational factors that determine the transport mode are:
· Environmental factors
· Characteristics of alternate transport modes
· Combination approach
We will see this with the help of a flow chart as shown in figure 14.2.
The various characteristics of alternative transportation mode are:1
· Useful load: physical capability and maximum load as a percentage of gross
weight.
· Density: cargo density, i.e. weight per cubic unit.
· Overheads: fixed costs as a percentage of total cost.
· Productivity: calculated in tonne-miles per direct man-hour.
It is very important to establish and determine the accurate operating characteristics
of each available transport mode, so that suitability of matching these to the operating
factors can be established. Each type of transport offers different characteristics and
as a supply chain manager you have to understand the efficacy of these aspects:
1
Deshmukh & Mohanty, Essentials of SCM, Transportation, pp 117-127
12
Transportation Mix
OPERATIONAL FACTORS
CUSTOMER ENVIRONMENTAL PRODUCT COMPANY

CHARACTERISTICS
ROAD
RAIL
CHARACTERISTICS OF TRANSPORT AIR
MODES
WATER
CHOICE OF TRANSPORT CUSTOMER SERVICE

MODE LEVEL
COSTS
Figure 14.2: Operational Factors for Deciding the Transport Mode (Deshmukh and
Mohanty, 2004)
· The 10-12 tonne truck (Punjab Body) offers the highest useful load.
· The cargo vessel offers the highest density.
· Freight trains have the highest overheads, though ODC clearance have to taken
from the railways if the goods are not of standard specifications and are being
transported in open BOM’s/KF’s.
· The cargo aircraft has the highest productivity.
Each of these transport modes has their peculiar characteristics that affect the
preparation of the product before movement, e.g. movement by sea will require
better packaging than those by air, mainly in the international and intercontinental
traffic utilizing multi modal transport.
Channelisation - Multi-modal Transport Operations
The choice of transport mode is not only a choice between type of transport, but
between a system or a process of transportation, between manufacturer or seller and
customer or buyer. It involves separate sectors i.e. between production line to go-
downs/warehouses, material handling interfaces at each terminal facility and the
documentation process to support the product. The complete market channel has to
be defined and each sector demarcated and analyzed separately for transport
requirements, in coordination with customer characteristics, volume, and the operating
environment through which the operation is carried out. Each of the sector would
require separate transport mode, to be precise. Let us understand the type of channel
with Figure 14.3.
If that were so, then what are the factors to be considered when analyzing the
transport requirement of each sector? What should be the basic guidelines? They are
(essentials of SCM, Deshmukh & Mohanty):
· Control, ownership, finances, security to include documentation and product and
responsive information system
· Movement of product, handling, requirement of stocks at each levels, packaging,
and safety standards
· Market factors
· Labor
13
Planning MANUFACTURERS
CAPITAL GOODS EXPENDABLE/PERISHABLE CONSUMER DURABLES

GOODS
GENERATORS FOOD PRODUCTS TV

TRANSFORMERS BREAD FRIDGE
HEAVY EATABLES MUSIC SYSTEM
EQUIPMENTS CONFECTIONARIES WASHING MACHINE
HOUSEHOLD
APPLIANCES
COMMODITY MARKET
CENTRAL WAREHOUSE
WHOLESALER
REGIONAL GODOWN
RETAILER
RETAILER
CONSUMERS/END USERS
Fig 14.3: Depicting the Types of Channel

· Training
· Turnover of both goods and manpower
· Risk factors, competitiveness, and profit potential
· Environmental realities.
Therefore, in order to maximize the usage of transport being offered, the transport
companies should be able to match and synchronize the market requirements, which
will then have a major influence on the choice of transport mode.
Specialization is created by the impact of channel costs, which are incurred either
before or after transportation, where the introduction of specialization reduces the
mechanical handling costs, packaging costs and related expenditures mainly during
terminal activities.
The very objective, by which the transport mode could be chosen, depends upon
whether the company is using revenue or capital to buy the transport. In case of
revenue, minimum cost throughout the transport operation should be the objective,
and in case of capital, maximum tax return upon capital should be the objective, since
this give maximum return.
In certain case, both revenue and capital expenditure will be included in the operation.
In such cases, the combination of the minimum expenditure and maximum after tax
revenue could be calculated by determining the net cash flow after tax for the life of
14 the capital asset. The criteria for choice will then become the maximum discounted
return or minimum discounted cost in terms of net cash flow, calculated with a Transportation Mix
discount rate equivalent to the cost of capital.6
· Revenue expenditures incurred during utilization of particular mode, as in
packaging and labour should be considered along with:
· Capital expenditure incurred in utilization of a particular mode as in mechanical
equipment at the terminals.
· Associated risks with any capital asset with a life of over 2 years, where the
asset would require changes and modification.
Inspite of determining a method of assessment, the correct decision can only be taken,
once the degree to which the calculations are taken have been considered in detail.
14.7 METHOD OF SELECTION
The selection procedure for the transport mode could vary from the simple decision
either to identify one feasible method of distribution or to follow the competitor’s
procedures, to the complex decision that calculates the cost incurred and produces an
optimum solution. The three potential methods are:7
· Judgment: Identification of the important factors affecting the transport problem
by the transport manager, and the transport mode from a list of alternatives
available, so that the important features of the transport requirements are met.
The shortcomings are tremendous in such a process, since; transport is
considered as a service rather than a distribution system.
· Cost trade-off: It is where the impact of transport is calculated in relation to
immediate terminal objectives and activities, and the total cost of distribution
system is optimized. This particular approach acknowledges the existence of
trade-off within the numerous alternative approaches in an attempt to assess the
situation to minimize total costs.
· Distribution models: This identifies and explains the interrelationships between
the components of the distribution system at various levels of daily, weekly or
monthly demands. These models could be built to examine the impact of
alternative transport modes and methods, as either the demand changes or the
components in the system change.
Therefore, in order to carry out a systematic selection of the transporter a
framework consisting of the following stages is recommended: (Figure 14.4)
SYSTEMATIC SELECTION
STAGE 1 STAGE 2 STAGE 3 STAGE 4

IDENTIFICATION CATEGORIZING & DETERMINING MEASURE
OF IDENTIFICATION OF DISTRIBUTION &
FACTORS POTENTIAL RISKS NETWORKS MONITOR COSTS
STAGE 5
MATRIX ANALYSIS
TO SELECTION
Figure 14.4: The Selection System

6
Deshmukh & Mohanty in Essentials of SCM, p 129
7
Deshmukh & Mohanty in Essentials of SCM, pp 130 15
Distribution Network · Stage 1: identifying the factors affecting the choice of transport selection
Planning
· Stage 2: categorizing the significant factors and identifying the potential risks
· Stage 3: determining the distribution network in terms of number and size of
depots
· Stage 4: applying the matrix analysis to select the most appropriate transport
method
· Stage 5: measuring and monitoring cost factors.
14.8 A TRANSPORTATION DECISION
Determining an organization’s transport requirement will be based on the following

underlying considerations, (Figure 14.5)
· The available depots, their sizes including movement requirements of raw
materials to manufacturing units and finished products to the warehouses and on
to the consumers.
· The best choice of mode available depending on the distance involved.
· Product characteristics that will further dictate the type of transport mode to be
employed.
· The choice of equipment in terms of type of transport for each requirement.
· The financial option that could be employed in terms of individual type of
equipment.
· The operation needs in terms of usage of the equipment for maximum utilization
and minimum operational costs.
DECISION FRAMEWORK
NUMBER & SIZE OF CHOICE OF THE CHOICE OF CHOICE OF

DEPOTS TO TRANSPORT MODE EQUIPMENT FINANCIAL
INCLUDE COINCIDENTAL TO SPECIFICATIONS OPTIONS
MOVEMENT OF EACH POTENTIAL ON TYPE OF AVAILABLE
RAW MOVEMENT IN TRANSPORT
MATERIALS/FINISH DISTANCE DEFINED BY
ED PRODUCTS TRAVELED PRODUCT
CHARACTERISTICS
CHOICE OF
OPERATIONAL
NEEDS AS
REGARDS
EQUIPMENTS TO
MAX UTILISATION
& MINIMISE COSTS
Figure 14.5 : Decision Framework
We have to understand that transportation operations cannot be seen in isolation, and

hence warehousing and depot locations are equally important to understand the
choice of transport selection process.
16
The total number and sizes of depots and warehouses will also have a direct Transportation Mix
bearing on transport operations of all companies across the board. Let us see
these in more details.
14.9 NUMBER & SIZE OF DEPOTS

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
· Inter-factory movements
· Delivery to warehouses
· Delivery to third-party transport facilities
· Delivery to satellite depots
· 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:
· Selection of initial decisions required based upon known alternatives; 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.
· Selection of basic alternatives, which adequately cover the conditions,
imposed by the vertical and horizontal axes.
· Determination of organization needs by analysis of the important factors
generated to produce the matrix and use of the matrix to select the options
required.
· Selection of the resources required by considering the results of the matrix
analysis plus other factors of importance.
· The combination of the matrix solutions to provide an effective and efficient
profile, which identifies the transport tasks and appropriate resources for the
tasks.
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.
Choice of mode
One of the ways to identify the appropriate choice of transport mode is to select
the most significant attributes affecting the decision. These could be the size of
the order (cubic meters or weight) and the distance to be traveled in miles from
the concerned supplying depots and related factors. Let us see this with an
illustration. 17
Distribution Network Let the attributes be x1, x2, and x3 etc. The weight of these attributes be denoted by
Planning w1, w2, and w3 etc. Let the transport alternatives be denoted by X1, X2, and X3 etc,
with each of the alternatives scaled from 0 to 10 for each of the attributes. Compute
the aggregate score for each of these alternatives (w1 s11 + w2 s12…etc). Select
that alternative which has got the maximum score (figure 14.6). This form of analysis
will help in identifying when each transport mode is appropriate.
Scores for alternatives
Attributes weights A1 A2 A3
x1 w1 s11 s21 s31
x2 w2 s12 s22 s32
x3 w3 s13 s23 s33
x4 w4 s14 s24 s34
Aggregate score S1 S2 S3
Figure 14.6 : Decision Matrix
Alternatively, an elaborate framework such as Analytic Hierarchy Process (AHP)

can be applied to rank the transport alternatives on a set of tangible/intangible
attributes. Therefore, in order to test the efficacy of this selection process, at the
macro level certain measures have to be instituted based on ratio including cost per
ton or cost per cubic meter, and cost per delivery. Actually a target has to be
established to each transport activity in order to determine the actual area where the
difference occur, and at the same time monitor these aspects as part of effective
decision making processes.
14.10 FLEET SIZING & CONFIGURATION
Fleet sizing objective is to employ through ownership, hire, lease and or rental the
fewest possible trucks to manage the company’s 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. Fleet size can be regulated
and minimized by:8
· Utilizing standard size pallets and transport containers.
· Vigorously monitoring fleet utilization levels annually.
· Maintaining total fleet visibility, including loading times, unloading, transit times
and maintenance times.
· Choosing low-use periods to conduct routine maintenance.
· Monitoring and charging for demiurges for fleet detention by suppliers, customers
and carriers.
· Utilizing alternative coverage means during super peak periods to avoid carrying
the burden of an oversized fleet.
8
EH Frazelle, in Supply Chain Strategy, pp 210-211
18
Therefore, it can be seen that whatever be the fleet size, the company has to use it Transportation Mix
judiciously and constantly monitor its progress for optimum utilization of the available
resources and at the same time cut down costs of maintenance and time lag.
Fleet maintenance is one means of reducing the ownership cost of the fleet by
delaying potential replacements and improving customer service through improved
reliability.
14.11 ROUTING AND SCHEDULING
India is one of the best examples of routing and re-scheduling, 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 doesn’t 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:
· Customer requirements and time available
· Balancing of the route for the driver, to minimize overtaxing
· Maximum route time
· Vehicle capacity
· Start & stop points enroute
· Infrastructure constraints.
Routing problems are some of the most difficult criticalities encountered, and cannot
actually be solved optimally.
14.12 FUTURISTIC DIRECTION IN TRANSPORTATION

One salient aspect that we all have to understand that with e-services our lead time
to delivery has reduced considerably, but somehow the movement of the product and
raw materials perforce cannot move through e-services and have to restrict
movement to roads, rail, air and waterways. Yes, the order can be placed through
e-services in a faster mode and so can payment be but the products cannot be
physically moved through the net. A truck, rail wagon or a ship or the cargo aircraft
has to move it from the place of origin to the consumer’s destination.
19
Distribution Network Transportation too, has improved considerably with the advent of technology and
Planning mechanical developments within a short span. Certain programs and organizations
help in coordinating transportation in a better way and as time passes they are bound
to improve transportation in a big way. They can be clubbed under as follows:
· Carrier relationship management: Speedy movements across the globe have
also given rise to lack of coordination and planning resulting in criticalities too.
However, through carrier relationship management programs we can bind the
transporters and those working with it under one roof/enterprise. These
programs are designed to formalize communication, partnering, negotiating, and
performance monitoring aspects of carrier management. At the heart of most
carrier relationship management programs is a set of guidelines for selecting core
carriers, the minority of carriers who carry a majority of the enterprise’s weight,
cube and shipments.9
· Corporate traffic councils: These help in bringing together all personnel
working in the area of transportation within an enterprise. The traffic council sets
corporate transportation policy and explores opportunities for leveraging
transportation spending across the corporation.
· Training and certification: Corporations should aim at making and maintain
transportation as a value added activity. For this everyone should be in one plane
and therefore, such training activities are carried out to get all under one
platform.
· Driver quality: Improvements in drivers with better working environment and
better wages will help in a big way to improve the driver’s capability and
capacity in the long run.
· Joint Procurement: Significant cost reduction can be carried out if the
purchase and negotiation of transportation services is consolidated across both
inbound/outbound transportation activities within a business unit, across units and
even with non-competitors.
· Logistics compliance & security officer: Forming the chief logistics security
officer will enable a company to cope with global logistics law and to anticipate
security lapses within the logistics network.
14.13 SUMMARY
We have in this unit discussed on transportation mix, techniques of cost reduction,
modes of transportation, multimode transport operations, carrier selection etc. It is
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 costs, i.e.
increased transport costs will have risen prices and vice versa. Therefore,
appropriate selection of the right transport mode is necessary for optimum customer
satisfaction and a balanced logistics system of the firm.

1) Explain transportation mix with relevant examples.
2) What are the various techniques of cost reduction?
9
EH Frazelle, in Supply Chain Strategy, pp 220-222
20
3) Explain MTO in detail with specific examples from those outside the unit. Transportation Mix
4) Explain the procedure of transport and carrier selection. Why is it carried out and
what are the major characteristics?
5) Why is fleet sizing necessary? Elucidate with relevant examples.
6) What is routing and scheduling? Explain in the Indian context.
7) What are the different constraints of routing?
8) Suggest a futuristic transport profile for a growing company.

READINGS
1) Frazelle, E.H., Supply Chain Strategy, McGraw-Hill, New York.
2) Deshmukh & Mohanty (2004), Essentials of SCM, Jaico Publishing House,

Mumbai.
3) Handfield, R. B. and Nichols, E. L. (1999) Introduction to Supply Chain

Management, Prentice Hall, New Jersey.
4) Waters Donald (2003), Logistics: An Introduction to SCM, Palgrave McMillan

(Indian Edition), NY.
21
Planning UNIT 15 LOCATION STRATEGY
Objectives
After reading this unit you would be able to
· discuss the steps in location planning;
· discuss the interdependence of location decision and distribution decision; and
· describe various measure for warehouse location.
Structure
15.1 Introduction
15.2 Plant Location
15.3 Distribution Problem
15.4 Warehouse Location
15.5 Retail Facility Location
15.6 Summary
15.1 INTRODUCTION
Facilities and their locations are major issues in an organization’s logistics system
efficiency and its ability to successfully implement its competitive advantage. Facility
location decisions are of major importance to a company’s ability to compete in the
market. Determining appropriate locations for facilities such as plants, warehouses,
retail stores, hospitals etc. represents an important strategic decision.
The choice of location for the place of business is one of the earliest problems facing
management. Location decisions come under the category of long-term decisions.
They involve long-term commitments. A plant location decision cannot be reviewed
until after quite sometime as they involve huge investments. Location decisions also
have effect on the operating costs/revenues. For example, a bad location decision
may call for excessive transportation costs, shortage of skilled workforce, loss of
competitive advantage, inadequate supply of raw materials etc.
Organizations are involved in location decisions for a variety of reasons such as the
followings:
· Expansion of existing facilities
· Addition of new facilities
· Closing down the plant at one location and moving to another.
Firms may experience growth in business and wish to increase the plant capacities.
Addition of new plants to complement an existing system is often contemplated.
Firms such as banks, supermarkets, retail stores consider location as a marketing
strategy and look for locations that will help them in expanding their markets.
Let us look at the importance of location in the context of business logistics. Business
logistics refers to the management of all move-store activities that facilitate product
flow to the point of final consumption. Figure 15.1 presents the key elements of a
logistics system or the production / distribution system.
22
Transportation Mix
Suppliers
Flow of Goods
Flow of Information
Manufacturing
Plant
Warehouse
Retail Store
Customers
Figure 15.1: Production / Distribution System
The key elements of the production/distribution system are: transportation, inventory

and order processing. Raw materials are ordered from the suppliers. These are
transported to the manufacturing plant for production into finished goods. Finished
goods are shifted to warehouse (also called distribution centers) and finally to retail
stores from where they are made available to customers. In order to have an
effective production and distribution system, business logistics coordinates the
production and marketing efforts. One of the important goals of marketing
management is to make the product available to customers at the right place and the
right time. Thus the decision of where a product is produced and stored is very
important. Production management, on the other hand, is concerned with maintaining
high productivity at low cost. A product mix that seeks only to satisfy marketing
goals may lead to inefficiencies in production. Similarly, decisions that consider
only production efficiencies may lead to high distribution costs and low customer
service.
The main objective of location decisions is to position each element of the production
/distribution system with respect to the overall system. A manufacturing plant must
be strategically positioned between its supplies and customers. The location problem
is more complex for large firms; they must position both plants and warehouse
simultaneously with respect to suppliers, retail outlets and each other. Rarely, all these
facilities are located simultaneously.
The typical case involves locating a new plant with respect to suppliers and a given
number of warehouses or locating a set of warehouses with respect to manufacturing
plants and markets.
We shall discuss here the problems of plant location, warehouse location, in the
distribution system and the special cases of locating retail stores and emergency
services.
23
Planning 15.2 PLANT LOCATION
Choice of location for a plant is one of the earliest problems facing management. But
location, perhaps, is one of the most neglected aspects of business, although the
manufacturing and distribution costs may vary by over 10 percent simply by virtue of
choice of location. The golden rule of business applies to location decisions as well.
The Golden Rule of Business states that the ones with gold make the rules.
There are two types of factors (or criteria) on which location decisions are based:
quantitative (or objective) factors and qualitative (or subjective) factors. The
objective factors involve cost of land, transportation costs, utilities rates etc. The
subjective factors include labour availability, climate, community environment, quality
of life, local politics etc.
The presence of objective and subjective factors results in greater degree of

complexity in the structure of the plant location problem as well as its solution. A
decision made on these factors is difficult as they are consistent over all locations.
For example, a plant may be located far from work but have lower utility bills related
to the area closer to work. Some factors may be more dominant than others. For
example, on mineral production plants, raw materials dominate the situations due to
which processing is located near mines. On the other hand, output oriented activities,
such as service organizations tend to be located near consumers. Table 15.1 presents
a list of some of the important location factors.
Table 15.1: Location Factors Determining Plant Location
Transportation Utilities Labor Climate, Community, States and Local

Factors Factors Factors Environment etc. Political Factors
· Proximity to · Power · Labor supply · Climate and living · Taxation policies

raw material · Water · Labor management conditions · Tax structure
sources · Fuel relations · Education
· Closeness to · Waste · Availability of · Community attitude
markets disposal skilled labor · Religious factors
· Modes of · Labor costs
transportation
· Transportation
costs
15.2.1 Steps in Location Planning
Location planning involves the following steps:

1) Determine the criteria to evaluate location alternatives (for example: minimize
costs)
2) Identify relevant location factors
3) Develop location alternatives
a) Identify the general region
b) Identify a small number of community site alternatives
4) Evaluate the alternatives and make a selection.
15.2.2 Evaluation of Location Alternatives
As stated earlier, the plant location problem involves both qualitative and quantitative
factors. Finding the best location alternative considering all the above factors is not an
24
easy one. Attempts have been made to combine the qualitative and quantitative Transportation Mix
factors and score the alternatives. One of the scoring (or rating) models is outlined
below (Table 15.2).
The procedure starts by listing the various factors and assigning weight to each factor
to represent the relative importance of various factors. The score for each alternative
is found by multiplying each factor’s score by its weight and summing the results.
Table 15.2 gives the details of this rating approach for two locations A and B.
Table 15.2: Rating Approach
Location factor Weight Score (out of 100) Weighted Score

A B A B
1. Labor Costs 0.40 70 90 70 × 0.40=28 90 × 0.40=36
2. Water supply 0.10 80 90 8 9
3. Climate 0.15 80 90 12 13.5
4. Proximity to Raw 0.20 40 70 8 14
Materials
5. Transportation Costs 0.10 80 90 8 9
6. Taxes 0.05 80 80 4 4
Total Score 68 85.5
From Table 15.2, we see that location B that has a higher score is preferred.
However one has to be careful in the use of the rating approach because of the
assessment of scores, which might have involved some amount of subjectivity. For
example, if the total score for location B were 70, which is very close to that of A,
one need to go for further analysis before arriving at the final decision.
15.3 DISTRIBUTION PROBLEM
The distribution problem is concerned with the allocation of goods flow to minimize
overall distribution cost. Most distribution systems are three-tired structures in which
goods start from the plant; flow to warehouse and ultimately to outlets. Warehousing
plays a crucial role in the total distribution system. Consider for example, a large
chain, which manufactures many products, maintains regional distribution centers and
owns a large number of retail store (Figure 15.1). The firm has control over the
location of all intermediate members of the logistics system.
In the absence of any warehouse, shipments of finished goods would have to be

made directly from the plant to the retail stores. If the plant is located far from the
raw material sources, inbound transportation costs would be high and delivery times
would be high, thereby increasing the chances of material shortage for production. If
the plant is located far from the group of retail stores, then also transportation costs
(i.e. outbound transportation costs) would be high and it takes longer to deliver orders
to retail stores. This may result in out-of-stock situations thereby reducing the level of
customer service. Warehouses placed close to the market can provide quick and
efficient delivery to retail stores, while still permitting the plants to be placed near raw
material sources. Warehouses and distribution centers play as important
intermediaries between plants and retail stores. They allow a company to store
finished goods for efficient distribution to points of use. The role of warehouses is
illustrated in Figure 15.2.
25
Planning
Plant 1 Plant 2 Plant 1 Plant 2
Warehouse
1 2 3 4 5 1 2 3 4 5
Retail Stores Retail Stores

(a) Without Warehouse (b) With Warehouse
Figure 15.2: Role of Warehouse
It can be seen from Figure 2 that the provision of intermediaries like warehouse
reduces considerably the number of interactions from 10 (i.e. 2 x 5) to 7 (i.e. 2 + 5).
There are other benefits associated with the provision of warehouses since they
support both manufacturing as well as retail stores. For example, warehouse
facilitates consolidation of orders.
A number of decisions should be made with regard to warehousing. Among the most
important warehousing decisions are the determination of number and location of
warehouses. The other decisions include the following:
· Which products should be stored in each warehouse?
· Should public or private warehouses be used?
· What type of material-handling equipment should be used?
· Which customers should be assigned to each warehouse?
We shall discuss the warehouse location problem in the following section.
Activity 1
Write True or False against the following statements.
1. The facility location decision belongs to the tactical decision area.
2. In all location problems, there is a unique location that is superior to all others.
3. Business logistics and facility location are unrelated issues.
4. Logistics management refers to the management of transportation function.
5. In the location of a gasoline station, labor availability is one of the most important
factors.
6. The location of aluminum reduction industry is energy-oriented.
7. For facility location, manufacturing costs are more important than transportation cost,
since the latter are going to be incurred anyway.
8. For facility location, quality of life in a given location is an irrelevant factor.
9. Scoring models are used exclusively in location decisions.
10. There is no difference between location decisions for manufacturing and service
organizations.
11. The major criterion for location of a retail outlet is the volume of demand.
12. One of the principal disadvantages of computerized logistics modeling is the ability to
easily modify data and perform “what if” analysis.
13. The presence of organized labor unions is irrelevant to the location decision.
26
Transportation Mix
15.4 WAREHOUSE LOCATION
In this section we present method(s) for determining the location(s) for

warehouse(s). It is assumed that there are a number of existing facilities in place and
we wish to find the optimum location of a new facility (or new facilities). The existing
facilities could be plants, retail stores. The new facilities could be warehouse. The
approaches take into account the locations of plants and markets, volume of goods
moved and transportation costs. All these models focus on minimizing transportation
costs.
15.4.1 Measures of Distance

Two measures of distance for movement of items are commonly used: Rectilinear
distance and Euclidean (straight line) distance.
The rectilinear distance (also known as metropolitan distance) recognizes that streets
usually run in a crisscross pattern.
Let the existing facility be located at the point (a, b) and let (x, y) be the location of
the new facility. The rectilinear distance between (a, b) and (x, y) is |x – a | + | y – b|,
whereas
The Euclidean distance is Ö(x–a)2 + (y–b)2
Figure 15.3 illustrates the two distance measures.
Rectilinear
(a,b) distance
Euclidean distance
(x,y)
Figure15.3 : Rectilinear and Euclidean Distance
Rectilinear distance is appropriate for many location problems such as in metropolitan

areas. In many manufacturing situations, material is transported along aisles arranged
in rectilinear pattern. Fortunately, rectilinear distance problem is easier to solve than
Euclidean distance problem.
The problem of locating a simple new facility with respect to a number of existing
problems is known as the single facility location problem whereas the problem of
locating multiple new facilities is known as the multi-facility location problem.
15.4.2 Single Facility Location Problem

In this section you would learn about Single Facility Rectilinear Distance Location
Problem, Squared Euclidean Distance Problem (known as the Gravity Problem) and
the Straight-Line Distance Problem.
27
Distribution Network Single Facility Rectilinear Distance Location Problem
Planning
Let there be “n” existing facilities located at points (a1,b1), (a2,b2)…………,(an,bn).
The objective is to locate the new facility to minimize a weighted sum of the
rectilinear distance from the new facility to existing facilities. The goal is to find the
values of x and y such that
n
minimize ¦(x,y) = ∑i =1
wi ( ½x – ai½+ ½y – bi½) , where
wi is the flow of material / goods between the new facility and ith existing facility. The
optimum values of x and y can be determined separately.
ƒ(x,y) = g1(x) + g2(y), where
n n
g1 (x) = ∑
i =1
wi ½x – ai½ and g2 (y) = ∑ w ½y – b ½
i =1
i i
As we shall see, the x coordinate of the new facility will be same as x coordinate of
some existing facility. Similarly y coordinate of new facility coincides with y
coordinate of same existing facility. An example of the single facility location problem
could be location of a new storage warehouse for a company with an existing
network of production and distribution centers.
Let us consider a case in which there are two existing facilities located at (5,10) and
(20,30) as shown in Figure 15.4. Assume that wi values are all equal to one.
(20,30)
(5,10)
Figure 15.4: Single Facility Rectilinear Location Problem - Two Existing Facilities
The values of g1(x) is equal to 15 for values of x between 5 and 20.
Similarly g2 (y) is 20 for values of y between 10 and 30.

For example, if x = 10 and y = 10
Then g1 (x) = ½ 5 – 10½+ ½20 – 10½ = 15
g2 (y) = ½10 – 10½ + ½30 – 10½ = 20

It can be seen that the optimum location for the new facility will be anywhere in the
area bounded by the lines x = 5, x = 20, y = 10 and y = 30.
Any value of x outside the closed interval [5, 20] and any value of y outside the
closed interval [10, 30] gives larger values of g1 (x) and g2 (y). Thus the optimum
solution is (x , y) where 5 £ x £ 20 and 10 £ y £ 30 .
The above analysis leads to the Simple Median model, which can be explained, with
28 the help of the following examples.
Suppose there are four existing facilities located at points ( 3 , 3), ( 6 , 9), ( 12 , 8) Transportation Mix
and (12 , 10) and the weights are all of value 1 ( w1 = w2 = w3 = w4 = 1). Rank the x
coordinate in increasing order: 3, 6, 12, 12.
A median value is such that half of values lie above it and half lie below it. Any value
of x between 6 to 12 is a median location and is optimum for this example problem.
The optimum value of g1 (x) is 15.
Similarly ranking the y values 3, 8, 9, 10 gives the median value as any value between
8 and 9 and the minimum value of g2 ( y) = 8. See Figure 15.5.
g1(x) g2(y)
x y
Figure 15.5: Optimum Locations
Let us take another example where there are four existing facilities located at (3,3),
(6,9), (12,8) and (12,10). The weightages are: w1 = 2, w2 = 4, w3 = 3 and w1 = 1.
The problem is equivalent to one where there are two facilities at location (3,3), four
facilities at (6, 9), three facilities at (12, 8) and one facility at (12,10), with weight
equal to 1.
The ranked x value are 3, 3, 6, 6, 6, 6, 12, 12, 12, 12
The median location is x = 6.
The ranked y values are: 3, 3, 8, 8, 8, 9, 9, 9, 9,10.
The median location is any value of y in the interval [8,9].
The optimum value of the objective function is 30 + 16 = 46.
A quicker method of finding the optimum location of the new facility is to compute
the accumulated weight and determine the location (s) corresponding to half of the
accumulated weight as shown below.
Facility X Weight Cummulative Facility X Weight Cummulative

coordinate Weight coordinate
1 3 2 2 1 3 2 2
2 6 4 6 Optimum 3 8 3 5 optimum
X=6 Y is
3 12 3 9 2 9 4 9 between
8 and 9
4 12 1 10 4 10 1 10
(Half of total weight first exceeds at x = 6 (Optimum y is between 8 and 9)

Hence optimum x = 6)
29
Distribution Network Euclidean Distance Problems
Planning
Although the rectilinear distance measure is applicable in many location problems,
there are situations in which the appropriate measure is the Euclidean or Straight-line
distance. Location of power generating facilities so as to minimize the total length of
electric cable that must be laid out to connect the plant and customer is an example
where the Euclidean distance measure is appropriate.
We shall discuss here the squared Euclidean Distance Problem (known as the
Gravity Problem) and the Euclidean Distance Location Problem.
The Gravity Problem
The Gravity problem corresponds to the case where the distance measure is square
of the Euclidean distance. This measure is appropriate for location of emergency
facilities. The objective is to find the value of (x, y) to minimize
¦ ( x, y) = å wi [ (x – ai )2 + ( y – bi )2]
The solution to this problem is straight forward and is often used as an approximation
to the more common straight-line distance problem.
To find the optimum value of x and y, the partial derivatives of the objective function
with respect to x and y are found and equated to zero.
∂f ( x, y) n
We get
∂x i =1
∑
= 2 wi (x − ai )
∂f ( x , y ) n
We get
∂y i =1
∑
= 2 w i (y − bi )
Setting these partial derivatives equal to zero and solving for x and y, we get
+
∑w a
i =1
i i
X = n
∑w
i =1
i
+
∑w a
i =1
i i
Y = n
∑w
i =1
i
Thus X+ and Y+ are the weighted averages of x and y coordinates and hence the
name Gravity problem.
The Straight-Line Distance Problem
The straight-line distance measure arises much more frequently than the Gravity
problem. The objective is to find (x, y) to minimize
n
¦ (x, y) = ∑ wi Ö (x – ai)2 + (y – bi)2
i =1
30
Unfortunately, it is not easy to find the optimum solution mathematically. The partial Transportation Mix
derivatives become undefined when the location of the new facility coincides with
that of an existing facility. There are no known simple algebraic solutions; all existing
methods require an iterative procedure. The Gravity solution is usually selected as the
starting solution for this iterative process.
15.4.3 Multi-facility Location Problem

The problem of locating multiple new facilities with respect to existing facilities is
known as the Multi-facility Location Problem. For example, a countrywide consumer
goods manufacturer might be considering where to locate four new regional
warehouses. There is interaction among new facilities as well as between new and
existing facilities. In some special situations, multi-facility location problem can be
solved as a sequence of single facility location problems.
Linear programming can be used to solve the multi-facility rectilinear distance
location problem. Assume that there are “n” existing facilities located at points
( a1, b1), ( a2 , b2),……(an , bn). Suppose the new facilities are to be located at
(x1 , y1), (x2 , y2), ……….., (xm , ym).
The objective function to be minimized is written as minimize ¦1 (x) + ¦2 (y)
m n
Where ¦1 (x) = å Vjk ½xj – xk½ + å å wji ½xj – ai½
i£j£k£m j=1 i=1
m n
and ¦2 (y) = å Vjk ½yj – yk½ + å å wji ½yj – bi½
i£j£k£m j=1 i=1
Vjk represents the interaction between new facilities j and k and wji represents the
interaction between new facility j and existing facility i. The optimum x and y values
can be determined independently as in the case of single facility location problem.
Multi-facility gravity problems require the solution of a system of linear equations, so
that gravity problems involving large number of facilities are easily solved. Multi-
facility Euclidean distance location problems are solved by using multi dimensional
version of the iteration solution procedure described in the previous section.
Activity 2
Fill in the blanks
1) An approach to location analysis that includes both qualitative and quantitative
considerations is ……………………………………………
2) A major advantage of warehousing is that
…………………………………………………………………..
3) The scoring model is both a ……………………………. and
…………………………… model
15.4 RETAIL FACILITY LOCATION
The major criterion used for retail facility location is the volume of demand and hence
estimates of demand must be known for potential locations. Statistical techniques
such as regression analysis can be used to predict demand. For locating facilities that
are oriented toward sales, the principal factors are market related and the important
data are demographic in nature. Other intangible factors, which affect retail location,
are competition, zoning laws, traffic patterns and accessibility etc. Like in plant
location, scoring models may be used to rank potential sites.
31
Planning 15.4 SUMMARY
As we have seen, the location decision and distribution decision are interdependent.
By considering only one of these, we get poor solutions. Both the problems should be
treated comprehensively.
Comprehensive computerized logistics systems are available to assist management in

achieving efficient solutions. Computerized systems help answering questions such
as: how many warehouses are needed and where they should be located? How
much of each product should be sent to each warehouse from each plant? How
should customers be assigned to warehouse? What modes of transportation are most
economical? For answering such questions, management needs large amounts of data
regarding warehousing and inventory costs, transportation costs, production costs and
so on.
1) “The most common method for evaluating non-economic factors in a facility

location study is to use a scoring model” Why? Justify your answer.
2) Is it true that subjective criteria in plant location models focus on long-run cost
effects? If yes, Why?
3) Given the information below, which alternative would you recommend?
Factor Weight Location
A B C
Raw Materials 0.40 50 70 60
Market 0.20 40 40 80
Transportation Cost 0.10 90 70 50
Labor Cost 0.20 40 40 30
Construction Cost 0.10 10 60 30
4) Given the information below, which alternative has the lowest breakeven point?
Alternative Fixed Cost Variable cost/unit Revenue/ Unit
A 30000 10 40
B 40000 15 40
C 50000 20 40
D 60000 30 40
E 70000 40 40
5) Given the following evaluation of subjective factors, find the total score for the
location.
Excellent = 8, Good = 6, Fair = 4, Poor = 3
Factor Rating Weight
Labor Supply Good 40%

Community Attitude Excellent 30%
Government Regulations Fair 20%
Quality of life Good 10%
32
6) Using the following scoring model, select the best location Transportation Mix
Location Attribute 1 2 3 4
Weight 10 25 35 30
A Good Very Good Bad OK
B OK OK Very Good Good
C Good Very Good OK Good
Very Good = 5 points, Good = 4 points, OK = 2 points, Bad = 1 point

READINGS
1) Ballou R., (1985), Business Logistics Management, Prentice Hall.
2) Francis, R. L. & White J. A. (1974). Facility Layout and Location - An

Analytical Approach, Prentice Hall.
33
Planning UNIT 16 LOGISTICS AND SCM ENVIRONMENT
Objectives
· discuss the commercial and legal issues concerning logistics;
· describe Sales laws;
· illustrate Warehouse operations; and
· render Documentation procedures such as Insurance, Octroi and Sales tax.
Structure
16.1 Introduction
16.2 An Illustration
16.3 Preventing Litigation
16.4 Sales Law: An Overview
16.5 Environmental Realities: Implications on Supply Chain
16.6 Warehouse Operations
16.7 Warehouse Jurisdiction
16.8 Wages, Earnings and Hours of Work
16.9 Documentation: Insurance & Sales Tax
16.10 Introduction to Sales Tax
16.11 A Case Study
16.12 Summary
16.1 INTRODUCTION
We have learnt in detail that logistics forms a key to SCM, and happens to be the
most important component in the entire channel. There are however, certain
environmental realities that govern the smooth running of this SCM system and it’s
imperative for every manager dealing with it to learn and know about it.
Legal issues concerning the movement, storage and shipment of materials, insurance
coverage, payment of taxes, Octroi and sales taxes are important part of
documentation process. In the Indian context it is also referred as consignor note
(Challan), delivery note, (delivery challan) etc.
Legal issues play a very important role in SCM, though the best one can do is to
avoid legal disputes at all costs, based on the adage, one ounce of prevention is worth
a pound of cure. Though, supply management professionals deal with two major
aspects of law; the law of agency and law of contracts, yet, they seldom get involved
in litigation, provided they are fortunate.
With this as a backdrop let us see an illustration, which will generally explain the
entire process of SCM in which a supply manager is likely to get involved in law suits,
legal hassles and how can he overcome or avoid it.
16.2 AN ILLUSTRATION
Let us take a company ‘A’, manufacturing soaps somewhere in outskirts of

34 Mangalore. Whatever raw material it requires comes from areas around it, and its
main constituent Caustic (sodium hydro-oxide or potassium hydro-oxide) is being Transportation Mix
supplied by a chemical plant located in Kerala. The fat constituent is also available
from a nearby unit. The main supplier of caustic is, say company ‘X’. So ‘X’ is the
main supplier of the constituents to ‘A’ and is hence governed by some legal issues
and laws of the SCM. ‘A’ can file a suit of litigation on ‘X’ for supplying lower
graded materials, for delay in dispatch of material, or unable to supply the goods after
initial payment has been done and the contract signed. The companies can also be in
litigation with each other, in case there are disputes or complaints related to quality of
the finished product from the consumers en-mass. At the same time any consumer
can sue a company in the court of law or in consumer forum for necessary
demurrages accrued on usage of a particular soap, on health related matters, or say
in case if the quantity specified on the pack don’t match the actual weight, or even
the advertisement theme and slogans don’t match the product quality. Actually, there
are number of places where a company could falter and be charged by law.
Companies generally avoid this aspect, and go in for an out of court settlement with
such consumers.
Similarly, there are other areas where legal aspects come into play like delayed
payments or non-payments. Well, this is better sorted out during the signing of initial
contracts and supplier selection processes. Next comes the transportation aspects,
wherein insurance has to be catered to for the consignment against theft, loss,
damages, fire etc. Sales tax for the goods and Octroi for utilizing the services and
infrastructure, differs from state to state. There are also various weighbridges where
the vehicles are checked for the load being carried, and in case of discrepancies the
companies are charged penalty for non-payment of taxes/less payment/fraudulent.
This illustration has purposely been included, just to make you understand, where and
how we can go wrong and how best can we sort out these differences, either by law
or through negotiation. We will see all this and many such related aspects as we go
through the unit.
The first step for all this is to prevent litigation, and how can we achieve this? Let us
see.
16.3 PREVENTING LITIGATION

The basic relationship between the supply manager and the buyer is like an agent for
his/her firm, and legally this is defined and governed by the law of agency.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. 35
Distribution Network Now let us see the four categories of dispute resolution as depicted in table 16.1:
Planning Dispute Resulution.
Category Remarks
Negotiation Disputes can best be resolved through negotiation and compromise to avoid further
confrontation, costs, complication, stress and damaging relationships
Mediation This is the next step to negotiation, and mediation involves introducing a third
party to resolve the issue. The mediator is expected to listen, sympathize, coax,
cajole and persuade. He/she could also render suggestion or encourage suggested
solutions. A mediator could do anything other than deciding, which is actually
arbitration the next step to mediation.
Arbitration In this process the output of the dispute goes to the third party an arbitrator.
Arbitration vests the decision-making authority with the arbitrator wherein he
would hear the testimony and study the evidences from both sides, and then take a
decision based on facts and law.
Litigation This is the last stage of the process where the disputants have already lost the
battle. In fact, wastages tend to be maximized in this stage relating to time, effort,
money, stress and damages to relationship. Knowing and understanding
fundamental legal principles better, could help in avoiding such a stage.
Let us now see how the development of commercial laws took place across the
world with special reference to USA.
16.4 SALES LAW: AN OVERVIEW
Most of these are academic in nature and you, as a supply chain manager should
know them thoroughly. But, in practicality one must understand these aspects before
venturing to SCM.
Historically, USA developed its own body of status and a common law for all states
to deal with the problem of dispute resolution and prevail uniformity. The
transactions for the sale (and leasing) of goods are governed mainly by sales laws of
each state. Every state, with the exception of Louisiana, has adopted, Article Two of
the Uniform Commercial Code (UCC) as the main body of law regulating
transactions in goods. Goods are defined as all things movable and identified to the
contract of the sale. It does not include secured transactions, leases, money
exchanged as the price, or real property (land and property permanently attached to a
piece of land). To be identified to the contract a good must exist and one of the
objects will be exchanged. Transactions between merchants and consumers and
those solely between merchants are regulated by Part Two. All transactions that are
for more that $500 must be in writing. Article 2 regulates every phase of a
transaction for the sale of goods and provides remedies for problems that may
arise. It provides for implied warranties of merchantability and fitness. There is also
a duty of good faith in the UCC that is applicable to all the sections. If a contract
contains unconscionable provisions a court may discard the contract or the
provisions.
Leases were traditionally governed by Article 2 or Article 9 (secured transactions) of
the UCC. This caused confusion and disparate application of the law to leases. In
1987 Article 2A was added to the UCC to regulate leases for goods. It has been
adopted, or is being considered for adoption, in a number of states.
1
WCSCM by TMH, Relationship management, chapter VI, pp. 555-557
36
Federal law has a limited impact on transactions for the sale of goods. The Transportation Mix
Bankruptcy Code regulates claims arising from sales transactions in bankruptcy
cases. The Magnuson-Moss Warranty, Act regulates explicit and implied warranties.
The Consumer Credit Protection Act provides protection to consumers entering into
leases.
In 1988, the United States joined the United Nations Convention on Contracts for the
International Sale of Goods.
16.5 ENVIRONMENTAL REALITIES: IMPLICATIONS

ON SUPPLY CHAIN
The significant impact that members of the supply chain have on organizations’
environmental performance, either through their actions or the products they
supply, is increasingly becoming recognized throughout business. Examples of
organizations, which have faced legal action, financial loss, and damage to
corporate image as a result of their supply chain partners’ activities, are
numerous, and as environmental protection climbs the social and political
agenda so the risks will increase.
In many cases action has been driven in response to specific events or pressure from
stakeholders (and commonly both) with the full value to the business of this action
only being realised subsequently. To exert some influence over supply chain partners’
approaches to environmental issues, control the associated risks, and realise further
potential benefits, companies have developed proactive environmental supply chain
management (ESCM) programmes to complement existing supply chain and
environmental management activity.
However, it is not enough to blindly trust that general improvements in the

environmental performance of supply chain partners will in turn improve the
organization’s environmental performance. Furthermore, the methodology employed
so far is diverse in design and application, and the focus of initiatives is sometimes
open to question. The ESCM process must be structured, and concentrate on
delivering benefit for the initiating organization, while a commonly demonstrated by-
product of this activity is the strengthening of supply chain partners, and the
relationships with them.
16.5.1 Extent of Involvement
The extent of engagement in ESCM activity varies greatly across commercial

organizations and industrial sectors. It would be fair to say that many organizations
have demonstrated good ESCM practice within individual projects without
recognizing it as such, while others have realised environmental benefits through
general SCM initiatives.
Business in the Environment (1999) have attempted to gauge environmental

engagement among the top 100 quoted companies in the UK since 1996 (and
including the mid 250 quoted UK companies since 1998), across a range of
environmental management parameters. Supplier focused initiatives represent one of
the parameters surveyed. The results of this survey have consistently shown supplier
focused initiatives to be the weakest parameter, that is, the least adopted (see table
16.2).
37
Distribution Network Table 16.2: Environmental Incentives
Planning
Percentage of Respondent Companies Engaging in Supplier Focused Environmental Initiatives
Year of Survey Group of Companies Percentage Involvement
1996 FTSE 100 37

1997 FTSE 100 42
1998 FTSE 100* 57
1998 Mid 250** 30
* Response rate, 77%; ** Response rate, 19% (Source: BiE Index Report 1999).
* Adapted from Mackenzie 1999
Given the response rate to this survey, the true percentage involvement is probably
lower than that stated, assuming that companies who have not responded are likely to
be less environmentally engaged on the whole.
Organizations can be categorized into five types when relating to ESCM involvement,
namely:
· The Blissfully Ignorant
· Going Through the Motions
· Control Management
· State of the Art
· Ground Breakers
State of the art and groundbreaking organizations are few in number with the
blissfully ignorant accounting for the majority. However, larger organizations are
beginning to respond to the need for ESCM programmes in increasing numbers and
the standard is steadily shifting up the scale.
16.5.2 Trends
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.
· There is not as much evidence of organizations initiating dialogue with customers
over the environmental probity of their products outside of a focused
environmental marketing strategy. Given some of the demands made by buying
organizations on their suppliers to demonstrate environmental probity however, a
proactive approach could well be advantageous by:
· Raising company profile.
38 · Improving company image.
· Building relationships and possibly dependency. Transportation Mix
· Creating new criteria and standards for the sector/competitors.

· Helping the customer to shape ESCM strategy.
· Prompting knowledge exchange.
· Potentially avoiding prescriptive requirements imposed by customers.
The techniques applied in ESCM vary greatly in their sophistication and resource
requirement. At the most basic level organizations tend to initiate activity on a
reactive basis dealing with a specific issue in response to legislative, financial or
moral pressures or crisis.
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.
16.5.3 Future Developments
ESCM has presented difficulties for many organizations with regard to finding a
practical and cost effective way of managing out the environmental risks and
improving performance. The use of environmental performance indicators for
39
Distribution Network supplier, service or product evaluation has, arguably, always been present. The
Planning selection, and analysis of the indicators which truly reflect performance though, has
been lacking and as such has left a hole in any risk assessment process.
The publication ISO14031 (international standard for environmental performance

evaluation) does provide a framework that could be applied to the selection of
indicators by which to evaluate supplier environmental (and potentially ethical)
probity. In view of this, a UK government sponsored ISO 14031-demonstration
project is currently under way to assess the feasibility of this approach to ESCM,
under the management of 14000 & ONE Solutions Ltd.
The use of performance indicators will provide a more cost effective supplier
evaluation tool than has generally been applied, as well as allowing for the
measurement of tangible and significant aspects of environmental performance, at a
point or over time, by the assessor and the supplier. Indicators will also allow for
benchmarking between suppliers and bolster overall company data availability. In
addition it is likely that the introduction of environmental performance indicators will
encourage wider use and allow for the tailoring of indicator sets as appropriate to the
supplier’s resources and capabilities, an issue currently overlooked by many ESCM
initiatives.
Social and ethical issues are commonly intertwined with environmental issues as
demonstrated in sustainability thinking. In view of this there is a growing trend to
incorporate ethical and environmental issues together in ESCM activity. Health and
safety issues are also being brought in, but recent experiences with introducing quality
issues has prompted many companies to resist this.
16.6 WAREHOUSE OPERATIONS
Warehousing is a very important operation of SCM system and without correct

understanding of this you as a supply chain manager will often find it difficult to
coordinate both ends. Today, under the influence of e-commerce, supply chain
collaborations, globalization, quick response and just in time, warehouses today are
being asked to2
· Execute more, smaller transactions
· Handle and store more items
· Provide more product and service customization
· Offer more value added services
· Process more returns
· Receive and ship more international orders
But, the warehouses today have
· Less time to process an order
· Less margin for error
· Lesser young, skilled, and English speaking personnel
· Less warehouse management system (WMS) capability
A warehouse manager today has to do more with a resource crunch. The
environment is changing rapidly and is almost difficult to keep pace with the changing
scenario. With this as a backdrop let us see in nutshell the various warehouse
fundamentals.
2
Warehousing Operations in Supply Chain Strategy by Edward H Frazelle pp 224
40
16.6.1 Warehouse Fundamentals Transportation Mix
The missions of warehouses are:

· Component warehouses: hold raw materials at or near the manufacturing unit or
the consumer markets.
· Work in process: hold partially manufactured assemblies at various points or near
the assembly lines.
· Finished goods warehouses: hold goods to balance the time variation between the
production schedule and demand.
· Distribution warehouses: a centrally located point, which holds goods from one
firm or many firms but for a common customer.
· Fulfillment centers: receive, pick and deliver small orders for individual
consumers.
· Local warehouses: to shorten the transportation distances and create rapid
response to customer demands.
16.6.2 Functions in Warehouses
Let us see this with a block diagram, figure 16.1.
RECEIVING PUT AWAY STORAGE
CROSS-DOCK SUPPORT FUNCTIONS

FLOWS
SHIPPING SORT & ACCUMULATE ORDER PICKING
Figure 16.1: Ware housing Activities (Adapted from Frazelle EH (2004)
In a nutshell the various functions are:

· Receiving: a collection of activities involving receipt of materials, quality
assurance and disbursing of materials to appropriate places.
· Prepackaging: to break bulk and pack for single unit delivery in merchandisable
quantities with other parts to form assortments.
· Put away: for placing the merchandise in storage.
· Storage: physical containment of merchandise.
· Order picking: process of removing items from storage to meet specific demand.
· Packaging and pricing: this is done when it’s required, just before sale.
· Sortation and accumulation: this is carried out when the order is more than one
item and accumulation is not done as the picks are made.
· Packing and shipping: the final stage before shipment of orders, which include
checking for completeness, containerization, documentation, weighing,
accumulating orders for outbound carrier, and loading of trucks.
41
Planning 16.7 WAREHOUSE JURISDICTION
The dictionary meaning of the word jurisdiction is ‘the area over which the legal
authority of a court or other institution extends’. Be it warehouse or any immovable
property they are governed by a set of taxable laws governed by the individual state
and differs from one country to the other. At times the countries get into a joint tie/
league with each other in order to facilitate easy import and export activities and
warehouse activities.
These are once again very academic in nature, and as a supply manager you will
have to be in the know of these aspects in order to avoid legal hassles at a later time.
Some of these are as listed below.
India and Netherlands Article 5

Permanent Establishment
1) For the purposes of this Convention, the term “permanent establishment” means
a fixed place of business through which the business of an enterprise is wholly or
partly carried on.
2) The term “permanent establishment” includes especially:
a) A place of management;
b) A branch;
c) An office;
d) A factory;
e) A workshop;
f) A mine, an oil or gas well, a quarry or any other place of extraction of
natural resources;
g) A warehouse in relation to a person providing storage facilities for others;
h) A premises used as a sales outlet;
i) An installation or structure used for the exploration of natural resources
provided that the activities continue for more than 183 days.
3) A building site or construction, installation or assembly project constitutes a
permanent establishment only where such site or project continues for a period
of more than six months.
4) Notwithstanding the preceding provisions of this Article, the term “permanent
establishment” shall be deemed not to include:
a) The use of facilities solely for the purpose of storage or display of goods or
merchandise belonging to the enterprise;
b) The maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of storage or display;
c) The maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of processing by another enterprise;
d) The maintenance of a fixed place of business solely for the purpose of
purchasing goods or merchandise or of collecting information, for the
enterprise;
e) The maintenance of a fixed place of business solely for the purpose of
advertising, for the supply of information, for scientific research, or for other
activities which have a preparatory or auxiliary character, for the enterprise;
42
f) The maintenance of a fixed place of business solely for any combination of Transportation Mix
activities mentioned in sub-paragraphs (a) to (e), provided that the overall
activity of the fixed place of business resulting from this combination is of a
preparatory or auxiliary character.
5) Notwithstanding the provisions of paragraphs 1 and 2, where a person - other
than an agent of an independent status to whom paragraph 6 applies - is acting in
one of the States on behalf of an enterprise of the other State, that enterprise
shall be deemed to have a permanent establishment in the first-mentioned State,
if -
a) He has and habitually exercises in that State an authority to conclude
contracts on behalf of the enterprise, unless his activities are limited to the
purchase of goods or merchandise for the enterprise; or
b) He has no such authority, but habitually maintains in the first-mentioned
State a stock of goods or merchandise from which he regularly delivers
goods or merchandise on behalf of the enterprise.
6) An enterprise of one of the States shall not be deemed to have a permanent
establishment in the other State merely because it carries on business in that
other State through a broker, general commission agent or any other agent of an
independent status, provided that such persons are acting in the ordinary course
of their business. However, when the activities of such an agent are devoted
wholly or almost wholly on behalf of that enterprise, he will not be considered an
agent of an independent status within the meaning of this paragraph if it is shown
that the transactions between the agent and the enterprise were not made under
at arm’s-length conditions.
7) The fact that a company which is a resident of one of the States controls or is
controlled by a company which is a resident of the other State, or which carries
on business in that other State (whether through a permanent establishment or
otherwise), shall not of itself constitute either company a permanent
establishment of the other.
With South Africa & India
Article 5: Permanent establishment
1) For the purposes of this agreement, the term “permanent establishment” means a
fixed place of business through which the business of an enterprise is wholly or
partly carried on.
2) The term “permanent establishment” includes especially, -
a) A place of management;
b) A branch;
c) An office;
d) A factory;
e) A workshop;
f) A mine, an oil or gas well, a quarry or any other place of extraction of
natural resources, including an installation or structure used for the
exploration or exploitation of natural resources; and
g) A warehouse, in relation to a person providing storage facilities for others.
3) A building site, a construction, installation or assembly project or any supervisory
activity in connection with such site or project constitutes a permanent
establishment only if it lasts more than six months.
4) Notwithstanding the preceding provisions of this Article, the term “permanent
establishment” shall be deemed not to include, -
43
Distribution Network a) The use of facilities solely for the purpose of storage, display or delivery of
Planning goods or merchandise belonging to the enterprise;
b) The maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of storage, display or delivery;
c) The maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of processing by another enterprise;
d) The maintenance of a fixed place of business solely for the purpose of
purchasing goods or merchandise, or for collecting information, for the
enterprise;
e) The maintenance of a fixed place of business solely for the purposes of
carrying on, for the enterprise, any other activity of a preparatory or
auxiliary character, and
f) The maintenance of a fixed place of business solely for any combination of
activities mentioned in sub-paragraphs (a) to (e), provided that the overall
activity of the fixed place of business resulting from this combination is of a
preparatory or auxiliary character.
5) Notwithstanding the provisions of paragraphs 1 and 2, where a person other than
an agent of an independent status to whom paragraph 6 applies is acting on
behalf of an enterprise and has, and habitually exercises, in a Contracting State
an authority to conclude contracts in the name of the enterprise, that enterprise
shall be deemed to have a permanent establishment in that State in respect of
any activities which that person undertakes for the enterprise, unless the
activities of such person are limited to those mentioned in paragraph 4 which, if
exercised through a fixed place of business, would not make this fixed place of
business a permanent establishment under the provisions of that paragraph.
6) An enterprise shall not be deemed to have a permanent establishment in a
Contracting State merely because it carries on business in that State through a
broker, general commission agent or any other agent of an independent status,
provided that such persons are acting in the ordinary course of their business.
7) The fact that a company which is a resident of a Contracting State controls or is
controlled by a company which is a resident of the other Contracting State, or
which carries on business in that other State (whether through a permanent
establishment or otherwise), shall not of itself constitute either company a
permanent establishment of the other.
Article 6: Income from immovable property
1) Income derived by a resident of a Contracting State from immovable property,
including income from agriculture or forestry, situated in the other Contracting
State may be taxed in that other State.
2) The term “immovable property” shall have the meaning which it has under the
law of the Contracting State in which the property in question is situated. The
term shall in any case include property accessory to immovable property,
livestock and equipment used in agriculture and forestry, rights to which the
provisions of the general law respecting landed property apply, usufruct of
immovable property and rights to variable or fixed payments as consideration for
the working of, or the right to work, mineral deposits, sources and other natural
resources. Ships, boats and aircraft shall not be regarded as immovable property.
3) The provisions of paragraphs 1 shall apply to income derived from the direct use,
letting or use in any other form of immovable property.
4) The provisions of paragraphs 1 and 3 shall also apply to the income from
immovable property of an enterprise and to income from immovable property
used for the performance of independent personal services.
44
Article 7: Business profits Transportation Mix
1) The profits of an enterprise of a Contracting State shall be taxable only in that

State unless the enterprise carries on business in the other Contracting State
through a permanent establishment situated therein. If the enterprise carries on
business as aforesaid, the profits of the enterprise may be taxed in the other
State but only so much of them as is attributable to that permanent establishment.
2) Subject to the provisions of paragraph 3, where an enterprise of a Contracting
State carries on business in the other Contracting State through a permanent
establishment situated therein, there shall in each Contracting State be attributed
to that permanent establishment the profits which it might be expected to make if
it were a distinct and separate enterprise engaged in the same or similar activities
under the same or similar conditions and dealing wholly independently with the
enterprise of which it is a permanent establishment.
3) In determining the profits of a permanent establishment, there shall be allowed as
deductions expenses which are incurred for the purposes of the permanent
establishment, including executive and general administrative expenses so
incurred, whether in the Contracting State in which the permanent establishment
is situated or elsewhere, in accordance with and subject to the limitations
prescribed in the taxation laws in that Contracting State.
4) As it has been customary in a Contracting State to determine the profits to be
attributed to a permanent establishment on the basis of an apportionment of the
total profits of the enterprise to its various parts, nothing in paragraph 2 shall
preclude that Contracting State from determining the profits to be taxed by such
an apportionment as may be customary. The method of apportionment adopted
shall, however, be such that the result shall be in accordance with the principles
contained in this article.
5) No profits shall be attributed to a permanent establishment by reason of the mere
purchase by that permanent establishment of goods or merchandise for the
enterprise.
6) For the purposes of the preceding paragraphs, the profits to be attributed to the
permanent establishment shall be determined by the same method year by year
unless there is good and sufficient reason to the contrary.
7) Where profits include items of income, which are dealt with separately in other
Articles of this Agreement, then the provisions of those Articles shall not be
affected by the provisions of this Article.
Article 8: Shipping and air transport
1) Profits of an enterprise of a Contracting State from the operation of ships or
aircraft in international traffic shall be taxable only in that State.
2) For the purposes of this Article, profits from the operation of ships aircraft in
international traffic shall include:
a) Profits derived from the rental on a bare boat basis of ships or aircraft used
in international traffic,
b) Profits derived from the use or rental of containers, if such profits are
incidental to the profits to which the provisions of paragraph 1 apply.
3) For the purposes of this Article, interest on funds connected with the operation of
ships or aircraft in international traffic shall be regarded as profits derived from
the operation of ships or aircraft and the provisions of Article 11 shall not apply in
relation to such interest.
4) The provisions of paragraph 1 shall also apply to profits from the participation in
a pool, a joint business or an international operating agency.
45
Distribution Network Article 9: Associated enterprises
Planning
1) Where, -
a) An enterprise of a Contracting State participates directly or indirectly in the
management, control or capital of an enterprise of the other Contracting
State; or
b) The same persons participate directly or indirectly in the management,
control or capital of an enterprise of a Contracting State and an enterprise of
the other Contracting State, and in either case conditions are made or
imposed between the two enterprises in their commercial or financial
relations which differ from those which would be made between
independent enterprises, then any profits which would, but for those
conditions, have accrued to one of the enterprises, but, by reason of those
conditions, have not so accrued, may be included in the profits of that
enterprise and taxed accordingly.
2) Where a Contracting State includes in the profits of an enterprise of that State –
and taxes accordingly – profits on which an enterprise of the other Contracting
State has been charged to tax in that other State and the profits so included are
profits which would have accrued to the enterprise of the first-mentioned State if
the conditions made between the two enterprises had been those which would
have been made between independent enterprises, then that other State shall
make an appropriate adjustment to the amount of the tax charged therein on
those profits if that other State considers the adjustment justified. In determining
such adjustment, due regard shall be had to the other provisions of this
Agreement and the competent authorities of the Contracting States shall if
necessary consult each other.
16.8 WAGES, EARNINGS AND HOURS OF WORK
A discussion on daily wagers is very important since such activities are very common
in SCM and warehouse handling. As a responsible supply chain manager you must be
aware of the rules and regulations in handling the wages of workers and keep
yourself updated on this count regularly. This will help you in negotiating any kind of
litigations at a later date.
The Minimum Wages Act, 1948 is both a protective and beneficial legislation
guaranteeing the payment of minimum rates of wages to the workers in the various
Scheduled Employments scattered over different parts of the country. Although the
Act does not provide for registration of establishments, yet it is applicable to
employments where the workers are particularly vulnerable to exploitation, due to
ignorance, poverty, illiteracy and lack of bargaining power. The workers in bidi
industry are scattered over large areas and do not have collective bargaining power.
Therefore, they are in need of protection. The Act empowers both the Central and
the State Governments to fix and revise the minimum rates of wages in the
Scheduled Employments falling under their respective jurisdictions. The bidi making
establishments, fall under the Scheduled Employment “Tobacco”, (including Bidi
Making) manufacturing in the State Sphere. Therefore, the responsibility for
implementation of the provisions of the Minimum Wages Act, 1948 rests with the
State Governments. They notify the minimum wages for bidi workers within their
jurisdiction.
In Madhya Pradesh, the rates of minimum wages for Bidi Rollers are fixed on a
piece rate basis (number of bidis rolled), the traditional measure being per thousand
bidis. However, fixation and revision of minimum wages is of no consequence unless
these are actually paid to them.The problems of the bidi workers continue to be a
46
cause of concern for the labor administrators and enforcement authorities as the Transportation Mix
workers often complain of the unfair treatment at the hands of manufacturers,
contractors and agents in matters of rejection of finished products, issue of
inadequate quantity and poor quality of raw material (tendu leaves, tobacco, thread,
etc.) as well as the violation of the provisions of the Bidi and Cigar Workers
(Conditions of Employment) Act, 1966, the Minimum Wages Act, 1948 and the Equal
Remuneration Act, 1976.The Regional Labor Ministers Conference held during 1994-
95 had endorsed the recommendations of the Ministry of Labor for the Constitution
of a Tripartite Standardization and District Level Vigilance Committee and had made
the following recommendations in respect of bidi workers:-
· The minimum quantity of raw material to be issued should be 800 grams of tendu
leaf of standard average quality and 300 grams of tobacco for 1000 bidis of
standard size.
· The wage loss due to rejection should not be more than 2.5 percent instead of
5 percent.
· Alternatively, the rejected bidis should be returned to workers after deducting
proportionate cost of tendu leaf and tobacco issued to them at the rates to be
fixed by the State Governments from time to time alongwith wages.
· The State Governments as well as Welfare Commissioners have been requested
to give wide publicity to the statutory provisions of the Bidi and Cigar Workers
(Conditions of Employment) Act, 1966, pertaining to rejection of not more than
2.5 percent bidis of sub-standard quality and ensure that employer/Contractor
supplies tendu leaf of the optimum quality to the workers. *
Prescribed rates of Minimum Wages
‘Tobacco (including bidi making) Manufactories’ is a Scheduled Employment

originally included in Part-I of the Schedule appended to the Act. The minimum
wages applicable to the bidi workers at the time of the Study were notified by the
State Government of Madhya Pradesh as provided under Section 3(1)(b) and Section
5 of the Minimum Wages Act, 1948.prior to 1953, Minimum Wages were fixed at Re.
0.62 to Rs. 1.37 per thousand bidis. These wages were revised to Rs. 2.00-2.25 for
the first time in 1966.Since then they have been revised several times. The latest
wage revision, which was in force at the time of the study, had become effective
from 1st October, 2000 vide notification No. 1/9/A/5/97/32759-33288 dated 12-10-
2000.The minimum rates of wages for various categories of employees in Tobacco
(including Bidi Making) Manufactories appearing in Part I of the Schedule were
linked to the Consumer Price Index Numbers (Industrial Workers). The revised rates
of minimum wages applicable during the period of study are given below: -
Table 16.3: Prescribed Minimum Rates of Wages for Piece Rated Employees
Class of Employees Minimum Wages ( in Rs.)
1) Bidi Rolling 36.17(per thousand bidis)
2) Wrapping/Packing/Labeling
a) Pasting of Slips on Bidi bundles
i) Labeling, Puda Making etc. Rs. 19.65 per thousand bundles
ii) Labeling on both sides of bundles Rs. 22.00 per thousand bundles
b) Wrapping and Labeling
i) Thin paper labeling Rs. 15.85 per thousand bundles
ii) Thin paper sticking Rs. 11.26 per thousand bundles
iii) Labeling Rs.4.76 per thousand bundles
iv) Puda Making Rs.5.01 per thousand bundles
Source: Annual Report 1999-2000, Ministry of Labour, Government of India, p.93
47
c) Wrapping on 1000 bundle (each bundle of 25 bidis)
Planning
i) Wrapping of Horizontal & Vertical Strips Rs. 68.35 per lakh bidis
ii) Wrapping/Pasting of paper Rs. 81.05 per lakh bidis
iii) Wrapping and Pasting of Trade Mark Rs. 81.05 per lakh bidis
In Bidi making industry all the time-rated (monthly/daily paid) workers other than the
above-mentioned piece rated categories have been classified into three broad
categories as Skilled, Semi-skilled and Unskilled workers. The occupations’, which
comprise these three skill categories, are as under (Table 16.4):
Table 16.4 : Workers in BidiMaking Industry.
1. Skilled Driver (Heavy Vehicle), Accountant, Munim, Cashier, Store Keeper,
Head Clerk, Godown keeper
2. Semi-Skilled Sorter/Checker, Bhattiwala, Driver (Light Vehicle), Typist, Billman,
Clerk
3. Unskilled Loader, Un-loader, Puda Maker and Chowkidar.
Prescribed rates of Minimum Wages (including V.D.A.) for time rated employees
were as below:
Sl. No. Skill Category Monthly Wages (Rs.) Daily Wages (Rs.)
1. Skilled 1995.44 76.75

2. Semi-Skilled 1828.30 70.32
3. Unskilled. 1662.80 63.95
N.B.- The wages includes the variable dearness allowance.
These wages have been linked to 1206 points of the Labour Bureau Series of All-
India Consumer Price Index Numbers for Industrial Workers (Base 1960=100).The
Variable Dearness Allowance (VDA) is payable at the rate of 1 paisa per point for
an increase of 930 points over 1206 points upto 30.09.2001.
The revised rates of minimum wages are subject to the following conditions:-
· The variable dearness allowances shall be calculated on 1st October of every
year on the basis of the average indices for twelve months i.e., July to June of
the preceding year.
· The revised rates of daily wages are to be worked out by dividing the monthly
rates by 26 days.
· Wherever the prevailing wages are higher, the revised wages will not have
adverse effect on any employee in any case and the higher rates shall continue
to be paid.
· An employee shall be entitled to a guaranteed minimum wage of Rs.178.00 in
case the employer fails to supply sufficient quantity of raw material for rolling
5600 bidis per week.
· The guaranteed wage will include the actual number of bidis made by an
employee during a week from the raw material supplied to him.
· An employee shall not be entitled to the guaranteed wages if he fails to make
full use of the raw material supplied to him while the raw material so supplied is
sufficient for rolling 5600 bidis per week.
In case an employer fails to supply raw material due to certain conditions like fire,
distress, epidemic etc., which are not under his control, an employee shall not be
entitled to the guaranteed wages.
48
Transportation Mix
16.9 DOCUMENTATION: INSURANCE & SALES TAX
Everything under the sun can be insured today, thanks to the various insurance
companies that have reached out to the environment in a big way. The age-old adage,
‘a stitch in time saves nine’ is very important for us to follow in letter and spirit.
Why should we insure? Very simple indeed, because a material/product that is
insured comes under the purview of Insurance act of 1938 (we will see later) and
that enables the consignor to claim the cost of the product in the event of any damage
to the product, which may occur, either during storage or transit. Every supply chain
manager should therefore understand the nuances of insurance, the risk covered and
the benefits accrued of insurance, unless you believe in, ‘penny wise and pound-
foolish’. Risk factor has enhanced tremendously with the turn of the century and
therefore remains covered under the protected wings of insurance and achieve the
maximum benefit that is available to you and your company. Let us see them as we
progress through the unit.
The Insurance Act, 1938 had provided for setting up of the Controller of Insurance
to act as a strong and powerful supervisory and regulatory authority for insurance.
Post nationalization, the role of Controller of Insurance diminished considerably in
significance since the Government owned the insurance companies.
With the opening up of the insurance industry to the private sector, the need for a
strong, independent and autonomous Insurance Regulatory Authority was felt. As the
enacting of legislation would have taken time, the then Government constituted
through a Government resolution an Interim Insurance Regulatory Authority pending
the enactment of a comprehensive legislation.
The Insurance Regulatory and Development Authority Act, 1999 is an act to

provide for the establishment of an Authority to protect the interests of holders of
insurance policies, to regulate, promote and ensure orderly growth of the insurance
industry and for matters connected therewith or incidental thereto and further to
amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the
General insurance Business (Nationalization) Act, 1972 to end the monopoly of the
Life Insurance Corporation of India (for life insurance business) and General
Insurance Corporation and its subsidiaries (for general insurance business).
The act extends to the whole of India and will come into force on such date as the
Central Government may, by notification in the Official Gazette specify. Different
dates may be appointed for different provisions of this Act.
The Act has defined certain terms, some of the most important ones are as follows: -
Appointed day means the date on which the Authority is established under the act.
Authority means the established under this Act.
Interim Insurance Regulatory Authority means the Insurance Regulatory
Authority set up by the Central Government through Resolution No. 17(2)/ 94-lns-V
dated the 23rd January, 1996.
Words and expressions used and not defined in this Act but defined in the Insurance
Act, 1938 or the Life Insurance Corporation Act, 1956 or the General Insurance
Business (Nationalization) Act, 1972 shall have the meanings respectively assigned to
them in those Acts.
Insurance Regulatory Authority
Establishment and incorporation of Authority
With effect from such date as the Central Government may, by notification, appoint,
the Insurance Regulatory and Develop is to be constituted. The Authority shall be a 49
Distribution Network body corporate, having perpetual succession and a common seal with power, subject
Planning to the provisions of this Act, to acquire, hold and dispose of property, and to contract
and can be sue or be sued in its own name. The head office of the Authority shall be
at such place as the Central Government may decide from time to time and it may
establish offices at other places in India.
Composition of Authority
The Authority shall consist of the following members, namely
a) A Chairperson;
b) not more than five whole-time members;
c) not more than four part-time members, to be appointed by the Central
Government from amongst persons of ability, integrity and standing who have
knowledge or experience in life insurance, general insurance, actuarial science,
finance, economics, law, accountancy, administration or any other discipline
which would, in the opinion of the Central Government, be useful to the
Authority:
The Central Government while appointing the Chairperson and the whole-time
members must ensure that at least one person each is a person having knowledge or
experience in life insurance, general insurance or actuarial science respectively.
Tenure of office of Chairperson and other members The Chairperson and every
other whole-time member shall hold office for a term of five years from the date on
which he enters upon his office and shall be eligible for reappointment.
However, no person shall hold office as such Chairperson after he has attained the
age of sixty-five years and no person shall hold office as such whole-time member
after he has attained the age of sixty-two years.
A part-time member shall hold office for a term not exceeding five years from the
date on which he enters upon his office.
A member may:
a) Relinquish his office by giving in writing to the Central Government notice of not
less than three months; or be removed from his office in accordance with the
following provisions.
Removal from Office
The Central Government may remove from office any member who: -
a) is, or at any time has been, adjudged as insolvent;
b) has become physically or mentally incapable of acting as a member;
c) has been convicted of any offence which, in the opinion of the Central
Government, involves moral turpitude;
d) has acquired such financial or other interest as is likely to affect prejudicially his
functions as a member;
e) has so abused his position as to render his continuation in office detrimental to
the public interest.
No such member shall be removed under clause (d) or clause (e) unless he has been
given a reasonable opportunity of being heard in the matter.
Comprehensive Policy
This insurance policy also known as a Comprehensive policy covers all the liabilities
of the insured vehicle under the Motor Insurance Act. No vehicle can be used
without insurance cover. Use of the vehicle without insurance cover is a penal
50 offence.
This insurance policy protects the motor vehicle owners from these liabilities: Transportation Mix
· Fire, Explosion, Self-Ignition and Lightning.

· Burglary, Housebreaking and Theft.
· Riot, Strike, Malicious and Terrorism Damage.
· Earthquake.
· Flood, Typhoon, Hurricane, Storm, Tempest, Inundation, Cyclone, Hailstorm.
· Accidental External Means.
· Transit by road, rail, inland waterway, lift, elevator or air.
· For motorcycles and commercial vehicles, the risk of Frost Damage is also
covered.
From the above coverage, for all classes of vehicles, the risks of riot, strike, malicious
and terrorism damage, earthquake, flood and storm can be opted out of with a
consequent discount in premium. In addition to these, cover is also available for
protection, removal costs and authorization of repairs.
Section II covers the liabilities towards third parties, i.e. liabilities of bodily injuries and
property damage.
For commercial vehicles, however, an additional Section III covers the vehicle while
it is being used for the purpose of towing disabled vehicles. This section covers third
party liabilities that the insured vehicle or the one being towed may incur as a result
of an accident. This is provided the towed vehicle is not towed for reward/
remuneration. Further, the insurance company is also not liable for damages to the
towed vehicle or any property being conveyed thereby.
Compensation Offered
This insurance policy would provide compensation for the motor vehicle owners from
these liabilities unlimited liability towards bodily
· Injury to any third party.
· Unlimited liability towards bodily injury to passengers of the vehicle.
· Liability towards third party property damage, limited to Rs.6,000/- only.
· Liability towards employees of the owner of the insured vehicle while travelling
or using it, against bodily injury to the extent required by the Workmen’s
Compensation Act.
If a motor vehicle is disabled as a result of loss or damage due to the perils mentioned
above, the insurance company bears the reasonable cost of protection and removal to
the nearest repairer and the cost of redelivery to the owner/insured subject to a
maximum limit, in respect of any one accident. The limits for various classes of
vehicles are as follows:
· Motor cycles/Scooters: Rs.300
· Private Car & Taxies: Rs.1500
· Other Commercial Vehicles: Rs.2500
Motor Vehicle Insurance Act
This insurance policy is essential for all motor vehicle owners since it protects them
from legal liabilities that might arise during their vehicle operation. This insurance
policy also known as the Act Only policy covers the act liability of the insured vehicle
that forms a compulsory requirement of the Motor Insurance Act. No vehicle can be
used without this insurance cover and use of the vehicle without this insurance cover
is a penal offence. 51
Distribution Network Risks Covered
Planning
This insurance policy protects the motor vehicle owners from the risks of:
· Fire, Explosion, Self-Ignition and Lightning.
· Burglary, Housebreaking and Theft.
· Riot, Strike, Malicious and Terrorism Damage.
· Earthquake.
· Flood, Typhoon, Hurricane, Storm, Tempest, Inundation, Cyclone, Hailstorm.
· Accidental External Means.
· Transit by road, rail, inland waterway, lift, elevator or air.
· For motorcycles and commercial vehicles, the risk of Frost Damage is also
covered.
From the above coverage, for all classes of vehicles, the risks of riot, strike, malicious
and terrorism damage, earthquake, flood and storm can be opted out of with a
consequent discount in premium. In addition to these, cover is also available for
protection, removal costs and authorization of repairs.
Section II covers the liabilities towards third parties, i.e. liabilities of bodily injuries and
property damage.
For commercial vehicles, however, an additional Section III covers the vehicle while
it is being used for the purpose of towing disabled vehicles. This section covers third
party liabilities that the insured vehicle or the one being towed may incur as a result
of an accident. This is provided the towed vehicle is not towed for reward/
remuneration. Further, the insurance company is also not liable for damages to the
towed vehicle or any property being conveyed thereby.
Compensation Offered
This insurance policy would provide compensation for the motor vehicle owners from
these liabilities Unlimited liability towards bodily
· Injury to any third party.
· Unlimited liability towards bodily injury to passengers of the vehicle.
· Liability towards third party property damage, limited to Rs.6,000/- only.
· Liability towards employees of the owner of the insured vehicle while travelling
or using it, against bodily injury to the extent required by the Workmen’s
Compensation Act.
If a motor vehicle is disabled as a result of loss or damage due to the perils mentioned
above, the insurance company bears the reasonable cost of protection and removal to
the nearest repairer and the cost of redelivery to the owner/insured subject to a
maximum limit, in respect of any one accident. The limits for various classes of
vehicles are as follows:
· Motor cycles/Scooters: Rs.300
· Private Car & Taxies: Rs.1500
· Other Commercial Vehicles: Rs.2500
16.10 INTRODUCTION TO SALES TAX

Sales tax is a tax on sale of goods. The liability to pay sales tax arises on making
sales of goods. In India, the law for levying sales tax is provided in the Central Sales
52
Tax Act, 1966. This act was passed by the Parliament and applies to the entire Transportation Mix
country. The main objects of this act are: -3
1) To formulate the principles for determining as to when sale or purchase of goods
takes place (i) in the course of inter-state trade or commerce or (ii) outside a
state or (iii) in the course of import into or export from India.
2) To provide for the levy, collection and distribution of taxes on sales of goods in
the course of inter-state trade or commerce.
3) To declare certain goods to be of special importance in interstate trade or
commerce.
4) To specify the restrictions and conditions in respect of State laws which impose
taxes on the sale or purchase of such goods of special importance.
The CST Act, being a Central Act passed by the Parliament regulates and provides
for levy of sales tax on the sale and purchase of goods made in the course of inter-
state trade or commerce. The sales tax law of each individual State regulates sales
and purchases made within a State, e.g., in the State of Maharashtra, the Bombay
Sales Tax Act, 1959 provides for the levy of sales tax on sales made within the State
of Maharashtra. Similarly, other States will also have their own sales tax laws for
levying sales tax on intra-state sales or purchases of goods. Generally the CST Act
does not deal with sales made intra-state. However, in respect of certain declared
goods oil seeds, sugar, pulses, crude oil, etc, the CST Act imposes restrictions on the
powers of State Governments to levy sales tax even in respect of intra-state sales.
Accordingly, Sales can broadly be classified into 3 categories
· Intra-state sales i.e. sales within the state
· Sales during import and export
· Inter-state sales
The provisions of the CST Act apply only in respect of inter-state sales and not intra-
state sales or import or export sales.
Definitions
It is essential to understand the meaning of certain terms used in the CST Act. For
the purposes of the Act, certain terms have been defined in the Act itself and the
meaning of these terms will be as per the definition only and not as per the ordinary
meaning of the term. However, where a particular term has not been defined, it will
have the same meaning as ordinarily understood.
Business includes
· Any trade, commerce, manufacture or any adventure or concern in the nature of
trade, commerce or manufacture, whether or not such trade, commerce,
manufacture, adventure or concern is carried out with the motive to make gain or
profit and whether or not, any gain or profit accrues from such trade, commerce,
manufacture, adventure or concern.
· Any transaction in connection with or incidental or ancillary to such trade,
commerce, manufacture, adventure or concern.
Dealer means any person who carries on, whether regularly or otherwise, the
business of buying, selling, supplying or distributing goods, directly or indirectly, for
cash or for deferred payment or for commission, remuneration or for other valuable
consideration and includes: -
· A local authority, body corporate, company, co-operative society or other society,
club, firm, Hindu Undivided Family (HUF) or other Association of Persons
(AOP) which carries on such business.
3
Shilpa Pandey in Indian sales tax site downloaded from the website www.salestax.com 53
Distribution Network · A broker, commission agent or any other mercantile agent, by whatever name
Planning called and whether of the same description as herein before mentioned or not,
who carries on the business of buying, selling, supplying or distributing goods
belonging to any principal, whether disclosed or not. An auctioneer who carries
on the business of selling or auctioning goods belonging to any principal, whether
disclosed or not and whether offers of the intending purchaser is accepted by
him or by the principal or by the nominee of the principal.
· A government, whether or not in the course of business buys, sells or supplies or
distributes goods, directly or otherwise, for cash or for deferred payment or for
commission, remuneration or other valuable consideration shall except in relation
to any sale, supply or distribution of surplus, unserviceable or old stores or
materials or waste products or absolute or discarded machinery or parts or
accessories thereof is deemed to be a dealer for the purposes of this Act.
Sale means any transfer of any property or goods from one person to another for
cash or for deferred payment or for any other valuable consideration and includes the
transfer of goods on hire purchase or other system of payment by installments but
does not include a mortgage or hypothecation or charge or pledge on goods.
Accordingly, consignments to agents or transfers of goods to branch or other offices

do not amount to sale for the purposes of the CST Act. Sale Price means an amount
payable to a dealer as consideration for the sale of any good less any sum allowed as
cash discount according to the practices normally prevailing in the trade but inclusive
of any sum charged for anything done by the dealer in respect of goods at the time of
or before the delivery thereof. However, it does not include freight or delivery cost or
cost of installation where such cost is separately charged.
Declared Goods means goods declared under section 14 to be of special importance

in inter-state trade or commerce. In section 14 there is a list of goods of special
importance, which are often called, declared goods. The important ones among them
are: -
Cereals
Coal in all forms excluding charcoal
Cotton in un-manufactured form
Cotton fabrics and cotton yarn
Crude oil
Hides and skin
Iron and steel
Jute
Oil seeds
Pulses
Man made fabrics
Sugar
Un-manufactured tobacco
Woven fabrics of wool, etc.
The CST Act has imposed certain restrictions on the powers of state government to
impose tax on declared goods inside the state.
54
Sale or purchase in the course of inter-state trade or commerce Transportation Mix
A sale or purchase of goods shall be deemed to take place in the course on inter-
state trade or commerce if the sale or purchase occasion’s movement of goods from
one state to another or is effected by the transfer of documents of title to the goods
during their movement from one state to another.
Explanation 1
Where the goods are delivered to a carrier or other bailer for transmission, the
movement of goods shall, for the purpose of clause 2 above, be deemed to
commence at the time of such delivery and terminate at the time when delivery is
taken from such carrier or bailer.
Explanation 2
Where that movement of goods commences and terminates in the same state, it shall
not be deemed to be a movement of goods from one state to another by reason
merely of the fact that in the course of such movements, goods pass through the
territory of any other state.
An Illustration
X of Ambala sells goods to Y of Bangalore in Ambala. Such sale is not an inter-state
sale since the goods do not move from one state to another. X of Mumbai sells and
dispatches goods to Y of Calcutta. This is inter state sales of goods since goods move
from one state to another under the contract of sales. X of Delhi sends goods by
railways to Y of Mumbai. Y sells the goods to Z of Mumbai and transfers the
document of title (railway receipt) during their movement from Delhi to the state of
Maharashtra. This is inter state sales since documents of title are transferred while
the goods are being moved from one state to another.
Sale or purchase inside the state
A sale or purchase of goods shall be deemed to take place inside the state if the
goods are within the state.
· In case of specific or ascertained goods, at the time the contract of sale is made
(Specific or ascertained goods means goods which are identified and agreed
upon at the time when contract of (sale is made) and
· In case of unascertained or future goods, at the time of appropriation of contract
of sale by the seller or by the buyer, whether the ascent of the other party is prior
or subsequent to such appropriation.(eg agreement to buy mangoes which are
still growing on the trees at a future date )
Explanation: Where there is a single contract of sale or purchase of goods situated
at one or more places the provisions of this subsection shall apply as if there were
separate contracts in respect of the goods at each of such places.
A sale or purchase of goods, which is not within the state as per the above provisions,
will be treated as taking place outside the state. The purpose of determining whether
the sales have taken place within the state or outside the state is very important for
levying central sales tax since under the CST Act, tax is leviable only on sales in the
course of inter-state trade or commerce.
Inter-state sales involve two or more states. It is necessary to determine the state in
which the sale or purchase of goods takes place since that becomes the appropriate
state for the purpose of levying and collecting central sales tax.
Sale or purchase of goods in the course of import or export
A sale or purchase of goods shall be deemed to take place in the course of exports of
goods out of the territory of India only if:-
1) The sale or purchase results in such exports; or

55
Distribution Network 2) Is effected by the transfer of documents of title after the goods have crossed the
Planning customs of India.
A sale or purchase of goods shall be deemed to take place in the course of import of
goods into the territory of India only if:-
1) The sale or purchase either results into such imports; or
2) Is effected by a transfer of documents of title to the goods before the goods
have crossed the customs frontiers of India.
In other words, location of goods when contract of sales is made is very important for
determining where the sale took place.
Types of excise duties
Under the excise laws, the following are the various types of duties, which are levied:
Basic duty: This is the basic duty levied under the Central Excise Act.
Special excise duty: This special duty is levied under special circumstances where
the levy of such additional duty is justifiable or found necessary to protect other
industries.
Additional Duty in lieu of Sales Tax: It can be charged on all goods by the central
government to counter balance exemptions from sales tax granted by various State
Governments to the detriment of industries in other States.
Additional Duty on specified items under the Act: If the Tariff Commission set
up by law recommends that in order to protect the interests of industry, the Central
Government may levy additional duties at the rate recommended on specified goods.
The notification for levy of such duties must be introduced in the Parliament in the
next session by way of a bill or in the same session, if the Parliament is in session. If
the bill is not passed within six months of introduction in Parliament, the notification
ceases to have force but the action already undertaken under the notification remains
valid. Such duty will be payable upto the date specified in the notification. Such duty
may be cancelled or varied by notification. Such notification must also be placed
before Parliament for approval as above.
It is noteworthy that “basic excise duty” is different from “special excise duty” or
“additional duty of excise”. Therefore an exemption from basic duty does not mean
that exemption from special duty or additional duty has also been granted unless there
is an express provision to that effect regarding the exemption in the notification.
Important definitions
Excisable Goods means goods specified in the schedule to the Central Tariff Act,
1985 as being subject to a duty of excise. The basic conditions to be satisfied by any
goods to be called excisable goods are:-
· The goods must be movable.
· The goods must be marketable i.e. saleable in the market as such goods. Actual
sale of goods in the market is not necessary because excise duty is chargeable
on manufacture and not on sales.
· The goods must be specified in the Central Excise Tariff Act
Factory means any premises including the precincts thereof, wherein excisable
goods other than salt are manufactured or wherein any manufacturing process
connected with the production of these goods is being carried on or is ordinarily
carried on.
Manufacture includes any process:
· Incidental or ancillary to the completion of a manufactured product; and
56
· Which is specified in relation to any goods in the section or Chapter note of the Transportation Mix
Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture
and the word “manufacturer” shall be construed accordingly and shall include not
only a person who employs hired labor in the production of manufacture of
excisable goods but also any person who engages in their production and
manufacture on his own account such as on contract basis or job work basis.
Once manufacture of goods is complete, excise duty is payable, whether the goods
are sold or self-consumed. Excise duty does not depend on the end use of the goods.
Sometimes, a particular process may not actually amount to manufacture but if it has
been specified that it amount to manufacture in the Schedule to the CETA, it will be
deemed to be manufacture and all the provisions applicable to manufacture will apply
to such process. Like repackaging of goods from bulk packing to small packing units
does not normally amount to manufacture. However, repackaging from bulk packing
to retail pack of pan masala will amount to manufacture on which excise duty has to
be paid.
Basis of charge and classification
Excise Duty is a tax on manufacture of goods but for the sake of administrative
convenience, it is collected only on removable of goods from the factory.
Excise duty may be levied in any of the following manner:-
Ad-valorem Duty: is levied as a percentage of value of the commodity
manufactured. For example excise duty could be 10 per cent of the cost of goods.
Most of the excise duty is levied on ad-valorem basis.
Slab System: Under this system, duty varies with the change of the value from one
slab to another. Thus for the first 1,000 kg, excise duty is Rs500, for next 1,000 kg it
is Rs750 and for production in excess, it is Rs1, 000 for every 1,000 kg manufactured.
Specific Duty Under this system, a specific rate of duty is fixed per unit rate or per
quantity item of the product manufactured, for example Rs10 per unit manufactured.
Compounded Duty: Under this system, Duty is levied on productive capacity
irrespective of the actual production. For example if a unit has installed capacity to
manufacture 10,000 ton, excise duty is Rs50, 000, whatever be the number of units
produced.
Once the liability to pay excise duty has been established on manufacture of
excisable goods, it is necessary to quantify the amount of excise duty payable. For
this purpose, it is necessary to find out, under which particular sub-group heading of
CETA do the goods in question actually fall. Since the rates of duty for each sub-
group are given in CETA the categorization of goods into sub-group headings is
known as classification of goods.
The Central Excise Tariff Act, 1985 (CETA) classifies all the goods under 20
sections and 96 chapters. Each of these sections is related to a particular class of
goods. Thus section 1 is on animal products, section 2 on vegetable products, so on
and so forth. Each section is divided into chapters and each chapter is sub-divided
into groups and sub-groups of excisable goods. This tariff schedule is based on the
internationally followed product coding system “Harmonised System of Non-
clementure” (HSN)
Excise Duty is payable at the rate specified in CETA against the sub-group heading
under which the product falls. However, benefit of exemptions or concessions may
be claimed under various notifications if the conditions specified in the notification are
satisfied.
57
Distribution Network Valuation
Planning
Since most of the excise duty is levied on ad-valorem basis i.e. at a percentage of
value of goods, the value of goods must be determined. Section 4 of the Central
Excise Act, 1944 provides for the determination of the value of goods for excise
purposes. The following are the provisions in this connection:-
· The value of excisable goods is the normal price of goods. The normal price of
goods means the price of goods at which the goods are normally sold in the
course of wholesale trade. However recent provisions have been introduced in
the Central Excise Act wherein certain specified articles are to be taxed on the
basis of the maximum retail price and not the wholesale price. Wholesale trade
means sales to dealer, industrial consumers, Governments, Local Authorities and
other buyers who purchase their requirements in bulk and not on retail basis.
· In determining the wholesale price, care should be taken that the buyer is not a
related person and the sale is for delivery at the time and place of removal. If the
buyer is a related person and this relationship has affected the price for sale,
suitable adjustments are to be made in arriving at the fair price. Similarly, if the
sale is not for delivery at the time and place of removal of goods, suitable
adjustments for other expenses such as freight and insurance of goods while in
transit from the place of removal to the place of sale must be made. Related
persons means a person who is so associated with the assessee that they have
interest, directly or indirectly in the business of each other and includes a holding
company, subsidiary company a relative and a distributor of the assessee and any
sub-distributor of such distributor.
· The price is the sole consideration for the sale. If there are other considerations
for the sale, suitable adjustments must be done in order to arrive at the
assessable value.
· If goods are sold at different wholesale prices to different classes of buyer (not
being related persons), each such wholesale price is deemed to be assessable
value. Therefore excisable goods can have more than one assessable value.
· If goods are sold in the course of wholesale trade at prices fixed by law or at
prices being the maximum chargeable under any law, such fixed price is taken as
the assessable value.
· If the assessee arranges that he does not generally sell goods in the course of
wholesale trade except to or through a related person, the price at which such
related person sells the goods is taken as assessable value.
· Expenses incurred on primary packing i.e. packing for making the product
actually saleable in the market are part of the assessable value. However the
packing expense on secondary or special packing or on durable packs, which are
returnable by the buyer, is not to be included in the value of the goods for the
purpose of calculation of excise duty.
· If the normal price of goods is not ascertainable because such goods are not sold
or for any other reason, the nearest equivalent price will be determined in the
manner provided in the Central Excise Valuation Rules, 1975.
· If the price at the time of removal of goods from the factory is not known but it
is dependent on the time and place of delivery, such price less cost of
transportation from the place of removal to the place of delivery will be take to
be the assessable value.
· If excisable goods are consumed within the factory, the value of comparable
goods produced by another person or the normal wholesale price of such goods
will be treated as assessable value.
58
· The assessable value does not include the amount of excise duty, sales tax and Transportation Mix
other taxes, if any, payable on such goods and subject to rules made in this
behalf, the trade discount allowed under normal wholesale business practices at
the time of removal.
· In case law has specified a tariff rate, the assessable value must be calculated
on the basis of such tariff rate.
· Excise duty is paid on the basis of normal price even if free samples are given.
· For example ABC Ltd manufactures toys which are chargeable to excise @ 10
percent. Cost of production is Rs10, 000 and profit margin is Rs1,000. Sales tax
is five percent. In this situation, excise duty is Rs1,100 ie 10 percent of Rs11,000.
Sales tax is included for the purpose of excise duty.
Valuation on retail price basis
The Central Government may notify goods by publication in the OFFICIAL Gazette
on which duty will be payable on the basis of the retail selling price. The following are
the provisions in this connection: -
1) The goods should be covered by the provisions of Standard of Weights and
Measures Act.
2) The Central Government may permit reasonable deductions from the “retail sale
price”. The Central Government takes into account excise duty, sales tax and
other taxes payable on the goods for allowing such reductions.
3) If more than one “retail sale price” is printed on the same packing, the maximum
of such retail price will be considered.
4) The “retail sale price” must be the maximum price at which excisable goods in
packaged forms are sold to the ultimate consumer. The retail sale price includes
all taxes, freight, transport charges, commission payable to dealers and all
charges towards advertisement, delivery, packing, forwarding charges, etc.
5) The price is the sole consideration for the sale.
e.g. Notification Nos. 18/97-CE(NT) and 19/97-CE(NT) both dt. 19-6-97 state that
excise duty on “cosmetics and toilet preparations” will be payable on the basis of
Maximum Retail Price printed on retail carton after allowing a deduction of 50%.
The following excisable goods have been covered under this scheme:
· Cosmetics and toilet preparations - deduction 50%
· Paints & Varnishes - deduction 40%
· Footwear and parts - deduction 40%
· Aerated waters - deduction 50%
· Colour television sets - deduction 30%
· Tooth powder & tooth paste - deduction 30%
· Detergents, Soaps etc - deduction 35%
· Chocolates - deduction - 35%
· Preparation of Malt, Cereals, Flour, Starch or milk - deduction 35%
· Pan masala in retail packs of 10 gms and more - deduction 50%
· Chocolates - deduction 35%
· Perfumes and toilet waters, beauty preparations, shaving preparations -
deduction 50%
· Glazed Tiles - deduction 50% 59
Distribution Network · Cooking appliances and plate warmers - deduction 40%
Planning
· Razor and Razor Blades - deduction 40%
· Primary cells and primary batteries - deduction 40%
· Electromechanical domestic appliances, shavers, hair clippers with self contained
electric motor - deduction 40%
· Radio and transistors set - deduction 40%
· Electric filament or discharge lamps - deduction 40%
Modvat
Modvat stands for “Modified Value Added Tax”. It is a scheme for allowing relief
to final manufacturers on the excise duty borne by their suppliers in respect of goods
manufactured by them. For example, ABC Ltd is a manufacturer and it purchases
certain components from PQR Ltd for use in manufacture. POR Ltd would have
paid excise duty on components manufactured by it and it would have recovered that
excise duty in its sales price from ABC Ltd. Now, ABC Ltd has to pay excise duty
on toys manufactured by it as well as bear the excise duty paid by its supplier, PQR
Ltd. This amounts to multiple taxation. Modvat is a scheme where ABC Ltd can take
credit for excise duty paid by PQR Ltd so that lower excise duty is payable by ABC
Ltd.
The scheme was first introduced with effect from 1 March 1986. Under this scheme,
a manufacturer can take credit of excise duty paid on raw materials and components
used by him in his manufacture. Accordingly, every intermediate manufacturer can
take credit for the excise element on raw materials and components used by him in
his manufacture. Since it amounts to excise duty only on additions in value by each
manufacturer at each stage, it is called value-added-tax (VAT)
The modvat credit can be utilized towards payment of excise duty on the final
product.
When the scheme was first introduced, it covered only some excisable goods.
Gradually, the scope of the modvat scheme has been enlarged from time to time
under various notifications. From 16 March 1995, all excisable goods can take the
benefit of the scheme except those mentioned below:-
In case of inputs
· Tobacco and Manufactured Tobacco Products
· Matches other than pyrotechnics articles of heading number 36.04 of CETA
· Cinematograph Films
· Motor Spirits, Special Boiling Spirits, High Speed Diesel
· In case of final products
· Tobacco and Manufactured Tobacco Products
· Matches other than pyrotechnics articles of heading number 36.04 of CETA
· Cinematograph Films
· Woven fabrics classified under chapter 52,54 & 55 of CETA other than cotton
fabrics, man made fibre fabrics and filament yarn fabrics
Advantages of Modvat
· It reduces the effects of taxation at multiple stages of manufacture.
· It facilitates duty free exports.
60 · It increases the tax base.
Disadvantages of Modvat Transportation Mix
· It increases paper work and leads to multiplicity of records.

· It leads to corruption.
· It leads to litigation.
The modvat scheme is regulated by Rules 57A and 57U of the Central Excise Rules
and the notifications issued thereunder.
Rule 57A This rule specifies the scope and applicability of the modvat. The modvat
scheme applies to all finished excisable goods which have been notified by the
Central Government in the Official Gazette for this purpose. The modvat scheme
may be made applicable in respect of certain goods or classes of goods with
restrictions and conditions.
For the purposes of the modvat scheme, input includes:-
· Inputs which are manufactured and used within the factory of production in or in
relation to the manufacture of the final product.
· Paints and packing material
· Inputs used as fuel
· Inputs used for the generation of electricity, used within the factory of production
for manufacturing of final products or for any other purpose, but does not
include:-
Machines, machinery, plant, equipments, apparatus, tools or appliances which are
used for production or processing of any goods or for bringing about any change in
any substance in or in relation to the manufacture of the final products. However, on
and from 1994-95, the benefit of modvat has been extended to excise duty paid on
several capital goods like plant, machinery, equipments, etc which are used for the
manufacture of the finished product.
As long as the capital goods are used in the factory of production, credit of modvat
will be allowed. No modvat is available in respect of capital goods not used within the
factory of production.
· Packing Material in respect of which any exemption to the extent of excise duty
payable on the value of packing material is being availed of for packaging of final
products.
· Packing materials of the cost of which is not included or had not been included
during the preceding financial year in the assessable value of the final products.
· The manufacturer can avail of the benefit of modvat credit on the final product
to the extent of specified duties paid on the inputs. The benefit of modvat will be
available only if the final product is an excisable goods. Modvat credit will not be
available if the final good is not an excisable goods or is exempt from duty or is
chargeable at nil rate of duty. However, benefit of modvat will be available to the
final goods manufactured by a unit in a Free Trade Zone or in an 100 percent
EOU where no excise duty is payable on final goods which are exported.
For example ABC Ltd purchased raw materials of Rs9,900 inclusive of excise duty
@ nine per cent and sales tax @ 10 percent. Modvat credit available will be Rs743
(Cost excluding sales tax will be Rs9,000 out of which excise duty will be Rs743 ie
9000/109*9)
Rule 57D Modvat credit will not be denied or varied just because some of the raw
materials and other inputs in respect of which excise has been paid become waste or
scrap in the course of the manufacturing process.
61
Distribution Network Similarly, modvat credit will not be denied or varied just because in the course of the
Planning manufacturing process of an excisable final product, an intermediate product which is
non-excisable or which is chargeable to excise at nil rate of duty or which is exempt
from excise duty is created.
Intermediate products are those products which get produced in the course of
manufacture of the final product. e.g. in the manufacture of alcohol from sugarcane,
first molasses are produced from which alcohol is produced. In such a situation,
molasses are an intermediate product, which are charged to excise duty. The benefit
of modvat will not be withdrawn if the intermediate product created is non-excisable
or is chargeable to excise at nil rate of duty or is exempt from excise duty. Whether a
product is an intermediate product or a final product depends on the facts and
circumstances of each case. The product may be intermediate so far as a particular
process of manufacturing is concerned but may be a final product for another
manufacturing process.
Rule 57E If the excise duty paid on modvatable inputs is subsequently increased or
refunded, the modvat claimed on the basis of those inputs will also be increased or
reduced, as the case may be. If any amount is found due as a result of such increase,
he with the excise authorities or in cash shall recover it from the manufacturer either
from the balance maintained.
Rule 57F The modvatable inputs must be used in or in relation to the manufacture of
final products for which they have been brought into the factory. However, the inputs
may be removed from the factory for home consumption or for export under bond but
only after intimating the Assistant Collector having jurisdiction over the factory and
obtaining a dated acknowledgement of the same. Where the inputs are removed for
home consumption, excise duty must be paid, at least of an amount equal to the
modvat credit claimed in respect of such inputs.
The modvatable inputs can also be removed from the factory to a place outside
either, as such or after they have been partially processed in the course of
manufacture but only after intimating the Assistant Collector having jurisdiction over
the factory and obtaining a dated acknowledgement of the same for any of the
following purposes:-
· For testing, repairs, refining, reconditioning or carrying out any other operation
required for the manufacture of final product provided that after such work, the
inputs are returned to the factory to be further used in the manufacture of final
product. The waste generated in such operation must also be returned to the
factory.
· For export of inputs under bond without payment of excise duty.
· For home consumption of inputs on payment of excise duty.
· For manufacture of intermediate products necessary for the manufacture of
final products provided that after such manufacture, the intermediate product is
brought back to the factory to be further used in the manufacture of final
product. The waste generated in such operation must also be returned to the
factory.
· For export of the intermediate products under bond without payment of excise
duty.
· For home consumption of the intermediate products on payment of excise duty.
However, waste is not required to be returned in case appropriate excise duty is paid
on the waste.
The main manufacturer as well as job worker are required to maintain register giving
62
details of materials sent, challan number, etc. similar to a stock register showing
goods lying with the job worker, goods returned by the job worker, etc. Generally, the Transportation Mix
goods sent must be returned to the main manufacturer within 60 days. If the job is not
completed within 60 days, the period may be extended for another 60 days.
The benefit of this rule is available only if the main manufacturer does a certain
amount of processing or value addition to make the final product. There must not be
complete manufacturing outside the factory by the job worker.
Modvat credit can be utilized for the following purposes:
· Towards payment of excise duty on the final product.
· Towards payment of excise duty on waste arising in the course of manufacture
of final product.
· Towards payment of excise duty on inputs themselves where they are cleared
for home consumption.
· Modvat credit in respect of finished products exported without payment of duty
(like goods manufactured by units in a Free Trade Zone or by 100 percent EOUs
or by units in an Electronic Hardware Technology Park or by units in a Software
Technology Park) may be utilized for discharging duty liability on similar final
products cleared for home consumption. If the manufacturer does not have any
excise liability, the modvat credit may be refunded to him provided he has not
availed claimed drawback of duty under the Central Excise Rules.
Any waste arising from processing of modvatable inputs in respect of which credit
has been availed may:-
· Be removed by payment of duty if such waste is produced in the factory.
· Be removed without payment of duty where permitted by order of the
government.
· Be destroyed in the presence of a proper officer on application made by the
manufacturer and if found unfit for further use or not worth the duty payable
thereon provided the manufacturer informs the appropriate authorities at least 7
days in advance in writing as regards the quantity of waste and the date on
which it is supposed to be destroyed and after complying with all the conditions
as may be prescribed by the Collector of Central Excise in this behalf.
The manufacturer may transfer or utilize modvat credit from one of his factories to
another with approval from the Collector of Central Excise provided application is
made by him in this behalf and all conditions imposed by the Collector are satisfied.
Rule 57G For availing the benefit of modvat, the manufacturer must carry out
certain procedures. He must file a declaration with the Assistant Collector of Central
Excise having jurisdiction over his factory indicating the description of final product
manufactured in the factory giving details of the inputs used for such purpose in each
of the said products. He must also give detailed information required by the Assistant
Collector of Central Excise and must obtain dated acknowledgement for such
declaration.
The manufacturer may avail of modvat credit only after he files the above
declaration. However, he cannot take credit unless the inputs are accompanied with
an invoice prepared as per Central Excise Rules, Form AR-1. In case of imported
goods it must be accompanied with triplicate copy of Bill of Entry or Certificate of
Appraisal by Custom posted in a foreign post office. In other words, the goods must
be accompanied with proof that duty has been paid on them.
The Central Government has the power to direct that modvat credit on specified
inputs may be allowed at such rate and subject to such conditions as it may direct
without production of documents evidencing the payment of duty. 63
Distribution Network Where copy of invoice meant for the purpose of claiming modvat is lost or misplaced,
Planning the manufacturer can claim modvat credit on the basis of or misplaced, the
manufacturer may claim modvat credit on the basis of the original invoice subject to
the satisfaction of central excise authorities.
A manufacturer of final products shall maintain:-
· An account in form of RG 23A - Part I and Part II in respect of duty payable on
final product. Part I is a record of inputs and subsequent utilization in the
manufacturing process. Part II is a record of modvat credit pertaining to such
inputs.
· An account current to cover the excise duty payable on the final product cleared
at any time.
· A manufacturer of final products must submit within five days after the close of
each month to the Superintendent of Central Excise, the following documents:-
· Original documents evidencing payment of duty
· Extract of RG 23A Part I and Part II
After verifying their genuineness, the Superintendent shall deface the documents and
return them to the manufacturer. The Collector may, having regard to the nature,
variety and extent of production or frequency of removal provide for a period shorter
than 1 month for submission of such return in respect of any assessee or class of
assessees. He may also permit filing of the aforesaid return by an assessee within a
period not exceeding 21 days after the close of each month. He may also permit filing
of the aforesaid return by an assessee within a period not exceeding 21 days after the
close of each quarter where the assessee is availing of an exemption based on the
quantity of clearances during a financial year.
In case the manufacturer is not in a position to file the aforesaid return on time for
sufficient cause, the Assistant Collector may allow the manufacture to take credit of
duty paid on inputs, condoning the delay and giving reasons in writing for such
condonation. The Assistant Collector must see that the following conditions are
satisfied before giving allowing such modvat credit: -
· Input in respect of which credit of duty is allowed are received in the factory not
before six months from the date of filing declaration and not before date of
eligibility for modvat credit.
· Amount of duty for which credit is sought has been actually paid on these inputs.
· Inputs have actually been used or are to be used in manufacture of final
products.
· The persons issuing invoices for modvatable inputs must follow certain
procedures and must get registered with the Central Excise authorities. He must
maintain stock account in the RG 23D. He shall make entries in RG 23D at the
end of the day of receipt and issue of excisable good and:-
· Shall enter the date of entry
· Correctly keep such book, account or register in the manner required
· Shall not cancel, obliterate or alter any entry therein except for correction of
errors
· Keep such book, account or register open for inspection by the concerned
authorities and allow such inspection
· Allow the concerned officer to take copies or extracts or send the records
to the concerned officer.
64
Such person shall issue serial-wise invoice containing details as prescribed by the Transportation Mix
Central Board of Excise and Customs or by the Collector of Central Excise in
quadruplicate as follows:-
· Original copy is for the buyer.
· Second copy is for the transporter.
· Third copy is for the excise department.
· Fourth copy is to be retained by the issuer.
The invoice contains the following details:
· Evidence showing proof of payment of excise duty.
· Rate of duty paid, amount of duty, duty debit entry in the PLA, date and number
of such entry.
· Postal address, range and division of the excise officer under which the
manufacturer falls, name and address and code number, excise registration
number of the factory and also the name and address of the consignee,
description and certification of goods, number of packages, total quantity of
goods, total price of goods, total assessable value, rate of duty, total duty paid,
serial number of debit entry in the personal ledger account, date and time of
removal of goods, mode of transport, motor vehicles registration number and
certificate duly signed by authorized person stating that what is stated above is
true.
· A working partner or managing director or secretary must authenticate each
invoice book.
· Each invoice shall bear a printed serial number running for the whole financial
year beginning on the 1st. April each year. The registered person for removal of
excisable goods at any one time shall use only one invoice book of each type
unless otherwise specially permitted by the collector in writing.
· The owner or the working partner or the managing director or the company
secretary shall authenticate each foil of the invoice book, as the case may be,
before being brought into use by the registered person. The serial number of the
invoice before being brought into use shall be intimated to the Assistant Collector
of Central Excise and the registered person shall retain dated acknowledgement
of receipt of such intimation. When the invoice is generated through computer,
serial number likely to be used in the forth-coming quarter shall be intimated to
the Assistant Collector of Central Excise and as soon as the same is exhausted,
a revised intimation must be send. Records and invoices generated through
computer are also recognized. Such registered dealer shall send details in
software used including the format for information to the Assistant Collector of
Central Excise.
Rule 57I The excise authority may disallow modvat credit, which has been wrongly
availed or incorrectly utilized. In case modvat credit has been taken on account of
error or misconstruction, the proper officer may send notice to the manufacturer
within 6 months from the date of filing of return to show cause why such modvat
credit should not be disallowed. In such cases, where modvat credit has already been
utilized, show cause notice must state the utlized amount must not be recovered from
the assessee.
In case such wrong modvat credit is on account of willful mis-statement, collusion or

suppression of facts on the part of manufacturer, instead of the aforesaid period of 6
months, notices may be sent for a period within 5 years from date of availment of
modvat credit. The period of stay by court order will not be considered while
determining the aforesaid period.
65
Distribution Network The proper officer must consider the representation of the manufacture with regard
Planning to the show cause notice and thereafter to determine the amount of disallowance, if
any.
Introduction of the Cenvat Scheme
The Modvat system, which has been operating in the country, has now become the
Cenvat Credit Scheme and the Modvat Rules have been replaced with a new set of
Cenvat Rules, combined for inputs and capital goods effective from 1.4.2000.
The scope of definition of inputs/capital goods has been widened. A major

disappointment of industry is that H.S.Diesel has been specifically kept outside the
purview of the Cenvat Scheme.
Cenvat credit on capital goods imported under Project Imports are now allowed @
100 % full instead of 75%. However, this credit can be claimed in a phased manner
of more than 1 year, provided the capital goods are still in the possession and use of
the manufacturer.
It is not necessary to avail Cenvat Credit only after installation of the capital goods.
Cenvat Credit on capital goods received after 1.4.2000 will be allowed only to the
extent of 50% of the duty paid. The balance credit can be availed in any subsequent
financial year, provided the capital goods are still in the possession and use of the
manufacturer.
In case of capital goods which have been received prior to 1.4.2000 but have not
been installed prior to 1.4.2000, Cenvat Credit @ 50% can be claimed in the financial
year 2000-2001 and balance in subsequent financial years.
The Modvat Credit on inputs or capital goods accrued prior to 1.4.2000 and remaining
unutilized on 1.4.2000 can be carried forward as Cenvat Credit.
Cenvat credit on items such as lubricating oils / grease, coolants are now covered in
the definition of inputs.
The procedure for defacing of the duty paying documents by the Central Excise
officers has been dispensed with, thereby giving assessees administrative
convenience.
The procedure for maintaining RG-23A Part-I Register has been dispensed with,
provided the assessee maintains all the required records as part of his normal
accounting system in a manner in which he finds suitable and all the relevant
information is contained in the records.
Inputs and semi-finished goods can be removed from the factory for further
processing or sub-contracting without debiting duty @ 10% of value of the inputs.
Such goods must however, be received back within 180 days. Otherwise, the entire
Cenvat Credit claimed will have to be reversed. The Cenvat Credit can be claimed
again when the goods are received back.
The scheme for issue of invoices by registered dealers upto second stage dealers has
been continued. However, the procedure for authentication of the invoices by Central
Excise Officers in case of importers has been dispensed with. The procedure of
authentication of invoices issued by the second stage dealer or an by first stage
dealer in respect of the imported materials has also been continued.
The procedure for filing Modvat Declaration under rule 57G and rule 57T(1) has
been dispensed with. However, the onus of proving admissibility of Cenvat Credit is
now on the assessee.
66
The procedure for movement of the inputs under the existing rule 57 f(4) and for Transportation Mix
movement of capital goods under rule 57S has been dispensed with. The assessee
can now use his own challans, memos or any other document evidencing that the
goods sent to job-workers have been received back.
A Manufacturer of the goods failing under Ch.39 of Central Excise Tariff Act and
manufacturing the dutiable goods as well as exempted goods will now be required to:
i) Either maintain separate accounts for receipt, consumption and inventory of
inputs used in the manufacture of exempted goods and exempted goods and take
credit only for those inputs used in the manufacture of dutiable goods ;or
ii) To debit 8% of the value of exempted goods at the time of clearance of such
exempted goods.
Cenvat Credit may be claimed on the basis of invoice, bill of entry or any other
prescribed document indicating payment of duty.
Service Tax
The major change as far as service tax is concerned is that the Supreme Court
Judgement has now been over ruled by amending the law with retrospective effect.
The Central Excise Department can now recover service-tax collected by the users
of the services. With the result no refund of service-tax paid on the services of goods
transport operators and clearing and forwarding agent would be granted.
Customs Duty
The peak rate of Customs Duty has been reduced from 40% to 35%. Special Custom
Duty of 10% of basic Custom Duty is being continued with and it is applicable to the
peak rate of 35% also.
SAD @ 4 % is now being made applicable to imports of goods by traders also.
In this year’s Budget the Finance Minister has attempted to make several changes in
the Modvat Scheme, firstly calling it “Cenvat” (Central Value Added Taxes), and
these new set of Rule 57A to 57I were introduced in Budget 2000 vide Notification
11/2000 (N.T.) dated 1.3.2000, which now are suddenly replaced vide an entirely new
set of Rule from 57AA to 57AK vide Notification No. 27/2000 (N.T.) dated
31.3.2000.
It is rather unfortunate that this notification was released just one day before the rules
become applicable due to which many of the assessees were not even aware of such
amendments. Even now, the industries are so confused that they are yet to get the
hang of all the procedures and documentations to actually say the procedures are
easy.
These new set of rules are welcome to the industry as they are based on the various
representations to remove the lacunas in the earlier rules but unfortunately still some
of the major procedures present under the Modvat Scheme were missing in these
new set of rules.
Under this new Cenvat Scheme, the assessee need not file any declaration to
department and he can now avail credit under Rule 57AB for the goods ie. Inputs
and capital goods as mentioned in the list, thus making only one set of rules for inputs
as well as for capital goods.
Moreover there are no prescribed documents and records to be maintained. This was
a welcome scenario but soon it is realised that this is a rather dangerous situation as
each one will have different types of records and each one will call it with a different
name. Hence the entire onus it is on the assessee, regarding correct documentation.
According to me this will lead to a very strict audit by the department and there are
67
Distribution Network more chances of flaws now than earlier, as these audits (Canadian Audit/EA-2000)
Planning are not only restricted to Excise but also all the related areas.
The new Cenvat rules have been amended such that the earlier crucial rules, which
were not included, are included now. But, still there remain some gray areas which
are not yet covered under the revised Cenvat rules like, there is no mention of the
words waste and scrap, even when it arises during the course if manufacture of the
final products; or in respect of waste and scrap arising during jobwork.
There is no mention of intermediate product as the earlier Modvat Rule 57D.
Even adjustment of credit under Rule 57E is not provided, where if the differential
duty is paid, whether the assessee is allowed to avail Cenvat or not is not clear.
Though under the new Cenvat Rule 57AG(2), it is mentioned that when the
manufacturer upto for exemption from whole of the duty in respect of goods
manufactured under any notification based on value or quantity of clearances in a
financial year, and if is availing credit of duty paid on inputs before such option is
exercised, he has to pay an amount equivalent to credit allowed to him in respect of
inputs lying in stock or used in any excisable goods lying in stock on the date of such
option and excess credit if any shall lapse. However, no provision is made to take
credit when the manufacturer opts for Cenvat Scheme for the first time or at any
time during the financial year in respect of inputs lying in stock on the date he opts to
avail Cenvat.
Moreover, there is no provision provided for direct delivery of inputs to the job worker
as earlier 57J, or even in case of sending material from one job worker to another.
There is no provision to store inputs outside the factory.
After all the hue and cry re-drafting of the new set of rules and bringing in
Notification 11/2000 dated 1.3.00, it was a pity that industries started following the
scheme, without being aware of the revised Cenvat rules, this is bound to create a
scope for unnecessary litigation. And I hope that the Central Board of Excise and
Customs provides instructions for not taking any actions for not following the new
Cenvat Rules with immediate effect.4
4
Shilpa Pandey, Excise and Service tax Consultant
68
Appendix ‘A’ Transportation Mix
State Wise Document Required for Goods Transports
States Sales Tax Form Local Sales Tax No. Octroi Remarks
Permit No.
Andhra Pradesh Not Required Consignee GST / CST Mandatory No Note
Assam Note Required No Note
Bihar 28B (R Permit) Required No Note
Chandigarh Not required Required No Note
Delhi Not required Required No -
Gujarat Not required Consignee GST / CST Mandatory Yes Note
Goa Not required Required No -
Haryana Not required Required No Note
Karnataka Not required Consignee KST/CST Mandatory No Note
Kerala Note Consignee KGST / CST Mandatory No Note
Madhya Pradesh Note Required No Note
Maharashtra Not required Required Yes -
Orissa Waybill No.32 Required - Note
Pondicherry Not required Required No -
Punjab Not required Required Yes Note
Rajasthan Form 18A Required Yes Note
Tamil Nadu Not required Consignee GST / CST Mandatory No Note
Uttar Pradesh Form 31/32 Required No Note
West Bengal Note Required No Note
Chattisgarh Form 59 A Required No Note
Jharkhand Note Required No Note
Uttaranchal Note Required No Note
General Requirements
· Invoices: Minimums of four copies are required.
· Central Sales Tax (CST) / Local Sales Tax (LST) Numbers: All invoices must
have both the sender’s as well as the recipient’s Central Sales Tax (CST)/Local
Sales Tax (LST) numbers printed.
· Most of the states do not accept the 10% CST as a criteria to allow entry of
shipments in their states without the local sale tax numbers.
· Octroi: An entry
· For Assam form 22/24 is required
Kerala: Only an original copy or a carbon copy of the invoice is acceptable.
Photocopies are not acceptable. The consignee’s KGST3 (Kerala Government Sales
Tax) and CST number must appear on the invoice.
Form 27 A is no longer required for a non-registered party, but the party should give a
declaration in duplicate the reason for the purchase of the goods outside Kerala. The
declaration should be on its letterhead and should accompany the shipment into
Kerala.
If the items categorized below are sent to the Consignee without a KGST3 number,
an entry tax would be applicable:
Product Tax(%)
69
Distribution Network Air Conditioner/Refrigerator/Washing Machine 12%
Planning Iron and Steel 4%
Granite 8%
Marble 10%
Furnace Oil 10%
Generator/Inverter 12%
Photocopier/Fax Machine/Scanner 8%
Entry Tax is not applicable to: Computers, components and spares/Other machinery
Computation of Tax: Tax is computed on: - total invoice value + freight + handling and
clearing charges. These should be shown on the invoice.
Entry Tax is exempted if:
The Consignee is a registered dealer having KGST (Kerala Government Sales Tax)
numbers. These numbers should be printed on the invoice.
The Consignee is a Central Government body i.e. Railways/Postal/All Defense

Services/Telecom/CBI/Account General Offices. The rest of the Central and State
Government bodies are subject to applicable taxes. Any shipment traveling out of
Kerala has to be accompanied by Form 26 in the absence of a regular commercial
invoice.
Activity1
As supply chain managers please read the laws, rules and regulations governing
insurance, sales tax as applicable to India and neighboring countries. Critically
examine these laws in the present scenario.
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16.11 A CASE STUDY
India, Switzerland and the United States: How Countries Avoid Liability after
Disaster (Bhopal gas Tragedy)
(Downloaded from the Internet site Disaster management By Karyn Keenan)

Mass disaster, illustrated by the tragic Bhopal accident, often affects multiple parties,
both individuals and nation states, and involves several legal jurisdictions. To resolve
such a legal conundrum, it is instructive to examine which parties escape liability as
well as those who fall prey. Significantly, in several of the worst international
accidents involving hazardous technologies and activities, nations that were arguably
responsible for the damage sustained, at least in part, escaped liability. This paper
explores how both importers and exporters of dangerous technology avoid
accountability, and whether or not the legal apparatus exists for their prosecution.
IMPORTING COUNTRIES
On December 2, 1984, forty tons of methyl isocyanate (MIC) leaked from the Union
Carbide India Limited (UCIL) plant in Bhopal, India. Considerable evidence indicates
70 that India was at least, in part, responsible for the accident. Government regulation of
industrial hazards is generally ineffective in this country. Inspection departments are Transportation Mix
understaffed; those agents who are employed are poorly trained; and funds are
scarce. In addition, regulatory legislation is largely ineffective. Implementing
procedures for requirements had not yet developed, set out under the Factories Act
of 1948. (Castleman et al, 1985). Similarly, the Water Act of 1974 and the Air Act of
1981 both designed to control pollution, are neither implemented nor enforced
effectively. Moreover, there is a deficiency of meaningful health and safety
regulations, which are actively enforced. Violations of what little law does exist are
met with paltry fines and take years to prosecute (Abraham et al, 1991).
India’s failure to adequately plan for the plant’s associated risk became obvious in the
aftermath of the accident. Medical facilities were unprepared for the disaster, and the
local community had been given no information regarding the risk inherent in plant
operations. Neither warning nor emergency procedures had been established
(Cassels, 1991). Moreover, the Indian Government failed to respond when the risk of
serious incident became known. A series of leaks, one involving the death of an
employee, preceded the December 1984 accident.
Significantly, Indian financial institutions owned approximately twenty per cent of

UCIL stock (Cassels, 1991). In addition, Muchlinski (1987) reports that originally,
UCC preferred not to construct a plant in India, but rather, to import pesticides
manufactured in the United States. India desired self-sufficiency in pesticide
production and accordingly, opposed UCC’s proposal. UCC gave in to India’s
requests and agreed to construct the Bhopal plant.
India’s failure to draft, implement, and enforce effective regulatory legislation, its
neglect for government inspection departments, its failure to respond to obvious signs
of impending crisis, its poor performance in anticipating and planning for potential
accidents, its interest as a minority owner in UCIL, and finally, its responsibility for
the establishment of the plant, point to certain liability in connection with the Bhopal
disaster.
Despite compelling evidence of culpability, India’s liability toward disaster victims was
never considered in the litigation. Following the accident, Americans initiated suits in
their domestic courts on behalf of thousands of Indian litigants. In response to the
extraordinary circumstances of the situation, including the enormous number of
litigants, their inability to effectively seek relief, and the international character of the
incident, The Bhopal Gas Leak Disaster Act (Bhopal Act) was passed. This Act
gave the Indian federal government parens patriae control of the case, allowing it to
appropriate the exclusive right to act on behalf of any person who wished to make a
claim with respect to the accident (Abraham et al, 1991). Absolute control over the
litigation allowed India to ignore any claim brought against itself. Moreover, as the
representative plaintiff, it’s questionable whether it would be possible for India to sue
itself!
This unprecedented act did not pass unnoticed. Bhopal victims claimed that the
statute unfairly denied them of control over the proceedings. Others argued that
because India was potentially liable both as a shareholder in UCIL, and with respect
to its regulatory duties, conflict of interest barred it from acting as the victim
representative. Furthermore, the Act jeopardized all future judicial decisions.
American courts hearing the case or enforcing an Indian decision were likely to
question the legality of the Bhopal Act. It is suggested that the Act both infringes
upon individual rights and fails to meet acceptable standards of due process, and
accordingly, would prevent a successful claim of the parens patriae doctrine (Cassels,
1991). Post settlement, the constitutionality of the Act was challenged. In December
1989 the Supreme Court of India upheld the statute, explaining that the Government’s
use of the parens patriae power was justified, considering the imbalance in available
71
Distribution Network resources between UCC and the victims. The Court also stated that the interests of
Planning the victims were sufficiently protected by the Act (Cassels, 1991).
The Indian Government’s ability to pass legislation granting it exclusive, parens

patriae power to control the Bhopal litigation precluded any inquiry into its culpability.
The ruling of the nation’s most exalted judiciary fortified this position. However, India
could not legislate away the counter-claim of its defendant. UCC counter-sued the
governments of both Indian and Madhya Pradesh in the Southern District Court of
New York. The suit was maintained following relocation to India. However,
settlement between India and UCC prevented the resolution of this counter-claim
(Koh, 1989).
On October 31, 1986, fire broke out in the warehouse of the Swiss pesticide
manufacturer, Sandoz. Due to the absence of an established catchments area, fire-
extinguishing efforts washed thirty tons of the chemicals into the Rhine. In contrast to
the Bhopal disaster, the corporation utilizing hazardous technology in this case was
domestic, and the accident caused trans-boundary damage. However, both cases
involve international claims. In both situations, the plaintiffs privatized their claims,
and the nation that was home to the dangerous activity avoided liability.
Through inadequate supervision over both the development and implementation of

Sandoz’s emergency plans, as well as its storage methods, Switzerland breached its
obligations under the Berne Convention on the Protection of the Rhine against
Chemical Pollution. Furthermore, Switzerland failed to satisfy its obligations under
Articles 7 and 11 of the Rhine Chemicals Convention, regarding the storage of
chemicals, containment of spills, and the notification of the International Commission
for the Protection of the Rhine (ICPR) (D’Oliveira, 1991).
Despite these breaches of both its international legal obligations and domestic
responsibilities to regulate industry, no claims were brought against Switzerland, either
by the foreign governments, which were affected, or by private citizens who
sustained damage. Instead, all responsibility was placed, in accordance with the
polluter pays principle, on the shoulders of Sandoz. The most important claims from
foreign litigants were those made by the Governments of the Netherlands, France
and Germany. These countries channeled all claims from their nations directly to the
Swiss Government, who transferred them to Sandoz. The Swiss Prime Minister
personally pledged the support of Swiss offices for the purpose of reaching
settlement. The claim channeling strategy was extremely efficient and by mid-1988,
over ninety percent of claims had been processed. The majority of unsettled claims
were Swiss.
The Swiss strategy was to create an efficient government-clearing house for claims,
which dealt preferentially with foreign claims. This strategy likely included
Government pressure on Sandoz to quickly resolve the claims through settlement, in
order to avoid litigation that could easily have involved the Swiss. It is conceivable
that Sandoz received some form of compensation for its compliance. Although
successful, no strategy, regardless of its efficiency in concluding settlement, would
have deterred litigation if the injured parties were determined to sue. D’Oliveira
(1991) suggests that the Netherlands, Germany and France were aware of the
significant possibility that any one of them could find itself in Switzerland’s position in
the future. By ignoring Swiss liability, it is probable that they anticipated comparable
future treatment. Furthermore, these countries wished to maintain friendly relations at
the ICPR.
The Indian and Swiss governments adopted different, but equally effective strategies
for avoiding liability. Exclusive legislative power and unacceptable high probability of
future European accidents were the tools handily wielded by India and Switzerland.
72
EXPORTING COUNTRIES Transportation Mix
Great discrepancy existed between the standards of operation, which were enforced
at the UCIL plant in Bhopal and those at the UCC plant in Institute, West Virginia.
The Bhopal plant was designed less safely than the corresponding facility in Institute.
A May, 1982 safety audit of the Bhopal plant by the Union Carbide headquarters
engineering group revealed dangerous operating conditions, which would have
merited immediate corrective action in the U.S.A.
Nothing was done in India. The corporate safety and health audit, which revealed this
information, was the only one of its kind for Bhopal in seven years of operation. In
contrast, American plants were audited every two years. Furthermore, other
industries manufacture MIC using a far less toxic process than UCIL. Still other
manufacturers choose not to use MIC, or store it in small amounts only, converting it
to product as quickly as possible (Castleman et al, 1985).
Based on the few examples listed above, it is clear that UCC took advantage of the
foreign locale of its subsidiary and failed to enforce U.S. standards of industry
regulation on UNIL. What is at least as significant, however, is the failure of the
United States to enforce the implementation of those standards on UCC. Despite
arguable liability on the part of the United States for the unsafe operation of UNIL,
India failed to bring a claim for American breach of international law, or to seek a
bilateral agreement for reparation. India instead privatized its claim. By characterizing
itself as an injured state to which UCC owed liability, rather than as an international
plaintiff, India avoided vulnerability to counter-suits in international law.
The Amoco Cadiz supertanker grounded in the territorial waters of France in March
1978, spilling dangerous quantities of crude oil. The American company owned the
ship, through various subsidiaries, Standard Oil. The Spanish company, Astilleres
Espanoles, designed and constructed the ship. The Government of France joined by
other injured parties, initiated litigation in the American court system. Standard, its
subsidiaries, and Astilleres Espanoles were found liable for negligent design,
construction and maintenance of the ship. However, no claims were made against the
United States for its failure to regulate the extraterritorial operations of Standard.
Scovazzi (1991) argues that it is doubtful that a principle of customary international

law has been established which requires states to regulate the activities of their
MNCs abroad. This uncertainty in the law may have discouraged France from
bringing an action. Moreover, like India, France may have feared exposing itself to
possible counter-suit as the host country within whose jurisdiction the accident
occurred.
Handl (1985) supports Scovazzi’s assertion, and states that under customary
international law, a country which authorizes the export of a hazardous technology is
not liable for accidental damage occurring in the use of said technology. In the
absence of international law, Handl (1985) looks to the criterion of control over the
technology to determine responsibility. He argues that practically, the host country
exercises this control. However, control can be defined expansively. Maritime law
illustrates the principle. Generally, vessels are deemed to be in the control of their
states of origin (Flag State), despite the fact that they may be found in the territory of
another. This is especially true with respect of those areas of operation over which
the host country exercises no control, such as construction of the ship and the
operation of its equipment. Applying this principle to MNCs in place of ships, the
United States would be held responsible for damage occurring as result of inadequate
safety measures regarding those aspects of operation over which it had greater
control than India. Considering that the U.S.A. controlled the plant design and
construction, as well as the technology utilized in the plant, its prescriptive jurisdiction
over UNIL operations is a convincing reason for holding the United States liable.
73
Distribution Network In its document, Liability for Injurious Consequences Arising Out of Acts Not
Planning Prohibited by International Law, the International Law Commission argues that an
exporting state should be subject to strict liability for damage arising out of accidents
concerning an area over which it has prescriptive jurisdiction. Smith (1988) argues
that the appropriate standard is due diligence, but that if an exporting country is
aware that the host lacks the technical and administrative capabilities necessary to
prevent the dangers associated with the technology, due diligence may require
prohibiting exportation.
Francioni (1991) contends that the argument used by home countries that they lack
the jurisdiction to enforce domestic safety and environmental standards on MNCs
located abroad is hypocritical. Exporting countries have successfully applied their
antitrust laws, fiscal and currency regulations, and trade union laws, among others, to
MNCs.
This author further argues that international law provides a basis for home country
liability. Principle 21 of the Stockholm Declaration on the Human Environment states
that nations are responsible to ensure that activities, which are within their jurisdiction
or control, do not cause environmental damage. Francioni (1991) argues that the
concept of control includes the type of power exerted by parent corporations over
their subsidiaries. He also looks to international human rights law. Several
international instruments proclaim the right of individuals to a healthy environment. If
the export of a hazardous technology jeopardizes the health of the host country’s
environment, the exporter could accordingly be found liable in international law.
Although several convincing arguments exist for holding exporting nations liable,
developments in the regulation of MNCs do not support this contention. International
organs are increasingly involved in the drafting of MNC codes of conduct. Neither
the U.N. Draft Code of Conduct on TNCs, nor other similar instruments provide
exporting state responsibility for noncompliance of parent companies (Handl, 1985).
Until the ability of government to legislate absolute control over MNC accident
litigation is challenged and potential plaintiffs overlook their self-interest as future
polluters, importer liability will be avoided. Similarly, despite the possible legal
foundations described above, exporter liability remains undeveloped. This weakness
must be addressed in order that countries such as India, Switzerland, the United
States are held responsible for their reprehensible behaviour.
An important could know fact and figures from Labour Bureau has been included
based on bidi workers in India as per minimum wages act of 1948.
16.12 SUMMARY
Legal issues play a very important role in SCM. Supply management professionals
deal with two major aspects of law: - the law of agency and law of contracts. This
unit has attempted to explain the entire process of SCM in which a supply manager is
likely to get involved in lawsuits, legal hassles and how can he overcome or avoid
these. The unit covers an overview of the sales laws, environmental realities and their
implications on supply chain, warehouse operations and jurisdiction. . It has discussed
the rules and regulations in handling the wages of workers Issues pertaining to
documentation: Insurance and Sales tax were also discussed.

1) As a supply chain manager critically evaluate the laws and regulations of both
74 India and EU countries.
2) How will you arrange for Insurance cover in case your vehicle meets with an Transportation Mix
accident and causes extensive damage to the goods, in the State of Assam?
3) What are the relaxations of Sales tax on goods across the various states in our
country and can we overcome this by a single document procedure?
4) As a warehouse manager list out your duties from receiving the goods to its
delivery to the manufacturer or to the end consumer.

READINGS
1) Central excise and Sales Tax laws books.
2) Books on commercial laws
3) Case studies on Litigations and company legal proceedings.
4) Internet sites www.comerciallaws.com , www.salestax.com
75
Indira Gandhi
School of Management Studies Logistics & Supply
Chain Management
Block
6
EMERGING TRENDS
Unit 17
Future Trends and Issues 5
Unit 18
Design for SCM and Greening the Supply Chain 20
Unit 19
SCM in Service Organization/Non-Manufacturing Sector 36
Mumbai New Delhi
Mumbai

Jharsuguda
Mumbai

December, 2004
ISBN-81-
BLOCK 6 EMERGING TRENDS
Unit 17: Future trends and Issues chats about trends and issues in the management
of supply chains in the future. It discusses collaborative strategic alliances for
enhancing supply chain effectiveness and talk about outsourcing services like third
and fourth party logistics. It also describes integrating supply chain logistics through
the use of IT and the Internet. Green supply chain strategies like reverse logistics are
dealt in detail. Finally it portrays a vision of deploying world-class supply chains in the
future.
Unit 18: Design for SCM and greening the Supply chain discusses various key
elements to be considered for designing of supply chain management. It reveals factors
influencing supply chain design decisions. It also discusses the emerging trends in the
field of supply chain management.
Unit 19: SCM in service organization/ non-manufacturing sector describes the

Supply Chain Management of Products vs. Services. It further discusses the
application of Supply Chain Management principles to a few broad industries in the
service sector.
Emerging Trends
4
SCM in Service
UNIT 17 FUTURE TRENDS AND ISSUES Organization/Non-
Manufacturing Sector
Objectives
· discuss the trends and issues in the management of supply chains in the future;
· discuss collaborative strategic alliances for enhancing supply chain effectiveness;
· discuss about importance of outsourcing services like third and fourth party
logistics;
· describe integrating supply chain logistics through the use of IT and the Internet;
· discuss green supply chain strategies like reverse logistics; and
· portray a vision of deploying world-class supply chains in the future.
Structure
17.1 Introduction
17.2 Collaborative Strategies
17.3 Vendor Managed Inventory
17.4 Third Party Logistics
17.5 Fourth Party Logistics
17.6 Enterprise Resource Planning
17.7 Internet and E-commerce
17.8 Supply Chain Agents
17.9 Green Supply Chain
17.10 Reverse Logistics
17.11 World Class Supply Chain
17.12 Summary
17.13 Self Assessment Exercises
17.14 References & Suggested Further Readings
17.1 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 cutting-edge information
technology.
Traditionally, the focus of companies has been on the intra-organizational 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 reclaimation through reuse, remanufacturing and recycling etc. This
5
Emerging Trends 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.
Organizations must provide world-class services to remain profitable and continue

serving the society in an effective manner in the ever-changing and turbulent market
space. The following sections are devoted to a discussion of the issues and trends
that supply chains are likely to adopt in times to come.
17.2 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.
Effective collaboration among channel partners can help in aligning them to enhance
the value of the integrated activities in the supply chain. This can contribute to faster
product development through shared design development and modification
documents. It can also contribute to synchronization of production and delivery
schedules and smoothen the material flow process obviating inventory management
problems. This can result in better capacity utilization, order fulfillment and customer
satisfaction.
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.
6
Collaboration can also enhance the logistics function in the supply chain. Transporters SCM in Service
can better organize inbound, inter-facility and outbound transportation to optimize Organization/Non-
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.
17.3 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 wholesaler’s inventory. This
eliminates the wholesaler’s/retailer’s 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.
Vendors are in an excellent position to manage inventory for the wholesaler/retailer

because they are a middle link in the supply chain and can track the needs both from
the supplier’s and the customer’s ends. Since the supplier/vendor understands his/her
own product better than anyone else, they can handle the replenishment needs of the
retailer who has to otherwise keep track of numerous products. The buyers’ role of
creating purchase orders from sales and supply forecasts is eliminated as the vendor
does handle this on behalf of the wholesaler/retailer. The buyers’ role becomes one
of assessing the recommendations made by the supplier and providing adequate
aggregate data and insightful information while collaborating on sales/demand
forecasts. Once VMI has been implemented, customers can benefit from 30 to 40
per cent reductions in inventory and 75 percent forecast accuracy.
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 synergise the flow inventory between the retailer and the supplier.
Accordingly, suppliers like Shell, a company manufacturing automotive lubricants etc.,
integrate customer’s 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
Shell’s suppliers. Similarly, Shell’s customers can now emulate the strategy and reap
benefits accruing out of reduced inventory in the supply chain.
Implementing VMI or SMI can be difficult when the supplier starts accounting for
the time and cost involved in managing the inventory. Some customers may not be
using computers and may be reluctant to allow suppliers to manage their inventory, if
it is a crucial business secret. Moreover, plant managers may be forced to stop
production if they stock out and suppliers are not able to replenish them just in time.
However, these problems can be overcome with some patience in understanding

customer’s and supplier’s inventory movement trends and building mutual trust. Since
buyers are often trained not to disclose information related to their inventory, enough
trust must be built to enable vendors and buyers to share inventory related
information. Once inventory flows are understood, the initial implementation cost is
well offset by recurring savings in inventory carrying costs and gains through 7
Emerging Trends optimum capacity utilization. For instance, Shell has reported returns of 10:1 on its
investment on SMIs.
Since data must be available on-line and is difficult to process manually, it is

necessary to use computers if this strategy has to be successfully implemented.
Often, suppliers can provide customers with computer hardware and easy-to-use
software in order to obtain real-time customer’s inventory status that is crucial for
preparing rolling production forecasts and schedules. VMI or SMI can also be
offered to customers as a value added service and can help in locking-in customers.
Once this cost-effective strategy is in place, all channel partners are able to reap rich
dividends and extend the strategy to other parts of the supply chain. Third party and
fourth partly logistics form some of the other collaborative efforts being evolved
towards effective management of supply chains.
17.4 THIRD PARTY LOGISTICS
Third-party logistics (3 PLs) is the use of an outside company to perform all or part
of the company’s 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 3PL’s 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
customer’s MIS for direct access.
3PLs can help customers reduce inventory and fixed assets, such as buildings and
8 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 SCM in Service
supply chain costs and sharing the savings with customers is probably the most visible Organization/Non-
(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 service-related 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 customer’s 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 latter’s
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.
Activity 1
Explain how a company can select a third party logistics (3PL) firm on the basis of
1) Customer orientation
2) Level of specialization
3) Asset ownership status
4) Price of the service
...............................................................................................................................
...............................................................................................................................
...............................................................................................................................
...............................................................................................................................
Activity 2
Which of the above criteria is most important for a company manufacturing fast
moving consumer goods (FMCG)? Why?
...............................................................................................................................
...............................................................................................................................
...............................................................................................................................
...............................................................................................................................
...............................................................................................................................
............................................................................................................................... 9
Emerging Trends
17.5 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 client’s 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
10
availability to reduce cycle times. Thus, working-capital reductions can be realized SCM in Service
through inventory reductions and reduced “order to cash” cycle times. Fixed-capital Organization/Non-
reductions result from capital asset transfer and enhanced asset utilization. 4PL’s 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 organization’s 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. These include:
· Availability of a large body of trained supply chain professionals, global
capabilities, reach and resources.
· Ability to manage multiple service providers.
· Ability to transition clients’ employees and other assets smoothly to the new 4PL
environment.
· Strong relationship and teaming skills.
· Delivery of world-class supply chain strategy formulation and business process
redesign.
· Strength in integrating supply chain technologies and outsourcing capabilities.
· Understanding of organizational change issues.
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.
Activity 3
Illustrate with examples, the three models that a 4PL company can adopt to deliver
supply chain services.
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Emerging Trends
17.6 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. Some of these tools are discussed in the
following sections.
Enterprise resource planning (ERP) tools are capable of capturing data and
automating financial, inventory and customer order tracking tasks. ERP systems
utilize a single data model and have an established set of rules for accessing data.
Although this is possible within an organization, more complex systems like electronic
data interchange (EDI) are required for accessing data from various databases
strewn along the entire supply chain.
EDI consists of a communications standard that supports inter-organizational

electronic exchange of common business documents and information. It represents a
cooperative effort between buyer and seller. They can become more competitive by
streamlining the communication process through the elimination of many steps
involved in traditional information flows. The basic components of an EDI system
includes:
1) A standard set of rules for formatting and syntax agreed upon by the user in the
network like the American National Standards Institute (ANSI) standards.
2) Software that can translate company specific database information into EDI
standard format for transmission.
3) A mail service responsible for the transmission of the document usually through
its own network or a third party value-added network (VAN).
Hence, the EDI involves three basic processes:
1) Collecting and receiving data from application programs in different computers,
2) Converting data from application program formats to standard format for
transmission over the network and reversing the same at the user end, and
3) Transmission of data between clients on the network.
For instance, a typical EDI inventory replenishment process could consist of the
following steps:
1) The buyer’s (customer’s) computer maintains a real-time inventory of each
product using automated technologies like bar-code readers.
2) It generates and delivers a predetermined purchase order to the supplier when
the inventory is reduced to the re-order level. The information is simultaneously
transmitted to accounts payable, warehouse and invoice files.
3) The supplier’s computer translates the purchase order into its own format and
automatically sends an acknowledgement to the customer.
4) A shipping note is electronically created with the fulfilled order and is sent to the
customer. Upon receipt of the consignment, the receiver creates an electronic
receipt notice that is sent to accounts payable and the supplier.
12
5) An invoice is then generated at the supplier’s end and sent to the customer SCM in Service
where the purchase order, receipt notice and invoice are automatically reconciled Organization/Non-
and a payment authorization is created and sent to accounts payable.
6) On receipt of this authorization, payment is transmitted electronically from the
customer’s bank to the supplier’s bank.
7) An electronic remittance advice is sent to the supplier and upon receipt, this
information is translated into accounts receivable and the buyer is given credit for
payment.
This process requires manual data entry at only three instances and reduces
paperwork drastically, thereby increasing the efficiency of the supply chain.
However, a significant investment has to be made by companies to implement EDI
and use VAN services. Due to excessive automation, collaboration is usually not
possible, thereby alienating business processes from the EDI process. In order to
overcome the difficulties that arose due to the use of EDI, companies, more recently,
have started using the Internet for integrating and exchanging information across the
supply chain.
Activity 4
Illustrate how EDI can help information flow for replenishing the inventory held by a
wholesaler stocking consumer durables.
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17.7 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 other’s ERP systems and data
warehouses for receiving real-time transaction processing data. It can enable on-
line and real-time 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. 13
Emerging Trends 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 organizational competitiveness through quick product development and
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 customer-centric supply chain. This
requires clear vision, strong planning and technical insight into the Internet’s
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 company’s 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 latter’s computer. This includes updating customer’s inventory data, and
generating re-order alerts based on the information of inventory on-line from various
sources. In this way, the supplier and customer’s 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 customer’s computer enabling it to support complex
decisions like vendor selection, etc.
14
SCM in Service
17.8 SUPPLY CHAIN AGENTS Organization/Non-
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 user’s 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.
17.9 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. 15
Emerging Trends Usage of materials must be limited to the extent required. Excessive trimming and
disposal of partially filled containers of materials is both wasteful and environmentally
harmful. Wastage can take place when materials or goods are unnecessarily stored
before they can be used. Just-in-time delivery and usage of materials can reduce the
wastage that can occur during multiple storage and handling.
While preventing and eliminating waste would be the best policy, some waste is
inevitable at the customer’s end in the form of used containers, packaging etc.
Recycling these materials helps to use them once again thereby reducing their role in
environmental pollution. The process of recycling, renovating and reusing materials
can be undertaken through a separate supply-chain channel, collectively termed as
reverse logistics.
17.10 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:
· Manufacturing returns from the production floor consisting of products having

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
Reverse Logistics activities include the following activities:
· Processing returned products
· Recycling packaging materials and reusing containers
· Reconditioning, remanufacturing and refurbishing products
· Disposing obsolete equipment
· Reuse or disposal of hazardous materials
· Asset recovery
Reverse logistics is a part of the closed-loop supply chain as depicted in Figure 17.1.
The reverse logistics parts of the supply chain starts with collection of returned goods
or refuse which then pass through sorters to reprocessing (reuse, recycle, recondition,
remanufacture, refurbishing and asset recovery) or to 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.
16
At most companies, returns are primarily managed through a series of SCM in Service
disconnected and paper-intensive processes. As a result, it takes the average Organization/Non-
company between 30 and 70 days to get a returned product back into the market,
including return transportation, repair or refurbishing, and redistribution to the
customer or market. Moreover, both companies and customers have limited
visibility into the returns process. In fact, a manufacturer frequently finds out
about a return only after it lands on the receiving dock.
Long reverse logistics cycles are harmful for products that have short lifecycles
such as high-tech products that can lose up to half their value in a single business
quarter. Moreover, Internet-based sales have increased the incidence of returns
to around 60%. Delays and lack of visibility into the reverse logistics process can
result in lost sales, customer dissatisfaction and inventory carrying costs.
Warehousing
Distribution
Manufacturing Consumption
CLOSED LOOP
Re-Manufacturing
SUPPLY CHAIN Returns/Refuse
Sorting
Disposal
Fig. 17.1: Closed Loop Supply Chain
Web-based applications are being developed that focus on automating and

streamlining the process and information flows associated with returns
management, These application connect customers, collectors, manufacturers,
and carriers while providing much needed visibility into, and control over, the
returns process. This can help suppliers maintain customer satisfaction levels.
17.11 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.
17
Emerging Trends Their employees would be empowered to think and act like owners and would go to
any extent to keep their customers delighted. They would be provided with the right
environment, management support and training to ensure excellent performance.
They would be fully involved and happy to meet organizational objectives.
World-class supply chain service providers would have a proactive management that
is balanced and consistent. Their management would be based on facts and analyzed
data. Activities and processes across the supply chain would be seamlessly integrated
with the help of IT, which would also be employed to assist decision-making, reducing
waste and remaining flexible. They would undertake a systems approach to
management. The leadership would establish unity of purpose and provide direction to
the organization. They would create an environment that provides continuous
challenge and rewards tied to performance and fair opportunities for growth.
They would collaborate and maintain strategic alliances with suppliers based on
ethics, honesty, professionalism and a win-win philosophy that can lead towards
combined growth of all the players involved in the supply chain.
Examples of some companies providing world-class services in the supply chain are
Federal Express (Inventory Control), British Telecom (Billing and Collection), Xerox
(Customer Service), Caterpillar (Information Systems), Wall-Mart (Logistics), Honda
(Purchasing), 3M (Supplier Management) and L. Bean (Warehousing and
Distribution). Managers and researchers agree that providing world-class services
can prove to be a sustainable strategy in the long run.
17.12 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.
17.13 SELF ASSESSMENT EXERCISES

1) What are the advantages of collaboration among members in the supply chain?
2) How can vendor managed inventory contribute to supply chain effectiveness?
3) “In this era of outsourcing, third party logistics can add value to existing supply
chains.” Explain this statement with examples.
4) What are advantages of fourth party logistics over third party logistics?
18
5) What is the skill set required by 4PL companies to be able to effectively SCM in Service
integrate the supply chain for their client company? Organization/Non-
6) Describe the role of the Internet in managing supply chains in the future.
7) What activities can be performed by e-Agents? How can e-agents help to
enhance collaboration among channel partners?
8) How can reverse logistics cater to a green supply chain strategy in the future?
9) What do you understand by the term “world-class supply chain”?

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.
19
Emerging Trends
UNIT 18 DESIGN FOR SUPPLY CHAIN
MANAGEMENT AND GREENING THE
SUPPLY CHAIN
Objectives
After reading this unit you will be able to:
· discuss various key elements to be considered for designing of supply chain

management;
· portray factors influencing supply chain design decisions; and
· discuss the emerging trends in the field of supply chain management.
Structure
18.1 Introduction
18.2 Factors Influencing Supply Chain Design Decisions
18.3 Sustaining Competitive Advantage
18.4 Good Business Model / Strategy
18.5 Demand Driven Supply Networks
18.6 Secret to Supply Chain Excellence is Balance
18.7 Supply Chain Design
18.8 Supply Chain Strategies
18.9 Hau Lee’s Uncertainty Framework
18.10 Aligning Strategies, Efficiency and Cost Savings in Supply Chain
18.11 Product and Process Design for Supply Chain Management
18.12 Design for Manufacturing
18.13 Design for Logistics
18.14 SCM –Trade off Curves
18.15 Greening the Supply Chain
18.16 Summary
18.1 INTRODUCTION
The rise of new technologies, new forms of competition, and new avenues to add
customer value have begun to redefine the basis of supply chain designs and
strategies. Product life cycles are being compressed. Services are becoming
commodities in ever-shorter time spans. Intellectual capital and proprietary
technologies, once protected by layers of patents and enshrouded in corporate
secrecy, have become widely available.
Building and sustaining competitive advantage requires firms to learn and adapt at an
ever-faster rate in order to distinguish themselves from competitors. Andy Grove, the
chairman of Intel, in his popular book “Only the Paranoid Survive” uses the term
‘inflection point’ to characterize the nature of the profound, sudden changes in the
environment that often spell a major crisis for the firms.
20
Inflection points signify the potential for a radical transformation of an industries SCM in Service
structure. In view of above, to remain competitive, effective and robust designing of Organization/Non-
supply chain management gains tremendous importance.
To remain competitive, industrial organizations are continually faced with challenges

to reduce product development time, improve product quality, and reduce production
costs and lead times. Increasingly, the challenges cannot be effectively met by
isolated change to specific organizational units, but instead depend critically on the
relationships and interdependencies among different organizations (or organizational
units). With the movement toward a global market economy, companies are
increasingly inclined toward specific, high-value-adding manufacturing niches. This, in
turn, increasingly transforms the above challenges into problems of establishing and
maintaining efficient material flows along product supply chains. The ongoing
competitiveness of an organization is tied to the dynamics of the supply chain(s) in
which it participates, and recognition of this fact is leading to considerable change in
the way organizations interact with their supply chain partners. The development of
techniques and tools to enable modeling and analysis of emerging supply chain
management strategies and practices, and application of these tools to understand
critical tradeoffs is very important for designing supply chain management.
18.2 FACTORS INFLUENCING SUPPLY CHAIN

DESIGN DECISIONS
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 firm’s 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. 21
Emerging Trends We should expect to see the impact of frequent and massive change on an industry in
three ways.
a) Commoditisation 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. Today’s 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
today’s 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 CD’s 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 so-called 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.
18.3 SUSTAINING COMPETITIVE ADVANTAGE
Companies can only survive and prosper to the extent that they are able to change as
fast or faster that the rate at which their industry is changing.
· They need to recognize that their customers are able to dictate prices and
offerings, their products and services have already become commodities
· Companies are able to generate high profitability to the extent that they are able
to differentiate themselves in a significant way from their competitor.
· They must balance their organizations designs to promote the kind of
innovation, experimentation and thinking that will encourage self-renewal and
reinvention.
22
Companies from variety of industries have implemented some new strategies to SCM in Service
embrace change in order to learn and craft new sources of competitive advantage. Organization/Non-
1) Pursue self-cannibalization opportunities.
2) Buy out the threat or new entrants.
3) Learn from new entrants.
4) Manage parallel product teams.
18.4 GOOD BUSINESS MODEL / STRATEGY
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.
Fargo’s business model changed the rules of the game, in this case, the economics of
travel. Traveler’s cheques remained the preferred methods for taking money abroad
for decades until a new technology—the 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 business—competition. Sooner or later every enterprise runs into
competitors. Dealing with that reality is strategy’s 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.
18.5 DEMAND DRIVEN SUPPLY NETWORKS (DDSN)
Demand driven supply networks are supply chains driven by the voice of the
customers. DDSN is a shorthand term for the next generation supply chain that has
been taking shape for sometime. It simply means building all supply chain processes;
infrastructure and information flow to serve the down stream – source of demand-
whether a consumer is in the super market or the department of defence.
Rather than the upstream supply constraints of factories and distribution system,
pioneers have been doing it this way for a decade or more & in the process
redefining what is possible in the 21st century supply chain practice.
DDSN Matters to Growth, Profitability and Valuation
Early adopters are already saving 5% of top live revenue compared to laggards. The
saving can be seen in more granular matrices as well like getting paid by customer 70
days sooner, holding half the inventory and delivering 92% perfect order verses the
laggards average 91%.
There is powerful and significant correlation between perfect order performance

return on assets earnings / shares and perfect margins. The takeaway! Higher levels
of supply chain service (on time delivery order occurrence and in stock
performance) correspond with lower level of supply chain cost (inventory,
transportation and material handling) for best performers.
DDSN give companies cost time and efficiency advantages that boost profits. It also
positions winners to grow with dramatically faster response to business opportunities
– at the level of lower stock outs for current products and as much as 70% faster 23
Emerging Trends time to market for new products. More innovations with better perfect product launch
performance means more business opportunities seized as customer or market
demand evolves.
DDSN Matters to the Decisions Made About Technology

1) Is radio frequency identification (RFID) just a costly tax dropped on
manufacturers by their mega customers or it is a unique opportunity to extend
visibility into consumer demand?
2) Is enterprise resource planning (ERP) consolidation & upgrade an expensive IT
projects with little clear benefit or is it a business backbone vital to supporting
future growth?
3) Is product life-cycle management (PLM) an engineering jargon or is the critical
infrastructure for accelerating product innovation?
Tackling such sweeping IT challenges without some guiding strategic principle is
playing professional Russian roulette. Simple minded truisms like “ business needs
determine IT priorities “ does not help at all. Supply chain professionals better have a
far more decisive basis for prioritizing the ‘to do’ list.
The right basis combines strategic direction, best practices & technology
1) Strategic direction: What is the long-term basis of competition for our
business? Where will new growth come from, rather than just lower cost?
2) Best practices: What role do lean or demand pull management principles play?
What role does supply chain collaboration play, including collaborative planning,
forecasting & replenishment (CPFR) or sales & operational planning (S&OP)?
What about product platform strategies or stage gate product development?
3) Technology: What existing supply chain execution (SCE) systems run in the
warehouses, distribution centers & field service operations that can be nervous
system for the demand driven future? What information they do not provide?
Approaching technology choices with answers to these three sets of questions in
hand we make the business case & roll out plan a lot easier.
DDSN Matters to the Global Economy and the Employment Base
The critical measure of supply chain’s importance to business is the impact on overall
productivity – not simply labor productivity, but multifactor productivity. This number
averages 4.2% per year from 1995 to 2000 for durable manufacturing. Through boom
and bust, war and peace & every other upheaval we have seen the past 10 years,
this trend still looks robust.
The essential fact is that output per unit input of labor and capital is growing three
times faster than population & at least twice as fast as it did through the entire
twentieth century. The steady march of supply chain efficiency from Ford’s River
Rouge mega factory to today’s network of contract manufacturers, third party
logistics services and outsource expertise is at an inflection point. Those, which do
not keep the pace, will be acquired or closed and those, which do so, will consolidate
their industries & built great corporate legacies.
For most of us this translates into more & better stuff with minimal or no inflation &
high paying jobs. These will not be factory jobs, nor will they be white-collar back
office functions all of which can be outsourced or automated with capital. These jobs
are about translating customer needs into supply chain execution. Designers,
marketers, coordinators, problem solvers, these are the kind of jobs behind the curtain
of the new demand driven supply network.
24
DDSN Matters Because Dell, Wall-Mart, & Procter & Gamble are doing it SCM in Service
now Organization/Non-
Under the most impossible supply chain conditions imaginable –super short product
life cycles (consumers pc’s) and long lead time components (semiconductors
including processors) –Dell managed to build the first true demand driven supply
networks. This network embraces demand variability (35% of home and small
business, customers cancel in the first 24 hours) like no push supply chain ever
conceives. And it keeps getting better.
Also, Proctor and Gamble’s “moments of truth” and Wall-mart’s “everyday low
prices” provide powerful strategic principles to set a course for long-term supply
chain excellence. Their financial performance shows that it works.
Recommendations
Start with demand and work backwards to define supply chain strategy. Constraints
are more fluid than ever, provided the visibility on demand is clear enough to quote
accurate requirements backwards into the network. The notion of a “moment of
truth” helps many companies to define exactly what matters at instant where supply
needs demand.
While looking to capitalize on existing supply chain applications in order management,

warehouse management and the like, prepare positions on the four emerging corner
stones of technology that support DDSN:
· Unit Level Demand Visibility: RFID, POS, B2C, E- commerce, all represent
demand at its most granular and therefore most precise. For some, this may be
no different than bar fleeting spikes in demand.
· Demand Management: Forecasting, price, and revenue optimization,
promotions management tools supporting these processes deepen the ability to
manage the supply / demand balance by tapping into demand variability as a
resource. Such tools are also essential to weather the storm of data from unit
level demand.
· Product Lifecycle Management: Design for X means, defining the product and
its supply and service network for speed, reuse and compliance. 80% of supply
chain costs are set during early design phase of new product development, PLM
focuses on getting this right.
· Executive Dashboards: Bench marking and balance performance,
measurement is the ultimate expression of business judgment driving supply chain
decisions. What data populates the dashboards and how it differs by role is a
deceptively thorny and potentially political issue.
18.6 THE SECRET TO SUPPLY CHAIN EXCELLENCE

IS BALANCE
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 don’t have to trade cost for service or vice –versa. The top companies
keep their balance in the details, catapulting them to best overall.
25
Emerging Trends 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.
· Getting the demand information possible from your key customers.
· Sharing it with your suppliers and logistics providers as early as possible.
· 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 don’t just move costs around.
Demand visibility is a major barrier in developing demand driven supply networks.
( DDSN’s).
Demand Visibility is Everyone’s Top Concern in Moving Supply Chains
Towards DDSN’s.
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
26
and processes is really a matter for Product Portfolio Management (PPM). With SCM in Service
future products, demand planning depends mostly on working ways lead time Organization/Non-
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.
18.7 SUPPLY CHAIN DESIGN

Successful supply chain design requires several decisions relating to the flow of
information, product and funds. These decisions fall into three categories or phases
depending on the frequency of each decision and time frame over which a decision
phase has an impact.
1) Supply Chain Strategy or Design: A company’s competitive strategy defines
the set of customer needs that it seeks to satisfy through its products and
services. The supply chain strategy includes supplier’s strategy, operations
strategy, and logistics strategy. Decisions regarding inventory, transportation,
operating facilities and information flows in supply chain are all parts of supply
chain strategy. Various functional strategies cannot be formulated in isolation.
They must fit and support each other if a company is to succeed. Achieving a
strategic fit between a company’s competitive strategy and supply chain strategy
is a key consideration. There are three basic steps to achieve this.
· Understanding the customer,
· Understanding the supply chain, and
· Achieving the strategic fit.
During the supply chain strategy design phase a company decides on how to
structure the supply chain. It decides what the chains configuration will be and what
processes each stage will perform. These decisions include the location and
capacities of production and ware housing facilities, products to be manufactured or
stored at various locations, modes of transportation and types of information systems
to be utilized. Supply chain design decisions are typically made for long term and are
very expensive to alter on short notice.
27
Emerging Trends 2) Supply Chain Planning: This starts with a forecast for the coming year of
demand in different markets – with all the details of markets, supply locations,
inventories, sub contracting of manufacturing etc.
3) Supply Chain Operations: The goal is to implement the operating policies in the
best possible manner.
18.8 SUPPLY CHAIN STRATEGIES

Let us see some supply chain characteristics and strategies
Demand and supply uncertainty characteristics
Hau Lee points out that in addition to important demand characteristics, there are
uncertainties revolving around the supply side that are equally important drivers for
the right supply chain strategy.
Lee defines a stable supply process as one where the manufacturing process and the
underline technology are mature and the supply base is well established. In contrast,
an evolving supply process is where the manufacturing process and the underline
technology are still under early development and are rapidly changing. As a result the
supply base may be limited in both size and experience. In a stable supply process,
manufacturing complexity tends to be low or manageable. Stable manufacturing
processes tend to be highly automated, and long-term supply contracts are prevalent.
In an evolving supply process, the manufacturing process requires a lot of fine-tuning
and is often subject to breakdowns and uncertain yields. The supply base may not be
reliable, as the suppliers themselves are going through process innovations. Following
exhibit summarizes some of the differences between stable and evolving supply
processes.
Lee argues that while functional products tend to have a more mature and stable
supply process, but that is not always the case. For example, the annual demand for
electricity and other utility products in a locality tend to be stable and predictable, but
the supply of hydroelectric power, which relies on rainfall in a region, can be erratic
year by year. Some food products also have a very stable demand, but the supply
(both quality and quantity) of the products depends on yearly weather conditions.
Similarly, there are also innovative products with a stable supply process. Fashion
apparel products have a short selling season and their demand is highly unpredictable.
However, the supply process is very stable, with a reliable supply base and a mature
manufacturing process technology.
Table 18.1: Demand Uncertainty Characteristics
Sl. No. Functional Innovative
1 Low demand uncertainty High demand uncertainty
2 More predictable demand Difficult to forecast

3 Stable demand Variable demand
4 Long product life Short selling season
5 Low inventory cost High inventory cost
6 Low profit margin High profit margin
7 Low product variety High product variety
8 Higher volume Low volume
9 Low stock out cost High stock out cost
10 Low obsolescence High obsolescence
28
Table 18.2: Supply Uncertainty Characteristics SCM in Service
Organization/Non-
Sl.No. Stable Evolving
1 Less breakdowns Vulnerable to breakdowns
2 Stable and higher yields Variable and lower yields
3 Less quality problems Potential quality Problems
4 More supply sources Limited supply sources
5 Reliable suppliers Unreliable Suppliers
6 Less process changes More process changes
7 Less Capacity constraints Potential capacity constraints
8 Easier to change over Difficult to change over
9 Flexible Inflexible
10 Dependable lead times Variable lead times
Types of Supply Chain Strategies
Lee characterizes four types of supply chain strategies as shown in the exhibit below.
Information technologies play an important role in shaping such strategies.
1) Efficient Supply Chains: These are supply chains that utilize strategies aimed
at creating the highest cost efficiency. For such efficiencies to be achieved, non
value added activities should be eliminated, scale economies should be pursued,
optimization techniques should be deployed to get the best capacity utilization in
production and distribution, and information linkages should be established to
ensure the most efficient, accurate, and cost effective transmission of
information across the supply chain.
2) Risk Hedging Supply Chains: These are supply chains that utilize the
strategies aimed at pooling and sharing resources in a supply chain so that the
risks in supply disruption can be shared. A single entity in a supply chain can be
vulnerable to supply disruptions, but if there is more than one supply source or if
alternative supply resources are available, then the risk of disruption is reduced.
3) Responsive Supply Chains: These are supply chains that utilize strategies
aimed at being responsive and flexible to the changing and diverse needs of the
customers. To be responsive, companies’ use build to order and mass
customization processes as a means to meet the specific requirements of
customers.
4) Agile Supply Chains: These are supply chains that utilize strategies aimed at
being responsive and flexible to customer needs, while the risk of supply
shortages or disruptions are hedged by pooling inventory and other capacity
resources. These supply chains have strategies in place that combine the
strengths of “hedged” and “responsive” supply chains. They are Agile because
they have the ability to be responsive to the changing, diverse, and unpredictable
demands of customers on the front end, while minimizing the back end risks of
supply disruptions.
18.9 HAU LEE’S UNCERTAINTY FRAMEWORK
Let us consider some examples and types of supply chain needed. According to Lee,
it is more challenging to operate a supply chain that is in the right column of the table
18.3 than in the left column, and similarly, it is more challenging to operate a supply
chain that is in the lower row of the exhibit than in the upper row. Before setting up a
supply chain strategy, it is necessary to understand the sources of the underlying
29
Emerging Trends uncertainties and explore ways to reduce these uncertainties. If it is possible to move
the uncertainty characteristics of the product from the right column to the left or from
the lower row to the upper, then the supply chain performance will improve.
Table 18.3: Type of Supply Chain Needed
Demand Uncertainty
Low (Functional Products) High (Innovative Products)
Grocery basic apparel, food Fashion Apparel,

Oil and gas Computers, Popular music
Low (Stable Efficient Supply Chain Responsive Supply
Supply Process) Chain
Uncertainty
High (Evolving Hydroelectric power, Some Telecom, high end
Process) Food produce computers, semiconductors
Risk Hedging Supply Chain Agile supply chain
18.10 ALLIGNING STRATEGIES, EFFICIENCY AND

COST SAVINGS IN SUPPLY CHAIN
Companies today are often presented with a myriad of supply chain strategies. How
can we learn more about these strategies and decide which one will help us the
most? Are we operating the most appropriate type of supply chain? Are we spending
time and money on strategies that are not providing maximum benefits?
We will begin with looking at products and supply chain characteristics and learning a
frame work for aligning the right strategies for your needs. We will then learn
strategies to improve efficiency and reduce costs. We will play a version of classic
Bear Game simulation used by business schools and executive training programs.
Through simulation we will see first hand the causes of Bullwhip effect, which leads
to major supply chain inefficiencies, including unpredictable lead times, stock outs,
miss trust between supply chain partners and higher manufacturing and transportation
costs. Once we have covered the causes of these problems we will learn the best
strategies to mitigate or remove them.
Then we have to understand what type of supply chain we should be targeting, a

critical first step in any supply chain initiative because putting teams to work on
wrong initiatives can cause us valuable time and money. However even with in a
company, several different types of supply chains may be called for, having a
complete understanding of a wide range of strategies is just as important. Then in
some cases, responsiveness is more important than efficiency and we have to
understand the ways to improve supply chain responsiveness.
Aligning strategies, efficiency and cost savings, we will explore set of concepts that
will help improve customer responsiveness and deal with highly uncertain demand.
We will learn a powerful tool for hedging demand uncertainty so that we minimize
total cost by taking into account both the opportunity / cost of stock outs and costs of
access inventory then we will learn several advanced emerging strategies that apply
to a wide range of supply chain. We will see how to understand and cope with supply
chain uncertainty to make our product process more reliable, use active demand
management methods to minimize the impact of shortages and discover new types of
supplier arrangements that share this among supply chain partners while providing
benefit to all players. Finally, we will see which of the strategies we’ve learnt are not
software intensive and understand how we should go about evaluating software for
those cases where it is a critical part of the improvement strategy. This can prevent
costly mistakes that don’t move the company forward.
30
SCM in Service
18.11 PRODUCT AND PROCESS DESIGN FOR SUPPLY Organization/Non-
CHAIN MANAGEMENT
Product design for supply chain management means building products that thrive in
and enhance our supply chain architecture. Simply ‘giving customers what they
want’, which is fundamental to customer satisfaction, is rarely enough. Companies
must be able to give customers the right products in the most resource effective
manner with out sacrificing quality or service. If our supplier, manufacturing and post
sales support networks are being stressed to the breaking point, if our products
require excessive inventories to maintain service levels, if our offerings are not
attracting new buyers in a saturated market or if our need to reduce cost and
complexity throughout the supply chain, designing products to take advantage of and
strengthen our supply chain can provide extra ordinary benefits.
Three fundamental concepts are to be explored.
1) Component commonality.
2) Modularity versus integral design.
3) Universality.
A framework for costs and benefits will help understand the value of these ideas and
what to expect as we integrate them into our product design plans. We will see an
excellent example of postponement, a strategy that can enhance service levels with
lower inventories. We will also learn how to quickly estimate the positive impact of a
postponement strategy in the company with out analyzing sales data or using complex
calculations. We will see examples of how postponement can be implemented
through software applied to product packaging and even how it can help during a new
product launch.
Product design is not the only place we can make improvements. The production
process itself is often overlooked as an incredible opportunity for enhancement. Re-
sequencing production operations, shifting the push pull points, or even something as
simple as administrative postponement can all provide significant benefits.
Mass Customization is often a hybrid of product and process design finding ways to
offer unique items with little or no additional lead-time can increase market share and
breathe new life in our products.
Focus on Various Ways that Product Design Interacts with Supply Chain
Management
Firstly, consider various designs for logistics concepts, in which product design is used
to lower the cost of logistics. Product designs for efficient packaging and storage
obviously costs less to transport and store. Designing products so that certain
manufacturing steps can be completed in parallel to cut down to manufacturing lead-
time, leading to a reduction in safety stocks and increased responsiveness to market
changes.
Secondly, postponing product differentiations enables risk pooling across products

leading to lower inventories and allows firms to use the information contained in
aggregate forecasts more effectively. Another critical design /supply chain interaction
involves integrating suppliers into the product design and development process. There
are different ways in which the suppliers can be integrated into the development
process and considered keys to managing this integration effectively.
Finally, advanced supply chain management helps to facilitate mass customization.

Mass customization involves the delivery of a wide variety of customized goods or
services quickly and efficiently at low costs. This approach helps to provide firms 31
Emerging Trends important competitive advantages and effective supply chain management is critical if
mass customization is to be success full. Mass customization or BTO (Built to order),
means designing your production operation to allow for customer orders to be
manufactured quickly. This is a means of eliminating demand uncertainty entirely.
Following are the important tools for coping with demand and supply uncertainty.
1) Outsourcing
2) Global sourcing
3) Mass customization
4) Postponement
Demand and supply uncertainty is a good framework for understanding Supply
Chain Strategy. Innovative products with unpredictable demand and an evolving
supply process face a major challenge. Because of shorter and shorter product life
cycles, the pressure for dynamically adjusting and adopting a company’s supply chain
strategy is great. Therefore, the concepts of outsourcing, global sourcing, mass
customization and postponement should be explored fully. They are important tools
for coping with demand and supply uncertainty.
However, a good supply chain design for one company may not work for another.
How supply chain should be structured to meet the needs of different products and
customer groups, is what supply chain design is all about.
A good supply chain design helps a firm to have competitive advantage. Weaknesses
in supply chain design can affect the performance of a firm. Keeping the above in
mind, strategic framework for supply chain management is developed.
Within the strategic framework, we identify the key drivers of supply chain
performance i.e.
· Inventory
· Transportation,
· Information, and
· Facilities.
Then these drivers are used on a conceptual level during supply chain design and
different supply chain Methodologies are used along with analytical tools and
techniques to design and improve supply chain performance.
18.12 DESIGN FOR MANUFACTURING
Earlier, design engineers worked on developing a product that worked and product
that used materials as inexpensive as possible. Then, they worked on how to make
this design efficient. Then a stage came when management’s realized that product
and process designs were key product cost drivers and manufacturing process should
be taken into account early in the design process to make it more efficient.
Earlier, we assumed that product design decisions were already made and designed
supply chain design and operation based on this assumption. We also assumed that
the supply chain involves determining the best way to supply existing products
using existing manufacturing processes. Now, we realize that a much more
efficient effective supply chain is possible to operate if we take logistics and supply
chain management concerns into account in the product and process design phase
itself.
32
SCM in Service
18.13 DESIGN FOR LOGISTICS Organization/Non-
Design for logistics concepts suggest product and process design approaches that
help control logistics costs and increased service levels this concept should be
incorporated into early phases of product development. This concept involves
consideration of material procurement and distribution costs during the product design
phase. Product packaging and transportation requirements need to be incorporated
into the design process .How a product is designed and the design of the components
and materials themselves can have a significant impact on the cost to deliver the
product. In efficient supply chain design, heavy emphasis is given on minimizing
inventory and handling costs.
18.14 SUPPLY CHAIN MANAGEMENT: TRADE OFF

CURVES
One of the fundamental tradeoffs in supply chain management is that between

inventory levels and customer service. For any given supply chain, increasing the
level of service (product/spare part availability) typically means higher levels of
inventory. Most companies have discovered their “best place” on the curve,
depending on what their customers require and what their competition offers.
However, supply chain strategies can shift the entire curve, lowering your inventory
levels without adversely affecting your customers (or the reverse, improving
customer service levels with no increase in inventory). How might this work?
Through effective supply chain management you may be able to reduce lead times.
This would shift the curve to the right, speeding up customer response times without
raising inventories. Supply Chain reviews a strategy called postponement, or risk
pooling that can lower the curve allowing you to maintain (or enhance) service levels
with less finished-goods inventory.
High
High
Inventory
Inventory
Goal
Goal
Low
Low
Poor Service Good Poor Service Good
Figure 18.1: Lowering the inventory/service trade-off curve provides

better customer response with lower inventories
This tradeoff curve provides a perfect example of how silo behavior (in which
functional areas lose sight of cross-functional optimizations) can cause problems in
supply chains. One of the first steps in improving a supply chain is making sure that
organizational responsibility for inventory levels and customer service are
appropriately managed. These two responsibilities should not be separated - in fact,
they should report to the same desk. Doing so enables a company to set expectations
and properly manage this tradeoff, without costly swings from one place on the curve
to another as different functional groups “fight” for either lower inventories or higher
33
service.
Emerging Trends
18.15 GREENING THE SUPPLY CHAIN
Greening the supply chain involves incorporation of environmental protection and

conservation initiatives into existing supply chain management activities and design,
procurement and distribution processes.
Involvement of suppliers in environmental initiatives and need to look beyond their

own facilities is being realized by growing number of companies to achieve their
environmental goals and satisfies stakeholders’ expectations. This involves
· Screening suppliers for environmental performance.

· Working with them on green design initiatives.
· Providing training and information to build suppliers environmental capacity.
This involves clear, constant, frequent two-way communication with them about
environmental issues and performance expectations. Working with them on
environmental issues not only generates significant environmental benefits, but also
opportunities for cost containment, improved risk management and enhanced quality
and brand image. Customer and stakeholders do not always differentiate between a
company and its suppliers and hold the company accountable for suppliers
environmental and labor practices. Therefore, many companies are working to
streamline their supply base and develop more cooperative long-term relationships
with key suppliers to achieve the green design initiatives.
18.16 SUMMARY
Redefining the basis of supply chain designs and strategies is prevalent now because
of rise of new technologies, new forms of competition, and new avenues to add
customer value. You have studied many factors that influence the design of supply
chain. This is important as companies can only survive and prosper to the extent that
they are able to change as fast or faster than the rate at which their industry is
changing. You have studied Demand Driven Supply Networks (DDSN) that are
supply chains driven by the voice of the customers. DDSN is a shorthand term for
the next generation supply chain that has been taking shape for sometime. It simply
means building all supply chain processes; infrastructure & information flow to serve
the down stream – source of demand- whether a consumer is in the super market or
the department of defence. You further studied about balance in Supply Chains as
most companies either keep costs down at the expense of service or keep service
levels up at the expense of costs. Successful supply chain design requires several
decisions relating to the flow of information’s, product and funds, hence we have
covered effective supply chain strategies and Hau Lee’s uncertainty framework.
Finally you learnt about various ways that product design interacts with supply chain
management and supply chain management trade off curves.

1) Identify and describe factors influencing supply chain network design decisions.
2) Describe how a company achieves strategic fit between its supply chain strategy
and its competitive strategy.
3) Identify and describe the major drivers of supply chain performance.
4) Describe how outsourcing works. Why would a firm want to outsource?
34
5) What are the advantages of using the Postponement Strategy? SCM in Service
Organization/Non-
6) What are the characteristics of Efficient, Responsive, Risk Hedging and Agile Manufacturing Sector
Supply Chains?
7) Can a supply chain be both efficient and responsive? Risk - Hedging and Agile?
Why or Why not?
8) What are the basic building blocks of an effective mass customization program?
9) What kind of company wide cooperation is required for a successful mass
customization program?

READINGS
1) 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.
2) Chopra Sunil, Supply chain management: Strategy, Planning and
Operations, Peter Meindl ,Pearson Education (Singapore) Pte . Ltd.
3) Richard B. Chase , F. Robert Jacobs , Nicholas J .Aquilano, Operations
Management for Competitive Advantage , Tata Mc GrawHill Publishing
Company Ltd.
35
Emerging Trends
UNIT 19 SUPPLY CHAIN MANAGEMENT IN
SERVICE ORGANIZATIONS / NON
MANUFACTURING SECTOR
Objectives
After reading this unit, you should be able to:
· discuss supply chain management of products vs. services;

· discuss the application of supply chain management principles to arange broad
industries in different sectors.
Structure
19.1 Introduction
19.2 Supply Chain Management of Products vs. Services
19.3 Financial Services Sector
19.4 Hospitality
19.5 Transportation
19.6 Software
19.7 Communication
19.8 Healthcare
19.9 Consultancy
19.10 Education
19.11 Government
19.12 Retailing
19.13 Summary
19.15 References and Suggested Further Reading
19.1 INTRODUCTION
Though traditionally Supply Chain Management has been applied only for products
and hence in the manufacturing sector, it is increasingly being recognized that the
basic principles of Supply Chain Management are equally applicable in the service/
non-manufacturing sector also. With the tertiary sector growing at a faster rate than
the other two and occupying a dominant share of GDP even in developing economies,
it is critical that Supply Chain Management professionals develop an expertise in
application of Supply Chain Management principles to this sector in order to enable
their organizations to develop a sustainable competitive advantage and contribute to
the economy by enhancing shareholder value. Though the basic principles of Supply
Chain Management remain the same, the very nature of services makes it necessary
to modify or adopt the same, as some traditional Supply Chain Management
strategies are infeasible in case of services.
Hence, before beginning a discussion on the application of Supply Chain Management

principles to services, it is important to understand the basic differences in the nature
of products and services.
36
SCM in Service
19.2 SUPPLY CHAIN MANAGEMENT OF PRODUCTS Organization/Non-
VS. SERVICES
The essential differences in the supply chain management of products vs. services
are discussed below.
· Simultaneous Production/Consumption: A large number of services can only

be rendered when actually demanded e.g. banking, nursing etc. This leads to the
second major difference i.e. absence of “inventory” concept.
· Absence of “Inventory” Concept: As stated above it is not possible to “store”
a number of services in order to do a capacity matching between demand and
supply, as is possible in case of products. Hence, this needs to be done by
building up resources rather than the services to do demand – supply matching.
· Low/no Cost of Inventory/Production: In a number of services/products
(typically software), the incremental cost of either production or holding
“inventory” is very low (or nil) in comparison to the value of product.
· “Instantaneous/Rapid” Production: In case of products/services, which can
be digitally duplicated/copied, it is possible to “produce” virtually instantaneously
at a very low cost e.g. movie prints, photograph copies etc.
· Rapid/low Cost Distribution: Similarly, in case of electronic digital distribution
over channels such as Internet, the cost of distribution is very low and speed
extremely rapid.
· “Impossible” Distribution: On the other hand, in case of some services,
“distribution” is not possible as consumption has to happen at the spot of
“production”. (E.g. restaurants, hotels, etc.).
· Instantaneous Value Destruction: Unlike physical goods, which may gradually
loose value over a time, services may incur sudden time related value destruction
for e.g. once an aircraft takes off, the value of the unoccupied seats drops to
zero.
Apart from these and such related other differences, most other Supply Chain
Management principles and models (e.g. optimization, queuing theory, forecasting,
DRP etc.) can be applied with suitable modifications to the service sector.
We will be discussing the application of Supply Chain Management principles to the

following broad industries in the service sector, as they comprise a major part of the
value generated by the sector.
1) Financial services - including banking, insurance, stock trading, FOREX trading
etc. and allied services.
2) Hospitality - including hotels, restaurants, travel and tourism comprising road,
rail, shipping and aviation industries pertaining to passenger transport.
3) Transportation - consists of goods transport by road, rail air or water including
courier and post.
4) Software - though software may be considered a product also, we will look at
the software development and distribution process from a service prospective.
5) Communication - this will include the Telco providing POTS as well as ISP’s,
mobile and satellite services etc. as well as broadcasting, telecasting and
publishing industries.
6) Healthcare - includes hospitals, pharmacies and allied services.
37
Emerging Trends 7) Consultancy - this would include knowledge management activities as well.
8) Education - both classroom and distance.
9) Government - this would include municipal, administrative, defence, police,
judicial etc. services.
10) Retailing - includes trading and value added reselling.
We will now look in detail at the emerging trends in the supply chain of the above-
mentioned industries using a few examples from each sector.
Activity 1
Can you list some further differences in the supply chain characteristics of products
and services?
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19.3 FINANCIAL SERVICES SECTOR
In this section we will discuss about banking, online mortgages, credit cards and
brokerages.
Banking
How banks are cutting costs and improving customer service - simultaneously -
by changing their supply chains from brick and mortar branches to ATM’s and
phone and net banking
Electronic banking emerged in prototype form in 1975 and was introduced by some
major banks as early as circa 1985. However, the absence of a critical mass of PCs
and a PC friendly population stunted its growth. But today, there are 35 million plus
PCs in US homes alone and the consumers there are now spending more on buying
PCs than TV sets. Home banking software has come a long way too. The best part
about e-banking is that, it cuts costs too (the estimated per transaction cost using an
ATM is estimated at just 10% of that using a manual teller and net banking cuts that
down further by about 90%!).
The banks have been distributing their services using the conventional supply chain
for a long time. The key now is to understand that banking is a value added
information business. The winners will be those who use technology to make it
continually easier for customers to manage their money anywhere anytime at lower
transaction costs.
Online mortgages
No brokers, no branches and lower costs - AFI shows the way
American Finance and Investment (AFI) is a new breed of lender with no branches
and brokers. It aims to deliver a totally new experience to mortgage shoppers – the
ability to finance a new house without setting foot outside the old one!
It’s as easy as point, click and borrow. First you input data about your finances and
your dream house. An online questionnaire then helps you choose from an array of
loan alternatives. Once you have decided, you are qualified for a loan and offered a
38 choice of mortgages.
As AFI sells mortgages directly to consumers, via the Internet and two call centers, it SCM in Service
has none of the overheads of physical branches. The salaried call center agents can Organization/Non-
process four times as many loans as commissioned agents in the field.
The typical AFI consumer saves about $1500 in upfront fees. This is an enormous
advantage as consumers who may have hesitated to borrow from a low –price, no-
name may be more willing to do so now, given the huge cost advantage – a direct
result of the reengineered supply chain.
Credit Cards
No forms, no waiting - Credit cards on top from NextCard
NextCard is an excellent example of using e-service to streamline the supply chain of

a financial product. Earlier for applying for a credit card, you had to fill out double
sided forms with lots of tiny boxes supposed to encompass your financial history
including account numbers, addresses (office and residence), income etc. Now, in
the US, an application for a NextCard Visa Credit Card can be made on-line in 30
seconds. All you provide is your name, address, social security number, annual
income and a few minor details. NextCard has figured out how to integrate its
website with the databases of the major credit bureaus, so that in just seconds, it
identifies who you are, looks up your current credit balances, does a calculation based
on that information and actually suggests which balances to transfer in order to get
the lowest rate on NextCard. The application gets approved (or rejected) in just 30
seconds!
Brokerage
Charles Schwab shows the route to e-biz
Schwab is the supreme e-broker with 67% of its customers’ trades going over the
web. It boasts $263 billion in online revenue. Schwab.com now provides a place not
just to trade stocks but also to write cheques, buy insurance and pay bills
electronically. The potential exists for Schwab to go to the public and say, “why do
you need a bank?” – on the strength of its unique supply chain.
Activity 2
Give an example of innovation in supply chain management for FOREX trading.
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19.4 HOSPITALITY
In this section we will discuss about Hotels, Resorts and Airlines

Hotels and Resorts
WorldRes - How WorldRes adopted a business model that took it on the net
startup’s fast track and attracted $30 million from investors
Rather than just struggling to build a brand in a small niche, WorldRes raised and
spent more than $10 million to build a reservation booking engine targeted at small
hotels, inns and resorts that don’t have enough business guests to justify a terminal
39
and the costly links to global reservation systems like Sabre or Apollo.
Emerging Trends Then, when the content sites, which serve such niches, had developed enough traffic
that they were ready to move to transactions, WorldRes was there ready with its
booking engine.
It functions as a virtual cash register that lets people check in real-time, the room and
facilities of their choice and its availability at a particular time and make the
reservation on-line.
Though, there are other booking engines available for the content sites to link up with
WorldRes’ competitors, all carry the burden of being older businesses that have
migrated to the web while it is in the enviable position of being the only pure Internet
play in leisure lodging.
This unique supply chain advantage has led to high investor valuation of WorldRes’
stock.
It hopes to make most of its money on its booking engine, being the unseen, but
lucrative back-end for thousands of resorts and small hotels that can’t justify paying
for a terminal and link to the global reservation systems.
This segment accounts for 85% of all hotels and WorldRes has exploited the
weakness in the existing distribution system for small hotels. They have handled the
complexity of a booking engine and hidden it from small hotels that are not technically
sophisticated.
They have also made smart distribution deals with the portals like Expedia, to drive
traffic to the hotels. With a mix of competitive supply chain technology that can turn
content into commerce and high stock valuation to fuel acquisitions, WorldRes is an
example of a company that is changing the way business is done in the hospitality
sector to become a leading player in its chosen segment.
Airlines
Southwest Airlines - Their site is so easy to use that web travelers don’t just
research flights - they buy tickets
13.8% of visitors to Southwest’s site book a ticket – a “look-to-book” ratio twice that
of the nearest ticket booking rival and higher than that of any traditional retailer on
the web.
This key to success in turning eyeballs into buyers is simple, to use web design.
Instead of the infinity of choices offered by other dotcoms, Southwest delivers a page
where a transaction takes just 10 quick clicks to complete using a popup giving fares
and options to help users get a better flight or better price.
Activity 3
What can the aircraft charter services do in terms of supply chain activities to
effectively compete with scheduled airlines?
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40 ...............................................................................................................................
SCM in Service
19.5 TRANSPORTATION Organization/Non-
In this section we will discuss about Package Delivery Services.
Package Delivery Services
Federal Express (FedEx) Logistics processes deliver over 99% of packages

accurately and on time everyday, in spite of handling more than a million
packages daily
In a highly competitive market, FedEx is the leader with 48% share. It launched its
FedEx ship customer premises tracking software in 1994 itself. The worldwide
supply chain consists of over 1,00,000 people, 500 jet aircrafts and 35,000 trucks. A
time variance of even 30 minutes can wreck the schedule.
FedEx operates a super hub at the Memphis, Tennessee airport on a 240-acre site
with 8,000 workers, unloading and reloading 130 Jumbo Jets using 171 miles of
conveyer belts, countless trucks, cargo tags and forklifts exploiting robotic sorters.
There are relentless cost cutting efforts such as additional package sorting hubs to
create less circuitous air routes. A product movement planner (a client/server
system for planning air and truck schedules) employs a built-in algorithm that finds
the least costly way to get a package to its destination. Productivity applications help
field-station managers in weekly forecasting, local courier scheduling and city route
planning. This help make light duty days more cost efficient by enabling appropriate
staffing levels.
The renowned COSMOS package scanning/tracking system uses PC attached

scanning gun along with older more sophisticated handheld Super Trackers, to read
parcel bar codes. Smarter sorting capabilities like automated overhead laser
scanners are constantly being invested in to augment package-handling processes.
Using the “document sort”, workers manually sort by region a minimum of 38 pieces
per minute.
Such continuous improvements in the widely acknowledged best practices keep

FedEx at the leading edge of excellence in Supply Chain Management.
19.6 SOFTWARE
How Resounding Technology is using a low cost approach to achieve wide

global distribution
Resounding Technology founder, Adam Frankl, uses “viral marketing” to distribute his
software “Roger Wilco” that transmits voice over the Internet and lets users link up
in virtual conference calls.
He posted a copy on a “freeware” website inviting anyone to give it a try and

forward the web address to a dozen friends (who in turn would Zap it to dozen more
– triggering a chain reaction).
Within 24 hours, 2,800 people in 46 countries had downloaded the software. In 30

days, it had spread to 1,00,000 people and the year-end target is to breach the one
million mark.
Though this does not result in profits, on the Internet, hits matter more than profits
and distribution alone creates wealth, as large companies are willing to buy reach at a 41
Emerging Trends premium. Hence what matters is reaching the maximum number of users in the
minimum amount of time.
To accelerate the effort, the company is now bundling its software with popular
computer games giving it major distribution reach through retail outlets.
This innovative approach to Supply Chain Management has led to the company taking
a lead in the highly competitive market space.
19.7 COMMUNICATION
In this section we will discuss about Internet, Voice Calls, Fax, Broadcasting and
Publishing
Internet, Voice Calls, Fax
New technologies to deliver communication services - easier, faster, cheaper
The convergence of digital technologies, networks and telephones is delivering high-

end capabilities with simplicity and prices that are affordable to even small business
and home users.
After the emergence of super-simple networking kits and servers, it’s time for high-
speed Internet access. A new technology DSL or Digital Subscriber Line service
provides an inexpensive easy way for small businesses and home users to get fast
access to the Internet at speeds, approaching those previously affordable only 10
large corporations using costly dedicated leased lines. It is more than 50 times faster
than an ordinary 56 KBPS modem and there is no waiting – the connection is always
on.
Using the net to make phone calls is another way to reduce costs. It is estimated that
by 2002, 18.5% of all domestic phone traffic in the US will be carried over data lines
up from just 0.2% in 1999.
A new piece of hardware called a gateway server is the technology, bringing about
the transition of moving long distance phone calls from traditional circuit switched
networks to packet-switched networks like the Internet.
How it works is simple – First you dial the local or toll free number of the closest
gateway server. You get an automated voice prompt and punch in the long distance
number you want to reach. The server converts your voice signal into packet data
and routes your call over the Internet. A server at the destination reconverts the data
back to voice and directs the call over local lines. You pay only for the local
connections on either end of the servers.
Internet fax services too are mushrooming. They save long distance charges needed
to fax lengthy documents and are also a boon to the business traveler. He can dial up
any of several on-line fax services from his laptop to send his document. Faxes can
also be received this way through your e-mail inbox. These services are very handy
for so-called broadcast faxing – sending one document to multiple fax machines all
over the world.
Some of these services are free, while charges for others are nominal. Some
software’s even combine voicemail, multiple voice mailboxes, call tracking, faxing and
paging.
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Broadcasting to “Narrow casting” SCM in Service
Organization/Non-
The news you want, on your PC Manufacturing Sector
A new piece of software brings personalized, updated news to the PC on your

desktop - and as advertisers pay – it’s free. PointCast is personalized news –
retrieval service that takes advantage of the fact that many offices PCs are always
turned on and connected to the network. Whenever the machine is idle for a few
minutes, PointCast commandeers the screen and starts flashing headlines, weather
reports and small-animated advertisements. A green ticker scrolls across the bottom,
reeling off sports scores and the current prices of stocks – customized for individual
interest. Click on a headline and up pops the full story. Click on the weather
summary and you get a variety of weather maps and forecasts of specific cities of
interest. Click on a stock price to get the current share price, a chart of the stocks
rise and fall over the past month and a dozen or so stories about the company. Click
on an ad and you will be connected to the company’s website. The ads are always
visible in one corner of the PointCast screen. They are animated, colorful and
impossible to ignore completely – advertising at its best. Like all great software,
PointCast hides its technological complexity. First you download the software from
the company’s website. Then you set your preferences by selecting categories of
news you like, sports you want to follow and companies you want to track. You can
even set PointCast to supply lottery numbers and your horoscope. Every hour or so,
the software connects via. the Internet to a PointCast server. It gathers up the kinds
of stories requested from various news services. The stories are automatically stored
on the PC hard-drive, so that the news you want will be instantly available on your
screen when you want it.
Thus, a startup, by innovating the news supply chain today delivers the kind of
personalized news broadcast that big media companies have been trying to for years.
Publishing
How a fashion magazine launches its premier issue with 30,000 subscribers and
expects to cross the circulation mark of 1,50,000 by its first anniversary using
innovative distribution
While other big publishers spend $30 for every new subscriber, Ralph Clermont’s
“wink” averages just $2. Instead of relying on inefficient direct mail campaigns, he
uses the Internet. Mass e-mails are sent and staffers make strategic postings in
chatrooms operated by women oriented sites. These messages direct users to wink’s
website where they can sign up for a year’s free subscription. On some days, daily
subscriptions top 1,700. Thus an innovative supply chain used to reach potential
subscribers helped make success of an idea that had failed six years ago when its
launch was attempted the traditional way.
19.8 HEALTHCARE
In this section we will discuss about Electronic transactions and on-line health related
information, Marketing healthcare – on-line, Selling medical equipments on the net
and digital medical information
Electronic transactions and on-line health related information
Using the power of computing and the Internet to revolutionize the healthcare
industry
The healthcare industry in US is the stingiest spenders on I.T. While most industries
spend 5-10% of operating budgets, healthcare averages just 2.5%. 95% of medical
43
Emerging Trends records are on paper. It is estimated that the overall waste in the industry is $300
billion that can be saved simply by using the Internet to cut paper jams and
seamlessly link patients, doctors, hospitals, pharmacies and insurance companies (for
e.g. the conventional cost of verifying a patient’s insurance eligibility is $10 against
that of on the Internet – 40 cents.)
However, the trend is changing. 48% of adult Internet users search of health
information on-line. Healthcare business-to-business e-commerce is expected to jump
from $6 billion in 1999 to $178 billion in 2003.
The legendary Jim Clark, founder of Silicon graphics and netscape, founded
healthcare in 1995. After its merger with webMD, a Microsoft funded on-line health
startup; it has emerged as a leader in areas as diverse as consumer health
information on the web and electronic transactions between doctors and health
insurers.
The supply chain benefits to its customers have been impressive for e.g. at a seven
doctor office, staffers had formerly worked overtime to write as many as 50
physician referrals a day. After implementing Healtheon’s on-line system, a referral
now takes about 30 seconds to complete and send over the webMD portal.
At an independent practice association, which clears insurance claims for more than
2,500 doctors, a year ago 34 employees, each entered about 150 paper insurance
claims a day into computer databases. Huge manuals guided the employees through
the clearing or denying of the claim. With more than 2,00,000 claims coming in each
month, the place was buried in paper. Today, a third of its claims arrive on Healtheon
/ webMD’s network, which can process 3,500 claims in 45 minutes. The claims
processing staff has been cut to 25.
Marketing healthcare – on-line
HealthCare’s power Retailers
The supply side of the health-care industry is likely to see the emergence of new
business models, notably power retailers who will use the Internet to create vast
amazon.com style health care superstores. In addition, the health-care providers will
have the chance to integrate functions that can lower the costs and risks of
developing new sales channels and customer friendly servicing.
The process would work as follows:
An employee armed with an annual defined contribution from his employer will
access an on-line retailer of health benefits and make a plan selection based on the
features, risks and pricing that best meet the employee’s needs. The on-line stores
would take care of enrollment, card issuance, provider selection and other front-end
services. Though the information requirements to provide an open and rational
market place for health-care benefits (e.g. provider panels, coverage, family structure
complexities, high quality data etc.) are staggering, the benefits are enormous.
It is estimated that in US alone, $18 billion of current spending can potentially be

saved ($5 billion that the health plans spend on sales and marketing, $3 billion paid to
benefit consultants for design, selection and other services and the $10 billion
employers spend on internal administrative costs – a hidden often overlooked burden
that adds roughly 10% to the $100 billion paid annually in employee premiums and
claims – a direct cost of current supply chain inefficiencies).
44
Selling medical equipments on the net SCM in Service
Organization/Non-
A site where hospitals can click to shop Manufacturing Sector
Hospital purchasing agents spend up to 15% of a hospital’s total budget on

equipments and furnishings. Locating and purchasing the items for a new room can
take six months. Neoforma hopes to cut that time by two-third. Its website is an on-
line catalog for the $150 billion-a-year clinical products industry. It aims to be a fully
functioning exchange, selling most of the $1.5 million products in this category. To
help suppliers, whose product information exists only in paper form, Neoforma has 60
odd workers in Bangalore, who will digitize their catalogs for them.
Hospital buyers can search the site by product or by the type of room that are
outfitting. They can see floor plans for more than 1,000 rooms at one of the
country’s leading hospitals. On clicking on a room, a list of all the items that belong in
that room – from life saving medical equipment to trash cans – appears. Click on a
product and up pop descriptions, pictures and prices from multiple suppliers along
with links to their websites.
The sites search engine is equipped with the world’s most comprehensive taxonomy
for medical products. The site thus acts to connect suppliers to customers, they did
not even know existed. It has thus become a vital link in the supply chain of this
crucial sector.
Digital medical information
Medicalogic, a dominant supplier of conventional systems for electronic medical
records is testing a system that enables physicians to record and review patient
information over the web from any computer wherever they happen to be. The new
product is not only better, it costs only $199 a month which includes use of a new
computer. While doctors pay an average of $25,000 a piece for the company’s
present non-internet medical records system. Thus the web has allowed Medicalogic
to eliminate a major obstacle in the healthcare documentation supply chain.
Also under development is a website that provides patients with free access to their
own records once again from any computer anywhere – records that are currently
spread across dozens of pharmacies, doctor’s offices and hospitals, much of them in
paper form.
19.9 CONSULTANCY
Managing Knowledge – The Consultants way
Consultancy firms can essentially be defined to be in the “Knowledge Management”

business using the latest IT tools to improve and optimize the knowledge supply chain,
which may be described as create-clarify-classify-communicate-comprehend-create,
can generate an enormous competitive advantage for such firms. KPMG
International uses a global knowledge-sharing platform, KWORLD and invests 1% of
its US $10 billion revenue on Knowledge Management. This project involved
international standardization of IT (software and hardware platforms). The challenge
was to get all the best practices from each of the local offices into one system when
each of the offices were used to managing their own systems.
The benefits were improved (productivity due to standardized interfaces and

integration of e-mail with calendar, diary and scheduling). Offline mail access helps
with 70% of staff having portable equipment and able to access their mail from
clients’ sites, home or even airport lounges. The entire exercise also involved training
45
Emerging Trends thousands of people, which was entirely handled internally (including writing the
course). The results were spectacular. E-mail usage grew exponentially before
plateauing out at 1,00,000 per week. More than 50% of users are covered by Internet
browsing and all users can browse the Intranets.
Thus there is a complete linkage to the centralized Knowledge Management content

and a fully integrated practice management system – Nexus. This has resulted in an
efficient, scam-less knowledge supply chain.
Major consulting firms, which are deeply concerned with the management of
research time, are also the lead users of a new technology-software that allows
Internet users to filter out extraneous information and zero in on the data they really
need. Their practice areas are defined by area experts who determine the context,
the competitive theories and ‘hot’ topics in which information takes shape. They
need a technology that brings the highest quality content for each topic – technology
that is now beginning to become available.
The Boston based knowledge management firm, context media, has a distinctive
technology that relies on ‘semantic tagging’. This entails a design intensive process
in which software writers develop custom ‘recognition frameworks’ i.e. language
rules for each topic. The software, once, deployed, automatically tags continuing
streams of on-line documents every night.
This enables consultants to get documents that link to other documents on the same
topic without having to waste time going back up some search hierarchy. The
tagging software embeds invisible hooks into every article that downloads and a
custom interface allows users in a particular working group to pull up selected articles
instantaneously with a click. Such innovative net filters are helping to unclog the
knowledge supply chain making it faster and more efficient.
19.10 EDUCATION
Delivering education through unconventional channels - triggered by the

Internet, continuing adult education could become a great growth industry
Education is already grabbing a major chunk of GNP in developed economies. The

US alone spends $1 trillion on education and training. This number will increase
rapidly but the major growth is expected not in traditional schools (which currently
accounts for 10% of GNP – up to high school 6%, colleges and universities 4%), but
in continuing adult education – triggered by a supply chain revolution – online
delivery. This opportunity has opened up, as knowledge is mobile, transferable and
highly marketable.
However, with a potential market for continuing adult education embracing at least
40% of the typical developed country’s workforce, the conventional supply chain
using traditional institutions no longer suffices. It is too expensive and insufficiently
accessible in a physical sense. Online teaching is not just time-efficient and cost-
efficient, but also learning-efficient. It’s flexibility and interactivity allows the student
to control the content and pace and its ability to blend graphics and pictures with the
spoken word and text gives it an advantage over the traditional classroom.
Effectively, it gives a one-to-one teacher-student ratio, improving the productivity of
education enormously. This new channel of distribution will complement the
traditional media creating a new and distinct educational realm. This is the future of
education and a global market potentially worth hundreds of billions of dollars – all
created and accessible through the new education supply chain.
46
SCM in Service
19.11 GOVERNMENT Organization/Non-
Electronic - Governance - The Information Age Government
The advent of information technology as a highly leveraged enabling tool for delivery
of services has by now been universally recognized. This has re-defined the
fundamentals and has the potential to change the institutions as well as mechanisms
of delivery of public services forever.
The objective of achieving E-Governance (EG) goes far beyond mere

computerization of stand alone back office operations. It means to fundamentally
change as to how the government operates and this implies a new set of
responsibilities for the executive, legislature and the citizenry.
Within 5 years, a majority of the transactional services will be provided by way of

Internet. A government Intranet can ensure smoother flow of data, communications
and access to information by different ministries and department. Transactions
between various departments of the government and other government organizations,
if networked, can replace a substantial part of transfer of files and papers.
There should be a single web based front end for all government services to the
public, with all departments and agencies operating websites that provide up to date
information. E-mail should be incorporated into the normal range of contact methods
and arrangements implemented for rapid response to e-mail queries. Use of local
language for access will go a long way in spreading the use of such services. The
public servants too need to be trained to bring about a change in mindset as well as in
basic computer usage. The manual office procedures also need to be redesigned.
Appropriate investment in IT infrastructure need to be made. Information kiosks in
public places can enhance accessibility to public. Effective cyber laws are needed to
validate and enforce such transactions.
Effective implementation of such steps will revolutionize the supply chain of

government services.
Activity 4
What will be the differences in the supply chain of services provided by the
government in a developed country (say the U.S.A) and a developing country (say
India)?
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19.12 RETAILING/TRADING
Freemarkets Inc. - How web auctions - a new B2B supply chain tool - are
revolutionizing the multi trillion-dollar market for industrial parts
Freemarkets Inc, the Internet auction company founded in 1994 for $50 million was
worth $7 billion in market capitalization within five years. It has lead to the rise of the 47
Emerging Trends auction economy by implementing a break through idea that is having a seismic
impact on 21st century industry. Using it big, shrewd buyers like General Motors,
United Technologies, Raytheon, Quaker oats who thought that they were already
getting rock bottom prices, have saved more than 15% on average buying parts,
materials and services. Not only the prices, but the billions of dollars of transaction
costs incurred by companies as blizzards of faxes, invoices etc, can be eliminated by
automating orders, payments and products information by such electronic catalogs.
However, unlike other auction sites holding sellers auctions’ (where buyers enter their
bids and the highest price wins) for standard processed materials, Freemarkets used
its insight to take the Internet into a much bigger far more complex kind of corporate
purchase – that for manufactured components. For manufacturers, 35% of sales (or
5 trillion dollars worldwide!) go towards purchasing industrial parts.
Though, constituting the largest part of cost of goods sold, they were also traditionally,
the most inefficient to buy. Traditionally, the manufacturer typically sends out
“requests for quotations” (RFQ’s), a few months before the existing contract expires,
problem was that these could be sent only to a limited number of candidates and
often did not spell out a lot of other important terms apart from the specifications. As
these terms (e.g. delivery schedule, supplier inventory etc) can have an enormous
impact on the total acquisition cost, the bids typically also differ in the terms offered.
Hence it’s extremely difficult to pick the best deal. Also, as the bids were sealed, the
suppliers have no idea what prices their competitors are offering. Hence, they had to
take a blind guess at how low they must go to win.
Hence, largely most manufacturers choose the path of least resistance by keeping the
current supplier as long as he is willing to keep the price more or less flat.
Freemarkets unshackled the power of the purchaser by turning the once secretive
RFQ into an open bidding war. Standardizing absolutely every item in the RFQ,
turning industrial parts into commodities, does this. All that remains is to find the
lowest price, best done through an auction.
Freemarkets not only conducts the auction but also acts as a consultant showing new
clients, how to spell out every possible requirement in their RFQ’s. It is also an
expert at finding and screening suppliers. The buyers can then shortlist the field to
those it wants to invite as bidders.
The auction itself is a tense 20 – 30 minute sweepstakes climax. These are called
“buyer’s” or “reverse” auctions as the buyer quotes the initial starting price and the
bids move downwards. Linked over the Internet, the sellers don’t have to guess at
their competitors’ bids as they can see exactly what the opposition is bidding, in real
time. Thus a revolution in the procurement end of the supply chain is cutting millions
off the purchase bills of big buyers while at the same time offering a new business
opportunity to intermediaries like Freemarkets.
19.13 SUMMARY
Traditionally when we talk about Supply Chain Management we think for products
and manufacturing. The basic principles of Supply Chain Management are equally
applicable in the service/non-manufacturing sector also. This unit has taken up
discussions on the application of Supply Chain Management principles to the broad
industries in the service sector viz. Financial services, Hospitality, Transportation,
Software, Communication, Healthcare, Consultancy, Education, Government and
Retailing. These industries comprise a major part of the value generated by the
sector.
48
SCM in Service
19.13 SELF ASSESSMENT QUESTIONS Organization/Non-
1) What strategies can be used to desynchronize production and consumption in

case of services?
2) How can one compensate for the absence of inventory to meet demand
fluctuations in case of services?
3) Suggest some ways to make distribution possible in case of the “impossible
distribution” examples.
4) Suggest some supply chain strategies for treasury management.
5) List the supply chain principles embodied in a “debit card”.
6) What supply chain strategies can rail companies use to stop the erosion of
market share to air travel in case of passengers and road in case of freight?
7) How can telephone companies protect their markets from competition from
ISP’s using supply chain strategies?
8) Which players in the healthcare sector are likely to die out as a result of
changing supply chain scenario?
9) What are the peculiar characteristics of “knowledge” as a product relevant to
its supply chain management?
10) What is the future of brick and mortar educational institutions given the
revolution in the educational supply chain?
11) How can government overcome infrastructure bottlenecks to streamline its
supply chain?
12) Comment on the prospects of retailing of services as a future growth industry.
13) In the new banking scenario, branches are a liability – comment.
14) Outline a supply chain strategy for timeshare resorts to enable them to get a
competitive advantage over traditional hotels.
15) How can bulk freight carriers take advantage of technological innovations to
streamline their supply chain?
16) Why is software more a service than a product given its supply chain
characteristics?
17) What impact will m-commerce (mobile commerce) and d-commerce (digital
commerce) have on traditional e-commerce (electronic commerce)?
18) How can traditional book, music, television and film industry react to new
distribution technologies to enhance customer value delivery?
19) With more medical information available online than a human mind can
assimilate, how will the role of doctors change in delivery healthcare services?
20) With information freely available on the Internet, the demand for consultants will
reduce – comment.
21) What are the essential differences in a B2C and a B2B supply chain. List the
respective characteristics that necessitate such differences?
49
Emerging Trends
READING
1) Above The Crowd; Banking in the New Millennium, FORTUNE, 06/07/1999
2) American Association of Health Plans, Washington, D.C.: www.aahp.org
3) Bill Gates, Business @ the Speed of Thought, Warner Books, 1999
4) “Bringing Banks Online”, FORTUNE, 01/24/2000
5) Charles C. Poirier, “The Path to Supply Chain Leadership”, Fall 1998 Supply
Chain Management Review
6) Christopher Helman </forbes/by/CHelmanx.htm>, “On A Wink And A Prayer”,
from May 29, 2000 Issue </Forbes/00/0529/>
7) David Bovet and Yossi Sheffi, “The Brave New World of Supply Chain
Management”, Spring 1998 Supply Chain Management Review
8) eBenX, Minneapolis, Minn.: www.ebenx.com
9) For more discussion on health care’s new electronic marketplace, visit the
Strategy + Business Idea Exchange at www.strategy-business.com/
ideaexchange/
10) “Going, Going, Gone!” FORTUNE, 03/20/2000
11) Health Care Financing Association, Baltimore, Md.: www.hcfa.gov
12) James D. Krasner and Michael Soignet, CASE STUDY – “Strategic Vision
Drives Domino’s Pizza Distribution”, Fall 1997 Supply Chain Management
Review
13) James W. Michaels, “Drucker’s Disciple”, Forbes Global (05-15-2000), May
16, 2000
14) J.Philip Lathrop and David C. Carlebach, “HMOs ‘R’ Us: A Prescription for
the Future,” Strategy+Business, Fourth Quarter 1998
15) John McCarron, “Stand By for the Next ‘Worst Leg’ of Our Health Insurance
Trip,” Chicago Tribune, February 14, 2000
16) Nicole Ridgway </forbes/by/NRidgway.htm>, “Plowing The Web”, From May
29, 2000 Issue </Forbes/00/0529/>
17) “NEWS TRENDS; THE COMPETITION HEATS UP IN ONLINE
BANKING”, FORTUNE, 06/26/1995
18) 18.Peter F. Drucker, Peter Drucker Is High On Webucation “Putting More Now
Into The Internet”, Forbes Global (05-15-2000), May 16, 2000
19) Peter J. Metz, “Demystifying Supply Chain Management”, Winter 1998 Supply
Chain Management Review
20) Robert E. Sabath and David G. Frentzel, Robert E. Sabath is vice president of
Mercer Management Consulting Inc. David G. Frentzel is a consultant to
Mercer and principal of Northeast Logistics, “Go for Growth! Supply Chain
Management’s Role in Growing Revenues”, Summer 1997 Supply Chain
Management Review
21) Rayport, J. and Sviokla, J. “Exploiting the Virtual Value Chain” Harvard
Business Review, November/December 1995.
22) Robyn Meredith </forbes/by/RMeredit.htm>, “Digital Drive”, On The Cover </
forbes/Section/OnTheCov.htm>, From May 29, 2000 Issue </Forbes/00/0529/>
50
23) Ron Winslow and Carol Gentry, “Companies Consider Letting Employees SCM in Service
Handle Their Health-Benefits Decision,” The Wall Street Journal, February 8, Organization/Non-
2000
24) Silvia Sansoni </forbes/by/SSansoni.htm>, Technology </forbes/Section/
Technolo.htm>, Internet </forbes/SubSect/Internet.htm>, “Word-of-modem”,
Issue </Forbes/99/0705/>, July 5, 1999
25) Shailagh Murray, “Why Health Insurance That Works Still Fails to Catch on
Broadly,” The Wall Street Journal, January 18, 2000
26) “The Trouble With Web Advertising”, FORTUNE, 04/12/1999
27) “The New Online Mortgages”, FORTUNE, 04/13/1998
28) Walter J. Doherty and Ahrvind J. Thadani, “The Economic Value of Rapid
Response Time” <http://vmdev.gpl.ibm.com/devpages/JELLIOTT/evrrt.html>,
1982 and 1997.
51

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Indira Gandhi National Open University MS-55

School of Management Studies

Logistics and SCM : An Overview 1

Design and Management of SCM 2

Cost and Performance

Distribution Network Planning 5

BLOCK 1 LOGISTICS AND SCM : AN OVERVIEW

BLOCK 2 DESIGN AND MANAGEMENT OF SCM

BLOCK 3 IT ENABLED SCM

BLOCK 4 COST AND PERFORMANCE MEASUREMENT IN SCM

BLOCK 5 DISTRIBUTION NETWORK PLANNING

BLOCK 6 EMERGING TRENDS

BLOCK 1 PUBLIC ENTERPRISE: AN OVERVIEW

Course Preparation Team (2004)

Dr. Anurag Saxena Dr. Himanshu Kumar Shee

Print Production: Tilak Raj, S.O.(P), SOMS, IGNOU

Unit 1: Logistics and SCM - An Introduction discusses about definition of Logistics

Unit 3: Customer focus in SCM comprehends the key processes required to

After going through this unit, you should be able to:

There is a great deal of material that is moved in any organization. Organizations

1.2 LOGISTICS AND SCM

A supply chain may be considered as a group of organizations, connected by a

Raw Semi-Finished Finished End

Figure1.1: Typical Supply chain

The supply chain activity therefore constitutes complex objects, as it involves

Raw Material Product Ordering

Figure 1. 2: Seamless Supply Chain

According to Christopher (1992) supply chain is network of organizations that are

Supply Chain Management is a set of approaches utilized to efficiently integrate

Planning Implementation Control

INPUT INTO OUTPUT OF

Natural Resources (Land, Marketing Orientation

Human Resources Raw In process Finished Time, Place, Utility

Information Resources Proprietary Asset

Figure 1.3: Components of Logistic Management

A representative list of logistic element for a firm is given in Table 1.1.

Facility Location Determining location, number and size of facilities needed,

1.4 THE ROLE OF LOGISTICS IN THE ECONOMY

1.5 LOGISTICS AND COMPETITIVE

Support Organization, People

Inbound Operation Outbound Marketing

Service Leader Cost and Service

Figure 1.5: Competitive Matrix

Traditionally most organizations have viewed themselves as entities that exist

Purchasing Material Production Sales Distribution

Stage 2: Functional Integration

Materials Manufacturing Distribution

Stage 3: Internal Integration

Materials Manufacturing Distribution

Stage 4: External Integration

Suppliers Internal Supply Customers

Figure 1. 6: Supply Chain Integration

1.6 PHYSICAL DISTRIBUTION MANAGEMENT (PDM)

1.6.1 Components of PDM

1.6.2 The Systems or ‘Total’ Approach to PDM

To plan an efficient logistics structure it is necessary to be aware of the interaction

1.8 SELF ASSESSMENT QUESTIONS

1.9 REFERENCES AND SUGGESTED FURTHER

2.2 HOW DOES SCM WORK?

Figure 2.1: Supply Chain System

Customer Service Management

Manufacturing Flow Management

Product Development and Commercialization