Logistics in supplies chain management

Definition of logistics

Is the movement of raw materials, components, finished goods and general supplies from
supplier through to the manufacturing and finally to the final consumer.

Philip Kotler: The planning, implementation, and controlling the physical flow of materials and
finished goods from the point of origin to the point of use in order to meet customer needs.

Logistics is concerned with two types of flows; material flow and information flow

According to the American Council of Logistics Management,

Logistics is the process of planning, implementing, and controlling the efficient, and cost
effective flow and storage of raw materials, in process inventory, finished goods, services, and
related information from point of origin to point of consumption for the purpose of
conforming to customer requirements.
Logistics therefore is concerned with two types of flows: information flow and material flow

Logistics tries to have the right product in the right place, at the right time, in the right quantity,
with the right cost, right quality and condition.

Logistics Management: Integrative process which optimizes the flow of materials and supplies
from the suppliers through an organization and its operations to the customer.

The logistics of physical items usually involves the integration of information flow, material
handling, production, packaging, inventory, transportation, warehousing, and often security.

Supply & Distribution Logistics

Plants/
The ‘physical supply channel’ refers to the time and space gap between a firm’s immediate
material sources and its processing points.
The ‘physical distribution channel’ refers to the time and space gap between a firm’s processing
points and its customers
Logistics Strategy
 Selecting a good logistics strategy may yield a competitive advantage. It must not been
seen as a less creative process than developing the corporate strategy.
 It is suggested that a logistics strategy has three (3) objectives:
 Strategy Description Sample Issues

STRATEGY DESCRIPTION SAMPLE ISSUES

Cost reduction Minimizing the variable costs choosing among different
associated with movement and warehouse locations, or
storage. _evaluate alternative transport
modes

Capital reduction _ Minimizing the level of Shipping direct to customers

investment in the logistics to avoid warehousing,
system. _ choosing public warehouses
_ Maximizing the return on over privately owned,
logistics assets _ selecting a just-in-time
supply approach rather
than stocking to inventory

Service improvement Recognizing that revenues Provide different and better

depend on the level of services than the competition
logistics services provided
l
Logistics decision level and issues
 Strategic
 Tactical
 Operations

Scope of logistics
Logistics integrates the processes through which customer demands are met. It provides
the thread that connects the processes for cost effective creation of time and place utility.

Factors that have led to widespread acceptance of logistics today/the paradigm shift
 Globalization
 Technology
 More demanding customers who are increasingly looking out for value for money
 Competitive pressures and proliferation of products and service varieties bringing about
uncertainties in the market place
 Struggling for growth and survival
Other terms
The ‘supply chain’ encompasses all activities associated with the flow and transformation of
goods from the raw materials stage to the end user (along with the associated information flow).

Supply Chain Management is the. Integration of these activities, through improved supply
chain relationships, to achieve a sustainable competitive advantage

The physical supply channel refers to the time and space gap between a firm’s immediate
material sources and its processing points.

The physical distribution channel refers to the time and space gap between a firms’s processing
points and its customers

Four (4) key players in the supply chain

1. Suppliers - Vendors
2. Manufacturers
3. Wholesalers (& Retailers)
4. Customers
Overview

Main logistics targets

Logistics is one of the main functions within a company. The main targets of logistics can be
divided into performance-related and cost-related targets. A few examples are high due date
reliability, short delivery times, low inventory level, and high utilization of capacity. When
decisions are made, there is a trade-off between targets.

Logistics Fields/Applications/Scope of logistics

Given the services performed by logisticians, the main fields of logistics can be broken down as
follows:

 Inbound logistics: deals with the flow of materials and information between focal firm
and its upstream suppliers
 Outbound logistics: deals with the link between the focal firm and its downstream
customers
 Internal logistics: deals with the planning and control of material flow within boundaries
of the focal firm
 Disposal logistics
 Reverse logistics
 Global logistics

Procurement logistics consists of activities such as market research, requirements planning,

make-or-buy decisions, supplier management, ordering, and order controlling. The targets in
procurement logistics might be contradictory: maximizing efficiency by concentrating on core
competences, outsourcing while maintaining the autonomy of the company, or minimizing
procurement costs while maximizing security within the supply process.

Production logistics connects procurement to distribution logistics. Its main function is to use
available production capacities to produce the products needed in distribution logistics.
Production logistics activities are related to organizational concepts, layout planning, production
planning, and control.

Distribution logistics has, as main tasks, the delivery of the finished products to the customer. It
consists of order processing, warehousing, and transportation. Distribution logistics is necessary
because the time, place, and quantity of production differ with the time, place, and quantity of
consumption.

Disposal logistics has as its main function to reduce logistics cost(s) and enhance service(s)
related to the disposal of waste produced during the operation of a business.

Reverse logistics denotes all those operations related to the reuse of products and materials. The
reverse logistics process includes the management and the sale of surpluses, as well as products
being returned to vendors from buyers.

Military logistics

In military science, maintaining one's supply lines while disrupting those of the enemy is a
crucial—some would say the most crucial—element of military strategy, since an armed force
without resources and transportation is defenseless.

Militaries have a significant need for logistics solutions and so have developed advanced
implementations. Integrated Logistics Support (ILS) is a discipline used in military industries to
ensure an easily supportable system with a robust customer service (logistic) concept at the
lowest cost and in line with (often high) reliability, availability, maintainability, and other
requirements, as defined for the project.

In military logistics, logistics officers manage how and when to move resources to the places
they are needed.

Business logistics

One definition of business logistics speaks of "having the right item in the right quantity at the
right time at the right place for the right price in the right condition to the right customer". As the
science of process business logistics incorporates all industry sectors. Logistics work aims to
manage the fruition of project life cycles, supply chains, and resultant efficiencies.

Logistics as a business concept evolved in the 1950s due to the increasing complexity of
supplying businesses with materials and shipping out products in an increasingly globalized
supply chain, leading to a call for experts called "supply chain logisticians".
In business, logistics may have either an internal focus (inbound logistics) or an external focus
(outbound logistics), covering the flow and storage of materials from point of origin to point of
consumption (see supply-chain management). The main functions of a qualified logistician
include inventory management, purchasing, transportation, warehousing, consultation, and the
organizing and planning of these activities. Logisticians combine a professional knowledge of
each of these functions to coordinate resources in an organization.

There are two fundamentally different forms of logistics: one optimizes a steady flow of material
through a network of transport links and storage nodes, while the other coordinates a sequence of
resources to carry out some project.

Production logistics

The term production logistics describes logistic processes within an industry. Production
logistics aims to ensure that each machine and workstation receives the right product in the right
quantity and quality at the right time. The concern is not the transportation itself, but to
streamline and control the flow through value-adding processes and to eliminate non–value-
adding processes. Production logistics can operate in existing as well as new plants.
Manufacturing in an existing plant is a constantly changing process. Machines are exchanged
and new ones added, which gives the opportunity to improve the production logistics system
accordingly. Production logistics provides the means to achieve customer response and capital
efficiency.

Production logistics becomes more important with decreasing batch sizes. In many industries
(e.g., mobile phones), the short-term goal is a batch size of one, allowing even a single
customer's demand to be fulfilled efficiently. Track and tracing, which is an essential part of
production logistics due to product safety and reliability issues, is also gaining importance,
especially in the automotive and medical industries.

Objectives of logistics:
Logistics has the following objectives:

Reduction of inventory: Inventory is one of the key factors, which can affect the profit of an
enterprise to a great extent. In the traditional system, firms had to carry lot of inventory for
satisfying the customer and to ensure excellent customer service. But, when funds are blocked in
inventory, they cannot be used for other productive purposes. These costs will drain the
enterprise’s profit. Logistics helps in maintaining inventory at the lowest level, and thus
achieving the customer goal. This is done through small, but frequent supplies.
Economy of freight: Freight is a major source of cost in logistics. This can be reduced by
following measures like selecting the proper mode of transport, consolidation of freight, route
planning, long distance shipments etc.

Reliability and consistency in delivery performance: Material required by the customer must
be delivered on time, not ahead of the schedule or behind the schedule. Proper planning of the
transportation modes, with availability of inventory will ensure this.
Minimum damage to products: Sometimes products may be damaged due to improper packing,
frequent handling of consignment, and other reasons. This damage adds to the logistics cost. The
use of proper logistical packaging, mechanized material handling equipment, etc will reduce this
damage.

Quicker and faster response: A firm must have the capability to extend service to the customer
in the shortest time frame. By utilizing the latest technologies in processing information and
communication will improve the decision making, and thus enable the enterprise to be flexible
enough so that the firm can fulfill customer requirements, in the shortest possible time frame.

To meet quality advantage: achieving fitness for use for each product in the supply chain.
Avoidance of defects, incorrect quantities and wrong items is key to effective customer service.
Logistics ensure robust processes that ensure cost reduction through elimination of errors which
inturn ensure dependability

Cost advantage
Sustainability advantage: environmental, social and CSR
Security: physical security of customers and their information and property.

Role/Contribution of logistics in business

 Achieve maximum customer service level

 Ensure high product quality
 Achieve minimum (possible) cost
 Be flexible in the constant market changes
 Logistics leads to competitive advantage
 Logistics adds time and place utility
 Logistics is a proprietary asset
Components/Activities of logistics

Components of a logistics system

In the picture Fig. 1 are shown the components of a logistics system.
Fig: 1: Logistics Components

The logistics system consists of the following components: Customer service, Inventory

management, Transportation, Storage and materials handling, Packaging, Information
processing, Demand forecasting, Production planning, Purchasing, Facility location and
other activities.

Other activities for a specific organization could include tasks such as after-sales parts and
service support, maintenance functions, return goods handling and recycling operations.
Clearly any one organization is unlikely to require all these specific tasks to be accomplished.
For example, a service firm such as an airline might combine elements from the information
processing, maintenance, demand forecasting, customer service, and purchasing functions into a
logistics system designed to reach its customers. On the other hand, a manufacturer of consumer
goods may draw from transportation, inventory management, storage, materials handling and
packaging in addition to customer service, purchasing and demand forecasting for their logistics
support.

The point is that every organization, be it manufacturer or service provider, for-profit or non-
profit, has customers that it wants to reach. By integrating the appropriate functions into a
customer-focused logistics system, the enterprise can develop a sustainable advantage that is
very difficult to be imitated by a competitor. Some of these activities have traditionally had a
well-defined stand-alone role within a company (purchasing, production, information
processing), while others have generally been more closely associated with logistics
(transportation, warehousing, packaging). What ties all of these functions together is their ability
to improve customer satisfaction. This is not to say that production, for example, should be
subordinate to logistics. Rather top management should utilize logistics as a way to integrate
these corporate activities and keep them focused on the customer rather than on internal
processes.
Order Processing: Processing the orders received from the customers is an activity, which is
very important by itself and also consumes a lot of time and paperwork. It involves steps like
checking the order for any deviations in the agreed or negotiated terms, price, payment and
delivery terms, checking if the materials are available in stock, producing and scheduling the
material for shortages, and also giving acknowledgement to the owner, by indicating any
deviations.

2. Inventory Planning and management: Planning the inventory can help an organization in
maintaining an optimal level of inventory which will also help in satisfying the customer.
Activities like inventory forecasting, engineering the order quantity, optimization the level of
service, proper deployment of inventory etc. are involved in this.

3. Warehousing: This serves as the place where the finished goods are stored before they are
sold to the customers finally. This is a major cost center and improper warehouse management
will create a host of problems.

4. Transportation: Helps in physical movement of the goods to the customers place. This is
done through various modes like rail, road, air, sea etc.

5. Packaging: A critical element in the physical distribution of the product, which also
influences the efficiency of the logistical system.

Logistics / Supply Chain in a business aim to the following contributions:

_Achieve maximum customer service level
_Ensure high product quality
_Achieve minimum (possible) cost
_Be flexible in the constant market changes

LOGISTICS OPERATING ENVIRONMENT

Internal environment
The four primary resource bases that serve as the foundation for performance are:
 human resources
 financial resources
 operating portfolio
 technological resources
Welcome to our Marketing Theories series. In this post we will be looking at the PESTEL
Analysis in a bit more detail.

A PESTEL analysis is a framework or tool used by marketers to analyse and monitor the macro-
environmental (external marketing environment) factors that have an impact on an organisation.
The result of which is used to identify threats and weaknesses which is used in a SWOT analysis.
PESTEL stands for:
  P – Political
 E – Economic
 S – Social
 T – Technological
 E – Environmental
 L – Legal
 
Lets look at each of these macro-environmental factors in turn.

All the external environmental factors (PESTEL factors)

 
Political Factors
These are all about how and to what degree a government intervenes in the economy. This can
include – intergovernmental relationships(positive and negative), government policy, political
stability or instability in overseas markets, foreign trade policy, tax policy, labour law,
environmental law, trade restrictions, liberalization policy, economic growth and so on, security
issues and the post September 9,11,2001(port of new york and port of jersey we shut down)
It is clear from the list above that political factors often have an impact on organisations and how
they do business. Organisations need to be able to respond to the current and anticipated future
legislation, and adjust their marketing policy accordingly.
 Transport and communications infrastructure sets limits for logistic activities.
Governments play an important role as investors and promoters of investment
 Transport planning at a national and regional level. To reduce congestion and provide
efficient transport corridors using policies such as road pricing.
 Land use issues (e.g. Planning Policy Statement 1 [PPS1] ‘Delivering Sustainable
Development’)
 Risk and security at ports, roads, trains and airports is increasingly important
 Taxation: Fuel and road pricing

Economic Factors
Economic factors have a significant impact on how an organisation does business and also how
profitable they are. Factors include – economic growth, interest rates, exchange rates- value of
currency of two nations influence the amount and the value of trade- also affect cost, prices of
products, inflation, disposable income of consumers and businesses and so on.
These factors can further be broken down into macro-economic and micro-economic factors.
Macro-economic factors deal with the management of demand in any given economy.
Governments use interest rate control, taxation policy and government expenditure as their main
mechanisms they use for this.
Micro-economic factors are all about the way people spend their incomes. This has a large
impact on B2C organisations in particular.

Economic (Economic conditions)

 Globalisation is increasing the volumes of goods traded across borders changing
logistical flows, inventory levels and the nature of services required
 Price and cost driven industry. The majority of customers of logistics services have price
as the most important factor in selecting a provider
  Longer and more complex chains are decreasing visibility and increasing risk
 Migration of clients from commoditised transport, freight forwarding and warehousing
companies to integrated supply chain specialists.
Transport is a service how can a service become a commodity? The term commodity
relates to common product that the buyers do not differentiate between producers and
regards its instances as equivalent or nearly equivalent. This term is used as a metaphor in
services characterized with the same criteria.
 Increasing regionalisation of demand that favours larger companies providing a wider
range of services
 Value-adding activities such as packaging and postponement are seen as a route to escape
commoditization
 Fragmented and competitive market leading to falling margins
 Low margins leading to underinvestment and risk aversion
 Balance of power tends to lie with the customers of logistics services
 Mergers and acquisition are creating large global players, allowing economies of scale
and increasing bargaining power
 Search for economies of scale promoting the use of larger warehouses, cross-docking and
consolidation centres
 Costs and margins are highly dependent on fuel prices
 Trends to increasing outsourcing of logistics services affect industry structure Innovation
in Logistics Services

Social Factors
Also known as socio-cultural factors, are the areas that involve the shared belief and attitudes of
the population. These factors include – population growth, age distribution, health
consciousness, price and negotiation perceptions, ethical issues and general collective cultural
differences. Career attitudes and so on. These factors are of particular interest as they have a
direct effect on how marketers understand customers and what drives them.
Customers’ and consumers’ changing needs drive change in the industry, e.g.:
 Growth in home delivery
  Demand for quick response
 Demand for fresh produce
 Carbon footprints (more social conscience about environmental issues)
 Increasing returns of products, increasing the need for reverse logistics
 High employment rates in certain areas leading to difficulties in finding sufficient
personnel and increasing rotation
 Congestion and accidents and their social impact

Technological Factors:technological improvements has had major impacts on clearing and

forwarding. The internet, www and other IT INFRASTRUCTURES.
It influences inventory tracking and filling, security, speed, payment system,
knowledgebase
We all know how fast the technological landscape changes and how this impacts the way we
market our products. Technological factors affect marketing and the management thereof in three
distinct ways:
 New ways of producing goods and services
 New ways of distributing goods and services
 New ways of communicating with target markets
 Visibility tools (shipment tracking/tracing/event management) including telematics,
GPS and RFID technologies
 Web-enabled communications
 Warehousing / distribution centre management
 Transport management for both planning and execution
 Transport technologies (e.g. more efficient vehicles)
Environmental Factors
These factors have only really come to the forefront in the last fifteen years or so. They have
become important due to the increasing scarcity of raw materials, pollution targets, doing
business as an ethical and sustainable company, carbon footprint targets set by governments (this
is a good example were one factor could be classes as political and environmental at the same
time. Has impacted packaging regulations, noise restrictions, worker safety regulations
Global warming: Increasing contribution of transport to CO2 emissions
 Contribution to air, water and noise pollution
 Impacts of transport include congestion and traffic accidents
 Reverse logistics: Increasing importance of recycling / reuse of material has led to
increase in the importance of warehouses and reverse logistics operations.
 Oil and gas are not sustainable. There is a need for alternative solutions.

Legal Factors
Legal factors include - health and safety, equal opportunities, advertising standards, consumer
rights and laws, product labeling and product safety and general compliance.
It is clear that companies need to know what is and what is not legal in order to trade
successfully.
Legal systems vary a grat deal, enforcements also vary.
If an organisation trades globally this becomes a very tricky area to get right as each country has
its own set of rules and regulations.

 Working time directive

 Road transport directive; vehicle issues, driver issues, compliance issues
 Deregulation and liberalization of transport
 Environmental regulations
 Lorry Road User Charging (LRUC) [scrapped] and other proposals for taxation

TOPIC 2 LOGISTICS AND CUSTOMER SERVICE

 Customer service as a combination of activities enables a business firm to add more value
to the buyer. It is a key element of the product or service, which is offered to the
customer.
 With good customer service, the existing customers are satisfied and this attracts new
customers through word-of-mouth communication.
 o Customer Service is not just a function or an activity.
o It is a philosophy, and attitude. With so much importance given to customer
service, companies are trying to increase the level of customer service and scale
up to the expectations of the customer. Unless the products are in the hands of the
customer at the time and place of requirement, products do not have any value
attached to them. To attain a commendable service level, the firm has to plan a
closely integrated logistics strategy.

As there is an increase in the competition, and there is advancement in technology, companies

today are faced with the mounting pressure to develop even more innovative strategies for
customer service
Two key factors that have contributed maximum for the growing importance of customer service
as a competitive weapon are the continuous development of customer expectations and the
gradual shift of customers from branded products to local unbranded products. A very good
example would be the personal computer market, where the buyer finds it difficult to make a
difference between a branded version and an unbranded one. The rapidity of technological
change and a decreased product life cycle has further developed the importance of customer
service.
Factors influencing customer perception of quality

 Competence

 Reliability: place, time, quality

 Responsiveness

 Transaction security

 Trustworthiness

 Access
The following are the elements of customer service: or service attributes

 Order Delivery Cycle Time/ Order process time; the time between placement of
order and supply of materials by the seller.: identify factors that affect order delivery
 cycle time- product availability, information mgt, capability of systems ( material
allocation, order pick –up, warehouses, distribution centres, disparch among others
Benefits: long-term relationship mgt,
The general tendency for a manufacturer to look into is the physical delivery of the product when
the orders are not delivered on time. So, when orders are not delivered on time and customer
complaints are received, the manufacturer looks into the physical delivery of the product to the
customer and tries to solve this problem by bringing the product closer to the client. Thus, there
is a tremendous increase in the stock-holding points for the manufacturer. When the
manufacturer examines this closely, he will realize that physical delivery is not the most time
consuming element of the order-delivery cycle time, but there are a host of other activities like
transmission of the order, processing the order, etc which also affect the delivery.
 Delivery Consistency: speaks of degree of coordination in the logistics arm of supply
chain
The firm must ensure the maintenance of a same or similar delivery period over a period of time
to deliver material to the customer. This means the firm must have the ability to coordinate the
various logistics arms, and also the efficiency and effectiveness of the entire chain.
 Reliability in terms of place, time, and quality
 frequency in delivery
 Competence
 Responsiveness; returning customer calls, emails, faxes, letters and resolving
customer complaints with speed
 Transaction security: confidentiality of customer information and transaction
 Trustworthiness: built through evolving policies on product returns, warranties,
guarantees and honoring commitments
 Access; ease with which customer can access information on products and services
before placing an order
 Stock availability
 Service support: commissioning, installation, technical support, spareparts supply
When a specific item is out of stock, which is interpreted as a loss of sale and if these stocks out
conditions take place frequently, these will influence the customer service levels. And would
further lead to a loss of credibility for the company.
  Other factors
Apart from the regular factors there are also others like the transmission of order collection,
frequency of visit of salesman to customers, invoicing and collection systems, communications
level between customers and suppliers which can be of more importance to certain organizations.

Phases in Customer Service:

a) Pre transaction phase It is the creation of a service platform to serve the customer, so as to
build up credibility in the market and create a good image amongst the existing and prospective
customers. In other words, this refers to those elements, which determine the capability of
service before they are provided.

The following are the important elements of the pre-transaction phase:

 Customer Service Policy Statement: This gives the service standards for the company.
For example, company X, a leading automobile spare part manufacturing company,
makes a policy commitment to deliver the spare parts to its customers within 48 hours of
placement of the order.
 Accessibility: This refers to the ease with which customers can contact the firm.
 Building the organization: In order to implement the policy derivatives on customer
service, the firm must formalize the support and reporting structure, delegate authority
and also allocate responsibility. Also, a proper reward system will motivate employees
who are involved in customer service to interface efficiently with the customer.
 Structuring the service: The expectations of customers, the industry standards, and the
standard of service the firm would like to maintain influence the basic structure of any
service.

For sustaining the competitive advantage, innovation in service is very much necessary.
Innovation adds to the value of the offerings made to customers. Another key aspect to service
structure is the delivery. Two important aspects of delivery are place and time.
  Educating the customer: This is important because this can reduce the customer
complaints on deliveries of products, their operations and maintenance etc., Usually
customers are educated through manuals training, seminars workshops etc.
 System design and flexibility: While designing the system, care should be taken that all
the possible queries, which the customers can ask, must be answered. The system may be
manual or fully automatic, similar to ecommerce. Also the adaptability of the service
delivery systems to meet a particular customer need is essential.

Transaction phase: During this phase, the customer service is associated with the routine tasks,
which have to be performed in the logistics supply chain. Those variables directly involved in
performance of the logistics functions, for example, availability of product, order cycle time,
reliability of delivery etc. The following are the various service elements associated with this
phase:
 Reliability of order fulfillment: This is a key factor. There needs to be reliability in
fulfilling the order within the agreed time frame and also with respect to the quantity and
quality of the material ordered.
 Order convenience: The ease with which customer can place an order. There are
various barriers to this like the paper work required by the supplier, compliance to
various procedures, complex payment terms, poor communication network at suppliers
end etc.
 Order postponement: Sometimes, the customer may postpone an entire order or some
parts of it. This means customer has to reschedule his requirements. In some other case,
due to availability of a certain product category in the future, the seller can allow the
buyer to place the order immediately and he would ship the product when it is available
on future dates.
 Consistency of delivery: Delivery consistency of repeat orders is important.
 Product substitute: There may be some situations in which the product ordered couldn’t
be shipped due to certain manufacturing or quality problems. In such cases, the seller can
offer a substitute product and honor his commitment.
Post transaction phase: This is a phase where customer satisfaction and building up of a long-
term relationship with the customer are involved. It involves commitment of resources to offer
the desired level of service. These measure the customer satisfaction on the basis of the expected
results. Generally supportive of the product in use, for example: warranty of products, parts and
repair service, procedures for complaints of customer and replacements of products
 Information of order status: In B2B transactions and e-commerce, the customer after
payment of part value (sometimes full value) of the product as an advance, requests
feedback on the status of the shipment on a continuous basis.
 Customer complaints, claims, and returns: The seller’s responsibility will not be over
once the product is dispatched to client. Sometimes, the products damaged during transit,
or the product may not be according to the functional requirements of the customer. For
this, there must be a policy for product return and this is usually done through reverse
logistics system.
 Product installation, commissioning and technical snags: This is part of the after sales
service, as complex products may sometimes develop technical snags during the
warranty period. The after sales department takes care of all these issues.
 Customer awareness and training: A key aspect of service element in this phase. For
technically complex products, it is necessary for the seller to train or educate the user
regarding its operation

CONCLUSION

The basic purpose of providing services is to deliver value to the customer for the money he is
spending for the product. Customer service means all customers must be treated equally and also
to extend service to build a fundamental business relationship. Also, a step ahead of offering
basic services is to offer zero defect services. Repetitive operations have to be performed without
errors by using automated systems.

Another possibility is to provide value added service, which are basically unique and add
efficiency and effectiveness to the basic service capabilities of the firm. These value added
services have evolved due to forced innovation due to differentiated offering, for growing and
surviving in competitive markets.

Value added logistical services

  Customized transport
 Payment systems
 Price marking and labeling
 Product mixing and packaging
 Cross-docking
 Inventory management
 Web-based consignment tracking and tracing
 Reverse logistics
 Load cobbling

OUTSOURCING AND THE ROLE OF 3PL AND 4PL
Logistics
Competitiveness for growth and survival
Trend

Logistics involves getting the right goods to right place at the right time at the right cost in the
right condition. To survive in today’s highly competitive markets, companies are focusing on
their core competencies to adopt outsourcing as a strategic solution to improve quality of service
and also reduce cost of key and non-core activities. An accepted trend today is to form a
collaborative relationship with logistics service providers on the basis of the backbone of
information technology, for integrating knowledge based supply chain.

Business organizations across the world are struggling for competitiveness for both growth and
survival. Customers are demanding more and more value-added services from prospective
suppliers for the amount spent. Business organizations have started reviewing business processes
and realized that cost cutting and differentiating in value delivery systems is essential. Focusing
on core business areas can be done through outsourcing non-core operations to experts in the
field.
Logistics operations are an area of specialized function and a majority of marketing and
manufacturing organizations do not have the requisite expertise in housed. Thus, there is a
requirement for outsourcing operations to experts in the field. It has become an accepted practice
to use strategic partnerships that are known as ‘third party service providers’ in integrated
logistics.

Most companies consider using the services of a 3PL in their supply chain operations when they
realize that it is essential in providing efficient and effective competitive customer service which
requires huge investment and is difficult to develop on their own.

Outsourcing has the following advantages:

1. Focus on core competencies

Management is freed from repetitive/mundane tasks, reduces investment and generates
cash. Organization can concentrate on core competencies

2. Organizations can adopt “best-in –class” practices.

Vendors have considerable strength and focus on outsourced processes. To remain competitive,
they are continuously looking to improvise their services and adopt best practices to make them
more efficient. This helps organizations achieve faster, efficient, effective and more economical
business process.
2. Organizations become more competitive
Can respond more effectively to changing demands.
Allows companies to gain more scalability.
Outsourced activities allow companies to have greater leverage in responding to changes and to
gain market access, expand.
4. Reduced cost and advanced technologies
Vendors often implement latest technologies to make their processes and services. Companies
can take advantage of these technologies, which they might not be always able to do if they were
conducting activity in-house. Vendor’s economies of scale helps drive down overall cost in the
system, thus enabling companies to realize more productivity and efficiency.
5. Reduced working fixed capital

6. Wider geographical coverage

7. Provides the operational flexibilities to meet the changing customer needs, thus enhancing
customization. Thus providing improved customer service.

Drivers of logistics outsourcing

 Competition

 Cost

 Globalization
1st Party: The Supplier
2nd Party: The Company buying the product that is being stored or shipped
3rd Party Logistics Provider (3PL): The company that provides warehousing and
transportation outsourcing.
4th Party Logistics Provider (4PL): The majority of people would agree that 4PL is little more
than logistics consultant speak, but nevertheless here is the official definition courtesy of
Accenture:
“A 4PL is an integrator that assembles the resources, capabilities, and technology of its own
organization and other organizations to design, build and run comprehensive supply chain
solutions.”
 First Party Logistics (1PL). Concerns beneficial cargo owners which can be the shipper
(such as a manufacturing firm delivering to customers) or the consignee (such as a
retailer picking up cargo from a supplier). They dictates the origin (supply) and the
destination (demand) of the cargo with distribution being an entirely internal process
assumed by the firm. With globalization and the related outsourcing and offshoring of
manufacturing, distribution services that used to be assumed internally tend be contracted
to external service providers.
 Second Party Logistics (2PL). Concerns the carriers that are providing a transport
service over a specific segment of a transport chain. It could involve a maritime shipping
company, a rail operator or a trucking company that are hired to haul cargo from an
origin (e.g. a distribution center) to a destination (e.g. a port terminal).
 Third Party Logistics (3PL). Concerns freight forwarders that could have stakes in a
specific transport segment and its physical assets, but who are offering comprehensive
freight distribution services along transport chains. These services can involve
warehousing, transloading, terminal operations and even forms of light manufacturing
such as packaging and labeling. A 3PL thus tries to organize the tasks related to physical
distribution, so that parts and finished goods can be carried from their origin to their
destination.
  Fourth Party Logistics (4PL). Concerns commonly independent and neutral actors such
as specialized consulting firms that are organizing and managing complete supply chains
strategies for their customers. They can be involved in outsourcing decisions, supplier
selection and the routing of cargo to support supply chain management. This often
involve agreements (subcontracting) with 3PLs and 2PLs.

First Party Logistics

First Party Logistics are companies, which do their own logistics activities.
Second Party Logistics
Second party logistics people provide their own assets such as truck owners, warehouse
operators etc.
Third Party Logistics
Third party Logistics Provider (3PL) performs logistics services on behalf of another company.
3PLs provide the management skills along with the physical assets, labor, and systems
technology to provide professional logistics services, relieving companies of the responsibility of
performing these services themselves. 3PL's typically can provide transportation, warehousing,
pool distribution, management consulting, logistics optimization, freight forwarding,
transportation management, rate negotiations, cost evaluations, and contract management
services.

3PL is the function by which the owner of goods outsource various elements of the supply chain
to one 3PL company that can perform the management function of the clients inbound freight,
customs, warehousing, order fulfillment, distribution, and outbound freight to the clients
customers. 3PL is a service provider who gives service for one or more portfolios of services in
stand alone or integrated manner with own or leased or contracted assets or services.

A 3PL can also be described as a contract logistics service provider who manage
inventory/material flow between companies and encompasses all processes and activities such as
transportation, warehousing, documentation

Common 3 PL functions are as follows:

1. Transportation Management
  3PLs fleet (or alliance partners) offer optimized network to serve their customers.
 3PLs plan load management, routing, equipment and driver management by Shipment
Management System (SMS).
 SMS can be effectively integrated with Warehouse Management Software (WMS), to
provide integrated logistics solutions concepts such as multi-stop workload or less than
truckload which are often used to serve customers better.
 Multi-vendor consolidation reduces overall costs. Full truckload economies can be used
to combine freight from different vendor to common destinations
2. Warehouse management
 3PLs run and manage warehouses using Warehouse Management Systems, radio
frequency scanning, and bar code labeling
 3PLs manage and track the movement of goods from initial receipt to outbound shipment.
Real time, periodic and accurate information can be provided to manage inventory and
demand better.
 Additional services such as advanced shipment notifications can be generated to inform
the retail partners in the supply chain.
3. Packaging
 3PLs often have ability to do final product packaging in their warehouse, thus eliminating
the need to ship product to offsite packaging companies. This in turn means reduced
product handling, reduced cycle time and reduced costs.
 3PLs can offer variety of packaging services like custom pallets, display shippers, inserts
and coupons,

Advantages to companies by using 3PL services: -

 Focus on core competencies: Outsourcing enables companies to focus on the core
businesses and strengths. The company’s limited resources can be saved and the
company can remain focused on what it can do best.
 Lower Investment: Organizations can outsource and save a large amount required for
building logistics assets, networks and facilities such as warehouses. As an alternative for
these investments, the companies can outsource these requirements by outsourcing and
investing in their core processes.
  Enhanced technological capabilities and flexibility: Utilization of technological
capabilities has enhanced the efficiency of logistics operations. But, it may not be
feasible always for companies to invest in newer systems or upgrade their existing
systems. However, deploying third party logistics providers can insure against such
technological changes. 3 PL often invest in such technologies for providing competitive
services.
 Best practices: Outsourcing logistics to third party logistics enables companies to
implement best practices and also allows organizations to achieve best performance.

Essential characteristics of a 3 PL
 Solutions Orientation
 Logistics Know-how
 IT Capability
 Management and organizational Skill
 Innovativeness
 Independent and best of breed approach

FOURTH PARTY LOGISTICS

Fourth Party Logistics (4PL) is the integration of all companies involved along the supply chain.
4PL is the planning, steering and controlling of all logistic procedures (for example flow of
information, material and capital) by one service provider with long-term strategic objectives.
Fourth-party logistics (4PL) has evolved as a breakthrough supply chain solution
comprehensively integrating the competencies of third party logistics (3PL) providers, leading
edge consulting firms and technology providers.

4 PLs see the process and what is required for the process to succeed. A 4PL is a supply chain
manager & enabler who assemblies and manages resources, build capabilities and technology
with those of complimentary service providers. They act as the first point for delivering unique
and comprehensive supply chain solutions. 4PL leverages combined capabilities of management
consulting and 3PLs. They act as an integrator assembling the resources, capabilities, and
technology of their own organization and other organizations to design, build and run
comprehensive supply chain solutions. 4 PL is an emerging trend and it is a complex model and
offers greater benefits in terms of economies of scale.

Features of a 4 PL:
 Covers the customer’s entire supply chain
 Collaboration between two or more logistics service providers on a resource-sharing
basis for extending logistics solutions to a common customer.
 Flexible arrangements

The following are the requirements of a 4 PL:

 3PL cost advantage are one time achieved through the contract process
 Performance and competency across the logistics network
 Logistics planning and consulting
 IT support
 Operative and administrative logistics functions
 Customer Relationship Management
 Linking analytical capabilities with strong implementation and operational capabilities
 Building a high level of customer confidence in outsourcing and its solutions
 Offering transparent and flexible win-win contracts

Advantages to companies using 4PL services: -

 Reduced inventory and cycle time.

 Improved delivery performance.
 Lower supply chain cost.
 Improved order fulfillment, capacity utilization.
 Overall productivity.

Selection of a Service Provider/ critical issues

Selection of a service provider is a strategic one and has long-term effects upon the customer
service capabilities of an organization.

Major issues to be considered before deciding on a 3PL or 4PL partner:

 Switching cost: Outsourcing logisticults in reorganizing the existing assets of a company

in tuning with the working methodology of the service provider. It includes activities
such as management of existing assets, fully or partly to the service provider, deploying
existing assets on lease to service provider and divesting existing assets and completely
switching over to the usage of a logistics infrastructure by the service provider. A high
degree of risk is involved in each of the activities. Though outsourcing reduces cost
substantially, switching over to other service providers in terms of poor customer service
during the period of transition and stabilizing new system will cause more loss.
 Degree of control: The firm, which is outsourcing needs to be particular about the degree
of control over activities of the service provider, for getting the desired service by the end
user. It is not possible to have direct control over the activities of the service provider but
the service provider should ensure timely availability of information to monitor activities.
 Degree of outsourcing: The following factors influence an organization’s logistics
outsourcing in part or in total:
- Existing logistics infrastructure of the company
- Policy of management for third party involvement
- Anticipated benefits
- Product portfolio of the company.
The areas of responsibility and authority both at the outsourcer’s and service provider’s end must
be clearly differentiated.
 Channelizing logistics services to suit the needs of channel partners: Logistics service
standards are to be quantified as per requirements of channel members who service the
end users or consumers in turn. Logistics acts as a key enabler for efficient channel
management. Channel and logistics management must go together for effective and
efficient physical distribution system.
  Interface: Suitable co-ordination through an intelligent interface is necessary for proper
working of two organizations together in partnership. A match of cultures is essential.
Proper interface between employees of both organizations is very important for formulating
policies and guidelines for smooth operations of the outsourcing firm and service provider.
Mismatch in technologies used at the two ends may result in problems too. Differences in
technologies used in communication, material handling, storage, inventory management may
cause delays and errors resulting in performance below the expected level.

Conclusion

Third party logistics service providers have the core competency in a particular area of logistics
such as warehousing, transportation, inventory management etc who provide comprehensive
logistics service solutions for the entire supply chain. A new and emerging trend in outsourcing
is the Fourth Party

Logistics who assembles and manages the resources, capabilities and technology of its own
organization with those of complimentary service providers to deliver a comprehensive supply
chain solution. A management’s decision to outsource can be justified by its value proposition or
the benefits. By outsourcing, the company gains on many fronts such as cost reduction, higher
return on investments, utilization of manpower for more productive work and a clearer focus on
core competency area

INVENTORY ROLE & IMPORTANCE OF INVENTORY

 Discuss inventory and its purpose

  Describe ABC inventory system

 Calculate an economic order quantity

 Calculate the safety stock

Introduction

Inventory refers to the stock of materials of any kind stored for future use, mainly in the
production process. Semi-finished goods, which are awaiting use in the next process, or finished
goods, which are waiting for sale, are also included in this broad category.

Inventory is a key determinant of profitability.

Inventory velocity turns assets into profits. The faster inventory turns, the greater the
profitability. Inventory is the key issue to supply chain management success.

Customers demand that their orders be shipped complete, accurate and on time. That means
having the right inventory at the right place at the right time.

Excess of inventory within the pipeline increases the overall working capital requirements of the
pipeline and places a large cost burden on the agents of the chain.

The levels of inventory need to be reduced throughout the logistics pipeline, which will lead to
an effective operation.

Today the focus is on retailers and their distribution services. Inventory aims to reduce costs and
simultaneously improve service. Thus the need to reduce costs as against improving service
becomes the key issue and the role played by successful inventory management is becoming
more apparent.

Role of Inventory

Functions of inventory
Inventory management is an area which has strategic importance in logistics operation and thus
impacts the efficiency and effectiveness of the overall supply chain system. In order to get over
the uncertainties in demand and supply, goods need to be kept in stock. This is because the cycle
of production and consumption never matches. However, higher inventory levels will affect the
bottom line of the company. It is important to strike a balance between the two extreme goals of
lower cost and higher levels of customer service, as it is a high risk and high impact
area.Companies block sizeable funds in inventories, which would otherwise have been invested
in other important and productive areas. Inventories are held in the categories like Raw material
and components, work in progress, finished goods, maintenance, repairs and operating supplies,
in-transit inventory etc.

Functions of Inventory

1. Striking a balance between supply and demand:

It is very difficult to achieve a match between the production and consumption cycle.Whenever
there is a sudden requirement of product in large quantities, it is not possible to produce such
quantities immediately. Thus, products are manufactured in advance, and kept in stock during the
peak period to avoid any shortage.

2. Minimize costs at acceptable inventory levels:

When inventories are replaced in extremely small quantities, they result in low investments but
high ordering costs. There has to be a point where, the total carrying cost of inventory is
minimum but the level of inventory is such that it doesn’t affect production.

3. Provide the desired customer service levels:

Customer demands are satisfied through inventory. The location of inventory determines time in
which customer will be served, the company’s policies concerning the economic order quantity,
safety stocks, etc will determine the cost at which customer is getting served.

4. Protecting the operating system: from uncertainties in demand

Inventory ensures that the operating system does not have any disruption. For example, if a
worker in one work center falls sick or if there is a machine breakdown, the work need not be
affected if the inventory is available and others can continue the work.

5. Advantage of quantity discounts from suppliers: Inventory helps the firms in getting the
advantage of quantity discounts from suppliers.

6. Specialization

7. buffer interface: supplier-purchasing-production-marketing-distribution-intermediary-

customer

The following are the costs for holding Inventory

An inventory manager’s job is to balance the conflicting cost and the pressures of determining
the appropriate level of inventory. The reason behind keeping the inventories low is that firms
must pay interest on the investment made on inventories.

Inventory holding (or carrying) cost is a variable cost on items such as storage and handling,
taxes, insurance, interest on capital and shrinkage cost. The annual cost to maintain one unit in
inventory typically ranges from 20 to 40 percent of its value.

Illustration:

If a firm’s holding cost is 30 percent. If the average value of total inventory is 20 percent of
sales, the average annual cost to hold inventory is 6 percent {0.03(0.20)} of total sales.

This cost is significant in terns of gross profit margins, which often are less than 10 percent.

The various costs in inventory are broadly classified as follows:

Interest or Opportunities Cost A company may obtain a loan or forgo an opportunity to invest
in an attractive return. Interest or opportunity cost whichever is higher is the largest component
of holding cost.

Storage and Handling Costs This cost is incurred when a firm rents out space. Here again there
is an opportunity cost, as the firm can utilize the storage space productively for some other
purpose.

Taxes, Insurance and Shrinkage When inventories are high, the insurance on the assets
(i.e. Inventories) also increases. Shrinkage takes place in three forms.

Pilferage or theft of inventory by customers or employees.

Obsolescence occurs when inventory cannot be used or sold to the full value due to

change in model, engineering modifications or low demand.

Deterioration through physical spoilage or damage results in lost value.

Ordering Cost This refers to the cost involved in the ordering process. The paperwork faxes,
phone calls etc. will add to inventory related costs.

Carrying cost Also called holding cost, carrying cost is the cost associated with having
inventory on hand. It is primarily made up of the costs associated with the inventory investment
and storage cost. For the purpose of the EOQ calculation, if the cost does not change based upon
the quantity of inventory on hand it should not be included in carrying cost. In the EOQ formula,
carrying cost is represented as the annual cost per average on hand inventory unit. Below are the
primary components of carrying cost.

a) Out of stock costs Incurred when the order placed by the customer cannot be filled from
the available inventory.
b) Over stock costs Incurred when the company is having some stock in hand even after the
demand for the product has been terminated.
Reasons for Carrying Inventories
Carrying Inventory can be classified under four heads

Cycle Inventory

Safety Stock Inventory

Anticipation Inventory and

Pipeline Inventory

1) Cycle Inventory: Raw materials, components, parts are required for production. This is
cycle plays a crucial role in keeping the production cycle continuous. The work in
progress inventory is a major part of production related inventory. Determining how
frequently to order and in what quantity is called Lot sizing.
2) Safety Stock: In order to avoid customer service problems and the hidden costs of
unavailable components, companies hold safety stock. This gives a cushion against
uncertainties in demand, lead-time, and supply therefore ensuring that operations aren’t
disrupted.
Illustration:

Suppose the average lead-time from a supplier is three weeks but a firm orders five weeks in
advance just to be safe. This policy creates safety stock equal to a two weeks’ supply (5-

3) Anticipation Inventory: This term refers to the inventory that is used to absorb uneven
rates of demand or supply that businesses face. Manufacturers of air conditioners, for
example, experience 90 percent of their annual demand during just three months of a
year. Hence anticipation inventory helps in evening out the volatility in demand and
supply. A company may stock up on certain items if its supplier threatened with a strike
or have severe capacity limitations.
4) Pipeline Inventory: Inventory moving from point to point in the materials flow system is
called pipeline inventory. Materials move from suppliers to a plant, from one operation to
the next in the plant, from the plant to a distribution center or customer, and from
distribution center to a retailer. Pipeline inventory consist of orders that have been placed
 but not yet received. Therefore stocking locations, improving materials handling and
delays in distribution should be overcome.

Inventory Levels

There are three basic types of Inventory: Raw Material, Work in Progress, and Finished Goods.

I. Raw Material
This includes all the purchased parts and direct materials that go into the end product. This type
of material has value added to it as it flows together as subassemblies, assemblies and finally into
the shippable product.

II. Work-in-Process
Refers to the inventory waiting in the process for being assembled into final products.

III. Finished goods

These refer to the inventory, which are ready for delivery to the distribution centers, retailers,
and wholesalers or to the customers directly.

Symptoms of poor inventory mgt

 An increase in the number of backorders

 Higher than normal customer turnover

 Increase in number of cancelled orders

 Insufficient storage space

 Increase in number and value of obsolete stock

Inventory Efficiency in the Supply Chain.

Lowering inventories is one of the quickest ways to substantially decrease working capital needs.
The drive for working capital use efficiency with the need to more quickly respond to changes in
customer demand, with shorter and shorter order-to-delivery cycle times is challenging to many
manufacturers. In times past, manufacturers would stockpile large quantities of raw materials;
load-up the shop floor with work-in-process; and, pack warehouses with finished goods. Not
only do those old ways increase working capital needs, they are a big factor in contributing to
erratic and longer lead times as well as increasing overall costs.

The pressures to reduce inventories, and therefore working capital requirements, are increasing
even in times of relatively low interest rates. The opportunities to use a finite source of capital,
not just more efficiently but in ways that yield high rates of return for employing the essentially
idle capital elsewhere in the business. For example, reducing inventories could provide the
necessary capital to finance such things as: new product development, expanded marketing and
sales, modernization, business process redesign,improved supply chain management, expansion,
acquisitions, debt reduction among others.

Need for inventory control:

1. Increase in the size of manufacturing units: With the increase in the size of manufacturing
units, there is a necessity to have sufficient inventory control so that increasing inventories do
not become non-value added expenditure. In fact, increasing inventory can erode the profits of
the company and the possibility of inventory control arises.

2. Wide variety and complexity of the requirements: The requirements of the modern industry
have necessitated the need for conscious inventory management.

3. High idle time cost of machine and men: If men and machines are kept idle, it is highly
uneconomical for the firm. Inventory levels have to be managed keeping this factor in mind.

4. Liquidity: There is an increased stress on liquidity in today’s organizations, where it becomes

a necessity to maintain liquidity at the levels of nearly 10-20 per cent of the total capital invested
in finished goods

Symptoms of poor inventory management

 Increase in the number of backorders, indicating too many stockouts

 A constant number of backorders but rising inventory investment

  Higher than normal customer turnover

 An increase in the number of cancelled orders from customers or intermediaries

 Insufficient storage space from too much inventory at hand

 An increase in the number and dollar value of obsolete inventory.

Certain Performance Indicators for Inventory:

 ABC analysis of the assortment categorized by stock value/volume

 Variance in throughput time of the product group in totality
 The number of damages/claim
 Mean throughput time of the product group / vendor wise/ location wise
 Reliability of the inventory regarding quantity and correct place.
PACKAGING AND MATERIALS HANDLING

Packaging is a marketing tool related to the performance of marketing function. The basic
objective behind packaging is to prevent damage to the product during storage, transportation
and handling, when it is in movement for distribution in the market. It forms an important cost
element of goods and represents 5 – 30 per cent of the value of goods, depending on the type of
product. It has a significant impact on the cost and productivity of the logistical system. The
main cost elements are the purchase of packaging materials, introducing automated or manual
packing operations, and further the need for disposal of material. A systems approach is
necessary to manage packaging. Any central planning logic, which is designed to control total
distribution costs, must keep in mind the costs related to packaging.
There are two main types of packaging: Consumer and logistical/industrial packaging
Consumer packaging
This packaging is done with a marketing emphasis. The packaging design focuses on aspects like
customer convenience, market appeal, shelf utilization, product protection etc.
The proper package design should have its base on a complete assessment of the logistical
packaging requirements, which requires a complete evaluation of how all the components in the
logistical system influence packaging.
Industrial packaging
The concept of containerization or unitization where the individual products are grouped into
carton, bags, bins, or barrels for handling efficiency. The master cartons are grouped into larger
units for handling, the combination that is referred to as containerization or unitization.
Logistical packaging is designed to meet the distribution objectives.
Determining the degree of protection required to cope with anticipated physical and element
environments is an important issue in package designing.

Functions of packaging:
Damage Protection
The master carton protects products from damage while movement and storage, in addition to
being a restraint to pilferage.
The cost of protection increases according to the degree of value and fragility of the product. The
vulnerability of damage is related to the environment in which it is stored and transported.

The physical environment relates to the logistical system. When the firm has more control over
its physical environment, lesser the packing precautions are required. An example can be the
utilization of privately owned transportation, which will move the product in a controlled
environment. But if common carriers are used for transportations, more precaution needs to be
exercised as the product may be transported in a variety of vehicles and there is lesser control.
Certain situations in which the product will cause in – transit damage to the product are
vibration, compression, puncture and impact. Securing the package with a tight strap or to load
the carrier in a right pattern can reduce this.
The outside elements also influence the packaging. There are certain factors like temperature,
humidity etc which are beyond the control of logistical management. It has to be determined in
advance how the contents of the packing will react to each of these factors and design the
packing accordingly.
Utility/Convenience
This refers to how packaging can affect the logistical productivity and efficiency. When products
are packed in certain configurations and order quantities, it increases the logistical output.
Packaging thus provides convenience of handling and storing. Also the concept of unitization is
very significant here. Unitization refers to the process of grouping the master cartons physically
into one restrained load for easier material handling and transportation.
Communication
Packaging plays a significant role by assisting all channel members to identify the contents of the
package. An attractive surface decoration can serve as a display item. Information such as the
manufacturer’s name, quantity, code number etc is mentioned on the package. The labels must
be visible from reasonable distances. Handling and damage instructions are provided on the
package. Especially for hazardous products such as chemicals such instructions can be of great
assistance. Tracking is one more feature of logistical packaging. The consignment moves along
multiple storage locations, transportation systems at various points with other consignments. For
a well – controlled material handling system to track the product as it is received, sorted or
shipped, packaging identifiable through a bar code is essential.

Packaging Cost:
The packaging cost depends upon factors like nature of product, physical dimensions, value,
regulations etc. Delivery of the product at minimum overall packaging cost is essential. These
are the costs included in packaging.
Unit Package Cost: Basic material or container price. This will depend upon factors like
volume, freight charges, and methods of over packing and development costs. An increase in the
volume attracts lesser price.
Operation Cost: The packaging equipment must have the strength and ability to withstand the
stress of high speed filling equipment, in order to make the production process cost effective and
efficient.
Warehousing: The packed product is shipped to the user’s warehouse for storage before
shipment. Shape of the package and strength of the package are the factors of key importance
here.
Distribution: Moving the product from the user’s warehouse involve several forms of transport.
The costs of these are referred to as transport costs, which are governed either by the weight of
the finished pack or the volume. They may also depend upon the shipping distance and value of
the item being handled

Unitization
Products are grouped together in cartons, bags and barrels for handling efficiency. The
containers used to group individual products are called master cartons. When the master cartons
are grouped together, it is called unitization. The concept of Unitization has its base upon the
theory that all shippers must pack their cargo in such a manner that it is moved and handled
entirely by mechanical equipment, like lifts and cranes, all through the distribution network. It
enables faster loading and unloading by transportation equipment, results in more efficient
distribution center operations and also a reduced level of pilferage.

Palletisation for Unitization

Pallets enable unifying dry cargo loads. Basically, it is a flat tray upon which a lot of articles
can be placed, and can be handled as one article. For securing the articles to the pallets,
metal strapping, plastic films or more elaborate forms of devices are used.
Benefits of palletisation include reduction in time required to load or unload the products
from the vehicle, and better utilization of warehouse space. Other benefits include assembly
of individual packages according to a single customer order, easy handling of pallets for
road as well as rail vehicles, and reduction in the rate of damage in transit, and reduced
delivery time.
A drawback can be the lack of uniformity in pallets.
Containerization:
Container refers to physical equipment, which is used for unifying a number of shipments, which
then move as individual units. These are used to handle bulk commodities as well as
merchandise and are especially adaptable for inter-modal transport.
Benefits of containerization
Reduced door to door shipment
Reduced freight costs
Reduced damage and pilferage, thus eliminating intermediate handling of packages
Higher productivity of labour
Lesser documentation
Reduced warehousing and inventory costs
Better utilization of capital equipment through uniformity of cargo
Environmental control
Drawbacks of containerization
All cargo need not necessarily suite containerization
Heavy capital investment in equipment required
Difficult to thrust liability as there are several carriers and also no intermediate
inspection
Proper equipment to handle containers may not be available
System not comfortable with air freight

Movement of containers:
While moving the container, the consignor is faced with several choices such as the
follows:
By Road: This is done by using equipments like direct lifting cranes, forklift trucks,
portal frames and other self-loading devices.
By Rail: For long distances, road may prove uneconomic and thus the rail transport
can be used to transfer containers.
By port terminals: The container finally arrives at the port to be shipped whether
road or rail transport is used to transfer containers.
By ships: To secure benefits of rapid loading and unloading and thus to ensure
efficient utilization of space, containers are built or customized. Wide hatches give
complete access to holds in these ships.

Designing a Package:
Designing the package involves the following steps:
o Briefing the designer: The person who is designing the package needs to understand
what is in the mind of the manufacturer. A complete marketing analysis may be given to
the designer or some specific objectives may be given. The designer needs to list his
views about the problem.
o Gathering information about the package: Meeting the people involved in the
production process, various channel members like sales personnel, dealers etc. has to
be done. Facts about the packaging materials need to be gathered.
o Writing the Design Platform: The designer gives a report giving details of what he has
understood and what must be done to achieve the objectives he has laid down. The
product and packaging engineers need to work together.
o Creative Phase: Here, the creative people are involved. They are given a precise
definition of the problem and a set of objectives to work upon. They are required to find
visual solutions to the problems stated within the boundaries outlined in the platform of
design.
o Consulting Suppliers: Then, the appropriate suppliers of materials need to be called in.
The ideas are synchronized with reality. The ideas need to be practical and also cost
effective.
o Initial Presentation: The ideas are presented at a first visual presentation meeting. The
client actually sees the work being done. The designs should be judged in relation to the
design platform.

o Modification: Modifications, if any which need to be done after the first presentation,
must be made.
o Design Testing: To test package, a number of tests have been developed, a few of
which have been listed below:
o Image tests: Use the qualitative and quantitative research to assess consumer
attitudes, preferences and message communicated.
o Usage tests: Examine the functional related attitudes towards packaging and usually
involve in - placement tests.
o Visibility tests: Are designed to evaluate legibility of pack graphics, relative impact of
different pack elements, and the relative impact of different designs they include the use
of Brainwave analysis: Used for both advertising and package designing. Method is
based on “Alpha” and “Beta” brainwaves.
o Final Design Phase: A final meeting with client is held to finalize the design. In this
stage the various aspects of packaging like labels, contents, colour schemes, artwork on
label etc need to be finalized.
o Production Design: The complete designs are presented to the clients for approval.
The design is approved and also set as per the initial discussions concerning the
marketing strategy. Any variance needs to be resolved by consulting the experts in the
respective fields.
o Finishing the Job: The finalized artwork is turned over to the suppliers for producing the
packs.

Factors effecting choice of packaging materials

Characteristics of Materials to be Packaged
Destination
Kind of Transportation
Handling, stowability and storage considerations
Conditions of usage and distribution
Cost
Availability of the type of package and choice of substit

Conclusion
Packaging has a key impact on the cost and productivity of the logistical system. A central
planning logic designed to control the total distribution costs must incorporate all the relevant
costs and trade – offs, also those related to packaging. The cost of every logistical activity is
affected by packaging. Inventory control is dependant on the accuracy of the manual or
automatic identification systems that are keyed by product packaging. The order selection speed,
accuracy, and efficiency are affected by the identification of product, configuration and ease of
handling. The capability of unitization and techniques influence the handling cost. Package size
and density influences the transportation and storage costs too. From the customer perspective,
factors like quality control during distribution, providing consumer education, compliance with
environmental regulations explain the importance of packaging. Given the complexity in the
global supply chain and the costs of locating new facilities, the concept of packaging
postponement to achieve strategic flexibility is gaining importance. With so much influence of
packaging in every logistical activity, an integratedlogistics approach towards packaging
operations can yield substantial savings
 MATERIALS MANAGEMENT

Materials Management is the process of management which co-ordinates, supervises and

executes the tasks associated with the flow of materials to, through, and out of an organization in
an integrated fashion. There is maximum utilization, conservation, elimination of wastes, and
thus avoidance of unnecessary delays.

Objectives of materials management

 Economical procurement of materials

 Issuance and timely distribution
 Store accounting
 Record keeping
 Stores control
 Looking at new supply sources
 Development of vendors
 Value engineering
 Coordinating smooth flow of materials

Materials Planning

This is a scientific technique of determining in advance, the requirements of raw materials,

ancillary parts and components, spares, etc. given by the production programme. The overall
management planning and control system is a broad perspective within which material planning
functions, and materials budgeting are an exercise translated in money terms for its effective
functioning, control as well as execution.

The actual planning starts with the information gathered from the annual sales forecasts,
production and general business forecast. Forecasts provide the means for satisfying locational
needs, and the general business forecasts provide the means to estimate in advance the trends in
prices, wages and costs of other services. While breaking down broad forecasts into specific
plans, the next step is to make the price and supply available to confirm to the specific plan. The
materials consumption estimation is broken down into specific periods. The quantities are
checked against the inventory control procedure, by taking into account the safety stock and
lead-time requirements.

Stores Management and Operation

The three main storage systems on a broad view are receipts, physical upkeep and maintenance
system. The system must be flexible enough to change with the change in the environment as
well as production demands.

The key activities of stores are as follows:

 Receipt of materials, checking the quantity, co – ordination for inspection and the preparing the
goods receipt note
 Accepting the checked materials, preparing rejection notes and thus completion of formalities for
payment of bills
 Taking stock of the accepted materials and storing them in their respective locations
 Preparing issue vouchers, making actual issues for disposals and accounting for the same
 Ensuring proper sharing of information with the purchase departments through regular reports
 Ensuring the storage place is clean to facilitate handling, movements and observing all safety and
security measures.

Having a key role to play in the success of warehousing operations, the storage system should be
designed in such a way that it accommodates the inflow of inputs of materials and bought out
components from the outside sources, in – process inventories and the outflow of finished goods
to the ultimate customers. The design, size and location of a storehouse must be an important
part of the management strategy.

Three basic ways of storage are as follows:

Fixed Location: An organized method of storage that places a product in a specific, pre-defined
location that does not change. Fixed location storage dictates that a given stock-keeping unit
(SKU) must always be stored in its assigned space even if there is available storage space
elsewhere in the warehouse. This method has the advantage of making items easy to find, but is
not always the most space-efficient method of storage. Opposite of random location storage.
  Stock can be found easily without any complex system of recording, but there is a considerable
wastage of space.
 Random Location: refers to storage method where a product may be stored in any location.
Random storage has higher space utilization and generally lower accuracy than fixed location
storage
pace is better utilized, but there is a need to keep good and elaborate records for the location of
materials.
 Zoned Location: Goods of a particular group are stored together in a given area.
In zoned storage the items are stored in the same location, but in a specific zone which is determined by
characteristics of the item.

 Refrigerated Zone - A business may use items that need to be kept at a certain
temperature such as food items or certain chemicals. Many businesses have
multi-temperature warehouse with both ambient and refrigerated zoned areas.
These refrigerated zones usually keep items at 38 degrees to 50 degrees
Fahrenheit. Some warehouses need to keep items frozen and these zones will
have temperatures as low as zero degrees Fahrenheit. These zones will only store
the materials that have these requirements.
 Dry Storage - Dry storage is a common zone in a warehouse. Many items need
to be kept away from moisture and a dedicated dry zone can be used. Most
warehouses that operate a dry storage zone do so to keep items between 50 and
70 degrees Fahrenheit. If temperatures in the dry storage area exceed 70 degrees,
there is the possibility of increased insect activity as well as damage to items
such as canned food items and items affected by humidity. To keep the dry
storage area less than 70 degrees a warehouse would need to use air conditioning.
In warehouses located in colder areas, the temperature in the dry storage area can
fall significantly and require heating to keep items from freezing.
 Flammable Liquids - Some companies use chemicals in their manufacturing
process and these need to be stored safely. Depending on the chemicals they need
to be stored in an approved storage cabinet and not will other non-flammable
liquids.
 Corrosive Materials - Corrosive Materials such as acids, also must be stored in
the warehouse in their separate cabinets.
 Gas Cylinder Storage - Gas cylinders are commonly stored in warehouses, but
they must be stored in a designated area, which includes chaining or strapping
them to a warehouse wall. They must always be transported using a cart with
safety chains when moving gas cylinders around the warehouse.
 Oversize Storage - Some materials in the warehouse will not fit in a normal size
rack and need to be stored in a separate area. For example in a automotive
warehouse, complete exhaust systems could not be stored on normal racking, so
would have to be stored in an area specifically for oversized items.
 Security Cage - For companies that have to storage small size, but high value
items, such as brand-name pharmaceuticals, there may be a need to store the
items in a security zone. This can be achieved either by creating a secure aisle
where there are locked gates at each end of the aisle or by using a security cage
where the movement of the high value items are checked by personnel.

  Material Handling and Storage Systems
Every operation in materials management involves the raising, lowering or moving an item,
which is termed as materials handling. The management of materials handling activities brings
about a host of specialty disciplines and responsibilities like mechanical, electrical,hydraulic
means and electronic devices.

Basic Principles of Material Handling

Orientation Principle Flexibility Principle

orient systems to methods and problems, physical Use methods and equipment which can
and economic constraint before establishing perform a variety of tasks under a variety of
future requirements and goals. operating conditions.
Planning Principle Simplification Principle
Establish a plan to include basic requirements, Simplify handling by eliminating, reducing, or
desirable options, and the consideration of combining unnecessary movements and/or
contingencies for all material handling and equipment.
storage activities.
Systems Principle Gravity Principle
Integrate those handling and storage which are Utilize gravity to move material wherever
economically viable into a coordinated system of possible, while respecting limitations
operation including receiving, storage, concerning safety, product damage, and loss.
production, assembly, packaging, warehousing,
shipping, and transportation.
Unit Load Principle Safety Principle
Handling product in as large a unit load as Provide safe material handling equipment and
practical. methods which follow existing safety codes
and regulations in addition to accrued
experience.
Space Utilization Principle Computerization Principle
Make effective utilization of all cubic space. Consider computerization in material handling
and storage systems when circumstances
warrant for improved material and information
control.
Standardization Principle Layout Principle
Standardize handling methods and equipment Prepare an operational sequence and
wherever possible. equipment layout for all viable systems
solutions, then select the alternative system
which best integrates efficiency and
effectiveness.
Ergonomic Principle Cost Principle
Recognize human capabilities and limitations by Compare the economic justification of
designing material handling equipment and alternative solutions in equipment and methods
procedures for effective interaction with the on the basis of economic effectiveness as
people using the system. measured by expense per unit handled.
Energy Principle Maintenance Principle
Include energy consumption of the material Prepare a plan for preventive maintenance and
handling systems and material handling scheduled repairs on all material handling
procedures when making comparisons or equipment.
preparing economic justifications.
Environmental Principle Reliability Principle
Minimize adverse effects on the environment Provide reliable and dependable material
when selecting material handling equipment and handling equipment from manufacturers who
procedures. have demonstrated quality and longevity in the
industry.
Mechanization Principle Accessibility Principle
Mechanize the handling process where feasible to Readily have access to the knowledge,
increase efficiency and economy in the handling expertise, professionalism, and industry
of materials. leadership.

Material Storage Systems

The storage system in a warehouse has a key role to play in the total cost and the efficiency of
warehouse operations.

An efficient usage of material handling equipment is possible if the storage system allows easy
access and retrieval of inventory.
Factors affecting selecting a storage system for a specific application depends upon the following
factors:

 Nature of the product: Products, which have a higher risk of contamination, will have to be
isolated from other product groups. For example hazardous chemicals can cause damage to other
products.
 Configuration: While uniform products may be stored in stacks or in an enclosure,products,
which are in odd shapes and sizes, need more space.
 Perishability: Perishable products are stacked in such a manner that consignments,which come in
first, are distributed first.
 Product variety: When a variety of products are stored together, there needs to be segregation
for easy identification for storage and retrieval.

Classification of material handling equipments

 Manual: most commonly used means of material handling. Limitations include: low
volume, slow speed,

 Mechanical : the use of machines in moving products within the organization.

Greatly affected by the organization’s layout. Mechanized equipment require space
for free movement across the warehouse. Advantages less fatigue. The criteria for
choice includes: improves space utilization, movement time reduction, speed,
reduced material damage, safety

o Whelled trolleys

o Folk lifts

o Towlines

o Convwyors

o Wheel conveyors

o Roller conveyors

o Carousels

o Overhead cranes

o Pneumatic tubes
  Semi-automated: includes mechanical handling but certain functions may be
automatically. Some equipment may be automated but others are computerized

o Sorting devices

o Robotics

o Automatic Guided Vehicle System(AGVS)

 Automated: human factor is minimized and restricted to programming and

controls. Have high speed and accuracy which improves productivity

 Information directed

Types of material handling equipments

Pallets: Specially designed platform, which is built to dimension to suit forklift operations.These
are designed out of hardwoods, though in some cases, steel pallets may also be used. The
supplies are loaded onto the pallets, transported and stored in warehouses.

Forklift trucks: Move loads of master carton horizontally and vertically. The master cartons are
stacked upon the pallet, which forms a platform. There are many types of forklift trucks, which
are available for handling a variety of products. Though these trucks can be used to load and
unload other vehicles too apart from transporting material, they are not economical for long
distance horizontal movement due to the high ratio of labour per unit of transfer.

Cranes: These are power – driven, self – propelled units fitted with a boom mounted on a mobile
chassis.
Conveyors: These enable straightforward transportation as rehandling before each and every
activity is eliminated. Nowadays these are loaded and unloaded automatically. The cost increases
with the distance to be traveled and thus it makes them more attractive for high –volume
throughputs overshooting the distances.

Elevators: Contains an endless chain or a belt which runs over two – terminal pulleys or
sprocket – wheels fixed at different levels on a vertical plane.

Tractors: Used as a substitute for forklift trucks, which are uneconomical for long distance
movements.

Towlines: Consist of either in – floor or overhead – mounted drag devices and are used in
combination with four – wheel trailers on a continuous power basis.

Carousels: Operates on a different concept than other equipments. The desired item to the order
selector is delivered by using a number of bins mounted on an oval track. The logic behind
carousel systems is to reduce walking length/paths and time.

Conclusion:

Most of the businesses arise out of the idea, which is much, more fundamental than mere profit
making. The ultimate product or service is of great importance. Materials Management involves
much more than cost – reducing techniques and includes cost control, cost reduction, work
simplification and value analysis.
The professional materials manager needs to judge the right procedures, tools and techniques
before approaching the job. Control of materials function is a primary task. In future, the
materials managers have to be well equipped to face the challenge the modern days have posed
to them.

STORES MANAGEMENT

Stores management ensures:

• That the required material never goes out of stock ;

• That no material is available in (much) excess than required
• To purchase materials on the principle of economic order quantity so that the associated costs
can be minimized; and
• To protect stores against damage, theft, etc.
This can be achieved by the following:
• A proper purchasing practice (i.e., when to order materials).
• An adequate procedure of receipt and issue of materials.
• Proper methods of storing materials.
• An effective system of physical control of materials.
• A proper method of keeping store records.
FUNCTIONS OF STORES DEPARTMENT AND THE DUTIES OF THE
STOREKEEPER

They are given as follows:

• To receive materials, goods and equipment, and to check them for identification.

• To receive parts and components which have been processed in the factory.

• To record the receipt of goods.

• To correct positioning of all materials and supplies in the store.

• To maintain stocks safely and in good condition by taking all precautions to ensure that
they do not suffer from damage, pilfering or deterioration.
 • To issue items to the users only on the receipt of authorized stores requisitions.

• To record and update receipts and issue of materials.

• To check the bin card balances with the physical quantities in the bins.

• To make sure that stores are kept clean and in good order.

• To prevent unauthorized persons from entering the stores.

• To make sure that materials are issued promptly to the users.

• To plan store for optimum utilization of the cubic space (i.e., length, breadth and
height).

• To ensure that the required materials are located easily.

• To initiate purchasing cycle at the appropriate time so that the materials required are
never out of stock.

• To coordinate and cooperate to the full extent with the purchasing, manufacturing,
inspection and production planning and control departments.

LOCATION AND LAYOUT OF STORES

Following points need to be taken care of:

• Location of the stores should be carefully decided and planned so as to ensure maximum
efficiency.
• The best location of stores is one that minimizes total handling costs and other costs
related to stores operation and at the same time provides the needed protection for stored
items and materials.
• Store location depends upon the nature and value of the items to be stored and the
frequency with which the items are received and issued.
• In general, stores are located close to the point of use. Raw materials are stored near the
first operation, in-process materials close to the next operation, finished goods near the
shipping area and tools and supplies in location central to the personnel and equipment
served.
• All departments should have easy access to the stores and especially those which require
heavy and bulky materials should have stores located nearby.
 • In big industries having many departments, stores department possibly cannot be situated
where it is convenient to deliver materials to all departments and at the same time be near
the receiving department ; thus it becomes often necessary to set up sub-stores
conveniently situated to serve different departments. This leads to the concept of
decentralized stores.
• In decentralized stores system, each section of the industry (e.g., foundry, machine
shop,forging, etc.) has separate store attached with it; whereas in centralized stores
system, the main store located centrally fulfills the needs for each and every department.

ADVANTAGES OF CENTRALIZATION OF STORES

Centralized store results into the following benefits:

• Better supervision and control.

• It requires less personnel to manage and thus involves reduced related costs.

• Better layout of stores.

• Inventory checks facilitated.

• Optimum (minimum) stores can be maintained.

• Fewer obsolete items.

• Better security arrangements can be made.

ADVANTAGES OF DECENTRALIZATION OF STORES

• Reduced material handling and the associated cost.

• Convenient for every department to draw materials, etc.

 • Less risk by fire or theft.

• Less chances of production stoppages owing to easy and prompt availability of

materials, etc.

• An idea about the disadvantages of centralized and decentralized stores can be had from
the advantages of decentralized and centralized stores

TRANSPORTATION

Transportation is basically the movement from one location to another as it makes its way from
the beginning of a supply chain to the customer’s hands. Transportation not only ensures
movement of people but also goods from one place to another thus assisting the economy in the
growth of trade and commerce. Being one of the most visible elements in the logistics
operations, this function has gained a lot of importance and interest from the logistics
perspective. Transportation plays an important role in each and every supply chain because
products are usually not produced and consumed in the same location.

With the growth in industry and commerce, transportation facilitates in achieving the social and
economic objectives. As times are changing and according to the requirements, the mode of
transportation is changing to keep pace with the growth of science and technology across the
globe. The degree of sophistication of the various transportation equipment in use varies
according to the level of economic condition and growth of any particular region / country. As
the economy has transformed from subsistence agriculture to commercial agriculture, and also
with the spurt of manufacturing activities, the scope of development of transportation modes has
widened

Transport, being the main component of logistics, plays an important part in all management
decisions within the organization, from strategic decisions to everyday operations. Day to day
management decisions also relies on transport, as “Just in Time” methods for both productions

and distribution have become the standard.

The appropriate use of transportation is the key to any supply chain’s success.

Basically, transportation serves two main purpose:

a) Product movement: The primary function of transportation is the forward and backward
movement of the product in the value chain. It is necessary that product be moved only
when they are necessary and there is an enhancement in the product value. This is
because transportation utilizes the financial resources for expenditure like driver’s labor,
operation cost of the vehicle, and other administrative expenditure. The environmental
resources are utilized both directly and indirectly. An example of direct usage can be the
fuel and oil costs and an indirect usage can be the environmental expense caused by air,
noise pollution in the environment.

b) Product Storage: Temporary storage for in – transit goods is expensive. But in

circumstances where the warehouse space is limited, utilizing the transportation vehicles
may be a better option. The vehicle can be used as a temporary storage option where the
origin or destination warehouse has limited storage capacity. Another option is to take a
 diversion. This is done when there is an alteration in the shipment destination while the
delivery is in transit.

A transportation strategy to be successful should recognize the following:

 Customer requirements. The supply chain involves continuous and efficient movement
of product from vendor to manufacturer to customer. Thus the transportation program
must reflect and meet the customer’s needs. The vital aspects are time and service.
 Timely movement of shipments. Customers demand their shipments be delivered as
they require - on the date needed, by the carrier preferred, both shipped complete and
delivered complete and in good order. A transportation program, which can do this, can
provide customer satisfaction and give a competitive edge.
 Mode selection. Selecting the mode of transport is an important consideration. The
transit time has to be considered while doing so.
 Carrier relationships. Volume catches the attention of the carrier of forwarder. The
carrier attention with volume creates a competitive interest in a business. Another side to
this attention is that the business cannot be divided among many carriers. The chief
reason being that responsive transportation can create a competitive advantage and this
can be done only with a focused relationship with a carrier.
 Measuring/benchmarking. There is a necessity to know about the performance of the
strategy as well as the carriers. Measuring and benchmarking can be of assistance to this.
Measuring means comparing performance versus standards. Benchmarking means
learning what other companies do--the best practices. Benchmark needs to be done with a
company in the same industry.

 Flexibility. As change is happening everywhere, the strategy has to be ready to change.

There is a constant change in the customers, products, business, suppliers and the overall
 corporate emphasis, which can dramatically change the company’s strategy. It is
important to recognize that change will occur. Just as times are changing, the strategies
will also keep changing. A company must adapt itself to such an environment.

Participants in the Transportation Decisions:

Primarily there are five key parties in transportation decisions. Each of these parties has a role in
the transportation environment.

a) Shipper: The party, which requires the movement of the product between the two points
in the chain. The shipper’s objective is to fulfill the customer order with responsiveness
but at the minimum cost.
b) Consignee: The destination party or receiver. The consignee also has the similar
objective of receiving the goods at a lowest cost and with maximum responsiveness.
c) Carrier: The party, which moves or transports the product with an objective of
maximizing the revenue at the least cost. Carriers have a tendency charge a higher rate
and reduce their costs by trying to consolidate various individual loads into economical
loads and thus would seek flexibility in pickup and delivery with the client. This motive
is in conflict with the manufacturer’s objective of reducing total transportation costs.
d) Government: The Government has a high interest level in the transactions because a
stable and efficient transportation environment is necessary to sustain economic growth.
To facilitate this, carriers must offer competitive services while operating profitably.
e) Public: The ultimate determinant of transportation by desiring goods at reasonable prices.
Their concerns are related with the accessibility, expenditure, effectiveness as well as the
safety and environmental standards.

Factors affecting carrier decisions:

a) Vehicle related cost: Cost incurred by the carrier for purchase or lease of the vehicle to
transport goods
 b) Fixed operating cost: Costs which can be associated with the airport, terminals and
labour which are incurred whether vehicles are in operation or not.
c) Quantity – related costs: Usually variable in nature except in circumstances where
labour for loading and unloading is fixed
d) Trip – related cost: Includes the price of labour and fuel incurred for each trip
independent of the quantity transported.
e) Overhead cost: Any cost incurred for planning, scheduling a transportation network as
well as the information technology costs incurred.

Factors affecting shippers decision:

a) Transportation Cost: Total amount paid to various carriers for transporting products to
customers.
b) Inventory Cost: Cost of holding inventory incurred by the shipper’s supply chain
network.
c) Facility cost: Cost of various facilities in the shipper’s supply chain network.
d) Processing cost: Cost of loading / unloading orders and the other processing costs
associated with transportation.
e) Service level cost: Cost of not being able to meet delivery commitments. This cost to be
considered in strategic, planning and operational decisions.

Transport Economics: The factors which influence transport economics:

1. Distance: This is a major influence on the cost as it is a direct contributor to variable costs like
labour, fuel, and maintenance. The tapering principle, where the cost curve increases at a
decreasing rate as a result of the distance function is relevant here.

2. Volume: It is viable to consolidate smaller loads into larger loads to take advantage of the
economies of scale.

3. Density: The product density or weight is discussed here, where the product density can be
increased within a truckload for better capacity utilization.

4. Stowability: This refers to the product dimensions and how they affect the vehicle space
utilization. It is easier to stow standard shaped items than odd – shaped items, which occupy
more space.

5. Handling: While loading or unloading trucks, railcars, or ships, there is a necessity for special
handling equipments like trolleys, forklift trucks, conveyors etc to load or unload trucks, railcars
or ships.

6. Liability: These are product characteristics, which basically affect the risk of damage and the
resulting incidence of claims.

7. Market Factors: Factors like lane volume and balance. A transportation lane refers to the
movements between the points of origin and destination. When a vehicle is sent from the point of
origin, it may return empty-handed or may bring back load. Due to the imbalances in demand in
both the manufacturing and consumption locations, a balanced (volume is equal in both
directions) move is nearly impossible.

Transportation Management
Factors like globalization and technological improvements in the past years have changed the
logistician’s view of transportation. The logistics manager is expected to be more proactive in
identifying the desirable combination of carrier services and also the suitable pricing structures
in order to meet the objectives of the firm. Transportation, when managed independently of other
value added logistics operations often represents the weaker elements. Transportation decisions,
which are made in co-operation with, related functions, remove this weakness.

Principles of transportation

The two main fundamental principles in transportation management and operations are economy
of scale and economy of distance. Economy of scale means the transportation cost per unit of
weight decreases with an increase in the size of shipment. Economy of distance implies that there
is a decrease in the transportation cost per unit with an increase in the distance. These principles
are essential while evaluating alternative transportation strategies or operating practices.

Thus transportation management is an important activity for the organization which involves the
following process:

a) Analysis and Understanding of environment: There is a necessity to understand the

transport environment, to make sound transport decisions. The environment consists of the five
parties – shipper, consignee, carrier, government and public.

b) Clarity in objectives: The order of preference in performance of transportation functions has

to be decided. The manufacturer must determine his objectives at a level at which service can be
performed and the levels at which customers expect, the amount of trade– offs that can be
expected. Such setting of objectives can enable the company to choose an efficient mode of
transport.

c) Selecting mode of transportation: A choice between single mode and intermodal transport
has to be made to achieve objectives efficiently.

d) In source or outsource: After selecting the mode, the company must decide whether to in
source the activity or outsource to third parties. According to the mode selected, the company
must perform the functions.

e) Evaluation and Control: The efficiency of the transport system can be ascertained by
measuring the customer satisfaction

Bases on Design features and operational characteristics, material handling equipment may be
broadly classified as:
 Hoisting Equipment’s:

It constitute a group of equipment which are employed mainly for lifting or lowering of unit load
or piece goods in batches. This group of equipment’s can be further sub classified into:

1. Pure Hoisting Machineries

 Jack
 Winches
 Hand Hoists
 Pulley Blocks
2. Cranes

 EOT Crane
 Jib Crane
 Cantilever Crane
3. Elevators

 Lift
 Bucket Elevators
Conveying Equipment’s:
It comprises of a number of equipment which are employed for handling principally bulk load
(occasionally piece goods or unit load may also be handled) in continuous flow. Such machines
do not have separate lifting or lowering gear. This group of equipment also can have further sub
classifications as:

1. Belt Conveyor

2. Hydraulic Conveyor

3. Pneumatic Conveyor

4. Apron Conveyor

5. Screw Conveyor

6. Flight Conveyor

Surface/ Overhead Equipment’s:

These are the group of equipment’s which are employed for handling unit load or bulk load in
batches on a horizontal surface. This group of equipment may be further sub classified into:

1. Truck and Lorries

2. Railway Cars and Wagons

3. Fork Lifts

4. Overhead mono-rail / Equipment

5. Scrapers and Skidders

Types of Material Handling Equipment Loads:

It usually classified into:

1. Unit Load

2. Bulk Load

Unit Load:
Unit loads are those which are counted by numbers or units. A component of a machine, a
complete machine, a structural element, a beam, a girder, building block are some examples of
unit load.
Sometimes certain quantities of free flowing materials can be placed in a container and can be
handled as unit load. Hoisting equipment are primarily used for handling unit load. Unit loads
are usually specified by it’s weight.

Bulk Load:
When the load is in the form of particles or lumps of homogeneous materials or powder like
materials, which can not be counted by numbers, it is called as “Bulk load”.

Examples are:
Sand, Cement, Coal, Mineral, Stone, Clay etc.,

A bulk material may be classified by it’s:

1. Bulk Density

2. Lump-Size

3. Flowability

4. Abrasiveness

5. Miscellaneous Characteristics