Elements of Logistics Management Notes

DEFINITION OF LOGISTICS
According to the Council of Logistics Management (CLM) Logistics is the
process of planning, implementing and controlling the efficient and effective
flow of goods, services and related information from point of origin to point
of consumption in order to meet customer requirements.
OPERATING OBJECTIVES OF LOGISTICS
03, 06)

(Nov.

1. Rapid Response: Rapid response is concerned with a firms ability to

satisfy customers requirement in a timely manner. Instead of stocking
the goods and supplying on demand, orders are executed on shipmentto-shipment basis. Here IT helps to postpone the logistical operations
to the latest possible time and then execute rapid delivery as when
needed by customer.
2. Minimum Variance: Variance is any unexpected event that disrupts
system. Logistical operations are disrupted by events like delays in
order receipt, disruption in manufacturing, goods damaged at
customers location and delivery to an incorrect location etc. Traditional
solution to deal with variance was to keep safety stock or use high cost
transportation. Such practices were expensive and risky and thus have
been replaced by information technology to achieve positive logistics
control.
3. Minimum Inventory: The objective of minimum inventory involves
asset commitment and inventory turnover. Asset commitment is the
financial value of inventory developed throughout the logical system
and inventory turnover is the rate of inventory usage over time. The
objective is to reduce the inventory without sacrificing customer
satisfaction.
4. Movement Consolidation: One of the most significant logistical costs
is transportation. Transportation cost depends on type of product, size
of shipment and distance. Movement consolidation means grouping
small shipments together in order to reduce transportation cost.
5. Quality Improvement: Logistics is a prime part of developing and
maintaining continuous TQM improvement. If the quality of product
fails, logistics will have to ship the product out of customers premises
and repeat the logistical function again. This adds to cost and
customer dissatisfaction.

6. Life-Cycle Support: Life cycle support is also called cradle-to-cradle

logistical support. It means going beyond reverse logistics and
recycling to include the possibility of after sale services, product recalls
and product disposal. This means that firms must consider how to
make a product and its package (cradle) and the how to remake and
reuse them (to cradle). E.g. Cold drink industries use their glass bottle
again and again whereas the cans are reused in making pf paper
dishes.
TYPES OF LOGISTICS
1. Reverse Logistics (May 06,07)
Reverse logistics is also known as Product Recall. It may be defined as a
process of moving goods from their place of use, back to their place of
manufacture for re-processing, refilling, repair, and recycling or waste
disposal.
Reasons for Reverse Logistics
1. Rigid quality standards- it is critical in case of contaminated products,
which can cause environmental hazard.
2. Rigid laws prohibiting unscientific disposal of items
3. Rigid laws making recycling mandatory
4. Transit damage e.g. leaking containers containing hazardous
material.
5. Product expiration.
6. Erroneous order processing by supplier
7. Exchange of new product for the old ones.
8. Return for repair or refill.
Drivers in Reverse Logistics (Nov. 03, May 04)
The success of reverse logistics depends upon the efficiency of following
subsystems:
1. Product Location: For product recall it is necessary to identify the
product location in the physical distribution system of the firm. It is

difficult in case of consumer goods but easier in case of industrial

goods.
2. Product Collection System: After the product location is identified,
product collection is to be done through companys field force or third
party.
3. Recycling / Disposal Centers: This may be companys plant, warehouse
or any other location. Called back products must be inspected before
recycling or disposal etc.
4. Documentation System: Proper documents should be maintained at
each level, this would help in tracing the product location.
2. Inbound Logistics (Nov. 06)

All the activities related to the material movement till the dispatch of
the products out of the factory gate are called as inbound logistics
activities.

Creation of value in the products depends upon availability of inputs on

time. Making available these inputs on time at minimum cost is the
essence of Inbound Logistics.

Activities of a procurement performance cycle come under the scope of

Inbound Logistics. They are transportation during procurement
operation, storage, handling and overall management of inventory of
inputs.

3. Outbound Logistics (Nov. 06)

All the activities in which the value added goods are to be made
available in the market for customers are called as outbound logistics
activities.

Success of the firm depends upon the supply of products to the

customer on time. Supplying the products of firm at marketplace at
minimum cost is the essence of Outbound Logistics.

Activities of distribution performance cycle come under the scope of

Outbound Logistics. They are order management, transportation,
warehousing, packaging, handling etc.

4. Third-Party Logistics (3PL)

In order to keep the costs of inbound and outbound logistics activities under
control, an outside agency appointed to perform these logistics functions is
called Third Party Logistics.
5. Forth-Party Logistics (4PL) (Nov. 06)
Forth Party Logistics is a complete outsourcing of manufacturing and logistics
functions including selection of Third Party service provider.
Need for 4PL:
1. Ever-increasing customer requirements.
2. Competitive and complex market scenario
3. Rising globalisation, liberalization and privatisation.
4. Rising accessibility of supply chain technology.
5. Inclination of companies to enter into higher margin business.
Services provided by 4PL
1. Procurement and storage of materials.
2. Manufacturing of products.
3. Selection of 3PL companies
4. Transportation and warehousing management
5. Collection of payment and cash flow management
6. Risk management and insurance.
7. Sharing of information, IT solution.

LOGISTICS
MANAGEMENT
IN
INDIA
TODAYS CONTEXT
(Nov. 01)
Logistics in Indian Business Environment (May 04)

Liberalization opens our door to competition.

Global business has long supply & distribution lines.

IN

Changing Indian customer, aware, demanding and less brand loyal

Competition ensures that product differentiation in terms of quality is

difficult.

Product life cycles are shrinking

Our markets are shifting from sellers to buyers

Many consumer products are moving into commodities market

In India, large distances separate production and consumption centers.

Essential commodities have to travel from Food Corporation
Warehouses to consumers through PDS.

Still Logistics performance in India has not been impressive Fruits and
vegetables are grown at various places but do not enjoy access to
market.

LOGISTICS IN THE GLOBALISATION

Logistics functions are same domestically and globally but differ in four Ds
i.e. distance, documents, diversity in culture and demand of customer. In the
global logistics distances are longer, documentation is more extensive,
customer demand varies to satisfy cultural differences within both, countries
and regions. Developing strategies to respond to the 4 D environment is the
global challenge for logistics management.
There are some factors that facilitate globalisation and necessitate global
logistics and also some barriers that continue to impede global logistics.
Logistics management must balance the cost of overcoming these barriers
with the potential benefits of going global.

Forces Driving Globalisation of Logistics

1. Economic Growth: After WWII there was a growth in industrial sector
of developed countries and their manufacturing and logistics
productivity increased. This forces the firm to expand their marketing
into developing nations. Such expansion requires the integration of
global manufacturing with marketing through logistics.
2. Supply Chain Perspective: Firms traditionally sought logistical
control as many essential activities as possible internally, which

resulted in private warehouses and transportation. Such privatisation

increased the capital and assets to support logistics operations
resulting in decline of Return on Investment and hence the concept of
outsourcing and supply chain emerged during 1980s.
3. Regionalisation: Traditionally trade and transportation across the
political borders of countries requires political formalities, which adds
to the logistics cost without any value addition to the consumer.
Regionalisation in the form of trade associations such as EU, NAFTA
and SAARC etc. removed such barriers and facilitates global logistics.
4. Technology: Mass communication and information technology
exposed international consumers to foreign products, thus stimulating
convergence of global needs and preferences. This promotes global
marketing and global logistics.
5. Transportation Deregulation: Initially there have been restrictions
for international transportation ownership and operating rights e.g.
foreign carriers could not operate domestically, steamship lines could
not own land based transport like motor or rail carriers etc. but such
restrictions have been removed in most of the countries.

Barriers to Global Logistics

1. Marketing Barriers: This includes (i) entry restrictions by placing
legal or physical barriers on importing (ii) poor information regarding
market size, demographics and competition (iii) pricing fluctuation and
tariff barriers.
2. Competition: Different rules in different countries concerning
competitive governance also serve as global logistics barriers.
3. Financial Barriers: This includes (i) difficulties in forecasting in the
global environment (ii) institutional infrastructure barriers result from
differences in services offered by banks, insurance firms, legal
counselors etc.
4. Distribution Channels: Lack of infrastructural standardisation such
as differences in transportation and material handling equipment,
warehouse and port facilities, communication system etc. also serves
as global logistics barriers.
Importance of Logistics Decisions in improving the profitability of
organisation (May 05)
CHAPTER 5 OVERVIEW OF LOGISTICS FUNCTION

MRP 1 (Nov. 01, May 05)

Material Requirement Planning is an integrated approach to the inventory
management, taking into the account purchase and production programme.
This is software that converts the Master Schedule to the requirement of raw
material, components, subassemblies, etc.
Structure of MRP1
- Three types of information are fed to the computer.
1. Master Schedule This is made up from sales forecast by marketing
department and the actual orders already received by the company. It
indicates which product is required to be delivered to the customer and
when.
2. Bill of Material This is prepared from product design documents
3. Inventory details of each item
- The MRP software processes the data and releases the output for ready use
of the management in the following way:
1. For purchase components it releases Purchase Request, Purchase
Order etc in the form of soft copy
2. For in-house manufactured components it releases Production Order
3. It prepares different types of reports for the use of management as
required
Benefits of MRP1
1. All the documents like purchase order, production order get ready as
per required time.
2. All information is ready on the screen at any time, which is duly
updated.
3. Making changes manually in Master Schedule is difficult task; this is
done by MRP easily and accurately.
4. It prepares the reports related to inventory status, production outputs,
latest sales figures.

5. MRP calculates and maintains an optimum-manufacturing plan, which

will reduce cash flow and increase profitability.
6. Reduced inventory levels
7. Reduced shortage of components
8. Reduced overtime on shop floor and offices
9. Improved shipping schedule
10.

Improved production schedule

11.

Improved calculation of material requirements

12.

Better manpower planning on shop floor

13.

Reduction in lead time

14.

Less scrap and rework

Closed-Loop MRP: When MRP extended to include feedback from vendors

and production operations it is called Closed-loop MRP
MRP II (Manufacturing Resource Planning): When closed-loop MRP
extended to include financial accounting, personnel, engineering and
marketing information, it is called MRP II
DRP (Nov. 01 03, May 05)
Distribution Resource Planning is concerned with the distribution of material,
warehouses, and transport arrangements. It is logically evolved from MRP
and hence it is more recent concept. DRP needs demand forecasts for each
warehouse and their current inventory level. MRP is concerned with inbound
logistics whereas DRP is concerned with outbound logistics activities.
Benefits of DRP

1. Reduce distribution center freight costs resulting from coordinated

shipments.
2. Reduce inventory level.
3. Coordinate inventory with organisational functions.

4. Decrease warehouse
reduction.

space

requirements

because

of

inventory

5. Improve service level by on time deliveries.

MRP
DRP
Guided by production schedules
Guided by customer demand
Under control of the firm
Not under control of the firm
Operates in dependant demand Operates in independent demand
situation
situation
Coordinates
scheduling
and Coordinates demand between outlets
integration of materials into finished and supply sources
goods
Controls
inventory
until Controls
inventory
after
manufacturing
and
assembly
is manufacturing and assembly of
complete.
finished goods

CHAPTER 6
PLANNING

LOGISTICS

STRATEGY

AND

Why has logistics recently been receiving more attention as a strategic

function of the organisation? (May 2006) [61 of reference book]
CHAPTER 7 CUSTOMER SERVICE (CS)
Definition: Customer Service is defined as a process of providing significant
value added benefits to the supply chain in a cost-effective way.
ELEMENTS OF CUSTOMER SERVICE (Nov. 01, 03, May 05, 06)
A]
Availability
*(Nov. 06)
Availability is the capacity to have inventory when it is desired by a
customer. The most common practice to achieve availability is to stock
inventory in anticipation of customer order. Availability is based on following
three performance measures:
1. 1. Stockout Frequency: Stockout frequency is a measure of how
many times demands for a product exceed its availability. The
aggregation of stock outs of all products indicates how well a firm is
able to provide basic service commitments.

2. 2. *Fill Rate: Fill rate measures the magnitude of stockouts over time.
E.g. if a customer orders 50 units and only 47 units are available, the
order fill rate is 94 % (47/50). Just because a product is out of stock
does not mean that a customer requirement is going unsatisfied.
Before a stockout affects service performance it is necessary to
forecast customer requirements then to identify the product
unavailability and to determine how many units customer wanted.
Stockout frequency and fill rate are inversely related through order
quantity. i.e. if a firm places larger order the stockout frequency will be
less and the expected fill rate will be higher.
3. 3. Orders Shipped Complete: It is a measure of time when a firm
received the entire inventory ordered by a customer. It indicates the
potential times that customers will receive perfect orders.
B] Operational Performance
1. Operational Speed: Performance speed is the interval between
placement of order and shipment arrival. Depending upon the logistical
system design, the speed can be as short as a few hours or as long as
several weeks. In critical situation service can be performed in a few
hours by special delivery or on overnight basis. But every customer
does not need maximum speed if it results in increase in logistics cost.
2. Operational Consistency: Consistency refers to a firms ability to
perform at the expected delivery time. When a form fails to be
consistent it forces customers to carry extra safety stock to protect
against possible late delivery.
3. Operational Flexibility: Flexibility refers to a firms ability to handle
extraordinary customer service requests. The events that requires
flexibility are:
-

Modifications in basic service arrangements

Product modification

Product introduction

Product phaseout

Product recall

Disruption in supply

C] Reliability

Reliability refers to logistics quality i.e. ability of firm to comply with levels of
planned inventory availability and operational performance. Reliability also
includes firms capability to provide accurate customer information regarding
logistical operations and order status.
OBJECTIVES / IMPORTANCE OF CUSTOMER SERVICE (May 06)

1.
Maintaining customer loyalty and level
of satisfaction.
1. Receiving repeat orders from customers.
2. To win new customers and keep existing customers
3. An edge over competition
CUSTOMER RETENTION
Once a customer is own by a company, it must be retained such that
customer keep coming again and again. This depends on the Customer
Service. For that the company has to motivate employees and to reinforce
the service concepts with top management.
Advantage:
1. Retaining more customers result in higher profit.
2. The cost of retaining customers is much less than to acquire them.
3. It helps in strengthening and expanding customer base.
4. If a regular customer were lost, then it would cost very heavily to
generate new customer.
Methods:
1. Offer only quality services and products
2. Demonstrate the use of product or services
3. Provide responsive customer service
4. Share testimonials of customers with other potential customers
5. Educate the customer about the market and value of the business

6. Invite customers opinion and feedback on products or services

CHAPTER 8 TRANSPORTATION AND INFRASTRUCTURE

INTRODUCTION
Transportation is an essential and major sub function of logistics that creates
time and place utility in goods. Transportation management covers the area
of Shipment Scheduling / Routing, Frei1ht Cost, Carrier Selection, Shipment
Tracking and Parcel Management. It helps us to make the best use of
available resources and keeps informed on all transportation process.
COST STRUCTURE *(Nov. 01, 02)
Basically there are two cost contents involved in transportation process:
(Diagram 79)
1. Fixed Cost
Fixed cost is the expenses related to the procedural part like cost of
documents, salaries of personnel, rent of the office etc. As per the product
needs and the environments, loading and unloading charges are included in
fixed cost.
1. Variable Cost
Among all logistic factors variable cost consumes main expenses. It
concentrates on the product related and market related aspects:
i) * Product related aspects are the physical attributes of products, like:
- Density e.g. density of sand is more than Cotton
- Size / Shape Transportation cost per unit weight decreases with the size of
the consignment.
- Space filling capacity e.g. space-filling capacity of iron flat is more than
that of chairs or tables.
- Difficulties in handling e.g. product like electronic items like TV are
difficult to handle since they are easily get damaged.
ii) * Market related aspects are:
- Distance to be traveled to customer The cost decreases with increase in
the distance.

- Government regulations, Octroy, Road Taxes, Tolls, etc.

- Intra-mode / Inter-mode
- Freight Traffic
- Domestic / International Transport
- Season Effect
FUNCTIONS OF TRANSPORTATION (Nov. 06)
1. Product Movement: Transportation facilitates the movement of raw
material, semi-finished items, WIP, finished goods, packaging material,
rejected material.
2. Product Storage: Transportation provides temporary storage in
stationary vehicles or Vehicles kept moving on a circuitous route.
Though the product storage is expensive in a transport vehicle, but this
is adopted in case of:
1. when unloading and loading is more expensive than storage.
2. when storage space is limited.
SELECTION OF CARRIERS / MODAL CHARACTERISTICS (Nov. 04, May
07)

In selection of a transportation mode, the

transportation
managers
consider
the
following criteria.
1. Cost: It includes freight charges, warehousing, buffer stick, broker
fees, custom charges octroy etc. Generally cost per mile is considered
which is should be economical.
2. Transit Time: It is the time from the shipment of goods to the receipt
of goods at the destination. It should be as less as possible.
3. Speed: Methods of working for the delivery of goods to the customers
place should ensure the on time delivery.

4. Safety: Safety of goods at every level from start to the end of delivery
should be ensured. Proper packaging should be done to avoid any
damage to quality or quantity of goods.
5. Claims Record: Claims against damages, pilferage or theft of goods
should be available. Though the supplier gets money back but the
customer remains unsatisfied in such cases.
6. Responsiveness: Transporter has to respond the changing needs of
the supplier and he should be able to handle various products.
7. Capability: Transporter should be in a position to deliver the goods at
any remote areas. He should have large number of geographic service
points.
8. Accessibility: Transporter should be easily accessible by providing
door-to-door pick up and delivery.
9. Reliability: It is the meeting of schedule on time as per requirement
of the customer. Faster the mode reliability increases, but it has to be
weighed against cost.
MODES OF TRANSPORTATION (May 06)
1. Airlines
Air transport is mainly used for international transport and in emergency
rather than in normal times.
Advantages:
1. It is the fastest mode of transportation.
2. Fixed costs are lower than rail or road or pipeline.
3. It brings distant markets closer.
4. It overcomes the hassle and cost of setting up depots and service
centers overseas.
5. Full potential of peak seasonal demand can be exploited.
6. Makes test marketing easy Products can be shipped directly from the
factory
Disadvantages:

1. Most expensive Operating costs are highest.

2. Generally used to transport small volume items.
3. Certain categories of items are not allowed
4. Require secondary mode of transport to deliver to ultimate customer

2. Water Transport
This mode of transportation is the link between countries separated by
water. Water transport is classified into deep-water transportation and inland
water transportation on lakes, rivers or canals.
Advantages:
1. Water transport has low capital costs and low operating costs.
2. Heavy and bulk goods of large quantities are transported by this mode.
3. Private or for hire shippers available in water transport.
Disadvantages:
1. Water transport is limited due to availability of harbor.
2. Water transport is the slowest mode of transportation.
3. Require secondary mode of transport to deliver to ultimate customer.
4. Deep-water ships designed for ocean and lakes are limited to shallowwater ports.
5. Shallow water vessels like diesel-towed barges are flexible but are
limited by their range of operations and speed.
3. Railways
Advantages:
1. Railways is comparatively fastest mode of transport
2. Railways is an inexpensive mode of transportation
3. Railways are suitable for large quantities.

4. Railways provide door deliveries for industries.

Disadvantages:
1. Unreliable mode especially for high value goods and directly usable
consumer goods.
2. Railways lack flexibility of high-speed delivery.
3. Railways require modal combination alongwith roadways.
4. Rail network needs a high capital investment due to right of way,
switching yards, terminals.
4. Roadways
Advantages:
1. Speedy Deliver the goods directly to the consignee very fast.
2. Highly flexible handling different types of goods
3. Ultimate mode consignment reaches the doorsteps of the customer.
4. Low capital cost as compared to railways.
5. Private or for hire shippers available.
Disadvantages:
1. Higher operating costs due to fuel requirement and higher labor
requirement.
2. Occasional fuel shortages leads to delay in delivery.
3. Strikes of carriers due to disputes with government making the
transportation idle.
4. Limited availability of trucks poses a constraint.
5. Octroi posts are notorious for delays and harassment of carriers.
6. Restrictive permits for licenses imposed by the government all over
the country.

Pipeline
(Nov. 01)
Pipeline mode of transportation facilitates the movement of liquids like oils;
crude petroleum products and water etc. In India more than 5,000 km of
pipeline exists for crude and petroleum products. Slurries, gases, vapors and
solids in powder form are also transported in pipelines.
Advantages:
1. Pipelines are reliable mode pilferage and loss of product is not
possible.
2. Pipelines have low energy consumption.
3. Pipelines being under ground, space occupation is minimal.
4. Pipelines operate all the time except when it is shut down for
maintenance.
5. No need to bring back empty container or wagon.
Disadvantages
1. Highest fixed costs due to lying of pipeline but lowest operating
costs.
1. Pipelines are fixed so the accessibility of product is limited on the
rout.
2. Only liquid commodity can be transported.

INTERMODAL
TRANSPORTATION
(Nov. 03, May 05, 06)
Intermodal transportation is the use of more than one mode of transport to
move a shipment to its destination. Intermodal movements combine the cost
and service advantages of two or more modes in a single product movement.
Benefits of long haul, short time & flexibility are optimized for achieving
overall cost reduction

Depending upon the type and amount of goods, time of delivery, and prices
following three Intermodal combinations are available:
1. Piggyback: It is coordination between railways and road transport. It
is also called as TOFC (Trailer on Flatcar) or COFC (Container on
Flatcar). In piggyback the motor carrier trailer placed on rail flatcar,
which moves the trailer by rail for a long distance. Then the motor
carrier moves the trailer for short distance for deliveries. Here the
placement of trailer on a railcar can lead to damages.
2. Fishyback: It is coordination between waterways and road transport.
In fishyback the truck or trailer rides on the ship for small portion of its
journey. This service is provided in coastal waters between Atlantic and
Gulf ports.
3. Birdyback: It is coordination between airways and road transport. In
birdyback the major portion of journey is covered by airways then the
cargo is transported by trucks or trailers.
4. Others: Water and railways, air and railways, air and waterways,
pipeline and water, pipeline and roadways etc.
INALND CONTAINER DEPOTS (ICDs)
ICDs are dry ports at a distance far away from the shoreline and handle all
the import export formalities. This a large warehouse where exporter books
his cargo and completes all export formalities. Then ICD moves the
containers to natural seaport. The customs department, shipping companies,
handling agencies, banks, customs house agents and clearing and
forwarding agents are all based at the ICDs.
Advantages / Uses
1. Connect major ports to hinterland i.e. land deprived of natural deepwater ports because of geography.
2. Handle containers from road and rail to a container yard.
3. Performing activities like weighing, inspection of scales, damages and
safety stickers.
4. Facilitate customs clearance and export import formalities.
5. Increase the export potential of industries in the hinterland and also
simplifies import of goods by hinterland.

6. Decongest major ports.

JNPT is directly connected to the following ICDs:
Ludhiana

Kerala

Nagpur

Wadibunder Chinchwad
Chennai Jaipur

Jodhpur

Baroda
Mulund

Bangalore

Mirage
Delhi

Kandla
Sabarmati

Hyderabad

Pune

Visakhapatnam

Muradabad

Kolkata Pitampur

TRANSPORTATION NETWORK OPTIONS

1. 1. Direct Shipping From shipper directly to retailers.
2. 2. Direct Shipping using Milk Runs Single supplier to a number of
retailers, deliver like a milkman.
3. 3. All Shipping via CDC Suppliers send the supplies to Central
Distribution centers and distribution center caters the needs of
retailers.
4. 4. All Shipping via CDC Using Milk Runs Suppliers send the
supplies to CDC and from CDC to large number of suppliers.
5. 5. Tailored Network - Tailor made network as per the company
needs. One model for some logistical mission and another model for
some other mission.

Milk Run
Milk Run is a transportation network, in which Suppliers send the supplies to
CDC and from CDC to large number of suppliers. Milk Run reduces out bound
transportation costs by consolidating small shipments.
CROSS DOCKING (Nov. 02)

Cross Docking is a new logistics technique used in the retail and trucking
industries which means receiving goods at one door and shipping to the
other door almost immediately without putting them into storage.
Advantages / Objectives
1. It helps to reduce operating costs by eliminating handling and storage
of products.
2. It helps to reduce inventory level by direct shipment to the customers.
3. It helps to increase sales by providing on time delivery to the
customers.
4. It encourages the electronic communication between the supplier and
retailers.
TERMINAL DELAYS
Delays which take place at terminals due to documentation problems,
congestion, poor unloading facilities etc. Influence vehicle turnaround time.
Adds cost to transportation, as vehicle is unutilized. E.g. at sea port or airport
cargos can get stuck.
Hidden Cost of Transportation (May 05)

CHAPTER
9
WAREHOUSES

TRANSPORTATION

TO

Unbalance Transportation Problem (May 05)

A transportation problem is balanced if the rim requirements are same, i.e.
the sum total of the plant capacities is equal to the sum total of the market
requirements. But in most of the practical life problem both are not same, i.e.
it is unbalanced transportation problem. In this situation, the unbalanced
problem is to be balanced for solution purpose by introducing a dummy plant
or a dummy market as the case may be.
CHAPTER 10 LOGISTIC INFORMATION SYSTEM (LIS)
Definition of LIS
LIS is an interacting structure of people, equipment and procedures that
together make relevant information available to the logistics manager. LIS is
a part of Management Information System.

Objectives of LIS
1. Obtaining correct and prompt information.
2. Maintaining and updating the information collected.
3. Communicating the information to all the concerned as and when
required.
4. Taking proper decisions at all levels in the organisation.
5. Supporting planning function.
Importance of LIS
1. LIS is a key element to develop logistical competence.
2. LIS integrates various activities of logistics.
3. LIS is one of the three pipelines managed by logistical management.
4. LIS is important to customer service.
5. LIS underwent revolutionary change due to changes in technology.
Primary Activities of LIS
1. Receiving, analysing, processing and storing related information within
organisation.
2. Communication of data to the decision makers.
3. Communication of information to the supplier, service providers and
customers.
4. Receipt of feedback from external sources (supplier, service providers
and customers)
Information Functionality
The organisation has different functional levels. Each level has different
needs of information.

1. Operating level It is the lowest level. Generally data gets generated

here which is transferred to further level to take decision in the form of
information.
2. Control level Here the efforts are to be taken to improve efficiency of
the operating level by analysing the information.
3. Decision level Here the manager has to evaluate the information to
see the operations and customer needs are equalised
4. Policy level Manager has to decide the policy on the basis of factors
warehouse, transportation system etc.
Electronic Data Interchange (EDI) (Nov. 06)
EDI is the electronic, computer-to-computer transfer of standard business
documents between organisations. EDI is extensively used in ILIS (Integrated
Logistics Information System) to enhance the speed, timeliness and accuracy
of the information. EDI has replaced the traditional transmission of
documents such as mail, fax etc.
Benefits of EDI

1. Greater accuracy due to reduction in manual processing.

2. Faster speed in order processing.
3. Reduced clerical efforts in data entry, filing, mailing and related tasks.
4. Reduced inventory due to reduced order cycle time.
5. Increased productivity though faster information transmission.
6. Improved channel relationships by reducing number of individuals
involved in data entry.
7. Decreased operating cost by reduction of labour and material cost
associated with paper work and telephone fax expenses.
8. Increased ability to compete internationally
Strategic Role of IT in Logistics Management (Nov. 04, May 07)

CHAPTER 11 LOGISTIC PLANNING PROCESS

Role of Planning in Logistics Management (Nov. 02)

Role of planning is central to logistics management

Mission of logistics management is to plan and coordinate all those

activities necessary to achieve desired levels of service and quality at
lowest possible cost.

Logistics is fundamentally a planning concept that seeks to create a

framework through which needs of the marketplace can be translated
into a manufacturing strategy and plan.

To match the changing environment in the logistics due to the changes

in the markets, competitors, suppliers and technology, there is a need
for a systematic planning.

CHAPTER
12
DECISIONS

FACILITIES

Factors for Selection of Location:

1. Availability of Land
2. Manufacturing Facility
3. Taxation and Regional Concession
4. Access to Transport
5. Power, Fuel, Water
6. Climate
7. Availability of Workforce
8. Union Activities
9. Political Pressure
10.

Bank and Finance Facilities

11.

Raw Material

12.

Safety and Social Security

LOCATION

13.

Supporting Industries

14.

Market Site

15.

People Culture and Site

CHAPTER 13 INVENTORY CONCEPT

DEFINITION OF INVENTORY
Inventory may be defined as usable but idle resource.
management is the job basically done for maintaining the stock.

Inventory

NEEDS OF INVENTORY
1. Smoothing out irregularities in supply: Inventory of raw materials
provide a buffer to overcome the problems of uncertainties in supplies
such as delayed deliveries and supply of short quantities by vendors.
2. Dealing with uncertainty of demand: The customer demand may
increase suddenly, in such case an inventory of finished goods will act
as a buffer against the uncertainties in demand.
3. Buying or producing in batches: When the demand for a good does
not require its continued production, it is produced in batches. Thus
during the period when the good is not being produced, demands are
met from the inventory which is accumulated from the batch
production.
4. To meet seasonal demand: When the demand is seasonal it may
become economical to have inventory during period of low demand to
ease the strain of peak period demand.
5. To take quantity discount: Inventories may also be built up take
advantage of price discounts, as hedge against anticipative price rise
in the future.
6. To maintain continuity in production process: It is necessary to
maintain in-process inventories or pipeline inventories at different
stages in a manufacturing process to continue production process
smoothly without any work stoppage and delay.

7. Stock built up for Scale of economy: Inventories may also be

maintained to get the economy of scale so that total cost due to
ordering, carrying and backlogging are minimized.
TYPES OF INVENTORY
1. Raw Material Inventory
Raw Material ITR =

Annual use of RM

Average RM
2. Work-in-Process Inventory
Work in Process ITR = Cost of Manufacture
Average WIP
3. Finished Goods Inventory
Finished Goods ITR =

Cost of Product Sold Yearly

Average Inventory of Product at Cost

4. Spares and Other Indirect Materials
PIPELINE INVENTORY (Nov. 01)
In any manufacturing organization the material undergoes different stages of
processing from the supplier place to the buyers place. These stages are
called pipeline. There is no problem when material moves from one
department to another, but material waiting anywhere is not good. Indian
industries have longer pipeline, as the organization is more sophisticated.
Longer the pipeline, longer the time material waits. The value is added on
the material only at stages where it is being processed, but no value is
added where it waits. So it is referred as waste.
Storage of material at any stage, inspection of any kind, packing, rejection,
rework and lead-time etc. are the operations to be eliminated. That is exactly
done in the process of JIT. These activities add to the cost of product and not
to the value of the product. The customer is not willing to pay for these.
In the pipeline there are two types of periods involved:
1. Period in which the material is under the process on machine. Value
addition activity.

2. Total period when material is kept in any form / place in the

organization.
The ratio of B to A should be 1, which is ideal, but it may be difficult.
LEAD TIME (Nov. 04, May 06)
Lead Time is an interval between placement of order and delivery of
material. It is a measure of logistical performance. Logistic manager should
ensure minimum lead-time so that the material arrived as soon as possible.
Local supplier needs the shortest lead time while the out of town supplier
requires much longer lead time. Lead-time also varies from supplier to
supplier and even same supplier will have different lead times for a given
item at different times. Variations in lead are one of the most difficult
logistical problems.
RE-RODER LEVEL (ROL) (Nov. 06)
ROL is that inventory level at which an order should be placed to replenish
the inventory.
ROL = Lead Time x Average Usage
If safety stock is present then reorder level becomes:
ROL = Safety stock + lead time consumption
SAFETY STOCK (May 07)
Safety Stock is a component of average inventory that takes care of shortterm fluctuations in lead-time and consumption.
Factors Affecting Level of Safety Stock:
1. Value of Item: Safety stock for high value items need be low.
2. Criticality of Item: Safety stock for critical items that affect the
business need be high.
3. Lead Time: Longer the lead-time more is the chances of fluctuation and
hence more is the requirement of safety stock.
4. Number of Suppliers: If more number of suppliers is available for an
item, there is no need to keep high level of safety stock, as it can be
procured from any alternate source.

5. Availability of substitutes: Lesser safety stock can be kept for items

where substitutes are easily available.
6. Risk of Deterioration: It is better to have low safety stock where the
cost of deterioration is more then the cost of stock out.
Role of Finished Goods Inventories in Physical Distribution System
(May 07)
Inventory Functionality and Principles (May 04, Nov. 04)

CHAPTER 14 ANALYSIS OF INVENTORY

SELECTIVE INVENTORY CONTROL
Each item of inventory has its own criteria of importance, thus depending
upon the type and importance of the inventory there will be variations in the
controls employed. This is the selective control of inventories.
Methods of Selective Inventory Control (Nov. 04, May 06)
1. ABC Analysis
2. VED Analysis
3. FSN Analysis
4. P&Q System
ABC ANALYSIS (Nov. 02)
Principle: The basic principle of ABC Analysis is 10 percent of items hold 70
percent of value.
Under ABC Analysis:

A category items account for 10% of item & 70% of the value.

B category items account for 20% of item & 20% of the value.

C category items account for 70% of item & 10% of the value.

Mechanism: The steps involved in ABC Analysis are as follows

1. Calculate the Annual Consumption Value (ACV) for each item by

multiplying the number of units with the unit price of the item.
2. Arrange all the items in the order of descending sequence of ACV.
3. Calculate the cumulative ACV for each item.
4. Calculate the cumulative percentage ACV for each item.
5. Locate the items in the list for which cumulative ACV is 70%.
Categories all the previously listed items upto this item as A category
item.
6. Locate the items in the list for which cumulative ACV is 90%.
Categories the items listed after A category item upto this item as B
category item.
7. Categories the remaining items as C category item.
Advantages: (Application in Inventory Management) (Nov. 03)
1. It helps to have a selective inventory control.
2. Safety stocks are kept low for the high value items to reduce total
inventory costs.
3. Safety stock is kept much higher for low value items to prevent stockouts.
Disadvantages:
1. It should be reviewed periodically so that changes in prices and
consumption are taken into account.
2. Importance is given only to the annual consumption value of items
and not its criticality for the production.
3. It does not apply to the dependent demand inventory, which is
controlled by Material Requirement Planning (MRP).

VED ANALYSIS
Principle: VED Analysis classify items into three categories depending upon
the consequences of material stock out when demanded.

Under VED Analysis:

Vital items are the most critical which can cause stoppage of the
production, if not available, hence should be available in stock at large.

Essential items are quite critical whose non-availability may not

adversely affect production; hence a low stock of essential items
should be available.

Desirable items do not have very serious consequences if not available

but can be stocked.

FSN ANALYSIS
Principle: FSN Analysis classify items into three categories depending upon
the past consumption pattern. Inventory policies and models for these three
categories have to be different.
Under FSN Analysis:

Fast moving items are those which drawn frequently from stores.

Slow moving items are those which drawn only once or twice a year
from stores.

Non-moving items are those which not at all drawn for the past two
years from stores.

INVENTORY CONTROL SYTEM (May 06)

1. Fixed Order Quantity System (Q-System)
Here the quantity to be ordered is worked out as the EOQ and the minimum
stock level is also worked out. When the stock in hand reaches this level, an
order is placed for q quantity equal to the EOQ.
Features of Q-System

1. Reorder quantity is always the same, which is equal to the EOQ

2. Time interval between the orders varies.
3. Reordering is done when the stock in hand is equal to safety stock plus
the lead-time consumption.

4. Minimum inventory will be equal to the safety stock.

5. Maximum inventory will be equal to the safety stock plus order
quantity.
6. This system is used for low value items where orders are placed
infrequently.
2. Fixed Order Period (P-System)
Here the stock in hand is reviewed at periodic intervals and an order is
placed which varies with level of stock in hand. It is also known as Periodic
Review System and Order Cycling System.
Features of P-System

1. Review period is decided to minimize the sum of annual procurement

cost and annual inventory carrying cost.
2. Quantity ordered is decided depending upon the stock in hand, so that
it will take care of the requirement till the next review period.
3. The interval between two orders is fixed.
4. This system is used for high value items needing a strict control.
CHAPTER 15 ECONOMIC ORDER QUANTITY

ECONOMIC ORDER QUANITY (Nov. 02, 04)

EOQ is the technique, which solves the problem of the inventory
management. It is the order size at which the total cost; comprising ordering
cost plus carrying cost, is the least.
The cost of carrying inventories is called Inventory Carrying Cost and the
cost of purchasing and processing the order is called Ordering Cost. One of
the most important goals in materials department is to strike the most
economic balance between ICC and OC in determining order quantity.
The graph shows the relation of the ICC and OC. As the order quantity
increases the ordering cost reduces. While the ICC goes on increasing with
increase in the order quantity. But at a certain stage it is equal to the OC.
This is shown by the crossing two lines, this is known as Economic Order
Quantity (EOQ).
Formula

Q = _2BA_
PC
Q = Order quantity
A = Annual consumption
B = Order Cost
P = Price per unit
C = Carrying cost percent
T = Total ordering cost
Assumptions of EOQ (Nov. 02)
Following assumptions are implied in the calculation of EOQ
1. Demand of the material occurs uniformly over the period at a known
rate.
2. Delivery of the materials is instantaneous.
3. Price per unit is fixed and is independent of order size.
4. Ordering cost is fixed and does not vary with the order size.
5. Carrying cost varies directly and linearly with the order size and
expressed as percentage of average inventory cost.
6. Lead-time i.e. interval between placing order and receiving inventory is
zero.
7. Materials can be procured in any desired quantity; there is no any
restriction of quantity.
8. Materials have fairly long shelf life; there is no fear of deterioration or
spoilage.
Limitations
(Nov. 02)

of

EOQ

1. The assumptions of EOQ may not true in real life, thus limiting the use
of EOQ model.

2. Price of material may not remain same throughout the year.

3. There can be delays in real time situation in placing orders.
4. Formula presumes that the usage of materials is both predictable and
evenly distributed. Which may not be possible.
5. Ordering cost varies from commodity to commodity and the carrying
cost can vary with the companys opportunity cost of capital.
6. Often inventory carrying cost and ordering cost cannot be identified
accurately and sometimes cannot be even identified.
7. Calculation of EOQ is time consuming and expensive. In many cases,
the cost of calculating EOQ exceeds the savings made by buying that
quantity
EOQ V/S JIT (May 05)

CHAPTER
METHODS

16

INVENTORY

CONTROL

JUST IN TIME
JIT is an organized approach to introduce in manufacturing cycle timelines,
quality, productivity, flexibility, and work simplification and waste reduction.
This is a technique from TQM activity. Basically this is waste control method;
it is not the inventory control technique.
TECHNIQUES USED IN JIT
1. Kanban An Integrated JIT System
Kanban stands for Kan-card, Ban-signal. Kanban concept suggest that a
supplier or the warehouse should only deliver components to the production
line as and when needed, so that there is no storage in the production area.
In this system, workstations located along production lines only produce or
deliver desired components when they receive a card and empty container.
Advantages of Kanban Process:
1. It is a simple and understandable process.
2. Provides quick and precise information.

3. Provides quick response to changes.

4. Low costs associated with the transfer of information.
5. Avoids over production.
6. Minimize waste.
7. Delegates responsibility to line workers.
2. Group Technology (GT)
GT is a modular manufacturing system, which involves organizing
machineries so that related products can be manufactured in a continuous
flow. Here, products flow smoothly from start to finish, parts do not wait for
move. This can be contrasted to a typical production system, where
machines are grouped by function and products move from one function to
another and back again. This results in long waiting times between
procedures.
Benefits of GT

1. Reduction in work in process

2. Reduction in over all stocks of material
3. Reduction in overdue orders
4. Increase in out put per employee
5. Simplification of material flow system.
6. Improvement of production and planning control
7. Improvement in material handling
3. SMED (Single Digit Minute Exchange Die)
SMED is a technique for performing setup operations in number of minutes
expressed in a single digit. Mr. Shingo revolutionized the SMED method since
1950 in Japan. E.g. Bottling industries sometimes spend more than 20% of
their planned production time on changeovers. These setup and changeover
times can be reduced significantly when the changeover SMED system is
applied.
4. JIDOKA (Automation)

JIDOKA is the concept of adding an element of human judgment to

automated equipment. So that the equipment can identify unacceptable
items and the automated process becomes more reliable. JIDOKA means not
allowing problems to pass from one workstation to the next. Such that the
production of a defective part is detected immediately and machine
responds by stopping and requesting help. E.g. In Toyota power loom the
shuttlecocks would stick and create defects in the cloth being produced. The
Toyota loom incorporated a simple stopper that was activated by a sticking
shuttlecock. The operator could stop machine when the shuttle would stick.
Objective of JIDOKA

1. Ensuring 100% quality.

2. Preventing equipment breakdowns.
3. Using manpower efficiently.
5. Total Productive Maintenance (TPM)
In any factory it is necessary to run all the equipments on continuous basis
to get maximum out put. It is found that generally that does not happen.
There is loss if any tool or machine is not in use. Due to any reason like
material not available or the machine is not working. In order to avoid such
losses TPM is implemented. For this purpose following steps should be taken.
1. All the reason for the loss of equipment should be avoided.
2. Preventive Maintenance program is to be made.
3. Operator should be given training to maintain his equipment when
required.
4. Autonomous maintenance by the operator is to be done.
6. Pokayoke (Mistake Proofing)
Pokayoke invented by Shigeo Shingo in the 1960s. The term Pokayoke
comes from the Japanese words poka(mistake) and yoke (prevent).
Pokayoke suggest that people are human and cannot be expected to do
everything like a machine, exactly the same each time. The basic principles
of Pokayoke advocate developing tools, techniques and processes such that
it is impossible or very difficult for people to make mistakes. E.g. a plate that
must be screwed down in one orientation only could have the screw holes in
non-symmetrical positions so that it can only be screwed in the right
orientation.

Vendor Managed Inventory (May 07)

Management of inventory is passed on vendor. Purchase order is redundant.
Strong mutual stake in each others business is a basic requirement. It is
beneficial to both customer and supplier.
Methods for Improving Inventory Management Performance (Nov. 06)
CHAPTER 17 PURCHANING AND PRODUCT SCHEDULING DECISIONS

PRINCIPLES OF PURCHASE (7-R RULE)

The supply chain management is controlled by the purchase function. The
purchase function is assuming the following seven principles known as 7Rs.
The Rule of seven Rs means, buying the material
1. at right price
2. of right quality
3. in right quantity
4. at the right time
5. from the right source
6. at right place
7. with right mode of transport
- This is basic factor in logistics management.
- It is the link between the production unit and the customer directly or
through the warehouses.
- Logistic cost based mainly on customer service. Better service and supplies
provides economic advantage to the customer.
- The suppliers logistic manager has to balance the high service level that
the customer desires and the belief that the supplier may gain from possible
increased sales against the cost of providing that services.
ORDER PROCESSING CYCLE (May 07)

1. Getting Requisition from User Departments: The department in

need of a material presents a completed requisition form. Such
requisition form includes details like department name, requisition
reference number, description of the material, quantity required,
suggested supplier, purpose and the approximate date when the
material will be required, followed by the name and signature of the
person preparing and authorizing the requisition form.
2. Sending Enquiries for Quotations: Purchase department invite
suppliers to quote the rates materials. For this purpose a standard
format is used which is similar to a purchase order, except that words
such as this is only a request for quotation or this is a not a
purchase order are printed so as to ensure that the supplier does not
construe the request for quotation as a firm order.
3. Negotiating with Vendors to Fix the Price: If the presented cost
does not match the companys budget, the purchasing department can
negotiate with the seller price and terms are met with. Another method
that can be adopted here is competitive bid method. This method is
widely used by governmental purchasing departments because of
statutory requirements but also applied by industrial purchasing
department.
4. Preparation of Purchase Order and Placing the Order: Having
selected the supplier and the rates agreed, the buyer places the
purchase order; expressing terms and conditions. All orders should be
in writing and should be on the buyers purchase order to avoid
possibility of level difficulties. When order is placed by telephone it is
the practice to confirm the order by sending the supplier a regular
order.
5. Follow Up with Vendor: After the order has been placed, the
purchasing department has the responsibility of following-up of the
order. Follow-up essentially holds the supplier to his promise of
delivery. A follow-up procedure is must when the costs or risks resulting
from delayed deliveries or non-deliveries are greater than the cost of
follow-up procedures.
6. Receipt of Material, Inspection and Storing the Material: The
material should be inspected properly, checked for its quality as well as
quantity. In addition to this, it should be reserved in a proper room in a
disciplined manner, so it is easy to recover it at any point of time.
7. Maintenance of Records: Purchase orders requisition and similar
other legal contracts and documents should be preserved. Since they

constitute the authority on which the purchasing department had

taken its actions to a given item.
SUPPLIER SELECTION (May 05)
While selecting the suppliers, the following factors must be taken into
account:
1. Lead times and on-time delivery:

What lead-time the supplier can provide.

What procedures does the supplier have for assuring on-time delivery?

What procedures does the supplier have for correcting delivery

problems?

2. Price:

Are prices given reasonable?

Is the supplier willing to negotiate prices?

Is the supplier willing to engage in a joint effort to reduce costs by

value analysis?

3. Qualities and Quality Assurance:

What procedures does the supplier have for quality control and quality
assurance?

Problems and corrective actions for quality are considered or not.

4. Product or Service Changes:

How much advance notification does the supplier give when changes
are made in products or services?

To what extent does the buyer have inputs regarding changes?

5. Flexibility:

How flexible is the supplier in handling changes in quantity, delivery

schedules and product or services design changes.

6. Reputations and Financial Stability:

What is the reputation of supplier?

How financially stable is the supplier

7. Location:

Is the supplier located nearby?

SUPPLIER EVALUATION (May 05)

For rating the suppliers, following factors should be considered:
1. Reliability in all Fields:

Is the supplier reputable, stable and financially strong?

Is the supplier going alongwith product development?

Is the suppliers competitive strength proved by past experience?

2. Technical Capabilities:

Can he provide assistance as to the application engineering?

Can he provide assistance as to the analytical engineering?

Can he provide design assistance?

3. Convenience to deal with:

Can he help to reduce the acquisition cost?

Is he qualified to help in solving difficult problems?

Does he pack his product conveniently?

4. Availability:

Does he assure delivery in time?

Are his stocks locally available at short time?

Can he plan his supply to minimise the inventory.

5. After-Sales Services:

Does the supplier have a service organisation?

Is an emergency service available?

Are parts available when needed?

6. Sales Assistance:

Can the supplier help in building mutual market.

Will he recommend our products?

Does his products enhance the appearance of our products.

OUTSOURCING
Outsourcing is the contracting companys business process to outside service
providers for increasing firms profitability by primarily reducing overall
operating cost and focusing on core competencies.
Objectives of Outsourcing

1. To reduce operating costs.

2. To focus on core competent functions.
3. To acquire new skills.
4. To avoid labour problems.
5. To avoid financial risks
6. To improve flexibility in functions.
7. To enhance market credibility.
8. To improve overall market performance.
Process of Outsourcing (May 07)
CHAPTER 18 LOGISTICS ORGANISATION

Logistics Interface with Marketing (Nov. 01)

Outbound logistics plays an important role in selling the product of the
company through the distribution system. Relation of logistics with 4Ps of
marketing can be explained as follows:
1. Price: Logistics enables marketing to quote a competitive price by
providing discount opportunities on account of transportation cost
savings. Logistics Management has to balance inventories to tackle
anticipated price-triggered sales.
2. Product: Size and shape of the product are quite important for
logistics. Weight/volume ratio plays very important role in deciding
economics of logistics.
3. Promotion: Logistics Manager and Marketing Manager need to work
closely in deciding promotional strategies for the product in order to
manage inventory needed to match sales triggered by promotional
activities in the market.
4. Place: Marketing decision to distribute the product directly to retailers
or through wholesalers has a great impact on logistical operations.
Retailers demand often requires time sensitive transportation
methods, which are expensive.
RESPONSIVE ORGANISATION (Nov. 06)
The competitive scenario at marketplace necessitated the logistics
organisation to be responsive. It seeks to put customer at the center of
business and design new systems and procedure to improve the response.
Logistics organisation should change its systems:
1. From function to process: emphasis on managing processes rather
than managing resources.
2. From profit to performance: emphasis on efficient performance, profit
will follow.
3. From products to customers: emphasis on customer value and not on
brand value.
4. Form transaction to relationship: emphasis on long-term relationships
with customer and supplier rather than just having business
transactions.
CHAPTER 19 LOGISTICS COSTING AND PERFORMANCE AUDITING

TOTAL COST ANALYSIS (Nov. 02)

The expenses involved in logistics activities are:
1. Procurement Cost
2. Inventory Cost
3. Warehousing Cost
4. Material Handling Cost
5. Packaging Cost
6. Transportation Cost
7. Distribution Channel Cost
8. Customer Service Cost
9. Communication and Information Processing Cost
Activity Based Costing V/S Mission Based Costing (May 04)

Activity Based Costing (Nov. 02, May 06, 07)

Activity based costing is based on the concept that the expenses need to be
assigned to the value adding activities rather than to budget unit. It suggests
that business activities are made up of a series of activities that consumes
costs.
Advantages (May 06)
1. It provides better operational performance.
1. It provides information about cost drivers and the relationship of these
drivers with resource consumption.
2. It gives more accurate picture of the expenses and helps managers to
make strategic decisions about costs.
3. It identifies the activities to be improved in order to reduce the cost
4. It simplifies the internal audit operations

Mission Based Costing (Nov. 02, 03, 06)

Mission based costing seeks to identify unique costs that are generated as a
result of specific logistic activities with a mission to achieve certain objectives in
a specific market. It is the logistic costing which can identify the total costs of
meeting a desired mission.
Stages of Implementing MBC

1. Define the customer service segment

2. Identify the specific resource use to support that customer segment
3. Identify the factors that produce variations in the cost of service.
4. Attribute activity costs by customer segment.
LOGISTICS PERFORMANCE MEASUREMENT
Performance measurement is a process of monitoring and evaluating
activities to determines their conformance to the requirements.
OBJECIVES (May 06, Nov. 02, 03, 06)
1. Monitoring Measures: To track historical logistics performance for
reporting to management and customers mainly on service level
achieved and logistics cost components. It may be monitored daily,
weekly, or monthly depending upon the volume and criticality.
2. Controlling Measures: To track ongoing performance and refine a
logistics process in order to bring it into compliance when it exceeds
control standards. To compares the actual performance with the set
standards. E.g. transportation damages tracking. If a system can
periodically report the product damage, logistics management can
identify the cause and adjust the packaging and loading process as
needed.
3. Directing Measures: To motivate the warehouse or transportation
personnel to enhance their performance. E.g. pay for performance
practices to encourage achieving higher levels of productivity. When
such directed measures are used, it is important that both positive and
negative performance to be measured.
Internal Performance Measures (Nov. 03)
Internal performance measures focus on comparing activities and processes
to previous operations.

Elements (May 07)

A] Financial Measures:
1. 1. Operating Cost: It reflects the efficiency of effectiveness of the
logistics system. It is measured in terms of percentage of sales value.
1. Return on Investment: It indicates whether the investment made in
logistical assets like warehouse, material handling etc. is paying
dividends.
B] Non Financial Measures:
1. Customer Service: It examines firms capacity to satisfy customer. It is
measured by fill rate, stock out, or cycle time etc.
2. Productivity: It is a relationship between the goods and services
produced and the amount of input utilised by the system.
3. Time: It indicates the systems efficiency in terms of response time,
lead-time, on time product shipment, etc.
4. Quality: It determines the effectiveness of series of activities rather
than an individual activity.
External Performance Measures (May 04)
The main objective of external performance measures is to understand,
maintain, and monitor customer perspective.
Elements (May 07)
1. Customers Perception: Customers feedback on delivery, reliability,
and responsiveness of the company needs to be regularly obtained to
achieve competitiveness in logistical operations.
2. Competitors Performance: Customers feedback provides the company
a comparative analysis of service level and value added services
offered by its competitors.
3. Benchmarking:
BENCHMARKING ((May 04)

Benchmarking is a process of measuring organisations overall performance

against the other organisation from the same industry or other industries. It
is a part of external performance measurement.
History

In the late 1970s When the Japanese competitors Canon and Mitsubishi etc.
entered into US market, the Xerox company pioneered the process of
benchmarking its manufacturing costs against these competitors. This
concept has become widely accepted in the late 1980s.
Steps in Benchmarking
(May 07)

1. Identify the items to be benchmarked

categorically i.e. never take broad subject area.

and

define

them

2. Create a benchmarking team and define rules and responsibilities

of each member.
3. Trace out the benchmark partners, who may be a world-class
benchmark leader, articles from magazines or newspapers,
publications of consultancies, trade literatures.
4. Identify the data collection process from different sources such as
postal surveys, direct interviews, questionnaire, and research through
Internet etc.
5. Finalise the benchmark study, after analyzing all the data
discarding the irrelevant and inaccurate data. Compare your
companys strength and weaknesses with those of benchmarking
partners. If you find any performance gap between yours and the
benchmarking partners, fill that gap.
6. Implement the findings into the task force of predetermined
operation, function or service.
Steps in Performance Appraisal (Nov. 01)
Guidelines for Performance Measurement (May 04)
Factors Affecting Performance Measurement (Nov. 04)
CHAPTER 20 WAREHOUSES

DEFINITION OF WAREHOUSING (Nov. 06)

Warehouse is a location provided with adequate facilities, where bulk

shipments are received from production centers, which are then broken into
small order size for shipment to the customers as per their requirement.
FUNCTIONS OF WAREHOUSING (Warehousing Operations) (Nov. 02)
1. Receiving finished goods from production centers
2. Performing quality and quantity checks
3. Sorting goods at specific locations
4. Packing the products for executing customers order
5. Shipping goods by selected mode of transport
6. Preparing records and documents of stock.
7. Information transfer to management
OBJECTIVES OF WAREHOUSING (May 04, 05, Nov. 04, 06)
1. To fulfill expected customer service level.
2. To achieve transportation economies by moving higher volume of
goods.
3. To achieve economies of scale in production by accommodating
additional quantity of produced.
4. To maintain steady source of supplies by balancing supply and
demand.
5. To provide mixed products option to customers.
6. To provide temporary storage of materials to be disposed off (reverse
logistics)
WAREHOUSING DECISIONS (Nov. 03)
1. Type of Warehouses
2. Location of Warehouses
3. Size of Warehouses

4. Layout Warehouses
5. Number of Warehouses

TYPES
WAREHOUSE

OF
(May 06, 07)

1. Private Warehouse
These are the warehouses owned by the company for their exclusive use of
storing the goods manufactured or traded by them for onward selling in the
market.
Advantages:
1. Better control over storage and movement of goods
2. Less chance of errors in handling the goods
3. Customised design and flexibility in operations
4. Cost effective and economic
Disadvantages:
1. Lack of geographical flexibility
2. Requires stable demand and high product throughput
3. Requires initial larger financial investment
4. Has permanent liability

2.
Warehouses

Public

These are the warehouses hired from other agencies for storing the goods for
a specific period of time by paying agreed rent. E.g. Central Warehousing
Corporation (CWC)

Advantages: (Nov. 05)

1. Generally located near ports and market place and thus has fixed
periodic operating cost
2. Great flexibility in location changeover.
3. No permanent liability.
4. Adjustments as per season are possible.
Disadvantages:
1. Lack of flexibility in operations
2. Not suitable for specialised services.
3. Contract Warehouses
It is a specialised form of public warehouses managed by Third Party
Logistics companies for providing total warehousing services by paying the
agreed charges.
Advantages:
1. Great flexibility in location changeover
2. No permanent liability.
3. Adjustments as per season are possible.
4. Availability of expert manpower and dedicated resources.
Disadvantages:
1. Less control on operations
2. Performance of organisation depends on the performance on third
party
4. Co-operative Warehouses
These warehouses are owned, managed and controlled by co-operative
societies. They provide warehousing facilities at the most economical rates
to member of society.

LOCATION OF WAREHOUSE
The primary considerations while locating the warehouse are:
1. Cost Warehouse may be located near production plant to reduce
operating cost.
2. Customer Service Warehouse may be located near market to serve
the customer well.
Steps in Site Selection of Warehouse (Nov. 02)
While deciding the location of warehouse following factors are to be
considered:
1. Desired level of customer service
2. Nature of product i.e. seasonal, perishable etc.
3. Presence of Competitors warehouse
4. Marketing oriented closer to market
5. Production oriented closer to plant
6. Cost of distribution to market area
7. Availability of transportation facilities and its cost
8. Availability and cost of basic infrastructure i.e. power, water, gas,
sewerage etc.
9. Availability and cost of labour supply
10.

Local taxation levied by the local authority in the area.

11.

Potential for further expansion of warehouse.

12.

Geographical hazards like floods, earthquake etc.

DESIGN AND LAYOUT OF WAREHOUSE (Nov. 05)

Steps in Design / Layout of Warehouse (Nov. 02)
1. Number and nature of activities to be performed

1. Nature of products to be stored

2. Frequency of in and out movement of the products
3. Storage and handling equipments to be used
4. Total space availability
5. Statutory requirements
6. Safety and security of people and products

NUMBER OF WAREHOUSES
Factors Deciding Number of Warehouse (May 04, 05, Nov. 04)
1. Desired level of customer service
2. Nature of the products
3. Presence of Competitors warehouse
4. Size of the market
5. Number of customer and their buying habits
6. Current and potential demand
7. Total operating cost of warehouse
SQUARE ROOT LAW (Nov. 03, May 04)
Square Root Law states that the total inventory in a system is proportional to
the square root of the number of warehouses.
Law: The law determines the extent to which inventory reduces by reducing
the number warehouses. Provided that the total customer demand remains
constant.
L = L1 _W2_
W1
L = Total inventory in future warehouses

L1 = Total inventory in existing warehouses

W1 = Number of existing warehouses
W2 = Number of future warehouses
Assumptions:

1. Inventory transfer from one warehouse to other is not done.

2. Lead-time for supply of goods is constant.
3. Customer service level does not change from any warehouse.
4. Demand level is well distributed from all the warehouses.
(May 05)
WAREHOUSE
DISTRIBUTION CENTER

Warehouses
belong
to
organisation
Warehouses stores all products

an Distribution center is a separate entity

It keeps minimum inventory of high

demand items.
It handles products in four stages It handles products in two stages
receive, store, pick and ship.
receive and ship.
It performs minimum value added It performs more value added activities.
activities.
It focuses on reducing operating It focuses on maximizing the profits.
costs
CHAPTER 21 MATERIAL HANDLING AND PACKAGING

MATERIAL HANDLING SYSTEM

Material handling is a process of movements of raw materials, WIP and finished
goods within a facility most efficiently at the lowest possible cost.
OBJECTIVES OF MHS
May 06)

(Nov. 05, Nov. 06,

1. To achieve efficiency in movement of products in & out of stores or

warehouse.

2. To ensure movement of goods in right quantity

3. To ensure availability of products when and where required.
4. Effective utilisation of available space, equipment and manpower.
5. To sort inbound shipments as per precise customer requirements

SCOPES
MHS
(May 06)
Activities performed during materials handling are as follows:
A] During Receipt of Materials:
1. Receipt of vehicle at nominated area
2. Unloading the consignment from vehicles.
3. Weighing, sampling and inspection of materials.
4. Moving the materials to assigned storage space.
5. Documentation of materials received and sold.
6. Management Information System
B] During Dispatch of Finished Goods:
1. Receipt of vehicle at nominated area
2. Weighing, counting and packing of goods to be dispatched
3. Movement of goods to the exit point
4. Loading the products to transport vehicles
5. Documentation of goods dispatched
6. Management Information System

OF

CLASSIFICATION OF MHS
1. Manual System

Manual handling of materials is done when the weight of materials is low and
distance to be traveled is less. It is the cheapest option for material handling.
Equipments required are manual trolleys, racks, drawers, lockers etc.
2. Mechanical System
Mechanical handling of materials is done when the weight of materials is
high and distance to be traveled is more. It is the safest option for material
handling.
Material Handling Equipments
(Nov. 01, 05)

1. 1. Forklift Trucks: They are lifting devices, can move loads both
horizontally and vertically.
2. 2. Cranes: They are drag devices, either floor mounted or overhead
mounted.
3. 3. Conveyors: They eliminate re-handling before and after each
function.
4. 4. Carousels: several bins on an oval track keep rotating. The operator
can choose required bin to pick from. The system saves space and
reduces walking time and distances.
3. Automated System
Automated handling of materials is done when the weight of materials is
very high and distance to be traveled is more as well as the warehouse
space is limited. It is the best and efficient option for material handling.
Material Handling Equipments
(Nov. 01, 05)

1. Sortations: In Sortations, labels are read and the packages are

delivered to right docks for onward dispatch
2. Robotics: It is a human like machine that can be programmed to
perform one or series of activities.

3. Automated Storage and Retrieval System: It has following merits and

demerits.
Merits ARS:
1.
1. Reduction in labour cost and material handling costs
2. Increase in productivity
3. Increase accuracy and speed of services
4. Reduce handling related product damage.
Demerits of ARS:
1.
1. It requires huge initial capital cost
2. It has perpetual maintenance costs
3. It cannot not respond to the changing needs
4. Downtime of equipment may cause interruptions
5. Its user required proper training
1. Automatic Guided Vehicle System (AGVS): It is as driverless vehicle
that are controlled by computers for task assignment, path selection,
and positioning.
Benefits of AGVS: same as that of ARS.

PRINCIPLES OF MHS
1. Planning: All material handling should be as a result of a deliberate
planning.
2. Work Principle: Avoid unnecessary movement the products.
3. Ergonomic Principle: Human capacities and limitations must be
recognized.

4. Unit Load Principle: Load should be of uniform size to have smooth

material flow.
5. Standardisation: Methods, equipments, controls and software should
be standardized.
6. Space Utilisation: Available space should be used efficiently.
7. Automation: Operations should be automated wherever feasible to
improve efficiency.
8. Systems: All activities should be integrated to form a coordinated
operational system.
9. Environment: Environment impact and energy consumption should
be considered.
10.
Preventive Maintenance:
should be regularly maintained.

Materials

handling

equipments

PACKAGING
Packaging though an integral part of logistics, also affect marketing and
production function. Packaging helps in promotion of products and size,
shape, material of the package affects production labour efficiency.
Logistical Functions of Packaging (May 06, Nov. 06)
How packaging helps reducing overall costs and value addition?
1. Containment: Packaging provides containment for products.
2. Protection: Protection
handling and moving.

from

environment,

pilferage,

shocks

of

1. Cube Minimization: Reducing the space occupied by the product to

cut the freight charge. E.g. Round containers, oval shaped containers
and square shaped bottles, etc.
1. Weight minimization: Reducing the weight of the consignment to
fully utilize the capacity of the truck. E.g. Liquids are packed in plastic
bottles rather than glass bottles.
2. Apportionment: Grouping goods into convenient unit for distribution.
E.g. mangos in boxes, milk bags in crates.

3. Facilitating handling & using: fruit juices in tetra packs, handling and
consumption by users
4. Convenience: Facilitating handling, storage & reuse. E.g. ink
cartridges for printers, reusable corrugated boxes, bottles and refill
packs.
5. Communication:
1. Content Identification Product, manufacturer, universal code
etc.
2. Tracking: Bar codes and scanners.
3. Handling Instructions: Fragile, This side up, temperature
restrictions, environment concerns, potential dangers etc
Consumer Oriented Packaging V/S Logistics Oriented Packaging (May
07)
1. Consumer Oriented Packaging: Focuses on consumer convenience and
appeal, marketing consideration and display.
2. Logistics Oriented Packaging: Focuses on handling convenience and
protection during transpiration, material handling and storage.

STAGES IN LOGISTICS PACKAGING

1. Products Packaging: Packaging the products itself, e.g. soft drinks are
packed in cans.
1. Master Cartons: Packaged products are packed in larger cartons to
facilitate quantity handling.
2. Unit Load: Master cartons are consolidated into a single large unit to
facilitate transportation, protection and storage. It involves Unitisation
or Palletisation.
3. Contenerisation:
transportation.

Unit

load

is

placed

Unitization / Palletisation (Nov. 03, May 05)

in

rigid

container

for

Unitization is a concept where size shape, weight, volume of the items is

considered and master cartons are placed to form a single larger unit. E.g.
bottles in crates, steel sheets in coils, etc.
1. Leads to standardization of handling equipments and methods.
2. Facilitates use of standardized handling equipment like a forklift or a
crane.
3. Reduces the time for handling and cost of handling.
4. Simplifies the checking of inbound shipments.
5. Improve product protection.

Types of Pallets
1. Wooden pallets used commonly but break and disintegrate.
2. Pressed wood fiber pallet
3. Plastic pallets light and recyclable
4. Solid molded plastic pallets
5. Corrugated fiberboard slip sheet provide cushion effect to the unit
load
6. Refrigerated pallets- for refrigerated materials

Contenerisation

(Nov. 04, May 05)

Contenerisation is a technique of distributing

goods
in
unitized
form
and
making
convenient to establish an intermodal
transport system. Containers are of standard
size i.e. 20 ft or 40 ft.
Benefits of Contenerisation:

1.
It eliminates need for intermediate
handling at terminals.
1. Standardized containers helps in saving on packaging materials and
labour for packaging.
2. Less risk of damage and pilferage.
3. Facilitates intermodal transportation without intermediate reloading.
Types of Containers:
1. General Cargo Containers for general cargo like garments metals etc.
2. Refrigerated Containers for food items that require cold storage like
fish, meat.
3. Insulated Containers for items that require airtight space like fruits
and vegetables.
4. Ventilated Containers for items that require fresh air like coffee
seeds, tea leaves.
5. Flat Containers They have only flat base with no walls, used when
cargo the cargo is of odd size or very heavy like trucks.
6. Liquid Containers They have main holes for loading and unloading of
liquid cargo like milk, oil.
7. Gas Containers They have fixtures to fill or empty liquefied gas. E.g.
Liquid oxygen.

Polarisation
(Nov. 04, May 05)
CHAPTER 22 SUPPLY CHAIN MANAGEMENT

CONCEPT OF SCM

According to Martin Christopher; Supply Chain Management is defined as

the management of upstream and downstream relationships with suppliers
and customers to deliver superior customer value at lesser cost.
OBJECTIVES OF SCM
1. To solve suppliers problems
2. To improve customers service performance
3. To reduce pre and post production inventory
4. To minimise total cost of operations and procurement
5. To achieve maximum efficiency in utilisation of labour, capital and
plant.
ADVANTAGES OF SCM
For Customers

1. Improve customers service performance.

2. Reduce product cost
3. Improve delivery performance
4. Provide quick response to change in demand
For Company

1. Reduce pre and post production inventory

2. Minimise total cost of operations and procurement
3. Facilitates efficient utilisation of labour, capital and plant.
4. Sustained growth of sales
SUPPLY CHAIN MANAGEMENT
LOGISTICS

Logistics is concerned with getting SCM is concerned with movement of

goods and services where and when goods from raw material stage to the
they required
end user
It works within a single organisation
It works in a coordination of various

organisations.
It is a part of supply chain It is an extension of logistics
management
management
The concept of logistics is relatively old The concept of SCM is relatively new
It is a narrow concept
It is a broader concept