What is Logistics Management

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What is Logistics Management?
• The objective is to plan and coordinate all the activities
necessary to achieve desired level of delivered service
and quality at lowest possible cost.
• The scope of logistics include the entire gamut of
activities starting from the procurement and management
of raw materials through to delivery of final product to
the customer.
• The ultimate purpose of any logistics system is to satisfy
the customer by establishing linkages of people at all
levels in the organization directly or indirectly to the
market place.
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• As it is getting increasingly difficult to maintain a
competitive edge through product alone, customer
service has started to provide the distinctive
difference between one company‟s offer and that of
its competitors.
• The underlying concept is “ The process of
strategically managing the procurement, movement
and storage of materials, parts and finished inventory
and the related information flows through the
organization and its marketing channels in such a
way that the current and future profitability are
maximized through the cost effective fulfillment of
orders.”
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Competitive Advantage
Customers seeking benefits at acceptable cost
Company A
(Asset utilization)
Company B
(Asset utilization)Cost differential
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Source of Competitive
Advantage
• Competitive advantage is the ability of an
organization to differentiate itself in the eyes
of the customer, from its competition, and to
operate at a lower cost and hence greater
profit.
• Competitive advantage helps organizations to
achieve commercial success which mainly
depends upon two factors – cost advantage
and value advantage.Zubin Poonawalla

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Commercial success
Cost advantage Value advantage
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• Cost advantage or Productivity advantage
- Characterized by low cost of production due to
greater sales volume, economies of scale enabling
fixed costs to be spread over a greater volume and
the impact of the „experience curve‟.
• Value advantage is in terms of product offering a
differential „plus‟ over competitive offerings.
- Based on marketing concept that customers that
„customers don't buy products, they buy benefits‟.
- Benefits may be intangibles and may not relate to
specific product features.
- It can be an image or reputation or even some
functional aspects. Zubin Poonawalla

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• Adding value through differentiation is
extremely powerful means of achieving
competitive edge in the market.
• One of the significant method of adding
value is service.
• Service helps in developing relationship with
the customers through provision of an
augmented offer.
• Augmentation takes many forms such as
delivery services, after-sales
services, financial packages, technical
support etc. Zubin Poonawalla

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Productivity and Value Matrix
Commodity Market
(1)
Cost Leader
(2)
Service Leader
(3)
Cost and Service
Leader
(4)
Productivity Advantage
V
a
l
u
e
A
d
v
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• For companies in quadrant (1), the market is
uncomfortable place as their products cannot be
differentiated from their competitors‟ offerings as
they do not have any cost advantage. These are
commodity markets.
• Companies in quadrant (2), adopt cost leadership
strategies. Traditionally, these are based on
economies of scale gained through volume.
• Another route to achieving cost advantage is through
logistics management. As logistics constitutes a major
proportion of total costs, reengineering logistics
processes results into substantial cost reduction.
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• Companies in quadrant (3), seek differentiation
through service excellence since markets are
becoming more and more service sensitive.
• Customers expect greater responsiveness and
reliability from the suppliers, reduced lead
times, just-in-time delivery, and various other value
added services.
• Services strategies can be developed through
enhanced logistics management.
• Companies in quadrant (4) are distinctive in value
they deliver and are also cost competitive.
• Competitors find it hard to attack these companies
which try to excel in all the value chain activities.
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Value Chain ActivitiesValue Chain Activities
Primary Activities
•Inbound Logistics
•Operations
•Outbound Logistics
•Marketing & Sales
•Service
Secondary Activities
•Infrastructure
•Human Resource Management
•Technology Development
•Procurement
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• Primary activities represent the functional
areas like arranging inputs for transforming
them into output, and managing distribution,
marketing, sales, and services.
• The secondary activities facilitate the
integration of all the functions across the
entire organization.
• The companies can achieve competitive
advantage and create differentiation by
organizing and performing these activities
more efficiently or in a unique manner than
their competitors.Zubin Poonawalla

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Factors affecting value and
productivity advantage
A. Productivity advantage
- Capacity utilization
- Asset utilization
- Inventory reduction
- Integration with the suppliers.
B. Value advantage
- Customized services
- Reliability
- Responsiveness. Zubin Poonawalla

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Underlying Philosophy Behind
Logistics Concept
Suppliers Procurement Operation Distribution Customers
Materials Flow
Information Flow
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• The objective of logistics is to link the market
place, distribution network, the manufacturing
process and procurement activity, so as to
provide higher levels of services to the
consumers yet at a lower cost.
• Scope of logistics management encompasses
management of raw materials and other inputs
through the delivery of the final product.
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How do we define logistics
management?
• A process of satisfying customer needs through
coordination of materials and information flows that
extend from the market through the firm‟s operation
and beyond that to the suppliers.
• A shift to an integrated orientation from the
conventional manufacturing or marketing
orientation.
• Traditionally, manufacturing and marketing have
been considered as separate activities each having
different priorities. Zubin Poonawalla

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• Manufacturing priorities and objectives are
concerned with achieving operating efficiencies
based on long production runs, minimized set ups
and changeovers, and product standardization.
• Marketing priorities and objectives are concerned
with achieving competitive advantage based on
varieties, high service levels, and frequent product
changes.
• Customer orientation and cost competitiveness has
been integrated by introducing flexible
manufacturing systems, practicing inventory
management policies based on manufacturing
requirement planning and just-in-time inventory
policy, laying sustained emphasis on quality and
integrating supply side issues in strategic plans.
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How do we define supply chain?
• A network of organizations that are having
linkages, both upstream and downstream in
different processes and activities that produce
and deliver value in the form of products and
services in the hands of ultimate consumer.
Customers Retailers Shirt Manufacturer
Weavers
of Fabrics
Yarn/Fibre
mfrers
Downstream Upstream
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• A shirt manufacturer is a part of supply chain
that extends upstream through the weavers of
fabrics to the spinners and the manufacturers
of fibres, and downstream though
distributors and retailers to the final
consumers.
• Though each of these organizations are
dependent on each other yet traditionally do
not closely cooperate with one another.
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Is Supply chain management
same as vertical integration?
• SCM is not the same as vertical integration.
• Vertical integration implies ownership of upstream
suppliers and downstream customers.
• Earlier, vertical integration used to be the desirable
strategy but increasingly the companies are focusing
on their core business i.e. the activities that they do
really well and where they have a differential
advantage.
• Everything else is outsourced.
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Implementation of SCM through
Logistics Management
• SCM raises the challenge of integrating and
coordinating the flow of materials from multitude of
suppliers, including offshore, and similarly managing
the distribution of the finished product by way of
multitude intermediaries.
• Transferring costs upstream or downstream leads to
logistics myopia as all costs ultimately will make
way to the final market place to be reflected in the
price paid by the end user.
• The prime objective of SCM is to reduce or eliminate
the buffers of inventory that exists between the
organizations in a chain through sharing of
information on demand and current stock levels.Zubin Poonawalla

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How does Logistics differ from
SCM?
• Logistics management is primarily concerned with
optimizing flows within the organization.
• Supply chain management deals with integration of
all partners in the value chain.
• Logistics is essentially a framework that creates a
single plan for flow of products and information
through a business.
• Supply chain builds upon this framework and seeks
to achieve linkage and coordination between
processes of other entities in the pipeline i.e.
suppliers and customers, and organization itself.Zubin Poonawalla

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Impact of Logistics and
Customer Service on Marketing
• Traditionally, marketing has focused on
end-customer or consumer, seeking to promote brand
values and to generate a „demand pull‟ in the market
place for company‟s products.
• Due to shift in power in marketing
channels, companies are realizing to develop strong
relations with such intermediaries like large retail
outlets to create a customer franchise as well as
consumer franchise.
• The impact of both strong consumer franchise and
customer franchise can be enhanced or diminished by
effectiveness of suppliers‟ logistics system.
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Consumer
Franchise
•Brand values
•Corporate image
•Availability
Customer
Franchise
•Customer
Services
•Partnership
•Quick
Response
Supply Chain
Efficiency
•Flexibility
•Reduced
Inventory
•Low cost
supplier
Marketing
Effectiveness
•Market
Share
•Customer
Retention
•Superior
ROI
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Activities Included in Logistics
• Logistics competency is achieved by
coordinating the following functional areas.
- Network design
- Information
- Transportation
- Inventory
- Warehousing, material handling and
packaging.
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Network Design
• Network design is the prime responsibility of
logistics managers since a firm‟ facilities and
structure is used to provide products and materials
to the customers.
• Logistics facilities typically include manufacturing
plants, warehouses, cross-dock operations, and retail
stores.
• Determining the number and type of facility
required, their geographic locations, and the work to
be performed at each is an important part of network
design.
• In certain situations, some of the facility operations
may be outsourced to service specialists.Zubin Poonawalla

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• Network design determines the type of the
inventory and the quantity to be stocked at each
facility, and the assigning of customer orders
for shipment.
• Network of facilities also includes information
and transportation as a part of entire structure
from where logistical operations such as
processing of customer orders, maintaining
inventory and material handling are performed.
• The network design must consider
geographical variations.
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• The factors influencing modifications of
network design are:
(a) Change in demand and supply
(b) Product assortments
(c) Changes in suppliers‟ source of supplies.
(d) Manufacturing requirements.
• The first step towards achieving competitive
advantage lies in superior network
design, as the real competition is not
between two companies but between
efficiency and effectiveness in managing
their supply chain network.
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Information
Deficiencies in the quality of information
Incorrect information
with respect to trends may cause
•Inventory
shortage
•Over commitment
Incorrect information
relating to a specific
customer‟s requirements
leads to
•Processing of incorrect
orders creating additional
costs.
•Reduced sales
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• Forecasting and order management are the
two areas of logistical work that depend on
information.
(a) Forecasting enables to decide on positioning
of inventory to satisfy anticipated customer
requirements.
(b) Order management involves handling of
specific customer‟s requirements, both
external as well internal.
- External customers are those that consume
the product or service, or trading partners
that purchase the products or services for
resale. Zubin Poonawalla

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- Internal customers are organizational units
within a firm that require logistical support
to perform their designated work.
(c)The process of order management involves
- Receipt of an initial order
- Invoicing
- Delivery, and
- Collection.
• Incorrect information and delays in order
processing can cripple the logistics
performance; thus quality and timeliness are
the key issues in logistical operations.
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Transportation
• Transportation is the operational area of
logistics that geographically positions the
inventory i.e. provides for place utility.
• Companies accomplish transportation in
three different ways:
(a) A private fleet of vehicles may be operated.
(b) Contracts may be entered into with
transport companies.
(c) The service of different transport
companies may be engaged on an
individual shipment basis.Zubin Poonawalla

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Factors affecting transportation
performance
Transportation performance
Cost Speed Consistency
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A. Cost of transportation
- The payment for movement between two
geographical locations and expenses related to
administration and and maintaining in-transit
inventory.
B. Speed of transportation
- The time required to complete a specific
movement.
- Transport firms capable of providing faster
services normally charge higher rate.
- The faster the transportation services, shorter is
the time interval during which the inventory is in
transit and unvailable.Zubin Poonawalla

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C. Consistency of transportation
- Refers to variations in time required to
perform a specific movement over a number
of shipments.
- Consistency is a measure of dependability of
transportation.
- Inconsistency in transportation leads to
inventory safety stocks required to protect
against unpredictable service breakdowns.
Speed and consistency combine to create
quality aspect of transportation.
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Inventory
• The objective is to achieve the desired
customer service with minimum inventory
commitment, consistent with lowest total cost.
• Excessive inventories may be helpful in
compensating for deficiencies in network
design but ultimately result into higher total
logistics cost.
• The best practice of inventory management is
to achieve maximum turnover while satisfying
customer commitments.Zubin Poonawalla

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Warehousing, Material
Handling, And Packaging
• Merchandise needs to be warehoused at selected
times, transport vehicles material handling for
efficient loading and unloading and goods are most
efficiently handled when packaged together into
shipping cartons or other type of containers.
• The logistical activities carried out in warehouse are
sorting, sequencing, order selection, transport
consolidation and sometimes product modification
and assembly.
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• Within the warehouse, products must be
received, moved, sorted, and assembled to
meet customer order requirements and for
these activities material handling becomes
significant.
• Products packed in cans, bottles or boxes are
handled more efficiently when combined into
larger units such as Master Cartons.
• Master units can further be consolidated into
large units such as pallets, containers etc.
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Inventory Management Policy
• The following factors are required to be
considered while formulating inventory
management policy.
- Customer segmentation
- Product requirements
- Transport integration
- Time-based requirements
- Competitive performance.
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Customer Segmentation
• The profitability of business depends upon the
products purchased by the customers, sales
volumes, prices, value-added services required and
supplementary activities to develop and maintain an
ongoing relationship.
• Some customers are highly profitable and have
growth potential, while others do not.
• Hence, highly profitable customers constitute the
core market for an enterprise and inventory strategies
need to be focused on meeting requirements of such
core customers.
• Inventory priorities designed to support core
customers come out of effective segmented logistics.
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Product Requirements
• Applying Pareto‟s principle, firm‟s 20% of
all products marketed account for more than
80% of total profits.
• Offer high availability and consistent delivery
on more profitable products, though sometimes
high –level support of less profitable items
becomes necessary to provide full-line service
to core customers.
• Not advisable to provide high service
performance on less profitable products
purchased by non core customers.
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• Thus, it may be desirable to hold slow-moving
or low profit items at a central distribution
warehouse whereas core customers may be
served by fast, reliable air services.
• Orders to fringe customers may be delivered
by less expensive ground transportation.
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Transport Integration
• A sound inventory management strategy
would be to stock sufficient products at
warehouse to be able to arrange consolidated
shipments to a customer or a geographic area.
• The corresponding savings in transportation
may more than offset the increased cost of
holding the inventory.
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Time-Based Requirements
• Time-based arrangements reduce the overall
inventories by developing the capability to respond
rapidly to exact to exact manufacturing or retail
customers.
• If the products/materials can be delivered quickly, it
may not be necessary to maintain inventories at
manufacturing plants/ retail stores.
• If replenishment can be achieved rapidly less safety
stock will be required and instead of stockpiling and
holding safety stock the requirement will be to
receive the exact quantity of inventory at the time
required. Zubin Poonawalla

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• Time-based programmes tend to reduce
shipment sizes, which in turn increases the
number, frequency, cost of shipments and
hence higher transportation cost.
• An effective logistical arrangement will be to
achieve a trade-off resulting into desired
customer service at the lowest total cost.
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Competitive Performance
• Sound inventory management policy is
designed to gain customer service advantage
or neutralize a strength that a competitor may
be enjoying currently.
• As inventories exist across a logistical system
for various reasons, the policy should be
viewed from holistic cost perspective.
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Integrated Logistics
Customers
Physical
distribution
Manufacturing
support
Procurement Suppliers
Inventory Flow
Information Flow
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• Information from and about customers flows
through the enterprise in the form of sales
activity, forecasts and orders.
• Information is then translated into manufacturing
and purchasing plans.
• The materials are then procured,value addition
takes place along with the inventory flow
ultimately resulting into transfer of ownership of
finished products to the customers.
• The process of integration is not restricted to
manufacturing companies alone, the retailing and
wholesaling firms link physical distribution and
purchasing since manufacturing is not required.
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• The entire process of integration can be
viewed in terms of two interrelated activities.
- Inventory flow, and
- Information flow
Inventory Flow
Physical
distribution
Manufacturing
support
Procurement
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Physical Distribution
• Establishes linkage of marketing channel with its
customers facilitating the movement of a finished
product to the final destination of a marketing
channel.
• Would need a proper marketing effort resulting into
desired assortment being delivered when and where
needed.-Outbound logistics.
• Fulfills objective of implementation of time and
space dimension of customer service as an integral
part of marketing.
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Manufacturing Support
• Concerned with managing work-in-process
inventory as it flows between the stages of
manufacturing.
• Formulates a master production schedule that
subsequently facilitates arranging for timely
availability of materials, component parts,
and work-in-process inventory.
• Is not concerned with ‘how’ production
occurs but rather ‘what,’ ‘when’, ‘where’
products will be manufactured.Zubin Poonawalla

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Difference between Physical distribution
and Manufacturing Support
• Physical distribution attempts to serve the
desires of the customers and therefore must
accommodate the uncertainties of consumer
and industrial demand.
• Manufacturing support involves movement
requirements that are under the contol of
manufacturing enterprise.
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Procurement
• Concerned with purchasing and arranging in-
bound movement of materials, parts, and/or
finished inventory from suppliers to
manufacturing or assembly plants
, warehouses, or retail stores thereby ensuring
availability of materials/ assortments where
and when needed. -Inbound logistics.
• In a given marketing situation, manufacturers‟
physical distribution is same as retailers‟
procurement operations.
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Information Flow
A. Planning & Coordination Flows
- Nature & Location of customers
- Required products & services matching to needs of
customers.
- Limitations or bottlenecks within manufacturing
capabilities thus helping to decide outsourcing
requirements.
- Requirements of logistical facilities based upon
forecasting.
- MPS and MRP to support manufacturing
/procurement requirements.
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B. Operational Flow
- Order management and processing
- Procurement
- Inventory management
- Transportation and shipping
Advantages of effective operational flows
- Allocates and assigns inventory/ assortments to
customers according to predetermined priorities.
- Use of information technology in deploying
inventory to ensure effective performance of
logistical system.
- Consolidating orders to achieve freight economies
and making correct documentation.
- Facilitate purchase order preparation, amendments
and release to ensure overall supplier compliance.Zubin Poonawalla

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Logistical Performance Cycles
• The logistical integration through performance
cycles provides interface and link the
suppliers, the firm and its customers by means
of communication and transportation.
Performance Cycle
Transaction creating
activities
Physical fulfillment
activities
Advertising & Selling Physical distribution
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Physical distribution performance
cycle
Customer orderOrder transmissionOrder processing
Order selection Order transportation Order delivery
to the customer
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Significance of physical
distribution performance cycle
• As it links a firm with its customers, it helps create
marketing and manufacturing initiatives into an
integrated efforts.
• It resolves conflicting interface between marketing &
manufacturing.
- As marketing is dedicated to delighting customers, it
would like to maintain broad product line with high
inventory regardless of each product‟s profit
potential. By doing so, any customer's
requirement, no matter how small or large would be
satisfied.
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- Traditional mindset in manufacturing is to
control cost, which is achieved by long
production runs. Continuous manufacturing
processes maintain economies of scale and
reduce per unit cost. Therefore, a narrow line
of products is mass produced.
- Inventories are kept to resolve the inherent
conflict between these two philosophies.
- The above is achieved by forward deployment
of inventory throughout the logistical system
in anticipation of future sales on the basis of
forecasted information.Zubin Poonawalla

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How to reduce physical
distribution operational variance
• Improve accuracy of forecast
• Improve order management and
coordination with the customers.
• Have responsive and flexible cycle.
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Manufacture Support
Performance Cycle
• It provides production logistics being positioned
between the physical distribution and procurement
operations of a firm.
• Movement and storage of product, materials, and
semi-finished parts and components between
enterprise facilities represent the responsibility of
manufacturing support logistics.
• In context of wholesale & retail trade, it implies
selection of assortment of inventory to be moved to
the next level of value chain.
• Basically, supports what, where and when of the
production and not how.Zubin Poonawalla

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Features of manufacturing
support performance cycle.
• Initiates provision of materials and externally
manufactured components at a place and time
needed.
• Operations are restricted to dock-to-dock movement
within the firm and where intermediate storage is
required.
• After completion of manufacturing cycle the finished
goods inventory is allocated and deployed either
directly to the customers or to distribution
warehouses for further customer shipment.Zubin Poonawalla

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Procurement Performance Cycles
Sourcing Order placement and
Expediting
S
U
P
P
L
I
E
R
S
TransportationReceiving
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• The procurement operations are identified as inbound
logistics.
• International procurement often requires large
shipments necessitating the use of barges, ocean
going vessels, trains and multiple truckloads for
transportation.
• The lower value of materials and components as
compared to finished product implies greater
trade-off between higher cost of maintaining
inventory in transit and the use of low cost modes of
transport.
• As the cost of maintaining inventory in the pipeline
is less per day than the cost of maintaining finished
inventory, there is no benefit for paying higher
freight rates for faster inbound transport.Zubin Poonawalla

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• Procurement performance cycles are
invariably longer excepting in those cases
where the value of material or component may
justify paying higher freight rates for faster
inbound transport.
• A critical issue in procurement is uncertainty
in respect of price change, and/or supply
discontinuity.
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Reducing performance cycle
uncertainties
• Use of electronic data interchange
• Monitoring daily changes in workloads
• Human resource availability
• Availability of specialized unloading and
loading handling equipments
• Establishing safety stock/ buffer inventory to
cover variances so as to avoid delays.
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A few terms used in Inventory
Management
• Buffer stock= {Average lead time}x{Average usage
rate}.
• Safety stock= Average usage during the extension of
lead time.
• Reserve stock= Excess usage requirement during the
average lead time.
• Re-order level= B.S.+ S.S.+ R.S.
• Minimum Inventory Level= S.S.+R.S.
• Max. Inventory Level= {Minimum Level} + {Order
quantity} Zubin Poonawalla

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• Average Inventory Level= (Min.
level+Max.level)/ 2
• In case of periodic review the buffer stock will
be modified to {Average consumption
rate}x{Average lead time+Review period}
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Inventory Planning
• Ideally, if the forecast is done accurately, there
will not be any need for an inventory.
• Most warehousing would vanish, product
would move with less handling requirements
from warehouses to customers.
• However, in real life situations, the thrust is on
reducing inventory and maintain proper
customer service and optimal inventory levels.
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Inventory decisions-High risk &
high cost
• Without the proper inventory assortment, marketing
may find that sales are lost and customer satisfaction
declining.
• Overstocks increase cost and reduce profitability
through added warehousing, working capital
requirements, deterioration, insurance, and
obsolescence.
• As the significance percentage of assets are inventory
related, a reduction of firm‟s inventory by a few
percentage points can lead to dramatic improvement
in profits.
• ROI= (Profit/ Fixed assets +Current assets)
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• Substantial improvement in the productivity of
inventory can be achieved by re-engineering
supply chain processes.
• Poor inventory management may lead to stock
outs and hence cancellation of customers
orders, overstocking leading to insufficient
storage space and increase in the number and
rupee value of obsolete products.
• Consequently, inventory management has a
large financial impact on the firm.
• Investments blocked in inventory cannot be
used to obtain other goods or assets that could
improve the enterprise performance.Zubin Poonawalla

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Types of Inventory
• Broadly there are three types of inventory
- Manufacturing inventory
- Wholesale inventory
- Retail inventory
(a) Manufacturing inventory
- Manufacturer‟s inventory commitment starts with
raw material and component parts, including work-
in-process, and ends with finished goods.
- Manufacturer needs to transfer the finished goods
inventory to warehouses in closer proximity to
wholesalers and retailers.
- Manufacturer‟s inventory commitment is relatively
deep and has long duration.Zubin Poonawalla

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(b) Wholesale inventory
- Wholesaler purchases large quantities from
manufacturers and sells small quantities to retailers in
order to provide retail customers with assorted
merchandise from different manufacturers in smaller
quantities.
- Thus wholesaler risk exposure is narrower but deeper
and of longer duration than that of retailers.
- In case of seasonal goods, the wholesaler is forced to
commit inventory, far in advance of selling, thus
increasing the depth and duration of risk.
- The current trend of expansion of product lines has
increased the width of inventory risk.
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(c) Retail inventory
- Retailer inventory risk is wide but not deep.
- The emphasis is more on inventory velocity.
- Inventory velocity is measured by inventory turnover.
- The risk is undertaken on variety of products but for a
given product the risk is not deep relatively. The
exception is specialty retailer where the depth and
duration will be longer as they handle narrower lines.
- For instance, retailers‟ risk is spread across more than
10,000 SKUs, a general merchandise and food store
may carry around 25,000 SKUs and a full line
department store may have as many as 50,000 SKUs.
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Functions underlying inventory
commitments
A. Geographical Specialization
- It allows for geographical specialization for
individual operating units.
- The need for geographical specialization arises
because various factors of production viz.
power, materials, water, labour, manufacturing
facilities are located at a considerable distance from
the major markets.
- For instance, tyres, batteries, transmission
equipments and springs for an automobile
assembly. The production facilities for each of the
these are traditionally located near the source of
materials to minimize transportation cost.
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- This strategy leads to specialization of manufacturing
each automobile component and hence economically.
- This will also involve internal inventory transfer to
completely integrate various components into final
assembly.
- Thus, manufactured goods from various locations are
collected at a single warehouse and then combined as
a consolidated/ assorted shipment.
- P&G uses distribution centres to combine products
from its laundry, food, and healthcare divisions to
offer the customer a single integrated shipment.
- Economies gained through geographical
specialization invariably offset increased inventory
and transportation cost.
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B. Decoupling
- Provides for increasing operating efficiency within a
single manufacturing facility by stockpiling work-in-
process inventory between production operations.
- Decoupling enables manufacturing and distribution of
economic lot sizes in anticipation of sales thus
ensuring large sized shipments with minimum freight
cost.
- Decoupling permits products manufactured over a
period of time to be sold as an assortment.
- Decoupling increases the operating efficiency at a
single location while geographical specialization
includes multiple locations.
- However, JIT,DRP etc have reduced the economic
benefits of decoupling considerably.Zubin Poonawalla

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C. Balancing Supply and Demand
- Balancing is concerned with elapsed time between
consumption and manufacturing as balancing
inventory reconciles supply availability with demand.
- Particularly useful in linking variations of
consumption with manufacturing in case of seasonal
products.
- Balancing seasonal production and year round
consumption such as orange juice or year round
production and seasonal consumption of blankets or
knitting wool.
- In case of sort selling
season, manufacturers, wholesalers and retailers are
forced to take an inventory position far in advance of
peak selling season. Zubin Poonawalla

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- From retailers‟ perspective, an inventory position is
planned six months prior to the peak selling period.
- The main function of balancing supply and demand
is to ensure that investment in stocks is liquidated
completely within the season.
D. Buffer Uncertainties
- Safety stock protects against two types of
uncertainties:
- (a) Demand in excess of forecast during the
performance cycle. For instance, customers‟ request
of more or less units than planned.
- Delays in the performance-cycle length itself. For
instance, delay in order receipt, order processing, or
transportation.
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Inventory Management Strategy
• Companies can postpone positioning of inventory
by maintaining stock at the plants or they may
decide to place more products in local distribution
centres to have it closer to the market.
(a) Manage inventory at each distribution centre
independently.
(b) Consider inventory interdependence across
distribution sites by managing inventory centrally.
(c) Ensure more coordination and communication in
case of centralized inventory management.
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Inventory Cost Consideration
1. Origin purchase consideration
2. Transportation cost.
(a) Origin purchase means the buyer is responsible for
freight cost and product risk when the product is in
transit.
(b) Depending on the delivery terms, the buyer
assumes full risk on inventory at the time of
shipment.
(c) Depending on the payment terms, transit inventory
would be a part of enterprise's average inventory
and therefore subject to an appropriate charge.
(d) Transportation cost must be added to purchase
price to obtain an accurate assessment of the value
of goods tied up in inventory.
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• After the inventory is received, the amount
invested in the product must be increased by
transportation expenses.
• Thus, inventory carrying cost should be
assessed on the combined cost of the product
plus transportation.
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Inventory Control Procedures
Perpetual Review Periodic Review
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Perpetual Review
• Inventory status is reviewed to determine
replenishment needs.
• Implemented through a reorder point and
order quantity.
ROP= D x T + SS, where
• ROP= reorder point in units
• D= average daily demand in units
• T= average performance-cycle length in days
• SS=safety or buffer stock in units.
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• The following are considered in perpetual
review:
- On hand inventory represents quantity that is
physically present in the particular distribution
facility.
- On-order inventory represents quantities that
have been ordered from suppliers.
- If on-hand plus on-order quantity is less than
or equal to the established reorder
point, inventory control process will initiate
another replenishment order.
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- Mathematically, this can be stated as
- If I+q ROP then order Q, where
(a) I= inventory on hand
(b) q= inventory on order from suppliers
(c) ROP = re-order point in units
(d) Q= order quantity in units.
• Average inventory level for a perpetual review
system is calculated as
(a) I = Q/2 + SS, where
- I= average inventory in units
- Q= order quantity in units, and
- SS= safety stock in units
• The assumption is that P.O. will be placed when the
reorder point is reached and there is a continuous
monitoring of inventory system.
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Periodic Review
• The inventory status is reviewed at regular intervals
such as weekly or monthly.
• The re-order point is adjusted to consider the
extended intervals between reviews.
• The formula for calculating the periodic review
reorder point is
ROP= D( T + P/2) +SS, where
- ROP= re-order point
- D=average daily demand
- T= average performance cycle length
- P=review period in days
- SS= safety stock Zubin Poonawalla

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• Average inventory for periodic review is
represented as I= Q/2 + (P x D)/2 + SS,
- I= average inventory in units
- Q= order quantity in units
- P= review period in days
- D= average daily demand
- SS= safety stock.
• Because of the time interval introduced by
periodic review, periodic control systems
generally require larger average inventories
than perpetual system.Zubin Poonawalla

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Inventory Planning Methods
Fair Share
allocation
Distribution
Requirement
Planning
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Fair Share Allocation
Plant Warehouse
Inventory- 600 units
Distribution
Centre-1
Distribution
Centre-2
Distribution
Centre-3
Inventory= 50 units
Daily use= 10 units
Inventory= 100 units
Daily use= 50 units
Inventory= 75 units
Daily use= 15 units
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• Fair share allocation provides each
distribution facility with an equitable or fair
share of available inventory from a common
source such as a plant warehouse.
• Assuming that from a total inventory units of
600 it is desirable to retain 100 units at plant
warehouse; 500 units are available for
allocation.
• First we need to determine the number of
days‟ supply.
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DS = (A + Ij ) / Dj , where
- DS= no. of days supply for distribution
centre inventories.
- A= inventory units to be allocated from the
warehouse
- Ij= inventory in units for distribution centre j.
- Dj = daily demand for distribution centre j
In the above example,
• DS = {500 + ( 50+100+75)} / (10+50+ 15)
• DS= {500 + 225} /75 =725/75 = 9.67 days
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• Thus, fair share allocation means that each
distribution centre should be brought up to 9.67 days
stock.
• The amount to be allocated to each distribution
centre is determined as under:
Aj = (DS – Ij /Dj ) x Dj, where
- Aj = amount allocated to distribution centre j
- DS= number of days supply that each distribution
centre is brought upto.
- Ij = inventory in units for distribution centre j
- Dj= daily demand for distribution centre j
- Thus, the amount allocated to distribution centre 1
will be
A1= (9.67- 50/10) x 10 = (9.67- 5) x 10= 4.67x 10=
46.7 or 47 units.
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A2= (9.67-100/50)x50=(9.67-2.00)x50=383.5 or
384.00
A3= (9.67-75/15)x15=(9.67-5.00)x15=70 units.
• However, does not consider site specific factors.
- Difference in performance cycle.
- Economic order quantity.
- Safety stock requirements.
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Distribution Requirement
Planning
• Logical extension of manufacturing requirement
planning (MRP).
• Operates in an independent environment where
uncertain customer demand determines inventory
requirements.
• Requires forecast for each distribution centre and
SKU as well as adequate lead-time to allow product
movement.
• Errors may creep in because of prediction of demand
at wrong location or at wrong time.
• Requires consistent and reliable performance cycles
for movement between distribution facilities.Zubin Poonawalla

96Plant Warehouse
Regional warehouse Regional warehouse
Distribution
centre
Distribution
centre
Distribution
centre
Distribution
centre
Distrib
ution
centre
Distribution centre
C U S T O M E R S
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Raw Materials Warehouse
Part A Part B
Sub-assembly A
Part C Part D Part E
Sub assembly B Sub assembly C
Final Assembly (Manufacturing)
Plant Warehouse
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• DRP/MRP system integrates finished goods, work-in-
process, and materials planning.
• DRP provides a schedule for each SKU and each
distribution facility.
• For each planning period, the schedule will report the
following:
- Gross requirements reflecting demand from customers
being catered to by different distribution facilities.
- Scheduled receipts i.e.replenishment shipments
planned for arrival at the distribution centre.
- Anticipated week ending total deliveries.
- Projected on-hand inventory i.e. prior week‟s on-hand
inventory- current week‟s gross requirement +
scheduled receipts.
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Benefits of DRP
• Improved service levels by increasing on –time
deliveries and decreasing customer complaints.
• Better planning of new product launches.
• Improved ability to anticipate shortages so that
marketing efforts are not expended on products with
low stock.
• Reduced distribution centre freight costs resulting
from coordinated shipments.
• Improved inventory visibility and coordination
between logistics and manufacturing.
• Reduced warehousing space requirements because of
inventory reductions.
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Demand Forecasting
• Forecasting process comprises of two
elements
(a) Nature of demand, and
(b) Forecast components
Nature of Demand
Dependent demand Independent demand
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Dependent versus Independent
Demand
• Vertical dependent is characterized by
sequence of purchasing and manufacturing,
such as number of tyres used for assembly
of automobiles.
• Horizontal dependent occurs in a situation
where an attachment, promotion item or
operator‟s manual is included with each item
shipped.
(a) The demanded item may not be required to
complete the manufacturing process but may
be needed to complete the marketing process.
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(b) Once manufacturing plan for base item is
determined , requirements of components/
attachments can be calculated directly and no
separate forecasting is done.
• Independent demands are ones that are not related
to the demand for another item.
• For instance, demand for refrigerator is not related
to the demand for milk.
• Independent demand items are forecasted
individually.
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Forecast Components
1. Base demand
2. Seasonal factors
3. Trends
4. Cyclic factors
5. Promotions
6. Irregular quantities.
• Mathematically forecast is expressed as
Ft+1= (Bt x St x Tt x Ct x Pt) + I, where
- Ft+1= forecast quantity for period t+1Zubin Poonawalla

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- Bt= base level sales demand (average sales level)
for period t+1
- St= seasonal factor for period t
- T= trend component (quantity increase or decrease
per time period)
- Ct= cyclic factor for period t
- Pt= promotional factor for period t
- I= irregular or random quantity.
All forecasts may not include all components.
A. Base demand is based on average demand over an
extended period of time.
(a) There is no seasonality, trend, cyclic or
promotional component.
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B. Seasonal component is characterized by upward
and downward movement in demand
pattern, usually on annual basis e.g. emand for
woollen blankets is at peak during winter months
and lowest during summer.
(a) Seasonality at wholesale level precedes consumer
demand by approximately one quarter.
(b) An individual seasonality factor of 1.2 indicates
that sales are projected at 20% higher than an
average period.
C. Trend Component exhibits long range movement in
sales over an extended period of time.
(a) Trend may change number of times over the entire
product life cycle.
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(b) For instance, a reduction in birth rate implies
reduction in demand of disposal diapers.
(c) Trend component influences base demand as
Bt+1 = Bt x T, where
- Bt+1 = base demand in period t+1
- Bt = base demand in period t, and
- T= periodic trend index.
D. Cyclic component are known as business
cycles.
(a) Economies swing from recession to
expansion every three to five years.Zubin Poonawalla

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E.Promotions are initiated by the firm‟s marketing
activities such as advertising, and various other
schemes.
(a) Sales increase during promotion as the consumers
take advantage of promotional schemes thus leding
to liquidation of inventories.
(b) Promotion can either be the deals offered to the
consumers or deals offered to the trade (wholesalers/
retailers).
(c) Promotions if offered on regular basis at the same
time every year will resemble a seasonal component.
F. Irregular components include random or
unpredictable quantities that do not fit into any other
category hence are impossible to predict.
(a) By tracking and predicting other components the
magnitude of random component can be minimized.Zubin Poonawalla

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Forecast Approaches
A. Top-Down Approach
Plant Distribution Centre
Field
Distribution
Centre# 1
Forecast
4000 units
Field
Distribution
Centre#2
Forecast
3000 units
Field
Distribution
Centre#3
Forecast
2000 units
Field
Distribution
Centre#4
Forecast
1000 units
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• Assume the firm has an aggregate monthly
forecast for the entire country as 10,000 units
and it use four distribution centres to service the
demand with a historical split of 40, 30, 20, and
10 per cent respectively.
• Forecasts for individual distribution centres will
be projected to be 4,000, 3000, 2,000 and 1,000
respectively.
• In top-down approach a national level SKU
forecast is developed and then the forecasted
volume is spread across locations on the basis
of historical sales pattern.Zubin Poonawalla

110
B. Bottom-up Approach
• Decentralized approach since each distribution
centre forecast is developed independently.
• Results into more accurate forecast as it tracks
and considers demand fluctuations within
specific markets.
• Requires more detailed record keeping and is
more difficult to incorporate demand factors
such as impact of promotion.
Trade-off the detail tracking of bottom-up
approach with data manipulation ease of
top-down approach.Zubin Poonawalla

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Components of Forecasting
Process
Orders
History
Tactics
Forecast
database
Forecast Administration
Forecast
Technique
Forecast
Support
System
Forecast Process
Forecast
Users
Finance
Marketing
Sales
Production
Logistics
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A. Forecast data base keeps information about
• Orders
• Order history
• Tactics used to obtain orders such as
promotions, schemes, special promotional
programmes.
• State of economy and competitive actions.
B. Forecast process integrates forecast
techniques, support system and administration.
• Two prominently used forecasting techniques are
time series and correlation modelling.
• Forecast support system is the capability to gather
and analyze data, evaluate impact of
promotion, develop forecast and communicate to
the relevant personnel.
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Issues addressed by Forecast
Administration
• Who is responsible for developing the forecast?
• How is forecast accuracy and performance
measured?
• How does forecast performance affect job
performance, evaluation and rewards?
• Do the forecast analysts understand the impact
of forecasting on logistics operations?
• Do they understand the differences in various
forecasting techniques?Zubin Poonawalla

114
Transportation
• Transportation decisions are more strategic ones
closely linked with inventory decisions.
• Decisions are based on trade-off between the cost of
using a particular mode of transport with the cost of
inventory associated with that mode.
• For instance, air shipments may be fast, reliable , and
warrant less safety stocks; they are expensive whereas
shipping by sea or rail may be much cheaper but they
necessitate holding relatively large amount of
inventory to protect against the inherent uncertainty
associated with them.Zubin Poonawalla

115
• Customer service levels and geographic
locations are important aspects in transportation
decisions.
• Transportation accounts for roughly 30% of the
logistics costs and therefore operating
efficiencies become important aspects .
• Shipment sizes i.e. consolidated bulk shipments
versus smaller lot sizes; routing and scheduling
of vehicles become important part of
company‟s transport strategy.
• Transportation is one of the most visible
elements in the logistics operation.Zubin Poonawalla

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Transportation Functionality
Product Movement Product Storage
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A. Product Movement
- Primary function is the movement up and down the
value chain.
- As transportation uses temporal, financial and
environmental resources, the movement of materials
should take place only when it enhances the product
value.
(a) Uses temporal resources because the product is
inaccessible while in transit.
- Due to JIT strategies transit inventories are
becoming more significant thereby reducing
manufacturing and distribution centre inventories.
(b) Expenses incurred internally for private fleet of
vehicles or externally for commercial or public
transportation constitute financial resources.Zubin Poonawalla

118
(c) Transportation consumes fuel and oil and also
creates environmental expenses through
congestion, air pollution and noise pollution.
Objectives of Transportation
Move product
from original
location to
prescribed
destination while
minimizing temporal,
financial and environmental
Costs.
Minimize
expenses
incurred
due to
loss and
damage.
Meet customer
demand regarding
delivery and
shipment
information
availability
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119
B. Product Storage
- Temporary storage through vehicles becomes
expensive as in-transit storage is required to be
moved again in a short duration of time.
- Sometimes temporary storage becomes
advantageous as the cost of unloading and
reloading the product in a warehouse may
exceed the daily charge of storage in
transportation vehicles.
- Many times where the warehouse space is
limited, utilizing transportation vehicles
becomes a viable option.Zubin Poonawalla

120
• The options available to a transporter in case of
warehouse space constraints are
(a) Instruct driver to take a circuitous or indirect route
to its destination, as the transit time would be
greater as compared to direct route. Thus transport
vehicle is used as temporary storage option.
(b) Change the shipment destination i.e. temporary
storage is achieved through diversion.
- For instance, product that is, say, scheduled initially
from Mumbai to Hyderabad gets diverted mid way
to Vishakapatnam (Vizag) as Vizag warehouse may
be in greater need of product and has the storage
capacity.
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121
- Traditionally, the telephone was used to direct
diversion but nowadays satellite
communications between headquarters and
vehicle handle such tasks more efficiently.
- Though product storage in vehicles can be
costly, it can be justified from a total cost
perspective when loading, unloading costs,or
capacity constraints are considered.
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Principles of Transportation
Economies of Scale Economies of Distance
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A. Economies of Scale
• Transportation cost per unit of weight decreases
when the size of the shipment increases i.e.
shipments that utilize the entire vehicle‟s
capacity like truck load (TL) cost less per kg
than less than truck load (LTL) shipments.
• Fixed costs in transportation include
administrative costs of taking transportation
order, time to position the vehicle for loading or
unloading, invoicing and equipment cost.
• It costs as much to administer a shipment of 1
kg as it does to administer a 1000 kg shipment.Zubin Poonawalla

124
B. Economies of Distance
• Transportation cost per unit of distance
increases at a decreasing rate as distance
increases. Also called “Tapering Principle”
• For instance, a shipment covering a distance of
800 kilometers will cost less than two
shipments of same combined weight covering
400 kms.
• Fixed expenses incurred to load and unload the
vehicle get spread over more kilometers
resulting in lower overall per kilometer charges.
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125
Tapering Principle
Distance
C
O
S
T
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126
Participants in Transportation
decisions
Government
Shipper Carrier Consignee
Public
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127
Role and Perspective of each
party
A. Shippers and Consignees‟ Expectations
• Move the goods from origin to destination
within a prescribed time at the lowest cost.
• Specified pick up and delivery times,
predictable transit time, zero loss and damage,
accurate and timely exchange of information
and invoicing.
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128
B. The Government Role
• Stable and efficient transportation environment
to sustain economic growth.
• Product availability throughout the country at a
reasonable cost.
• Providing right-of-way such as road or railways
or air traffic control system.
C. The Public concerns
• Accessibility, cost effectiveness and protection
of environmental and safety standards.
• Development of transport infrastructure to have
goods from global sources.
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129
Features of Different Modes of
Transportation
Modes of Transportation
Rail Highway Water Pipeline Air
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A. Rail
- Capability to transport large shipments
economically with more frequency.
- High fixed costs because of expensive
equipment, right of way, switching yards, and
terminals.
- Variable cost per kg/km has been consierably
reduced by electrification.
- Bulk industries and heavy manufacturing use
railways more frequently.
- Can improve effectiveness of transportation
by having alliances with other modes.Zubin Poonawalla

131
B. Highway
- Growth of motor carrier industry has resulted
into door-to-door operating flexibility and
speed of inter-city movement.
- Compared to railways, motor carriers have
relatively small fixed investments in terminal
facilities and operate on publicly maintained
highways.
- Variable cost per kilometer is high because a
separate driver and cleaner are required for
each vehicle.
- Labour cost is also high because of the need
for substantial dock labour.Zubin Poonawalla

132
Cost Structure in respect of
Motor Transport
Fixed costs
such as
overheads
and vehicle
cost are
low relative
to railway
Variable costs
such as driver,
fuel, tyres and
repairs are
high relative
To railways.
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133
• Motor carriers are best suited to handle small
shipments moving short distances.
• Favour light manufacturing and distributive
traders, short distances and high value
products.
• Have captured significant market share of
railways in medium and light manufacturing
industries.
• Because of delivery flexibility, motor transport
has captured almost all freight moving from
wholesalers or warehouses to retail stores.
• Higher cost in replacing equipment, higher
wages to driver and other dock labour.Zubin Poonawalla

134
C. Water
- Capacity to move extremely large shipments.
- Fixed costs are somewhere between rail and motor
carriers.
- Though water carriers have to develop and operate
their own terminals, the right-of-way is developed and
maintained by the government, resulting into
moderate fixed costs compared to rail and highways.
- Low variable cost makes this an attractive mode when
low freight rates are desired and speed is secondary
consideration.
- Typically bulk commodities such as mining
, chemicals, cement, and certain selected agricultural
products are transported by ocean going vessel.
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135
- Unless the point of origin and point of destination are
adjacent to a waterway, it needs to be supplemented
by rail or trucks.
D. Pipelines
- Used for transporting natural gas, manufactured
chemicals, pulverized dry bulk materials such as
cement and flour via hydraulic suspensions, sewage
and water within the cities and municipalities.
- Operate on 24x7 basis are limited only by commodity
changeover and maintenance.
- No empty container or vehicle that must be returned.
- Highest fixed cost an lowest variable cost.
- High fixed costs due to right-of-way, construction and
requirements for control station and pumping
capacity. Zubin Poonawalla

136
- As pipelines are not labour intensive, variable
operating cost is extremely low once the pipeline is
constructed.
- Inflexible and limited to products in the form of gas,
liquid or slurry.
E. Air
- Significant advantage lies in the speed with which a
shipment can be transported.
- Though the freight cost is very high, the same may be
trade-off with reduced warehousing or inventory.
- Characterized by load size constraints and aircraft
availability.
- Fixed cost associated with aircraft purchase and
requirements for specialized handling systems is low
as compared to rail, water and pipeline.Zubin Poonawalla

137
- Airways and airports are generally
developed and maintained with public funds.
- Airfreight variable cost is extremely high as
a result of fuel,maintenance and intensity of
in-flight and ground crew.
- Airfreight is justified in following situations:
(a) High value products
(b) Perishables
(c) Limited marketing period.
(d) Emergency.
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138
Nature of Traffic versus Mode of
Transportation
Mode Nature of Traffic
Rail Extracting industries, heavy manufacturing,
agricultural commodities
Highway Medium and light manufacturing, distribution
between wholesalers and retailers.
Water Mining and basic bulk commodities, chemicals,
cement, agro-based products.
Pipeline Petroleum, gases, slurry.
Air Emergency, perishables, limited marketing period,
high value premium products.
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Cost Structure for Each Mode of
Transportation
Mode Fixed Cost Variable Cost
Rail High- equipment terminals, tracks etc. Low
Highway Low-highways provided by public funds Medium- fuel, maintenance.
Water Medium- ships and equipment Low-capability to transport
large amount of tonnage.
Pipeline Highest-rights-of-way, construction,
control stations, pumping capacity.
Lowest-no labour cost of
any significance.
Air Low-aircraft and cargo handling system. High-fuel, labour and
maintenance.
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Transport Economies
• Distance
• Volume
• Density
• Stow ability
• Handling
• Liability
• Market factors
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A. Distance
- Cost curve increases at a decreasing rate as a
function of distance and is known as tapering
principle.
- Cost curve does not begin at the origin because of
the fixed costs associated with shipment pick up and
delivery regardless of distance.
- Tapering effect comes into existence, as the longer
movements tend to have a higher percentage of inter-
city rather than urban kilometers.
- Frequent intermediate stops, typical of urban
kilometers, and additional loading and unloading add
to the costs.
- Inter-city miles are less expensive since more
distance is covered with same fuel as a result of
higher speed.
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B. Volume
- Transport cost per unit of weight decreases as load
volume increases.
- Fixed costs of pick up and delivery as well as
administrative costs get spread over additional
volumes.
- Smaller loads must be consolidated into larger loads.
C. Density
- Transportation cost per unit declines as product
density increases.
- In terms of weight and space, an individual vehicle is
constrained more by space than by weight. Once is
the vehicle is full, it is not possible to increase the
amount carried even if the product is lightweight.
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143
- Higher density products allow fixed costs to be
spread across additional weight, as a result the
products are assessed at a lower transport cost per
unit.
- Attempts are made to increase product density so that
more can be loaded in a vehicle to utilize its capacity.
D. Stow ability
- Refers to product dimensions and impact of the same
on vehicle utilization.
- Odd sizes and shapes as well as excessive weights
and lengths do not stow well and typically waste
space.
- Though density and stow ability are similar, products
may have same density that stow differently.
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144
- Items with regular shapes are easier to stow than odd
shaped items.
- While the steel blocks and rods have the same
density, rods are more difficult to stow because of
their length and shape.
E. Handling
- Special handling equipments may be required for
loading or unloading trucks, trains, or ships and the
unitization/ palletization affects the handling cost.
F. Liability
- Product characteristics such as susceptibility to
damage, perishability, susceptibility to to
theft, susceptibility to explosion affect the risks and
hence claims.
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145
G. Market factors
(a) Back-haul i.e. vehicle returning back to the
point of origin with load.
(b) Dead head to be avoided because empty
returns incur labour, fuel, and maintenance
costs.
(c) Thus design of logistics system must add
back-haul movement wherever possible.
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146
Multimodal Transport System
• Multimodal or Intermodal transport refers to
journeys that involve two or more different
modes of transport.
• For instance, if materials are moved from
Lanchow in central China to Warsaw in Poland
goods may be loaded on to trucks, transferring
them onto rails for a journey across China to
Shanghai, then ship to Rotterdam, back into
rails to cross Europe, then truck for local
delivery.
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147
• For Logistics managers intermodal services become
necessary because of their characteristics and costs.
• For example, limited accessibility of air transport
requires coordination with a land carrier to make the
pick ups and deliveries.
• Similarly, inaccessibility applies to rail, water and
pipeline but not to the motor which has a definite
advantage here.
• The intermodal services maximizes the primary
advantages inherent in the combined modes and
minimize their disadvantages.
• The combined services will have both good and bad
aspects of the utilized modes.
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• For instance, coordinate of rail and water will
have a lower total cost than an all-rail
movement but higher cost than that of all-water.
• Likewise, combined system transit time will be
lower than all water movement but higher than
all-rail.
• The decision to use multi-modal system must
consider the effect on total logistics costs.
• The aim of intermodal transport is to combine
the benefits of several separate modes but avoid
the disadvantages of each, like, combining the
low cost of shipping with flexibility of the road,
or getting the speed of air with the cost of road.Zubin Poonawalla

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• However, each transfer between modes causes
delays and adds costs of extra handling.
• Intermodal transport works well when transfer
can be done efficiently.
• Transfer of motor carrier trailer to another
transport mode is facilitated through
containerization.
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Choice of Mode
• Factors influencing the choice of mode are as under:
- Bulkiness of the materials; heavy items would be
shipped by ocean going vessels.
- Value of materials; expensive items raise inventory
costs and thus encourage faster modes.
- Criticality of materials; even low unit value items that
hold up the operations need fast and reliable transport.
- Susceptibility to market changes; operations that
respond quickly to changes cannot wait for critical
supplies using slower transport.
- Reliability with consistent delivery is important.
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- Cost and flexibility to negotiate rates.
- Reputation and stability of carrier.
- Susceptibility to loss, theft and pilferage
- Schedule and frequency of delivery.
- Special facilities available
• Limitations of Multimodal system
- Sometimes carriers are reluctant to participate.
- Willingness to coordinate in respect of moving
the product is higher when any one carrier is
incapable to transport in its entirety.
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Containerization
• Container is large rectangular box into which a firm
places commodities to be shipped.
• After initial loading, the commodities themselves are not
rehandled until they are unloaded at their final
destinations.
• Throughout the movement, the carrier handles the
container, not the commodities.
• The shipper can transfer the container from one mode to
another, eliminating the need to handle the commodities
each time thus reducing handling costs, damage
costs, theft, pilferage and the time required to complete
the modal transfer. Zubin Poonawalla

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• Many firms that modify their material
handling systems to include cranes, forklift
trucks, and other equipment capable of
handling large, heavy containers have found
containerization to be desirable avenues for
increasing productivity and controlling
material handling costs, especially in periods
of continually increasing labour costs.
• As the objective of intermodal transport
system is to provide virtually seamless
journey, the best way to achieve same is to use
modular or unitized loads.
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Piggyback –Trailer on Flat Car
• TOFC is a specialized form of containerization
in which rail and motor transport coordinate.
• Carrier places motor carrier trailer on a rail
flatcar, which moves the trailer by rail for long
distance.
• A motor carrier then moves the trailer for short
distance pickups and deliveries.
• This service combines the long-haul, low cost
advantage of rail with accessibility of motor.
• Piggyback services mostly move under contract.Zubin Poonawalla

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Material Handling
• The primary material handling objective is to
efficiently move large quantities of inventory into
and specific customers orders out of the warehouse.
• The functions performed in a warehouse are
classified as movement or Handling and storage.
• Movement or handling is emphasized and storage is
secondary.
• Handling is divided into
- Receiving
- In storage handling , and
- Shipping Zubin Poonawalla

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• An extremely important aspect of logistics is the
productivity potential that can be realized from
capital investment in material-handling
equipment.
• Specialized handling equipment is required for
unloading bulk materials such as for
solids, fluids, or gaseous materials.
• The guidelines suggested in designing the material
handling systems are:
(a) Equipment for handling and storage should be as
standardized as possible.
(b) When in motion, the system should provide
maximum continuous flow.
(c) Investment should be made in handling rather
than stationery equipment.Zubin Poonawalla

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(d) Handling equipment should be utilized to the
maximum extent possible.
(e) In selecting handling equipment, the ratio of
deadweight to payload should be minimized.
(f) Whenever possible, gravity flow should be
incorporated in the system design.
• The handling systems can be classified as
under:
- Mechanized
- Semi automated
- Automated, and
- Information directed.Zubin Poonawalla

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Mechanized Systems
A. Forklift Trucks
• Forklift trucks can move loads of master
cartons both horizontally and vertically.
• A pallet or slip sheet forms a platform upon
which master cartons are stacked.
• A slip sheet is a thin sheet of solid fibre or
corrugated paper and are used for situations
when product is handled only a few times.
• A forklift truck normally transports a
maximum of two unit loads i.e. two pallets at
a time Zubin Poonawalla

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• High stacking trucks are capable of up to 40 feet of
vertical movement.
• Even trucks capable of operating in aisles as narrow as
56 inches ar also found in warehouses.
• The significance of narrow-aisle forklift trucks has
increased as warehouses seek to increase rack storage
density and overall storage capacity.
• Forklift trucks are not economical for long distance
horizontal movements because of high ratio of labour
per unit of transfer.
• Most effectively utilized in shipping and receiving
and placing merchandise in a predetermined storage
space.
• Common sources of power are propane gas and
electricity. Zubin Poonawalla

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• Many forklift operations are utilizing radio
frequency data communication to speed up
load put away and retrieval assignments.
• Under the above system, workers receive their
assignments through either handheld or vehicle
–mounted RF terminals.
• RF technology provides real-time
communication capability to central data
processing systems, and when combined with
bar code scanning of cartons and pallets,it
allows fork lift operators to receive and update
item status inquiry, material orders and
movement and inventory adjustments.
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B. Walkie-Rider Pallet Trucks
• Low cost, effective method of material
handling.
• Highly versatile low-lift pallet and/or skid
handlers with load capabilities from 3,000 to
8,000 lbs.
• Typical applications include loading and
unloading, order selection and shuttling over
longer distances throughout the warehouse.
• Popular in grocery warehouses.
• Electricity is the power source.
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C. Towlines
• Either in-floor or overhead mounted drag devices.
• The major advantage is the continuous movement but
lacks flexibility of forklift trucks.
• Most common application is for order selection within
the warehouse. Order selectors place merchandise on a
four wheel trailer, which is then towed to the shipping
dock.
D. Conveyors
• Conveyors are classified according to power, gravity
or roller/belt movement.
• Portable gravity style roller conveyors are often used
for loading and unloading.
• In some cases these are transported on the over-the-
road trailers to assist in unloading at the destination.Zubin Poonawalla

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Semi automated Handling
Semi automated system supplements a mechanized
system by automating a specific handling
requirements.
Semi automated warehouse is a mixture of
mechanized and automated handling.
A. Automated-Guided Vehicle Systems
• Performs similar kind of handling function as a
mechanized tow tractor with a trailer.
• The essential difference is that an AGVS does not
require an operator and is automatically routed and
positioned at destination with intervention of the
operator. Zubin Poonawalla

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• Typical AGVS equipment relies on an optical
or magnetic guidance system.
• In the optical application, tape is placed on the
warehouse floor, and the equipment is guide by
a light beam that focuses on the guide path.
• A magnetic AGVS follows an energized wire
installed in the floor.
• The primary advantage is the elimination of a
driver and newer AGVS use video and
information technology to follow paths without
the need for fixed tracks.
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B. Sortations
• Typically used in combination with conveyors.
• The products are selected in the warehouse, they are
sorted as per specific specific shipment docks and
taken onto the conveyors for moving out.
• Master cartons have a distinguishing code, these are
read by optical scanning devices and automatically
routed to the desired locations.
• The rate of flow is customized to meet changing
requirements.
• The benefits are
(a) Reduction in labour, and
(b) Increase in speed and accuracy.Zubin Poonawalla

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C. Robotics
• Humanlike machine that can be programmed
by microprocessors to perform various
activities.
• Robots are use in warehouses to break down
and build unit loads to accommodate exact
merchandise requirements of a customer‟s
orders.
• In break down process, the robot is
programmed to recognize stocking pattern and
place products in the desired position on a
conveyor belt.
• Similarly, robots are used to build unit loads.Zubin Poonawalla

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• Robots are used effectively in warehouses
where prevailing environments make it
difficult for humans to work such as high
noise areas and extreme temperatures like cold
storage freezers.
• The capability to incorporate artificial
intelligence in addition to speed,
dependability, and accuracy makes robotics an
attractive alternative to traditional manual
handling systems.
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Automated Handling
• Substitutes capital investment in equipment for labour
required in mechanized handling systems.
• Though operates faster and more accurately, requires
high degree of capital investment and complex to
operate.
• Most automated systems are custom deigned and
constructed for each application.
• Automated handling concentrates on order selection
system at the master carton level as well as on high
rise storage and retrieval system.
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A. Order Selection System
• The handling of fast moving products in master
cartons is fully automated from the point of
merchandise receipt to placement in over-the-road
trailers.
• Such systems use an integrated network of power
and gravity conveyors linking the storage.
• System is controlled by computer coupled with
inventory and order processing systems of
warehouse.
• Upon arrival, merchandise is automatically routed to
storage position and inventory records are updated.
• Upon order receipt, merchandise is unitized to
vehicle size and schedules made for selection.
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• At an appropriate time, all merchandise is selected in
loading sequence and automatically transported by
conveyor to th loading dock.
• The only manual handling of merchandise occurs
while stacking into transport vehicle.
B. Automatic Storage and Retrieval System (ASRS)
• High rise handling systems are fully automated from
receiving to shipping.
• The components of this system are storage
racks, storage and retrieval equipment and control
systems.
• The high rise are the vertical storage racks up to the
height of 120 feet. Zubin Poonawalla

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• The storage and retrieval machine travels
back and forth with the primary objective of
moving products in and out of storage.
Functions of storage & retrieval equipment
(1) To reach the desired position rapidly.
(2) To deposit or retract a load of merchandise.
(3) To ensure merchandise flowing from
production is automatically stacked to create
a unit load.
(4) To transport the unit load to the high rise
storage area by power conveyor.
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C. Information-directed Systems
• All material handling movements are directed
and monitored by the command of
microprocessors.
• To begin with all required handling
movements are fed into the computer for
analysis and equipment assignment.
• Analysis of handling requirements and
equipment assignment is done in such a way
that direct movements are emphasized and
deadhead movements are minimized.
• Work assignments are provided to individual
forklifts by terminals located on the truck.Zubin Poonawalla

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• Communication between the computer and the
truck uses radio frequency (RF) waves with
antennae located on the forklifts and high up
in the warehouse.
• Information-directed systems can increase
productivity by tracking material handler
performance and allowing compensation to be
based on activity level.
• A single handling equipment may be involved
in loading or unloading several
vehicles, selecting many orders, and
completing several handling assignments, thus
increasing the complexity of work direction.
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Packaging
• Packaging can be categorized into two types viz.
(a) Consumer packaging, which has a marketing
emphasis, and
(b) Industrial packaging, which has more of logistics
emphasis.
A. Consumer Packaging (Marketing Emphasis)
- Consumer packaging design focuses on customer
convenience, market appeal, retail shelf
utilization, and product protection.
- Large containers and odd sizes may increase the
consumer visibility but make poor logistical
packaging. Zubin Poonawalla

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• For example, shipping products fully
assembled such as motorcycles results in
substantial reduction in density.
• A low density package would mean higher
transportation costs and greater warehousing
requirements.
B. Industrial Packaging (Industrial emphasis)
- Individual products or parts are normally
grouped into cartons, bags, bins, or barrels for
handling efficiency.
- These containers are used to group individual
products and are referred to as master
cartons. Zubin Poonawalla

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• When master cartons are grouped into larger
units for handling, the combination is
referred to as containerization or unitization.
• The master carton and the unitized load
provide the basic handling unit in the
logistics channel.
• The weight, volume, and fragility of the
master carton in an overall product line
determines transportation and material
handing requirements.
• If the package is not designed for efficient
logistical processing, overall performance of
the system would suffer.Zubin Poonawalla

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• Standardization of master carton facilitates
material handling and transportation.
• Standardization of master carton is beneficial even
in context of retail backend operations.
(a) For instance, in case of shoe store as the contents
of each master carton are known, it is not
necessary to search through many cartons for a
particular style or size of shoe.
(b) Allows master cartons to be more efficiently
stacked, resulting in to less backroom congestion.
(c) Complete identification of master carton contents
facilitates completion of retail inventory and
merchandise reorder.
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• Standardized cartons are selected to achieve
maximum conformity in increasing the density in the
trailer thereby eliminating dead space in stacking.
• The end result of standardized master carton usage is
substantial reduction in total cost combined with an
effective material handling system at both
warehouse and the retail store.
• In situations, when master cartons of more than one
size are required, extreme care should be taken to
arrive at an assortment of compatible units.
• These different sizes of master cartons should result
into modular compatibility.
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How to design an Ideal Package?
• Invariably, logistical considerations alone
cannot fully dominate package design.
• The ideal package for material handling and
transportation would be a perfect cube having
equal length, depth, and width with
maximum possible density but such a
package does not exist in practice.
• Thus, logistical requirements should be
evaluated along with
manufacturing, marketing, and product
design considerations when standardizingZubin Poonawalla

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• Another critical issue to be considered in package
design is to determine the degree of protection
required to cope with the anticipated physical and
climatic environments.
• The package design and material should combine to
achieve the desired level of protection without
incurring the expense of overprotection.
• In most cases the cost of absolute protection will be
prohibitive and therefore the package construction
should be a proper blend of design and material.
• Three broad functions of packaging are
- Damage protection, Utility/ efficiency, and
Communication.
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A.Damage Protection
• A major function of the master carton is to protect
products from damage while moving and being
stored in the logistical system.
• Master carton also serve as a deterrent to pilferage.
• Achieving desired degree of protection involves
tailoring the package to the product and selecting
proper material for package construction.
• The determining factors are the value and fragility of
the product; higher the value, the greater is the
justification for nearly absolute protection.
• If the product is fragile and has high value, then the
cost of absolute protection can be significant.
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Cost of Packaging
L
o
s
S
B
y
D
a
m
a
g
e
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• The susceptibility to damage of a given
package is directly related to the environment
in which it moves and is stored.
• Product fragility can be measured by
product/package testing by means of shock
and vibration equipment.
• If packaging requirements and cost are
prohibitive, alternative product designs can be
evaluated utilizing the same testing
equipment.
• The end result is the determination of the
exact packaging required to protect the
product. Zubin Poonawalla

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• During the logistical process, common causes
of product damage are
vibrations, impact,puncture, and compression.
• Stacking failure can also result in damage
while the product is in storage.
• The potential physical damage of poor
stacking ranges from surface scuffing and
marring to complete product
crushing, buckling and cracking.
• Typical methods of securing the packages are
strapping, tie-downs, and use of various
dunnage materials that limit vibrations and
shock.
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B. Efficiency/ Utilization
• Logistical operations are affected by
packaging utility i.e. from truck loading and
warehouse picking productivity to
transportation and storage space utilization.
• Logistical activity output can be described in
terms of packages, such as number of cartons
loaded per hour into a trailer, number of
cartons picked per hour in a warehouse or
distribution centre.
• Material handling efficiency is also strongly
influenced by the unitization of packages.Zubin Poonawalla

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• An important part of packaging relating to
storage and material handling is the concept of
unitization.
• Unitization describes the physical grouping of
master cartons into one restrained load for
material handling or transport.
• Concept of containerization includes all forms
of unitization, from taping two master cartons
together to the use of specialized transpotation
equipment.
• All types of containerization have the basic
objective of increasing material handling
efficiency. Zubin Poonawalla

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Benefits of Unit Loads
- Unloading time and congestion at destination
is minimized.
- Products shipped in unit load quantities
facilitate material handling and inventory can
be positioned rapidly for order selection.
- Damage in transit can be reduced by unit load
shipping and specialized transportation
equipment.
- All above factors lead to reduction in logistical
cost.
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- A unit load can increase damage potential if it
is not properly restrained during handling or
transport.
- Standard method of imparting stability to unit
load include rope ties, steel strapping,
adhesives, wrapping- both shrink wrap as well
as stretch wrap.
C. Communication
• Critical to content identification, tracking, and
handling as the these are becoming necessary
to total channel success.
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(a) Content Identification
- A very obvious communication role is identifying
package contents for all channel members.
- The typical information includes
manufacturer, product, type of container i.e. can or
bottle, count and product code number.
- The carton information is used to identify product
for receiving, order selection, and shipment
verification.
- Visibility is the major consideration, and material
handlers should be able to see the label from
reasonable distances in all directions.
- High value products often have small labels to
minimize the temptation of theft.
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(b) Tracking
- A well controlled material handling system
tracks product as it is
received, stored, retrieved, and shipped.
- A good control on movement reduces product
loss and pilferage and is useful for monitoring
employee productivity.
- Low cost scanning equipment, and
codification increases the tracking capabilities
and effectiveness.
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(c) Handling Instructions
- Final role of logistics package is to provide
handling and damage instructions.
- The information should be provided about any
special product handling considerations such
as glass containers, temperature restrictions,
stacking considerations, or potential
environments concerns.
- If the product is dangerous, such as an
explosive chemical , the packaging should
provide instructions for ealing with spills and
container damage.Zubin Poonawalla

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Channel Integration-PCM
• Packaging, Containerization, and Material handling
represent integral parts of the logistical operating
system; as all three areas influence each other.
• For instance, automated handling cannot be
efficiently designed without a high degree of master
carton standardization, which in turn provide the
opportunity to containerize individual products.
• The integration between material handling
capability, transportation, warehousing, inventory
policy and packaging communication into customer‟s
logistical system leads to minimum handling during
the exchange of merchandise.
• This type of integration is commonly found in
physical distribution.Zubin Poonawalla

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Scrap/Waste Disposal
Scrap
Material Input
Material
Processing
Material
Output
Recycle Disposal
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A. Scrap
• Scrap is a waste created while processing the
materials.
• The process scrap is unavoidable extra material
removed from the stock of material while
generating a component.
• For example, while making a machined component
some material has to be removed in the form of
chips.
• Quite often, while manufacturing any component
some dimensions are not maintained and the lot is
scrapped as these cannot be used in the assembly of
the product.
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B. Surplus
• When the project or product needs a specific quantity
of the item, extra leftover cannot be used and this
quantity is called surplus.
• The surplus quantity has to be disposed off.
C. Obsolete
• When the item cannot be used in the product/ project
due to changes that might have taken place in respect
of dimensions, shape, colour etc, these are called
obsolete items.
• Changes ay occur due to defect in product design, or
shelf life etc.
• These components have to be scrapped/ disposed off.
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Wastivity of a System
• Wastivity of the system is defined as the ratio of the
waste to the input.
• Wastivity= Waste / Input
• Gross wastivity= Total waste generated/ Total input.
• All waste is not the waste, some part of it can be
recycled.
• Net waste={Total waste generated}-{Waste recycled
within the system}.
• Net wasitivity= Waste which cannot be recycled/
Total input.
• Wastivity assesses the productivity for each type of
input. Both wasitivity and productivity are
complementary to each other.Zubin Poonawalla

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Issues to be addressed
• Quick identification of the waste generated.
• Separation of different types of waste.
• Economic reduction.
• Efficient collection and handling.
• Recycling, and effective disposal without
affecting the environment.
• Designing a suitable „waste control
programme‟.
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Recycling /reusing/ disposal of
waste/ surplus/ scrap.
- Recycling refers to the use of bad quality outputs
(rejects) or wastes as inputs to the same process or
system e.g. reusing plastic scrap.
- Use the scrap for producing by-products.
- Transfer the surplus from one department to another.
- Sell the scrap/surplus as raw materials to other user
factories, external agents, or even to the employees.
- Sell scrap through advertisement and auctioning.
- Return the surplus to the vendor, if possible.
- Donate rejected material to charitable organizations to
gain social respect.
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Warehousing
• The primary purpose of a warehouse management is to
control the movement and storage of materials within
an operation.
• Warehousing can be viewed as a place to store
inventory as well as a facility for switching the
inventory.
• Warehousing is becoming significant to achieve the
following objectives:
- To reduce inventory
- To reduced labour costs
- To increase storage capacity
- To increase customer service
- To increase inventory accuracy.Zubin Poonawalla

200
• Typically, the warehouses received
merchandise by rail or road and the materials
were moved manually to a storage area within
the warehouse and piled up on the floor in
stacks manually.
• Due to above, though different products were
stored in the same warehouse it was difficult to
identify the merchandise with respect to a
particular order.
• On the receipt of the customer orders, products
were handpicked and placed on the wagons and
these wagons were pushed out of shipping area.
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• As the labour was inexpensive, human resources were
used extensively and no consideration was given to
efficiency utilization, work methods, or material
handling.
• Inspite of poor efficiency, warehouses continued to
provide a necessary bridge between production and
marketing.
• With the improved techniques of forecasting and
production scheduling the need to build up inventory
was considerably reduced.
• Also, delays during manufacturing process reduced as
the production became more coordinated.
• Seasonal products continue to require warehousing.
• The overall need to store materials to support
manufacturing has been reduced.Zubin Poonawalla

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• In context of retailing, the department stores
face the necessity of stocking an increased
variety of products and are unable to order in
sufficient quantities from a single supplier to
enjoy the benefits of consolidated shipment.
• Direct ordering from manufacturers becomes
prohibitively expensive due to high cost of
transporting small shipments.
• This necessitates the need for warehousing to
provide timely and economical inventory
assortments.
• At wholesale level, the warehouse becomes a
support unit for retailing.Zubin Poonawalla

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• In context of manufacturing, companies
producing products at multiple
locations, efficient warehousing becomes a
method for reducing material and parts storage
and handling costs while optimizing
production.
• For implementing JIT and stockless
production strategies warehousing becomes an
integral part of entire value chain.
• As the basic objective of JIT is to reduce
work-in-process inventory, manufacturing
needs to supported by highly dependable
delivery.
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• In a country as large as India, this is possible
only by having strategically located
warehouses.
• The stocks can be held at a central warehouse
thereby reducing the need to maintain
inventory at each assembly plant.
• Using consolidated shipments, materials are
purchased and transported to the supply
warehouse and then distributed to
manufacturing plants as and when needed.
• A fully integrated warehouse is a vital
extension of manufacturing.Zubin Poonawalla

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• In context of outbound logistics, warehouses have
made possible the direct shipment of mixed/
assorted products to the customers thereby
enhancing the service capabilities.
• The direct assorted shipments have two
advantages, namely,
(a) Reduced logistical cost because the full product
assortment can be delivered while taking the
advantage of benefits obtained through consolidated
transportation.
(b) More competitive advantage for the manufacturers
due to speedier shipments and mixed lots.
• Recently, warehouses have been able to increase
productivity due to effective use of Information
Technology. Zubin Poonawalla

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Role of Warehousing in
Logistical System
• Provision of strategic storage, though an effective
distribution system should not have the necessity of
inventory for an excessive length of
time, sometimes storage becomes inevitable.
• Acting as a switching facility
• Provision of economic and service benefits.
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Economic Benefits
Consolidation Break-bulk Cross-docking Postponing
Stock
piling
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Consolidation
Plant A
Plant B
Plant C
Consolidation
warehouse
Customers
A B C
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• The benefits and features are
- Realization of lowest possible transportation
rate.
- Reduction of congestion at a customer‟s
receiving dock.
- Manufacturing plants can use warehouse as a
forward stock location or as sorting and
assembly facility.
- Combines the logistical flow of small
shipments to a specific market area.
- A single firm may use consolidation
warehousing or a number of firms may join
together and hire the consolidation service.Zubin Poonawalla

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Break-bulk
Plant A Break-bulk warehouse
Customer A
Customer B
Customer C
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• Break-bulk operations receive combined
orders from manufactures and ships them to
individual customers.
• Break-bulk warehouse splits individual orders
and arranges for local delivery.
• Cross-dock facility is similar to break-bulk
except that it involves multiple manufacturers.
• In transit-mixing and release as well as
manufacturing support are also included in
cross dock facility.
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Cross-docking
Company A or Plant A
Company B or Plant B
Company C or Plant C
Distribution
centre
Customer A
Customer B
Customer C
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In Transit mixing and release
Plant A
Plant B
Plant C
Warehousing
Transit
mixing
point
Product D
Customer X
Customer Y
Customer Z
Customer W
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Manufacturing Support
Vendor A
Vendor B
Vendor C
Manufacturing
warehouse
Assembly
plant
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• The features and benefits of cross-dock
facilities are:
- The full trailer loads of product arrive from
multiple manufacturers and as the product is
received it is sorted and allocated to customers.
- The product is then moved across the dock to
be loaded onto the trucks destined for
appropriate customer.
- The trucks are then transported to retail outlets
once the same have been filled with the mixed
product from multiple manufacturer.
Zubin Poonawalla

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