1. ELEMENTS OF LOGISTICS MANAGEMENT
WHAT IS LOGISTICS?Logistics is concerned with getting the products and services where they are needed and when they are desired. It is difficult to accomplish any marketing or manufacturing without logistical support. It involves the integration of information, transportation, inventory, warehousing, material handling, and packaging.
The operating responsibility of logistics is the geographical repositioning of raw materials, work in process, and finished inventories where required at the lowest cost possible.
The formal definition of the word ‘logistics’ as per the perception of Council of Logistics Management is the process of planning, implementing and controlling the efficient, effective flow and storage of goods, services and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements.
Mission of logistics is providing a means by which customer satisfaction is achieved. Art of moving, lodging and supplying troops, supplies and equipment is logistics. Concept of logistics has moved into business to move, lodge and supply inputs and outputs.
Logistics is practiced for ages since organized activity began. Without logistics support no activity can be performed to meet defined goal. The current challenge is to perform logistics scientifically in order to optimize benefits to the organization.
Logistics is a planning function of management. Logistics function is concerned with taking products and services where they are needed and when they are needed. Logistics ensures that the required inputs [what] to a value adding process are made available, where they are needed, when they are needed and in the quantities [how much] they are needed. It also ensures that the outputs of the value adding process are made available where they are needed when they are needed and in the quantities [how much?] they are needed.
There are many ways of defining logistics but the underlying concept might be defined as follows: ‘Logistics is the process of strategically managing the procurement, movement and storage of materials, parts and finished inventory through the organization and its marketing channels in such a way that current and future profitability are maximized through the cost-effective fulfillment of orders.’
GENESIS OF MODERN LOGISTICS
Several Modern Management concepts are born or refined in the crucible of II World War. You may remember several OR techniques like Value Analysis & PERT/CPM have their origin in the II World War. Resources come under pressure in a war, like no other time and one is expected to deliver results in spite of all odds. These trying situations forced the military planners to evolve solutions to their problems. After the war these concepts traveled to business where resource crunch is usual. In business there is no enemy, but there are competitors who pose threat to the organizations survival.
Field Marshall Rommel’s words that ‘………before they are fought, battles are won or lost by quartermasters’ speak about the importance of logistics.
There are several examples where battles are lost due to long & ineffective supply lines.
Logistics received great importance in military planning and subsequently became a very important management function in the course of last 40 years.
Logistical management includes the design and administration of systems to control the flow of material, work in process and finished inventory to support business unit strategy
OVERVIEW OF LOGISTICS FUNCTION
Logistical History of India: India was a maritime power since about 300 BC, trading with several countries of the world bringing prosperity home. Traders of Surat brought riches to the country by extensive maritime trade. Like many of our excellent practices, logistical efficiency also faded away over a period of time.
Some important logistical feats in history:
1. Berlin Airlift – 1945: A study in logistics. When the city of Berlin was blockaded by Soviets and all supply lines were cut off, Americans planned and executed a major logistics operation to feed the city from air.
2. Indians in the Gulf countries – 1991:
1n 1991, when gulf war broke out, Indian Government evacuated thousands of Indians from the gulf countries and brought them home in a massive exercise employing Indian airlines planes.
3. Operation Overlord-1945: Allies’ invasion of Europe and subsequent victory In II World War.
4. American war of Independence
Keeping 12,000 soldiers armed and fed from England was a big task; British lost the American war of independence due to bad logistics.
What causes bad logistics?
a. Infrastructure: Bad roads, inefficient railways, poor communication lines, and congestion in the ports.
b. Taxation: e.g. Octroi
c. Information: Inadequate information
d. Management: Poor management decisions
IMPORTANCE OF LOGISTICS
Logistics is the bed rock of trade and business.
•
Without selling and or buying there can be no trade and business. Buying and or selling takes place only when goods are physically moved into and or away from the market.•
Take away logistical support trade and business will collapse1. Leads to customer satisfaction through superior customer service.
Organizational objectives of P[Productivity],Q [Quality],C [Cost],D [Delivery],E [Employee Morale],F [Flexibility],S [Safety],H [Health],E [Environment] are set to meet customer expectations of Q,C,D.
Q, C, S, H, E are parts of must be quality that a customer expects. Logistics addresses D, F objectives which lead to customer satisfaction through superior customer service 2. Integrates logistical activities
In conventional management environment, various activities of logistics work in isolation under different management functions. Each pocket trying to sub optimize its objectives at the cost of overall organizational objectives. Purchasing trying to purchase at minimum price at the cost of what is needed by operations. Operations
produce large quantities at minimum production cost ignoring demand leading to doom inventory. Logistics function of management brings all such functions under one umbrella pulling down inter departmental barriers.
3. Competitive edge : In the fiercely competitive environment logistics provides the edge. Due to technological revolution most of the products are moving into commodity markets. In a commodity market where price is controlled by competition, where there is no product differentiation in terms of quality parameters like performance & reliability, where brands are almost irrelevant, competitive edge is that of availability of product and service in terms of time, place and quantity.
4. Logistics wins or loses wars
• British lost American war of independence due to poor logistics • Rommel was beaten in the desert by superior logistics of Allies 5. Supports critical functions like operations and marketing
Strong logistics support enables a company to move towards JUST IN TIME production system for survival in a highly competitive market
a) Interface with marketing
These days marketing a product is increasingly on the strength of availability and flexibility as we discussed earlier. Stronger emphasis is on the last of four Ps of marketing [product, price, promotion and place]. Logistics provides the interface between production function and marketing function. Marketing is trying to sell the product in the market place. Logistics makes the product accessible to marketing by acting as interface between the function that produces it and the function that makes the consumer buy it.
This interface is gaining importance due to following changes that are sweeping the market making many companies adopt JUST IN TIME production system.
a. change in the customer: demanding, knowledgeable, conscious of rights, lacking in brand loyalty, changes preferences very fast, expects very high degree of service
b. many products are moving towards commodities market: product differentiation in terms of quality of performance is vanishing and brands are losing their magic.
As a result of above we find that availability is an important determinant of purchasing decision.
6. Logistical costs : For individual businesses logistics expenditures are 5% to 35% of sales depending on type of business, geographical areas of operation, weight/value ratios of products and materials. This is an expensive operation. Improvement in the efficiency of logistics function yields savings as well as customer satisfaction
WHY SHOULD WE LEARN LOGISTICS?
HOW OR WHY DOES LOGISTICS BECOME IMPORTANT FOR MANAGEMENT STUDENTS?
1. Impact on cost of creating and delivering of product to the customer 2. provides competitive edge to business
3. crucial to survival and prosperity in global trade and business 4. many products have short life cycles
5. more & more logistics experts are going up the hierarchical ladder 6. leads to the concept of supply chain management
7. Logistics is important in the Indian market due to the sweeping changes, which are taking place.
b. Shift from seller’s market to buyer’s market c. Changing customer
d. Expanding business, growing exports
e. Corporate mangements’ Shift towards modern management concepts like Lean management, Just In Time, Total Quality Management etc.,
IMPORTANCE OF LOGISTICS MANAGEMENT IN INDIA
I. Liberalization and opening our door to competition II. Global business has long supply & distribution lines
III. Changing Indian customer, aware, demanding and less brand loyal
IV. Competition ensures that product differentiation in terms of quality is difficult V. Product life cycles are shrinking
VI. Our markets are shifting from sellers’ to buyers’
VII. Many consumer products are moving into commodities market
VIII. India is a large country. Large distances separate production and consumption centers. Essential commodities have to travel from Food Corporation warehouses to consumers through PDS.
IX. Logistics performance has not been impressive
X. Fruits and vegetables are grown at various places but do not enjoy access to market
WHAT ARE THE OPERATIONAL OBJECTIVES OF LOGISTICS?
1. Rapid response
F-flexibility objective of an organization: Some companies measure this as response time to customer’s order. On an average how much time do we need to fulfill one particular type of customer’s order in a year? This is a measure of Rapid response Logistics should ensure that the supplier is able to respond to the change in the demand very fast. Entire production should change from traditional push system to pull system to facilitate rapid response. Instead of stocking the goods and supplying on demand, orders are executed on shipment to shipment basis. Information Technology plays an important role here as an enabler. IT helps management in producing and delivering goods when the consumer needs them. This results into reduction of inventory and exposes all operational deficiencies. Now the management resolves these deficiencies and slashes down costs. [Concept of SMED and KANBAN as practiced by JIT companies in Japan or elsewhere]
2. Minimum variance
D-delivery objective of an organization, this can be measured as ‘On Time Delivery’ or OTD. If 100 deliveries are made in a month/quarter/year how many reached as per the commitment made to the customer? This percentage is OTD.
Any event that disrupts a system is variance. Logistics operations are disrupted by events like delays due to obstacles in information flow, traffic snarls, acts of god, wrong dispatches, damage in transit. Traditional approach is to keep safety stocks and transport the goods by high cost mode. The cost of this approach is huge. Logistics is expected to minimize these events, thereby minimize and improve on On Time Delivery.
3. Minimum inventory
This is component of cost objective of a company. Inventory is associated with a huge baggage of costs. It is termed as a necessary evil. Objective of minimum inventory is measured as Inventory Turns or Inventory Turnover Ratio. Americans call
this measure as turn velocity. Logistics management reduces these turns without sacrificing customer satisfaction. Lower turns ensure effective utilization of assets devoted to stock. [Concept of single piece flow as practiced by JIT companies in Japan or elsewhere]. Logistical management should keep the overall well being of a company in view and fix a minimum inventory level without trying to minimize the inventory level as an isolated objective
4. Movement consolidation
Transportation is the biggest contributor to logistics cost. Transportation cost depends on product type, size, weight, distance to be transported etc. for transporting small shipments just in time [reduction in inventory costs] expensive transport modes are used which again tend to hike the costs. Movement consolidation is planning several such small shipments together [of different types of shipments] by integrating interests of several players in the supply chain. Generally, large shipment size and long distances reduce transportation cost per unit. Movement consolidation shall result into reduction in transportation costs.
5. Quality
If the quality of product fails logistics will have to ship the product out of customers premises and repeat the logistics operation again. This adds to costs and customer dissatisfaction. Hence logistics should contribute to TQM initiative of management. In fact, commitment to TQM has made the managements world over wake up to the significance of logistics function. Logistics can play a significant role in total quality improvement by improving the quality of logistics performance continuously and continually.
6. Life cycle support [cradle to cradle logistical support- produce, pack (cradle) and repack(cradle)]
Logistics function is expected to provide life cycle support to the product after sale. This includes
a. After sales service: the service support needed by the product once it is sold during its life cycle
b. Reverse logistics [concept Oct’03] or Product recall as a result of
- rigid quality standards [critical in case of contaminated products which can cause environmental hazard]
- transit damage [leaking containers containing hazardous material] - product expiration dating
- rigid laws prohibiting unscientific disposal of items associated with product [packaging]
- Rigid laws making recycling mandatory - Erroneous order processing by supplier
- Reverse logistics is an important component of logistics planning
WARE HOUSING - Storage, Handling, Packing & INFORMATION SYSTEMS
- Internal & External Information flow
NETWOR K DESIGN - Suppliers,
LOGISTICAL FUNCTIONS [components of logistics or
elements of logistics]
1. Information management
Management is appreciating importance of information as an element of logistics of late, now. The role of information is vital in order processing. Quality of information is critical as error in composition of information requirement creates potential disturbance in the supply chain. Incorrect order processing due to erroneous information will result into product recall and reshipment if the sales opportunity still exists.
Faster and quality information flow from customer to processor results into cost effective logistics. Forecasting and order management are two areas of logistical work dependent on information.
Forecasting is an effort to estimate future requirements to position inventory or assets devoted to inventory. As forecasting becomes unreliable in a fast changing environment, control strategies like JIT, Quick Response and Continuous Replenishment came into being. Now it is the task of the logistics function to use information technology to strengthen operation control and forecasting to the best advantage of the organization.
Leading firms typically have information systems capable of monitoring logistical performance on a real time basis giving them the capability to identify potential operational breakdowns and take corrective actions prior to customer service failure.
LOGISTICS
FUNCTIONS
INVENTORY - When to order? How much to order? Just In Time TRANSPORTATION - Water, Road, Rail, Pipeline & AirIn situations where timely corrective action is not possible, customers can be notified in advance and thereby taking the surprise out of forthcoming service failures
2. Inventory control
Keeping the stock levels in such a position, so that neither stock out nor stock piling takes place is Inventory control. While formulating inventory policies find out 20% of the products marketed that account for 80% of the profit.
3. Transportation
Transportation is the most visible of all elements of logistics and high contributor to logistics expenditure. Costs of transportation are mainly as follows
a. Movement costs: money paid for moving material across geographical terrain b. Preservation costs: money spent on preserving the material during transit
c. Cost of idle asset: inventory is unavailable for conversion during transit. This results into costs for organization
d. Administration costs: money spent on administration Transportation is accomplished in three ways
a. One’s own fleet – private carriage
b. Contract with specialists on long term basis – contract carriage c. Contract on individual shipment basis – common carriage Expectations from transportation service are
a. minimum cost – transportation costs are explained earlier
b. Speed: speed of transport means the speed with which goods reach the destination.
c. Consistency: consistency in speed is achieving the same speed over a long period of time. Consistency reflects on the reliability of carrier. Any unexpected variance can play havoc with logistics. Modern information technology has made continuous tracking of consignments possible. This takes the element of surprise out. IT has helped logistics managers to seek out ways and means to improve speed and consistency. What is becoming important is a combination of speed and consistency. Requirement of speed depends on type of industry. In some situations speed may not be important. Then transportation service offering high speed increases cost. So logistics managers have to strike a balance between service and cost. Three important aspects of transportation are facility location, transportation cost and consistency.
Design of logistics system should consider total costs rather than elemental cost of transportation
4. Warehousing
Warehousing is holding material before dispatch after it is produced. Although warehousing is conventionally considered to be a storage facility, it plays a much higher role from logistics viewpoint. It is perceived to be a switching facility rather than a storage facility. Warehouse ownership can be private, public or third party contract. Warehouse provides economic and service benefits to the logistical system. Economic benefits are Movement Consolidation, Break-bulk, Cross-dock, Processing/Postponement & stock piling.
Service benefits are spot stocking, assortment, mixing & production support 5. Material handling
Material handling covers receiving, moving, storing, dispatching activities. It has an
impact on cost [capital as well as running], quality and safety. One of the principles of
material handling is minimum movement. Commonly used material handling equipment
are forklifts, EOT Cranes, hoists, pulley blocks, trolleys, railroad cars, conveyers, ropes
and slings etc. 6. Packaging
Packaging is done to make handling and transporting cost effective. It protects the product in transit and handling. Packing is expected to facilitate lifting and moving by providing easy access to forks or hooks. Packing is also expected to display universal symbols and other instructions for handling. Eg. pallets and containers, wooden boxes, wrapping etc.
Types of packaging: consumer packaging and industrial packaging
Consumer packaging - There is no focus on logistics. Importance is given to marketing appeal and packaging the finished product.
Industrial packaging importance is given to logistics considerations handling and moving. Individual parts are packed in cartons or bags and grouped together as master cartons. Master cartons are grouped into units for handling. This concept leads to unitization and subsequently to containerization.
SOME IMPORTANT CONCEPTS
1. Logistics Management and Supply Chain Management……… Development of Logistics and Supply Chain Management Concept
a. 1950 – 1960: Importance of examining costs and benefits in physically moving the goods to customers came into focus in post war1950s. We have seen earlier that concept of logistics was born in the crucible of warfare and came into business after the end of II world war. Idea of total system cost emerged during this period. Analyses of trade off situations between costs of several activities, selection of modes of transport keeping total system cost in mind are fallout of this concept. It can be understood that selection of water as a mode of transport gives low transportation cost that will result into high transit inventory adversely affecting total system cost. Initially outbound logistics was in focus as value of the finished goods inventory is high.
9
Finished Goods Stores
R3
R4
W3
R5
R6
Market
Procurement
Inbound
Logistics
V
1
V
2
V
3
I N F O I N V
A new management function called Physical Distribution Management emerged integrating various activities on the outbound side like transportation, warehousing, packaging, customer service etc.
Advent of electronic era of 1960s made information a strong component of physical distribution management. Inbound logistics was still considered to be a concern of vendors and did not receive the attention of management.
Market
Receiving stores
Operation
Finished Goods Stores
W1
W2
W3
R1
R2
R3
R4
R5
V5
V
4
R6
Market
Inbound
Logistics
I N F O I N F O I N F O I N F O I N V I N V I N V I N V OUTBOUND LOGISTICS INBOUND LOGISTICS PROCUREMENT OPERATION DISTRIBUTIONb. In 1970s strengthened by IT, physical distribution management started looking into some aspects of financial management subsystems. Monitoring and planning for efficient completion of cash cycle became attached to physical distribution management. Around the same time importance of inbound logistics was appreciated. c. In 1980s physical distribution management function came to be called logistics management encompassing inbound and outbound logistics.
During this time this function started looking closely into logistical operations adopting modern concepts like TQM & TPM to logistical operations.
d. 1990: This concept expanded, all up stream and down stream organizations and activities were brought closer for mutual cooperation in order to gain benefits of QCD. This idea of external integration is Supply Chain Management.
Definition: the management of upstream and down stream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole. Supply Chain Management looks beyond the confines of organizations to deliver value to the end user at minimum cost. Supply chain is visualized as a pipeline through which products from raw materials stage to the end user. Supply Chain Management is ensuring that this flow is smooth and quick.
Henry Ford visualized the importance of this flow in early 1990s and expanded his business to cover raw materials, their deposits, forests, plantations and even transportation activities like shipping lines. His business interests extended beyond the frontiers. This diverse expanse of business gave him final control on the supply chain but became nonviable due to labor problems and unwieldy bureaucracy. He realized that smaller independent organizations were more efficient and cost effective in delivering value and shifted his focus to a network of competent dealers.
Idea of supply chain management
Supply Chain Management aims at breaking down organizational barriers
a] to share sales information on ‘real time’ basis that reduces inventories and need for safety stocks. This is called supply chain compression resulting into inventory reduction and larger inventory turns. Dell Computers considered to be leaders in computers business have recorded 50 inventory turns in 1997, IV Q, whereas Compaq could manage only 10 turns.
b] Smoothen the flow of information both ways [orders reaching the suppliers, and products reaching the that results into reduced delivery time or reduction of lead-time resulting into shortened cash-flow cycle
particulars Logistics management Supply chain management Scope Inbound logistics, in process
inventory [movement from one plant to another], outbound logistics
All players in the supply chain from raw material source to finished product consumer, vendors, their vendors, supplier
organization[shipper],
Warehouses, service
providers, customers, their customers
How this is created in business?
By internal integration of logistics functions handled by
various management
functions within organization
By external integration of roles of various players in the supply chain.
Main
objective Logistics cost reduction by integrating resources across the pipeline
Supply chain profitability by value creation.
definition Logistics is the process of
procurement and storage of material , part and finished inventory [and related information flow] through organization and its marketing channels in such a way that current and future profits are maximized through cost effective fulfillment of order
relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole.
Origin A very old concept in military
planning. As a logical extension of logistics management focus L/M tries to take the product
to the consumer at minimum logistical cost. Hence it is supply driven.
SCM focuses on value creation in the supply chain. Hence this is customer focused or demand driven. 2. Business functions of logistics
I] Business logistics is planning, implementing and controlling efficient & effective flow and storage of goods, efficient & effective flow services, and related information from point of origin to point of use or consumption in order to meet customer requirements.
a. Food and agricultural products: We are familiar with warehouses owned by Food Corporation of India. The government in these warehouses stores huge quantities of procured food grains. These stocks are subsequently moved to outlets of Public Distribution System. This is a logistical operation by Govt. of India in Agricultural Products Sector
b. Raw materials and finished engineering, chemical, pharmaceutical goods.
c. Consumer durable goods: Logistical Management is receiving attention in industry as many consumer durable products are moving into commodities market.
II] Business logistics plays the role of facilitator for trade and business. It makes business happen.
3. Logistical mission
Mission of logistics is to achieve business objectives by delivering desired quality of service at the lowest total cost. This is nothing other than delivering QCD expectations of the customer by planning logistical operations at minimum cost. This can also be called creating customer value at minimum cost. The illustration below shows that
290 Customer service goals [QCD] At market type A Customer service goals [QCD] At market type B Customer service goals [QCD] Transportation Warehouse M/H
Logistical mission cuts across functional lines to achieve business objectives at minimum cost.
Logistical mission is a set of goals to be achieved at a particular type of market for a particular type of product. Naturally this is responsive to competition. Hence logistical mission is to achieve above goals at minimum system cost. Focus is on mission rather than on isolated functions. Mission of logistics is providing a means by which customer satisfaction is achieved.
4. Role of planning in logistics management • Role of planning is central to logistics management
• Mission of logistics management is to plan and coordinate all those activities necessary to achieve desired levels of service and quality at lowest possible cost. • Logistics is fundamentally a planning concept that seeks to create a frame work through which needs of the market place can be translated into a manufacturing strategy and plan
• Logistics makes one plan, integrating various resources of the organization that replaces traditional concept of planning in pockets
5. Logistics interface with marketing
Interface is a common wall or surface between two objects, concepts or functions. It can also be common area/areas of performance or interest. Outbound logistics plays an important role in selling the product of the company as it moves the product through the distribution system to the customer. Hence it is called the other half of marketing. In several instances making the product available at the right time at the right place itself is the key to successful selling. A student of management very well knows four Ps of marketing. We have already seen the role of logistics as far as ‘Place’ is concerned. It is quite interesting to see the interface with respect to other Ps as well.
Price: Logistics enables marketing to quote a competitive price by providing discount opportunities on account of Transportation cost savings. Logistics Manager can plan the size of the consignment confirming to the most economical schedules published by transportation service providers to save transportation costs. If order size matches with the favored size the benefits are substantial. Logistics Management has to balance inventories to tackle anticipated price-triggered sales.
Product: Inputs of logistics manager are quite important as far as the size and shape of the product are concerned. Size and shape of the product can make logistics nightmarish, thereby adding huge amount of costs. Weight/volume ratio plays very important role in deciding economics of logistics.
The story of Gillette is well known logistical circle. The low weight, unwieldy floor display proved to be a very expensive logistical operation. While consumer packaging provides sales push in a retailers shop, it can make industrial packaging difficult due to its shape and ability to protect the contents. Product and its packaging is a common area from the point of view of logistics.
Promotion: Logistics Management is required to manage inventory needed to match sales triggered by promotional activities in the market. Marketing Management & Logistics Management need to work closely in deciding promotional strategies for the
product. Promotional strategies may be push or pull type. Logistical problems may be faced in either or both, but being aware takes the punch away from the blow!
Place: Marketing decision to distribute the product directly to retailers or through wholesalers has a great impact on logistical operations. Demand placed by wholesalers is more streamlined as compared to retailers. Logistical management of retailers’ demand often requires time sensitive transportation methods which are expensive.
In addition to the four Ps, customer service is another area where marketing & logistical mangements have to work closely to effectively beat the competition.
6. Inbound & outbound logistics Inbound Logistics
Creation of value in a conversion process heavily depends on availability of inputs on time. Making available these inputs on time at point of use at minimum cost is the essence of Inbound Logistics. All the activities of a procurement performance cycle come under the scope of Inbound Logistics.
Scope of Inbound Logistics covers transportation during procurement operation, storage, handling if any and overall management of inventory of inputs. Several activities or tasks are required to facilitate an orderly flow of materials, parts or finished inventory into a manufacturing complex. They are sourcing, order placement and expediting, transportation, receiving and storage. Overall, procurement operations are called inbound logistics. A procurement cycle is shown below. Inbound logistics have potential avenues for reducing systems costs.
Delivery time, size of shipment, method of transport & value of products involved are different from those of physical distribution cycles. Normally delivery time is large as a low cost transportation mode is chosen. As the value of inventory is low size of shipment is large & transit inventory costs are low. As the price of products is lower, trade off between cost of maintaining inventory in transit and low cost transport exists to the benefit of the organization.
Inbound logistics
Outbound Logistics
Value added goods are to be made available in the market for customers to perceive value. Finished goods are to be distributed through the network of warehouses and supply lines to reach the consumer through retailers’ shops in the market. During
conversion value is added to the raw materials and as a result value of the inventory in
Sourcing
Order
placement
& expediting
Transportation
Receiving
this case is very high unlike inputs. Now the size of shipment, modes of transport and delivery time are different as compared to inputs. Activities of distribution performance cycle come under the scope of Outbound Logistics. They are order management, transportation, warehousing, packaging, handling etc.
7. Importance of 3Cs – competitive advantage by effective logistics management [Logistics and Supply Chain Management by Martin Christopher, Page # 5,]
The three Cs in business are Company, Customer and Competition. All the three “C” are vital for healthy business and prosperous economy. Buying decision is always triggered by a need a consumer is experiencing due to the stress he is under. Customer is attracted by value when he is about to make a buying decision. Competitors in business continuously add value to their products in order to be ahead in the competition. Any supplier organization or Company tries to be better than the Competition by utilizing their assets efficiently and effectively. Ref. Fig.12
The Supplier Company tries to differentiate her products in terms of functional quality and product cost. Competition has ensured that technology and human skills are almost same everywhere. Hence product differentiation in terms of functional quality and product cost is nearly impossible. But a great opportunity exists for the Supplier Company to differentiate her products by service and logistics cost by superior logistics. When this happens customer sees better value in the products of Supplier Company as compared to competition.
Importance of 3Cs
8. Logistics overview and its implications
a. Birth and development of logistics in post war business since 1950. [Refer our earlier notes]
b. External integration of supply chain and concept of Supply Chain management………… 1990
c. Elements of Logistical Management function d. Scope of Logistical Management
e. Significance of logistics in Business Management, the time and place a. Overall goal of Logistical Management function
“C” customers Look for value, benefit at lowest price
“C” company
By effective utilization of assets tries to create and offer value to customers
“C” competitor
By effective utilization of assets tries to create and offer value to customers
Value
Value
9. Different attributes of logistics management and need of coordination of different organizational departments with that of logistics
Attributes of Logistics Management [what makes Logistics Management distinct from other departments?]
1. Functions of logistics are spread across various stages of value chain.
2. Provides interface between marketing and customers, marketing and operations, operations and supplier
3. Provides competitive edge to business in the current environment 4. Handles flow of information and materials.
5. Large avenue for cost reduction.
Need of coordination of different organizational departments with that of logistics
The above features show the complexity and scope of logistics management. For such a management function to function effectively various pieces of jigsaw puzzle should fall at correct places which requires coordination of all functional departments. If we want to solve a jigsaw puzzle, we need to have the complete picture on the box. In the absence of this picture solving the puzzle becomes impossible. Overall coordination of different organizational departments can provide the complete picture. This requires integration of all functions of logistics.
If a firm does not consistently satisfy time and place requirement it has nothing to sell in the market, it is simply out of business. Good logistics alone can enable organizations to do business. To enjoy full benefits of logistics, full range of functional work must be performed on an integrated basis. Excellence in each aspect of functional work is relevant only when it is viewed in terms improving overall efficiency and effectiveness of integrated logistics. This requires that the functional work of logistics be integrated to achieve business unit goals.
Concept of Integration in Logistics Operation
What is the concept of Integration in Logistics Operation?
In order to perform various functions of logistics in coordinated fashion bringing all functions of logistics under one operational command is important. Performance of these functions in an isolated fashion is detrimental to the objectives organization. Performance in isolation loses sight of overall picture. It is like trying to solve a jigsaw puzzle without complete picture before you.
What do we integrate? Information flow, inventory flow, procurement, operations support, physical distribution.
Concept of Integration in Logistics Operation
Inventory flow Physical distribution Manufacturing support Procurement Information flow Custom er Suppliers
If we view the above graphic we see all internal logistical operations in an organization. We also see their close relationship with each other and the need to perform them in an
Value added role of Logistics
Different types of economic utilities like form utility, place and time utility and possession utility add value to a product. In other words make product attractive and trigger purchase.
a) Form Utility is given by Production to a product when conversion process is held. Logistics also adds form utility when warehousing activities like mixing, assembling, processing postponement or unpacking take place.
b) Place and Time Utility is given by logistics functions when a product is moved to a needed place on time to serve the customer
c) Possession Utility: Marketing creates Possession Utility by promoting the product by advertising and or by any other means. But logistics finally possession by customer happen
Elements of logistics Management
Inventory planning methods use a common information base to co-ordinate inventory requirements across multiple locations or stages in the value added chain. Planning activities may occur at the plant warehouse level to coordinate inventory allocation and delivery to multiple distribution centers. Planning may also occur to coordinate inventory requirements across multiple channel partners such as manufacturers and retailers.
Two inventory planning methods are: a) Fair share Allocation
b) Distribution requirement planning. Fair share Allocation
It is a simplified inventory management planning method that provides each distribution facility with an equitable or ‘Fair share’ of available inventory from a common source such as a plant warehouse.
Example of a fair share allocation
The above figure illustrates the network structure, current inventory levels and daily requirements of three distribution centers served by a common plant warehouse. Using fair share allocation rules, the inventory planner determines the amount of inventory that can be allocated to each district center from the available inventory at the plant warehouse. For this example assume that it is desirable to retain 100 units at the plant warehouse, hence 500 units are available for allocation.
Plant warehouse Inventory 600 units.
Distribution center 1
___________________ Inventory 50 units
Daily use 10 units
Distribution center 2
_____________________ Inventory 100 units
Daily use 50 units
Distribution center 3
_____________________ Inventory 75 units
Formula
DS = Where,
DS = common days supply for distribution center inventory. Aj = inventory units to be allocated from plant warehouse. Ij = inventory in units for distribution center ‘j’
Dj = daily demand for distribution center j. n = number of distribution centers.
In this example, DS = 500 + (50+100+75) 10 + 50 +15 = 500 + 225 75 = 9.67 days
Hence the fair share allocation indicates that each distribution center should be brought up to 9.67 days of stock. The amount to be allocated to each distribution center is determined by:
Aj = (DS – Ij ) x Dj Dj
Aj = amount allocated to distribution center ‘j’.
Ds = days’ supply that each distribution center is brought up to Ij and Dj are as above.
The amount allocated to distribution center 1 in this case: A1 = (9.67 – 50/10) x 10 = (4.67) x 10 = 46.7 ~ 47 units.
However fair share allocation does not consider site-specific factors such as differences in performance cycle time, EOQ, safety stock requirements.
SKU (Stock keeping unit – it is a specific item purchased by the customer including colour and size uniqueness.)
Role of value added Logistics
ACHIEVING LOGISTICS COMPETENCY.
Logistics is the process of strategically managing the procurement, movement and storage of materials, parts and finished goodsinventory(and the related information flows) through organisation and its marketing channels in such a way that current & future profitabilty is maximised through the cost effective fullfillment of orders.
In order to achieve logistics competency following aspects are to be tacklses: 1) The inbound logistics:
• Locating suppliers • Selection of suppliers • Suppliers warehouse • In-bound transportation
• Involving suppliers from the beginning as partners 2) Operations:
• Superior technology and advanced process • Automation
• Scheduling & planning
• Response to quick changes in demand/product cahnge • Re-engineering • Internal- storage/transpor • JIT, KAIZAN? • ERP • Value engineering • Packaging 3) Outbound logistics: • Finished product- storage
• Selection of distributors/ dealers
MARKETING
Possession
Utility
LOGISTICS
Place &
Time Utility
PRODUCTION
Form Utility
• Distribution channel selection • Transportation
• Inventory(finished goods) 4. Customer service
• Delivery should be as per the schedule
• Provide excellent service support by way of appointing servicing agents • Availability of original spare parts
• Value-added services 5. Logistics costing • Activity – based costing • Transportation costs • Inventory holding costs
• New product development costs • Sales/distribution/marketing costs • Sales promotions/advertising costs • Operational costs
All the above activites are to be coordinated Example
Maruti cars:
ENGINE - FROM JAPAN SUZUKI
CARBURETOR - LOCAL SUPPLIERS
STEERING ASSAY - LOCAL SUPPLIERS
CHASSIS - MARUTI
SHEET METAL - MARUTI
ELECTRICAL FITTINGS - LOCAL SUPPLIERS
TYRES - MRF
BEARINGS - SKF
FANS - LOCAL SUPPLIERS
METERS - LOCAL SUPPLIERS
PAINTING - MARUTI
DHL - COURIER
GATTI - COURIER
RAIWAYS - LONG DISTANCE
EXPORT - SEA
DELHI DISTRIBUTOR - ROAD Factory
• Cars moves on rails, each assembly line is called “line” where right from the chasis assembly is done
• Road test & performance testing is done for each car • Strict quality control/quality assurance
• 6-5 implementation(not more than 5 cars should go for re-work- existing 25 cars out of 1500 cars/day)
Customer services
• Delivery as per schedule
• Excellent service support by way of appointing servicing agents like service in mumbai/pune doing sale & servicing
IN - BOUND
• Availability of original spare parts • Value added services
2.
LOGISTICS MANAGEMENT?
“Logistic is the process of planning, implementing and controlling the efficient, effective flow of goods storage of goods, services and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements”
Logistics exists to satisfy customer requirements by facilitating relevant manufacturing and marketing operation. The main responsibility of logistic is the geographical positioning of raw materials, work in process and finished inventories at the lowest possible cost.
Creating logistics value is costly. Logistics accounts for one of the highest costs of doing business. Logistics expenditure normally ranges from 5% to 35% of sales depending on the type of business. Thus logistics even though very important for any business success is expensive.
VARIOUS DEFINITIONS OF LOGISTICS MANAGEMENT
Logistic management encompasses all materials flows management, from the inflow of purchased materials into works (i.e. materials planning of raw materials components and other products, transport of materials from suppliers to works, receiving and inspection and storage of materials) materials flow through manufacturing processes (i.e. materials issues and materials handling) and material (flow to customers (physical distribution (Refer fig.1 for these relationships)
Schmidt describes logistics management as:
“The management (i.e. the planning, execution and control) of all factors that affect the material flow and the information about it, seen from the perspective of customer’s requirements for the purpose of achieving a high reliability, a high degree of completeness and a short delivery time”
Institute of purchasing and supply define logistics as:
“Logistics is the concept which seeks provide for the management and co-ordination of the activities within the supply chain from sourcing and acquisition through production, where appropriate, and on through distribution channels to the customer. The goal of logistics is the creation of competitive advantages through the simultaneous achievement of high customer service levels, optimum investment and value for money.”
According to Bowersox and Closs:
“Logistics management includes the design and administration of systems to control the flow of materials work in progress and finished inventory to support business unit strategy”
From the above definitions, we conclude
that--(1) Logistics management is the function of managing the total flow of materials which includes movement of raw materials from suppliers, in process within the firm, and movement of finished goods to the customer.
(2) Logistics management covers both physical flow of products as well as information flow covering reports and documentation relating to goods movement.
(3) Logistics management evolves procedures that meet customer service at the minimum cost.
(4) Logistic management achieves cost reduction by speeding the flow of materials, work-in-progress and finished products.
Funtions of Logistics Managers
1. Receiving of materials, counting and storing.
2. In-plant progress checking and up to date information. 3. Contact person for customers.
4. Arranging in-bound and out bound transportation of materials . 5. Quality assurance.
6. Packing & Dispatching.
MISSION STATEMENT
"Mission of Logistics management is to plan and coordinate all those activities necessary to achieve, desired levels of delivered service and quality at lowest possible cost.”
1. Logistics: We aim at the timely movement of materials to the specified destinations at the minimum cost, every time & at all the time."
2. Blue - Dart: "Meeting perceived and actual expectations of both - our customers & fellow Blue - Darters, in the most cost - effective manner by eliminating waste, duplication and defects in the shorte5t possible time, continuously."
3. GATI: "We deliver anything any where. To provide a single window solutions to the customers covering from courier to cargo across the world, with service offering suiting customer needs, on a time frame"
4. Radhakrishna Foodland {P} Ltd. - McDonald's Distribution Partner: "To ensure that all McDonald's restaurants are supplied without interruption, products conforming to acceptable standards at lowest LOCAL COSTS to the system"
5. Parle Products Pvt. Ltd: "Parle Products Limited will strive to provide constantly nutritious and quality food products to meet consumer's satisfaction by using quality materials. And by adopting appropriate process. To facilitate above we will strive to continuously train our employees and to provide them an open and participative environment."
Achieving Logistics competency (How to be 1 UP in
the market?)
Logistics is a process of strategically managing the procurement, movement and storage of materials, parts and finished goods inventory ( and the related information flows ) and its marketing channels in such a way that current & future profitability are maximized through the cost effective fulfillment of orders .
In order to achieve logistics competencey following aspects are to be tackles :-1. The In-bound Logistics :
. Locating suppliers (finding out) . Selection of suppliers
. Suppliers Warehouses . In-bound transportation
. Involving suppliers from the begning – as partners 2. Operations :
. Superior technology & advanced process (cutting edge technology ) . Automation
. Scheduling & planning
. Response to Quick – changes in demand / product – change / R&D . Re-engineering
. Internal – Storage / transport
. Inventory holdings – stores / Work in progress / finished goods . JIT , KAIZAN ?
. ERP
. Value Engineering . Packaging
3. Outbound Logistics :
. Finished product – storage / Bonded store location . Selection of distributors / dealers .
. Distribution channels selection .
. Distribution Process (transported by road) . Transportation (own vehicle)
. Inventory (finished goods) 4. Customer Service :
1. Delivery as per schedule
2. Provide excellent service support by way of appointing service agents (sales
& Service)
3. Availability of original spare parts . 4. Value - added services.
5. Logistics coasting :
1. Activity – Based coasting . 2. Transportation coast . 3. Inventory holding coast .
4. New product development coast . 5. Sales / Distribution / Marketing coast . 6. Sales / Promotion Advertising coast . 7. Operational coast .
All the above activities are to be co-ordinated In Short
1. Logistics Network Design. 2. Information flow of Network. 3. Transportation coast.
4. Inventory coast.
5. Warehouses, Material handling & Packaging. 6. Marketing / Distribution.
7. Service support activities. EXAMPLE
1. Maruti car : In – Bound
Engine - From Japan Suzuki
Carburetor - Local Suppliers Steering Assay - Local Suppliers
Chasis - Maruti
Sheet Metal - Maruti
Electric Fittings - Local Suppliers
Tyres - MRF
Bearings - SKF
Fans - Local Suppliers
Meters - Local Suppliers
Painting - Maruti
Out – Bound
DHL - Courier (special trolley Trucks) Gatti - “ “ “ Railways - Long Distance
Export - Sea Delhi Distributor - Road
Factory
. Cars move on RAILS , each assembly line is called “LINE” where right from chasis thewhole assembly is done.
. Road test and performance testing is done for each car.
. All tools are Hydraulic and hence no extra pressure on any nut or bolt. . Strict Quality control / Quality Assurance
. 6-5 implementation (not more than 5 cars should go for re-work – exsisting 25 cars out of about 1500 cars / day.
Customer Services
1.
Delivery as per schedule, (Since 6- σ is under implementation car is taken not to get Non-conforming report.2.
Excellent service support by way of appointing servicing agents (sales & services) like Sai service in Mumbai / Pune doing sales & servicing.3.
avalibility of original spare parts.4.
Value – added service (take packing & forwarding).Logistics & Marketing Interface There are 4 – Ps in the marketing viz.
1.
Price2.
Promotion3.
Product4.
Place1.
Price refer to the time, efforts and money a customer expends to get a product orservice from the standpoint of the selling firm price is the amount of money o firm receives for its products and services. The should cover
. Fixed costs . Variable costs
. Some margine of profit
(Role of logistics) By proper scheduling, planning, and better utilization of transport etc prices can be reduced (eg:- items from China like computer, mobile).
Examples :
1.
Godrej has sub-contracted out-bound logistics to DHL / ELBEE etc.2.
Voltas also has done the same.3.
Camline’s pencil packing at a private factory in Umargaon.4.
HMT Tumkar / ranibug units – Assembly is done by ancillary units in various states.They do not manufacture straps & cases being low skilled operations as compared to producing components.5.
Call-Centres of foreign companies in India.2. Promotion : Needed to (1) Educate customers (2) Attract customers
(3) Making product more visible (4) Offer discount to customers i.e. surf/Arial or Pilsbery Atta (some gifts).
3. Product : A product is the SUMof the attributes that the customer buys.
Logistics takes the responsibility for protecting product attributes through the supply chain. It also covers packing.
. Potato wafers packing (Rs.10 for about 30 chips) . Cots – wool packing for glass items or instruments.
. Product features like more comfort in car (AC, Stereo. Telephone, Safety devices)
4.
Place : Warehouse location, transport to various retail counters in TIME, quickreplacement of stocks etc are the aspects. Examples
1.
Bread distribution2.
Egg distribution3.
Dabbewala distribution4.
Flowerwala distribution5.
Milk distribution / Curd distribution6.
Amul chocolates 7 other products7.
Madecines distribution8.
Watches distribution9.
Some provision distribution – Toothpaste, Cosmetics oils, etc.A product should be available at a right place at the time, at the Right-Quantity, Right-Quality & Right Price.
5.
Psychology : This is new dimension to the 4P’s advocated by the marketing Gurus. The psychology of the customers at Different levels or say of differentNICHE groups is to be understood in order to create the required impact of the advertisement or promotion activities.
Example
If Price is reduced – psychological factor is . Since product is not selling the company has reduced price, but the case may be different we have done cost reduction 7 productivity improvement & desire to pass benefits to the customers.
The importance of 3-C’s in Logistics
The 3-C’s in Logistics & there relationship with each other are as follow
COMPANY COMPETITOR
The source of competitive advantages is initially found in the ability of the organization to differentiate itself in the EYES of the customer
. From its competition
. By operating at a lower cost . Greater profit due to above
In today’s Global competitive market a product will not sell itself either . Based on its BRAND image
. Based on its success today
COMMERCIAL SUCCESSES can be derived from either : COST advantage or
VALUE advantage or BOTH
1. Cost Advantage
Cost Advantage can be gained by productivity improvements or increasing the sales & market share. The expenses or costs are distributed over the sales volume & the more the sales – lesser are the cost (cost per unit).
All costs will decline at a given rate as volume of sales increased . Cost in the logistics can be reduced by
CUSTOMERS
ASSETS &
UTILISATION UTILISATIONASSETS &
VALUE VALUE
COST DIFFERENTIALS
a) Saving in transportation costs – outward inward b) Saving in operating costs
c) Saving in post production costs viz. warehousing, distribution etc. These savings can be passed on to customers.
Example
1.
Cost of Arial and Surf came down.2.
Cost of TV / DVD recently came down (DVD 1 Lacs to Rs.30,000)3.
Cost of gold plating on Watches came down due to change in processing viz . Instesd of chemical processing called electronic – present technology is physicalo vapour defisution (cost / straps from Rs.180 to Rs.50 for gold plating).2. Value Advantage
“Customer don’t buy product – they buy BENEFITS
Hence number of advertisements tell us about what that product can deliver in addition to its basic function.
Example : Surf / Arial not only washes clothes but REMOVE STAINS
. Ayush Shampoo – not only acts as cleaning agents but strengthen hair. . Watch not only shows time but also has features like Date, Day, stop-watch function etc.
. Some cars – more LEG space etc.
Therefor companies manufacture number of models for Niche market i.e. requirement of a section of people.
Example
. Maruti – 800 -General Public
. Maruti – Zen -For slightly more comfort requirement . Maruti Esteem -High class people
. Maruti Omni / Van -Specific use Marrayes Value Advantage is gained by
1) Delivery service 2) After sales-service 3) Financial package
4) Technical support (say upgrading of computers)
For value advantage a customer will be ready even to PAY MORE TO BRIEF 3C’s in logistics
1. CUSTOMER -Needs benefits from the products in addition to its primary function at the same cost or even paying slightly more. 2. COMPETITOR -Always tring to be ONE-UP & hence requires productivity and cost improvements.
3. COMPANY -Assets / Facilities utilization
-Having a cutting edge Better Technology Process / R&D
1. Fridge a) Double door
b) Auto defrosting
c) Front door water outlet etc. 2. TVS are tooled up with a) DVD / CVD Connections b) Multi – channels
c) Act as computers 3. Telephones with
a) caller identification
b) Storage of some phone numbers c) Hand set
d) Call waiting features e) Call transfer etc. 4. TITAN Watches
a) Titan show rooms – general class
b) Tanishq show rooms : exclusive costly watches & jewellery.
Competitive Advantage
Effective logistics management can provide a major source of competitive advantage. The bases for successes in the marketplace are numerous, but a simple model has been based around the three C’s – Customer, Company & Competitor. The source of competitive advantage is found firstly in the ability of the organization to differentiate itself, in the eyes of the customer, from its competition and secondly by operating at a lower cost and hence at greater profit.
Seeking a sustainable competitive advantage has become the concern of every manager who realizes the marketplace and it is no longer acceptable to assume that the goods will sell themselves. An elemental, commercial success is derived either form a cost advantage or a value advantage or, ideally both. The greater the profitability of the company the lesser is the production of cost. Also a value advantage gives the product an advantage over the competitive offerings. Successful companies either have a productivity advantage or they have a value advantage or maybe a combination of the two.
There are two main vectors of strategic direction that need to be examined:
-♦ PRODUCTIVITY ADVANTAGE
In many industries there will be a competitor who will be a low cost producer and will have greater sales volume in that sector. This is partly due to economies of scale, which enable fixed costs to spread over a greater volume but more particularly to the impact of the experience curve.
It is possible to identify and predict improvements in the rate of output of workers as they become more skilled in the processes and tasks on which they work. Bruce Henderson extended this concept by demonstrating that all costs, not just production costs, would decline at a given rate as volume increased. This cost decline applies
only to value added, i.e. costs other than bought in supplies. Traditionally it has been suggested that the main route to cost reduction was by gaining greater sales volume and there can be no doubt about the close linkage between relative market share and relative costs. However it must also be recognized that logistics management can provide a multitude of ways to increase efficiency and productivity and hence contribute significantly to reduced unit costs.
♦ VALUE ADVANTAGE
It is a cliché that customers don’t buy products they buy benefits. These benefits may be intangible i.e. they relate not to specific product features but to such things as image and reputation. Unless the product or service that we offer can be distinguished in some way from its competitors there is a strong likelihood that the marketplace will view it as a ‘commodity’ and so the sale will tend to go to the cheapest supplier. Value differentiation can be gained in numerous ways. When a company scrutinizes markets closely it frequently finds that there are distinct value segments. In other words different groups of customers attach different levels of importance to different benefits. The importance of such benefit segmentation lies in the fact that often there are substantial opportunities for creating differentiated appeals for specific segments. Adding value through differentiation is a powerful means of achieving a defensible advantage in the market. Equally powerful as a means of adding value is service. Increasingly it is the case that markets are becoming more service sensitive and this poses a challenge in management of logistics. It is important to seek differentiation through means other than technology. A number of companies have responded to this by focusing upon service as a means of gaining a competitive edge. Service in this context relates to the process of developing relationships with customers through the provision of an augmented offer. This augmentation can take many forms including delivery service, after sales service, financial packages, technical support and so on.
This matrix is a useful way of examining the options available for value and productivity advantage: SERVICE LEADER COST & SERVICE LEADER COMMODITY
MARKET LEADERCOST
In commodity market situations where a company’s products are indistinguishable from their competitors’ offerings the only strategy is to move towards being a cost leader or towards being a service leader. Often the leadership route is not available. This particularly will be the case in a mature market where substantial market share gains are difficult to achieve.
Cost leadership strategies have been based upon the economies of scale, gained through greater volume of sales. This is why market share is considered to be so important in many industries. This cost advantage can be used strategically to assume a position of price leader and make it difficult for high cost competitors to
