CHAPTER 15: MARKET LOGISTICS AND SUPPLY CHAIN MANAGEMENT

I. ORIGINS OF LOGISTICS

The origin of logistics and supply chain management are from materials management.

Material management –is the function in a company responsible for the co-ordination
of planning, moving, storing and controlling materials in an optimum manner to provide
a pre-decided service to the customer at a minimum cost.

Material management function includes:

a. Materials planning and control
b. Purchasing
c. Store and inventory control

It is important that handling these functions in an integrated approach otherwise

it could create a conflict of interest.

II. CUSTOMER SERVICE

According to Mahatma Ghandi, Customers is the most important person ever in this
premises. A customer Is not dependent on us. We are dependent on him. A customer is
not an interruption of work –he is the purpose of it. We are not doing a favor by serving
him –he is doing us a favor by giving us the opportunity to do so/

Today’s Customer:
a. Is hard to please
b. Is smarter, more value conscious
c. Is more demanding and less forgiving
d. Is approached by more competitors with equal or better offers.

Elements of customer acquisition:

a. Lead generation – reaching the prospects who can become customers.

b. Lead qualification –to meet and judge the financial strength and decides on
the capacity of the prospect to become a customer.
c. Account conversion –to make offers, answer objections and negotiate final
terms of the sale.

The most difficult part of the task starts only after getting the customer –that retaining
him of her for the longer term.

Indicators of satisfied customers:

a. Stay loyal longer with the company and its products and service.
b. Has chances of buying more products and services from the same company and
upgrades from existing products.
c. Always talks favorably about the company and its products and services.

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 d. Expected to offer product or service ideas to the company.
e. His transactions with the company become so routine that he or she cost the
company less to service.

Customer service performance is a measure of how well the logistics systems functions
in creating time and place utility for the company’s customers.

Elements of customer service:

a. Pre-transaction elements –including the company policies on how to deal with

customers.
b. Transaction elements –they physical distribution of the products and services and
reflects in the “ease” of doing a business with the company for its average
customer.
c. Post-transaction elements –includes the things like warranty, spare parts and
service.

III. LOGISTICS

Definitions:

 Logistics means having the right thing at the right place at the right time.
 The procurement, maintenance, distribution and replacement of personnel and
materials
-Webster’s Dictionary
 The science of planning, organizing and managing activities that provide goods
or services
-Logistics World, 1997

Key Tasks of Logistic management

a. Planning – indicates carefully thought out process that has critical implications on the
operations of the company.
b. Implementation – clearly indicates that it is a happening exercise and not just a
concept.
c. Controlling –that all action and operation has to be done within certain feasible
business parameters. These parameters could include speed, reliability, consistency,
efficiency and effectiveness.
d. Communication is another key component of logistics function and all players involved
need to be kept informed about what is happening so that they can in turn plan their
activities better.

Logistic operations can be considered as follows:

a. Functions –inlude planning, procurement, transportation, supply and maintenance.

b. Processes –requirements determination, acquisition, distribution and conservation.

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 c. Business –science of planning, design and support of business operations
of procurement, purchasing, inventory, warehousing, distribution, transportation,
customer support, financial and human resources.

IV. SCOPE OF LOGISTICS

Logistic is relevant to a wide range of manufacturing and service organizations, any of

whom believes in maximising customer service. Scope of logistic could also include:
a. A company choosing the market in which it want to operate
b. Deciding on the plant location and layout.
c. All aspects of inventory managemnent including costs and service levels
d. Cusotemer service policies
e. Extent of distribution network to be built up
f. Location and management of storage facilities
g. Choices of mode of transpor, selection and management of carriers
h. Any packing decisions that directly impact storage and transportation.

Key Logistic Activities

a. Customer service –consistent provision of time and place utility. The customer is the
utltimate judge to show how well he thinks his needs are being taken care of. This is the
primary focus of marketing. Logistic is only required to provide the time and place
utility. It has to ensure that the product or service being offered by the copamy is
available to the final consumer or end user when he or she wants it and where he or she
wants it.
b. Demand forecasting –decisions on how much to order from suppliers and when and
how much to produce for custoemers. This activity normallu starts with the sales
forecasts given by marketing and sales function. This is normally the funciton of sales to
develop the forecast at agreed frequencies for agreed geogrpahies. The forecast then
becomes the starting point of the planning function which is the responsibilitu of
logistics.
c. Distribution communications – need for information on distribution, which could be
complex, automated and fast. That may include status of orders (from suppliers to the
company and the company to its first tier customer who could distributors), shipmate
dates and like delivery dates.
d. Inventory control –this is a trade-off between the level of inventory to be maintained
and the expected service levels to be provided to the customers.
e. Materials handling –movement and storage or raw and packaging materials, work-in-
process and finished goods. This is the physical handling of the goods within the firm
and in the case of finised goods till they reach the customer.
f. Order processing –getting orders in time from the customers, checking the status of
execution and delivery. The sales people get the orders and usually pass it in to the
logistics function for processing and dispatch.
g. After sales parts and service support –this is very crititcal for all technical productsm
engineering goods and consumer durables.
h. Plant and warehouse site location –at optimised cost to the company. There are linear
programming models which can help arrive at the ideal location but this has to be
tempered for local operating conditions.

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 i. Procurement –purchase material and service from outside organisation to support the
firm’s operation including selection of vendors, price negotiations, terms and supplier
quality assessment.
j. Packaging –primary purpose is that it is a form of advertising and marketing support.
Logistic is concerned with providing protection for the product in transit and storage.
Therefor, involved in outer packaging.
k. Returned goods handling – in case of a problem with the product or the customer.
l. Reverse logistic –getting back materials for disposal, re-use, reprocessing or reclying
purpose. This is the logistics part of the returned goods mentioned above.
m. Salvage and scrap disposal – of all materials not usable in its original form or for its
original pupose.
n. Traffic and transportation – add place utility to the product.
o. Warehousing and storage – to support the time and place utility. These warehouses
could be owned by the company or leased by it.

Components of Logistic Management

Figure 1: Components of Logistic Management

V. MATERIALS HANDLING
It is the one of the functions of managing inventory along with storage and transfer of
information. The activities under materials handling are as follows:
A. Receving, storing and dispatching of goods;
B. Order picking and packing;
C. Sorting of goods
D. Additional processing may mean re-packing where there are damages to the
original packing.
E. Arranging transport and loading the goods on the truck or whatever mode
required for dispatch of the goods to the selling points.

Order processing –is part of the logistics or the supply chain function in the company and is the
primary contact between the company (supplier) and its customer.

Types of logistic activities

Logistic activites are divided into inbound and outbound.

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 1. Inbound or upstream includes:
A. Receiving, storing and issuing inputs and taking care of:
 Materials handling
 Inventory control
 Inbound quality inspection along with the quality control function
 Scheduling of production to manage “issues”
 Return of unacceptable materials back to supplies.

Inbound logistics is the interface with the company suppliers, vendors and other service
providers.

2. Outbound or Downstream Logistics includes:

A. Collecting, storing, dispatching and physically distributing the finished goods to the
buuyers distribution channerl/consumer and includes:
 Order processing of all orders received through the sales systems
 Materials handling of finished goods
 Warehousing both in the plant and in the field
 Delivery vehicle operations and scheduling
 Shipping and related documentation.

Any operating company is connected on the supply side with the supplier and through him the
supplier’s supplier. On the demand side, the company is connected with the customer and the
customer’s customer. These link create three kinds of flows:

a. Material flow from the supplier end into the firma and finished good flow till the
customer.
b. Finance flows from the customer (payment for finished goods) into the company and
out to the supplier.
c. Information flow both ways.

VI. EXTENSION INTO SUPPLY CHAIN MANAGEMENT

According to the Council of Logistics Management, SUPPLY CHAIN MANAGEMENT “the
process of planning, implementing and controlling the efficient, cost-effective flow and
storage or raw materials, finished goods and related information from the point-of-origin
to the point-of-consumption for the purpose of conforming to customer requirement.

All supply chian activities have only one objective of satisfying customers so that they
keep coming back to the company and its products.

A typical supply chain extends fromt the company suppliers (point of origin) to uts
customer (point of consumption) and involves three flows:
a) Physical flow of materials in one direction from the supplier to the customer.
b) Information flows in both directions,
c) Financial flows in one direction from the customers to the vendors.

Like logistic, supply chains are expected to deliver the right product at the right place at the
right time and at the right price and profit to the company.

A. Supply Chain Management focus

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 SCM focus on the processess linking the generationof demand to the fulfillment of that
demand. The starting point is the customer and what he or she wants ans all the
activities are centered around this.
 SCM create the processss to fulfill customer service needs.
 SCM is seriously concerned with the physical infrastructure required to support
these operations like plants, warehouse and transport.
 SCM manages this infrastructure to maximise service level to customers.

B. Need for a Supply Chain Review

Visible symptoms is business that indicate the need for a review and revamp or re-
design of the supply chain process.
 Slowed down response to change in the market.
 Large write-offs, since what the firm is producing, does not seem to be what the
customers are looking for.
 In order to meet customer service needs and demands of customers which seem
to be imposing stringent conditions of delivery, the company would be taking up
the easy way out by building up inventories.
 The firm in unable to commit on finished goods and delivery dates.
 There could be frequent stock-outs and lost revenues as the palnning seems to
be not keeping pace with the market needs.
 The various partners in the supply chain blame each other for below optimum
performance and escalating costs.
 Meeting customer requirements means significant trade-offs in operations
affecting the profitability.

VII. DIFFERENCE BETWEEN LOGISTICS AND SUPPLY CHAIN MANAGEMENT

There is no clear differentation made by the experts on logistics and supply chain
management.

LOGISTIC SCM
Logistic insclude physical distribution, Includes logistic business functions
warehousing, transportation (inbound and mentioned in logistic, and also icludes
outbound) and in some industries customer purchasing, sourcing, procurement, buying,
service also( sales order processing, manufacturing operations, production
invertory planning and production planning). scheduling inventory control and materials
management, facilities location planning,
the information technology to coordinate
between suppliers, the company and
customers.
Table 1: According to Pete Cosby (SCM Consultant)

LOGISTIC SCM
Concerned with strategy and corrdination of Tends to focus on purchasing and
flows between marketing and production. procurement. It can include materials,
inventory and production planning. There is
also Demand Management which focuses on
forecasting, but is sometimes included un
either logistics or supply chain function
Table 2: From another Logisctic consultant

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 LOGISTIC SCM
Is part of supply chain management process Encompasses the planning and
that plan, implements and controls the management of all activities involved un
efficient, effective forward and reverse flow sourcing and procurement, conversion and
and storage of goods, services and related all logistic management activities. It also
information between the point of origion to includes coordination and collaboration with
the point of comsumption in order to meet channel partners, which can be suppliers,
customers’ requirements. intermediaries, third-party service providers
and customers. In essence, SCM integrates
supply and demand management within the
across companies.
Table 3: According to Council of Logistic Management

VIII. LOGISTIC AND OTHER FUNCTIONS -INTERFACE

Logistic is the internal service provider for both (1) production and (2) sales and marketing.
1. Production –provides the raw materials, packaging materials and consumable required to
keep the production running.
2. Sales and marketing –provides finished goods to help the revenues come into the company

The interfaces includes:

 With marketing: logistic activies include getting demand forecast, arranging for
dispathces, providing field warehousing, inventory management, packaging and
transportation.
 With production: logistic to interact with the vendors, get the raw materials and
packaging materials on time, help in the production scheduling, arrange in plabt
storage and transportation.
 With finance and accounting: create budgets, allocation of resouces and cost
management.
 With pruchase: The purchase function negotiates terms wiht the suppliers and
places the orders.
 With quality control: the SC function will not take it into the stores or issue it to
production, till the quality has been checked by the QC function and approved
by it.

Figure 2: Intergrated Supply Chain

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IX. FOCUSES AREAS OF LOGISTIC AND SCM
The three (3) main focus areas of Logistic and SCM:
1. Inventory Management
2. Storage and Warehousing
3. Transportation

1. Inventory Management
Objective of inventory:
o To maximise customer service – ensure the availability of stocks when and
where required.
o Help minimise the cost of plant operations
o Minimum investment to deliver the agreed customer serives.

a. Funtions of inventory
Inventory serves as a buffer between:
o Supply and demand
o Customer demand and finished goods 
o Requirements for an operation and the output from the previous
operation 
o Parts and materials to begin an operation and the suppliers of
the materials

b. Factors Which Drive Inventory

o Target service level parameters
o Lot sizing practices
o Safety stock and safety time conventions
o Volume discounts and purchase arrangements
o Seasonal build up needs

c. Categories of Inventory
o Anticipation -built in anticipation of future demand Peak season,
strike, promotion
o Fluctuation (safety) -to cover random, unpredictable fluctuations
in supply and demand and lead time -to prevent disruption in
operations, deliveries etc
o Lot-size : to take advantage of quantity discounts, reduce
shipping, set up and clerical costs -also called cycle stock .
o Transportation -pipeline or movement inventories -to cover the
time needed to move from one point to another  -factory to
distribution point for example
o Hedge -for materials where prices are volatile
o Maintenance, repair and operating supplies(M RO) -to support
M and O -spare parts, lubricants, consumables etc

d. Classification of Inventory
Practicing managers have found a ways to classify their inventory in
different categories and applying various methods to manage these
items. ABC –Always Better Control –is one of the most popular
classification of inventory. This is based on Paretos’s Law.

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 ◦ A -20% items contribute to 80% of the revenues or account for
80% of value  - high priority
◦ B -30% items contribute 15% of the revenues or account for 15%
of value – medium priority
◦ C -about 50% items contribute to 5% of the revenues or account
for 5% of the usage – lowest priority.

e. Inventory Control
Some of the steps taken for inventory control:
 Continuous review:
o Safety stocks and forecasting methods 
o Excess and obsolete inventory
 Part simplification and re-design
 On-site supplier managed inventory
 Use of supply chain inventory management systems, materials
Requirement Planning, Distribution Requirement Planning etc
 Automated inventory tracking systems
 Supplier -buyer cycle-time reduction

f. Inventory cost
The cost of inventory is basically the interest of cost of the inventory
held, the storage costs and any losseson account of damages or
deterioration in quality.

Costs related to inventory:

 Item or unit cost – basic value of item carried
 Carrying cost – capital, storage, risks which could be damage,
deterioration, pilferage, obsolescence
 Ordering costs of materials - mostly relating to follow-up with
vendors but could also include generating and sending material
releases, transport or any other acquisition costs.
 Stock-out costs –back-order costs, lost sales or lost customers
 Quality costs associated with non-conforming goods
 Others costs could include duties, tooling and exchange rate
difference

g. Inventory stragey
Factors companies looks when deciding their inventory stratege:
1. Delivery lead time and service levels desired by the markets and how
much of this is the company willing to satisfy in terms of fill rates,
order fills rates and percentage backlog of orders they are willing to
carry and serice.
2. The means the company chosen to service market.
3. The position of the company in the market.
4. The effectiveness and accuracy of the sales forecast generated by the
company salespeople.
5. Relates to the strategy possible in terms of inventory and its relation
to demand.
6. The account the company ability to take care of short term demand
changes.

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 7. the state in the product-cycle at which the company products are
presently.

2. Warehousing

Storage or warehousing provides the place uyility as part of logistics for any business
and along with transportation is a critical component of customers servoce standards.
The purpose of warehousing is To provide desired level of customer service at the
lowest possible total cost. The warehousing is that part if the company’s logistic
framework that stores items at and between the point of origin to point of
consumption and provide information to management on the status, condition and
disposition of items being stored.

Figure 3: Function of warhousing

a. Reasons for warehousing

1. To support the company’s customer service policy.
2. To maintain a source of supply without interruptions.
3. To achieve production economies in terms of sep-up times.
4. To achieve transportation economies

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 5. To take advantage of quantity purchase discounts offered by vendors or
forward buying when prices are favorable
6. To support changing market conditions and sudden changes in demand.
7. To ensure least logistics cost for a desired level of customer service.
8. To overcome time and space differential
9. To support JIT programms agreed with suppliers or even customers.
10. To provide customers with the right mix of products at all times and all
locations.
11. Temporary staroge for materials that need to be disposed off or re-cycled.

b. Distribution Warehousing
 The objective is to set up a network of warehouses closest to the
customer locations to service markets better and minimize cost
 Could be C&FA s, depots or distribution centers

The warehouse location strategies could be:

1. Market Positioned - Warehouses located nearest to the final customer 
 Factors influencing are:
◦ Order cycle time 
◦ Transportation costs 
◦ Sensitivity of the product 
◦ Order size 
◦ Levels of customer service offered

2. Production Positioned
 Warehouses located close to the production facilities or supply
sources
 Not the same level of customer service as the earlier one
 Serve as points of aggregation / collection for products made in a
number of plants
 Factors influencing are:
◦ Perishability of raw materials 
◦ Number of products in the product mix 
◦ Assortments ordered by customers 
Transport consolidation rates

3. Intermediate Positioned
 Mid point locations between the final customer and the producer 
 High customer service levels possible even if products made in
number of units
 Other macro approaches look at cost minimization or cost and
demand elements to maximise profitability
X. ADVANCES IN SUPPLY CHAIN MANAGEMENT
1. Efficient Consumer Response
The idea of such strategy is to supply to the final user/consumer only what he or she wanted in
the most efficient manner.

2. Category Management

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 Managing categories of product makes the task of logistics relatively easier. Even while calling-
off products based on the merchandiser negotiation, logistics can suppliers more efficiently.
Coordination between retailers and the vendors has become better.

3. Continuous Replenishment
This result from tracking the online consumption of the product at the point of sale. The
principle is to replace stocks on the retail shelves based on the updated knowledge of consumer
off-takes. Logistics helps in filling up the retail shelves based on the marketing information.

4. Quick Response Logistics

Here the customer decides what he wants when and where. The logistic system has to respond
the needs highlighted. The point of sale data is collected and analysed to keep manufacturing
flexible to meet the demand.

5. Handling Functional and Innovative Products

A functional product meets the basic needs of the customer. It requires that the supply chain
addresses the issues of time and place utility efficiently. Such supply chain is known as physically
efficient supply chain.

There are innovative products which are difficult to forecast and also the demand is not certain.
Some of these products may even have a short life. In such case, one is looking for a supply
chain which is quick in responsible to the market needs. This kind of supply chain is known as a
market responsive supply chain.

6. Benchmarking
Comparing performance of supply chain systems between companies to help adopt best
practices.

XI. TECHNOLOGY IN LOGISTICS

1. Supplier Relationship Management (SRM)
This include the processes for the flow of materials, etc. between the supplier and the firm. The
process includes:
 Design collaboration between the firm and its suppliers –joint product development
efforts.
 Sourcing –selection of appropriate suppliers –factors kept in mind the quality, lead
time reliability and prices.
 Buying –managing the purchasing process to reduce time and cost.
 Negotiation –at all stages from the time of the receipt of the quotes from the suppliers
and to prices, delivery times and other terms and conditions of the transaction.
 Collaboration with suppliers –to improve their performance in better forecasting, good
production planning and managing optimum inventory levels.

2. Customer relationship Management

The process for the flow of materials and information between the company and its customer.

3. Supply chain Management

Focuses on the process within the firm to enhance customer service. It takes care of all
processes right from the planning to fulfilling customer’s order.

4. Electronic Data Interchange (EDI)

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 Electronically connecting suppliers, production units, field distribution centers and key
customers for exchanging data and information.

The exchange of business information through standard interface by using computers. This
defines the exchange of data in a structured form between the firm and its suppliers. This
method replaces oral and written communication with electronic communication.

5. Bar Codes (Universal Product Code)

Pre-printed bars on packages with unique identification to track goods in the supply chain.

6. Radio Frequency Identification (RFID)

Radio frequency waves to track items, people, equipment etc. in real time without the need for
contact or line-of-sight.

7. Optical Character Recognition

Similar to bar code but less accurate. Normally, this technology is used by companies like
couriers to track or sort mails or documents.

8. Data Warehousing
 Collects data from multiple, heterogeneous sources;
 Uses tools to convert the data into information and store it, the data is stored in a step-
by-step manner.
 The stored integrated information can then be used for queries, analysis and decision-
making; this is a part of the Decision Support System.
 Make the optimizations of the supply chain possible through consolidation, conversion,
transformation and integration of operational data.

Data mining – is an information analysis tools that automatically discovers patterns and
relationship in a data warehouse.

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