Download - Logistics,Supply Chain Strategy and Planning
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Logistics / Supply Chain Strategy and
Planning
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• Corporate Strategy
• Logistics Strategy
• Logistics Planning
• Review of Logistics Plan
• Guidelines for Strategy Formulation
• Selecting the proper Channel Strategy
• Measuring the Strategy Performance
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Corporate Strategy
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CORPORATE STRATEGY
• Corporate strategy begins with a clear expression of the firm’s objectives.
It typically includes:
Market Share
New Products and Services
Return on Investment
Growth goals
• A good strategy addresses four key components of business:
Customers
Suppliers
Competitors
Company itself.
• Assessing the needs, strengths, weaknesses, orientations and perspectives
of each of these components is integral part of strategic planning.
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CORPORATE STRATEGY
• The firms generally identifies a list of options before finalizing the actual
strategy which it will implement.
• The strategic direction that the company finalizes depends upon:
Firm’s costs
Financial strengths and weaknesses
Market Share position
Asset base and Deployment
External environment
Competitive forces etc
• The corporate strategy drives the functional strategies and is realized as
manufacturing, marketing, finance and logistics shape their plans to meet it.
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Logistics Strategy
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LOGISTICS STRATEGY
• Logistics strategy of a company should flow from the company’s strategy.
• Logistics strategy generally has 3 objectives:
Cost reduction
Capital reduction
Service Improvement
• Though all of the above are equally important, a company’s emphasis on any
of the parameters could change over time.
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COST REDUCTION STRATEGY
• Cost reduction is strategy directed toward minimizing the variable costs
associated with movement and storage.• This is done by choosing among different warehouse locations or selecting
among alternative transport modes.• Service levels are held constant while the minimum cost alternatives are
being considered.• Margin maximization is the prime goal.
CAPITAL REDUCTION STRATEGY
• Minimizing the level of investment in the logistics system or maximizing the
return on logistics assets is the motivation for this strategy. Some examples
are: Shipping direct to customers to avoid warehousing Choosing leased warehouses over self-owned warehouses Selecting JIT rather than high inventory Using 3 PL services.
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SERVICE IMPROVEMENT STRATEGY
• Service improvement strategies recognizes that revenues depend on the level
of logistics service provided.• Although costs increase rapidly with increased levels of logistics customer
service, the increased revenues may offset the higher costs.• Typically, for companies that follow service strategy, service level would be
the key differentiator. Example: Maruti Udyog, Caterpillar
Once the logistics strategy is formulated the next task is to implement it which is done through logistics planning
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FLOW OF LOGISTICS PLANNING
Business goals and strategies
Customer Service requirements
Integrated logistics planning
Design of integrated logistics management system
Overall performance measures
Individual links of logistics system:•Facility location•Operations strategy•Inventory management•Information systems•Materials handling•Traffic and transportation•Planning and control methods•Organization
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Logistics Planning
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LEVELS OF PLANNING
• There are 3 levels of planning: Strategic Tactical Operational
• Strategic planning is considered long-range, where the time horizon is longer
than one year.• Tactical planning involves an involves an intermediate time horizon usually
less than a year.• Operational planning is short-range decision making, dealing with day-to-day
operations.
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EXAMPLES OF STRATEGIC, TACTICAL AND OPERATIONAL PLANNING
Decision Area
Level of Design
Strategic Tactical Operational
Inventories Inventory Control Policies Safety Stock levels Replenishment quantities and Receiving
Transportation Mode Selection Seasonal equipment leasing
Routing, dispatching
Order processing
Information System / ERP Processing Orders, filling back orders
Customer Service
Setting standards Priority rules for customer orders
Expediting deliveries
Warehousing Layout design Seasonal space choices
Order picking and restocking
Purchasing Development of supplier buyer relationships
Contracting, vendor selection, forward buying
Order releasing and expediting supplies
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MAJOR PLANNING AREAS
Customer Service Goals
Transport Strategy
• Modes of Transport
• Routing / Scheduling
• Shipment Size /
Consolidation
Inventory Strategy
• Inventory Levels
•Deployment of
inventories
•Control MethodsLocation Strategy
• Number, Size and location of facilities•Assignment of stocking points to sourcing points•Assignment of demand to stocking points or sourcing points•Private or public warehousing
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CUSTOMER SERVICE GOALS
• Logistics service levels will be directly proportional to the costs• Low levels of service allow centralized inventories at few locations and use of
less expensive forms of transportation.• High service levels increase the costs• Beyond a certain point, logistics costs will rise at a rate disproportionate to
the service level.
FACILITY LOCATION STRATEGY
• Placement of stocking points and their sourcing points forms the core of
facility location strategy.• This also include fixing the number, location and size of the facilities and
assigning market demand to them determines the paths through which
products are directed to the marketplace.• This should be done by taking into consideration the costs.
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INVENTORY DECISIONS
• Inventory decisions refer to the manner in which inventories are managed.• Push versus Pull represents two different strategies.• Inventory policy can very w.r.t each of the items (Ex: ABC, Seasonal – Non
seasonal etc) or w.r.t to the customer segments served (Ex: OEM,
Aftermarket)TRANSPORT STRATEGY
• Transport decisions can involve mode selection, shipment size, routing and
scheduling.• Transportation, Warehousing and Inventory decisions are highly interrelated.
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CONCEPTUALIZING THE LOGISTICS / SC PLANNING PROBLEM
It is pictorial representation of the whole logistics system
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Review of Logistics Plan
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TRIGGER FOR REVIEW
• Review of the logistics plan may be required based on the following triggers: Demand Customer Service Product Characteristics Logistics Costs Pricing Policy
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TRIGGER FOR REVIEWDemand
• Level of demand and its geographical dispersion greatly influence the
configuration of logistics networks.• Firms often experience disproportionate growth or decline in one region of
the country compared with others.• This may require new warehouses be located in rapidly growing areas while
facilities in slow growth or declining markets be closed.• If there is a change in pattern of demand, it is a strong trigger to logistics re-
planningCUSTOMER SERVICE
• Re-planning is usually required when service levels are changed due to
competitive forces, policy revisions or if there was a fundamental error in the
earlier fixed service levels.
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TRIGGER FOR REVIEW
Product Characteristics
• Logistics costs depends upon product characteristics such as weight, volume,
shape etc.• When substantial changes are made in the product characteristics, re-
planning the logistics system could be beneficial.• Also, shipping a product in a knocked-down form can considerably affect the
weight-bulk ratio of the product and the associated transportation and
storage rates.LOGISTICS COSTS
• This could be the most important trigger for re-planning the logistics.• If the logistics costs as proportion of sales increase or if any competitor is
performing much better in terms of costs that should be a trigger for review.PRICING POLICY
• Changes in the pricing policy under which goods are purchased or sold will
affect logistics plan mainly because it defines responsibility for certain logistics
activities. Example: A supplier that switches from an f.o.b factory price to a delivered
price.
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TRIGGER FOR REVIEW
Product Characteristics
• Logistics costs depends upon product characteristics such as weight, volume,
shape etc.• When substantial changes are made in the product characteristics, re-
planning the logistics system could be beneficial.• Also, shipping a product in a knocked-down form can considerably affect the
weight-bulk ratio of the product and the associated transportation and
storage rates.LOGISTICS COSTS
• This could be the most important trigger for re-planning the logistics.• If the logistics costs as proportion of sales increase or if any competitor is
performing much better in terms of costs that should be a trigger for review.PRICING POLICY
• Changes in the pricing policy under which goods are purchased or sold will
affect logistics plan mainly because it defines responsibility for certain logistics
activities. Example: A supplier that switches from an f.o.b factory price to a delivered
price.
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Guidelines for Strategy Formulation
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TOTAL COST CONCEPT
• The total cost concept is the trade-off or all costs that are in cost conflict with
each other and that can affect the outcome or a particular logistics decision.
Rail Truck Air
Transportation cost
Inventory Cost
Total cost
Cost
Transportation and Inventory Cost
Customer Service Level
Transportationand Inventory cost
Lost Sales Cost
Total cost
Cost
Customer Service Level and Costs
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DIFFERENTIATED DISTRIBUTION OR MIXED STRATEGY
• Not all products should be provided the same level of customer service.• Different customer service requirements, different product characteristics and
different sales levels among multiple items that the typical firm distributes
suggests that multiple distribution strategies should be provided within the
product line.• A mixed distribution strategy will have lower costs than a pure or single
strategy.• Differentiation can come from:
Value of the items Velocity of the movement Sensitivity of the customer segments Difficulty in procurement etc
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POSTPONEMENT
• The final production, time of shipment and the location of final product
processing in the distribution of a product should be delayed until a customer
order is received.• The idea is to avoid shipping goods in anticipation of when demand will occur
and to avoid creating the form of the final product in anticipation of that form.• Postponement is favored when the following characteristics are present:
Technology and Process Characteristics: Feasible to decouple primary and postponed operations Limited complexity of customizing Modular product design
Product Characteristics: High commonality of modules
Market Characteristics Short product lifecycles High sales fluctuations
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STANDARDIZATION
• Variety increases the prices in the logistics channel and managing becomes
very difficult.
• Proliferation of product variety can increase inventories and decrease
shipment sizes.
• Adding a new item to the product line that is similar to an existing one can
increase the combined inventory levels of both items by 40% or more, even
total demand does not increase.
• Standardization/Commonization in production is created through
interchangeable parts.
• This effectively controls the variety of parts, supplies and materials that must
be handled in the supply channel.
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CONSOLIDATION
• Creating large shipments from small ones (consolidation) is a powerful
economic force in logistics planning.• It results from the substantial economies of scale that are present in transport
cost structure.• In general, the concept of consolidation will be most useful in strategy
formulation when quantities shipped in individual orders are small.
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Selecting the proper Channel Strategy
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RESPONSIVE VS EFFICIENCY
• Selecting the proper channel design greatly affects the efficiency and
effectiveness of the supply chain.• Two strategies are significant – Supply-to-stock and supply-to-order.
Supply
Chain Type
Channel Design Characteristics
Efficient Supply Chain (Supply-to-stock)
Economical Production runsFinished goods inventoriesEconomic buy quantitiesLarge Shipment sizesBatch order processing
Responsive supply chain (Supply-to-order)
Quick ChangeoversShort lead timesFlexible processingPremium transportationSingle order processing
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Measuring Strategy Performance
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• Once supply chain strategies are planned and implemented, managers want to
know if they are working.• Three measures are useful to monitor this:
Cash Flow Savings Return on Investment
• Cash Flow: Cash flow is the money that a strategy generates. If the strategy is to decrease the amount of inventory in a supply channel,
then the money released from the inventory carried as an asset is turned into
cash.• Savings:
Savings refer to the change in all relevant costs associated with a strategy The savings appear as a profit improvement on a business’s profit and loss
statement.
• Return on Investment: Return on investment is the ratio of the annual savings from the strategy to
the investment required by the strategy.