Logistics and Supply

UNIT 1 LOGISTICS AND SUPPLY CHAIN Chain Management –

An Introduction
MANAGEMENT – AN INTRODUCTION

Objectives
After going through this unit you should be able to
• Define Logistics & Supply Chain Management
• Understand the development of logistics and its role in the economy
• Discuss Physical Distribution Management (PDM) and its components
• Understanding Principles of Supply Chain Management
• Define how the supply chain works
• Understand the key processes required to integrate the supply chain
• Examine critical areas of Logistics-Marketing Interface
• Examine critical areas of Logistics-Manufacturing Interface

Structure
1.0 Objectives
1.1 Introduction
1.2 Logistics and SCM
1.3 Development of logistics
1.4 The role of logistics in the economy
1.5 Logistics and competitive performance
1.6 Physical distribution management (PDM)
1.6.1 Components of PDM
1.6.2 The Systems or “total” approach to PDM
1.7 Principles of Supply Chain Management
1.7.1 How does SCM works?
1.8 The Logistics-Marketing Interface
1.8.1 Logistics & Product Life Cycle
1.8.2 Areas of Logistics and Marketing Interaction
1.9 The Logistics-Manufacturing Interface
1.9.1 Customer Service Issues at the Logistics-Manufacturing Interface
1.10 Summary
1.11 Self Assessment Exercises
1.12 References and Suggested Further Readings

1.1 INTRODUCTION
There is a great deal of material that moves within and across different
organizations. Organizations collect raw materials from suppliers and deliver
finished goods to the customers. It is logistics that does this function. In other
7
Logistics and SCM: words, logistics is the function that moves materials through the operations to
An Overview
the customers (as a finished product). In continuation to this explanation, we
would introduce what a supply chain means, “A supply chain consists of a
series of activities and organizations on which the materials move from initial
suppliers to final customers.” There are different supply chains for different
products. The chain of activities and organizations is named differently as per
the situation. If the emphasis is on the operations, then it is called process; if
the emphasis is on order fulfillment then it is called replenishment; if the
emphasis is on value-addition then it is called value-chain; if the emphasis is
on meeting customer demand then it is called demand chain; If the emphasis
is on movement of material then we use the most general term i.e. supply
chain. However, many times, these terms are used interchangeably. This unit
will introduce you with the concept of a supply chain.

1.2 LOGISTICS AND SCM

A supply chain may be considered as a group of organizations, connected by
a series of trading relationships. This group covers the logistics and
manufacturing activities from raw materials to the final consumer. Each
organization in the chain procures and then transforms materials into
intermediate/final products, and distributes them to customers.
The supply chain can be defined as the integral management (within the
company and through other companies) of the company’s various logistical
stages such as materials procurement, production, storage, distribution and
customer service. The Supply Chain concept should be seen as a whole, that
is, the entire system from the mine to the final consumption of a good or
service.
In this group/network we must include all the organizations involved in the
production of a certain good or service (from the mine to final consumption),
and each of the logistical stages within these organizations. Thus, the supply
chain is a network linking and interweaving the different supply chains of all
the companies involved in a production process. A diagram depicting the
typical supply chain is shown in Figure 1.1

Figure 1.1: Typical Supply chain

8
The supply chain is therefore a complex object, as it involves decision- Logistics and Supply
Chain Management –
makers from many different companies, who sometimes have no direct An Introduction
relationship and are in very different geographical locations; yet the decisions
they make are mutually dependent upon each other. Hence, there is a need for
an information system capable of linking together the different members of
the chain so that there is open communication between them.
The concept of supply chain is not new. Historically we have moved from
physical distribution to logistics management to supply chain management.
This major difference seems to be that supply chain management is the
preferred name for the actualization of “integrated logistics”, with it acting as
an enabler, it is now possible to have an integrated process view about the
logistics and all allied processes related to business. Ideally the supply chain
should be a “seamless” chain as shown in Figure 1.2

Raw material

Product ordering channel

Seamless Supply
Chain

Material End Customer

Flow channel
Figure 1.2: Seamless Supply Chain (Source: Sahay B S, 1998 Supply Chain
Management for Global Competitiveness (Macmillan)

The importance of logistics can be gained from the fact that logistics and
supply chain management costs are in range of 13-20% of GDP for
developing countries while it is around 7 to 10 percent for developed
countries. The concept of integrated logistics consists of two interrelated
efforts:

• Logistics operation: Logistic operation can be basically gripped into

physical distribution management, materials management and internal
inventory transfer.
• Logistic coordination. Logistic coordination pertains to forecasting, order
processing, operational planning and product procurement or material
requirement planning (MRP). This integration is effected through
effective information flows.

Definitions
Forrester (1961) suggested that the five flows of any economic activity --
money, orders, materials, personnel and equipment are interrelated by an
information network, which gives the “system,” which has now come to be
called a supply chain, its own character.
9
Logistics and SCM: According to Christopher (1992) supply chain is network of organizations
An Overview
that are involved, through upstream and downstream linkages, in the different
processes and activities that produce value in the form of products and
services in the hands of the ultimate consumer. Managing these linkages and
delivering the product/service to the customer in a cost effective way is SCM.
Supply chain management encompasses materials/supply management from
the supply of basic raw materials to final product (and possible recycling and
re-use). Supply chain management focuses on how firms utilize their
suppliers' processes, technology and capability to enhance competitive
advantage. It is a management philosophy that extends traditional intra-
enterprise activities by bringing trading partners together with the common
goal of optimization and efficiency (Tan et al. (1998)).

Supply Chain Management is a set of approaches utilized to efficiently

integrate supplier, manufacturer, warehouse and stores so that merchandise is
produced and distributed at the right quantities, to the right location and at the
right time, in order to minimize system under costs while satisfying service
level requirements (Levi (2022)).
The common thread in these definitions is that supply chain management
seeks to integrate performance measures over multiple firms or processes,
rather than taking the perspective of a single firm or process.

Supply Chain During Covid-19 Pandemic

Supply chains in India suffered very badly during Covid-19 pandemic. The
disruption in the supply chain was due to many reasons. Shortage of workforce,
shortage of raw material, dampening in demand, closed market places were some of
these reasons.
A typical supply chain should achieve seven rights: right product, to right customer,
at right price, in right condition, in right quantity, at right time, and at right place.
When there was huge shortage of Oxygen in different hospitals, there existed a
serious demand supply gap. Many of the rights, mentioned above were missing.
However, when, Indian Railways started Oxygen Express trains, which carried filled
Oxygen Tankers, the effort facilitated these rights to become a reality. Of course, the
district administration supported the last-mile-delivery by facilitating the local
movements of these oxygen tanker/trucks from railway track to hospitals’ storage
points. (Levi et al., 2022)

Supply chain management has provided the next logical stage in the
evolution of competitiveness for the manufacturing organization and added,
importantly, a concern for the flow of materials to and from the organization.
Supply chain management integrated suppliers to the end consumers and
emphasized the need for collaboration to optimize the whole system. As such,
supply chain management is the process of designing, planning and
implementing change in the structure and performance of the ‘total’ material
flow in order to generate increased value, lower costs, enhanced customer
service and yield a competitive advantage. In effect, the addition of supply
chain management to the marketing model created a truly ‘systems’ approach
to the organization and its direct and indirect trading relationships. The
content of supply chain management with in a firm varies considerably with
the type of business. Figure 1.3 shows the different components of logistics
10 management.
 Logistics and Supply
Management Actions Chain Management –
An Introduction

Planning Implementation Control

Input into logistics Output of logistics

Suppliers Customers
Marketing orientation
Natural resources (land, (competitive advantage)
facilities and equipment)

Time, Place Utility

Human Resources

Raw In process Finished

Efficient movement to
Financial Resources Material Inventory Goods
customer

Proprietary asset
Information Resources

Logistics activities

• Customer service * Plant and warehouse site selection

• Demand forecasting * Procurement
• Distribution communication * Packaging
• Inventory control * Return goods handling
• Material handling * Salvage and scrap disposal
• Order processing * Traffic and transportation
• Parts & service support * Warehouse & stays

Figure 1.3: Components of Logistic Management (Source: Douglas M. Lambert

Fundamental of logistics management, McGraw Hill, 1998, Pg-5)

A representative list of logistic elements for a firm is given in Table 1.1

Table 1.1: Logistic Element

Facility Location Determining location, number and size of facilities

needed
Allocation demand to facilities
Transportation Mode & service selection
Carrier routing
Vehicle scheduling
Inventories Finished goods stocking policies
Record keeping
Supply scheduling
Short term sales forecasting
Customer Service Cooperate with marketing in
Determining customer needs and wants for service
Determining customer response to service
11
Logistics and SCM:
Order Processing & Sales order procedure
An Overview
Information Flows Information collection, storage and manipulation
Data analysis
Warehousing & Space determination
Material Handling Stock layout
Material handling equipment selection
Stock storage and retrieval
Equipment replacement policies
Protection Packaging Design for
Handling
Storage
Protection
Product Scheduling Co-operate with production in
Specifying aggregate production quantities
Sequencing and timing of production

1.3 DEVELOPMENT OF LOGISTICS

Logistic activity is literally thousands of years old, dealing back to the
earliest form of organized trade. As an area of study however it first began to
gain attention in the early 1990s. The more emphasis has been given to
logistics after the Gulf war in 1990-91 when the efficient and effective
distribution of store supplies and person were the key factors for success.
With rising interest rates and increasing energy cost logistics received more
attention as a major cost driver. In addition logistics cost became a more
critical issue for many organization because of globalization of industry. This
has affected logistics in two primary ways. First, the growth of world-class
competitors from other nations has caused organization to look for new way
to differentiate their organizations and product offerings. Second, as
organization increasingly buys and sell offshore, the supply chain between
the organization and those it does business with becomes longer, more costly
and more complex. Excellent logistics management is needed to fully
leverage global opportunities. Information technology input has given a next
boom to logistics management. This gave organization the ability to better
monitor transaction intensive activities such as ordering movement and
storage of goods and materials. Combine with the availability of
computerized quantitative models; this information increased the ability to
manage flows and to optimize inventory levels and movement.

Other factor contributing to the growing interest in logistics include advances

in information system technology, an increased emphasis on customer
service, growing reorganization of the system approach and total cost
concept. The profit leverage from logistics and realization that logistics can
be used as strategic weapon in competing the market place.

The system approach is a critical concept in logistics. Logistics is in itself a

system. It is a network of related activities with the purpose of managing the
orderly flow of material and personal with in the logistic channel. The system
approach simply states all functions or activities need to be understood in
terms of how they effect and are affected by other elements and activities
12
with which they interact. The idea is that if one looks at action in isolation, he Logistics and Supply
Chain Management –
or she will not understand the big picture or how such action affects or are An Introduction
affected by other activities. In essence the sum or outcome of series of
activities is greater than its individual parts.

Activity 1
Every organization has to move materials to support its operations and order-
fulfillment. What do service companies like Internet Service Providers move?

…………………………………………………………………………………
…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

1.4 The role of logistics in the economy

Logistics play a key role in the economy in two significant ways. First,
logistics is of the major expenditures for business. Logistics expenditure
accounts for around 13-20% of GDP for developing nations. Thus by
improving the efficiency of logistics operations, logistics make an important
contribution to the economy as a whole.
Second, logistics support the movement and flow of many economic
transactions; it is an important activity in facilitating the sale of virtually all
goods and services. To understand this role from a system perspective,
consider that if goods do not arrive on time, customer cannot buy them. If
goods do not arrive at the proper place or in the proper condition, no sale can
be made. Thus all economic activity throughout the supply chain will suffer.
One of the fundamental ways that logistics add value is by creating utility.
From an economic stand point utility represent the value or usefulness that an
item or service has in fulfilling a want or need. There are four types of
utilities namely Form, Possession, Time and Place. Form utility is the process
of creating the good or service or putting them in proper form for the
customer to use. Possession utility is value added to a product or service
because the customer is able to take actual possession like credit arrangement
and loans. These two utility are not directly related to logistics but these are
not possible without getting the right item needed for consumption or
production to the right place at the right time and in the right condition at the
right cost. The time and place utility are directly related to logistics. Time
Utility is the value added by having an item when it is needed. Place Utility
means have the item or service available where it is needed. The five rights of
logistics are the essence of the two utilities provided by logistics time and
place utility.

13
Logistics and SCM:
An Overview 1.5 LOGISTICS AND COMPETITIVE
PERFORMANCE
Today logistics department appear on the organization chart of many large
organizations. Linking logistics activities directly to organization strategic
plan can work effectively to support organization in achieving competitive
advantage.

Porter used a tool called the value chain as shown in the Figure 1.4 to
separate buyers, supplier and a firm into the discrete but interrelated activities
from which value stems. The value chain concept may be used to identify and
understand the specific source of competitive advantage and how they related
to buyer value. Value is the amount a customer is willing to pay for the
products, services provided by an organization. Value added is the difference
between the customer pays and the cost of the organization providing that
product or service. Porter defines the five categories of primary activity
involved in competing in any industry.

Inbound logistics :- Activities associated with receiving, storing and

disseminating input to the product.

Operation : - Activity associated with transforming input into the

final product form.
Outbound logistics : - Activity associated with collecting storing and
physical distribution of the product to buyers.

Marketing & Sales : - Activities associated with providing a means by

which buyers can purchase the product and inducing
them to do so such as advertising, promotion etc.

Service : - Activity associated with providing service to

enhancer maintain the value of the product such as
installation, repair etc.

14
 Logistics and Supply
Company infrastructure Chain Management –
An Introduction

Support Organization, people and

activity
System & technology

Procurement

Inbound operation outbound Marketing Service

Logistics Logistics & Sales

Primary Activity

Figure 1.4: Porter Value Chain (Source: Porter, Michael E., "Competitive Advantage".
1985, the Free Press. New York)

The effective logistics management can provide a major source of

competitive advantage. The source of competitive advantage is found firstly
in the ability of the organization to differentiate itself in the eyes of the
customer from its competitor and secondly by operating at a lower cost and
hence at greater profit. There are two bases of success in any competitive
context. One is the cost advantage and second is the value advantage. Cost
advantage is achieved through greater productivity and value advantage is
pursued through a different plus over competitive offerings.

High Service Leader

Cost and Service
leader
Value
Advantage

Low
Commodity market Cost leader

Low Productivity Advantage High

Figure 1.5: Competitive Matrix (Source : Christopher, M., 1992, Logistics and Supply
Chain Management)

From the matrix given in Figure 1.5, it is clear that successful companies will
often seek to achieve a position based upon both a productivity advantage
and a value advantage. Logistics management can play a critical role to gain
both advantages. In many industries logistics cost represent such a significant
proposition of total cost that it is possible to make major cost reduction
through fundamentally reengineering logistics process. In term of value
advantage, companies can gain through service differentiation. Today
markets have become more service sensitive. Customer in all industries are
seeking greater responsiveness and reliability from suppliers, they are
looking for reduced lead time, just in time delivery and value added services
that enable them to do better job of serving their customers.
15
Logistics and SCM: Traditionally most organizations have viewed themselves as entities that exist
An Overview
independently from others and indeed need to compete with them in order to
survive. However, such a philosophy can be self-defeating if it leads to an
unwillingness to cooperate in order to compete. Behind this seemingly
paradoxical concept is the idea of supply chain integration. Supply chain
integration links a firm with its customers, suppliers and other channel
members. As such it integrates their relationships, activities, functions,
processes and locations. The purpose is to improve the effectiveness and
efficiency of SC for ultimate consumers.

A model of the evolution of supply chain is shown in Figure 1.6, Integration

starts with the ‘baseline’ organization (Stage 1) with a reasonably informal
approach to management by departments. This level of evolution involves the
processing of material requirements and planning routines that are short term
in nature. The material inventories simply arise in response to reactive
management practices. The key requirement of employees is to react to
failure and manage as best that they can.

The Stage 2 organization reflects the traditional form of supplier

management. The business departments tend to operate autonomously. The
Stage 2 organization is focused on the annual budget allocation and
departmental cost management. For the purchasing function this implies
seeking out the lowest price provider of material requirements often through
a process of tendering, the use of ‘power’ and the constant switching of
supply sources to prevent ‘getting too close’ to any individual source.
The Four stage of Development

Stage1: Baseline

Purchasing Material Production Sales Distribution

Control

Stage2: Functional Integration

Materials Manufacturing Distribution

Management Management Management

Stage3: Internal Integration

Distribution
Manufacturing Management
Materials Management
Management

Stage4: External Integration

Internal Supply
Customers
Suppliers Chain

Figure 1. 6: Supply chain integration

16
 Logistics and Supply
Chain Management –
An Introduction
The Stage 3 organization is internally integrated and has a much greater level
of interest in material flow processes from suppliers to customers rather than
the ‘grenade over the all’ approach of the earlier two forms. The organization
has integrated the aspects of the internal supply chain that it can influence
and control. In parallel, planning systems operated throughout the
organization are integrated and demand information, production schedules
and material requirements are synchronized by teams of individuals that were
once subordinates of separate departments. For this company, the demand
and material flow drive the entire system in an end-to-end supply chain and
the organization makes use of Just in time materials management techniques.

The Stage 4 company has begun to realize the benefits of true supply chain
management and the ability to synchronize all activities within the factory
and to interface the factory with its suppliers and customers. Under these
conditions, the collaborative and participative internal environment is
extended upstream and downstream and the planning of supply chain
management is recognized formally. The factory is ‘customer oriented’
instead of product oriented and seeks to partner with key customers and
suppliers in order to better understand how to provide value and customer
service. This form of company has full improvement processes within the
organization that are encapsulated in medium term plans for the organization
and its supply chain. The organization makes most use of information
systems to enhance the responsiveness of the organization and supply chain
to deliver products and has also developed a capability in terms of product
design that includes customer and supplier involvement. To enhance the
nature of collaboration the organization rewards supplier partnerships with
sole sourcing agreements in return for a greater level of support to the
business and a commitment to on-going improvement of material flow and
relationship management. The model provides a useful means of analyzing
the current state of the organization and understanding where the next
interventions will need to be taken in order to improve performance.

Activity 2
Describe the Supply Chain for a paper manufacturing organization.
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………

1.6 PHYSICAL DISTRIBUTION MANAGEMENT

(PDM)
They are the decisions that must be taken, when a company organizes a
channel or network of intermediaries, who take responsibility for the
management of goods as they move from the producer to the consumer. Each
17
Logistics and SCM: channel member must be carefully selected and the company must decide
An Overview
what type of relationship it seeks with each of its intermediate partners.
Having established such a network, the organisation must next consider how
these goods can be efficiently transferred, in the physical sense, from the
place of manufacture to the place of consumption. Physical distribution
management (PDM) is concerned with ensuring the product is in the right
place at the right time.

It is now recognised that PDM is a critical area of overall supply chain

management. Business logistical techniques can be applied to PDM so that
costs and customer satisfaction are optimised. There is little point in making
large savings in the cost of distribution if, in the long run, sales are lost
because of customer dissatisfaction. Similarly, it does not make economic
sense to provide a level of service that is not really required by the customer
and leads to an erosion of profits. This cost/service balance is a basic
dilemma that a physical distribution manager face.

The reason for the growing importance of PDM is the increasingly

demanding nature of the business environment. In the past it was not
uncommon for companies to hold large inventories of raw materials and
components. Although industries and individual firms differ widely in their
stockholding policies, nowadays, stock levels are kept to a minimum
wherever possible. Holding stock is wasting working capital for it is not
earning money for the company. To think of the logistical process merely in
terms of transportation is much too narrow a view. Physical distribution
management (PDM) is concerned with the flow of goods from the receipt of
an order until the goods are delivered to the customer. In addition to
transportation, PDM involves close liaison with production planning,
purchasing, order processing, material control and warehousing. All these
areas must be managed so that they interact efficiently with each other to
provide the level of service that the customer demands and at a cost that the
company can afford.

1.6.1 Components of PDM

There are four principal components of PDM namely Order processing, Stock
levels or inventory, Warehousing and Transportation.

Order processing
Order processing is the first of the four stages in the logistical process. The
efficiency of order processing has a direct effect on lead times. Orders are
received from the sales team through the sales department. Many companies
establish regular supply routes that remain relatively stable over a period of
time providing that the supplier performs satisfactorily. Very often contracts
are drawn up and repeat orders (forming part of the initial contract) are made
at regular intervals during the contract period. Taken to its logical conclusion
this effectively does away with ordering and leads to what is called
‘partnership sourcing’. This is an agreement between the buyer and seller to
supply a particular product or commodity as and when required without the
necessity of negotiating a new contract every time an order is placed. Order-
processing systems should function quickly and accurately. Other
18
departments in the company need to know as quickly as possible that an order Logistics and Supply
Chain Management –
has been placed and the customer must have rapid confirmation of the order’s An Introduction
receipt and the precise delivery time. Even before products are manufactured
and sold the level of office efficiency is a major contributor to a company’s
image. Incorrect ‘paperwork’ and slow reactions by the sales office are often
an unrecognised source of ill will between buyers and sellers. When buyers
review their suppliers, efficiency of order processing is an important factor in
their evaluation. A good computer system for order processing allows stock
levels and delivery schedules to be automatically updated so management can
rapidly obtain an accurate view of the sales position. Accuracy is an
important objective of order processing, as are procedures that are designed
to shorten the order processing cycle.

Inventory
Inventory, or stock management, is a critical area of PDM because stock
levels have a direct effect on levels of service and customer satisfaction. The
optimum stock level is a function of the type of market in which the company
operates. Few companies can say that they never run out of stock, but if
stock-outs happen regularly then market share will be lost to more efficient
competitors. The key lies in ascertaining the re-order point. Carrying stock at
levels below the re-order point might ultimately mean a stock-out, whereas
too high stock levels are unnecessary and expensive to maintain. Stocks
represent opportunity costs that occur because of constant competition for the
company’s limited resources. If the company’s marketing strategy requires
that high stock levels be maintained, this should be justified by a profit
contribution that will exceed the extra stock carrying costs.

Warehousing
Many companies function adequately with their own on-site warehouses
from where goods are dispatched direct to customers. When a firm markets
goods that are ordered regularly, but in small quantities, it becomes more
logical to locate warehouses strategically around the country. Transportation
can be carried out in bulk from the place of manufacture to respective
warehouses where stocks wait ready for further distribution to the customers.
This system is used by large retail chains, except that the warehouses and
transportation are owned and operated for them by logistics experts. Levels
of service will of course increase when numbers of warehouse locations
increase, but cost will increase accordingly. Again, an optimum strategy must
be established that reflects the desired level of service

Transportation
Transportation usually represents the greatest distribution cost. It is usually
easy to calculate because it can be related directly to weight or numbers of
units. Costs must be carefully controlled through the mode of transport
selected amongst alternatives, and these must be constantly reviewed.
The patterns of retailing that have developed, and the pressure caused by low
stock holding and short lead times, have made road transport indispensable.
When the volume of goods being transported reaches a certain level some
19
Logistics and SCM: companies purchases their own vehicles, rather than use the services of
An Overview
haulage contractors. However, some large retail chains have now entrusted
all their warehousing and transport to specialist logistics companies.

For some types of goods, transport by rail still has advantages. When lead-
time is a less critical element of marketing effort, or when lowering transport
costs is a major objective, this mode of transport becomes viable. Similarly,
when goods are hazardous or bulky in relation to value, and produced in large
volumes then rail transport is advantageous. Rail transport is also suitable for
light goods that require speedy delivery (e.g. letter and parcel post). Except
where goods are highly perishable or valuable in relation to their weight, air
transport is not usually an attractive transport alternative. For long-distance
overseas routes it is popular. Here, it has the advantage of quick delivery
compared to sea transport, and without the cost of bulky and expensive
packaging needed for sea transportation, as well as higher insurance costs.

The chosen transportation mode should adequately protect goods from

damage in transit (a factor just mentioned makes air freight popular over
longer routes as less packaging is needed than for long sea voyages). Not
only do damaged goods erode profits, but frequent claims increase insurance
premiums and inconvenience customers, endangering future business.

1.6.2 The Systems or ‘Total’ approach to PDM

PDM has been neglected in the past; this function has been late in adopting
an integrated approach towards it activities. Managers have now become
more conscious of the potential of PDM, and recognize that logistical
systems should be designed with the total function in mind. A fragmented or
disjointed approach to PDM is a principal cause of failure to provide
satisfactory service, and causes excessive costs.

PDM is concerned with ensuring that the individual efforts that go to make
up the distributive function are optimised so that a common objective is
realised. This is called the ‘systems approach’ to distribution management
and a major feature of PDM is that these functions be integrated.
To plan an efficient logistics structure it is necessary to be aware of the
interaction between the different distribution costs and how they are vary
with respect to the different depot alternatives (number, size, type and
location).

Figure 1.7 demonstrates how the individual distribution and logistics cost
elements can built up the total logistics cost.
• Storage Cost: Storage cost will increase as the number of depots will
increased because there will be a need for more stock coverage, more
storage space, more management etc.
• Delivery cost: This will concern with the secondary transportation cost
i.e. cost of delivery from the depot to the consumer. The greater the
number of depots, the less the secondary mileage and lesser the delivery
cost.

20
 Logistics and Supply
Chain Management –
An Introduction

Figure 1.7: Total Logistics Cost (Source: Croucher Phil et al, The handbook of
Logistics and distribution Management Page No .123)

• Trunking Cost: This is the primary transport cost in the supply of

products in bulk to the depots from the central finished good warehouses
or production points. As the number of depots increases this cost will
also increases.
• Inventory Cost: The main elements of inventory holding costs are:
• Capital Cost: The cost of physical stock. This is the financing charge,
which is the current cost of capital to a company.
• Service Cost: That is stock management and insurance cost
• Risk Cost: Which occur through pilferage, deterioration of stock, damage
and stock obsolescence.
• System cost: These costs represent a variety of information or
communication requirements ranging from the order processing to load
assembly lists.

The top line on the graph shows the overall distribution cost in relation to the
number of depots in the network. The minimum point on this curve
represents the lowest cost solution. The result will depend in the number of
factors–product type, geographical area of demand, service level
requirements etc.

1.7 PRINCIPLES OF SUPPLY CHAIN

MANAGEMENT
Now you are aware of what Logistics and SCM mean. You have appreciated
the role of Logistics and SCM in the economy. SCM is basically a system
that connects an organization with its customers and suppliers. SCM is the
management of all key business processes across number of supply chains. It
21
Logistics and SCM: is important to know about different supply chain processes for having an
An Overview
integrated SCM.

Also there is a strong relation between Logistics group and Marketing group
in an organization. Similarly, Manufacturing and Logistics are also
interrelated. This section will take you through to these concepts.

The most important principle of supply chain is that it is demand driven. The
supply chain exists not merely because there is something to supply but it
exists because there exists a definite demand.

Second principle is about the chain approach. Individual links may be

performing well but if the entire chain is not getting the strength, ultimately,
it's a loss to the chain as whole. It is not the strongest link of the chain which
decides the strength of the chain it is the weakest link which decides the
strength of a chain. So, a chain is only as strong as its weakest link. The
concept is about not the link optimization but the chain optimization.
The third principle of supply chain is about linkage between links. This
principle emphasizes on relationships and coordination between links. The
extent and intensity of relationship are two important factors defining
relationship between links.

The fourth principle of supply chain is about the smoothness of flows

(physical, financial and information) in the chain. As an analogy, what
matters most is the smoothness of fluid-flow in the pipe as compared to the
size of the pipe.

The fifth principle is about optimization of the resources in supply chain in

the process of delivering goods or services to the end customer while
simultaneously keeping customer satisfaction objective achieved in most
effective and efficient way.

22 Figure 1.8: Principles of Supply Chain Management

1.7.1 How does SCM works? Logistics and Supply
Chain Management –
An Introduction
The supply chain management (SCM) is viewed as a system that links an
enterprise with its customer and suppliers. Information flows from and about
customer in the form of forecast and orders to both the enterprise and
suppliers. This information is refined through planning into specific
manufacturing and purchasing objectives. As materials and products are
purchased, a value added inventory flow is initiated which ultimately result in
ownership transfer of finished product to customers.

Value added inventory

flow

Enterprise

Customers Physical Manufacturing Purchasing Suppliers

Distribution support

Requirement information flow

Figure 1.9: Supply Chain System (Source: - Logistics Management, Bowersox et al.,
1986)

SCM is an integrated approach that is highly interactive and complex and

requires simultaneous consideration of many trade-offs. SCM is the
management of all key business process across number of the supply chains.
Successful SCM requires a change from managing individual function to
integrating activities into key supply chain processes. Operating an integrated
supply chain requires continuous information flows, which in turn help to
create the best product flows. The customer remains the primary focus of the
process. However, improved linkages with supplies are necessary because
controlling uncertainty in customer demand, manufacturing processes and
supplier performances are critical for effective SCM. The key processes for
the integrated SCM identified by Lambert (1998) are as follows.

Customer Relationship Management

This is the process to identify the key customers. With customer moving to
center stage, more companies have begun to treat a customer as a value
independent entity. The companies are no longer view sales as selling of their
products, but as selling of relationships, solutions, support and care.
Customer relationship teams develop and implement partnering program with
key customer. Product and service agreements specifying the level of
performance are established with these key customers.

23
Logistics and SCM:
An Overview

Figure 1.10: Supply chain processes for integrated SCM (Source: - Lambert 1998)

Customer Service Management

Increased and intense competitions all around have made customer service as
the key differentiator in a marketing system. Customer service provides the
single source of customer information. It provides the customer with real
time information on promised shipping dates and product availability.
Customer service is a valuable business activity governing both resources and
top management attention. Customer service is being offered in many forms
such as post warranty support, fast repairs, speedy response to service calls
from customers, easy availability of spares, qualified, competent and
customer friendly technicians.

Demand Management
Customer demand in the form of irregular order pattern is the largest source
of variability. Given this variability in customer ordering, demand
management is a key to an effective SCM process. Manufacturers are moving
from a push system to make to order mode, in such case predicting or
forecasting demand is the key driver on which all of the supply related
decision will depend. The demand management process must balance the
customer’s requirement with the firm’s supply capabilities. A good demand
management system uses point of sales and “key” customer data to reduce
24
uncertainty and provide efficient information flows through out the supply Logistics and Supply
Chain Management –
chain. An Introduction

Customer Order Fulfillment

The key to effective SCM is to achieve high order fill rate. Order fill rate can
be defined as % of order fulfilled before or on the customer need dates.
Performing the order fulfillment process effectively requires integration of
firms manufacturing, distribution and transportation plans.

Manufacturing Flow Management

This functional area decides how production should be organized and
managed. Traditionally production system uses push strategy but in a
customer focus environment pull strategy is more effective. To implement
pull system-manufacturing process must be flexible to respond to market
changes. This requires the flexibility to perform rapid change over to
accommodate mass customization, orders are processed on a just in time
basis in minimum lot size. In a customer focused business world, production
process has to optimize balance between customer satisfaction and efficiency.

Procurement
Procurement is concerned with buying and movement of materials, parts or
finished inventory from supplier location to manufacturing or assembly
plants, ware house or retail stores. Traditionally procurement is carried out on
the basis of bid and buys system whereas in new integrated concept long-
term partnerships are developed with core group of suppliers. Suppliers are
involved at the early design stage which can lead to reduction in product
development cycle times. For quick response to customer demand purchasing
activities are carried out with rapid communication mechanism such as EDI
and interest linkages. This reduces the cost and time on the transaction
portion of the purchase.

Product Development and Commercialization

In today’s fast changing environment new products are life bloods of a
company. For the firm to remain competitive it has to sharpen its product
development times. This requires customer and suppliers must be integrated
into product development process.

Return Channel
Managing the return channel as a business process offers the same
opportunity to achieve a sustainable competitive advantage as managing the
supply chain from an out bound perspective. Effective process management
of return channel enables the identification of productivity improvement
opportunities and break through projects.

Focusing effort on improvement in key business process is the foundation of

SCM philosophy. Thus the goals of these processes are to:

a) Develop customer focused teams that provide that provide beneficial

product and service agreement to strategically significant customers
25
Logistics and SCM: b) Provide a permit of contact for all customers, which efficiently handle
An Overview
their inquiries.
c) Continually gather, compile and update customer demand to match
requirement with supply.
d) Develop flexible manufacturing system that responds quickly to
changing market conditions.
e) Manage supplier partnership that allow for quick response and
continuous improvement.
f) Fill 100% of customer order accurately and on time
g) Enhance profitability by managing the return channel (reverse logistics)

Activity 2
Take the case of an organization where you are working or about which you
know of and identify the key processes within that organization vis-à-vis
those proposed by Lambert.
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………

1.8 LOGISTICS - MARKET INTERFACE

Traditionally logistics group assumed primary responsibility for
warehousing, inventory and transportation within many organizations while
marketing group is responsible for negotiation, promotion and selling. As
neither group had responsibility for over all channel management, conflicts
arose at the expense of overall organization goal. The organizations had
realized that functional interdependence, not internecine conflicts, is the key
to satisfy customer needs. Despite the realization by logistics and marketing
manager that cooperation is essential marketers often criticize logistics
department for being cost minimizers having no concern for customer needs
while logistics department accuse marketers of chasing sale at any cost.
Therefore it is essential that organizations identify area of agreement and
potential conflict. Senior management must be keen to actively support
cooperation between the two groups. This can be assisted by performance
measurement that reward cooperation and a spirit of interdependence and
actively discourage parochial behavior.

1.8.1 Logistics and Product Life Cycle

Product life cycle (PLC) is a key marketing concept that affects the
relationship between logistics and marketing. For different stages of PLC i.e.
introduction, growth, maturity and decline, different level of logistics support
is required by marketing. In the introduction and growth stage timely cost
effective fulfillment of order is a major requirement in ensuring initial
26 acceptance of the product. Later as sales slow-down and the product move
into the maturity and decline stages, the company changes to trimming cost Logistics and Supply
Chain Management –
as the product faces stiff price competition and consequent pressure on An Introduction
margins. Hence there is need for a logistics manager to understand what
marketing is trying to achieve with each product and what appropriate level
of logistics support is required accordingly.

1.8.2 Areas of Logistics and Marketing Interaction

In today’s competitive environment organizations are utilizing the benefits of
their established logistics/marketing interface to be competitive not in terms
of product and price but also logistics services tailored to meet individual
customer needs. These organizations are able to differentiate themselves from
their competitors by offering a total service with logistics forming an
essential part of the total value chain.
The major area of interaction between logistics and marketing includes
(Gattorna 1995):
• Product Design: This can have a major effect on warehouse and
transportation utilization (and therefore costs).
• Pricing: This is the means by which logistics services customer demand
affects the overall cost of the product and in turn the organization’s
pricing policies.
• Market and Sales Forecasts. Marketing forecasts will largely dictate the
level of logistics resources needed to move products to customers.
• Customer Service Policies. If marketing opts to offer a very responsive
level of service to customer, logistics resources, in the form of facilities
and inventory, will need to be very considerable.
• Number and Location of Warehouses. This is one of the greatest areas of
contention and can only be satisfactorily resolved if marketing and
logistics develop the policy jointly.
• Inventory Policies. This is another area of contention, as decisions have a
significant bearing on operational costs and the extent to which desired
levels of customer service are achieved. It is another key area where
policy should be developed jointly.
• Order Processing. Responsibility for who receives customer’s orders and
the speed and efficiency with which they are processed has a major
impact on operational costs and customer’s perceptions of service levels.
This is another area where joint policy-making is preferable.
• Channels of Distribution. Decisions to deliver direct to the customer or
through intermediaries will greatly influence the level of logistics
resources required. As channels change, so too will the resources
required. Marketing should definitely consult with logistics when making
channel decisions.

27
Logistics and SCM:
An Overview 1.9 THE LOGISTICS-MANUFACTURING
INTERFACE
Manufacturing and logistics are interrelated so no one can be considered in
isolation. Decisions made in these two areas commit the organization to
relatively long-lasting cost structures and also determine the manner in which
the business competes in its chosen markets.

To maintain its competitive position in a dynamic industry, the

manufacturing and logistics functions must respond positively by considering
the manufacturing/logistics network as whole and continuous improvement
programmes coordinated across the various activities like delivery service,
production priority control and purchasing to exploit the synergy available.

There are two fundamental competitive strategies, which every organization

has to decide to remain unbeaten in the competitive environment. Cost
leadership i.e. be the lowest-cost producer in the industry or Meaningful
differentiation i.e. to differ by competitor in some form, that can be in terms
of service like delivery time, delivery reliability etc or in terms of technical
advantages like superior features, superior product etc. In new environment,
where integration is the driver to achieve competitive advantage,
organizations have evolved new approaches to develop interface between two
functions. The differences in these perspectives are shown in tables 1.2 and
table 1.3 when organizations decide to compete on the basis of cost
leadership and differentiation respectively.

Table 1.2: Manufacturing / logistics approach When the basis for

competing is cost leadership (Source: Gattorna 1995)

Basis for Competing: Lowest – Cost Competitor

Old Approach New Approach
Cost-reduction programmes Eliminate all non-value adding
activities/procedures/tasks etc
Reduce inventory Reduce the need to buy capacity by
shortening internal lead times
Trim 10% all budget allocations Reduce the material conversion cost
by simplifying processes through
integration and technology
Defer capital expenditure Emphasize product and process
quality so as to reduce costs associated
with rework, breakdowns etc.
Emphasize control on expenses Reduce need for inventory through
particularly direct labour superior planning systems, shortened
internal lead times; linking processes
etc

Which also results in: Which also results in:

28
 Logistics and Supply
• Inadequate support • Improved product performance Chain Management –
An Introduction
• Poor product quality • Reduced product variability
• Ageing equipment/processes • Improved flexibility
• Poor customer service • Improved responsiveness to
market
• An image of being unreliable
• Poor product availability
• Poor delivery service

Table 1.3: Manufacturing / logistics approach when the basis for

competing is differentiation (Source: Gattorna 1995)

Basis for Competing: Product Availability and delivery time

Old Approach New Approach
Increase inventory to act as a buffer Shorten internal lead times to
improve responsiveness to market
Increase number of branch Emphasize schedule performance to
warehouses ensure reliable supply
Increases capacity to provide Emphasize product and process
flexibility quality so as to reduce delays caused
by rework, breakdowns etc.
Release orders early to production Utilize express transport and
centralized distribution to prevent
misallocation of stock
Emphasize production output Initial superior customer service and
order entry systems to enhance
customer communication
Which also results in: Which also results in:
Higher costs Lower costs
Negatives cause by the complexity of Improved product performance
the system and poor product quality Reduced product variability
caused by emphasis on ‘getting the
product out’

Long internal lead times caused by An image of reliability

early release of works orders to give
the plant ‘plenty of time’
Stock-outs due to work order Improved flexibility in volume and
overload, confused priorities and product mix
difficulty in allocating stock to many
warehouses

Logistics links the manufacturing both from characteristics of inputs i.e.

suppliers of raw materials and characteristics of market i.e. customers. For a
given manufacturing organization there is a production/branch warehouse 29
Logistics and SCM: configuration, which satisfies most constraints or pressures imposed by the
An Overview
inputs or the markets. For effective operation of manufacturing/logistic
interface there are two primary determinants i.e. Capacity and Location.

Capacity is related to location and logistics in the following way. First,

production capacity must be matching in some sensible way to the market
demand then in accordance with the production capacity matching is required
for the logistics network i.e. procurement, storage, order entry and
processing, outbound transport, branch warehouse and final customer
delivery.

The capacity issues are very crucial decision and are required to change as
per the market demand and demand locations. Short-term solutions can be
capacity enhancement by overtime, second and third shifts, third party
contracting, extension of the existing facility and long-term solution are
additional facility in a new location or extensive capacity in new location.
Short term decision possess the least risk, and impact on the logistics network
only in terms of the additional capacity requirement where as long term
solution demand a re-evaluation of the manufacturing/logistics network not
only in terms of the capacity of each component but also the strategic
necessary and location of each facility (factory, warehouse) in terms of its
contribution to the effectiveness of the total network. In other words, a
change in location and capacity of any one facility requires a review of the
location and capacities of all other facilities. Clearly, the issues involved in
location, capacity and logistics are inextricably linked.

1.9.1 Customer Service Issues at the Logistics-Manufacturing

Interface
Customer service strategy is an on-going process of increasing both the
quality and number of links between the manufacturing organization and the
customer. The whole emphasis in today’s service intensified businesses are to
increase a series of both human and information based technological
relationships between customer and the organization so that better customer
services and satisfaction to the customer can be realized. The issues at the
manufacturing/logistics interface for better customer service are as follows

Demand Forecasting
The general function of product forecasting in the short to mid term is to
contribute to the process of ensuring the availability of stock for customers.
This includes the use of distribution requirements planning (DRP) where
appropriate. For the longer term, forecasting at product group level is crucial
for manufacturing capacity and flexibility decisions.

Customer and Supplier Oriented System

Organizational systems will need to be directly related to the issues of how to
bind the customer more tightly to the organization and how effectively to
integrate suppliers into the overall supply chain with the objective of
enhancing significantly customer service.

30
The systems installed by organizations will need the capability to formally Logistics and Supply
Chain Management –
link with the customer in a form that benefits both parties. The systems will An Introduction
also be required to link up with suppliers in a manner that gives meaning to
and supports the concept of strategic alliances. In a strategic alliance the
supplier and the manufacturer agree to a relationship that goes beyond the
normal commercial relationship such that each obtain synergistic benefits
similar to that obtained by forward/backward integration but without the
associated risks and negative attributes.

Plant Configurations
The location, nature and operating performance of manufacturing facilities,
central warehouses and branch warehouses impact heavily on both cost
structure and service levels. In the longer term, and in conjunction with other
factors (systems, supplies), the plant/branch configuration is a major
structural input into reducing overall supply chain costs. When the links
between manufacturer and customer and manufacturer and supplier are
complete, a rethink of the logistics (supply chain) network from supplier
through to customer will be required, for two reasons.

• Available technology, particularly information technology, will allow

certain plant/branch configurations, previously ruled out, to be feasible.
• There will be an on-going need to reduce (in real terms) the cost of the
network.
A key feature of this process will be the requirement of involving in an
appropriate manner both customers and suppliers. This will be new ground
for many organizations and will force a re-evaluation of values and mission
in some circumstances.

Master Production scheduling

The master production schedule (MPS) is an area where a number of parties
(manufacturing, logistics, marketing, finance) have a vested interest in it
being done well. Often as not, though, it is done by one group in isolation
from the others. In the operational sense the MPS is primarily concerned with
stock availability within a set of constraints such as capacity. As such, it is
the single instrument, which demonstrates the plan for:
a. Finished goods inventory levels
b. Customer service in terms of stock availability
c. Machine utilization
d. Capacity utilization
e. Labor productivity
f. Output
g. Need for overtime/casual employees and so on.

The real power of the MPS, however, is its potential to involve all interested
parties. In practice, when people from marketing, logistics and manufacturing
get together and agree on a schedule, the result is a superior schedule. Clearly
31
Logistics and SCM: the MPS may be used as a vehicle to integrate a number of parties into the
An Overview
planning and decision-making process with the result being a superior plan
which, when executed, results in superior customer service.

1.10 SUMMARY
Supply chain is network of organizations that are involved, through upstream
and downstream linkages, in the different processes and activities that
produce value in the form of products and services in the hands of the
ultimate consumer. Logistics expenditure accounts for around 13-20% of
GDP for developing nations. Thus by improving the efficiency of logistics
operations, logistics make an important contribution to the economy as a
whole. Factors contributing to the growing interest in logistics include
advances in information system technology, an increased emphasis on
customer service, growing reorganization of the system approach and total
cost concept. Supply chain management seeks to integrate performance
measures over multiple firms or processes, rather than taking the perspective
of a single firm or process. Supply chain integration links a firm with its
customers, suppliers and other channel members. As such it integrates their
relationships, activities, functions, processes and locations. Physical
distribution management (PDM) is concerned with ensuring the right item
needed for consumption or production to the right place at the right time and
in the right condition at the right cost

1.11 SELF-ASSESSMENT QUESTIONS

1. “Logistics is the function that is responsible for the flow of materials
into, through and out of an organisation”. Elaborate?
2. “These are many possible structures for SC, but the simplest view has
materials converging on an organising through tiers of suppliers and
products diverging through tiers of customers”. Elaborate.
3. It is said that the overall aim for logistics is to achieve high customer
satisfaction or perceived product value. This must be achieved with
acceptable costs. How would you find the best balance?
4. What is Physical Distribution Management? Describe its components?
Also, elucidate the “total approach” to PDM.
5. Describe the model for evolution of Supply Chain. What in your opinion
is the most important stage?
6. Explain various supply chain processes for an integrated SCM. Are there
any other processes that you can think of?
7. What are the primary responsibilities of logistics group and marketing
group within an organization? Why there is a conflict between the two?
What measures can be taken to enhance cooperation.
8. What is the difference between manufacturing/logistics approach when
the basis for competing is
i. Cost leadership
ii. Differentiation
32
 Logistics and Supply
1.13 REFERENCES AND SUGGESTED FURTHER Chain Management –
READINGS An Introduction

1 David Simchi-Levi, Philip Kaminsky, Edith Simchi-Levi and Ravi

Shankar (2022): Designing and Managing the Supply Chain: Concepts,
Strategies, and Case Studies (4th Edition, Indian Reprint), McGraw-Hill
Publishing Company Ltd, New Delhi.

2 Richard B. Chase, Ravi Shankar, and F. Robert Jacobs

(2018): Operations & Supply Chain Management (15th Edition, Indian
Reprint), McGraw-Hill Publishing Company Ltd, New Delhi.

3 Christopher, M., 1992, Logistics and Supply Chain Management:

Strategies for Reducing Costs and Improving Services, Pitman, London.

4 Rushton Alan, Croucher Phil, and Oxley John, The Handbook of

Logistics and Distribution Management, 5th Edition, Kogan Press,
London
5 Douglas M. Lambert, 1998, Fundamental of logistics management,
McGraw Hill.
6 Sahay B S, 1998, Supply Chain Management for Global competitiveness
(Macmillan)
7 Chopra Sunil and Meindl P, 2001, Supply Chain Management: Strategy,
Planning, and Operation, Prentice Hall.
8 Forrester J W 1961, Industrial dynamics, Cambridge, Massachusetts, The
MIT press.
9 Waters Donald, 2003, Logistics: An Introduction to SCM, Palgrave
McMillan (Indian Edition), NY
10 Bowersox D. J., Closs D. J. and Helferich O K, 1986, Logistical
Management, Macmillan.
11 Lambert D. M., 1998, Fundamental of Logistics Management, McGraw
Hill.
12 Gattorna J, 1995, Handbook of Logistics and Distribution Management,
Ashgate Publishing Company.

33