Block-2 - MS 55 - IGNOU

UNIT 4 LOGISTICS - INBOUND AND OUTBOUND
Objectives
After reading this unit you would be able to:

• define Logistics;
• describe the facets of Logistics i.e. Transportation & Warehousing;
• portray Logistics as a key to supply chain management;
• discuss about Inbound & Outbound Logistics; and
• describe Logistics from supplier to manufacturer & manufacturer to consumers.
Structure
4.1 Introduction
4.2 Logistics: Definition
4.3 What is Supply Chain Management (SCM)?
4.4 Design and Management of SCM
4.5 Logistics: Inbound and Outbound
4.5.1 Suppliers to Manufacturers
4.5.2 Manufacturers to Consumers
4.6 Logistics Management
4.7 Integrating Logistics
4.8 Perspectives in Logistics
4.9 Summary
4.10 Self Assessment Questions
4.11 References and Suggested Further Readings
4.1 INTRODUCTION
The role of logistics has for long been perceived by many senior managers and chief
executives, as nothing more than getting the right product at the right place in time
and within costs. However, in recent times to be successful logisticians a wider
perspective has to be developed with due consideration to the strategic role played by
logistic management in an organization. Strategic management of acquisitions,
movement, storage of raw materials, production and shipment to delivery to end-users
are some of the significant tasks of logistics management. Cost-effectiveness and
speed are the inherent requirements to make the operation a successful one.
Logistics is a very intricate yet a very simple subject to learn about, but a very
complicated subject in case the channels of logistics are not in place and not
integrated. Logistics per se, require a lot of coordination and integration at the highest
and the lowest of levels. Rightly said, a logisticians phone never stops ringing, he
moves from crisis to crisis, and from one criticality to another.
4.2 LOGISTICS: DEFINITION
We will begin with an illustration. Take the case of a small time businessman who
manufactured and marketed jam, those were the days when it had only a few brands
to reckon with. It entailed traveling long distances from Calcutta (now Kolkata) to the
remotest parts of Bengal & Bihar (some areas of Jharkhand). The load used to be 5
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Design and Management of huddled up at the rear (body of the vehicle) neatly packed in bright colored cardboard
SCM packages. The manufacturer processed the guavas/mangoes/pine-apple etc into a
jelly like substance, bottled them carefully under his eyes, sealed them with molten
wax (that was the practice those days), labeled them, packed them into neat
containers careful enough to prevent breakages, marked them for the consignor and
dispatched them to their destination. The surplus were sent to a badly lit room and
stacked neatly by placing bricks under the packages to prevent against damp. You
must have observed how meticulous he was and so concerned about his products.
One must admit here that one learn logistics in a very practical way. Right from the
time you used your tri-cycle to lug the loads your friends carried. When you played as
children, unknowingly, stacking your belongings neatly and carefully, inadvertently,
and later delivered them to another friend and took a few marbles in return of those
proud possessions. Till date one is doing almost the same thing; mobilizing men,
material, equipment and supplies over long distances across the length and breadth of
this country, and stocking them for a further use. That is what is logistics in short.
Coming to the proper definition, the term logistics could be used to cover all aspects
of movement, storages of material and to deliver the material to the user. For a
manager the definition would mean involving movement of goods both in the inbound
and outbound sides. It is responsible for both incoming goods and distribution of goods
to the next member of the supply chain and to the end consumer per se. In almost all
cases, the logisticians design and manage the company’s distribution system, which
consists of warehouses, distribution points and transport systems. Logistics can play a
major role in shaping and determining the nature of the overall corporate response to
exploit market opportunities (Deshmukh & Mohanty, 2004). Marketing forecasts
precede exploration of market opportunities, since, overall potential of the market,
customer profiles, price/volume combinations and resellers profile is to be identified
before the best suited infrastructure is utilized to maximize the opportunities available.
A logistic activity enables a broader view that has to be undertaken on how the
available opportunity can at best be approached. This would further enable the
management to review the number of production options available whether it is
manufacturing of components, assembly operations or a combination approach. The
important characteristics of this decision process concern the relationship between
fixed and variable costs ab-initio and also through the product life cycle. This will
require a view of the markets, the response of the product competitors and an
assessment of market risk.
Logistics can make or break a company. How? Once a logistics decision is taken, the
implications of that will be, high level of services in terms of product availability and
delivery. Failure of logistics will affect your company repute and overall affect the
market share. Therefore, in a nutshell one has to understand the importance of
logistics and its related decision, since it’s the key to effective supply chain
management, and also the first step towards building a strong market position.
Let us see this through an illustration fig 4.1:
Once you have generally understood the basics of logistics we can now inch forward
to the intricacies involved in making this logistics happen and what helps in a
successful logistics activity. Like in the army it is said that no war can be won without
the foresight and planning of an expert logisticians. A soldier can fight a battle in the
adverse of conditions, only when, the logistician ensures timely supply of stores, ration
and ammunition in all weather and terrain conditions. The two major aspects of
logistics are transporting and warehousing, without which logistics is seriously
affected.

Logistics : Inbound and
Outbound
DIRECT
OUTLETS
MOVE OF RAW
MATERIALS BY DIFFERENT MODES OF TRANSPORT
PRODUCT WAREHOUSING CONSUMERS

IN-DIRECT
PROCESSING & STORAGE
MOVE OF RAW BY DIFFERENT MODES OF TRANSPORT

MATERIALS
OUTLETS
Fig 4.1: Basic Block Diagram to Understand Logistics
Transportation
Transportation happens to be the most fundamental part of strategic logistic

management. Transport costs include all costs associated with movement of products
from one location to another. The average transport costs ranges from 5 to 6% of the
recommended retail price of the product.
Transportation is the movement of products, materials and services from one area to
another, both inbound and outbound. It can also be said as movement from one node
of the supply chain to the other. As Deshmukh and Mohanty (2004) says, “ by
providing for the swift and uninterrupted flow of products back and forth through the
chain, transportation provides a sort of lubrication to run the chain smoothly. It also
permits deeper penetration of newer markets far from the point of production.”1
Therefore, in order to effectively manage this transportation system the first step
would be to establish a cost effective transportation mode. In other words highest
customer service in lowest price, leads to company growth (Fig 4.2).
40
35
COMPANY GROWTH
30
TRANSPORTATION SYSTEM
25 CUSTOMER
COST SATISFACTION
20
15
PRODUCT
10
PRICE LEVEL COMPANY OPTIMUM
05 EXPANSION
00 05 10 15 20 25 30 35 40
Fig 4.2 Transportation Cost Factor and it’s bearing on the Company and Customer
1
Mohanty & Deshmukh in Essentials of Supply chain Management, chapter 7, pp. 118-119.
7

Design and Management of Where, numerical 40 is a variable factor representing the optimum level in terms of
SCM costs & growth in X & Y axis. With the transportation costs coming down from 40 to
30 the product costs lowers to even between 10 and 5, which is directly proportional
to the customer satisfaction, which rises to 30 to 35 and affects company growth
to 40.
Transportation system has a strategic bearing on operation of a company. Therefore,

failure to identify the best transportation mode can directly affect the growth of a
company. Higher transport costs will raise prices, which will directly affect the
customer satisfaction in a negative way. The three factors as mentioned by Gattoma
& Walters required to consider are:
• Customer
• Environment
• Product & company.
Organization, which involves physical movement of goods require transport services

that varies from mode to mode. The best suitable mode is required to be identified
depending upon the nature of product that has to be moved.Therefore, in order to
identify the right transport system the following have to be considered:
• Impact of the transport system on the supply chain.
• Factors that determine the choice of transport mode.
• Who are the customers to your product per se?
• What are the environmental factors?
• What is the product?
• What is your company profile?
• Feedback and reporting both from within and the environment on the choice of
transport, and rectify in case you went wrong the first time.
• Your foresight, flexibility & integration of available resources in planning stage
will be one of the crucial factors that will dictate the choice of transport.
Next we have to see as to what are the considerations that influence transportation?2
Considerations Influencing Transportation
• Customer Communications: in order to obviate delays in transportation and
handling of logistics both the suppliers and distributors are relying more and
more on electronic transfer systems, IT & the internet. This will help in
considerable reduction in time delays and effect better cooperation between the
chains.
• Market Coverage: transportation costs influence the size of markets covered
in a big way. The characteristics are: costs, flexibility, reliability and availability.
The product per se will influence the economics of the decision. A low volume
and high value product will be able to support higher costs, which means
extended delivery distances and increase in delivery frequency.
• Sourcing Decisions: the geographical dimension of the source markets can be
influenced by low cost transportation system, i.e. ‘reliable bulk freight services
could extend the source markets,’ says Mohanty & Deshmukh. Companies
therefore have to consider a trade off between price & quality and the costs
involved in delivering to the processing point, i.e. volume & cost of
transportation.
2
Mohanty & Deshmukh in Essentials of SCM, chapter on Transportation in SCM, pp. 119-121.
8

• Manufacturing Operations: cost of transporting has a direct bearing on the Logistics : Inbound and
location of the manufacturing market center. That is why, extraction based units Outbound
are close to the source of raw materials and the products related to customer
satisfaction are closer home, i.e. near to the customer hub center.
• Pricing Decision: transportation happens to be the important component of

product costs. Therefore, selection of the appropriate transportation mode will
have a direct bearing on the product costs per se, with more relevance to
exports. Increase in transportation costs increases the product pricing.
• Customer Service Decisions: both customer service policy and transportation

decisions go hand in hand and hence one cannot be considered in isolation of the
other. Moreover, the type of market will also dictate the decision and will vary
considerably. Therefore, its pertinent to overrule the cost factor while servicing
the medical customers, since speed is more important than cost in selecting the
transport mode.
An Effective Selection System
Transport selection can effectively be resolved by adhering to the five stages of
selection framework:3
• Stage I: identification of those factors affecting the choice of transport selection.
• Stage II: categorize the significant factors and identify the potential risks.
• Stage III: determination of the distribution network depending upon the number
and size of the depots.
• Stage IV: application of matrix analysis for selecting the right transport.
• Stage V: measure and monitor costs continuously.
A Decision Framework
Determining an organization’s transport requirement will be based on the following

underlying considerations:
• The available depots, their sizes including movement requirements of raw
materials to manufacturing units and finished products to the warehouses and on
to the consumers.
• The best choice of mode available depending on the distance involved.
• Product characteristics that will further dictate the type of transport mode to be
employed.
• The choice of equipment in terms of type of transport for each requirement.
• The financial option that could be employed in terms of individual type of
equipment.
• The operation needs in terms of usage of the equipment for maximum utilization
and minimum operational costs.
From the above its evident that transportation is one of the important facets of
logistics and equally important in the process of SCM, because they impact the
customer services and other areas of cost. These decisions are prominent within the
purview of company logistics decisions due to the factor of trade off potential that
exists between alternative modes of transportation and other logistics functions within
the firm. Therefore, an understanding of costs and benefits of alternative transport
modes, together with an in-depth evaluation of overall corporate implications is
mandatory. Transportation costs will always have a direct bearing on the product
3
Deshmukh & Mohanty in Essentials of SCM, pp130-131.
9

Design and Management of costs, i.e. increased transport costs will have risen prices and vice versa. Therefore,
SCM appropriate selection of the right transport mode is necessary for optimum customer
satisfaction and for a balanced logistics system of the firm.
Warehousing: This happens to be the other important facet of logistics chain and
works side-by-side with transportation. It is that segment of logistics function that
deals with storage and handling of inventories starting from supplier receipt to
consumption point. The management of this includes the maintenance of accurate
and timely information relating to inventory status, location and disbursement. Factors
influencing the warehousing decisions are:
• Type of distribution.
• Value of the firm.
• Quantity and potential for obsolescence.
• Competitiveness.
• Economic condition.
Warehousing perform a variety of roles as mentioned below:
• Material handling. It consists of receiving, storing and shipping.
• Storage. This maximizes customer services by improving product and location
positioning.
• Transfer of information. This ensures timely and accurate information on
inventory status, space utilization, equipment and manpower availability and
transport capacity.
In order to develop an effective warehousing strategy the following areas have to be
addressed:
• Documentation of existing warehouses operations.
• Documentation of the storage facilities and put forth requirements over the
planning horizon.
• Identify the shortfalls within the warehouses that are available including the
deficiencies.
• Alternate warehousing plans to meet contingencies in strategy.
• Selection of the best alternative.
• Update the warehouse strategic plan.
With that as a backdrop to our study let us see the design and management of Supply
Chain Management, since logistics happens to be the key of SCM.
4.3 WHAT IS SUPPLY CHAIN MANAGEMENT (SCM)?
A simple definition would be; an integrated, synchronized and a closely knitted chain
which links all the supply interacting organization in a two way communication system
in order to maintain a high quality of inventory in the most effective manner.
Managers at all levels should understand this, since this is related closely to world-
class supply management. It can also be defined as:
• An integrated system that helps in managing the flow of distribution channel
from supplier to the consumers.
• SCM is a systematic method designed to manage the flow of information,
materials and services both inbound and outbound, i.e. from the supplier to
10 manufacturer to the end customers.

• It’s a strategic coordination of all the related business functions within a Logistics : Inbound and
particular firm and across businesses within the supply chain, in order to improve Outbound
performance of the individual companies and of the supply chain.
• It is associated with all the activities encompassing the upward and downward
movement of goods and materials from the nascent stage to the production
stage and to the consumer. SCM is integrating these activities under one control
for better management and for attaining substantial and sustainable advantage.
It can be better achieved through better coordination and relationship.
• It’s a concerted effort of all in the channel to develop, design, manage and
implement value added services towards ultimate customer satisfaction.
Integrating men, technology, information, finances and material under one roof is
the ultimate aim of this SCM system.
These varied definitions placed above are to guide you to understand the concept of
SCM better and can be used as per individual perception. The common factor to all
this is one has to go beyond the realms of traditional functioning to include and
integrate external entities to include customers and suppliers.
For better assimilation let us put it across this way.
The Chocolate Way
You manufacture a particular brand of chocolate, a popular one with all age groups.
Now, in order to make your product responsive and hold fast into the competitive
market you got to maintain a close link with suppliers who will provide the best milk
COMPANY MANAGEMENT
SUPPLIERS PRODUCT DESIGNER
PRODUCT MANAGER
MILK
SUGAR MANUFACTURER
WORK FORCE
COCOA TRANSPORT
SYSTEM PROCESSING
BUTTER FAT UNIT
SALT
FINISHED PRODUCT
CHOCOLATES
LABELLERS
TRANSPORT SYSTEM
PRICING
CONTROL
WAREHOUSES
STOCKISTS
TRANSPORT SYSTEM
DISTRIBUTORS DISTRIBUTORS DISTRIBUTORS
CONSUMERS CONSUMERS CONSUMERS
Fig. 4.3 : A Layout of An Ideal Processing Unit Explaining the Supply Chain 11

Design and Management of for your money, the best coca powder for the flavor, an efficient product manager
SCM with an equally trained staff who will design and manufacture what the market
requires, an effective marketing system and above all the vendor who will carry it
and distribute it to my consumers. This is your supply chain and managing this to
maintain a high quality at all times is called the supply chain management.
It is a linkage, so designed, that one cannot function with out the other and all have to
function in close unison and you, as the entrepreneur has to ensure this. It involves a
well conceived strategic planning and long-term tactical orientation, and there is a
world of difference between practicing and preaching.
A few flow diagrams have been placed for your better understanding. Once you
have understood this part of the unit the associated and related matters to supply
chain will follow suit, (figure 4.3).
Activity 1
Visit a nearby industry and understand the SCM system being followed in that
organization and co-relate the same with what you have learnt theoretically.
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4.4 DESIGN AND MANAGEMENT OF SCM
Internal functions and external suppliers constitute a company’s supply system, which
are involved in identification and fulfillment of requirement for equipment, materials
and key services in an optimized manner. Supply management is the foundation to
successful supply chain management. It can create a tremendous impact on any
company’s bottom line more than any other business function. In case the supply
chain is not positively been addressed there is bound to be problems in the firm.
Integration of these services and managing them under one head is therefore the key
to an effective supply chain system in the organization.
The principle phases of supply chain management are:

• What are the requirements and its generation?
• Sourcing
• Pricing
• Post-award activities
These phases are all interrelated and interdependent and cannot function in isolation.
The generation of requirement phase is the most important of all the phases, since;
almost 85% of the cost of materials, services and equipment is designed during this
phase. However, the irony is that supply management is not a contributor to this
phase in particular but assumes greater role for the next three phases, i.e. sourcing,
pricing and post award activities4 .
1
World Class Supply management by Burt, Dobler & Starling Tata Mc Graw-Hill page 2.
12

Let us now see the four phases of supply management and how best can this be Logistics : Inbound and
obtained by interfacing each one of them with the other. Outbound
Generation of Requirements
As an entrepreneur what is your requirement, and how do you get them? It is a
question that is continuously lingering in the minds of all managers involved with this.
It is a critical activity that terminates in identifying the right and the best material
along with development of specifications and statements of work that describe these
requirements. The exodus of materials, services and equipments are ‘designed in’
during this particular phase5 , to the tune of almost 85%. Therefore in order to ensure
appropriate consideration to the services, raw materials and costs per se, supply
management should be involved right from the word go during generation of
requirement phase.
Sourcing
When one decides to go shopping just try and visualize what all plays up in one’s
mind? Say, you have to buy a Music System for example. Then what? The mental
appreciation quickly says thems following:
• Budget: How much money can you spend on a system?
• Brand: Which is the best brand available in the market for the budget you have?
• Availability: Is it readily available too?
• Services: In case it is available how are its after sales services?
• Final selection: What is the best that suits all the above?
That is exactly the appreciation one got to do before sourcing. Identifying and
selection of the best supplier available in the market, whose costs, materials,
dependability, quality and services suits the manufacturers requirements. Sourcing is
development of a supply alliance, and it is an activity by itself.6
Pricing
It’s a two way traffic aimed both at the supplier and the manufacturer. It’s done in
such a way that it benefits the supplier for its effort and also results in lowest cost for
the firm who buys the supplies. Keeping in mind inflationary trends, pricing forms
part of the on-going process in supply management with inbuilt negotiations, to arrive
at the best deal possible. If the supplies are costly the price of the commodity also
rises. Therefore, in order to strike a balance the job of supply management is to
continuously monitor this aspect so as to keep the prices from rising. For example,
when the prices of diesel goes up, the transportation cost increases leading to
increase in prices of supply. Foresight and planning on the part of the manufacturer
plays a leading role in assessing and reacting to such eventualities in a big way.
Post pricing
This is another important phase which ensures that the firm receives what it
demanded, and that too timely. It also ensures that the prices are in check and that
quality is being maintained. This also includes supplier developments, criticalities
management, technical assistance and management of the complete contract.
That is what are the principal phases of supply chain management (SCM). All the
sub phases are inter-related and managed under one head the SCM systems. Let us
see this more closely with this block diagram.
5
“Manufacturing by Design” by D Whitney, Harvard Business Review, July 1988, pp. 83-91
6
‘The Foundation’, chapter 1 of WCSM, by Burt, pp. 16. 13

Design and Management of
SCM
GENERATION OF REQUIREMENT SOURCING
MATERIALS SERVICES COSTS
QUALITY TIME
STATEMENTS OF WORK SPECIFICATIONS
TECHNOLOGY
POST-PRICING PRICING
QUALITY LOWEST COST TO FIRM APPROPRIATE COST TO SUPPLIER
QUANTITY
TIMELY PRICE CONTROL
Fig 4.4: The Principles and Phases of SCM
4.5 LOGISTICS : INBOUND AND OUTBOUND
Let us now take a closer look at the logistics both inbound and outbound. Let me
tell you this is the most intricate part of the system of SCM. If your goods don’t
reach in time and they are of inferior quality you as an entrepreneur earn a bad
name too. So why give the consumer a chance? Plan it in a way that you
ensure both quality and quantity in a reasonable time frame. Take for example
7 days trucker’s strike in 2004. It was bad for economy of the country and
above all worse for those manufacturer’s who couldn’t deliver goods on time. A
strike or a bandh as we call it in India is a happy situation for the fleet owners
but a bad time for the drivers, mill owners, small timers, labourer, suppliers,
manufacturers and the consumers. That is the reason contingency planning plays
a predominant role in shaping our SCM system. How, let us see.
4.5.1 Suppliers to Manufacturers
The most complicated, yet, the most important phase in any production is the
movement of raw materials from the supply point by the suppliers to the
manufacturing unit. Identification of the right type of suppliers is therefore the
key to effective SCM system.
Can you envisage the various agencies and steps that are involved in this total
system? Let us see them one by one.
• What is the raw material that has to be moved?
• What is the cheapest and the best available with the suppliers?
• Where is it available?
• What are the credentials of the supplier?
• What is the mode of transport being utilized for the move?
14
• Is it cost effective?

• What is the time factor involved in the movement? Logistics : Inbound and
Outbound
• Does weather and climate play a predominant role in moving the raw
material?
• What are the terrain conditions in the areas from where it has to be
moved?
• What is the distance involved?
• Is it of acceptable quality?
All these have to be addressed before one plans for movement of these raw
materials, that too in great detail. That is what is an effective SCM system to be
followed by every firm. Let us see this with an illustration.
An Illustration
A material ‘X’ has to move from Bihar, which is famous for lot of ores and raw
materials responsible in shaping our products. Let me be more specific in saying
so. Some minerals from Sasaram have to be moved to Surat in Gujarat for
making some product ‘Y’. The road distance works out close to approximately
1600 kilometers, quite a lot as per Indian standards. A truck loaded with X
leaves Sasaram on D-day (where D is 1). As per Indian road conditions it could
take anything between 3 to 4 days for the material to reach. Therefore the total
time works out to D+3/D+4, i.e. 4th/5th day the truck will reach Surat. Unloading
time ½ a day, running time works out to 4 ½ /5 ½ days. Thereafter quality
checks and various processes to place these raw materials on the production line
will take another 2 days works out to 6 ½ /7 ½ days. Production time of 1 to 2
days depending on the type of product works out to 7 ½ / 8 ½ days. Keeping a
cushion of 1 day the time taken for the finished product will be anything between
9 to 10 days. That is the planning involved in making a finished product and
achieving your target. That is under absolute ideal conditions. India is subjected to
numerous disruptions in form of natural calamities, man made obstacles, disasters,
accidents and unrest. One has to cater for these criticalities and therefore
foresight in planning is must. Suppose there is flood like situation at Sasaram,
then what? One has to plan for warehousing near Surat where certain stocks
catering to these kinds of contingencies have to be catered for, ab-initio. Like
floods there could be strikes and bandh too. These are the gray areas that have
to be addressed in totality, apart from the fact that the vehicle could also break
down en-route. There could be a number of examples related to movement of
stocks and supplies, be it rail, water, road or air. All have their complexities and
peculiarities, but the underlying basics are the same one has to plan ahead come
what may, to avoid irregularities.
Table 4.1: Terrain-wise Criticalities
Criticalities Mountains Plains Desert Link Roads
Going Hilly roads, Smooth Going, A mix of good and Rough and slow
Conditions Bends & Zigs Faster mode bad going
Time Factor Slow Fastest Medium Very slow
Prone To Severe Lesser Rare but at times Loots, bandh and
accidents, magnitude, but over speeding results Strike, Accidents
Losses in Cannot be ruled In damages Related to
supplies out population
Repair & Difficult, Available in Repair facility Rare, prone to
Recovery Frequent plenty restricted to severe breakdowns
breakdown highways only
Calamities Road Blocks, Floods, bandhs, Very rare, since Frequent

Slides, Flash riots & strikes population centers disruptions owing
Floods are far apart to congestion of
population centers
15

Design and Management of Movement of supplies from suppliers to manufacturers differs from place to
SCM place. Terrain plays a predominant role in this aspect and you have to realize this
point. In mountains the criticalities are far too many and you can understand the
aforesaid through this chart in a better way.
From the above it’s evident that criticalities in any form disrupts movement in a big
way irrespective of the terrain but you got to plan your time schedule depending on
the terrain on which your supplies are moving. Therefore, knowledge on these areas
is very important so that the suppliers cannot take you for granted on these counts.
Studies on geography and layout of an area of responsibility and related aspects are
therefore important for a manager dealing with logistics.
Activity 2
Study the aspects of terrain and its implications on logistics management. Visit a few
places in the hilly and mountainous terrain and understand the implication of these
areas on logistics management.
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Differences in Urban and Rural Areas

India is one such country, which enjoys a rare mix of both urban and rural pockets at
regular intervals. Rural areas require tremendous amount of logistics supply and
coordination to make the SCM system effective. That is the lay of Indian society and
hence one has to understand and be live to the problem. Actually most of our supplies
move generally from these rural areas and hence you should be aware of these areas
in a nutshell. Let us discuss them for a while.
The various criticalities pertaining to logistics in rural areas are:
• Large quantities and more number of collection points.
• Distance between the manufacturers and users are large.
• Materials are bulky, perishable, and expendable and have inferior packaging.
• Certain places have to be communicated through handcarts, tractors, boats,
cycles and bullock carts.
• Trips are generally one-way and hence not cost effective.
• Uniformity in work is missing, since; logistics are restricted to peak seasons
only.
• A mix of intermediaries and direct delivery.
• Storage, movement and packaging of agro products are difficult and time
consuming.
There are many more to this depending upon the nature of terrain and climatic
conditions too, but these are the salient ones and you as a manager have to
understand this aspect. Trading in rural areas is difficult and risky too.
Storage in rural areas is another criticality due to restriction in storage areas and
because the agro produces are seasonal in nature. These are to be consumed round
the year, both in season and off-season. Storage starts right from the time the harvest
is ready till its distributed to the consumers. The various storage places available are:
16

• At the farm itself. Logistics : Inbound and
Outbound
• Village collection centers/collection points.
• With the processor.
• Wholesaler.
• Bins and self-help store rooms under stringent conditions.
• Retailer.
• Market place/selling points.
The shelf life of these items generally the farm produce are very less and hence
planned infrastructure has to be developed for proper storage facility like the cold
rooms.
Transport in these areas is still primitive in nature; starting from bullock carts,
cycles, hand carts, rickshaw van, boats, animal transport and even stragglers.
This is due to bad roads and roads connectivity. India has one of the largest road
networks in the world with approximately 2.5 million kilometers of road network.
National highway accounts to nearly 5200 km, which is barely 2% of the total
roads in the country. Actually movement of goods from rural areas becomes
expensive due to its handling costs and number of organizations involved in it. Let
us see it with an illustration.
ROADS
SOURCE WAREHOURSES
PRODUCE FACTORIES GOODS
MARKETPLACE CENTRAL POINTS
CONSUMERS
A RURAL AREA SCM SYSTEM: DEPICTING MOVES OF GOODS

EX SOURCES TO THE MARKET PLACE
Fig 4.5: Rural Area SCM System

Activity 3
As a student of Logistics suggest a few practical viewpoints, which differs urban
from rural logistics, both in terms of management and maintenance. Organize a
visit to a rural area factory and carry out a feasibility study on how logistics can
be improved for better response.
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17
..............................................................................................................................

Design and Management of Urban Areas
SCM
Coming on to urban areas, the process is certainly different since; it doesn’t have
to go through the exercise of moving through bad roads too often and poor
storage system. Things move more systematically and less time consuming,
though at times the carriers perforce move through difficult stretches of rural
areas, generally a mix of urban and rural areas. What happens in urban areas?
Let us see.
• The procurement is done generally closer home and very near to the towns
and cities.
• The supplier’s job is to supply the goods in the time frame and price that is
fixed initially.
• The company management generally contacts the supplier who has nominated
go-downs close to the place of manufacture, for better and even time
management.
• Unlike rural areas the suppliers in the fastest mode deliver the material and
services in order to save on time; a combination of rail, air and road at
places even waterways.
• Manufacturing takes lesser time in production and distribution thereafter.
• A better market available to the manufacturer for his goods.
From the above it’s evident that a manufacturer in the rural area stands at a
disadvantage visa-vie his urban counterpart for the following reasons:
• Movement of raw materials.
• Transport system.
• Storage facility.
• Production.
• Preservation.
• Distance from source to market area.
• Availability of market.
In a nutshell the SCM involved in managing a rural enterprise is more cumbersome
than the urban one.
4.5.2 Manufacturers to Consumers

Let us now visualize the various stages involved in moving the finished products
from the manufacturing units to the consumers. They are:
• Packaging of goods.
• Stocking them in warehouses/containerization.
• Loading into carriers/transportation.
• Delivery to the nearest wholesalers.
• Wholesalers to retailers.
• Retailers to market places/stores.
• To consumers.
These 7 steps are like any of those 7 days. It’s difficult to skip one to save on
another. Yes, there are direct marketing that the companies are following these
days, but they are numbered. But the basic stages of these companies too move
through pre-designated franchises and not directly. Hence, the time taken or cost
18 per se generally remain the same.

Problems envisaged in movement of products from manufacturing units to Logistics : Inbound and
consumers are many and can be listed as under: Outbound
• Perishable products.
• Losses in transit.
• Accidents and calamities.
• Unavoidable delays in terms of strikes and bandh.
• Labor unrest.
• Rats and rodents.
• Breakages during handling.
• General costing since at times even double handling is involved.
Let us see this with the help of a diagram, (figure 4.6).
TRANSPORT
PILFERAGE
SYSTEM
MANUFACTURING UNITS WAREHOUSES RIOTS & STRIKES
DISTRIBUTORS PERISHABLE
ULTIMATE AIM LABOUR UNREST WHOLESALERS BREAKAGES
LOSSES
RATS & RODENTS
MARKETS/STORES NATURAL
CONSUMERS RETAILERS CALAMITIES
RESPONSE OF THE EFFECT ON

CONSUMERS COSTING
Fig. 4.6: Problems Involved in Logistics Support
From the above it’s evident that labor’s unrest is generally common in the
complete process and an effective SCM in position can only help reducing these
miscalculations and criticalities. Natural calamities and strikes do pose a problem
for the manufacturer and indirectly increases the cost of items ultimately
available to the consumers. What is therefore your ultimate aim in this process of
SCM? It’s the response of the consumer for whom you made this happen, and
side-by-side what is the effect of the problems and criticalities on your product?
It affects the costing per se, and this is what is shown in the diagram above
(Fig.4.6).
Logistics both inbound and outbound is very intricate in nature. A consumer

sitting at the comfort of the room cannot virtually visualize how a packet of
toothpaste reaches him every time he uses it. What actually happens on ground
can only be realized by him who makes it happen that way. Once you start
thinking on it the various questions that arise are:
19

Design and Management of • Where does the raw material come from?
SCM
• Who supplies it to you?
• What is the best course available to you in procuring the right material with
in the cost per se from the available options? Who decides on that? You
and the management.
• How is the material moved and where to?
• How do you store this?
• What are the various contingencies involved in this?
• What if the stores don’t reach on time? What is the option available to you?
• What would be the losses in production?
• What would be the losses in packaging?
• If the production channel breaks down, then what?
• How do you transport the finished goods in the time frame available to you?
• How will your marketer’s distribute or market the products?
• What will be the response of the consumers to your product, your ultimate
aim?
All of the above are interlinked and have a direct bearing on the net output of
the firm. An effective SCM system in place wards off any such minor
shortcomings that can run into problems and criticalities later.
4.6 LOGISTICS MANAGEMENT
Before we went on to this let us see the triangle that is formed in the supply
chain management (SCM).
DEMAND
MANAGEMENT
LOGISTICS
MANAGEMENT
Fig. 4.7: Three Components of SCM
The three critical components of SCM are:

• Supply management
• Demand management
• Logistics management
You would learn about the supply and demand part of SCM in next unit and
would discuss on logistics part of it now. As discussed earlier that the logistics
20 professionals play a vital role in shaping the success of SCM as regards

management of transportation, storage and warehousing. We sometimes do tend Logistics : Inbound and
to ignore the role of logistics but the supply and demand chain cannot be met Outbound
without the integrated and close-knit support of the logistics.
Logistics management deals with receiving, handling, movement, storage and

delivery of material, services and finished product in an SCM system. Logistics is
required both at the beginning and at the end of it. (Fig 4.8)
RECIEPT HANDLING MOVEMENT STORAGE
TO
DELIVERY
MANUFACTURER
TO
CONSUMERS
Fig 4.8: Domain of Logistics
As Coyle puts it, “ logistics is the part of supply chain process that plans,
implements and controls the efficient, effective flow & storage of goods, services
and related information from point of origin to point of consumption for the
purpose of conforming to consumer requirements”. Logistics include the following
role (Fig 4.9)
ROLE
OF LOGISTICS
TRAFFIC CONTROL & WAREHOUSING &

TRANSPORT STORAGE TO INCLUDE
MANAGEMENT INFRASTRUCTURE
INVENTORY MATERIALS
CONTROL & MANAGEMENT &
MANAGEMENT HANDLING
DEMAND FORECAST SERVICE SUPPORT
SALVAGE
MANAGEMENT &
DISPOSAL
Fig 4.9: Role of Logistics
An effective SCM system will never be possible without the integration of

logistics, since logistics is the foundation of SCM discipline and is responsible for
its activities. Needless to mention here is that the transportation cost is the 21

Design and Management of heaviest in the entire chain, and even more than product selling prices. Therefore,
SCM in order to maximize customer satisfaction and meeting firm’s goal it is
mandatory to ensure that effective storage facilities for goods and services are in
place.
4.7 INTEGRATING LOGISTICS
Logistics planning has to be integrated with material and capacity planning in

order to achieve maximum and optimum level of satisfaction. The needs and
requirements of our customers is variable and never a constant factor, therefore,
in order to serve them better and be profitable you got to tailor your logistics and
ensure it to be more dynamic with passing time. The emphasis should be on
reduction of cycle time and elimination of waste in order to increase customer
satisfaction. You have to understand that movement of goods, warehousing of
materials and delivery is time consuming and at times requires precision
synchronization at all levels i.e. from supplier to manufacturer and from
manufacturer to consumer.
Illustration
Can you visualize the effort involved in moving crackers from Shivakasi in Tamil
Nadu to Kolkata? A child who burst these crackers only have to demand them,
and you as the guardian have to procure them from the shop, which sells these.
Where does the shopkeeper get it? He gets from the wholesaler, and the
wholesaler from the distributor/stockiest of that area. How does the company X
stock the stockiest? The crackers are packed at Shivakasi and loaded in carriers,
depending upon the time it has to reach and the time in hand before it is
required. In case the planning fails the crackers will land up after Diwali to the
dismay of many. That’s dead stock and is of no use to the consumer.
Therefore, logistics involves procuring and transporting of the raw materials

required to make firecrackers from the source to the manufacturer and once
again tran-shifting the finished products to the warehouses near to the target
area, so that closer to the festival the crackers could be utilized at once. When
this is happening another set of crackers are in the process of moving from
Shivakasi for the target area to meet any contingency. What if the warehouse
catches fire? That actually depends on the demand per se and supply thereof,
which we shall see in the follow up unit.
From the above it’s seen, as to what all gets involved in movement of
firecrackers, from the source to the consumer, and how logistics play a
predominant role in assisting the products to reach the consumers in time.
4.8 PERSPECTIVES IN LOGISTICS
One has to continuously think and think rightly to get over the routine criticalities
that are involved with logistics. Theory will surely help you to understand the
guidelines involved in logistics, but unless you understand the practical aspects
and device methods to tackle them, you will find yourself in a quandary each
time, when faced with a criticality. Certain newer perspective in logistics
planning and execution could be as enumerated below.
• Produce at Source: This will involve production near to the source of raw
material and cheap labor. It will also involve lesser movement of transport
and reduce double handling to a large extent. There are other disadvantages
22

in this though, like distance from the target population, which will involve Logistics : Inbound and
more number of stocking points and areas. But, this can reduce the basic Outbound
cost of production considerably.
• Fleet Management: Can you think of managing your own set of transport?
Yes, certainly you can. Thinking of additional costs and expenditure? Yes,
there are. But, certainly not more than hiring and facing the problems of
trucker’s strike, and incessant rise of carriage charges. Maintaining a fleet is
cumbersome today, but if you can maintain a good sixty vehicles along with
a minor repair organization, it will help you immensely on a rainy day. You
have something to call your own.
Integration of logistics network. Logistics have to be integrated with the others in
the firm for a better coordination. How? Let us see with the help of a figure.
DY MANAGING DIRECTOR /CEO
CHIEF LOGISTICS OFFICER (CLO)
MANAGER STORES TRANSPORT MANAGER SUPPLY OFFICER
COSTING FINANCES SPARES & SERVICES PROCUREMENT WING
INVENTORY CONTROL DELIVERY CONTROL WING
Fig. 4.10: Showing An Integrated Logistics Organization And Inherent Reporting
Activity 4
Suggest a new perspective to logistics management keeping in mind the present

changing logistics scenario.
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4.9 SUMMARY
Logistics plays a predominant role in designing and shaping of SCM in a firm.

Without an effective logistics system the effectiveness of the firms SCM channel
is questionable. Logistic activity helps in enabling a broader view to be taken for
handling the best available opportunity and how it is to be approached. If we
understand and know the economics of logistics activities it is possible to review
a number of production options that may include individual production
(manufacturing of all components), assembling, or an ideal combo approach. The
key players of logistics activity that is transportation and warehousing has been
amply discussed and will enable you to understand the nuances of selecting the
right transport mode for the right product and equipment within the overall gambit
23

Design and Management of of cost effectiveness. We have discussed the issues pertaining to move of
SCM logistics both in-bound and out-bound in the Indian scenario, within the scope of
this unit per se. Last but not the least, we have understood the designing and
management of SCM and the key to effective SCM, the logistics.
4.10 SELF ASSESSMENT QUESTIONS

1) Define logistics and elucidate with appropriate examples in the Indian
context.
2) Explain the various factors of logistics with special reference to
transportation.
3) What are the stages for selection the appropriate transport mode and why?
4) Why is transportation important in a firm’s supply chain?
5) What is more important-inbound or outbound logistics in a supply chain?
6) Give relevant examples of the problems involved in logistics activity. How
can we overcome them?
7) What is a supply chain and what is effective SCM?
8) What are the factors that link supply chain?
4.11 REFERENCES AND SUGGESTED FURTHER

READINGS
1) Krishnaveni Muthiah (2003), Logistics Management & World Sea-borne

Trade, Himalaya Publishing House, Mumbai (for basics of Logistics &
marketing interface)
2) Deshmukh & Mohanty(2004), Essentials of SCM , Jaico Publishing House,

Mumbai (should be included in compulsory reading, since the text pertains to
Indian context, simple and easy to comprehend)
3) Simchi-Levi, David Kaminsky, Philipsimchi-Levi, Edith (2004), Designing

And Managing The Supply Chain, Tata McGraw-Hill
4) Mentzer, Fundamentals of Supply Chain Management, Sage India

Publishers
5) Burt, Dobler & Starling, World Class Supply Management, Tata Mc Graw-
Hill
6) D Whitney (1988), Manufacturing by Design, Harvard Business Review,

July 1988, pp. 83-91.
24

UNIT 5 MODELS FOR SCM INTEGRATION
Objectives
• define SCM integration & describe strategies involved in SCM integration;
• illustrate models for integrating supply and demand chain;
• define demand management & visualize real demand;
• highlight the relationship between material flow, information flow and cash
flow; and
• elucidate Bullwhip effect and illustrate measures to counter them.
Structure
5.1 Introduction
5.2 Integrated Supply Chain/ Value Chain
5.3 Supply Chain Strategies
5.3.1 Push Based Supply Chain
5.3.2 Pull Based Supply Chain
5.3.3 Push-Pull Strategy
5.4 Demand Management
5.5 Internet and SCM
5.6 Physical Goods Flow, Virtual Flow and Cash Flow
5.7 Bullwhip Effect
5.8 A New Perspective to Counter Bullwhip Effect
5.9 Drivers of SCM
5.10 Summary
5.1 INTRODUCTION
The main objective of the supply chain concept is to integrate and synchronize
the service requirements of the consumer/customer with the flow of materials
from suppliers in such a way that any conflicting or contradictory situation rising
can be balanced out. These conflicts could be like, high customer service, low
inventory investment and low operating cost. These have to be balanced or
optimized, and therefore, various models have been proposed over the years in
order to integrate the SCM systems, for example Stevens Model (1989), which
proposes a balance in the supply chain involving functional trade-off. Supply chain
management revolves around efficient integration of suppliers, manufacturers,
warehouses and stores. The main challenge being coordination of the activities
within the chain and across it for improved performance, reduced costs, increased
service level, reduced bullwhip effect, resource utilization, and effective response
to market changes. Companies have realized over a period of time that
integrating the front-end of supply chain, customer requirements/demands, to the
back-end of the supply chain, the production and manufacturing portions of the
supply chain.1
1
Designing and managing the Supply Chain by Simchi Levi etal, TMH, p. 120
1

Design and Management of Development of an integrated supply chain requires management of material and
SCM information flows to be viewed from three perspectives:
• Strategic
• Tactical
• Operational.
At each of these levels, there has to be utmost coordination and harmonization
between the finance, information, material, facilities, people and the system as a
whole. Let us see these perspectives one by one.
5.2 INTEGRATED SUPPLY CHAIN/VALUE CHAIN

Integration of Supply Chain & Demand Chain can be seen from three angles as
follows:
Strategic Level: What should be the focus at the strategic level?
• What are the objectives and policies for the supply chain and how can they
be developed to achieve competitive superiority?
• How to develop the physical components of the supply chain?
• How to develop the statement of customer service intent by the product
market, customer group or by a large customer?
Stage 1: Baseline, Elevation Principa
Material Flow Customer Service
Purchasing Material control Production Sales Distribution
Stage 2: Functional Integration Eleva
Material Flow
Material Management Manufacturing

n Management Distributionn
Stage 3 Internal Integration - Eleva
Material Management Manufacturing Management Distribution
Stage 4 External Inte
Suppliers Internal Supply Chain Customers
2
Fig 5.1: Steven’s Model of Supply Chain Integration

• Developing an organizational structure capable of bridging the functional Models for SCM
hurdles, thereby ensuring an integrated value delivery based supply chain. Integration
Tactical Level: This focuses on the means by which the strategic objectives
could be achieved. The various objectives for each element in the supply chain
provide the directions for achieving the balance within the supply chain. It
involves identifying the necessary resources with which the balance could be
achieved.
Operational Level: the implementation level in the model, and aims at
converting the objectives and policies so formulated into workable solutions. This
is also the supply chain development phase and the strategy and plans for
implementation are evolved. Implementation plans require a time-phased program
for allocation of resources all through the supply chain. (Fig 5.1).
Steven’s comment concerning supply chain development is equally interesting,
which says while the impetus for the development of the strategy may be a top-
down approach; its success is likely to be achieved by a bottom-up approach.
The same is highlighted in the fig 5.1 (Stevens 1989):
• Stage 1 is a situation in which the company approaches the supply chain
tasks in discrete decisions with a responsibility lodged in each of the task
centers. The result is usually a lack of control across the supply chain
function because of organizational boundaries preventing the coordinated
decisions from achieving an overall customer service objective.
• Stage 2 of development is denoted by the functional integration of the
inward flow of goods through material management, manufacturing
management and distribution. The emphasis is mainly on cost reduction
rather than on performance achievement and is focused on the discrete
business functions with certain attempts at achieving internal trade-off
between purchasing discounts and inventory investment, and also plant
operating costs and batch volumes. Customer service is reactive in this case.
• Stage 3 accepts the necessity of managing the flow of goods to the
customer by integrating the internal activities. In this stage, the integrated
planning is achieved by using the distribution requirement planning (DRP),
JIT (just in time), manufacturing techniques, etc. This stage is essential
before the company can consider integrating customer demand in an overall
demand management activity. IT is an effective enabler for this process.
• Stage 4 extends the integration to external activities. While doing so, the
company becomes customer oriented by linking the customer procurement
activities with its own procurement and marketing activities.2
The concept of value chain/supply chain management approach enables a
company to react effectively to market swings and changes. However, in order
to get the optimum potential, a connection and inter-relationship between the
components of the supply chain has to be established and an integrated chain
formed for utmost customer satisfaction, i.e. cost-effective product.
5.3 SUPPLY CHAIN STRATEGIES
The various strategies that has to be followed for an effective integration are:
• Push & pull
• Push-pull
2
Mohanty & Deshmukh in Essentials of SCM, JAICO, 2004, pp. 8-10.
3
Supply chain integration by Kaminsky, TMH pp. 120-122 3

Design and Management of 5.3.1 Push Based Supply Chain
SCM
Long-term forecasts are the backbone of a push-based supply chain model, as
regards the production and the distribution decisions are concerned. Typically
though, the manufacturer bases demand forecasts in orders received from the
retailer’s warehouses. Therefore, it takes much longer for the push based supply
chain to react to the changing marketplace, which may lead to3
• Inability to meet changing demand patterns.
• The obsolescence of supply chain inventory as demand for certain products
disappears.
Actually, the bullwhip effect leads to under utilization of resources, because
planning and managing is (to be discussed later in this block) more difficult. For
example a production manager is in quandary as to how to discern production
capacity. Should it be based on peak demand or average demand? Similarly it is
not clear as to how to determine the transportation aspects, based on average or
peak demand? Therefore, a push based chain we find extra transportation costs,
higher inventory levels and higher manufacturing costs, due to need for
emergency production change-overs.
5.3.2 Pull Based Supply Chain

In this type of supply chain the production and distribution is based on demands
so that it can be effectively coordinated with true customer requirements rather
than forecasts. Inventory in on firms following the pull system is negligible and it
responds only to orders per se. This is further coupled with fast information flow
mechanisms on customer demands to the various components of the supply chain.
This system is more attractive in nature because, it leads to:
• A lesser lead-time, since better anticipation is made on customer demands
and the retailers
• Lesser inventory with the retailers
• A decrease in variability due to reduction in lead-time
• Decreased inventory with manufacturer due to reduction in variability.
In a pull based supply chain there is considerable reduction in inventory, enhanced
resource management and a comparable reduction in system costs to push based
system. At the same time, pull based systems are difficult to implement when
lead-time are long and it is not practical to react to the demand information.
Moreover, since the systems are not planned well in time it’s difficult to take
advantage of economics of scale in manufacturing and transportation. Taking
these advantages and disadvantages into consideration the companies have
formulated a new system ‘the push-pull’ system, i.e. an integration of push and
pull system.
5.3.3 Push-pull Strategy

This is an ideal mix of both push and pull strategy in which the first half of the
system is based on push method and the remaining half as pull based. The
interface between the two models is push-pull boundary. In order to comprehend
the strategy better you have to consider the supply chain time line, that is, the
time that elapses between procurement of raw materials and the delivery to the
customer, the end of the time line. The push-pull boundary, exists somewhere in
between this time line and denotes the time when the company switches from
one strategy to the other as illustrated in figure 5.2.
3
4 Supply chain integration by Simchi Levi etal, TMH pp. 120-122

Consider a computer manufacturer, who builds to stock and thus makes all Models for SCM
production and distribution decisions based on forecast. This is a push system. Integration
Whereas, push-pull strategy is one in which manufacturer builds to order, which
implies that component inventory is based on forecast and final assembly is in
response to specific customer request. Therefore, the push system is prior to
assembly and the pull system starts with assembling till delivery of the product.
The push-pull boundary is prior to assembly.
PUSH-PULL
START TIME BOUNDARY END TIME
PUSH STRATEGY PULL STRATEGY
PROCUREMENT OF RAW DELIVERY TO

MATERIALS CUSTOMER
Fig. 5.2: The Push-Pull Supply Chain System
Activity 1
Visit a company and analyze the SCM strategy being followed in the light of
present trends worldwide and justify your observation, with suitable case studies.
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5.4 DEMAND MANAGEMENT
Why do we require demand management? It’s primarily required since

accumulation of inventories amounting to millions in the supply chain shows
absence of demand management in the total system. “Demand management’s
imperative of forecast error reconciliation with the actual order rate of an
enterprise is one of the most overlooked potentials in the successful management
of inventory levels, customer satisfaction, staffing strategies and facilities
expansion or contraction”.4
An Example to Elucidate Forecast Accuracy

You are part of a counseling class on SCM at IGNOU that meets every day
between 1800 hours to 2000 hours. Let the topic of discussion be forecast
accuracy. The counselor asks you approximately as to where will you be one
week from now at 2130 hours. You respond by saying 90% you will be here for
the class, with a 10% possibility of getting tied down to family commitments.
4
WCDM, from World Class Supply Management by Burt, Dobler & Starling, TMH, Chapter 8, pp. 624-626. 5

Design and Management of The next question of the counselor will be, with that in mind where will you be
SCM 4 years from now, at the same time?
You are partly speechless, and say “well one cannot be too sure and probably I
will graduate from IGNOU with a degree in SCM and will be trying to cope
with a job in hand.” The counselor adds on by saying, how sure can you be of
that? “ Not to sure perhaps I will be where I presume to be at that point in
time.”
So that is what it is just try and visualize how difficult it is for the firms to
forecast future demand for their product and services. It is quite akin to the
policy on trees plantation adopted by certain firms a few years back, where you
purchased trees today and expect a hike 20 years from now, without actually
forecasting what is going to be the condition of the sapling planted today after 20
years. The firms actually utilized the concept of forecast demand in a reversing
order and made the consumer/customer go in circles over own probability errors,
which they miscalculated. The company had done their homework pretty well to
convince you on this aspect, but you as the customer didn’t predict the future too
well. That is forecast accuracy, very difficult to predict in actuality but easy to
talk appreciate, with a may/could be factor, a gamble better avoided.
What is Demand Management?
Let us now see what is demand management per se? “It seeks to estimate,
control, smooth, coordinate, balance and influence the demand and supply for a
firm’s products and services in an effort to reduce total costs for the firm and its
supply chain.”5 It recognizes that forecasts are developed at several points
through out an organization, but doesn’t develop forecast. It accepts forecast
from other functions and updates these based on real time demand. It is also
directly related to supply in order to adjust the flow of raw materials and
services. So, how can we establish control in demand management?
By:
• Execution of effective production schedule
• Calculation of inventory levels
• Capabilities and capacity
• Developing of customer service strategies
It is also responsible for smoothing and streamlining production after the master
production schedule is in place and been released to internal production and
external suppliers. Demand keeps on changing on a day-to-day basis. Therefore
the demand managers should have contingencies in place in coordination with the
supply chain members so that necessary modifications could be affected well in
time. “Demand management also balances the total costs of not meeting the
demand against the total costs of adding additional resources required to meet the
growing demand,” says Burt in his book WCSM. Actually, without a forecast of
demand, supply channels tends to get cluttered and all this can effectively be
overcome through a comprehensive demand management.
Demand Driven Strategies
Demands forecast and demand shaping are the two different processes, which
helps in generating information for integrating demand information into the supply
chain planning process, as enumerated below:
• Demand forecast: A process in which historical demand data are used to
develop long-term estimates of expected demand, that is, forecast.6
5
Demand Management from WCSM by Burt, TMH, pp. 326.
6
Demand driven strategies in designing and managing supply chain, Simchi Levi et. al,
6 pp. 126-128

• Demand shaping: It is a process in which the firm determines the impact of Models for SCM
various marketing plans such as promotions, pricing discounts, rebates, new Integration
product introduction and product withdrawal on demand forecasts.
In either case, the forecast is not completely accurate, and hence an
important output from demand forecast and demands shaping processes is an
estimate of the accuracy of the forecast, the so called forecast error,
measured according to standard deviation. This information provides insight
into the likelihood that demand will be higher (or lower) than the forecast.
High demand forecast error has a negative impact on supply chain
performance, resulting in obsolete inventory and underutilization of resources.
Therefore, can the firm employ supply chain strategies to increase forecast
accuracy and thus decrease error? Let us see with the following
approaches:
• Select the push-pull boundary so that demand is aggregated over one or
more of the following dimensions:
• Demand is aggregated across products
• Demand is aggregated across geography
• Demand is aggregated across time
The objective is clear. Since aggregate forecasts are more accurate, the result is
improved forecast accuracy.
• Use market research, demographic and economic trends to improve forecast
accuracy
• Incorporate collaborative planning and forecasting processes with the
customers for better understanding of demands
• Determining the optimal assortment of products by store so as to reduce
the number of SKUs competing in the same market
At the end of it the firm has a demand forecast by SKU by location. The next
is to analyze the supply chain and see if it can support these forecasts. This
process, called supply and demand management, involves matching supply and
demand by identifying a strategy that maximizes profit or minimizes transportation
costs, inventory costs and production costs. The firm also determines the best
possible way to handle volatility and risks in supply chain. This is tactical
planning, which is impact to demand planning. Therefore an iterative process
must be used to identify the following:
• The best way to allocate marketing budgets and supply and distribution
resources
• The impact of deviation from forecast demand
• The impact of changes in supply chain lead-times
• The impact of competitors’ promotional activities on demand and supply
chain strategies
5.5 INTERNET AND SCM

The influence of Internet has been tremendous over a very short period of time.
Changes are taking place rapidly and the emerging e-business has its inherent
advantages and disadvantages. E-business strategies supposedly reduce costs,
increase service level, increase flexibility and increase profits. But in reality very
few have been successful. Many Internet companies have crashed due to their
individual logistic gray areas. On the other hand some of them have been
7

Design and Management of successful in developing new business models and profited significantly by
SCM capturing a sizable market share. These companies use the Internet as the driver
of business changes. Next is e-business and e-commerce. Now what is e-
business? It is a collection of business models and processes motivated by the
Internet technology and focuses on improvement of extended enterprise
performance. E-commerce is the ability to perform major commerce transactions
electronically, and it forms the integral part of e-business.
Companies have realized over a period of time that Internet can have a huge
impact on supply chain performance. Internet can help in a big way to move
away from the traditional push strategies to the pull system, but eventually most
of the companies have landed up with the push-pull strategy.
The Bottom Line
Recently, many companies have improved performance, reduced costs, increased
service levels, reduced bullwhip effect and improved responsiveness to changes in
marketplace by integrating the supply chain. In most cases, this was facilitated by
the push-pull model and by a focus on demand driven strategies, however, in
effect the Internet has created a revolution in integrating the SCM and evolving
supply chain strategies. At the same time the collapse of many such internet
companies does send an alarm that e-business not only makes business but break
them too. The key to these challenges lies in identifying the appropriate strategies
for a particular company and individual product. The new supply chain paradigm,
push-pull strategy, advocates holding inventory, though it pushes the inventory
upstream. Most important is that the traditional companies are required to
maintain and effective distribution system depending on environmental factors,
warehouses, direct shipment, transshipment so as to ensure effective management
of inventory and reduction of distribution costs.
5.5 PHYSICAL GOODS FLOW, VIRTUAL FLOW AND

CASH FLOW
Related to what we have studied earlier in integration of Supply chain, physical

flow, virtual flow and cash flow could be seen in more detail. David N Burt in
his book World Class Supply management says ‘the supply chain extends from
the ultimate consumer to the mother earth’ and has explained the same with an
illustration, which we shall see later. “The chain is viewed as a whole, a single
entity rather than fragmented groups, each performing its own function”.7 Only
when an ultimate customer buys a product does the money enter the supply
chain. Transactions help in allocating the customer’s money among the members
of the chain. “A firm’s supply system includes all the internal functions plus
external suppliers involved in the identification and fulfillment of needs for
materials, equipment and services in an optimized fashion”.8 Supply system plays
a key role in helping the firm satisfy its role in supply chain. Professor Charles
of MIT writes, “Supply chain design is the meta-core competency for
organizations”.9
The Internet today permits the supply chain managers to manage their supply
chains collaboratively and also synchronizes their operations. The net result is:
7
Gentry, J. J, “The role of Carriers in buyer-supplier strategic partnerships: a supply chain
management approach,” Journal of Business logistics pp. 35-53, cited in Amelia S. Carr & Larry
Smeltzer, “The relationship of strategic purchasing to supply management”, European Journal of
Purchasing and supply management 5 (1999) p. 44.
8
Burt, Dobler & Sterling WCSM by Tata Mc Graw Hill 7th edition, p. 7 in Supply chain & networks.
9
Charles H. Fine, Clockspeed: Winning Industry Control in the Age of Temporary advantage. (as
8 specified by Burt in his book WCSM by Mc Graw-Hill, p. 7.)

• Reduced costs. Models for SCM
Integration
• Time management.
• Competitiveness.
• Profitability.
Success of an organization in the near future will be driven by its ability to
compete effectively as a contributing member of a dynamically connected supply
chain management and not in isolation. Connectivity with customers, suppliers and
other partners and be able to interact quickly is critical to survival. Tomorrow, a
tightly connected e-chain will be a necessity.”10
SUPPLIERS/
MOTHER EXTRACTORS/
EARTH MINERS CONVERTER OEM
CONVERTER
DISPOSAL END DISTRIBUTOR

CUSTOMER
SOURCE OF
FUNDS
MATERIALS & SERVICES PHYSICAL
INFORMATION VIRTUAL
FUNDS/CASH FLOW
Fig 5.3: Supply System’s Role in helping the Firm satisfy its role in its Supply Chain (Adapted
from ‘The Supply Chain’ By Burt In WCSM, 7th Edition, TMH)
Supply chains are relatively easier to describe and visualize, but the terminology is
already dated. “Traditionally, companies have connected with one another in
simple, linear chains, running from raw material producers to distributors to
retailers.”11 But the day is not far off that most companies will be an integral
part of the supply networks worldwide. Networks optimize the flow of goods
(physical flow) and services, virtual flow (information) and money (cash flow). It
focuses on the ultimate customer, who is once again the generator of funds.
They are so designed that one member doesn’t benefit at the cost of the other,
the networks are therefore:
• Adaptive
• Speedy
• Innovative
• Integrated
SCM in essence is based on creation of values. It is a network of business
processes used to deliver products and services from raw materials to end
customers through an engineered flow of information, physical distribution and
cash flow. It oversees the organizational relationships in order to get the
information necessary (virtual flow) to run the business, to get the products
delivered (physical flow) and get the finances that generate the business profits
10
Lisa L. Henriott, “Transforming Supply Chains into e-chains,” Supply chain management
supplement, Spring 1999, p.16 (Burt and Dobler in WCSM Tata Mc Graw-Hill pp. 7-9.)
11
Kevin Werbach, “Syndication: The emerging model for business in Internet era”, Harvard Business
Review, May-June 2000, pp. 85-93. 9

Design and Management of (cash flow). This is an integrated and extended enterprise concept and includes
SCM not only relationships with internal business functions, but also with those outside
the firm. What has been explained above is just the tip of the iceberg, since
SCM strategies are changing rapidly with growing involvement of IT and
electronic media.
.
(23 CUSTOMERS
u OEMs
MOTHER
EARTH b
Fig 5.4: An Ideal Supply Network (Adapted From Supply Networks, Chapter 1 WCSM By Burt,
Dobler & Starling)
With this as a backdrop we come to bullwhip effect, which happens to be the

basic benchmark in understanding the supply, demand and inventory management,
and reasons why companies fall pray to this effect and how best can they
reduce it if not eliminate.
5.7 BULLWHIP EFFECT
“Failure to accurately estimate demand and share information among supply chain
entities can result in bloated inventory levels due to cumulative effect of poor
information cascading up through a supply chain12 , says Burt in his book WCSM.
This is in fact quite natural in a way. If a firm doesn’t have information of the
demand it will unnecessary carry a load of additional inventory or even increase
the lead-time to cater for the uncertainty. Either ways the inventory gets bloated,
if the lead-time increases so will the buyer increase order quantities (based on
conventional recorder point calculations). This will result in the supplier
interpreting this to be growing customer demand, with a cascading effect on the
supplier who feels the necessity to increase capacity to meet the trend. To add
fuel to the fire, just as supplier has added additional capacity to meet the
increase in demand, demand falls off because the buying firm has excessive
stock available. The resultant is firing of employees, selling of assets in order to
reduce the capacity. This ‘phantom’ demand in SCM is called as bullwhip effect.
In other words, ‘the increase in variability as we travel upwards in the supply
chain is referred to as the bullwhip effect.13
12
‘The Bullwhip Effect’ Chapter 27 towards world-class supply chain management, WCSM by Burt,
Dobler & Starling, TMH, pp. 627-628
13
10 Value of information, in Designing & managing the SC by Samchi Levi et. al, second edition, 2004,
TMH

Therefore, in order to identify and control the bullwhip effect its pertinent to Models for SCM
understand the main factors that contribute towards increase in variability in the Integration
supply chain.14
• Demand forecasting: Traditional inventory management techniques practiced
at each level in the supply chain lead to the bullwhip effect. As discussed
earlier in unit 5, managers generally use standard forecast smoothing
techniques to estimate average demand and demand variability. The
important characteristics of forecasting are that as more data are observed,
the more we modify the estimates of the mean and standard deviation in
customer demands. Since safety stocks strongly depend on these estimates,
the user is forced to change the order quantities, thereby increasing
variables.
• Lead Time: Increase in variability is magnified with increase in lead-time. In
order to calculate safety stock levels and recorder points, we in effect
multiply the estimates of the average and standard deviation of the daily
customer demands by the lead-time. Thus, with longer lead-times, a small
change in estimate of demand variability implies a significant change in
safety stock and recorder level, leading to a significant change in order
quantities, which in effect leads to increase in variability.
• Batch Ordering: The impact of batch ordering is simple to understand. If
batch ordering is used by the retailer, as happens while using min-max
inventory policy, then the wholesaler will observe a large order, followed by
several period of no orders, followed by another large order, and so on.
Therefore, the wholesaler sees a distorted and highly variable pattern of
orders.
• Price Fluctuation: This can also lead to bullwhip effect. If prices fluctuate
the retailers tend to stock up when the prices are lower. That is another
reason why stocks vanish from the market prior to budget month. This is
accentuated by certain manufacturers and companies of offering promotions
and discounts at certain times on certain commodities.
• Inflated Orders: Inflated orders placed by the retailers during storage
periods increase the bullwhip effect. Such orders are common when retailers
and distributors suspect that a product will be in short supply, and therefore
anticipate receiving supply proportional to the amount ordered. When the
shortage period is over, the retailer goes back to the standard orders, leading
to all kinds of distortions and variations in demand estimates.
After having seen the factors leading to the bullwhip effect we now go on to
how to reduce the bullwhip effect by centralized information.
Impact of Centralized Demand Information
Centralizing demand information within a supply chain can reduce bullwhip effect
considerably. This would entail providing information on customer demand in each
stage of the supply chain. How and why? If demand information is centralized,
each stage of the supply chain can use the actual customer demand data to
create more accurate forecasts, rather than relying on the orders received from
the previous stage, which can vary significantly more than the actual customer
demand. To determine the impact of centralized demand information on the
bullwhip effect, we have to distinguish between two types of supply chains: one
with centralized demand information and a second with decentralized demand
information, as described below.
14
Value of Information in Designing & Managing Supply Chain, pp. 104-106.
11

Design and Management of • Supply Chain with Centralized Demand Information: In this type of
SCM supply chain the retailer (who is the first stage) observes customer demands
and forecasts his demands with moving average method finds his target
inventory level on the forecast mean demand, and places orders to the
wholesaler. The wholesaler who forms the second stage of the supply chain,
receives the order along with the retailers forecast mean demand, uses this
forecast to determine its target inventory level, and places the order to the
distributor. The distributor who finally places the demand to the factory, the
fourth stage in the supply chain, follows the same process.
In this particular chain, each stage of the supply chain receives the retailers
forecast demand and follows an order-up-to inventory policy based on this
demand. Therefore, the demand information, forecast technique and inventory
policy in this case has been centralized.
FACTORY
DISTRIBUTORS
STOCK/GOODS
FLOW DEMAND FLOW1
WHOLESALER
INFORMATION
*:* Observe Customer Demand.

RETAILER *:* Forecast Mean Demand.
*3 Find Target Inventory.
O Place Orders.
CASH FLOW
CONSUMERS
Fig 5.5: Supply chain with centralized demand information
• Decentralized Demand Information: the second type of supply chain is

the decentralized one. In this case the retailer doesn’t make its forecast
mean demand available to the remainder of the supply chain. Instead, the
wholesaler must estimate the mean demand depending upon the orders
received from the retailer. Here once again the wholesaler uses a moving
average with p observations of the orders placed by the retailer in order to
forecast the mean demand. Thereafter, it uses this forecast to determine the
target inventory level and places an order with the distributor. The
distributors target level is utilized to place orders in the fourth stage of the
supply chain. Again, in this stage as we move up the supply chain the
orders become larger and the variable increase with every stage.
Actually, in both the types of the supply chain the variance of orders become
larger as we go up the chain so that the orders placed by the wholesaler are
larger than those placed by the retailer, and so on. The difference in the two
types of supply chains is in terms of how much the variability grows as we move
from stage to stage. It is seen that the orders move additively in the centralized
12 system and multiplicative in the decentralized one. In other words in the

decentralized system where only the retailer knows the customer demand can Models for SCM
lead to higher variability than a centralized one, in which the customer demand is Integration
available at each stage, particularly when the lead times are large. Therefore
more often than not the centralized system can effectively reduce the bullwhip
effect.
It’s also important to note that even with the centralized system the bullwhip
effect remains, since the complete system is based on demand predictions and
this is a variable factor. Therefore, it will be correct to say that it can only
reduce the effect but not eliminate it completely.
Activity 2
Understand the aspects of Bullwhip effect and analyze the same with a practical
case study. Try and visit a firm to understand the effect of Bullwhip on SCM
systems and how does the company plan to negate the effect to some extent.
..............................................................................................................................
..............................................................................................................................
..............................................................................................................................
..............................................................................................................................
5.8 A NEW PERSPECTIVE TO COUNTER BULLWHIP

EFFECT
We have seen that bullwhip effect continues to stay in spite of our relentless
efforts. Hence, why don’t we put our minds together to find some solution to
counter this effect and remove it almost completely? It can be considerably
reduced, if we gave it a fair try. Let us take into cognizance of the various
environmental factors, consumer behavior, market research and area study into
effect to counter this problem. For a moment let us get into a model called
direct information system (DIS), in which we allow the manufacturer to get
direct information from the consumer bases rather than the retailers and
wholesalers or the distributors. It will require the following:
• A thorough knowledge on the consumer behavior, to include peculiar habits
as available in the Indian context and differs state-to-state, region-to-region
• A detailed market research
• An area study compendium to know about the area per se, this will ease
out transportation, warehousing and material handling activities
• Last two to three years consumption report analysis
• Last but not the least, an integration of these factors under one common
head the DIS.
Let us see this with a live example
An area ‘X’ has a vibrant population and uses 2 popular brands of toothpaste
‘Y’ & ‘Z’. Say 50% uses ‘Y’ and the other 50% uses ‘Z’. Keeping the trends
of our present day advertisements people can sway from Y to Z and vice versa.
How do you find that out? Through your retailers/wholesalers who tell you this
month people are asking for more number of Y to Z? Can you actually believe
them? Since you believe them you aggravate your problems of existing Bullwhip
effect. Resultant to this is over stocking and if not sold you land up with a
clogged inventory, since the demands were more predictive than actuality. In
13

Design and Management of order to nullify this effect you could get your DIS activated and find out the
SCM actual on ground situation and believe your ‘eyes to the ears’. Let us see this
mathematically. Out of 1000 customers in an area, 700 under presumed ideal
conditions uses ‘Y’ and the balance 300 uses ‘Z’. That has been the trend for
the last 3 months plus minus 10% here and there. This month things were
different and you find your brand ‘Y’ has dipped to a low of 300, i.e. this month
you got 400 toothpastes that never sold. What do you do now? Think of a sale
gimmick and rush out your stock? Under ideal conditions, Yes! But how long
could you afford to do that? Another 3 months? It’s better you tide over this
persistent problem once for all by activating the DTC (direct to consumers)
method, wherein your own representatives are on the move continuously taking
direct feedback from the consumers, in site. This will give a more realistic figure
than a predictive one. These inputs can then be compared with that you received
from the retailers/wholesalers/distributors, and you reach a common average of
demands from one particular area. Looks simple on paper, requires tremendous
coordination to implement. Let us see this with a figure to remove any ambiguity
of sorts.
DIRECT INFORMATION MANUFACTURER

SYSTEM
ENVIRONMENTAL DISTRIBUTORS
REALITIES
DIRECT TO
WHOLESALER CONSUMERS
AREA STUDIES
A TWO WAY TRAFFIC
CONSUMER RETAILER
BEHAVIOUR
MARKET RESEARCH FEEDBACK/DEMAND

TECHNIOUES
CONSUMERS CONSUMERS CONSUMERS
Fig 5.7 : DIS model for negating bullwhip effect by DTC link (Direct to Consumer)
5.9 DRIVERS OF SCM
SCM is indeed the most dominating paradigm in contemporary business and is

slowly emerging as powerful creators of sales and revenue growth. In the 21st
century, the rapidly exploding liberalized global market is creating enormously
diversified customers, products and services. Organizational, informational and
managerial demands are being redefined. The new millennium is creating
conditions and an entirely different type of challenge, which are being manifested
in innovative supply chain developments. The first driver is the behavioral
14
changes in the top management of global companies. This has dramatically

altered the way people think, learn, decide, act and believe in how they can Models for SCM
improve their responsiveness towards their clientele groups. The second is Integration
concerned with making quality products to retain customers, the third driver is
discipline of supply chain cost economics, fourthly is creation of a value
innovation process and fifth the decision making process, so as to make every
stage of the management accountable and responsive.
5.10 SUMMARY
In this unit we have focused on the concepts like models for SCM. You have
learnt about value chain system. You deliberated the stages of integration of
supply chain and learnt about integrating supply and demand chain to include
demand management. You discussed the relationship of goods flow, information
and cash flow. Bullwhip effect and measures to reduce this effect were also
deliberated.

1) Integration of supply and demand chain will go a long way to build and
effective SCM system. Discuss with examples.
2) Explain with examples demand and demand management.
3) Explain the various models of SCM.
4) Explain push-pull model with relevant examples.
5) Discuss the role of Internet in SCM. Explain e-business and e-commerce.
6) What is Bullwhip effect? Explain the various permutations and combinations
to reduce this effect in SCM.
7) What are the reasons for variability in the supply chain? Explain in detail
with relevant examples.
8) How do you link goods flow, information flow and cash flow in SC
integration? Explain with appropriate diagram.

READINGS
1) Burt, Dobler & Starling, World Class Supply Management, Tata Mc Graw-
Hill
2) Deshmukh & Mohanty (2004), Essentials of SCM, Jaico Publishing House,
Mumbai-23 (should be included in compulsory reading, since the text pertains
to Indian context, simple and easy to comprehend)
3) Simchi-Levi, David Kaminsky, Philipsimchi-Levi, Edited (2004), Designing
And Managing The Supply Chain, Tata McGraw-Hill
4) Mentzer, Fundamentals of Supply Chain Management, Sage India
Publishers
5) Gentry, J. J,(1999), “The role of Carriers in buyer-supplier strategic
partnerships: a supply chain management approach,” Journal Of Business
Logistics pp. 35-53, cited in Amelia S. Carr & Larry Smeltzer, “The
relationship of strategic purchasing to supply management”, European
Journal of Purchasing and Supply Management 5 (1999) p. 44.
6) Kevin Werbach, “Syndication: The emerging model for business in Internet
15
era”, Harvard Business Review, May-June 2000, pp. 85-93.

UNIT 6 STRATEGIC SUPPLY CHAIN
MANAGEMENT
Objectives
After reading this unit you would be able to:
• discuss the imperatives for supply chain, strategy development;
• be acquainted with the issues in supply chain domain and strategic decisions
in the supply chain;
• discuss supplier alliances;
• illustrate supplier quality management and related problems; and
• explain supply chain re-engineering.
Structure
6.1 Introduction
6.2 Supply Chain: Growth
6.2.1 Trends in SCM
6.2.2 Strategic Decisions
6.2.3 Strategic Supply Management Activities
6.3 Supply Alliances
6.3.1 Developing and Managing the Relationship
6.4 Supplier Quality Management
6.4.1 Problems of Quality
6.4.2 How to Find the Qualified Supplier?
6.4.3 Quantity Survey of Suppliers
6.5 Supply Chain Re-engineering
6.6 Summary
6.1 INTRODUCTION
After having seen the various models for SCM integration, integration of supply
and demand chain, let us now take a closer look at the strategic supply chain
management.
The successes in the manufacturers of today revolve around certain basic

services related to both product management and consumer satisfaction. The
imperatives are:
• Shorter product life cycle.
• Quality control.
• Timely delivery.
• Low cost delivery options.
• Reduction in costs, both production and to the end user.
• Waste management.
The imperatives above create a continuous pressure on the companies for
frequent changes, both in terms of policies and strategies, and in a way force the
1

Strategic Supply Chain
Management
companies to stay abreast of the latest. According to the world competitiveness

report competitiveness is equal to multiplication of competitive assets and
competitive process (Deshmukh & Mohanty).
Where, competitive assets include technology, infrastructure, people and

government institutions, and competitive process include quality, speed,
customization and services.1 Logistics has always been the backbone to
infrastructure for the manufacturers. Within the purview of SCM logistics has
been the art and science of procuring, producing and delivering products and
services at the right time, in right quantity and at the appropriate place. As we
have seen earlier, SCM involves planning, implementation, controlling, storage, and
transportation and end delivery from the point of origin to the point of
consumption as part of consumer/customer requirements. It is a network of
facilities that perform the tasks of procuring the raw materials, transport them,
transformation of materials to finished products and further distribution of goods
to the end user, the customers. During initial evolution it was felt that logistics
that involved transporting and warehousing couldn’t effectively influence the
strategic goals and hence, extensive investment needn’t be done. Activities
relating to customer services, warehousing, order processing, inventories and sales
were also ignored. Production, marketing and finance operated independently, and
inventories and sales ignored. It was in the seventies that the management
explored the scope of reducing the distribution costs. The concept of total cost
management was evolved in order to optimize the total costs rather than costs of
activities taken in isolation. A centralized logistics function was given the
responsibility of controlling costs with emphasis on maximization of service level.
Slowly but steadily the aspects of logistics got integrated with the other functional
activities of the supply chain, and the functional chain emanating from supplier to
the delivery options to the end user, were formulated and incorporated with the
operational and strategic plans. In the final stage logistics were accorded due
importance in the strategic planning. The imperatives for supply chain strategy
are:
• Global sourcing
• Global networking and marketing
• Revolution in global business process
• Customer centric management activities
• Integrated planning system
• Integration of functional activities in the supply chain towards a common
goal for competitive advantage
6.2 SUPPLY CHAIN: GROWTH
According to Hicks, the imperatives for growth of supply chain are:

• Enhanced customer expectation: Competition worldwide has led to
maximum emphasis on customer service over the years. The value of the
product can only be determined when the product reaches the customer in
time and at the required place. The value of customer service has acquired
such dimension that, if the product doesn’t reach in time, the sale will be
lost to a competitor who offers in time, an ideal substitute. This can further
be classified under:
• Pre-transaction Elements: Relating to corporate policies and program.
1
2Deshmukh & Mohanty in Essentials of Supply Chain Management, p 13

•
SCM
Transaction Elements: These are those variables involved directly in
physical distribution, i.e. product and delivery reliability.
• Post-transaction Elements: These are those aspects dealing with after
sales service, warranty, repair, customer complaints and replacements.
• Pressure for Quick Response: Customers today expect a better and
quicker response owing to the value added services being provided by the
manufacturers. This is mainly due to shortened product life cycles,
consumer’s drive and volatile markets, making reliance on forecasts difficult
and dangerous. The key to quick response is pipeline management, i.e. a
process where manufacturing and procurement procedures are linked to
requirements of the market. It seeks to meet the competitive challenges of
increasing the speed of response to the market needs.
• Impact of Globalization: Present global environment is forcing the
organizations to incorporate the world in their strategies and analysis. Certain
key factors like, economic trends, competitiveness, technological advances,
the firms today cannot ignore them. Companies therefore must identify and
analyse factors that differ across nations and determine the impact on the
operations functions. Transportation and distribution therefore assumes
greater importance in such scenario, and the companies have to rightfully
integrate and manage the facilities and markets available in this backdrop.
Logistics, therefore, assumes greater strategic significance.
• Organizational Integration: Organizations today need to be broad-based
integrators, inclined towards the achievements of market place successes,
based on managing systems and people that deliver the service. Generalists,
therefore, assume greater importance to specialists to integrate materials and
operation management with delivery. Today, IT is slowly proving to be a
great integrator for various functions, spanning from supplier to the
customers.
6.2.1 Trends in SCM

The major trends in SCM are:
• Co-maker Ship: It is defined as the development of a long-term
relationship with limited number of suppliers on the basis of mutual
confidence.2 The benefits are:
• Shorter delivery lead times
• Reliable delivery
• Lesser schedule disruption
• Lower stock levels
• Lesser quality problems
• Stable prices
• Higher priority to orders
The basic philosophy of this alliance is that the supplier is considered to be the
extension of customer relationship, with emphasis on continuity and a seamless
end-to-end pipeline. With growth in outsourcing the trend towards co-maker ship
also increases manifold. This principle can be extended both ways in the supply
chain-upstream to customers and downstream to distributor, retailer and users.
• Third Party Logistics: Outsourcing operations like storage, transportation
and delivery, improve service levels, reduce costs and increase flexibility. It
2
Essentials of SCM by Deshmukh & Mohanty pp. 16-18 3

Management
also helps in reducing costs on trucks, warehouses and certain infrastructure

requirements, and allows firms to acquire new technologies and enter newer
markets. Yet, certain aspect does merit attention. These outside service
providers may not at times perform up to the requirements of the
manufacturer and would result in loss of image of the firm. Therefore
though third party logistics could be cost effective, at times the firm should
use these depending upon the organization’s needs, capabilities of the service
provider and the resulting pay off.
• Principle of Postponement: The time when the product is ready for sale
is known to the organisation, and consequent delay in labeling, packaging and
pricing till the last moment is called principle of postponement. The sole
objective is to minimize the risk of carrying finished product to the various
points of the supply chain by delaying the product differentiation to the latest
possible moment before customer purchase. The cost savings on
transportation and storage are attained by keeping products at the highest
level and by moving goods through the supply chain in large, generic
quantities (Deshmukh & Mohanty 2004). Examples of postponement are:
• Delayed labeling
• Shipping in bulk
• Transferring to small containers at warehouses
• Delay final assembly
• Stocking fuel, oil & lubricants (FOL) in unblended state
However, it has to be noted that postponement shouldn’t compromise the desired
service level.
• Enterprise Resource Planning (ERP) & DRP: ERP systems are
basically information integrators and they help in binding various business
processes in an enterprise. It also helps in streamlining and re-engineering of
various processes, focusing on value activities and eliminating non-value
added activities. Due to influx of IT, ERP has been able to provide a wide
information base with an aim to optimize resources. This has further helped
in in-bound logistics, transportation, material management and accounting at
large. DRP on the other hand helps in estimating inventory requirements at
stocking areas and ensures supply sources are able to meet the demand. It
incorporates policies on safety stocks, information and relation between
demand forecasts, inventory levels, manufacturing and distribution schedules.
DRP helps in both short term and future production and distribution
resources, in order to match both supply and demand. Because of minimal
inventory that is held, DRP can be called the key to logistics and JIT
productions.
6.2.2 Strategic Decisions
Strategies are a set of important decisions derived from a decision making

process of the top management in the organization. In order to ensure success,
the strategic changes that are being incorporated in the supply chain, has to
conform to well defined strategies formulated by the company from time to time.
The top management in the company forms the strategic decisions and successful
execution of these decisions should provide a cutting edge to the organization.
Areas that require strategic decisions are warehousing, transportation, IT, and
make versus buy. We have already seen warehousing and transportation in detail
in unit-4 and 5, and hence will dwell on IT and makers versus buy.
• IT Solutions and Integration: IT solutions will play a significant role in
4 information building all through the supply chain. However, companies should

SCM
address several queries centered on proper alignment of information
technology tools and the expected increase in productivity and services.
Identifying the very scope of the business problem that is to be addressed is
the most important in this complete exercise. This effort will help in
identifying the best course available to the manufacturer and the area that it
is to be applied, the core business issues. At the same time, it is also
important to assess the effect of IT on the organization as a whole and its
capabilities. More often than not, IT affects the business in 3 ways:3
• The integrated process requires managers for restructuring the cultures
and capabilities on values providing continuous improvement and
teamwork.
• It enables the organization not only to rethink but also leverage new
information, like graphics, computer integration and workstation
technology.
• Application of new information requires redefinition of goals and skills of
the enterprise’s people resources.
The response to the issue of managing the supply chain included having a fully
integrated business, and some of the vehicle manufacturing companies were
structured in a way where the input were raw materials and output the finished
product. However, the driving forces for global manufacturers have ranged from
becoming a tiered global supply system in the West to the Japanese Kereitsu
based company supply system, although there are quite a few near fully
integrated companies in the developing nations till date.
The following are the reasons propounded by Christopher (1992) for not following
the integrated supply chain:
• Few managers retain a grasp of a process from one end of the pipeline to
the other. As a result, the way things get done can reflect convenience for
doers, a desire to protect functional boundaries and a lack of understanding
the related consequences, both up and down streams of individual
processes.
• Initiatives of changes are functional in nature and seldom reflect the cost
of the system.
• Their custodians as a means of providing breathing space and as ways of
providing some hidden flexibility respond to protect lead times. The
individual functional lead times contain slack and where these become
embodied in a processing system, they are institutionalized.
Actually, companies that have benefited from integration are pacing ahead with
confidence, and IT as a whole have further aided in integration vigorously.
• Make versus Buy: The main organization focus today is on outsourcing of
non-critical components. These decisions are arrived at after considering the
factors like, capacity, leverage an organization gets and the quality and
confidence in working with the vendor. Make buy decision is a strategic
decision and the area that has to addressed in this is development of the
total cost model (Deshmukh & Mohanty). It has been seen that having a
supplier that can work in a simultaneous engineering way with the company
is the main aspect in order to avoid costs associated with unnecessary
design complexity. This may also mean having a supplier who can provide
the same support through IT rather than having an engineer in site, and
achieve the same result. The next consideration is the aspect of labour
3
Deshmukh & Mohanty in Essentials of supply chain management, pp. 20 5

Management
elements. Here, once again the need for simultaneous engineering is required
mainly in those off-shore areas with low labour rates, over and above issues
like labour rate inflation and challenges of overseas sourcing. All these have
to be considered in a structured manner and not in isolation.
6.2.3 Strategic Supply Management Activities
As per Burt and Dobler, supply management focus on ten strategic activities:
• Environment Monitoring: Monitoring the supply environments to identify
threats and opportunities, is an important task of supply managements, to
include material shortages affecting both price and availability of purchased
materials and services. They can further be classified as:
• Changes in legislation: affecting the workplace. This can affect both
price and availability.
• Wars and conflicts that can affect availability of materials resulting in
price increase.
• Consolidation among suppliers: to the extent of monopoly. A firm should
change its strategy based on such changes.
• Integrated Supply Strategy: Supply management should develop and
manage the firm’s supply strategy based on wholesome integration strategy
and not in isolated strategies.
• Commodity Strategy: Must develop and update sound commodity supply
strategy. The following activities have to be performed to ensure
effectiveness of the strategies:
• Strategy Updating: Commodity teams must identify materials, items of
equipment and services that are strategic in nature or should formulate
a strategic plan for obtaining them.
• Technology Access Control: All supply management organization’s
develop and update technology road maps, which lists critical current
and future technologies to be pursued. Action should be at hand to
protect these technologies that yield a competitive edge and ensure are
not transferred to competitors.
• Supply Management Organization: The organization of the supply
management system must enhance the effectiveness and efficiency of
the system in attaining the primary objective.
• Risk Management: Actions should be taken to ensure minimum
disruption of supplies and price increase.
• Data Management: Supply management, accounting and information
technology must cooperate in the collection and application of supply data to
facilitate the strategic supply planning.
• Corporate Strategic Plan: Supply management should join the marketing
and operations as the key players in development of each of the firm’s
corporate strategic plan. Supply management provides input to the strategic
planning process on threats and opportunities in the supply world. It also
provides inputs on constraints that may affect strategic initiatives. Its
knowledge of the firm’s supply world may be a vital source of input for
strategic planning.
• Strategic Sourcing: The firm should manage and develop its supply base in
line with firm’s strategic objectives. Several actions that should be taken are:
• Periodic review of the active suppliers.
• Identification of the appropriate relationship (transactional, collaborative
6 or alliance) for each commodity class.

•
SCM
Optimization of supply base with coordination and combination
with several forces to increase the importance of the firm’s supply
base.
• Strategic Supply Alliances: Developing and managing the supply alliances
frequently are two of the most crucial and most strategic activities
undertaken by any firm. Institutional trust is a key prerequisite to supply
alliances. Rapid growth of American society of Alliance Professionals is a
testimony to the industry’s recognition of importance of these activities.
Fig 6.1 Strategic Supply Management

7

Management
Supply Chain/Networks: These help in developing and managing of supply

alliances, but is more complex. IT & relationship skills are essential
prerequisite for personnel assigned to the task. Charles Fine in his book
Clock speed writes, ‘ the farther you look upstream in your technology
supply chain, the more volatility you see. Customers are foolish if they don’t
spend any time or resources thinking of the health, survival, and possible
independence of their core technology suppliers’.4
• Social Responsibilities: Supply management must develop and implement
programs that will protect the environment, facilitating the inclusion of
woman-owned, minority based and small business in our economy to
promote values in the workplace.
• Understand Key Supply Industry: Its impact is directly proportional to the
knowledge of related industries in which it buys. They study and understand
the industries that provide the key materials, equipment, and services, cost
structures, technologies, competitive nature and culture.
The above provides the understanding of supply managements responsibilities both
strategic and tactical, which if executed effectively and efficiently will be a key
to the firm’s success and survival, fig 6.1.
Activity 1
Understand the difference in strategies in supply managements and how it builds

up a company to be successful in the international arena?
..............................................................................................................................
..............................................................................................................................
..............................................................................................................................
..............................................................................................................................
6.3 SUPPLY ALLIANCES
As seen above supplier alliances plays a key role in strategic supply chain
management activities across the board. Therefore in order to develop and
manage these relationship and alliances a firm has to continuously endeavor to
identify methods to facilitate these relations. Supplier is as important as the
customer and that has to be realised in the true sense.
Riggs & Robbins spelt out these relations in their book ‘The Executive Guide to
Supply Management Strategies’, they are:
• Annual Supplier Meetings: Annual supplier meeting is a common
phenomenon in maintaining direct relationship with the suppliers by the buyer
firm. It is used both as a teaching and learning platform as well as the
opportunity to distinguish one’s organisation as a supply management leader.
It dwells on the buyer’s management performance, learning and future goals.
The main objective being learning of key strategies to support the buyer’s
business. It requires extensive planning and is expensive, but it lays the
foundation of a buyer supplier relationship in the long run.
• Supplier Discussions: It’s an informal forum for gaining and sharing
learning, between the representatives, like the chief executive, chief
operating officer, and representatives from marketing, supply management
4
8 Fine, Clockspeed, p. 95.

SCM
and research divisions. It reviews the buyer’s progress and goals in the
backdrop of shift in strategies and policies. It’s a forum that builds trust and
respect, towards a successful supplier relationship.
• Workshops and Seminars: These are aimed at creating opportunities for
supply-stream innovations, which will benefit all the participants. It composes
of members of supplier participants who provide material and services that
are critical to the products made available at the marketplace. Such
discussions open the door for newer set of goals and collaborations. It
provides the base for continual improvement, concepts and innovations
required to guide and organize discussion and work sessions.
• Collaborations/Partnership: This is supposed to be the most successful
supplier buyer relationship in recent times. These are based on mutual
interdependence and respect. These alliances begin with careful selection of
source during the product design process. This is the time when the buyer
requires a dependable supplier who can provide the required process, design
and technological support for a successful product. The supplier at the same
time requires a responsible customer for its product and services. They both
require each other and have to work hand in glove. Unexpected criticalities
that may arise can be sorted out with a ‘we shall overcome’ attitude. The
most important in these relationships is the integration of the buyer and
supplier as long as the relationship is beneficial to each other.
6.3.1 Developing and Managing the Relationship
Supply managers at all levels should ensure and tailor appropriate actions during
the planning and management of such alliances mentioned above. Like:
• Instituting a Cross-Functional Team: A team so designated should be in
place to handle such alliances, which is responsible for development,
integration, and develop and manage appropriate measures for the alliance to
be successful.
• Training: Teams from both sides as designated should undergo appropriate
training in being constructive team players, and also in cross-functional team
skills.
• Communication System: The teams should develop and integrate an
effective communication system responsive to the needs and requirements of
both the firms.
• Trust Building: Measures to improve trust between the two organizations
have to be developed and implemented too.
• Visits: Periodic visits by the respective team members to each others site
has to be resorted to for confidence building and co-location of key technical
persons.
• Specialized Training: Plans have to be evolved and developed for
specialized training involving variance of products, designing, value analyses,
engineering, cost analysis and cost management.
• Objectives: Certain objectives have to be established in areas, including
quality, cost and time aspects.
• Monitoring: Results have to be continuously monitored and reported to the
management level.
• Supportive: Inter-firm team members should realize the importance of such
alliances and support the alliance goal in letter and spirit. It’s in the interest
of both the firms to support each other’s operations and their respective
goals, ethics over expediency. 9

Management
Management of supply contract is a challenging responsibility and a critical too.

Companies have to continuously generate and develop newer ideas and
innovations to maintain these relations and work in unison to a common goal
without jeopardizing each other’s interest in the overall gambit of supplier buyer
alliances and relationship.
6.4 SUPPLIER QUALITY MANAGEMENT
After having seen the supplier-buyer relationship, we will now see the quality
control aspects of supplier units. Quality management dates back to the 80’s,
wherein the Japanese companies developed a zero-defect program for their
products, primarily based on quality of the raw materials they procured. This was
resorted to by traditional methods of sampling of the incoming raw materials,
which implicitly inferred that there will be some non-conforming parts, that will be
used in the manufacturing operations resulting in lower material productivity and
higher manufacturing costs. This was never a full proof system and the lacunas
were too many, and resulted in longer lead-time to correct the specific problems
or adjustments to the operating systems. This would generally lead to longer
customer delivery time and cascading decrease in profits.
The main objective of this unit is to discuss the problems of quality and how to
generally overcome these issues. In every organization there is a wide diversity
of functions and structures for quality planning and control, and hence the first
step to quality assurance is a structural basis for the procurement system that
should be organic in character and reflect the concern for quality control in
developing the relationship of the interdependent organization throughout the
supply chain. With this as a preamble let us see the problems of vendor /
supplier quality.
6.4.1 Problems of Quality
The suppliers till late had been providing natural/semi-processed materials to the
manufacturers for their finished products. Under such circumstances, quality
control was never a problem since it was dependent on the quality of raw
materials. “The buyer and suppliers were almost quasi-independent and had little
interaction between them” (Deshmukh & Mohanty, 2004). Today things have
changed considerably and most of the companies are engaged in different type of
purchases and procurements, particularly very complex and highly engineered sub-
systems with critical interfacing with other components. Therefore, some key
features have to be evolved for a better buyer-supplier relationship and its effect
on the quality assurances on the whole (we have seen this in the last unit of
buyer-supplier relationship/alliances). However, for quality assurance, some
activities that are to be followed are:
• Mission: The company’s mission and policies on supplier quality relations
have to be spelt out clearly (as for ISO-9000).
• Identification: Identify and develop qualified and capable suppliers who can
assure of quality, and weeding out the lesser variants.
• Communication: Communicating essential and helpful information, designs,
and specifications and also engineering changes promptly.
• Development: Developing methods for detecting the deviations through
reproduction and trials.
• Assistance: Provide assistance to the supplier on quality related problems
and overcome them.
10

•
SCM
Review: Periodic review of the performance of the supplier through
supplies rating and follow up actions against poor suppliers.
These activities are not sacrosanct and depend on the following:
• Nature of goods being purchased
• Volume of the purchase
• Total suppliers
• Repeat purchase
• Research, design and subcontract management.
6.4.2 How to Find the Qualified Supplier?
A very tedious process and action at hand by the buyer firm is to find a suitable
supplier who can generally meet the benchmark of the purchaser, i.e. ‘the best
from the best within the cost’, under ideal conditions of course. However the
following evaluation methods could be used to get the best from the best:
• Reputation: This is a variable factor and differs from company to company,
big and small. For a big company it is of significance and for a smaller
company it’s almost obscure. A detailed survey and market search will help
in identifying the best that can deliver the best within the cost per se. The
buyers’ generally maintain database on prior performance of these
companies.
• Database: Maintaining a database in financial function has been very
effective, however, it is in development stage for use in quality functions
(Desmukh & Mohanty, 2004).
• Surveys: The purchasing and procurement division of a company is carrying
out the selection of the appropriate supplier. Clarity of information is an
important factor in this selection process, and such information on the
supplier will provide the right weightage for the supplier selection.
• Trial & Error: Sometimes this procedure will also help in choosing the
correct supplier for the manufacturer. At times certain obscure suppliers
qualify to the requirements of the manufacturer and provide the goods as
required. The limiting factor is the right chance at the right time.
• Faith & Reliance: This is another aspect that will help in getting the right
supplier when the company requires the most. No supplier would like to
loose out/compromise on the aspects of faith and reliability that has been
bestowed on it by the buyer unit.
• Opportunity: This is another factor because of which many small suppliers
loose out on a buyer’s search radar. The buyer should carry out an in-depth
selection of the supplier and provide a fair opportunity to even the smallest
to prove its worth, sometimes, it does pay huge benefits in the long run.
6.4.3 Quality Survey of Suppliers
It’s an evaluation process, which enables the buyer to select the appropriate
supplier conforming to the buyer’s requirements. Does the supplier have the
ability to respond to the buyer’s requirements? Does he require assistance in any
form? This and many, can be answered by help of visits to the supplier’s site by
a team of specialists or through a balanced questionnaire. The following are the
survey evaluation on the supplier:5
5
Assuring the Quality Procurement System in Essentials of SCM by Desmukh & Mohanty 11

Management
Policies/Practices on Quality: These are the basic guidelines based on

which the quality assurance of the supplier can be determined. They are the
real intentions that are to be implemented in a variety of degrees, the main
problem is to evaluate the policies and determine the degree to which they
are to be implemented.
• Facilities: These are related to tests and inspection that meet the quality
requirement of the purchased product. Samples are taken and checked with
the vendor and buyer’s gauge to compare the gauging systems. This kind of
checking reduces the risk to both the supplier and the buyer.
• Procedures and Actions: These are the procedures for handling quality
problems like gauge control deviations from existing specifications. The
aim of the survey is to determine whether the procedures are in vogue
or not.
• Appraisal: Appraisal of personnel from viewpoint of quality is very difficult,

but discovering the technical competence and attitude to quality can be
established. But, this could be just subjective at times, due to turnover of
key personnel. Yet, a general attitude of quality control can be found out
through auditing, discipline, and maintenance and housekeeping records.
For a new product line searching for a capable supplier is indeed a difficult task
and this can well spell the difference between success and failure of any new
product. Geographical location and close proximity is a reason to search for a
supplier closer home, without a rating of sorts, but selection for a long-term
supplier in high volumes is a tedious process and should start early. The
prospective suppliers can be located by any methods, but the pertinent questions
that should be addressed are:
• How well do the objectives of the quality program conform to the buyer’s
needs?
• How well the practices of the quality control program conform to the
objectives?
The objective of this evaluation is to arrive at a judgment of how well supplier’s
programme operates, neither to tabulate the efficiencies nor rationalize the
shortcomings. The areas for evaluation are:
• Quality
• Price
• Performance
• Production capabilities
A supplier survey is analogous to a profit and loss statement, that is, it speaks of
the status at any one point in time and will not guarantee of the status at any
other time. Therefore, the communication of the survey must continue for a long
time towards a good partnership.
Increased competition in the economic scene worldwide results in heavy

dependence on quality as both an endogenous and exogenous factor. This results
in the other elements that aid in quality control to have an ever-expanding role.
Procurement function therefore plays a key role in getting the best from the best
available in the open market. It plays a predominant role in the in ensuring quality
in an organization. Improving quality therefore should shift from desire to
compulsion in the quality assurance of supply agencies.
12

SCM
6.5 SUPPLY CHAIN RE-ENGINEERING
Business structure is continuously changing from one phase to another, and today
has reached the stage of professionalism where it is revolving around customer
focus in a big way. These changes have shown remarkable improvement in
company performance measures such as quality, costs, services and lead times.
Hammer & Champy in 1993 identified these changes and improvements and
packaged these ideas into concept of ‘business re-engineering’, which was later
termed as ‘business process re-engineering’ (BPR).
The areas in common between BPR and SCM seems to be very few at a
cursory glance, but SCM is not a traditional improvement technique, but a
philosophy that helps in improvement not involved with functional reviews, as
highlighted by Stevens’ model of supply chain integration, which we have seen in
our earlier units. However, in an introspection of BPR & SCM reveals that there
is more than one common link between the two. Business transformation from
the concept ‘what we make we sell’ to a more flexible concept of ‘what the
market want us to sell’ can effectively be achieved after a competitive analysis
and a supply chain diagnostic review. It is well understood, that effective
transformation is only possible after a series of phased step involving
technological reorganization, attitudinal and organizational attribute, and integration
between the competition and customer demands.
The comparison between SCM & BPR is as shown in the table 6.1
Table 6.1 : As Adopted from Deshmukh & Mohanty, 2004 (Essentials of SCM)
Business (Process) Re- The fundamental rethinking and radical redesign of business
Engineering process to achieve dramatic improvements in critical,
contemporary measures of performance, such as cost, quality,
(Hammer & Champy, 1993) service and speed.
Supply Chain Management The management of material suppliers, production facilities, and
(Stevens’ 1989) distribution services and customer linked together via the feed
forward flow of material and the feedback flow of information.
Achieving internal integration is a desirable stage, however, performance of

pockets of excellence is generally downgraded (from customer’s viewpoint) due
to poorly performing suppliers and customers in the supply chain. In order to
understand this further a wider perspective of the supply chain needs to be taken
keeping in mind the 12 steps of BPI, as evolved by Harrington, to streamline the
process. They are:
• Elimination of bureaucracy
• Eliminating duplication
• Value added assessment
• Simplification
• Process cycle time reduction
• Error proofing
• Upgrading
• Simple language
• Standardization
• Supplier partners
• Broader picture improvement
• Automation 13

Management
From the above its evident that the first 9 steps are operational, step 10 is for
supplier side, and step 11 is for the customer satisfaction. Therefore, to attain this
step, if a radical redesign is taken, business process integration turns to business
process re-engineering, in the supply chain scenario. Side by side in the Stevens’
model step 3 moves to step 4, i.e. full integration is achieved. Therefore, this
integration involves extending the internal management to supplier focus and
customer orientation in order to create a strategic partnership, by reducing the
suppliers. Customer understanding will in a big way change the entire philosophy
from pushing products to selling goods as per customer requirements. Backward
integration is a very difficult process in supply chain integration, since; it involves
a change in inter-company attitudes from adversarial to that of mutual support,
which is in fact very crucial to a successful supply chain integration.
We should as a matter of fact, never lose sight of the fact that business in the
supply chain, is directly dependent on customer finances which enables the
continuity of the supply chain. Therefore, the strategies in the supply chain should
have common aim of improving the performance of the chain from the
perspective of the consumer/customer. Stevens’ integration, in stage 4 of the
supply chain is generally successful because of the financial position enjoyed by
the big companies. Such companies generally bend rules of supply chain
integration and manipulate smaller members of the chain to their financial ends, in
order to benefit the most. Therefore, backward integration is a contentious issue.
Both internal and external integration is required to be achieved for improving
performance in the supply chain management, under ideal conditions. Yet, internal
or external or a combination approach may be the goal depending upon product,
industry, market conditions or where advantage could be gained for the supply
chain. Though, Stevens’ model suggests that external integration, without internal
reorganization does not exploit all the benefits of true supply chain integration.
Now, let us see whether BPR internal re-engineering is equivalent to the

functional and internal integration stages in the Stevens’ model? Actually, the first
and the final stages are similar in both BPR & Stevens’ model. Initially, non-
existent planning and control structures across departments are optimized to
departmental goals resulting in customer necessities not being catered to, but the
final structure is customer centric with major changes in culture, structure and
technology. The intermediate steps are different, since BPR calls for one-leap
changes on a process-by-process basis. Whereas, Stevens’ model opts for
functional integration, followed by internal integration. Functional integration in
BPR is not necessary, only the process should be sought and redesigned. Efforts
to optimize a function are considered a waste in this system. The functional
integration stage, does bring together a trans-departmental view which, if
performed correctly, will lead to improved operating performance (Deshmukh &
Mohanty). Improvement in the overall performance level and integrating of the
core functional areas as one single function does negate the poor performance of
the surrounding functions. Therefore, It is mandatory to initially bind the functions
along a process line, and then integrate the appropriate cross-functional processes
at a later stage.
Therefore in spite of BPR being a later model, Stevens’ model is still valid in the
light of BPR concept, though more details of reorganization stages are required.
Therefore, cross-relationship between both the stages is to be highlighted more
vigorously. This can be achieved by examining the pre-requisites and techniques
used in integration stages of SCM and in virtuality, i.e. by philosophy.
Let us now see the various categories covering the parallels of essentials
between SCM & BPR, through this table:
14

SCM
Table 6.2: Parallels of Essentials between SCM & BPR (excerpts from Hammer &
Champy, Davenport, Grover et al, Stevens & Deshmukh & Mohanty, 2004)
Area for change BPR (Business Process Re- Supply Chain Management
engineering) Terminology
Process • Elimination of wastes • Reduce non-value added activities

• Speed up process • Lead time reduction
• Concentration on core • SCM positions each firm to do
processes what it does best
People • Board level commitment • Board level commitment with a

• A management that questions logistics champion at board
• A workforce that questions • A management that questions
• Multi-skilled workforce • A workforce that questions
• Attitudinal changes • Multi-skilled workforce
• Attitudinal changes
Technology • Technological changes • Technological changes
• IT a key to BPR • IT a key to SCM
• Break the rule • Partnership sourcing
• Treat vendors as adversaries • Deep penetration to customers
bases
Innovation • Customer focus • Constant innovation at the
• Constant innovation interfaces of the company
• Constant • Streamline processes
• product/process innovation
Analysis • Analysis by paralysis is not • Aggregate modeling can aid the
beneficial redesign strategy and take a
• Take a holistic view systems view
6.6 SUMMARY
This unit highlights the common foundations, which underlie both SCM & BPR
philosophies, which are indicative of the important difference between the two,
the drive for improved business operations. Those who follow the SCM
philosophy would have traversed the path as BPR after having re-engineered
own processes. The existing philosophies such as SCM (integrated) as mentioned
in this unit covers a large portion of the BPR ideas, yet a few ideas have to be
added to the model:
• Radical approach for internal integration.
• Continuity in step changeover improvements, and strategic placements of
these ideas on the marketplace.
The various points for learning in SCM re-engineering are:
• SCM is not a traditional improvement technique but that which facilitates
improvement, not associated with functional/departmental reviews that focus
internally.
• Transforming a business from inward looking to outward looking.
• Integration being the mainstay between the customers and competition.
• Inquisitiveness throughout the organization will facilitate re-engineering.
• This is applicable at the higher echelons as these positions give a wider
perspective, seeking core processes and creating leaner structures, a must
for SCM integration through re-engineering.
• The change management associated with re-engineering has to be handled
smoothly and skillfully.
Sustaining the spirit of re-engineering throughout the corporate culture is a big
issue that requires serious attention. Continual re-engineering allows a company’s
quality initiatives and re-engineering to be completely and effectively integrated,
with an added advantage of the involvements of the high teams for continual re-
engineering.
15

Management

1) Explain in detail the process of re-engineering.
2) What are the benefits of re-engineering in supply chain?
3) Explain the benefits of integrated approach for implementation of SCM.
4) It is a fact; SCM and BPR have a common goal and are interrelated.
Explain the sentence with examples.
5) Explain the parallels between the BPR & SCM philosophy.

READINGS
Burt, Dobler & Starling, World Class Supply Management, Tata Mc Graw-Hill
Deshmukh & Mohanty (2004), Essentials of SCM, Jaico Publishing House,
Mumbai-23.
Simchi-Levi, David Kaminsky, Philipsimchi-Levi, Edith(2004), Designing And
Managing The Supply Chain, Tata McGraw-Hill
Mentzer, Fundamentals of Supply Chain Management, Sage India Publishers
16

UNIT 7 ORGANIZING FOR GLOBAL MARKETS
Objectives
• define WCSCM and International SCM;
• discuss international logistics and globalization;
• identify the steps to be initiated before going global;
• talk about organization for global markets & global sourcing; and
• describe world-class logistics management & interfacing of logistics.
Structure
7.1 Introduction
7.2 Strategies for WCSCM
7.2.1 What is WCSCM?
7.2.2 Features of World –Class Companies
7.3 Globalization
7.3.1 Organizing for Global Markets
7.3.2 Stages to Global SCM
7.3.3 Supply Channels
7.4 International Logistics
7.4.1 Integrating Logistics
7.4.2 World Class Logistics Management (WCLM)
7.5 Summary
7.1 INTRODUCTION
After having seen the strategic SCM, supplier alliances, quality management &
SCM re-engineering let us see SCM as organized for global markets. This
particular unit is focused on world-class supply chain management, which is
spreading rapidly in almost all countries across the globe, and in most advanced
economies. Broad product range, shorter product life cycle and growing changes
in the market place are becoming the norm. More and more companies are
coming forward to provide customized value based services to their clientele and
at the same time maintaining a high volume of production. Internet, e-business
and e-commerce have become the business drivers of today with companies able
to converge geographically through the electronic media. At the same time data
warehousing and data mining is allowing the companies to contact the customers
over a wide front and at the same time maintain a one to one contact.
World-class is a wide term extending over a vast spectrum of correlated

developments, which together define a comprehensive change in the prevailing
environment of hyper-competition.1 They are:
• At the marketing level, customer satisfaction, and integration of product and
services, characterizing a world-class supply chain.
• At the organizational level, world-class supply chain is defined by the
integration of new productive capabilities out of available resources. It refers
1
Essentials of SCM by Deshmukh & Mohanty, p.282 1

Organizing for Global
Markets
to the physical facilities and knowledge base irrespective of the location

within one group or cooperating companies.
• At the individual (people) level, the development and emergence of a
flexible, skilled and knowledgeable workforce as the ultimate differentiators.
• At the management level, world-class supply chain is governed by a
philosophy of leadership, empowerment, motivation and productive
performance (White, 1994).
The world-class manufacturing model is summed up by Schonberger’s agenda
that included:2
• Design & organization.
• Operations.
• Human resources development.
• Quality and problem solving.
• Accounting and control.
• Capacity.
• Marketing.
The Cranfield Competitive Manufacturing Model (New, 1987) has identified the
performance characteristics of manufacturing systems through seven fundamental
objectives for step change, they are:
• Reduction of inventory by 50% or even more.
• Reduction in manufacturing lead-time by 50% or more.
• Introduction of new products at 2 to 3 times the rates.
• 50% of the current design/development lead-time.
• Reduction in costs by 30% or more.
• Reduction in support labor by 50% or more.
• Improve quality to parts per million.
With this as a backdrop let us now see the strategies for World-Class Supply
Chain Management (WCSCM).
7.2 STRATEGIES FOR WCSCM
WCSCM is a result of the developments of the world-class manufacturing model

and is to be capable of operating profitably in a competitive environment to the
factors of uncertainty and unpredictability. The companies that are able to
respond to the structural and functional changes in this changing market place
can emerge profitable in the long run. WCSCM is a process that is value centric,
and therefore all the processes like development, sourcing, movement, production
and distribution of products and services are centered on value generating
paradigm. It is an ongoing process from buying a product to buying a solution on
a long-term basis.
WCSCM can be conceptualized under three basic dimensions:3

• Enrichment of Customers: Represents varying degrees of collaboration
and interaction in defining products, services and concepts.
2
Schonberger, 1990 as also in Deshmukh & Mohanty in Essentials of SCM p 282
23 WCSCM Chapter 17, in Essentials of SCM by Deshmukh & Mohanty, 2004, p 283

SCM
• Recognition of Company by the Customers: Quality speaks, and
reduction in fixed price to shared risks and recognition.
• A Linkage between Suppliers, Company and Customers: Represents
linked networks of workstations, shared databases, tools and facilities.
In order to meet the challenges of globalization, economies that are liberal will
require restructuring their operating policies and a complete reformulation of the
systems to eliminate wastes and create a value base. Value for money is
becoming a strategic necessity in this competitive world, i.e. high quality at
reasonable prices at the appropriate time. But, for the manufacturer the realities
like increase in costs of labor and energy continue to pressurize them. They have
to realize this aspect and identify what and how to do it, by servicing the existing
customers, dealings with suppliers, opening new channels for newer customers,
reduction in costs and adding to value added services.
7.2.1 What is WCSCM?
Before getting on with the various components of WCSCM, we must understand

the working definition of this term. It has to be understood that every company
aims to make profits, which further results growth. World-class denotes to be
able to sustain oneself, in this competitive market and at the same time make
profits in the long run. For profit, a company got to sell its product at a cost
higher than its costs, and at the same time offer its product through the supply
chain at the competitive market place with a value for money. In actuality, world-
class denotes being able to provide the better value than the competition without
going broke.
7.2.2 Features of World –Class Companies
The world-class companies as compared to non-world-class companies are

featured by a set of different characteristics as under:
Management Level: The various tasks performed by them are:

• Visionary: Has a set of managers who are continuously improving
performance through leadership, coaching, vision, and motivation. They work
towards eliminating of wastes and create competitiveness. The top
management in such circumstances performs the role of a visionary force
and the middle management involve in coaching and training the
subordinates. The supervisory staff executes the role of facilitator and
supporter of the employees in eliminating waste.
• Policy Making: These companies use benchmarking methodologies to seek
and evaluate the best policies and practices for setting agendas to tide over
the old traditions and new set of thinking, to strive towards previously
unreachable goals (Senge, 1990).
• Long-term Strategies: They generally have a long-term strategic plan,
defining the corporate activities, objectives, goals, and operational plans to
add value to company’s products and services. The Tata Group is one such
living example.
• Human Resource Development: They generally involve their employees
and their staff through extensive training programs for providing them the
skills and knowledge base to achieve these policies and goals. It is a proven
fact that if the employees are treated equally and with respect, is provided
meaningful jobs and is involved intimately in decision-making and problem
solving the company will develop, because it satisfies personal goals and
3

Markets
company objectives. Tata group is once again one such example of human
resource development. The Sahara Group has of late started to show
results.
• Holistic Approach: The management policies and practices are so tuned
that it provides a holistic approach, which helps in integrating the objectives
and activities of different functional areas. These developments of common
corporate goals are necessary for competing successfully. Providing
leadership by the top management in an eventuality can obviate losses in
certain circumstances.
• Measurement and Rewards: It is recognized that what gets measured and
rewarded gets done (Deshmukh & Mohanty 2004). Simple performance
related policies are used towards human resource improvement, team efforts
and selected key variables necessary for adding value to its product, thereby
avoiding short term dictates, evolving from financial controls and dictated
standards.
Quality Control: They can further be divided as under:
• Customer Focus: These companies establish relationship and linkage with
university systems, promoting research and educational activities for long-
term competitive advantage. All these activities are aimed at customer focus
and service.
• Customer Oriented Products: These companies aim at customer driven
strategies for product development and marketing, organizing customer
contact, and intellectual commitment for product concepts, performance and
specifications. One has to continuously determine the customer requirements
and expectations. Hearing the ‘voice of the customer’ is the key issue. It’s
customer definition of value that counts for a faster and flexible supply
chain.
• Cross-functional Teams for Product Design: These companies use design,
manufacturing, marketing & distribution for responding and communicating
the needs of the customer throughout the organization, and integrate the
cross-functional teams for a better quality product in a faster time frame.
Team approach to product development and improvement has allowed many
companies to achieve 4 to 6 fold improvements in product reliability, 70-90%
reductions in warranty costs, 40-50% reduction in workmanship and 20-40%
reductions in product costs. It is a key for becoming world-class
manufacturers and the top management can influence this aspect more than
anyone else, since It is more of cultural changes than technological.
• Quality Improvement: There is no compromise in quality as far as such
companies are concerned. The quality improvement department continuously
serves as a support and coordinate functions for quality improvements and
excellence all through the organization.
• Process Control: These companies, control the products based on statistics
and encourage decision making at operating level using local data sources on
key variables for comparisons against customer needs.
• Innovation: These companies are innovators, who constantly experiment to
improve existing products and processes, and develop new ones (Deshmukh
& Mohanty 2004). Lesser variability and greater capability.
• Partnership: Vendor partnership provides a win-win situation as regards
quality improvement and new product development efforts. These companies
seek outwardly for such partnership like relationship, since suppliers are
important to success and crucial too.

SCM
Integrated Operations/Production: They are further sub-divided as under:
• Cellular Manufacturing: The main focus in standardizing and simplifying
their manufacturing operations and related instructions, thereby, reducing
complexity, and facilitating the effective use of continuous-flow processing
concepts for reducing lead-times, process inventories and materials handling.
Continuous flow processing, often implemented through cellular
manufacturing, provides quantum leaps. Improvements in manufacturing
lead-time from 10-12 weeks, to one to three days are common along with
corresponding reductions in work-in-process levels from weeks to days.
These companies use multi-disciplined and multi-level work teams to
standardize and simplify changeover procedures, thus reducing equipment
downtime during job changeovers and allowing production in smaller lot sizes,
a key requirement for flexible production.
• Demand-based Processing: These companies believe that by adopting an
enlarged view of manufacturing operations even at the cost of allowing
machines to sit idle can provide gains in plant efficiency and quality;
whereas, pushing the machines to their optimum usage can yield poor quality
products and longer manufacturing lead-time, over and above wear and tear
of the machines.
• Standardization: World-class companies rely on high technology and
automation more as complementary tools than as part of the manufacturing
strategy, with focus on standardization, simplifying and proving the integrity
of the manufacturing process before automating. Automation before
standardization creates non-solving problems. It focuses on flexible changes
and decisions and avoids making expensive changes and inflexible decisions.
Shankar says, principal of USA (understand, simplify and automate) is
extensively applied by these companies, in their organization.
• TPM (Total Productive Maintenance): In these organizations preventive
and predictive maintenance are given importance, based on worker
involvement so as to minimize occurrence of machine downtime.
Technological Advances.
• Communication Systems: These companies recognize the importance of
effective communication skills and strive to establish and maintain simple
procedures so as to provide timely and accurate information flow throughout
the manufacturing enterprise (Chatterjee 2000). Information is the basic
survival of any organization, both directional and feedback oriented. It is the
management’s responsibility to provide effective, simple and appropriate
information to the workforce for better results.
• Information Technology (IT): It can be utilized in a big way to the
competitive advantage of an organization. Data mining and warehousing and
ERP are the technological solutions available today. The main purpose being
shortening the lead-time and remove non-value added activities.
• Human & Technology Interface: These companies recognize and
acknowledge the interface and importance of humanity and technology. It is
the responsible of the top management to do so across the organization. The
required resources are so deployed so as to make the interface more and
more active. At every stage of technology deployment, the human issues are
dealt in a serious manner. All these don’t happen automatically, but with the
interference of the management’s leadership, and application of the policies
to strive better to eliminate waste and creating better value for the customer,
the end user.
5

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ROLE OF TOP MANAGEMENT AND ITS BEARING ON SCM
TECHNOLOGY LEADERSHIP, HOLISTIC DEVELOPMENT VENDOR INTEGRATION

ADVANCES/ VISION & OBJECTIVES OF INTERFACE OF
DEVELOPMENT STRATEGIC & SYSTEMS HUMAN PRODUCTION
PLANNING THINKING RESOURCES & OPERATIONS
CUSTOMER FORESIGHT QUALITY REWARD SOCIETAL WORKER

SATISFACTION IN PLANNING CONTROL SYSTEM CHANGES SATISFACTION
LEVEL
MARKET MARKET MARKET

GROWTH ULTIMATE COMPANY AIM GROWTH GROWTH
Fig 7.1.: A Model for Supply Chain Excellence

Activity 1
Identify the role of management in integration of SCM and its positive implication
on the organization through a case study you have encountered.
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7.3 GLOBALIZATION
WCSCM is responsible for those actions and values responsible for continuous up
gradation and improvement of the development, design & management process of
a firm’s supply system. The main objective is to, improve the profitability, survival
and mere existence of both the supplier and the customer. A world-class supply
manager is not departmentally or internally focused, but concentrates in
continuously improving the system with an ultimate goal of upgrading the
competitive capability of the firm and it’s supply chain.
Senior management must always recognize supply management’s critical nature
and support the required transformation, to see the firm grow to a world-class
status. It is indeed necessary in that case to appoint a Chief Supply Officer at
the organizational level equated in stature and responsibility like the marketing,
engineering and operations. The transformation has to be planned very carefully
and executed well with the commitment of the top management and their
involvement.4
7.3.1 Organizing for Global Markets
Before going global you got to answer the set of six questions, which needs to
be addressed as a candidate of global sourcing:5
4
WCSM, chapter 1 by Burt, Dobler & Starling, pp. 6-7.
5
6 Raul Casillas, “Foreign Sourcing: Is it for you?” Pacific purchaser, November-December 1988, p.9
(Burt & Dobler in WCSM Tata Mc Graw-Hill pp. 361-369.)

SCM
• Does it qualify as high-volume in your industry?
• Does it have a long life (two to three years)?
• Does it lend itself to repetitive manufacturing or assembly?
• Is demand for the product fairly stable?
• Are specifications and drawings clear & well defined?
• Is technology not available domestically at a competitive price and quality?
If the answer to all the six questions is yes, then the supply manager may want
to evaluate the support network within his/her firm, asking the following questions:
• Does sufficient engineering support exist to efficiently facilitate engineering
change orders (ECOs) when they occur?
• Will the buyer be able to allow sufficient time to phase out existing “in the
pipeline” inventory?
• Will the supply managers firm take the responsibility for providing the
necessary education and training for those that will have to interact with and
support foreign suppliers?
• Is the firm ready to make a financial commitment for expensive trips to the
supplier?
• Is the management willing to change the approach, in some cases even
policy matters of how business and related transactions are conducted?
• Is the buyer aware of the environment?
If the answer is positive to both sets of these questions, global sourcing is
possible.6
Activity 2
Visualize the impact of globalization and its effect on Indian companies and how
they could effectively gear up to the international order?
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7.3.2 Stages to Global SCM
Most of the firms today are replacing the term international sourcing by a
broader philosophy of “global supply management”.7
The three stages of world class wide sourcing is as follows, as suggested by

Joseph Carter:8
• Stage One: International Purchasing : Organizations focus on leveraging
volumes, minimizing prices, and managing inventory costs. These areas are
the characteristics of an organization first entering the global purchasing
arena.
6
Burt & Dobler in WCSM by Tata Mc Graw-Hill pp. 369-370 (7th edition)
7
Robert M. Monczka & Robert J. Trent, Global Sourcing: A development Approach”’ International
Journal of purchasing and materials Management, Spring 1991, p. 3 (Burt & Dobler in WCSM by Tata Mc
Graw-Hill pp. 365-366)
8
Joseph R Carter, PhD, “The Global Evolution”’ Purchasing today, July 1997, p. 33 (Burt & Dobler in
WCSM by Tata Mc Graw-Hill p. 365) 7

Markets
• Stage Two: Global Sourcing : Organizations focused on global

opportunities will put more emphasis on supplier capability, supporting
production strategies, and servicing customer markets. Of those that have
sourced offshore for some time, most are at this stage.
• Stage Three: Global Supply Management : Organizations optimizes
supply networks through effective logistics and capacity management. These
organizations have effectively minimized risks in offshore sourcing and have
sourced worldwide for technology leadership.
(As enumerated by Burt, Dobler & Starling in their book World Class Supply
Management)
Let us now take a look at the reasons for doing global sourcing.
It requires additional efforts as compared to regional/domestic sourcing; but
natural, but yields greater profits in the bargain. The biggest criticality or
complexity of purchasing goods from foreign countries is the wide variability
available in the open market. The difference comes in quality, services and the
dependability factor. Quality could be very high in the products of a particular
country and unacceptably low or inferior in another. With this in the backdrop let
us now see the reasons for purchasing the goods and services from international
sources.9
• Superior Quality : A key reason to global supply management is to obtain
the required level of quality. Although this is loosing its significance, yet the
managers worldwide are still looking at international sourcing for the critical
quality requirements.
• Better Timed : Another good reason for global tendering is to meet the
schedule requirements. Lead-time between orders and delivery is lesser as
compared to domestic sourcing and more reliable too. This aspect has in
fact improved considerably over the years and so has the capability of the
suppliers in meeting the growing requirements. Once the initial hiccups are
stabled many international sources have proved more dependable than those
closer home, specifically in meeting the time schedule.
• Lower Cost : There are a lot of add on expenditures that are involved
during international sourcing compared to domestic ones. Communications,
transportations, duties and investigation of potential supplier’s add to these
expenses, however, cost of material being cheaper compensates these
expenses. Yet, it’s very seldom that a company’s total cost of material
through global sourcing could be lowered.
• Advanced Technology : Globally this is more advanced as compared to
domestic products and materials. Advantage will always be of the
manufacturer who can identify the right source of the technologically
superior material in order to maintain a monopoly in business. An
entrepreneur who fails to identify this will loose out on the product
competition too soon.
• Larger Supply Base : International sourcing increases the number of
possible suppliers resulting in a choice among many. Competitiveness will
enhance the chances for the firm to get the best deal keeping in mind
reliability and low cost options. Broadening the supply base doesn’t increase
the quantity of suppliers but increases the options of finding better suppliers,
so as to enable the purchaser firm to reduce the number of contracted
suppliers and pursue collaborative or alliance relationship at the appropriate
time.
9
8 “World Class Supply Management,” Burt, Dobler & Starling Tata Mc Graw-Hill pp. 366-367, 7th edition.

SCM
Larger Customer Base : Global sourcing can create opportunities to sell in
countries where the buyer’s suppliers are based. With minimal trade restrictions
sales opportunities could arise just out of interaction itself. Yet, some countries
have arrangements like barter, offsets or counter trade, wherein there are
tremendous trade restrictions. Here the international suppliers/non-domestic
suppliers are required to procure materials in the buying country as part of sales
transactions. This kind of tying makes both marketing and supply management far
more challenging than when pure money transactions are involved. Such an
arrangement of competing and selling in many countries makes it a necessity to
enter into some kind of agreement to purchase items from that particular country,
Fig 7.2 (a).
SUPERIOR QUALITY TIMELINESS
ADVANCED LOWER COST

TECHNOLOGY
GLOBAL TENDERING
N
LARGER SUPPLY LARGER

BASE CUSTOMER BASE
Fig 7.2(a): Global Tendering
There are however certain criticalities in going global too, it’s not so easy as it
seems and one has to keep this at the backdrop before setting out, fig 7.2.2(b).
• Cultural Aspects : These are mostly in relation to beliefs and superstitions
that are generally prevailing in Asian and African countries. These are real
issues and shouldn’t be ignored.10 These are generally due to the versatile
regions available across the globe; every region has its belief and faith that
revolve around their day-to-day dealings.
• Longer Timeframe : Longer lead-time in shipping of material and services
from international sourcing creates a major problem. Generally through sea,
which are prone to storm damage. Hence, there is a requirement to tap the
aerial route; a much costlier option although.
• Inventory Increase : There could be an increase in inventory in such
conditions, and this can never be determined. Therefore to obviate such
criticalities inventory-carrying cost must be added to purchase price, the
freight costs, and administrative cost to determine the actual cost of buying
from global resources.11
• Inferior Quality : As mentioned earlier, global sourcing is generally resorted
to due to high level of quality control, however, there are chances that there
is a risk of production outside the control of the domestic firm, resulting in
“off-spec” incoming material. Like for example, the United States is the only
major non-metric country in a metric world, which frequently leads to
manufacturing tolerance problems for buyers of US products and vice
versa. 12
• Labor Problems : This is a growing problems world over, mainly in the
third world countries. This would entail stringent measures to be adopted by
these countries to improve the labor laws to tide over this menace.
10
Chapter Strategic Sourcing: WCSM by Burt & Dobler Tata Mc Graw-Hill, pp. 368-369.
11
‘Additional Inventory’ paragraph 3 of Potential Problems, WCSM, and p. 368.
12
“Lower Quality”, paragraph 4 of Potential Problems, WCSM, p. 368.
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Markets
Cost Factor : There are a considerable amount of add on costs due to the
communication factor, translators cost, and distances involved. These
increase the cost of doing business. Moreover, inadequate logistical support
complicates communication and product distribution in the long run.
• High Opacity : Bankers, investors and supply managers involved in global
activities have been aware that the risk of conducting business varies from
country to country. Recently, a risk factor called the “opacity index” has
been developed to address the risk costs associated with conducting business
in a specific country.13 It addresses the following areas:
• Corruption at bureaucratic levels.
• Contract & property right laws.
• Economic policies.
• Accounting standards.
• Business regulations.
CRITICALITIES IN GOING
GLOBAL
CULTURAL LABOUR HIGH INFERIOR LONGER INVENTORY COST

ASPECTS PROBLEMS OPACITY QUALITY TIMEFRAME INCREASE FACTOR
• Corruption at bureaucratic levels

• Contract & property right laws
OPACITY • Economic policies
INDEX • Accounting policies
• Business regulations.
Fig 7.2.2 (b): Criticalities in going Global
China for example has a higher opacity in comparison to USA. US have fewer
hurdles of types mentioned above and very less corruption.
7.3.3 Supply Channels

After having decided to go global the next step is to infer the supply channels
that are to be used. Direct procurement is the easiest and lowest cost option to
procure goods globally. It entails dealing with all the associates in procurement by
the buying firm along with the facilities. However, limited resources in supply
management may make direct procurement infeasible more often than not.
Therefore, intermediaries will play a key role in streamlining the efforts of
procurement through international sources, in fact, the simplest way to procure
globally.14
Though sourcing through the intermediaries is costly option, yet, in most of the
cases it avoids many unforeseen problems. The supply manager venturing into
global sourcing is advised to solicit the advice of the contemporaries from the
local supply management association. Certain, typical intermediaries are as
mentioned below:15
13
“The Opacity Index: Launching a new measure of the effects of opacity on the cost and availability of capital
in countries World-wside (Executive Summary)”, Price Waterhouse Coopers, London, January 2001, pp.
1-3. http://www.opacityindex.com/. Burt, Dobler & Starling in WCSM, Tata Mc Graw-Hill, p. 369.
14
‘Supply Channels’ Strategic sourcing in WCSM by Burt, p. 370.
15
N. A. DiOrio, “International Procurement”, Guide to Purchasing 1987, p. 7, & Strategic Sourcing WCSM,
10TMH, pp. 370-371.

SCM
• Import Merchants: They buy the goods for their own account and sell
through their own outlets. They including all intermediary activities carry out
all the risks of clearing.
• Commission Houses: They generally act for exports abroad, like selling in
USA & receiving commission ex foreign exporters. Bills are generally never
billed to them, though they handle all clearing of shipping and customs.
• Agents: These are representatives or firm that carry out the selling. They
handle all the clearing and handling of material but hold no financial
responsibility of the principal. They receive their commission from the seller
and hence their primary interest is the exporter.
• Brokers: Just like the marriage brokers, they mediate between the buyer &
the seller from different nations. They receive the commission from both the
buyer & the seller, but are not involved in clearance/shipment of the material.
They often do act as special purchasing agent against commission, for pre-
designated material. They don’t have any fiscal responsibility of the seller,
just like the import brokers.
• Trading Companies: These are large companies that generally perform all
functions like the agents/groups listed above. They have an added advantage
over the others and are listed in directories and trade publications.
• Subsidiaries: They are established by MNCs in countries where a physical

presence is required to improve competitive capability and/or meet host
government restrictions. Akin to most of the publishing houses that carry out
reprint of the popular titles worldwide from established publishing house and
also act as their subsidiary in India. Hitachi America is also such an example
that was created primarily to look after the interest of North American
market. Subsidiaries can increase sales and lower employment costs by the
principal of sons of the soil concept. They slowly develop the host managers
over a period of time and train them according to their requirements. Most
of the MNCs in India are following this principle, like Citibank, HSBC and
Alcatel. These subsidiaries offer to set prices in the local currency and
deliver material to buyers with all duties paid. However, at times they could
block flow of technical information since they are remote from manufacturing
and marketing decision.
The above are the intermediaries for global trade and an organization interested
in going global should perforce follow the proper channel, lest you fall prey to the
upheavals of the host country. Various offices like the IPO (international
procurement offices) are set worldwide to tide over these intricacies. These
offices facilitate business transactions and interactions in the foreign country and
surrounding areas.
7.4 INTERNATIONAL LOGISTICS
‘Logistics management includes the design and administration of systems to

control the flow of material, work in progress and finished inventory to support
business unit strategy’, (Krishnaveni Muthiah 2003). Logistics is a strategic
resource and its importance has to be understood by one and all (the functional
members in the supply chain). But, in order to achieve this strategic influence, a
good amount of competency has to be achieved and a well-defined logistical
mission and objective has to be committed to, by everyone in the firm, especially
by the top management.
11

Markets
As brought out earlier in unit 4, international logistics can be well comprehended

with this figure, the triangle that is formed in the supply chain management
(SCM), fig 7.3 (a).
W
T
EN
OR
EM
LD
AG
CL
AN
AS
S
M
LO
D
AN
GI
ST
EM
I
CS
SD
M
AS
AN
CL
AG
LD
EM
OR
EN
W
Fig. 7.3 (a) World class supply chain management
The Three Critical Components of WCSCM are:

• World class Supply management
• World class Demand management
• World class Logistics management
As discussed earlier, the logistics professionals play a vital role in shaping the
success of WCSCM as regards management of transportation, storage and
warehousing is concerned. We sometimes do tend to ignore the role of logistics,
but the supply and demand chain cannot be met without the integrated and close-
knit support of the logistics.
International Logistics management deals with receiving, handling, movement,

storage and delivery of material, services and finished product in a WCSCM
system, at a global level. Logistics is required both at the beginning and at the
end of it, Fig7.3 (b).
RECIEPT HANDLING MOVEMENT STORAGE
TO DELIVERY
MANUFACTURER
TO
CONSUMERS
Fig. 7.3(b): International Logistics management

12

SCM
As Coyle puts it, “ logistics is the part of supply chain process that plans,
implements and controls the efficient, effective flow & storage of goods, services
and related information from point of origin to point of consumption for the
purpose of conforming to consumer requirements”. Logistics include the following
role, Fig 7.3 (c).
ROLE
OF LOGISTICS
TRAFFIC CONTROL & WAREHOUSING WAREHOUSING

TRANSPORT STORAGE TO INCL STORAGE TO INCL
MANAGEMENT INFRASTRUCTU INFRASTRUCTU
INVENTORY INVENTORY
CONTROL & CONTROL &
MANAGEMENT MANAGEMENT
DEMAND FORECAST
SALVAGE
MANAGEMENT &
DISPOSAL
Fig. 7.3 (C): Role of Logistics
An effective SCM system will never be possible without the integration of

logistics, since logistics is the foundation of SCM discipline and is responsible for
its activities. Needless to mention here is that the transportation cost is the
heaviest in the entire chain, and even more than product selling prices. Therefore,
in order to maximize customer satisfaction and meeting firm’s goal it is
mandatory to ensure that effective storage facilities for goods and services are in
place.
7.4.1 Integrating Logistics
Logistics planning has to be integrated with material and capacity planning in

order to achieve maximum and optimum level of satisfaction. The needs and
requirements of our customers is variable and never a constant factor. Therefore,
in order to serve them better and be profitable you got to tailor your logistics and
ensure it to be more dynamic with passing time. The emphasis should be on
reduction of cycle time and elimination of waste in order to increase customer
satisfaction. You have to understand that movement of goods, warehousing of
materials and delivery is time consuming and at times requires precision
synchronization at all levels i.e. from supplier to manufacturer and from
manufacturer to consumer (unit 4). But things at the international level are much
complicated. The coordination aspects required are tremendous and detailed
planning is required before execution of the logistics movement.
13

Markets
7.4.2 World Class Logistics Management (WCLM)

The third side of WCSCM triangle, is the WCLM include the following:
• Value-added Activity: WCLM ‘tailors’ products to the consumers/customers
needs and requirements. Logistics characteristics for each type of customer
are incorporated into each product’s specifications. Product testing prior to
delivery, packaging for unique storage related to the type of product being
shipped, specialized marking and labels, and tracking of products through the
supply chain are some of the events involved in WCLM. These are the
value added activities that take place and are enhanced as per the customer
requirements.
• Real Time Trace Ability of Materials and Product: WCLM organizations
employ paperless inventory status and movement in real time, through out the
supply chain.
• Enhanced Logistics Competency: Logistic competencies of the supply chain
members are continuously being gauged by survey and related activities.
Effort is on to reduce waste and continuous improvement in all spheres.
Focus is generally ‘outward’ towards extended enterprise.
• Collaborative Cross-functional Teams: (as discussed earlier in same unit):
They involve both the customers and the suppliers and integrate their
respective functions under one head. Actually, more often than not the
changing pace of market and technological advances mandate the
requirement of a team based effort and a collaborative approach to logistics
planning and execution.
Each of the functional areas in SCM is important to each other and together they
serve an important role in achieving WCSCM. The professionals in logistics,
finance, marketing, accounting, engineering, IT, and other functional areas are
never geared adequately both in skills and know how to manage the
interrelationship based on which the successful supply chains are built. The
integration of these functional areas is what separates the excellent from the
lesser ones.
It is quite unfortunate that supply management and logistics don’t collaborate the
way it should in many companies, and hence, effort should be there to
collaborate these functional areas and integrate them to perform better. This
would not only gather efficiency but at the same time will eliminate wastes in a
big way.
7.5 SUMMARY
Moving towards a global market requires detailed planning, foresight, flexibility

and integration. In order to achieve excellence and a competitive advantage in
the global market the companies have to continuously modify their strategies in
order to remain embedded in the international markets since, the competition level
is much more. Foundation of a company will also play a leading role in
establishing itself globally. A well-conceived and accepted strategic plan is to be
evolved which has to be far-sighted and look after the long-term aspects of the
company, and not be myopic in nature.
A sound strategic plan, however, makes the ultimate difference in the amount of
gains achieved in quality, quantity, productivity, cost reduction and manufacturing
flexibility, the key components of value, which determine competitive advantage
and profitability. Actually, establishing the strategic plan is the first step towards
achieving excellence.
14

SCM
More often, a firm’s approach to global supply management progresses from a
reactive mode to a proactive one. Therefore, in order to remain in this
competitive world the supply management professionals must have the following
ability:
• Develop a strategic point of view with relation to global supply
management
• Deal with continuous changing scenario
• Dealing with diversity in culture
• Work with and within distributed organizational structures
• Work with others as team members and leaders
• Communication aspects.
Keeping the above in mind we can conclude by saying that this will not only help
us to become successful supply chain professionals but also help us in becoming
better human beings in this far reached professional and busy environment.

1) Explain in brief international SCM.
2) How can you organize your company for global markets? Give relevant
examples to elucidate your point.
3) Explain the interfacing between logistics and functional members of the
supply chain, with examples.
4) Logistics is a strategic resource; discuss the same in the global context.
5) Explain global sourcing and its advantages and disadvantages. How can you
arrive at the best course of action for global sourcing?
6) Explain world-class management model in respect to SCM.

READINGS
1) Krishnaveni Muthiah, (2003), ‘Logistics Management & World Sea-borne
Trade,’ by Himalaya Publishing House, Mumbai.
2) Deshmukh & Mohanty, ‘Essentials of Supply Chain management,’
JAICO, Publishing House, Mumbai.
3) ‘Design & Management of SCM’, Simchi-Levi, David Kaminsky, Philip
Simchi-Levi, Edit (2004), Tata Mc Graw-Hill.
4) Burt, Dobler & Starling, (2002), ‘World Class Supply Chain
management’, Tata Mc Graw-Hill.
5) Dr KK Khanna,‘Physical Distribution Management & Logistical
Approach’ Himalaya Publishing House, (Eighth reprint)
15

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UNIT 4 LOGISTICS - INBOUND AND OUTBOUND

After reading this unit you would be able to:

4.2 LOGISTICS: DEFINITION

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Let us see this through an illustration fig 4.1:

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PRODUCT WAREHOUSING CONSUMERS

MOVE OF RAW BY DIFFERENT MODES OF TRANSPORT

Fig 4.1: Basic Block Diagram to Understand Logistics

Transportation happens to be the most fundamental part of strategic logistic

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Transportation system has a strategic bearing on operation of a company. Therefore,

• Product & company.

Organization, which involves physical movement of goods require transport services

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• Pricing Decision: transportation happens to be the important component of

• Customer Service Decisions: both customer service policy and transportation

Determining an organization’s transport requirement will be based on the following

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4.3 WHAT IS SUPPLY CHAIN MANAGEMENT (SCM)?

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DISTRIBUTORS DISTRIBUTORS DISTRIBUTORS

CONSUMERS CONSUMERS CONSUMERS

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4.4 DESIGN AND MANAGEMENT OF SCM

The principle phases of supply chain management are:

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MATERIALS SERVICES COSTS

QUALITY LOWEST COST TO FIRM APPROPRIATE COST TO SUPPLIER

TIMELY PRICE CONTROL

Fig 4.4: The Principles and Phases of SCM

4.5 LOGISTICS : INBOUND AND OUTBOUND

4.5.1 Suppliers to Manufacturers

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Calamities Road Blocks, Floods, bandhs, Very rare, since Frequent

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Differences in Urban and Rural Areas

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PRODUCE FACTORIES GOODS

MARKETPLACE CENTRAL POINTS

A RURAL AREA SCM SYSTEM: DEPICTING MOVES OF GOODS

Fig 4.5: Rural Area SCM System

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4.5.2 Manufacturers to Consumers

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MANUFACTURING UNITS WAREHOUSES RIOTS & STRIKES

ULTIMATE AIM LABOUR UNREST WHOLESALERS BREAKAGES

RATS & RODENTS

RESPONSE OF THE EFFECT ON

Fig. 4.6: Problems Involved in Logistics Support

Logistics both inbound and outbound is very intricate in nature. A consumer

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4.6 LOGISTICS MANAGEMENT

Fig. 4.7: Three Components of SCM

The three critical components of SCM are:

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Logistics management deals with receiving, handling, movement, storage and

: Observe Customer Demand.