CUSTOMER-ORIENTED LOGISTICS

MANAGEMENT

PRESENTED BY:

Aruz Mahajan (16)Anshul Pandoh (10)

LOGISTICS

The commercial activity of transporting goods to customers.

LOGISTICS MANAGEMENT

It is a supply chain management component that is used to meet customer demands through the planning, control and implementation of the effective movement and storage of related information, goods and services from origin to destination.

OBJECTIVES OF LOGISTICS

•COST REDUCTION: It is usually achieved by tactics such as altering the number and location of warehouses, altering the mode of transport, route optimization for the transport function, and optimizing the quantum of inventory.

•CAPITAL REDUCTION: It is a strategy devoted towards minimizing the level of investment in the logistical system. Also, substantial capital reduction can be achieved by leasing and renting facilities without affecting the service output to the customers.

•SERVICE IMPROVEMENT: It involves giving better service across the dimension of service without substantially increasing the cost of logistics.

FACILITIES DECISIONSThree generic types of outbound logistics strategies are possible:

• DIRECT SHIPMENT: In direct shipment strategies, goods once manufactured are directly shipped to the point of sale without being stocked anywhere.

• WAREHOUSING: In warehousing strategies, however, goods once manufactured are stored in warehouses waiting from orders from the retail outlets or others point of sale.

• CROSS-DOCKING: In cross docking, while warehouses do exist, the storage time is reduced to a minimum. In this strategy, items are distributed continuously from suppliers through warehouses to suppliers with the items lying in the warehouses for just a few hours.

Cross docking is possible only when certain conditions are satisfied:

i. The inventory destination is known when stocks are received

ii. Customer is ready to receive inventory immediately

iii. The number of locations to ship inventories are not high

iv. It is possible to pre-label the inventory

v. Inventory arrives at a state where it is immediately conveyable

MAIN FUNCTIONS OF WAREHOUSING OPERATIONS

The warehousing functions perform several specific activities :

• MOVEMENT

• STORAGE

• INFORMATION TRANSFER

MOVEMENT FUNCTION This function itself consists of several activities such as:

i. Receiving: the main activity at this stage involves the unloading of the goods, updating of the inventory records, inspection of damage, and verification of merchandise count against the orders and shipping records.

ii. Transferring: it involves transferring the shipment received to locations within the warehouse specifically meant for the storage of that category of inventory to enable easy access whenever required.

iii. Order picking or selection: this activity takes place whenever the warehouse gets an order from the downstream recipient for the goods stored.

iv. Shipping: once the order is received, the order is picked and packed to be shipped after selecting the mode of transfer, after adjusting the inventory records.

STORAGE FUNCTION Goods can be stored in a warehouse temporarily awaited an order from the downstream intermediary or else, mainly in the case of seasonal products, goods can be stored for a reasonably long period either to offset the seasonal demand or on the basis of speculation or forward buying.

INFORMATION TRANSFER FUNCTION Information on inventory levels, throughout levels, stock keeping locations, inbound and outbound shipments, facility space utilization, order fulfillment data, etc. are the are the type of information that a firm expects a warehouse to provide.

MAIN DECISIONS IN WAREHOUSING

I. The location of the warehouse

II. The number of the warehouse

I. WAREHOUSING LOCATIONS The location or site selection decision can be approached from macro and micro perspectives.

MACRO PERSPECTIVES ON WAREHOUSE LOCATIONS: It examines the issue of locating a warehouse within a broad geographical area and concerns issues such as whether the warehouse should be located near the production plant, the market, or the midway between both.

MICRO PERSPECTIVES ON WAREHOUSE LOCATIONS: The most popular approaches are the-

Centre of gravity method: It considers the transportation rates and the points volume for arriving at the exact location for the warehouse. It tries to minimize the cost of logistics by selecting an appropriate site for locating the warehouse when the transportation cost as well as the volume to be shipped to various markets is known.

Cost-volume-profit analysis: it is a simple method which uses the break-even analysis to select from a set of locations. In this we decide about a few alternative locations and then select from this set of alternative locations.

II. NUMBER OF THE WAREHOUSE Four factors are considered in deciding about the number of

warehouses are:

a) Cost of lost sales: It is the stockout cost when a customers order is not fulfilled due to lack of availability of stock within the permissible waiting time allowed by the customers. This is basically an opportunity cost, as actual outflow of money does not take place.

b) Inventory cost: These are the cost incurred in procuring and holding the inventory for the entire system. Since every warehouse will have a specified safety stock for all the item stocked, the inventory cost are estimated to go up with the number of warehouses.

c) Transport cost: These are the cost incurred in transportation in the entire system consisting of the transportation from the production point to the warehouses, as well as warehouses to the points of sale.

d) Warehousing cost: It consists of the cost of renting, leasing or owning the warehouse as well as the maintenance of the warehouse.

INVENTORY MANAGEMENT Inventory management is all about having the

right inventory at the right quantity, in the right place, at the right time, and at the right cost.

Inventory levels directly influence the profitability of a firm. Excess inventory –Greater chance of damage, More

cost Insufficient inventory- Missing out on sales, Missing

out on favourable prices.

So optimal level of inventories are required.

INVENTORY MANAGEMENT DECISIONS 4 main decisions:

1. Why do we need inventory?

2. Objective of inventory management

3. Inventory level decisions

4. Distribution resource planning system

WHY DO WE NEED INVENTORIES? Improves customer service: In the

absence of inventory, many customer orders might have to be turned down.

Smoothens the operations of logistics system: Inventories reduces the pressure on logistics system to cut the lead time.

Reduces cost: Inventory carrying capacity can reduce transportation cost by reducing the less-than-truckload shipments. Moreover discount on large shipments can also reduce cost.

OBJECTIVE OF INVENTORY MANAGEMENT Reduce inventory cost

Developing accurate forecasts

Reducing lead time

Accurately calculating the inventory levels at various locations

Achieving customer service targets

Cost associated with inventory

1. Inventory procurement cost: These are fixed costs which have to be incurred in setting up the machinery, procurement of related materials, transportation, order processing etc.

2. Inventory carrying cost: 4 categoriesa) Capital costb) Storage space costc) Inventory service costd) Inventory risk cost

a) Capital cost: It is the cost of capital tied up in the inventory. It is difficult to calculate.

b) Storage space cost: The storage space cost is a combination of the warehouse rent or mortgage, lighting, heating, air conditioning, plus the handling costs of moving the materials in and out of the warehouse.

c) Inventory service cost: These costs include insurance paid on the inventory and taxes,

d) Inventory risk cost: It includes the cost associated with obsolescence, damage, shrinkage of the unsold goods

3. Out-of-stock costs: Out-of-stock costs are incurred when an order is placed but cannot be filled from the inventory to which the order is normally assigned.

Two types: a) Cost of lost sale

b) Backorder costs

INVENTORY LEVEL DECISIONS Inventory level decisions are the decision

related to the quantity of inventory to be carried.

As these decisions directly affect the inventory carrying costs

These decision mainly involve two main decisions: Push or pull inventory control decision Order quantity decisions

Push vs pull inventory control: In push strategy, decisions about the

inventory levels are taken at the central level.

The storage points are replenished after a fixed time.

In pull strategy, inventory levels are decided in a decentralized manner.

Can reduce inventory if implemented properly.

Economies of scale is hard to achieve.

Order quantity decisions: Decision related to the quantity and time of reordering the product is taken so that optimal inventory level is maintained

The effect of variability in demand can be reduced by :

1. Risk pooling- Reducing the number of storage points.

2. Echelon inventory: It is defined as the inventory between a stage in the supply chain and the final customer.

DISTRIBUTION RESOURCE PLANNING SYSTEM(DRPS) It is a logistics information system innovation that enables

managers to plan effectively and efficiently

It controls the flow of goods from production facility to retailers in time phased manner.

It helps manufacturers to make and ship just what is needed for the current demand.

Helps to reduce inventory investment, safety stock levels and transportation costs

Helps in improving customer service levels, flexibility in the system, system-wide forecasts and the utilization of manufacturing resources

TRANSPORTATION DECISIONS3 decisions:

1. Mode selection: 5 modes of transport- air, rail, road, water and pipeline. Managers must consider cost, dependability and possibility of loss and damage associated with the mode available to them.

2. Vehicle routing and scheduling: It tries to find out the best path a vehicle should travel through a network of roads, rail lines, shipping lines, etc so that the time and distance travelled is minimized

3. Freight consolidation: It is mainly intended to reduce the cost of transportation through bringing together smaller quantities of inventory in order to create a higher quantity for transportation

FACTORS AFFECTING TRANSPORTATION COST1. Product related factors:

a) Density of the product:

b) Stow ability:

c) The ease or difficulty in handling

2. Market related factors:a) Degree of intermode or intramode competition

b) Location of the market

c) Seasonability of the product movement

SUPPLY CHAIN MANAGEMENT Supply Chain Management includes every

effort involved in producing and delivering a final product or service, from the supplier to the customer.

Supply Chain Management includes managing supply and demand, sourcing raw materials, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer.

THE SCM NETWORK

PRINCIPLES OF SUPPLY CHAIN MANAGEMENT

The four principles of SCM are:1. Efficiency2. Reliability3. Flexibility4. Innovation

1.EFFICIENCY The principle of efficiency requires that any

supply chain should be conscious of cost reduction in all the activities. Efficiency leads to reduction in the wastage of resources, including wastage of time. The principle of efficiency is reflected in initiatives such as JUST-IN-TIME(JIT).

2.RELIABILITY Reliability is associated with consistency.

Consistency should be measured mainly in terms of the consistent delivery time achievement, accuracy in order fulfillment, consistency and accuracy in payment processing time, installation support and after-sales service.

3.FLEXIBILITY Flexibility is associated with the ability of the

entire supply chain to adapt to changes in the demand or supply pattern. Flexibility is also termed as the agility of the supply chain.

4.INNOVATION Innovation is important as it could generate a

sustainable competitive advantage for the firm. Supply chains that do not innovate will slowly erode their comparative advantage with regard to their competitors.

GENERIC SUPPLY CHAIN MANAGEMENT STRATEGIES

Four different Generic Supply Chain Management Strategies are:

1. Rationalization strategy2. Synchronization strategy3. Customization strategy4. Innovation strategy

1.RATIONALIZATION STRATEGY Rationalization strategy places greater

emphasis on process rationalization that eventually leads to better net margin. This strategy involves closely assessing the process and working about ways of reducing wastage wherever possible.

2.SYNCHRONIZATION STRATEGY Synchronization strategy involves elements

such as collaborative inventory management, perfect order fulfillment and optimal inventory placement. One of the most popular supply chain practices that follows from synchronization strategy is JIT inventory management.

3.CUSTOMIZATION STRATEGY Customization strategy involves developing

specific Strategies for profitable customers and executing it with a view to establishing a long term relationship with them. The elements of customization strategy involves mass customization, lifetime relationships, customer profitability management, customer knowledge management and value analysis.

4.INNOVATION STRATEGY Supply chain innovation strategy involves

exploiting the competitive advantage generated by a strong supply chain to introduce successful new products in the market at a much higher rate than competitors. For a company like apple developing a constant stream of new product involved working closely with their partners in research and development (R&D).

SUPPLY CHAIN TECHNIQUES Supply chain techniques are the bunch of

activities that the SCM process should incorporate, in order to achieve the objectives set in the SCM strategy. According to Jacoby (2010) the essential supplies and techniques are as follows:

1. SUPPLY CHAIN NETWORK DESIGN Network design is probably the most critical

part of supply chain management. To achieve the optimum supply chain performance it is necessary to establish a powerful network design. Fairness and transparency contribute to the sustainability of a network design.

2. CAPACITY PLANNING Capacity planning is associated with the

ability of the network to respond to change in demand patterns and market conditions. Capacity planning requires both long term as well as short term orientation. For instance capacity planning should address issues such as- if the demand increases gradually how the requirements for additional inventory storage limit after 2 years? In the short term how the short term dip in demand affect storage space productivity?

3.RISK MANAGEMENT Environmental factors such as sudden

increase in cost of certain components or disruptions to the physical flow of goods due to natural disasters could create tremendous disruption in the whole system. Risk management is therefore very critical in SCM strategies.

4.ORGANIZATIONAL CHANGE MANAGEMENT SCM is also an Organizational process

involving organizational players including departments, teams and informal groups. SCM involves a continuous adaption to market changes, the organization will also need to change constantly. An organization that refuses to change will find it difficult to adopt SCM.

5.PERFORMANCE MEASUREMENT AND MONITORING Developing and implementing performance

monitoring process is also very crucial to success of a SCM strategy. Performance metrics and measurement provide the crucial feedback that guides the SCM strategy. Lack of proper feedback or faulty feedback leads to faulty implementation of the strategy.