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Elements of Logistics and Supply Chain Management

Definition: Logistics is the process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements.

Origin: The term "logistics" comes from the Greek "logos meaning speech, reason, ratio, rationality, language, phrase and more specifically from the Greek work "logistiki meaning accounting and financial organization. Logistics is considered to have originated in the military's need to supply themselves with arms, ammunition and rations as they moved from their base to a forward position. In ancient Greek, Roman and Byzantine empires, there were military officers with the title Logistikas who were responsible for financial and supply distribution matters.

In military science, all the activities of armed-force units in support of combat units, including transport, supply, communications, and medical aid. The term, first used by Henri Jomini, Alfred Thayer Mahan, and others, was adopted by the U.S. military in World War I and gained currency in other nations in World War II. Its importance grew in the 20th century with the increasing complexity of modern warfare.

The scope of logistics goes well beyond transportation. Logistics forms the system that ensures the delivery of the product in the entire supply pipeline. This includes transportation, packaging, storage and handling methods, and information flow. The impact of logistics in the ability of a company to satisfy its customers cannot be overstated. All other efforts at modernization within a company would not bear fruit until the logistics system is carefully designed to facilitate the smooth and efficient flow of goods in the system.

Competitive edge: In the fiercely competitive environment logistics provides the edge. Due to technological revolution most of the products are moving into commodity markets. In a commodity market where price is controlled by competition, where there is no product differentiation in terms of quality parameters like performance & reliability, where brands are almost irrelevant, competitive edge is that of availability of product and service in terms of time, place and quantity.

Effective logistics management can provide a major source of competitive advantage. The basis for success are several and are based on the links of 3 Cs, namely Company, Customer, and Competitors. The source of competitive advantage is found firstly in the ability of the organisation to differentiate itself in the eyes of the customer, from its competition and by operating at a lower cost and correspondingly at a greater profit.

Seeking a sustainable and defensible competitive advantage is the concern of every Company Management and it is no longer acceptable to assume that good products will sell themselves, neither to imagine that the success of today will be carried forward tomorrow. Considering the bases for success in a competitive context, commercial success derives either from a cost advantage or a value advantage or both. The productivity advantage gives a lower cost profile and the value advantage gives the product a plus over competition.

1. Productivity Advantage: In most of the industries there will be at least one competitor who will be a low cost producer, and more often than not, will have the greater sales volume. This is partly due to economies of scale which enable fixed costs to be spread over a greater volume but more particularly to the impact of the experience curve

The experience curve is a phenomenon which has its roots in the earlier notion of the learning curve. Researchers discovered that it was possible to identify and predict improvements in the rate of the output of workers as they became more skilled in the processes and tasks on which they were working. Bruce Henderson of Boston Consulting went a step further to extend this concept by demonstrating that all costs would decline at a given rate as volumes increased.

Traditionally it has been suggested that the main route to cost reduction was by gaining greater sales volume and there can be no doubt about the close linkage between relative market share and relative costs. However logistic management can provide a multitude of ways to increase efficiency and productivity and hence contribute significantly to reduced per unit costs.

2. Value Advantage. It has long been a maxim that customers do not buy products, they buy benefits. Alternatively, the product is purchased not for itself but for the promise of what it will deliver. These benefits may be intangible i.e. they relate not to specific product features but rather to such things as image or reputation. Unless the product or service offered can be distinguished in some way from its competitors there is a strong likelihood that the market place will view it as a commodity and the sale will tend to go to the cheapest supplier. Therefore the

importance of seeking to add additional values to the offering will mark it out from the competition. What are the means by which such value differentiation may be gained? Essentially, the development of a strategy based upon added values will normally require a more segmented approach to the market. When a company scrutinises markets closely it frequently finds that there are distinct value segments.

It means different group of customers within the total market attach different importance to different benefits. Often there are substantial opportunities for creating differentiated appeals for specific segments. E.g. In cars there are different models aimed at defined segments. In between the basic small car to a very large car there are a whole variety of options, each seeking to satisfy the needs of different benefit segments. Adding value through differentiation is a powerful means of achieving a definite advantage. Equally powerful as a means of adding value is Service.

Markets are becoming more sensitive to service and this poses a challenge to the logistics management. This means it is becoming progressively more difficult to compete purely in the basis of brand or corporate image. Additionally, technology plays a very important role within product categories, which means that it is no longer possible to compete effectively on the basis of product differences alone.

Thus the need to seek differentiation through means other than technology. A number of companies have responded to this by focusing upon service as a means of gaining a competitive edge. Service in this context refers to the process of developing relationship with customers augmented by offers such as delivery service, after sales service, rebates, technical support etc.

Customer service is a key element in logistics strategy. Value added customer service is leveraged to gain competitive advantage. Good customer service builds customer loyalty amongst existing customers and through positive word of mouth communication. The following are the few cues that affect customer perception of service quality: Competence: The information provided by the firm through product brochures, manuals, websites, sales talk and the service offerings of the firms.

Reliability: Delivery of product or services as promised in terms of place, time and quality. Responsiveness: Returning customer calls, e-mails, letters etc, in time and resolving customer problems or complaints with speed. Transaction security: This aspect relates to the confidentiality of customer information and transaction.

Access: This refers to the ease with a customer will have access to information on products, and services before placing an order, status of the order placed and the status of the product complaints, claims, and damages post sale phase. Marketing is the central point of all business processes. The objective of the marketing function is to identify the need of the customers and fulfill it by providing a product or service at an appropriate price to generate profits. Hence, logistics competency plays a very important in customer service planning for developing sustainable

competitive advantage, not just for growth but for survival.

What are operating objectives of logistics management? 1) Rapid response Flexibility objective of an organization: Some companies measure this as response time to customers order. On an average how much time do we need to fulfill one particular type of customers order in a year? This is a measure of Rapid response

Logistics should ensure that the supplier is able to respond to the change in the demand very fast. Entire production should change from traditional push system to pull system to facilitate rapid response. Instead of stocking the goods and supplying on demand, orders are executed on shipment to shipment basis. Information Technology plays an important role here as an enabler.

IT helps management in producing and delivering goods when the consumer needs them. This results into reduction of inventory and exposes all operational deficiencies. Now the management resolves these deficiencies and slashes down costs.

2.Minimum variance Delivery objective of an organization, this can be measured as On Time Delivery or OTD. If 100 deliveries are made in a month/quarter/year how many reached as per the commitment made to the customer? This percentage is OTD. Any event that disrupts a system is variance. Logistics operations are disrupted by events like delays due to obstacles in information flow, traffic snarls, acts of god, wrong dispatches, damage in transit.

Traditional approach is to keep safety stocks and transport the goods by high cost mode. The cost of this approach is huge. Logistics is expected to minimize these events, thereby minimize and improve on, On Time Delivery.

3. Minimum inventory This is component of cost objective of a company. Inventory is associated with a huge baggage of costs. It is termed as a necessary evil. Objective of minimum inventory is measured as Inventory Turns or Inventory Turnover Ratio. Americans call this measure as turn velocity. Logistics management reduces these turns without sacrificing customer satisfaction. Lower turns ensure effective utilization of assets devoted to stock.

[Concept of single piece flow as practiced by JIT companies in Japan or elsewhere]. Logistical management should keep the overall wellbeing of a company in view and fix a minimum inventory level without trying to minimize the inventory level as an isolated objective.

4. Movement consolidation Transportation is the biggest contributor to logistics cost. Transportation cost depends on product type, size, weight, distance to be transported etc. for transporting small shipments just in time [reduction in inventory costs] expensive transport modes are used which again tend to hike the costs. Movement consolidation is planning several such small shipments together [of different types of shipments] by integrating interests of several players in the supply chain.

Generally, large shipment size and long distances reduce transportation cost per unit. Movement consolidation shall result into reduction in transportation costs.

5.Quality If the quality of product fails logistics will have to ship the product out of customers premises and repeat the logistics operation again. This adds to costs and customer dissatisfaction. Hence logistics should contribute to TQM initiative of management. In fact, commitment to TQM has made the managements world over wake up to the significance of logistics function. Logistics can play a significant role in total quality improvement by improving the quality of logistics performance continuously and continually.

6.Life cycle support [cradle to cradle logistical support- produce, pack (cradle) and repack(cradle)] Logistics function is expected to provide life cycle support to the product after sale. This includes a. After sales service: the service support needed by the product once it is sold during its life cycle b. Reverse logistics or Product recall as a result of rigid quality standards [critical in case of contaminated products which can cause environmental hazard]

transit damage [leaking containers containing hazardous material] product expiration dating rigid laws prohibiting unscientific disposal of items associated with product [packaging] Rigid laws making recycling mandatory Erroneous order processing by supplier

Logistical Performance Cycles

Logistical performance cycles link the facilities in a value chain with each other. The facilities in the value chain are called nodes and the links connecting these nodes are logistical performance cycles. These links are product transportation and information flows. Obviously information flow is vigorous in both directions where as product flows down the value chain although in some cases upward flow is possible. Close examination

these links reveals dynamics, interfaces and decisions within the logistical system. Logistical performance cycles are input sensitive and highly dynamic. They render entire system dynamic and responsive to customer needs. If the LPCs are not dynamic obviously the organization loses the edge. Logistical Performance Cycle Diagram next slide.






Physical Distribution Cycle

Order Processing Order Transmission Customer Order Sourcing Order Placement & Expediting

Order Selection

Product Transport

Supplier Delivery To





Inventory is made to flow from one warehouse to another, factory to ware house, plant to plant or warehouse to customer. Sluggish LPCs reveal poor interface between the nodes and between customer and organization. LPCs reveal effectiveness and efficiency of resource allocation and operational decisions in the organization. To understand the operating system one has to analyze these links. A logistical operating system requires links, nodes and inventory to perform logistical operations. Nodes are the facilities

linked by logistical performance cycles. Inventory is measured, stored and moved in nodes regularly. But this may also be done during transportation. We can notice that three types of logistical performance cycles exist in a logistical operating system. The cycle linking material source and components plant is procurement cycle.

Procurement cycle Components plant is a node which manufactures components or detailed parts needed to make sub assemblies for the final assembly. This is where the operations function begins to operate. Raw materials are to be made available here for production. Procurement cycles connect raw material source and component plant or plants.

Manufacturing support cycle. The cycle linking components making plant, assembly and distribution center is manufacturing support cycle. The logistical network for an organization may contain several components plants and or several assembly plants. These plants are to be linked to enable flow of inventory as and when needed. Finished goods should flow from assembly plant or plants to the distribution centers. This support to manufacturing is provided by manufacturing support cycle.

Physical distribution cycle. The cycle linking distribution center to customers is called physical distribution cycle. Logistical performance cycles are input sensitive and dynamic in nature. We can visualize these cycles vibrating with vigor whenever a customer order is received for fulfillment. Overall efficiency of logistical operating system depends on the efficiency of logistical performance cycles. Logistical performance cycles link participating firms and organizations inthe supply chain.

Managing operational uncertainty Variance in logistical performance cycle results in customer dissatisfaction. If an overall customer delivery cycle is analyzed, we naturally find that it is made up of several mini cycles performed in logical sequence. These cycles are, order selection cycle, order processing, order transmission, customer delivery cycle and order transportation cycle.

We have to analyze these cycles to find out difference between average performance time and maximum cycle time. This gap is to be analyzed to eliminate variance.

When this variance is reduced goods begin to arrive at destinations earlier than expected. Infrastructure is required to be strengthened to cope with improved performance.

Value Chain
Outboun d Logistics Marketing & Sales

Inbound Logistics

Operation > s






Firm Infrastructure HR Management Technology Development Procurement

Inbound Logistics: Inbound activities to receive, store and distribute inputs to the product, such as material handling, inventory control, warehousing and contact with suppliers. Inbound logistics traffic departments do not simply manage shipments from their own companies (outbound), they plan shipments from other companies "in" to their location.

OUTBOUND LOGISTICS Involve The Collecting, Storing, And Distributing the product to the buyers. (e.g. Processing of orders, warehousing or storage of finished goods, and delivery)

Customer Order Cycle A customer order cycle begins with the placement of an order by a customer. It ends when you are finally paid for goods or services rendered. But there are activities in between the two events that consume time. Some add value, such as packing and shipping, and some are non-value adding and delay time, such as moving the order around the building from mailbox to mailbox, sitting on a desk, or repetitive motions.

When a cycle ends, a lot of non-value adding time has been consumed that may constitute 90-95 percent of total time. Some of the time is lost in travel, some is lost in the processing backlog, and some may be lost diverting a customer's order to a credit department for release. If you can identify the non-value added time in the cycle, you can devise ways to eliminate the causes.

Mainstream value-add activities are identified on flow process charts. Flow process charts are analyzed for activities that delay mainstream activities. Delays can be moves, slow operations, inspections, as well as waiting time. Cutting cycle times fifty percent per established period of time is a good goal. The process is continuous.

Mapping process flow is a fundamental step in reducing total cycle times. Mapping the flow and tracking time for each of the events provides a basis for analysis. The process is not difficult, however it is time consuming. It provides a step by step image of work flow, systems, procedures, and volumes. It reveals the relationships between the tasks.

Once cycles are mapped, the opportunities to compress time can be pursued. The goal in compressing time is not to devise the best way to perform a task, but rather to either eliminate the task altogether or perform it parallel with other tasks so that the overall system response time is reduced.

Lead Time:
Lead time in the supply chain management realm is the time from the moment the customer places an order, to the moment it is received by the customer.

Logistical interfaces: Logistic functions and activities have a significant amount of overlap with the other functions and activities of a company. The functions with a high degree of overlap are finance, marketing, information technology and production. Figure in the next slide shows the relationship between logistics and other business functions.

Costing Interest Factors Tax Rates Rates For Services Depreciation Negotiations

Information Technology Information Storage Information Processing User Interface Analytical Tools Reports

LOGISTICS Inventory Levels Lead Time Transport Mode Delivery Schedule Product Availability Production


Location/ no. of Warehouses

Customer Requirements Customer Commitments Market Promotion Capacity Planning Production Planning Quality Control

The Logistical Mission: Logistics exists to satisfy customer requirements by facilitating relevant manufacturing and marketing operations. The challenge is to balance service expectations and cost expenditures in a manner that achieves business objectives. Basic logistical service is measured in terms of 1. Availability 2. Operational performance, and 3. Service reliability

1.Availability means having inventory to consistently meet customer material or product requirements. 2.Operational performance deals with the elapsed time from order receipt to delivery. Operational performance involves delivery speed and consistency. A firm's operational performance can be viewed in terms of how flexible it is in accommodating unusual and unexpected customer requests. 3.Service reliability involves the quality attributes of logistics. For logistics performance to continuously meet customer expectations, it is essential that management be committed to continuous improvement.

The mission of the logistical system is measured in terms of total cost and performance. Performance measurement is concerned with the availability of inventory, operational capability, and quality of effort. Logistical costs are directly related to desired level of performance. As a general rule, the greater the desired performance, the higher the total logistics cost. The key to effective logistical performance is to develop a balanced effort of service performance and totalcost expenditure.

Competitive edge: In the fiercely competitive environment logistics provides the edge. Due to technological revolution most of the products are moving into commodity markets. In a commodity market where price is controlled by competition, where there is no product differentiation in terms of quality parameters like performance & reliability, where brands are almost irrelevant, competitive edge is that of availability of product and service in terms of time, place and quantity.

Customer service is a key element in logistics strategy. Value added customer service is leveraged to gain competitive advantage. Good customer service builds customer loyalty amongst existing customers and through positive word of mouth communication.

Importance of 3 Cs The three Cs in business are Company, Customer and Competition. All the three C are vital for healthy business and prosperous economy. Buying decision is always triggered by a need a consumer is experiencing due to the stress he is under. Customer is attracted by value when he is about to make a buying decision. Competitors in business continuously add value to their products in order to be ahead in the competition.

Any supplier organization or Company tries to be better than the Competition by utilizing their assets efficiently and effectively. The Supplier Company tries to differentiate her products in terms of functional quality and product cost. Competition has ensured that technology and human skills are almost same everywhere.

Hence product differentiation in terms of functional quality and product cost is nearly impossible. But a great opportunity exists for the Supplier Company to differentiate her products by service and logistics cost by superior logistics. When this happens customer sees better value in the products of Supplier Company as compared to competition.

Importance of 3Cs

Value C Company By effective utilization of assets tries to create and offer value to customers

l C Customers Look for value, benefit at lowest price benefit at lowest price

Value l
C Competitor By effective utilization of assets tries to create and offer value to customers

Cost differentials osiffere

Logistics Outsourcing Outsourcing logistics operations to a 3PL (third party logistics) adds to the bottom line for both the retailer and manufacturer through accurate, wellmanaged inventory and supply chain solutions. Outsourcing reduces the need for costly real estate to hold inventory. Manufacturers, distributors and retailers who outsource save time and money.

3PLs offer expertise that manufacturers, distributors and shippers can tap into, allowing users to achieve supply chain solutions with their customers that minimize total delivered costs. The efficiencies generated by outsourcing logistics has made it extremely popular. Recent studies show that fully 80 percent of Fortune 500 companies outsource at least one function - the largest such number in history.

Third-party logistics. A third-party logistics provider (abbreviated 3PL) is a firm that provides a one stop shop service to its customers of outsourced (or "third party") logistics services for part, or all of their supply chain management functions. Third party logistics providers typically specialize in integrated operation, warehousing and transportation services that can be scaled and customized to customers needs based on market conditions and the demands and delivery service requirements for their products and materials.

Fourth party logistics (4PL) Arrangement in which a firm contracts out (outsources) its logistical operations to two or more specialist firms (the third party logistics) and hires another specialist firm (the fourth party) to coordinate the activities of the third parties.

Integrated Logistics:

System-wide management of entire logistics chain as a single entity, instead of separate management of individual logistical functions. For business excellence logistics operations need to be integrated on the following 2 fronts: a) Integration of logistics into the business b) Integration of components of logistics.

Any business process consists of a set of activities those include raw material procurement, conversion, and the distribution of the finished products for selling. To accomplish the objective of making available the right product, at the right place, at the right time at low cost, the assistance of integrated logistics is needed. This process takes care of material storage and movement across these three stages of the business process.

The integration will make the business process run as a chain rather than as isolated process elements. The logistics process is a set consisting of a number of activities those include warehousing, material handling, packaging, transportation and information flow.
(In todays business processes there are many companies offering total integrated logistics solutions.)

Material Flow
Suppliers Procurement Processing Distribution Customers

Information Flow

Logistics Integration
In the logistics process the close coordination of inventory flow and information flow is essential for system efficiency and effectiveness. The volume of logical activities varies with the width of the supply chain, product category, and volume of business.

Logistics Planning and Strategy It's an accepted fact that there is always a need for a proper and efficient business plan for any particular element such as planning or controlling in an organization. Similarly, there is also a need for a business to clearly establish its logistics business plan. This can clearly point out the steps required and the personnel who will be performing the tasks and assigning responsibilities.

The logistics business plan must be clearly defined so that there is no confusion or vagueness in the content of the plan that could interfere with accomplishment of the desired objectives of the organization. While drafting a logistics plan, you must keep in mind all possible present and future scenarios. The ascertainment of future conceivable scenarios can be made by a logistic manager with the ability to carefully plan, analyze and implement forecasts to a considerable extent on the behalf of the enterprise.

The logistics business plan must be organized in a manner that each of the personnel knows his duties and roles and makes sure that the duties assigned to him are performed on time. This would make sure that the plan is at least worth a try. The plan's success would be dependent on the entire organization and a good logistic plan will benefit the whole organization. This would require a high level of understanding and coordination in all departments of the organization, each giving their best towards the attainment of common objectives.

What Is a Logistics Strategy? When a company creates a logistics strategy it is defining the service levels at which its logistics organization is at its most cost effective. Because supply chains are constantly changing and evolving, a company may develop a number of logistics strategies for specific product lines, specific countries or specific customers.

What Is Involved in Developing a Logistic Strategy? A company can start to develop a logistics strategy by looking at four distinct levels of their logistics organization. 1. Strategic: By examining the companys objectives and strategic supply chain decisions, the logistics strategy should review how the logistics organization contributes to those high-level objectives.

2.Structural: The logistics strategy should examine the structural issues of the logistics organization, such as the optimum number of warehouses and distribution centers or what products should be produced at a specific manufacturing plant. 3.Functional: Any strategy should review how each separate function in the logistics organization is to achieve functional excellence.

4.Implementation: The key to developing a successful logistics strategy is how it is to be implemented across the organization. The plan for implementation will include development or configuration of an information system, introduction of new policies and procedures and the development of a change management plan.

Components to Examine when Developing a Logistics Strategy When examining the four levels of logistics organization, all components of the operation should be examined to ascertain whether any potential cost benefits can be achieved. There are different component areas for each company but the list should at least include the following: Transportation: Does the current transportation strategies help service levels?

Outsourcing: What outsourcing is used in the logistics function? Would a partnership with a third party logistics company improve service levels? Logistics Systems: Do the current logistics systems provide the level of data that is required to successfully implement a logistics strategy or are new systems required? Competitors: Review what the competitors offer. Can changes to the companys customer service improve service levels?

Information: Is the information that drives the logistics organization real-time and accurate? If the data is inaccurate then the decisions that are made will be in error. Strategy Review: Are the objectives of the logistics organization in line with company objectives and strategies? A successfully implemented logistics strategy is important for companies who are dedicated to keeping service levels at the highest levels possible despite changes that occur in the supply chain.

Supply Chain Management: The concept of Supply Chain Management is based on two core ideas. The first is that practically every product that reaches an end user represents the cumulative effort of multiple organizations. These organizations are referred to collectively as the supply chain. The second idea is that while supply chains have existed for a long time, most organizations have only paid attention to what was happening within their four walls. Few businesses understood,

much less managed, the entire chain of activities that ultimately delivered products to the final customer. The result was disjointed and often ineffective supply chains. Therefore, the responsibility and authority for implementing SCM must be placed at the highest levels of an organization.

Supply chain management, then, is the active management of supply chain activities to maximize customer value and achieve a sustainable competitive advantage. It represents a conscious effort by the supply chain firms to develop and run supply chains in the most effective & efficient ways possible. Supply chain activities cover everything from product development, sourcing, production, and logistics, as well as the information systems needed to coordinate these activities.

Definition of Supply-Chain:
All the activities in delivering the products from raw material through to the customer including sourcing raw materials and parts, manufacturing and assembling, warehousing and inventory tracking, order entry and order management, distribution across all channels, delivery to the customer and the information systems necessary to monitor all these activities.

SCOPE The scope of SCM is functional and organizational. The functional scope of SCM refers to which traditional business functions are included or excluded in the implementation and the process of SCM. The functional scope of SCM encompasses all the traditional intra-- business functions.

The organizational scope of SCM concerns what kinds of inter-firm relationships are relevant to the participating firms in the implementation and the process of SCM. Organizational scope of SCM is the implementation and process of SCM across three or more companies, all of which must have a SCO (Supply Chain Orientation)

Logistics Vs. SCM

Logistics management is that part of the Supply Chain Management process that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers' requirements. Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all Logistics Management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies.

Supply Chain Scenario and Importance When we talk about the importance of Supply Chain Management we try to bring into sharp focus the loss due to the absence of an effective supply chain strategy and / or the benefit due to a well oiled supply chain for any firm. Basically, it is a question of how good is the integration of supply chain that matters for any firm. Of critical importance in today's business scenario is managing competition through partners.

An independent firm on its own may not have all the resources to match its competitors. In an era of gaining competitive advantage through reduced inventories all over ,a company is going to have a disadvantage of having to carry unnecessary inventory for the fear of losing future business.

The importance of Supply Chain Management thus is in : 1.Reduced inventories along the chain 2. Better information sharing among the partners 3. Planning being done in consultation rather than in isolation The benefits too would be reflected in terms of : Lower costs Better customer service Efficient manufacturing Better trust among the partners leading to win-

win situation for both. Process integration and other efforts result in improved quality as higher profit margins shall get reflected in creation of better facilities for manufacturing, product design research, enhanced customer service. In scenario planning, senior managers build internally consistent, alternative views of possible future outcomes. Senior managers formulate strategy to maximize shareholder value; supplychain planners run optimization models to minimize costs.

Combining scenario planning with supply-chain planning achieves the best of both worlds, which leads to long-term competitive advantage. Any company that has a global supply chain should consider introducing its strategic left hand to its operational right hand. Strategic supply-chain planning that combines aspects of business-strategy formulation with aspects of tactical supply-chain planning can make each far more valuable to the planning effort than either would be alone.

Strategic supply-chain planning is the Pegasus of strategy: It can soar, but it also needs to keep its feet on the ground. Conventional supply chains concern all materialmanagement stages from the supply of raw material through to the sale of final product to the end customer. Key concepts used in conventional supply chains are demand management, strategic sourcing, inventory management, supply synchronization, project management, and use of technology.

Conventional supply chain management targets mainly the operational aspect of businesses, whereby inventory levels need to be analyzed on a month to month basis with corresponding customer demand and ad-hoc operational issues.

Supply Chain Planning Matrix

Supply chain management, in addition, provides all companies connected in a supply partnership with the greatest level of transparency. i.e, all orders and requests are readily accessible to all connected parties, which not only facilitates the transaction process by providing all companies with information, but also increases accountability, as all companies are made aware of each movement through the supply chain and can spot shortcomings. In this way, business partnerships are forced to become more honest, and there is less room for laziness or skimming off the top.

From the examples that have been analyzed it is clear that most supply chain problems are related to the lack of co-ordination and linkage between various parties in the chain. Indeed there is a growing recognition by many companies that partnership and co-operation achieves more than narrow self-interest and conflict.
The benefits of co-maker relationships Shorter delivery lead times Reliable delivery promises Less schedule disruption Lower stock levels

Faster implementation of design changes Fewer quality problems Stable competitive prices Orders given higher priority

Supply Chains and the Value Delivery Network Value Delivery Network

The network made up of the company, suppliers, distributors, and ultimately customers who partner with each other to improve the performance of the entire system.
Marketing Channel Set of interdependent organizations involved in the process of making a product or service available for use or consumption by the consumer or business user.

Channel choices affect other decisions in the marketing mix Pricing, marketing communications A strong distribution system can be a competitive advantage Channel decisions involve long-term commitments to other firms

Channel structures range from two to five levels. The simplest is a two-level structure in which goods and services move directly from the manufacturer or provider to the consumer. Two-level structures occur in some industries where consumers are able to order products directly from the manufacturer and the manufacturer fulfills those orders through its own physical distribution system. In a three-level channel structure retailers serve as intermediaries between consumers and manufacturers. Retailers order products directly from the manufacturer, then sell those products

directly to the consumer. A fourth level is added when manufacturers sell to wholesalers rather than to retailers. In a four-level structure retailers order goods from wholesalers rather than manufacturers. Finally, a manufacturer's agent can serve as an intermediary between the manufacturer and its wholesalers, making a five-level channel structure consisting of the manufacturer, agent, wholesale, retail, and consumer levels.

A five-level channel structure might also consist of the manufacturer, wholesale, jobber, retail, and consumer levels, whereby jobbers service smaller retailers not covered by the large wholesalers in the industry.

Relationship Management. Like customer relationship management, supply chain management seeks to build relationships with vendors. Building a collaborative, teamoriented culture starts with the leader's realization that the company must work together with supply chain partners to deliver value for consumers. In practice, such a culture encompasses the codes of conduct in the process of pursuing mutual as well as individual supply chain goals.

Broadly speaking, codes of conduct include the willingness to share information with partner firms, flexible actions such as quickly adapting to changing supply and demand for the good of the entire supply chain, and performing mutual responsibilities with a team spirit when the supply chain faces threats and/or a part of supply chain process fails. Narrowly, codes of conduct include "vendor codes of conduct," "labor regulation" and/or "business ethics codes."

What Is Extended Enterprise? The term "extended enterprise" represents a new concept that a company is made up not just of its employees, its board members, and executives, but also its business partners, its suppliers, and its customers. The notion of extended enterprise includes many different arrangements such as virtual integration, outsourcing, distribution agreements, collaborative marketing, R&D program partnerships, alliances, joint ventures, preferred suppliers, and customer partnership.

The Bullwhip Effect The bullwhip effect is the magnification of demand fluctuations. The bullwhip effect is evident in a supply chain when demand increases and decreases. The effect is that these increases and decreases are exaggerated up the supply chain. The essence of the bullwhip effect is that orders to suppliers tend to have larger variance than sales to the buyer. The more chains in the supply chain the more complex this issue becomes.

This distortion of demand is amplified the farther demand is passed up the supply chain. Some of the reasons that the bullwhip effect occurs include the following: Over reacting to the backlog orders. Little or no communication between supply chain partners. Delay times between order processing, demand, and receipt of products.

Order batching: method for reduction of ordering costs due to price discounts for bulk ordering, transportation expense decrease by ordering fulltruck loads, etc. Limitations on order size (i.e. retailers can order products in cases of 10 from wholesaler; however, distributors receive orders in cases of 1,000) Inaccurate demand forecasts. Free return policies.

Organisation Structure Basic Concept: An organization structure is the way in which the tasks and subtasks required to implement a strategy are arranged. A strategist has to grapple with the complexities of creating the structure, making it work, redesigning when required, and implementing changes that will keep the structure relevant to the needs of the strategies that have to be implemented.

Successful strategy formulation does not guarantee successful strategy implementation. It varies among different types & sizes of organizations. Organizational structure & the controls that are a part of it affect firm's performance. When the firm's strategy is not matched with the most appropriate structure & controls; performance declines.

Organizational structure specifies the firm's formal reporting relationships, procedures, controls & authority, and decision-making process. It influences how managers work & the decisions resulting from that work. It specifies the work to be done & how to do it given the firm's strategy or strategies. It provides the stability a firm needs to successfully implement its strategies & maintain it's competitive advantages.

Organizational structure determines the manner and extent to which roles, power, and responsibilities are delegated, controlled, and coordinated, and how information flows between levels of management

Scope Structural Stability: Provides the capacity the firm requires to consistently and predictably manage its daily work routines. Structural Flexibility: Provides the opportunity to explore competitive possibilities & allocate resources to activities that will shape the competitive advantages of the firm that it will need to be successful in the future.

The importance and objectives for conducting organizational structure are to control: . Markets: share and growth, customer base and diversification, competitor information, pricing, sales, etc. Organization: size, structure, responsibilities and accountability, etc. Product: quality, performance, reliability, maintainability, design technology and innovation, demand, mix, packaging, pricing, warranty, support, etc.

Processes: facility, capability, capacity, technology, reliability, quality Supplier management: quality, delivery, price, consistency, flexibility Workforce: labor availability, competence, mix, utilization, compensation, health and safety, etc. Capital: sourcing, availability, cost, prioritization of use, return, etc. Other: environment, regulatory issues, governmental policies, communications, etc.

Barriers In Forming Effective Organizational Structure: The traditional organisations are not capable of implementing any cross functional processes. These are structured to divide authority and responsibilities according to functional work such as inventory control, warehousing, or transportation. Each of such organisations become concerned with achieving their own functional excellence thereby hindering the goal of integration achieved by co-

The traditional functioning as described above is referred to as silo mentality. (A lack of communication and common goals between departments in an organization.) Successful integration of logistics requires a structure that facilitates cross functional coordination.

Stages in evolution of logistical organization, with emphasis on modern flat organization. The evolution of enterprise logistics management went through the following five stages: 1) The logistics function of the individual management phase (Transportation and Warehousing) At this stage, the true sense of the concept of logistics and logistics management awareness had not yet appeared. To reduce total logistics costs was not the goal, but only in lowering transportation costs and storage costs for individual links.

2) The logistics function of a systematic management phase (PD Management) This stage is characterized by: the enterprises setting up a dedicated logistics management system; This era of supply chain management studies was highlighted with the development of Electronic Data Interchange (EDI) systems in the 1960s and developed through the 1990s by the introduction of Enterprise Resource Planning (ERP) systems.

This era has continued to develop into the 21st century with the expansion of internet-based collaborative systems and is characterized by increasing value-addition and cost reductions through integration.

3. Globalization phase The globalization phase, can be characterized by the attention given to global systems of supplier relationships and the expansion of supply chains over national boundaries and into other continents. It was in the late 1980s that a considerable number of organizations started to integrate global sources into their core business. The main aim was in increasing competitive advantage, value-adding, and reducing costs through global sourcing.

4. Specialization Phase : Outsourced Manufacturing and Distribution In the 1990s industries began to focus on core competencies and adopted a specialization model. Companies abandoned vertical integration (absorption into a single firm of several firms involved in all aspects of a product's manufacture from raw materials to distribution), sold off noncore operations, and outsourced those functions to other companies.

This changed management requirements by extending the supply chain well beyond company walls and distributing management across specialized supply chain partnerships.

5) Supply chain logistics management phase (SCM) Into the 90's, the U.S. business logistics system became more systematic, integrated technology, and internet technology, were instrumental in the success of supply chain management, providing a strong support. The supply chain was built around the core business, through the information flow, logistics, capital flow controls, starting from procurement of raw materials to final products.

Supply Chain Logistics Management stressed that the alliance between the various business partnerships in developing the logistics alliances and extensive cooperation. At any given moment, market forces could demand changes from suppliers, logistics providers, locations and customers, and from any number of these specialized participants as components of supply chain networks.

Supply chain specialization enabled companies to improve their overall competencies in the same way that outsourced manufacturing and distribution had done; it allowed them to focus on their core competencies and assemble networks of specific, best-in-class partners to contribute to the overall value chain itself, thereby increasing overall performance and efficiency.

Customer Service "Customer service is an organization's ability to supply their customers' wants and needs"

Scope of Customer Service Creating, communicating and delivering value to selected customers can only be achieved if the company aligns and co-ordinates its relationships with four other major constituencies: suppliers, owners/investors, employees and partners. Together, these five constituencies form the S.C.O.P.E. of customer relationship management.

Suppliers: Suppliers are all those who provide input to a companys value chain. These include suppliers of raw material, components, technologies, money (relationship banks), people, knowledge and so on. The emphasis is on building strategic, long-term relationships with a smaller number of suppliers. These relationships feature co-operation to conjointly produce value for all parties supplier, customer and the customers customer.

Owners/investors: Being successful at customer relationship management means creating value for the company and the customer over the long-term. It may mean sacking customers in the short-term, nurturing a relationship now in order to reap a future benefit, investing in technologies which facilitate customisation.

Employees: Employee behaviours can either enhance or damage value for the selected customers. In other words, employee satisfaction drives customer satisfaction and, in a competitive market place where customers can switch suppliers, customer satisfaction is the outcome of customer retention.

Partners: Partnering relationships can support the creation, communication and delivery of value to strategically significant customers in many ways. Value-adding partnerships, strategic alliances and joint ventures are all forms of partnering arrangements.

Objectives/Importance Of Customer Service: Looking at the main objectives of the supply chain management, one can easily notice that they all have implications related to customer service. The following features are mentioned most often: 1. Reduced order lead time; 2. Ensured reliability, proper frequency, quality and flexibility of deliveries; 3. Optimized stock level within the entire supply chain; 4. Minimized total costs of goods flow.

Objectives no. 1 and 2 are actually the fundamental objectives of the logistic customer service. Objective no. 3 pertains to stock optimization, not minimization, meaning that stock management may not be treated as an autonomous activity, but the stock level must be flexibly adjusted to match customer preferences, as it determines the availability of goods, i.e. the basic element of the logistics service. Minimized total costs of goods flow, in turn, must always be confronted with the level of delivery service, as this is the basic trade-off of the whole logistics system.

The objective of supply chain should be to establish a chain of customers that links people at all levels in the organization directly or indirectly to the marketplace.

Elements of Customer Service: The widely accepted trend is to view customer service in the marketing context under three different headings: 1. Pre transaction elements 2. Transaction elements 3. Post transaction elements

Pre transaction elements Written customer service policy: Accessibility:

Organisational culture:

System flexibility:

documented and well articulated policy easy to reach and easy to communicate management focus on customer service and organisational structure adaptability to meet customer requirement

Transaction elements Order cycle time: Inventory availability: Order fill rate: elapsed time between order and delivery percentage of demand met from stock in hand proportion of order filled within the stated lead time query response time and exception advise

Order status information:

Post- transaction elements Availability of spares: Warranty and product tracing: Customer complaint handling:

in stock level of service parts warranty handling and product tracing capability dealing with complaints and returns

This way customer service can be viewed as an important front end element for value creation.

The Seven Rights: The seven rights state that the logistician's job is to ensure the 1)availability of the right product 2)at the right time 3)in the right quantity 4)in the right condition 5)at the right place 6)for the right customer 7)at the right cost.

Customer Service Audit: Customer service audit is collection and examination of records and customer data. Verification of accounts and financial data is done to check any errors and corrections. Customer service audit comprise of many methodologies which helps in for improved employee performance and overall development of the organization. Customer service audit is beneficial for the management of value service of a customer.

Such constant checks are necessary in order to keep close eye on customer satisfaction and responses. Customer service audit encompasses variety of methodologies like customer feedback, customer questionnaires, customer information records, communication with customers and their records, and the customer service measurement. These all methods when applied simultaneously with proper scrutinizing tools, gives you the optimum customer service audit. Such a productive service audit is very crucial for future strategy and current trends and quality service.

Customer Service Strategy: When a company creates a logistics strategy it is defining the service levels at which its logistics organization is at its most cost effective. Because supply chains are constantly changing and evolving, a company may develop a number of logistics strategies for specific product lines, specific countries or specific customers.

As services are customer-centered, the strategy, systems and people in the operations of service should also focus on the customer. Customers expectations are central to the design of service strategy of the firm. The line linking customer to people (service providers) signifies that people are extremely important in producing and delivering services to the customer. The customer to systems link shows that the service operations/delivery system should also be designed with the customer in mind.

The strategy to system link means that the systems and procedures should follow from the service strategy. The systems should support the strategy.
The strategy to people link means that all the service providers (people in the service organization) should be well aware of the organizations strategy.

The system to people link means that the service operations system and procedures should be people-friendly.

The only criterion that counts in evaluating a service quality is defined by the customers. Only customers can judge quality. All other judgments are essentially irrelevant.

Demand Forecasting Definition: Estimate of expected demand over a specified future period. Also called forecast demand.

Accurate demand forecasting is essential for a firm to enable it to produce the required quantities at the right time and arrange well in advance for the various factors of production, viz., raw materials, equipment, machine accessories, labour, buildings, etc.

Purposes of forecasting Purposes of short-term forecasting a. b. c. d. Appropriate production scheduling. Reducing costs of purchasing raw materials. Determining appropriate price policy Setting sales targets and establishing controls and incentives. e. Evolving a suitable advertising and promotional campaign. f. Forecasting short term financial requirements.

Purposes of long-term forecasting a. Planning of a new unit or expansion of an existing unit. b. Planning long term financial requirements. c. Planning man-power requirements. Demand forecasts of particular products form guidelines for related industries (e.g. cotton and textiles). Also helpful at the macro level.

Nature of Demands: It is the nature (or source) of demand which provides the real key to inventory control technique applicability and selection. The fundamental principle in the selection of order point or material requirements planning is whether demand for the item is dependent or independent of that for other items."

Independent demand must be forecast, but dependent demand can be calculated since it is directly related to, or derives from, the demand for another inventory item or product...Dependent demand need not and should not be forecast; it can be precisely determined from the demand for those items that are its sole cause.

Forecasting Components: Raw Data Trend Component: Trend identify the rate of growth or decline of a series over time (Long-term historical pattern between demand time) Seasonal Component: Seasonal variations consists of annually recurring movements above and below the trend line

Demand fluctuates in a repetitive pattern from year to year Seasonal periodic peaks and valleys should occur at the same time every year Seasonal variations should be of larger magnitude than the random variations . Cyclic Component: Cyclical variations are long term oscillations or swings about a trend line The cycles may or may not be periodic, but they often are the result of business cycles of expansion and contraction of economic activity over a number of years

Business cycles may be due to one or more of the following: prosperity, recession, depression and recovery The cycles may vary with respect to the time of occurrence, the length of the phases, and the amplitude of the fluctuations

Random Component: Random variations have no particular pattern and usually are without specific assignable cause They represent all influences not included in trend, seasonal, and cyclical variations Erratic occurrence may be isolated and removed from the data, but there are no general techniques

for doing so Averaging process will help to eliminate its influence Random variations are often referred to as noise, residuals, or irregular variations

Approaches to Forecasting : Qualitative & Quantitative: There are two approaches to determine demand forecast (1) the qualitative approach, (2) the quantitative approach. The comparison of these two approaches is shown below:

Descriptio Qualitative Approach Quantitative n Approach Applicabilit Used when situation is Used when situation is y vague & little data exist stable & historical data (e.g., new products and exist technologies) (e.g. existing products, current technology) Considerati Involves intuition and Involves mathematical ons experience techniques Techniques Jury of executive Time series models opinion Causal models Sales force composite Delphi method Consumer market survey

Qualitative Method Jury of executive opinion

Description The opinions of a small group of high-level managers are pooled and together they estimate demand. The group uses their managerial experience, and in some cases, combines the results of statistical models. Each salesperson (for example for a territorial coverage) is asked to project their sales. Since the salesperson is the one closest to the marketplace, he has the capacity to know what the customer wants. These projections are then combined at the municipal, provincial and regional levels. A panel of experts is identified where an expert could be a decision maker, an ordinary employee, or an industry expert. Each of them will be asked individually for their estimate of the demand. An iterative process is conducted until the experts have reached a consensus. The customers are asked about their purchasing plans and their projected buying behavior. A large number of respondents is needed here to be able to generalize certain results.

Sales force composite

Delphi method

Consumer market survey

There are two forecasting models here (1) the time series model and (2) the causal model. A time series is a set of evenly spaced numerical data and is obtained by observing responses at regular time periods. In the time series model , the forecast is based only on past values and assumes that factors that influence the past, the present and the future sales of your products will continue. On the other hand, the causal model uses a mathematical technique known as the regression analysis.

The time series forecasting methods are described below:

Description Time Series Forecasting Method Nave Approach Assumes that demand in the next period is the same as demand in most recent period; demand pattern may not always be that stable For example: If July sales were 50, then Augusts' sales will also be 50

Time Series Description Forecasting Method Moving Averages MA is a series of arithmetic means and is used if little or no trend is (MA) present in the data; provides an overall impression of data over time A simple moving average uses average demand for a fixed sequence of periods and is good for stable demand with no pronounced behavioral patterns. Equation: F 4 = [D 1 + D2 + D3] / 4 F forecast, D Demand, No. Period A weighted moving average adjusts the moving average method to reflect fluctuations more closely by assigning weights to the most recent data, meaning, that the older data is usually less important. The weights are based on intuition and lie between 0 and 1 for a total of 1.0 Equation: WMA 4 = (W) (D3) + (W) (D2) + (W) (D1) WMA Weighted moving average, W Weight, D Demand, No. Period

Exponential Smoothing A statistical technique that calculates a moving average where the most recent data are given a different weight to earlier data; useful if recent changes in data are the results of actual change (e.g., seasonal pattern) instead of just random fluctuations F t + 1 = a D t + (1 - a ) F t Where F t + 1 = the forecast for the next period D t = actual demand in the present period F t = the previously determined forecast for the present period a= weighting factor referred to as the smoothing constant

Order Processing Order processing is the term used to identify the collective tasks associated with fulfilling an order for goods or services placed by a customer.

Integrated System: Is relevant to any organization, regardless of size or sector, looking to integrate two or more of their management systems into one cohesive system with a holistic set of documentation, policies, procedures and processes.

The first stage of the fulfillment cycle is the way in which your business processes a customer's order. How your business handles orders has a major impact on customer service, from encouraging initial interest to prompting repeat business. While several factors - price, quality of product or service, range of goods, stock availability - are vital to achieving sales in the first place, a responsive, fully automated order-fulfillment procedure plays a key part in overall customer satisfaction.

Automating your internal systems can help achieve the speed and efficiency you need from order processing. It brings together all departments that handle the order, from website or sales reps to warehouse staff. You can do this by: Considering using enterprise resource planning software which can tie in your website with other facets of your business, such as planning, manufacturing and distribution.

Connecting your suppliers and customers to the system. Integrate your system with your website, then customer orders that arrive in your system can be transformed into orders to your suppliers. This is so that they can benefit from more timely, accurate order information, with invoices sent and processed automatically.

Customer Order Cycle The customer order cycle occurs at the customer/retailer interface and includes all processes directly involved in receiving and filling the customers order. Typically, the customer initiates this cycle at a retailer site and the cycle primarily involves filling customer demand. The retailers interaction with the customer starts when the customer arrives or contact is initiated and ends when the customer receives the order.

The processes involved in the customer order cycle include: Customer arrival Customer order entry Customer order fulfillment Customer order receiving Customer Arrival. The term customer arrival refers to the customers arrival at the location where he or she has access to his or her choices and makes a decision regarding a purchase. From the supply chain perspective, the key flow in this process is the customers arrival. The goal is to facilitate the

contact between the customer and the appropriate product so that the customers arrival turns into a customer order. Customer Order Entry. The term customer order entry refers to customers informing the retailer what products they want to purchase and the retailer allocating products to customers. The objective of the customer order entry process is to ensure that the order entry is quick, accurate, and communicated to all other supply chain processes that are affected by it.

Customer Order Fulfillment. During the process, the customers order is filled and sent to the customer. Order fulfillment takes place directly from the manufacturers production line. The objective of the customer order fulfillment process is to get the correct orders to customers by the promised due dates at the lowest possible cost. Customer Order Receiving. During this process, the customer receives the order and takes ownership. In SCM receiving occurs when the product is delivered to the customer.

EDI (Electronic Data Interchange) EDI is a set of protocols for conducting electronic business over computer networks. EDI defines the electronic exchange of structured business data, such as purchase orders, invoices, and shipping notices, typically between one organization and another. The relationship is usually between a vendor and customer. For example, EDI provides a way for a customer's computer to place orders for goods with a vendor's computers, based on reorder levels. The EDI system coordinates the transaction, initiates deliveries, and generates invoices.

Advantages: EDI can reduce costs, workforce requirements, and errors associated with retyping orders, invoices, and other documents. With EDI, computer data already entered by one organization is made available to a business partner. EDI is typically handled using store-andforward technologies similar to e-mail.

Accuracy: Traditionally, the manufacturing, and sale of new products and services involves a long paper work. EDI simplifies this process and makes it possible to accomplish receiving the data exactly as transmitted, so you eliminate errors. Competitive Advantage: If you are able to receive point of sales data allowing you to keep the shelves stocked while saving transaction costs for your customer, you will have a competitive advantage over non-EDI competitors. This helps build long term relationships with your customers.

Informed Decision Making :More accurate information leads to improved decision making procedures. Customer Service: Responding to customer needs is the key to continued long term customer relationships. EDI insures that information is accurate and readily available for maintaining a high level of service within a competitive market place.

Enhanced Partnership: EDI makes doing business with your company easier and more cost effective. This will advance you from being merely a vendor to a full business partnership where both sides work together for mutual profitability. Improved Cash Flow: EDI allows you to instantly turn over invoices on purchase orders and immediately begin transmitting electronic funds transfers (EFTs) to your account.

Inventory Control: EDI will decrease the cost of storing inventory because it reduces the lead-time necessary to process an order. Labor Cost Reduction: Data entry, manual reviews and reconciliations, sorting, copying, filing documents and, most importantly, errors are significantly reduced by limiting the number of person hours involved in processing an order from bid request to invoicing. Responsiveness: Integration of EDI with retailers' point of sale(POS) information allows you to

respond more quickly to immediate changes in market conditions. Paper and Postage: Since transactions are completed electronically, EDI will eliminate the expense of paper, envelopes, preprinted forms and postage. Shipping: EDI communicates with bar codes that allows for tight tracking of inventory. EDI provides quick and accurate information. Better shipment planning, through a well designed EDI system, saves you time and money.

Streamlined Processes: With EDI, information is shared, human intervention is reduced, customer response is increased, and you gain the ability to respond to the market fluctuations almost instantaneously.

Transportation (9-07-2010)
Transportation means movement of people and goods from one location to another. Principles of Transportation: Principle #1: Access: People are entitled to reasonable access to other people, places, goods and services.

Principle #2: Equity: Nation states and the transportation community must strive to ensure social, interregional and inter-generational equity, meeting the basic transportation-related needs of all people including women, the poor, the rural, and the disabled. Principle #3: Health and Safety: Transportation systems should be designed and operated in a way that protects the health (physical, mental and social well-being) and safety of all people, and enhances the quality of life in communities.

Principle #4: Individual Responsibility : All individuals have a responsibility to act as stewards of the natural environment, undertaking to make sustainable choices with regard to personal movement and consumption. Principle #5: Integrated Planning : Transportation decision makers have a responsibility to pursue more integrated approaches to planning.

Principle #6: Pollution Prevention: Transportation needs must be met without generating emissions that threaten public health, global climate, biological diversity or the integrity of essential ecological processes. Principle #7: Land and Resource Use: Transportation systems must make efficient use of land and other natural resources while ensuring the preservation of vital habitats and other requirements for maintaining biodiversity

Principle #8: Fuller Cost Accounting: Sustainable transportation systems must be cost effective. Transportation decision makers must move as expeditiously as possible toward fuller cost accounting, reflecting the true social, economic and environmental costs, in order to ensure users pay an equitable share of costs.

The Role of Transportation

The role that transportation plays in logistics system is more complex than carrying goods for the proprietors. Its complexity can take effect only through highly quality management. By means of well-handled transport system, goods could be sent to the right place at right time in order to satisfy customers demands. It brings efficacy, and also it builds a bridge between producers and consumers.

Therefore, transportation is the base of efficiency and economy in business logistics and expands other functions of logistics system. In addition, a good transport system performing in logistics activities brings benefits not only to service quality but also to company competitiveness.

Logistics Functions: Transportation Functionality provides 2 major functions: 1) Product movement: To move various types of product whether it is raw materials component, semi- finished goods, finished goods, packaging material, scrap and so on. Transportation has become a very essential. Transportation of a product involves the use of temporal (related to time)resources. This is because a particular product is inaccessible while it is in-transit. i.e. while it is being transported from one place to another place.

These products are called in-transit inventories. These products are significantly important because they influence a variety of supply chain decision. For e.g. if supply chain is a considering a just in time strategy, or say. quick response strategy with regard to supply of goods to the customer then this influences the time for which the goods should be in transit because the goods have to reach quickly, or just in time to meet the requirement of the customer.

Further, if goods are dispatched only when a customers requires them. Then such decision also affects the amount of inventories that have to be stored at the distribution centers. Transportation of product involves the use of financial resources. Expenses on transport result from cost of driver, cleaner, casual laborer, taxes, administrative costs, and repairs/ maintenance. In addition, if during transportation there is product loss or product damage, these expenses have also to be taken into consideration.

Transportations of product also use environmental resources. It uses a very large amount of energy in term of fuel and oil and also creates environmental expenses in terms of congestion, air pollution, and noise pollution.

2. Product storage: Though it is not very common, but one of the functions of transportation is also temporary storage of goods. Of course, storing goods in vehicles is quite an expensive affair. However, in case of goods have to be moved once again within just a few days. It is advisable to keep them stored in transport vehicles themselves. this will avoid the cost of unloading and loading as well as the possible damage to goods during such a operation.

It may happen that a company has limited storage facility at a particular warehouse. Hence, when the company loads the goods in to the transport vehicle to be sent to the warehouse. It may request the transport company to take a longer route to reach the destination. This will act as temporary storage for the goods.

Importance of Transportation
The transport sector is an important component of the economy impacting on development and the welfare of populations. When transport systems are efficient, they provide economic and social opportunities and benefits that result in positive effects such as better accessibility to markets, employment and additional investments.

The economic impacts of transportation can be direct and indirect: Direct impacts related to accessibility change where transport enables larger markets and enables to save time and costs.
Indirect impacts related to the economic multiplier effect where the price of commodities, goods or services drop and/or their variety increases.

The economic importance of the transportation industry can thus be assessed from a macroeconomic and microeconomic perspective: At the macroeconomic level (the importance of transportation for a whole economy), transportation and the mobility it offers are linked to a level of output, employment and income within a national economy. In many developed countries, transportation accounts between 6% and 12% of the GDP.

At the microeconomic level the importance of transportation is linked to producer, consumer and production costs.

Transportation Modes: Transport modes are the means by which people and freight achieve mobility. They fall into one of three basic types, depending on over what surface they travel land (road, rail and pipelines), water (shipping), and air. Each mode is characterized by a set of technical, operational and commercial characteristics: When designing a supply chain, either domestic or global, it is essential to understand the different modes of transportation, transit times, related steps and cost implications that will affect how goods move.


ROADS : A road is an identifiable route, way or path between two or more places. Roads are typically smoothed, paved, or otherwise prepared to allow easy travel; though they need not be, and historically many roads were simply recognizable routes without any formal construction or maintenance. ADVANTAGES 1.Provide high flexibility, 2.Allow easy travel, 3.Serve as initial and final stage of freight transport,

4.Most commonly used mode of transportation, 5.Suitable for short and medium distances. DISADVANTAGES 1.Low capacity, 2.High energy and area use, 3.Main source of noise and air pollution, 4.Cause of road accidents. EXAMPLES: Cars, Buses, Trucks, Motor Bikes, Rickshaws etc.


RAIL: Rail transport is where train runs along at two parallel steel rails, known as a railway or railroad. Alternative methods include monorail and maglev. A train consists of one or more connected vehicle that run on the rails. Propulsion is commonly provided by a locomotive, that hauls a series of unpowered cars, that can carry passengers or freight. The locomotive can be powered by steam, diesel or by electricity supplied by a trackside systems.

Railed vehicles move with much less friction than rubber tires on paved roads, making trains more energy efficient, though not as efficient as ships. Intercity trains are long-haul services connecting cities. Modern high-speed rail is capable of speeds up to 350 km/h (220mph),but this requires specially-built track.

ADVANTAGES: 1.Fast medium of transportation, 2.Suitable for long distances, 3.Economical medium of transportation, 4.Suitable for transportation of heavy goods, 5.Energy efficient mode of transportation. DISADVANTAGES: 1.Requires special infrastructure, 2.Chances of accidents are high, 3.Require high cost, 4.Not flexible mode of transportation.


Air transport: This is the fastest mode of transport. It carries goods and passengers through airways by using different aircrafts like passenger aircraft, cargo aircraft, helicopters, etc. Besides passengers it generally carries goods that are less bulky or of high value. In hilly and mountainous areas where other mode of transport is not accessible, air transport is an important as well as convenient mode. It is mostly used for transporting goods and passengers during natural calamities like earthquake and floods, etc.

Advantages of Air transport It has the following advantages. 1. It is the fastest mode of transport. 2. It is very useful in transporting goods and passengers to the area, which are not accessible by any other means. 3. It is the most convenient mode of transport during natural calamities. 4. It provides vital support to the national security and defense.

Disadvantages of air transport 1. It is relatively more expensive mode of transport. 2. It is not suitable for transporting heavy and bulky goods. 3. It is affected by adverse weather conditions. 4. It is not suitable for short distance travel. 5. In case of accidents, it results in heavy losses of goods, property and life.

Water transport

Water transport Water transport refers to movement of goods and passengers on waterways by using various means like boats, steamers, launches, ships, etc. With the help of these means goods and passengers are carried to different places, both within as well as outside the country. Within the country, rivers and canals facilitate the movement of boats, launches, etc.

Since the goods and passengers move inside the country, this type of transport is called inland water transport. When the different means of transport are used to carry goods and passengers on the sea route it is termed as ocean transport. There are two types of water transport. I. Inland water transport Inland water transport use boats, launches, barges, streamers, etc., to carry goods and passengers on river and canal routes. These

routes are called inland waterways and are used in domestic or home trade to carry bulky goods. Passenger transport through waterways is not so popular in our country. Inland water transport system exists only in few states like. West Bengal, Andhra Pradesh, Assam, Tamil Nadu, etc. 2. Ocean transport Ocean transport refers to movement of goods and passengers with the help of ships through sea or ocean waterways. It plays an important role in the development of international trade. It is also used for transporting goods and passengers in the

coastal areas. Ocean transport has its fixed route, which links almost all the countries of the world. Sea transport may be of the following two types. 1. Coastal Shipping - In this transport, ships ply between the main ports of a country. This helps in home trade, and also in carrying passengers within the country. 2. Overseas shipping - In this transport, ships ply between different countries separated by sea or ocean. It is mainly used for

promotion and development of international trade. It is economical means of transport to carry heavy machines and goods in bulk. Overseas transport is carried out on fixed routes, which connect almost all the countries. In ocean transport, different types of ships are used to carry passengers and goods. These may be classified as under.

Liners : 1. A liner is a passenger or cargo vessel, which belongs to a regular shipping company. These ships ply over a fixed route according to a prescribed schedule or timetable. 2. Tramps - A tramp is a cargo ship, which does not make regular trips but plies whenever cargo is offered to it. It does not follow a fixed route or a prescribed timetable like that of liners.

Advantages of water transport

1. It is a relatively economical mode of transport for bulky and heavy goods. 2. It is a safe mode of transport with respect to occurrence of accidents. 3. The cost of maintaining and constructing routes is very low as most of them are naturally made. 4. It promotes international trade.

Disadvantages of water transport 1. The depth and navigability of rivers and canals vary and thus, affect operations of different transport vessels. 2. It is a slow moving mode of transport and therefore not suitable for transport of perishable goods


Pipeline transport is the transportation of goods through a pipe. Most commonly, liquid and gases are sent, but pneumatic tubes that transport solid capsules using compressed air have also been used. As for gases and liquids, any chemically stable substance can be sent through a pipeline. Therefore sewage, slurry, water, or even beer pipelines exist but arguably the most valuable are those transporting oil and natural gas.

Advantages 1.Lower cost of transportation 2.Lower transit losses 3.Lower energy intensiveness 4.Economies of scale 5.Safety and Reliability -minimum disruptions 6.Environment-friendliness 7.Multi-product handling 8.Flexibility 9.Stationary carrier 10.Augmentation at low cost 11.Minimal land costs 12.Decongestion of surface transport systems

Disadvantages As easy targets Pipelines can be the target of vandalism , sabotage, or even terrorist attacks. In war, pipelines are often the target of military attacks, as destruction of pipelines can seriously disrupt enemy logistics.

Ropeway Systems

Ropeway Systems Aerial ropeway is one such unique and ingenuous mechanical system, which facilitates transportation of man and material over difficult and peculiar terrain bringing about comparative ease and economy vis--vis other means of transport.

Ropeway refers to a mode of transport, which connects two places on the hills, or across a valley or river. In the hilly areas, trolleys move on wheels connected to a rope and are used for carrying passengers or goods, especially building materials, food, etc. Advantages Ropeways can generate their own power and use it efficiently and economically. A major advantage of ropeways is their ability to operate over rough terrain. A technical advance is more efficient loading, and the noise level on a ropeway is low.

Disadvantages It lags behind in heavy investments and limitations on size, nature and quantity of the haul.

Intermodal freight transport

Intermodal freight transport involves the transportation of freight in an intermodal container or vehicle, using multiple modes of transportation (rail, ship, and truck), without any handling of the freight itself when changing modes. The method reduces cargo handling, and so improves security, reduces damages and losses, and allows freight to be transported faster. Reduced costs versus over road trucking is the key benefit for intra-continental use. The negative is that it takes longer than normal truck delivery would.

Factors to be considered for mode and carrier selection: Essential to effective transportation management is knowing what carrier and what mode to utilize and when. In making a mode and carrier selection, a shipper must: (1) consider both quantitative cost factors and less tangible, qualitative factors; and (2) determine how to weigh all of these factors together.

Carrier selection is one of the most important decisions in the transportation strategic planning that affects both logistics cost and customer service. As the entire supply chain is affected by carrier selection, the decision process should incorporate 5 groups of criteria that influence the carrier selection and evaluation: 1) Cost, 2) Insurance of service provision, 3) Handling services, 4) Customer service and 5) Strategic compatibility.

The exact definition of objectives is a crucial task which should be considered before going into the process of carrier selection. The methodology consists of three phases: Phase one: Requirements identification: The ultimate goal is to select carriers which are best suited for the firm to achieve its objectives. So, the first question is what are the objectives in each market? For instance in a market that the firm has newly entered, it

needs to suggest a high level of service to be able to get a share, or in a market in which there is a strong competition on the price the firm should try to reduce its costs. Each of the objectives will define the kind of carriers it needs. For example, a responsive and an effective carrier are appropriate for each of the mentioned objectives, respectively.

After the identification of objectives, the relevant criteria should be defined. So the kind of criteria that a decision maker considers is dependent to the objectives and this dependency prevents suggesting a fixed number of criteria to all the firms even in a similar industry. However, this order is not definite and different firms in various situations can put different importance to each criteria but it seems that cost of transportation is usually the most important one.

Phase two: Planning: Carrier weighting: The data necessary in this section (criteria, potential carriers, objectives and etc.) are gathered in the previous section. In the first step, all the carrier selection criteria should be categorized. The first group contains cost relevant criteria. The second group consists of criteria of customer service. Quality of drivers and personnel of the carrier, computerized links and flexibilities in deliveries can affect the reputation of the firm and are included in this group.

This leads us to third group which is named insurance of service provision. The forth group consists of freight handling services. Facilities, the ability to handle special freights, expedited shipments and capacity are main considerations of this group. The last group is about strategic compatibility between the firm and the carrier. Previous experiences, consistency of strategies, reputation and the possibility of long term relationships are included in this group.

Phase three: Implementation and appraisal: Implementation: As is stated by Bowersox (1996) there are four steps in implementing a logistics project which are: planning, timing, success criteria and implementation. The definition of implementation includes breaking down the project into independent activities, determining the sequence and relations between activities and assigning a person or a team to each activity.

Performance appraisal: After implementation, in order to measure the deviation from the objectives, some performance appraisal programs should be done. In performance measurement, the difference between the actual and planned outcome will be calculated and in a case with significant difference, the real causes will be investigated. This difference could be caused by the weakness or negligence of the carrier and be solved with more cooperation with them. For example, inefficient routing by the carrier may have cause late

deliveries or the increase in the transportation costs. This could be solved by helping the carrier in routing programs.

Modal Characteristics How do we measure relative weight of each mode? System mileage, traffic volume, revenue, nature of traffic composition

Railways Rail network * Stands out in terms of tonne / kilometres moved * 226 billion tonne / kilometres and 55.8% of total tonne/kilometers moved in 1982 in India * 449 billion tonne / kilometres and 51.7% of total tonne kilometers now moved in India * Facing very stiff competition from roadways * High capital investment due to right of way, switching yards, terminals, locomotives and rolling stock, but low operating costs. (contd)

* Focus on specific products than on broad range * Raw material extractive industries away from water ways.

Developments in this area * Recent customer friendly attitude * Inter modal transport through alliances and acquisitions as in US, providing single window service to customers * Development of Specialized Equipment to suit the needs of bulk volume of customers * Unit trains * Container trains * Double stack containers

Road transport * High flexibility and speed * Ultimate mode of transport * Rapid growth * Low capital cost as compared to railways * 179.2 billion tonne/kilometres and 44.2% of total tonne /kilometres moved in 1982 in India * 585 billion tonne/kilometres and 56% of total tonne/ kilometres moved in India now.

* Operating costs are higher * Ideal for small shipments over short distances * Labor intensive * Occasional fuel shortages * Availability of good quality vehicles * Availability & cost of maintenance and spares * Bad and unsafe road conditions * Carrier organizations and their disputes with government * Octroi * Restrictive permits

Developments in this area * Entry of several manufacturers of trucks-entry of Daimler to produce Mercedes CVs * Trailer-tractor sets * National grid of highways * Road widening schemes, bypass to cities * Pay and use roads private road builders * Express ways

Water transport * Sailing vessels, steamships-1800, diesel driven ships * Limited scope for deep water transport * Limited extent of navigable inland water transport -lakes, rivers, canals * Main advantage of water transportation is extremely large shipments & low cost * Importance of deep water vessels & deep water ports to fully realize benefits of water transport

* Diesel towed barges- high flexibility, disadvantages are range of operation (not for long distance) and slow speed * Ferries- for small water bodies like rivers and bays. * Inland water Transport is not used to its full potential in India although we have used mechanized IWT since early 1800. Main hurdles appear to be 1. Low priority in policy 2. Construction of dams 3. Receding water levels in the rivers 4. Tough competition by other modes

Developments in this area * Construction of deep water ports: JNPT * Construction of ports with private investment * Port Pipavav, India's first port in the private sector is operated by APM Terminals, one of the largest operators of container terminals in the world * A consortium led by P&O Australia is setting up a $200 million Container terminal on BOT basis at Jawaharlal Nehru Port Trial operation started in April 1999 * Agreement signed for construction of a captive coal Jetty at Mumbai by Tata Electrics.

Pipelines * Reliable all weather means of transport * Low energy consumption * Pipeline being under ground space occupation is minimal * Pipe line operates all the time except when it is shut down for maintenance * No empty container or wagon to be brought back * Highest fixed costs, right of way and laying of pipeline, and lowest operating costs * Not labour intensive (contd)

* Not flexible by nature. Pipe lines are stationary * Physical state of the commodity is a limitation. * This mode of transport can release capacity of other modes for transport of essential commodities

Rope ways * Hilly and otherwise inaccessible area * Steep gradients * Cause minimum ecological imbalance * Point of supply and demand can be connected by shortest route *Logistics of fruits in Himachal Pradesh

Air transport * Speed of transport is highest * Fixed costs are lower than rail or road or pipe line. But operating costs are highest * Air transport brings distant markets closer perishables market in gulf countries * Overcomes the hassle and cost of setting up depots and service centers overseas * Full potential of peak seasonal demand can be taken * Test marketing is easy. Products can be shipped directly from the factory