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CHAPTER 5

LOGISTICS SYSTEM DESIGN AND ADMINISTRATION

Himalaya Publishing House

Logistics and Supply Chain Management

K. Shridhara Bhat

Chapter 5Logistics System Design

and Administration

• After reading this chapter, you should be able to:• Understand what is meant by logistics system design.• Discuss the various approaches to analysis of logistics systems.• Describe the systems approach to logistics.• Discuss the techniques of logistics system analysis.• Discuss the various topics relevant to logistics positioning.• Understand what is meant by logistics administration.• Describe the various types of organisational structures in integrated

logistics.

Logistics System Design and Administration



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5.1 Logistics System Design

Logistics system design refers to the design of logistics network which involves (i) determining the number of each type of facilities required, (ii) the geographical location of those facilities and (iii) the work to be performed at each facility.

5.2 Approaches to analysis of logistics systems

These four approaches are briefly discussed in the following paragraphs:

Four approaches to the analysis of logistics systems are : (i) materials management versus physical distribution (i.e., inbound logistics versus outbound logistics), (ii) cost centres, (iii) nodes versus links and (iv) logistics channels.



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5.2.1. Materials Management Versus Physical DistributionsLogistics is classified into materials management (i.e.,

inbound logistics) and physical distribution (i.e., outbound logistics). This classification is useful for managing or controlling logistics operations in a firm.

The difference in logistics requirements that may exist between materials management and physical distribution functions may have important implications to the design of a firm’s logistical system.

From the inbound and outbound requirements perspective of logistics, we may classify firms into four different types of logistics systems. They are (i) Balanced system, (ii) Heavy inbound system, (iii) Heavy outbound system and (iv) Reverse systems.

5.2.2 Cost CentresThe logistical activities are highly inter-related. By viewing

these activities as cost-centres it is possible to analyse possible cost trade-offs among these various types of costs so as to have the total cost or overall cost as low as possible.



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5.2.3. Nodes Versus Links

Nodes are spatial points where goods are stored or processed and links represent the transportation network connecting the nodes in the logistics system.

5.2.4. Logistics Channels

The logistics channel can be viewed as a part of the total distribution channel. The logistics channel can be simple or complex depending on the number of manufacturing plants, number of raw material supply sources and the number of warehouses, wholesalers and retailers in the system. Accordingly the logistics channels can be classified as (i) A simple logistics channel, (ii) A multi-echelon logistics channel and (iii) A complex logistics channel which are illustrated in Exhibit 5.1.



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Exhibit 5.1 : Classification of a Logistics Channel



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and Administration5.3 SYSTEMS APPROACH TO LOGISTICSTwo aspects of systems concept are :

(i) cost perspective and

(ii) level of optimality.

5.3.1 Cost Perspective :

If efficiency is measured in terms of cost, an individual part of the system not operating at its lowest cost may contribute to the context of the overall efficiency of the system. In the systems approach, the focus is not on individual variables but on how the individual variables interact as a whole. The objective is to operate the whole system effectively, not just the individual parts.

5.3.2 Level of Optimality :

Levels of optimality is another aspect of the systems concept. A firm should not optimise transportation at the expense of related logistics areas such as warehousing and packaging. At the same time, logistics is only one subsystem in the firm and therefore the firm should not optmise it at the expense of another area.



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5.4 Techniques of logistics system analysis

The total-cost analysis techniques for logistical systems include the following:

(i) Short-run/Static Analysis, (ii) Long-run/Dynamic Analysis

These techniques are briefly discussed in the following paragraphs.

5.4.1 Short-run/Static Analysis

This is a general approach to total-cost analysis for business logistics. In this technique, a short-run situation is considered and costs associated with the various logistics cost centres are developed. Such cost information is developed for each alternative system considered. Then, the system with the lowest over-all cost is selected, ensuring that it is consistent with constraints imposed by the firm on the logistics area.



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5.4.2 Long-Run/Dynamic Analysis

A particular firm may consider more than two logistics systems at any one point of time. For example, a firm may consider three or four systems. In such cases also break-even-analysis may be done to determine the relevant points of indifference or break-even-points.

5.5 Logistics positioning

Logistics Positioning is concerned with alternative ways that logistics can be deployed as a core competency of a firm. The various topics relevant to logistics positioning are:

1.Logistics reengineering, 2. Logistics environment assessment, 3. Time based logistics, 4. Alternative logistics strategies, 5. Strategic integration and 6. Logistics time-based control techniques.

5.5.1 Logistics Reengineering

Reengineering is a fundamental rethinking and radical design of business processes to achieve dramatic improvements in performance.



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All logistical reengineering initiatives have four common factors. They are

(i) The objective is to increase integration of the some or all aspects of the activities under review for reengineering.

(ii) Bench marking is a critical part of reengineering.

(iii) The activities being reviewed need to be decomposed or deaveraged to achieve effective integration (by developing activity based metrics).

(iv) Reengineering is continuous in the quest for quality (i.e., for continuous improvement).

(v) Systems Integration

The logic of systems analysis forms the foundation for logistics reengineering. The systems approach or systems analysis is referred to as system integration. Integrated logistics can only be fully appreciated through a basic understanding of the systems concept.

The systems concept stresses total integrated effort toward the accomplishment of predetermined logistical objectives.



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and Administration(ii) Benchmarking

Benchmarking is a management tool for comparing performance against an organisation that is widely regarded as outstanding in one or more areas, in order to improve performance.

(iii) Activity-Based Costing

For improving a process, it is critical to develop meaningful metrics to measure existing practice and evaluate the relative attractiveness of alternatives. The challenges of “deaveraging” and developing activity-based costs that reflect true metrics are critical to reengineering.

(iv) Quality Initiatives

Reengineering is the procedure that enables firms to improve quality on a continuous basis. Operational quality is a fundamental objective of integrated logistics.

Reengineering Procedure

The standard six-step procedure to guide a firm’s reengineering initiative is illustrated in the Exhibit 5.2.



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Step 1 : The first step is target identification. It is essential to identify exactly which work is the best candidate for potential change. It is also important to identify the known range of potential improvements.

Exhibit 5.2 : Standard Reengineering Procedure



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Step 2 : This step involves fully understanding the sequence of work that is being evaluated. Traditionally a work sequence is evaluated by developing a detailed flowchart or process chart of the steps required to complete the work.

Step 3 and Step 4 : These steps involve the creative aspect of the reengineering process. Internal analysis helps to identify improvement and to model the activity under consideration so as to identify the best possible design. Simultaneously, the firm should carryout external benchmarking to seek improved alternate approaches. These steps aim at achieving a combination of internal and external perspectives.

Step 5 : This step involves evaluation of modification carried out to the activity that is being reviewed.

Step 6 : This is the final step in the reengineering procedure and it involves implementation of the modification selected after evaluation of alternatives.



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5.5.2. Logistics Environmental Assessment

To develop a strategic logistics plan it is necessary to gain an understanding of the internal and external forces that will influence performance. In today’s dynamic business environment, change is the only constant thing. Hence an important input to logistical planning is to access, monitor and evaluate the changes that take place in the business environment. The type of environmental factors that should be considered are: (i) inflation, (ii) interest rates, (iii) energy, (iv) population, (v) house holds, (vi) transportation regulations and (vii) productivity.

5.5.3. Time Based Logistics

Two basic concepts of time-based logistics which facilitate timely performance and reduce costs are

(i) postponement and

(ii) consolidation.



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( i ) Postponement

Postponement refers to the delay of final activities (i.e., assembly, production, packaging etc.) until the latest possible time. Two types of postponement are (i) manufacturing or form postponement and (ii) logistical or time postponement.

These two types of postponement are discussed in the following paragraphs:

(a) Manufacturing Postponement :

The vision of manufacturing postponement is one of products being manufactured an order at a time with no preparatory work or component procurement until exact customer specifications are fully known and purchase commitment is received.

(b) Logistics Postponement :



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This is exactly opposite of manufacturing postponement. Its basic notion is to maintain a full-line anticipatory inventory at one or a few strategic locations. Forward deployment of inventory is postponed until customer orders are received. After the logistical process is initiated, every effort is put to move products direct to customers as rapidly as possible.

(ii) Consolidation

Consolidation refers to collecting small shipments to form a larger quantity in order to realise lower transportation rates.

Effective freight consolidation can be achieved in three ways, from an operational viewpoint. They are: (a) market area, (b) scheduled delivery and (c) pooled delivery.

(a) Market Area : In this approach to consolidation, small shipments going to different customers in a market area are combined. The quantity being shipped to customers in the overall market area provides the basis for consolidation.



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(b) Scheduled Delivery : It consists of limiting shipments for specific markets to selected days in each week. In this method, the shipping firm commits to the customer that all order received before a specific cut-off time will be guaranteed for delivery on the scheduled day.

(c) Pooled Delivery : In a pooled delivery plan, a freight forwarder, public warehouse or transportation company arranges consolidation for multiple shippers who serve the same market area.

5.5.4. Alternative Logistics Strategies

Because of the need to be flexible, a firm needs to develop the capability to have alternative logistics strategies, which is rooted in structural separation. A firm must position its operating resources to structurally achieve economy of scale and at the same time maintain flexibility.

(a) Structural Separation



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(a) Structural Separation

Structural separation is advocated because of the fact that typical channel arrangements are not normally ideal to accomplish both marketing and logistics performance. This is because factors that tend to increase or decrease the total cost of logistics are often contradictory to those that improve or hinder marketing performance.

In a single structure system, one channel participant such as a dealer performs both marketing and logistics work. The disadvantage of such a structure is that it ignores the fact that one very effective channel partner in marketing may not have the expertise to perform the logistics function effectively. Hence structural separation is recommended in which marketing channel and logistics channel are separated and specialists in each area of operation perform these functions.

Structural separation provides increased opportunity for specialization.



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(b) Logistical Operating Arrangements

Channel design has become complicated because of the many facets of logistical performance. The basis system design selected must be capable of offering an acceptable balance of performance, cost and flexibility. Structural similarity rarely exists because of the wide variety of logistical systems used throughout the world to serve widely diverse markets. Three widely used structures are (i) echelon structure, (ii)direct

systems and (iii) flexible systems.5.5.5 Strategic Integration

It is necessary for a firm to synchronize a wide variety of operational factors so as to effectively exploit logistical competency.A firm must be able to achieve sufficient internal and external integration to satisfy basic business objectives.

The challenge to positioning logistics as a key competency is to develop programs with suppliers and customers, which leverage internal integration of logistical resources. The firm and its preferred material and service suppliers must focus their combined effort on creation of value for selected customers.



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5.5.6. Logistics Time-based Control Techniques

A logistics manager needs to use a variety of different control techniques to effectively implement time-based logistics in a flexible framework. These techniques are classified as (i) supply-driven techniques and (ii) demand-driven techniques.(i) Supply driven techniques : Two types of supply-driven control techniques are (a) Just-in-time (JIT) and (b) Requirements planning (RP).(ii) Just-in-Time Strategy : The key to JIT manufacturing operations is

that demand for materials and components depends on the finalized production schedule. Once the production schedule for the lead or primary product is established, just-in-time arrival of materials and components can be planned to coincide with the production requirements resulting in reduced handling and inventory carrying costs.



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(iii) Requirements Planning :Two comprehensive requirements planning techniquesare (a) material/manufacturing requirements planning (MRP) and (b) distribution requirements/resource planning

(DRP). MRP technique is applied to inbound materials whereas DRP applications are used to plan forward allocation of finished inventory in the distribution channel.

(iv) Demand-Driven Techniques :These techniques are applied in situations where requirements are independent. Four techniques used for response-based logistics are: (a) Rules-based reorder (ROP), (b) quick response (QR), (c) Continuous replenishment (CR) and (d) Automatic replenishment (AR).

(a) Rules-Based Reorder (ROP) : This is the oldest technique for managing inventory using statistical probability. It provides for safety stocks to accommodate variability in demand and lead time.



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(b)Quick Response, Continuous Replenishment and Automatic Replenishment :These response-based techniques are all variations on

a theme that concentrates on rapidly replenishing forward inventories according to sales experience. Quick Response is a cooperative effort between retailers and suppliers to improve inventory velocity while providing merchandise supply closely matched to patterns of consumer purchase.

A continuous replenishment strategy (sometimes called vendor managed inventory) is a modified form of quick-response strategy. It eliminates the need for replenishment orders.

The supplier assumes responsibility for replenishing retail inventory in the required quantities, colours, sizes and styles based on the receipt of daily transmission of retail sales or warehouse shipments.

Automatic replenishment (AR) is a more sophisticated sharing of replenishment responsibility. This strategy extends QR

and CR by giving suppliers the right to anticipate future requirements according to their overall knowledge of merchandise category.



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END of Chapter 5

CHAPTER 6

INTEGRATED LOGISTICS ACTIVITES



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• After reading this chapter, you should be able to:• Discuss ‘logistics network design’.• Discuss information flow for logistics.• Discuss the recent trends in managing materials flow.• Discuss the role of transportation in logistics.• Describe the characteristics of transportation modes and selection.• Understand the nature of transportation infrastructure.• Discuss how inventory is managed in a logistics system.• Discuss the role of warehousing, materials handling and packaging in

logistics.

Learning Objectives



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Logistics is viewed as one of the competencies that contribute to the universal process of creating customer value. When logistical operations or activities are highly integrated and positioned as a core competency, they can serve as the corner stone for strategic advantage.

The key logistics activities, i.e., activities required to facilitate the flow of a product from point of origin to point of consumption are listed alphabetically in the following paragraph: They are (i) Customer service, (ii) Demand planning/forecasting, (iii) Inventory management, (iv) Logistics Communication, (v) Material Handling, (vi) Order processing, (vii) Packaging, (viii) Parts and service support, (ix) Plant and warehouse site selection, (x) Procurement, (xi) Return goods handling, (xii) Reverse logistics, (xiii) Traffic and transportation and (xiv) Warehousing and storage.

Logistical competency is achieved by co-ordinating (i) network design, (ii) information,(iii) transportation, (iv) inventory, (v) warehousing, (vi) material handling and (vii) packaging.



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and AdministrationIntegration of logistical activities assumes strategic importance because of two

major reasons:(i) All firms require the support and co-operation of many other businesses to

complete their overall logistical processes. Because of such co-operation, firms are united in terms of common goals, policies and programs. Firms having the perspective of total supply chain (or value chain) can improve their efficiency by eliminating duplication of efforts and wastage. Joint planning and relationship management facilitate cross organisational co-ordination.

(ii) There are many service firms which perform logistical work on behalf of their customers such as transportation carriers (trucks) or warehouse firms. The modern trend in logistics management is Logistics outsourcing for example, third party logistics (3PL) and fourth party logistics (4PL).

A third-party logistics firm is an external supplier that performs all or part of a company’s logistics functions such as transportation, warehousing, distribution, financial services etc. Fourth-party Logistics (4PL) is an emerging trend in supply chain management in which a customer firm out-sources the entire set of logistics and supply chain activities to a single logistics provider firm which will act as a single point of contact for all their vendors, service providers and customers with regard to any logistics need in order to provide an overall maximum benefit.



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and Administration6.1. Logistics Network DesignLogistics network design involves (i) determining how many of each type of facilities are needed, (ii) their

geographical locations and (iii) the work to be performed at each location.

The requirements of logistics network design include (i) determination of the number and location of all types of facilities required to perform logistics work and (ii) determination of what inventory and how much to stock at each facility and where to assign customer orders for shipment.

The design of a network must consider the geographical variations existing between markets and between material and component part source locations. When a firm is involved in global logistics (having global markets and global suppliers) issues related to network design become more complex.



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and Administration6.1.1Network Configuration :

The following are the objectives of network configurations:

(i) To minimise all relevant logistics costs while meeting the constraints on logistics customer service

(ii) To maximize the logistics customer service level while holding the line on total logistics costs.

(iii) To maximize the profit contribution made by logistics by maximizing the spread between the revenues generated by a logistics customer service level and the costs for providing that level of service.

Configuration of the network mainly involves location choices, issues related to inventory and transportation and considerations regarding how the products should be directed through the configured network.

6.2. Information Flow for Logistics The quality of information plays a major role in the effectiveness of logistics performance.



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Recently developed information technology facilitates the implementation of control techniques such as just-in-time (JIT), quick-response (QR) and continuous replenishment (CR).

6.3. Managing Material Flow and Transportation

Materials management is an integral part of logistics management because logistics management is concerned with the efficient flow of raw materials, in-process inventory and finished goods from point of origin to point of consumption. Material management is very crucial to the total logistics process.

Efficient and effective management of inbound materials flow enables the manufacturing process to produce products at the desired price and at the time the products are required to be distributed to the customers of the firm.

Poor materials management can cause stockouts in retail outlets resulting in customers seeking substitution or buying competitor’s products.



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and AdministrationScope of Materials Management

Four basic activities of materials management are :

(i) anticipating requirements of materials

(ii) sourcing and processing materials

(iii) introducing new materials into the organisation and

(iv) monitoring the status of materials as a current asset (inventory).

Objectives of Materials Management

The objectives of integrated materials management are as follows:

(i) Low Costs :

(ii) High Service Level :

(iii) Quality Assurance :

(iv) Low Level of Tied-up Capital :

(v) Support of Other Functions :



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and Administration6.3.1 Relationship Between Materials Management and Logistics

ManagementIntegrated materials management includes (i) purchasing and procurement, (ii) production control, (iii) inbound traffic and transportation, (iv) warehousing and storage, (v) management information system control, (vi) inventory planning and control and (vii) salvage and scrap disposal.6.3.2 ForecastingThe various types of forecasts are: (i) demand forecast, (ii) supply forecast

and (iii) price forecast.Demand forecast involves determining the firm’s demand for an item. This

includes current and projected demand, inventory status and lead times.Supply forecast involves collection of data about current suppliers and

producers, aggregate projected supply situation and technological and political trends which might affect supply.

Price forecast is based on information gathered and analysed about demand and supply. It provides a prediction of short-term and long-term prices and the underlying reasons for those trends.



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6.3.3 Administration and Control of Materials Flow

To properly administer and control materials management activities, a firm must be able to measure, report and improve its performance. In measuring the performance of materials management, the various elements that should be examined are : (i) supplier service levels, (ii) inventory, (iii) prices paid for the materials, (iv) quality levels and (v) operating costs.

6.3.4 Recent Trends in Managing Materials Flow

Modern techniques or approaches to improve the management of materials flow in a firm include the following:

(i) Materials Requirement Planning (MRP I)

(ii) Manufacturing Resource Planning (MRP II)

(iii) Just-in-time Systems (JIT)

(iv) Distribution Requirements Planning (DRP I)

(v) Distribution Resource Planning (DRP II)

(vi) Total Quality Management (Continuous Improvement and Reengineering).



K. Shridhara Bhat


and Administration(i) Materials Requirement Planning (MRP I)

Materials requirement planning (MRP-I) is a computerised information system developed specifically to aid in managing and scheduling materials to forecasted demand. It determines how much material to be purchased and when to purchase based on forecast.

(ii) Manufacturing Resource Planning (MRP II)

Manufacturing resource planning (MRP-II) refers to the process of identifying, performing a needs analysis and committing the resources needed to produce a product.

(iii) Just-in-Time System

Just-in-time (JIT) is an approach that seeks to eliminate all sources of waste in production activities by providing the right part at the right place at the right time.

(iv) Distribution Requirements Planning (DRP I)

DRP is the application of MRP principles to the distribution environment. It integrates the special needs of distribution. It is a dynamic model which looks at a time-phased plan of events that affect inventory.



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(v) Distribution Resource Planning (DRP II)It is an extension of DRP I. It applies to the time phased DRP I

logic to replenish inventories in multiechelon warehousing systems. It extends DRP I to include the planning or resources in a distribution system - warehouse space, manpower, transport capacity and financial resources.

It is an extension of DRP I. It applies to the time phased DRP I logic to replenish inventories in multiechelon warehousing systems. It extends DRP I to include the planning or resources in a distribution system - warehouse space, manpower, transport capacity and financial resources.

DRP I and DRP II are outgrowths of MRP I and MRP II, applied to the logistics activities of a firm.

(vi) Total Quality Management (TQM)Total Quality Management (TQM) is a philosophy and a set of

guiding principles, which represent the foundation of a continuously improvinorganisation.



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The TQM Approach : Two key philosophies in TQM approach are : (i) never - ending push to improve which is referred to as continuous improvement (Kaizen in Japanese) and (ii) goal of customer satisfaction which involves meeting or exceeding customer expectations.

Elements of TQM

(i) Continuous Improvement :

(ii) Competitive Bench Marketing :

(iii) Employee Involvement and Empowerment :

(iv) Team Approach :

(v) Supplier Quality :

(vi) Quality at the Source :

(vii) Supplier Partnership :

(viii) Decision Based on Facts Rather than Opinions :

(ix) Knowledge of Tools :



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(x) Inventory Reduction Through JIT System of Production and Procurement :

Continuous Improvement and Reengineering :

Continuous improvement (based on a Japanese concept called Kaizen) involves identifying bench marks of excellent practice and instilling a sense of employee ownership in the process. The focus can also be on problems with customers or suppliers.

Reengineering :

Re-engineering has been defined as “the fundamental rethinking and radical design of business processes to achieve dramatic improvements in critical contemporary measures of performance such as costs, quality, service and speed”.

The concept of reengineering deals with “starting with a clean slate”, that is, taking systems and processes and rethinking and redesigning them in order to create significant improvements in quality, cost, speed and service.



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Relationship between TQM and Logistics

Quality is more important than cost within materials management, especially in outsourcing and supplier selection decisions.

TQM and logistics are interrelated. Managing logistics without incurring costs of quality is impossible. Hence it is important that the flow of materials is administered and controlled by applying the concepts of TQM.

6.3.5 The Logistics/Manufacturing Interface

Logistics and manufacturing activities of a firm must work together closely for the successful application of systems such as continuous improvement, Just-in-time (kanban) MRP and DRP. Successful implementation of JIT requires cooperative effort and minimum conflict. This requires that logistics and manufacturing planning and decision making be done jointly. The following actions are required to make improvements:



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(i) Joint effort of logistics and manufacturing in the area of production scheduling to reduce production planning cycle time.

(ii) Manufacturing and logistics strategies such as reduction of lead time, set up time and production-run sizes must be used to minimize average inventory levels and stock outs.

(iii) Logistics must develop strategies for reduction of supplier lead times for parts and supplies.

(iv) Products with low inventory turn-over ratio should be produced only after orders are received instead of producing and holding in stock.

6.3.6 Transportation Management

6.3.7 The Role of Transportation in Logistics

Transportation refers to the physical movement of products from where they are produced to where they are needed, thereby adding value to the materials being transported (i.e., place utility).



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and Administration6.3.8 Traffic and Transportation Strategy

Four strategic decisions to be made by integrated logistics managers are :

(i) What modes of transportation will the firm use?

(ii) What carries in each mode will the firm use?

(iii) Will the firm operate its own fleet or hire outside carriers for transportation service?

(iv) Will the firm manage transportation operation or hire a third party?

Characteristics of Transportation Modes and Selection

Factors affecting the choice of transportation modes are :

(i) nature of goods, (ii) access to carriers, (iii) price, (iv) transit time,

(v) security of goods, (vi) government regulations and (vii) safety.

Carrier Characteristics and Selection

The general criteria for selection of carrier are :

(i) price, (ii) accessibility, (iii) responsiveness, (iv) claims record and (v) reliability.



K. Shridhara Bhat


and AdministrationCarrier Selection Decision

Steps involved in the carrier selection process are :

(i) Selection of transportation mode by the firm.

(ii) Selection of a specific carrier from within the chosen mode or inter modal form.

(iii) Carrier Selection Determinants : The salient carrier selection determinants are: (i) carrier costs and (ii) service performance. The relevant service performance determinants are:

(a) transit time, (b) reliability, (c) capacity and (d) security.

How carrier cost and service determinants interact in the firm’s logistics function is discussed in the following section:

(i) Transportation Cost :

(ii) Service Performance :

(a) Transit time

(b) Reliability



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(c) Capacity and accessibility

(d) Accessibility

(e) Security

The basic modes of transportation available to the logistics managers are : (i) road (trucks), (ii) rail (goods train), (iii) water (river, ocean shipping), (iv) air (transport aircrafts) and (v) pipe lines (for liquids and gases).

Transportation infrastructure consists of the rights-of-way, vehicles and carrier organisations which offer transportation services on a for-hire or internal basis

Intermodal Transportation

Intermodal transportation refers to the use of two or more transportation modes to transport freight, for example, rail to ship to truck. Various intermodal transport services are (i) truck-rail (piggy-back),

(ii) truck-water (fishy-back), (iii) truck-air (birdy-back) etc.



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Activities of Transportation Managers

Some of the common activities of transportation managers irrespective of the types of firms in which they work are : (i) contract negotiations, (ii) efficiency improvement, (iii) evaluation of customer service quality level and (iv) supervision.

Transport Documentation : The three basic types of transport documentation are: (i) bills of lading, (ii) freight bills and (iii) shipping manifests.

The bill of lading is the basic document utilised in purchasing transport services. It serves as a receipt and documents commodities and quantities shipped.

The freight bill represents a carrier’s method of charging for transportation services rendered.

The shipping manifest lists individual stops or consignees when multiple shipments are placed on a single vehicle.



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6.4. Inventory Management Inventory planning and management is one of the most

misunderstood activities in integrated logistics management. Inventory decisions are high risk and high importance decisions from the perspective of logistics operation.

6.4.1 Rationale for Having Inventory

A firm’s different functional areas may view inventory differently. For instance, marketing wants high inventories over a broad range of products to allow quick response to customer demands. Manufacturing wants high inventories to support long production runs and also to ensure that there will not be any production stoppage due to non–availability of raw materials and component parts.Finance generally prefers low inventories so as to increase inventory turn-over ratio, reduce current assets and increase return–on–assets. Integrated logistics concurs with the point of view of finance.



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Basic Inventory Concepts

The basic inventory concepts include: (i) reasons for holding inventory and various types of inventory. Why hold inventory? Inventory serves five purposes:

(i) It enables the firm to achieve economies of scale.

(ii) It balances supply and demand

(iii) It enables specialisation in manufacturing

(iv) It provides protection from uncertainties in demand and order cycle.

(v) It acts as a buffer between critical interfaces within the channel of distribution.

6.4.2 Objectives of Inventory Management

The objective of inventory management are : (i) to increase corporate profitability through improved inventory management, (ii) to predict the impact of corporate policies on inventory levels and (iii) to minimise the total cost of logistics activities while making customer service requirements.



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Measurement of Effectiveness of Inventory Management

The key measure of effective inventory management is the impact that inventory has on corporate profitability. Profitability can be improved by lowering costs of supporting increased sales.

Measures to decrease inventory – related costs include :

(i) Reducing the number of back orders or expedited shipments.

(ii) Purging obsolete or dead stock from the system and

(iii) Improving the accuracy of forecasts.

(iv) Inventory Turnover is another measure of inventory performance. It is measured as the ratio of annual rupee sales volume at cost to average rupee inventory investment, i.e.,

Inventory turnover =

Turnover should be used along with other measures that reflect customer service issues to indicate the measures of inventory effectiveness.



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and Administration6.4.4 Financial Impact of InventoryInventory accounts for the largest liquid asset for most firms. Inventories

can account for 20 per cent or more of total assets and over 10 per cent of total sales. Inventory costs may range from 20 to 40 per cent of the value of the average inventory held. Inventories influence a firm’s financial performance in at least two ways : (i) net profit margin, (ii) return on assets managed (ROAM) or return on investment (ROI).

(i) Net profit as a percentage of sales measures how efficiently and effectively products are manufactured and sold.

(ii) Return on assets or Return on Investment (ROI) is determined by multiplying net profit margin by asset turnover.

ROI =

ROI =



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Financial Leverage : Financial leverage is calculated by dividing total assets by the firm’s net worth.

Return on Equity (Networth) : Another important measure of performance is return to the stock holder which is calculated by dividing a firm’s net profit by stock holder’s equity.

6.4.5 Inventory Costs

Four major types of inventory costs are : (i) inventory carrying costs, (ii) Order/set up costs, (iii) expected stock-out costs and (iv) in-transit inventory carrying costs.

6.4.6 Impact of Demand Pattern on Inventory Management

The inventory management methods are influenced by :

(i) Pull versus push production system and (ii) Dependent or independent demand inventory.

Pull versus push systems are distinguished by the way the company’s production is driven.



K. Shridhara Bhat


and AdministrationInventory manager must take two decisions – (i) how much inventory to order and (ii) when to place the order.

6.5. Warehousing, Materials Handling and Packaging6.5.1 Warehousing refers to the physical handling or storage of raw

materials and component parts until they are used in the production process.

6.5.2 Consolidation refers to collecting smaller shipments to form a larger quantity in order to realise lower transportation

rates.6.5.3 Cross-docking refers to the movement of goods directly from receiving dock to shipping dock to eliminate storage expenses.6.5.4 Warehouse management involves many basic warehousing decisions such as ownership, number, size, stocking and location. i.e., what type of organisation, how many, what size, what products and where.

The decision regarding whether to own a warehouse or hire warehousing space in a public warehouse impacts a firm’s facility investment as well its warehousing costs.



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Another important decision is whether to centralize or decentralize warehousing.

When a company decides to have its own warehouse, the question of “what size of warehouse” arises as it involves investment in fixed assets.

Within the warehouse, material handling is an important activity. Products must be received, moved, sorted and assembled to meet customer order requirements.

Product Packaging has a major role in logistics management. Packaging interacts with the logistics system in many ways. The size and protection afforded by the package affect the type of materials handling equipment used and the level of product damage incurred. Packaging design is important for efficient use of either a warehouse or transportation carrier, so coordinating packaging with warehousing and with materials handling and transportation is crucial in warehouse management.

The objectives of product packaging are :



K. Shridhara Bhat


and Administration(i) To facilitate storage and handling (ii) To promote better utilisation of transport equipment (iii) To promote product protection (iv)To identify product and provide information (v) To improve efficiency in handling and distributing products. (vi)To change the product density.

When effectively integrated into company’s logistical operations, warehousing, material handling and packaging facilitate the speed and overall case of product flow throughout the logistical system.

Functions of Packaging : Six specific functions of packaging are :(i) containment, (ii) protection, (iii) apportionment, (iv) unitization,(v) convenience and (vi) communication.



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and Administration

Package Design : Good package design is influenced by (i) standardization, (ii) Pricing (cost of package), (iii) product or package adaptability, (iv) level of protection, (v) handling ability, (vi) product pack ability, (viii) reusability and recyclability.



K. Shridhara Bhat


and Administration

END OF WEEK 3