DEFINITION OF LOGISTICS

According to the Council of Logistics Management (CLM) “Logistics

is the process of planning,
implementing and controlling the efficient and effective flow of goods, services and
related information from point of origin to point of consumption  in order to meet
customer requirements”.

OPERATING OBJECTIVES OF LOGISTICS                                       

1. Rapid Response:  Rapid response is concerned with a firm’s ability to satisfy customer’s
requirement in a timely manner. Instead of stocking the goods and supplying on demand,
orders are executed on shipment-to-shipment basis. Here IT helps to postpone the logistical
operations to the latest possible time and then execute rapid delivery as when needed by
customer.
2. Minimum Variance:  Variance is any unexpected event that disrupts system. Logistical
operations are disrupted by events like delays in order receipt, disruption in manufacturing,
goods damaged at customer’s location and delivery to an incorrect location etc. Traditional
solution to deal with variance was to keep safety stock or use high cost transportation. Such
practices were expensive and risky and thus have been replaced by information technology
to achieve positive logistics control.
3. Minimum Inventory:  The objective of minimum inventory involves asset commitment
and inventory turnover. Asset commitment is the financial value of inventory developed
throughout the logical system and inventory turnover is the rate of inventory usage over
time. The objective is to reduce the inventory without sacrificing customer satisfaction.
4. Movement Consolidation:  One of the most significant logistical costs is transportation.
Transportation cost depends on type of product, size of shipment and distance. Movement
consolidation means grouping small shipments together in order to reduce transportation
cost.
5. Quality Improvement:  Logistics is a prime part of developing and maintaining
continuous TQM improvement. If the quality of product fails, logistics will have to ship the
product out of customer’s premises and repeat the logistical function again. This adds to
cost and customer dissatisfaction.
6. Life-Cycle Support:  Life cycle support is also called cradle-to-cradle logistical support. It
means going beyond reverse logistics and recycling to include the possibility of after sale
services, product recalls and product disposal. This means that firms must consider how to
make a product and its package (cradle) and the how to remake and reuse them (to cradle).
E.g. Cold drink industries use their glass bottle again and again whereas the cans are reused
in making pf paper dishes.

TYPES OF LOGISTICS

1. Reverse Logistics (May 06,07)

Reverse logistics is also known as Product Recall. It may be defined as a process of moving goods
from their place of use, back to their place of manufacture for re-processing, refilling, repair, and
recycling or waste disposal.

Reasons for Reverse Logistics

1. Rigid quality standards- it is critical in case of contaminated products, which can cause
environmental hazard.
2. Rigid laws prohibiting unscientific disposal of items
3. Rigid laws making recycling mandatory
4. Transit damage – e.g. leaking containers containing hazardous material.
5. Product expiration.
6. Erroneous order processing by supplier
7. Exchange of new product for the old ones.
8. Return for repair or refill.

Drivers in Reverse Logistics (Nov. 03, May 04)

The success of reverse logistics depends upon the efficiency of following subsystems:

1. Product Location: For product recall it is necessary to identify the product location in the
physical distribution system of the firm. It is difficult in case of consumer goods but easier in
case of industrial goods.
2. Product Collection System:  After the product location is identified, product collection is to
be done through company’s field force or third party.
3. Recycling / Disposal Centers:  This may be company’s plant, warehouse or any other
location. Called back products must be inspected before recycling or disposal etc.
4. Documentation System:  Proper documents should be maintained at each level, this
would help in tracing the product location.

2. Inbound Logistics (Nov. 06)

 All the activities related to the material movement till the dispatch of the products out of the
factory gate are called as inbound logistics activities.
 Creation of value in the products depends upon availability of inputs on time. Making
available these inputs on time at minimum cost is the essence of Inbound Logistics.
 Activities of a procurement performance cycle come under the scope of Inbound Logistics.
They are transportation during procurement operation, storage, handling and overall
management of inventory of inputs.

3. Outbound Logistics (Nov. 06)

 All the activities in which the value added goods are to be made available in the market for
customers are called as outbound logistics activities.
 Success of the firm depends upon the supply of products to the customer on time. Supplying
the products of firm at marketplace at minimum cost is the essence of Outbound Logistics.
  Activities of distribution performance cycle come under the scope of Outbound Logistics.
They are order management, transportation, warehousing, packaging, handling etc.

4. Third-Party Logistics (3PL)

In order to keep the costs of inbound and outbound logistics activities under control, an outside
agency appointed to perform these logistics functions is called “Third Party Logistics”.

5. Forth-Party Logistics (4PL) (Nov. 06)

Forth Party Logistics is a complete outsourcing of manufacturing and logistics functions including
selection of Third Party service provider.

Need for 4PL:

1. Ever-increasing customer requirements.

2. Competitive and complex market scenario
3. Rising globalisation, liberalization and privatisation.
4. Rising accessibility of supply chain technology.
5. Inclination of companies to enter into higher margin business.

Services provided by 4PL

1. Procurement and storage of materials.

2. Manufacturing of products.
3. Selection of 3PL companies
4. Transportation and warehousing management
5. Collection of payment and cash flow management
6. Risk management and insurance.
7. Sharing of information, IT solution.

LOGISTICS MANAGEMENT IN INDIA IN TODAY’S

CONTEXT              (Nov. 01)
Logistics in Indian Business Environment (May 04)

 Liberalization opens our door to competition.

 Global business has long supply & distribution lines.
 Changing Indian customer, aware, demanding and less brand loyal
 Competition ensures that product differentiation in terms of quality is difficult.
 Product life cycles are shrinking
 Our markets are shifting from sellers to buyers
 Many consumer products are moving into commodities market
 In India, large distances separate production and consumption centers. Essential
commodities have to travel from Food Corporation Warehouses to consumers through PDS.
  Still Logistics performance in India has not been impressive – Fruits and vegetables are
grown at various places but do not enjoy access to market.

LOGISTICS IN THE GLOBALISATION

Logistics functions are same domestically and globally but differ in four D’s i.e. distance, documents,
diversity in culture and demand of customer. In the global logistics distances are longer,
documentation is more extensive, customer demand varies to satisfy cultural differences within
both, countries and regions. Developing strategies to respond to the 4 D environment is the global
challenge for logistics management.

There are some factors that facilitate globalisation and necessitate global logistics and also some
barriers that continue to impede global logistics. Logistics management must balance the cost of
overcoming these barriers with the potential benefits of going global.

Forces Driving Globalisation of Logistics

1. Economic Growth:  After WWII there was a growth in industrial sector of developed
countries and their manufacturing and logistics productivity increased. This forces the firm
to expand their marketing into developing nations. Such expansion requires the integration
of global manufacturing with marketing through logistics.
2. Supply Chain Perspective:  Firms traditionally sought logistical control as many
essential activities as possible internally, which resulted in private warehouses and
transportation. Such privatisation increased the capital and assets to support logistics
operations resulting in decline of Return on Investment and hence the concept of
outsourcing and supply chain emerged during 1980s.
3. Regionalisation:  Traditionally trade and transportation across the political borders of
countries requires political formalities, which adds to the logistics cost without any value
addition to the consumer. Regionalisation in the form of trade associations such as EU,
NAFTA and SAARC etc. removed such barriers and facilitates global logistics.
4. Technology:  Mass communication and information technology exposed international
consumers to foreign products, thus stimulating convergence of global needs and
preferences. This promotes global marketing and global logistics.
5. Transportation Deregulation:  Initially there have been restrictions for international
transportation ownership and operating rights e.g. foreign carriers could not operate
domestically, steamship lines could not own land based transport like motor or rail carriers
etc. but such restrictions have been removed in most of the countries.

Barriers to Global Logistics

 1. Marketing Barriers:  This includes (i) entry restrictions by placing legal or physical
barriers on importing (ii) poor information regarding market size, demographics and
competition (iii) pricing fluctuation and tariff barriers.
2. Competition:  Different rules in different countries concerning competitive governance  
also serve as global logistics barriers.
3. Financial Barriers:  This includes (i) difficulties in forecasting in the global environment
(ii) institutional infrastructure barriers result from differences in services offered by banks,
insurance firms, legal counselors etc.
4. Distribution Channels:  Lack of infrastructural standardisation such as differences in
transportation and material handling equipment, warehouse and port facilities,
communication system etc. also serves as global logistics barriers.

Importance of Logistics Decisions in improving the profitability of organisation (May 05)

CHAPTER 5 – OVERVIEW OF LOGISTICS FUNCTION

MRP 1 (Nov. 01, May 05)

Material Requirement Planning is an integrated approach to the inventory management, taking into
the account purchase and production programme. This is software that converts the Master
Schedule to the requirement of raw material, components, subassemblies, etc.

Structure of MRP1

– Three types of information are fed to the computer.

1. Master Schedule – This is made up from sales forecast by marketing department and the
actual orders already received by the company. It indicates which product is required to be
delivered to the customer and when.
2. Bill of Material – This is prepared from product design documents
3. Inventory details – of each item

– The MRP software processes the data and releases the output for ready use of the management in
the following way:

1. For purchase components it releases Purchase Request, Purchase Order etc in the form of
soft copy
2. For in-house manufactured components it releases Production Order
3. It prepares different types of reports for the use of management as required

Benefits of MRP1

1. All the documents like purchase order, production order get ready as per required time.
2. All information is ready on the screen at any time, which is duly updated.
3. Making changes manually in Master Schedule is difficult task; this is done by MRP easily and
accurately.
 4. It prepares the reports related to inventory status, production outputs, latest sales figures.
5. MRP calculates and maintains an optimum-manufacturing plan, which will reduce cash flow
and increase profitability.
6. Reduced inventory levels
7. Reduced shortage of components
8. Reduced overtime on shop floor and offices
9. Improved shipping schedule
10. Improved production schedule
11. Improved calculation of material requirements
12. Better manpower planning on shop floor
13. Reduction in lead time
14. Less scrap and rework

Closed-Loop MRP:  When MRP extended to include feedback from vendors and production
operations it is called Closed-loop MRP

MRP II (Manufacturing Resource Planning):  When closed-loop MRP extended to include

financial accounting, personnel, engineering and marketing information, it is called MRP II

DRP (Nov. 01 03, May 05)

Distribution Resource Planning is concerned with the distribution of material, warehouses, and
transport arrangements. It is logically evolved from MRP and hence it is more recent concept. DRP
needs demand forecasts for each warehouse and their current inventory level. MRP is concerned
with inbound logistics whereas DRP is concerned with outbound logistics activities.

Benefits of DRP

1. Reduce distribution center freight costs resulting from coordinated shipments.

2. Reduce inventory level.
3. Coordinate inventory with organisational functions.
4. Decrease warehouse space requirements because of inventory reduction.
5. Improve service level by on time deliveries.

MRP DRP
Guided by production schedules Guided by customer demand
Under control of the firm Not under control of the firm
Operates in dependant demand situation Operates in independent demand situation
Coordinates scheduling and integration of Coordinates demand between outlets and
materials into finished goods supply sources
Controls inventory until manufacturing and Controls inventory after manufacturing and
assembly is complete. assembly of finished goods

CHAPTER 6 – LOGISTICS STRATEGY AND PLANNING

Why has logistics recently been receiving more attention as a strategic function of the organisation?
(May 2006) [61 of reference book]

CHAPTER 7 – CUSTOMER SERVICE (CS)

Definition: Customer Service is defined as a process of providing significant value added benefits

to the supply chain in a cost-effective way.

ELEMENTS OF CUSTOMER SERVICE (Nov. 01, 03, May 05, 06)

A] Availability                                                                                                           *(Nov. 06)

Availability is the capacity to have inventory when it is desired by a customer. The most common
practice to achieve availability is to stock inventory in anticipation of customer order. Availability is
based on following three performance measures:

1. 1.  Stockout Frequency:  Stockout frequency is a measure of how many times demands
for a product exceed its availability. The aggregation of stock outs of all products indicates
how well a firm is able to provide basic service commitments.
2. 2.  *Fill Rate:  Fill rate measures the magnitude of stockouts over time. E.g. if a customer
orders 50 units and only 47 units are available, the order fill rate is 94 % (47/50). Just because
a product is out of stock does not mean that a customer requirement is going unsatisfied.
Before a stockout affects service performance it is necessary to forecast customer
requirements then to identify the product unavailability and to determine how many units
customer wanted. Stockout frequency and fill rate are inversely related through order
quantity. i.e. if a firm places larger order the stockout frequency will be less and the
expected fill rate will be higher.
3. 3.  Orders Shipped Complete:  It is a measure of time when a firm received the entire
inventory ordered by a customer. It indicates the potential times that customers will receive
perfect orders.

B] Operational Performance

1. Operational Speed:  Performance speed is the interval between placement of order and
shipment arrival. Depending upon the logistical system design, the speed can be as short as
a few hours or as long as several weeks. In critical situation service can be performed in a
few hours by special delivery or on overnight basis. But every customer does not need
maximum speed if it results in increase in logistics cost.
2. Operational Consistency:  Consistency refers to a firm’s ability to perform at the
expected delivery time. When a form fails to be consistent it forces customers to carry extra
safety stock to protect against possible late delivery.
3. Operational Flexibility:  Flexibility refers to a firm’s ability to handle extraordinary
customer service requests. The events that requires flexibility are:

–          Modifications in basic service arrangements

–          Product modification

–          Product introduction

–          Product phaseout

–          Product recall

–          Disruption in supply

C] Reliability

Reliability refers to logistics quality i.e. ability of firm to comply with levels of planned inventory
availability and operational performance. Reliability also includes firm’s capability to provide
accurate customer information regarding logistical operations and order status.

OBJECTIVES / IMPORTANCE OF CUSTOMER SERVICE (May 06)

1.      Maintaining customer loyalty and level of

satisfaction.
1. Receiving repeat orders from customers.
2. To win new customers and keep existing customers
3. An edge over competition

CUSTOMER RETENTION

Once a customer is own by a company, it must be retained such that customer keep coming again
and again. This depends on the Customer Service. For that the company has to motivate employees
and to reinforce the service concepts with top management.

Advantage:

1. Retaining more customers result in higher profit.

2. The cost of retaining customers is much less than to acquire them.
3. It helps in strengthening and expanding customer base.
4. If a regular customer were lost, then it would cost very heavily to generate new customer.

Methods:

1. Offer only quality services and products

2. Demonstrate the use of product or services
3. Provide responsive customer service
4. Share testimonials of customers with other potential customers
5. Educate the customer about the market and value of the business
6. Invite customer’s opinion and feedback on products or services
CHAPTER 8 – TRANSPORTATION AND INFRASTRUCTURE

INTRODUCTION

Transportation is an essential and major sub function of logistics that creates time and place utility
in goods. Transportation management covers the area of Shipment Scheduling / Routing, Frei1ht
Cost, Carrier Selection, Shipment Tracking and Parcel Management. It helps us to make the best use
of available resources and keeps informed on all transportation process.

COST STRUCTURE *(Nov. 01, 02)

Basically there are two cost contents involved in transportation process:      (Diagram 79)

1. Fixed Cost

Fixed cost is the expenses related to the procedural part like cost of documents, salaries of
personnel, rent of the office etc. As per the product needs and the environments, loading and
unloading charges are included in fixed cost.

1. Variable Cost

Among all logistic factors variable cost consumes main expenses. It concentrates on the product
related and market related aspects:

i) * Product related aspects are the physical attributes of products, like:

– Density – e.g. density of sand is more than Cotton

– Size / Shape – Transportation cost per unit weight decreases with the size of the consignment.

– Space filling capacity – e.g. space-filling capacity of iron flat is more than that of chairs or tables.

– Difficulties in handling – e.g. product like electronic items like TV are difficult to handle since they
are easily get damaged.

ii) * Market related aspects are:

– Distance to be traveled to customer – The cost decreases with increase in the distance.

– Government regulations, Octroy, Road Taxes, Tolls, etc.

– Intra-mode / Inter-mode

– Freight Traffic

– Domestic / International Transport

– Season Effect

FUNCTIONS OF TRANSPORTATION (Nov. 06)

 1. Product Movement: Transportation facilitates the movement of raw material, semi-
finished items, WIP, finished goods, packaging material, rejected material.
2. Product Storage: Transportation provides temporary storage in stationary vehicles or
Vehicles kept moving on a circuitous route. Though the product storage is expensive in a
transport vehicle, but this is adopted in case of:
1. when unloading and loading is more expensive than storage.
2. when storage space is limited.

SELECTION OF CARRIERS / MODAL CHARACTERISTICS (Nov. 04, May 07)

In selection of a transportation mode, the transportation

managers consider the following criteria.
1. Cost: It includes freight charges, warehousing, buffer stick, broker fees, custom charges
octroy etc. Generally cost per mile is considered which is should be economical.
2. Transit Time:  It is the time from the shipment of goods to the receipt of goods at the
destination. It should be as less as possible.
3. Speed: Methods of working for the delivery of goods to the customers place should ensure
the on time delivery.
4. Safety:  Safety of goods at every level from start to the end of delivery should be ensured.
Proper packaging should be done to avoid any damage to quality or quantity of goods.
5. Claims Record: Claims against damages, pilferage or theft of goods should be available.
Though the supplier gets money back but the customer remains unsatisfied in such cases.
6. Responsiveness:  Transporter has to respond the changing needs of the supplier and he
should be able to handle various products.
7. Capability:  Transporter should be in a position to deliver the goods at any remote areas.
He should have large number of geographic service points.
8. Accessibility: Transporter should be easily accessible by providing door-to-door pick up
and delivery.
9. Reliability: It is the meeting of schedule on time as per requirement of the customer.
Faster the mode reliability increases, but it has to be weighed against cost.

MODES OF TRANSPORTATION (May 06)

1. Airlines

Air transport is mainly used for international transport and in emergency rather than in normal
times.

Advantages:

1. It is the fastest mode of transportation.

 2. Fixed costs are lower than rail or road or pipeline.
3. It brings distant markets closer.
4. It overcomes the hassle and cost of setting up depots and service centers overseas.
5. Full potential of peak seasonal demand can be exploited.
6. Makes test marketing easy – Products can be shipped directly from the factory

Disadvantages:

1. Most expensive – Operating costs are highest.

2. Generally used to transport small volume items.
3. Certain categories of items are not allowed
4. Require secondary mode of transport to deliver to ultimate customer

2. Water Transport
This mode of transportation is the link between countries separated by water. Water transport is
classified into deep-water transportation and inland water transportation on lakes, rivers or canals.

Advantages:

1. Water transport has low capital costs and low operating costs.
2. Heavy and bulk goods of large quantities are transported by this mode.
3. Private or ‘for hire’ shippers available in water transport.

Disadvantages:

1. Water transport is limited due to availability of harbor.

2. Water transport is the slowest mode of transportation.
3. Require secondary mode of transport to deliver to ultimate customer.
4. Deep-water ships designed for ocean and lakes are limited to shallow-water ports.
5. Shallow water vessels like diesel-towed barges are flexible but are limited by their range of
operations and speed.

3. Railways

Advantages:

1. Railways is comparatively fastest mode of transport

2. Railways is an inexpensive mode of transportation
3. Railways are suitable for large quantities.
4. Railways provide door deliveries for industries.

Disadvantages:
 1. Unreliable mode  – especially for high value goods and directly usable consumer goods.
2. Railways lack flexibility of high-speed delivery.
3. Railways require modal combination alongwith roadways.
4. Rail network needs a high capital investment due to right of way, switching yards, terminals.

4. Roadways

Advantages:

1. Speedy – Deliver the goods directly to the consignee very fast.

2. Highly flexible – handling different types of goods
3. Ultimate mode – consignment reaches the doorsteps of the customer.
4. Low capital cost as compared to railways.
5. Private or ‘for hire’ shippers available.

Disadvantages:

1. Higher operating costs – due to fuel requirement and higher labor requirement.
2. Occasional fuel shortages – leads to delay in delivery.
3. Strikes of carriers – due to disputes with government making the transportation idle.
4. Limited availability of trucks poses a constraint.
5. Octroi – posts are notorious for delays and harassment of carriers.
6. Restrictive permits for licenses – imposed by the government all over the country.

Pipeline                                                                                    
                                   (Nov. 01)
Pipeline mode of transportation facilitates the movement of liquids like oils; crude petroleum
products and water etc. In India more than 5,000 km of pipeline exists for crude and petroleum
products. Slurries, gases, vapors and solids in powder form are also transported in pipelines.

Advantages:

1. Pipelines are reliable mode – pilferage and loss of product is not possible.
2. Pipelines have low energy consumption.
3. Pipelines being under ground, space occupation is minimal.
4. Pipelines operate all the time except when it is shut down for maintenance.
5. No need to bring back empty container or wagon.

Disadvantages

1. Highest fixed costs – due to lying of pipeline but lowest operating costs.

1. Pipelines are fixed – so the accessibility of product is limited on the rout.

 2. Only liquid commodity can be transported.

INTERMODAL
TRANSPORTATION                                                    (Nov.
03, May 05, 06)
Intermodal transportation is the use of more than one mode of transport to move a shipment to its
destination. Intermodal movements combine the cost and service advantages of two or more
modes in a single product movement. Benefits of long haul, short time & flexibility are optimized for
achieving overall cost reduction

Depending upon the type and amount of goods, time of delivery, and prices following three
Intermodal combinations are available:

1. Piggyback:  It is coordination between railways and road transport. It is also called as TOFC
(Trailer on Flatcar) or COFC (Container on Flatcar). In piggyback the motor carrier trailer
placed on rail flatcar, which moves the trailer by rail for a long distance. Then the motor
carrier moves the trailer for short distance for deliveries. Here the placement of trailer on a
railcar can lead to damages.
2. Fishyback:  It is coordination between waterways and road transport. In fishyback the
truck or trailer rides on the ship for small portion of its journey. This service is provided in
coastal waters between Atlantic and Gulf ports.
3. Birdyback:  It is coordination between airways and road transport. In birdyback the major
portion of journey is covered by airways then the cargo is transported by trucks or trailers.
4. Others: Water and railways, air and railways, air and waterways, pipeline and water,
pipeline and roadways etc.

INALND CONTAINER DEPOTS (ICDs)

ICDs are dry ports at a distance far away from the shoreline and handle all the import export
formalities. This a large warehouse where exporter books his cargo and completes all export
formalities. Then ICD moves the containers to natural seaport. The customs department, shipping
companies, handling agencies, banks, customs house agents and clearing and forwarding agents are
all based at the ICDs.

Advantages / Uses

1. Connect major ports to hinterland i.e. land deprived of natural deep-water ports because of
geography.
2. Handle containers from road and rail to a container yard.
3. Performing activities like weighing, inspection of scales, damages and safety stickers.
4. Facilitate customs clearance and export import formalities.
 5. Increase the export potential of industries in the hinterland and also simplifies import of
goods by hinterland.
6. Decongest major ports.

JNPT is directly connected to the following ICDs:

Ludhiana         Kerala              Nagpur

Wadibunder Chinchwad      Bangalore

Chennai Jaipur               Jodhpur

Baroda                        Mirage             Kandla

Mulund           Delhi               Sabarmati

Hyderabad      Pune                Visakhapatnam

Muradabad      Kolkata Pitampur

TRANSPORTATION NETWORK OPTIONS

1. 1. Direct Shipping – From shipper directly to retailers.

2. 2. Direct Shipping using Milk Runs – Single supplier to a number of retailers, deliver like a
milkman.
3. 3. All Shipping via CDC  – Suppliers send the supplies to Central Distribution centers and
distribution center caters the needs of retailers.
4. 4. All Shipping via CDC Using Milk Runs – Suppliers send the supplies to CDC and from
CDC to large number of suppliers.
5. 5. Tailored Network – Tailor made network as per the company needs. One model for
some logistical mission and another model for some other mission.

Milk Run
Milk Run is a transportation network, in which Suppliers send the supplies to CDC and from CDC to
large number of suppliers. Milk Run reduces out bound transportation costs by consolidating small
shipments.

CROSS DOCKING (Nov. 02)

Cross Docking is a new logistics technique used in the retail and trucking industries which means
receiving goods at one door and shipping to the other door almost immediately without putting
them into storage.

Advantages / Objectives

1. It helps to reduce operating costs by eliminating handling and storage of products.

2. It helps to reduce inventory level by direct shipment to the customers.
 3. It helps to increase sales by providing on time delivery to the customers.
4. It encourages the electronic communication between the supplier and retailers.

TERMINAL DELAYS

Delays which take place at terminals due to documentation problems, congestion, poor unloading
facilities etc. Influence vehicle turnaround time. Adds cost to transportation, as vehicle is unutilized.
E.g. at sea port or airport cargos can get stuck.

Hidden Cost of Transportation  (May 05)

CHAPTER 9 – TRANSPORTATION TO WAREHOUSES

Unbalance Transportation Problem (May 05)

A transportation problem is balanced if the rim requirements are same, i.e. the sum total of the
plant capacities is equal to the sum total of the market requirements. But in most of the practical life
problem both are not same, i.e. it is unbalanced transportation problem. In this situation, the
unbalanced problem is to be balanced for solution purpose by introducing a dummy plant or a
dummy market as the case may be.

CHAPTER 10 – LOGISTIC INFORMATION SYSTEM (LIS)

Definition of LIS

LIS is an interacting structure of people, equipment and procedures that together make relevant
information available to the logistics manager. LIS is a part of Management Information System.

Objectives of LIS
1. Obtaining correct and prompt information.
2. Maintaining and updating the information collected.
3. Communicating the information to all the concerned as and when required.
4. Taking proper decisions at all levels in the organisation.
5. Supporting planning function.

Importance of LIS

1. LIS is a key element to develop logistical competence.

2. LIS integrates various activities of logistics.
3. LIS is one of the three pipelines managed by logistical management.
4. LIS is important to customer service.
5. LIS underwent revolutionary change due to changes in technology.

Primary Activities of LIS

 1. Receiving, analysing, processing and storing related information within organisation.
2. Communication of data to the decision makers.
3. Communication of information to the supplier, service providers and customers.
4. Receipt of feedback from external sources (supplier, service providers and customers)

Information Functionality

The organisation has different functional levels. Each level has different needs of information.

1. Operating level – It is the lowest level. Generally data gets generated here which is
transferred to further level to take decision in the form of information.
2. Control level – Here the efforts are to be taken to improve efficiency of the operating level by
analysing the information.
3. Decision level – Here the manager has to evaluate the information to see the operations and
customer needs are equalised
4. Policy level – Manager has to decide the policy on the basis of factors warehouse,
transportation system etc.

Electronic Data Interchange (EDI) (Nov. 06)

EDI is the electronic, computer-to-computer transfer of standard business documents between

organisations. EDI is extensively used in ILIS (Integrated Logistics Information System) to enhance
the speed, timeliness and accuracy of the information. EDI has replaced the traditional transmission
of documents such as mail, fax etc.

Benefits of EDI

1. Greater accuracy due to reduction in manual processing.

2. Faster speed in order processing.
3. Reduced clerical efforts in data entry, filing, mailing and related tasks.
4. Reduced inventory due to reduced order cycle time.
5. Increased productivity though faster information transmission.
6. Improved channel relationships by reducing number of individuals involved in data entry.
7. Decreased operating cost by reduction of labour and material cost associated with paper
work and telephone fax expenses.
8. Increased ability to compete internationally

Strategic Role of IT in Logistics Management (Nov. 04, May 07)

CHAPTER 11 – LOGISTIC PLANNING PROCESS

Role of Planning in Logistics Management (Nov. 02)

 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 framework through
which needs of the marketplace can be translated into a manufacturing strategy and plan.
 To match the changing environment in the logistics due to the changes in the markets,
competitors, suppliers and technology, there is a need for a systematic planning.

CHAPTER 12 – FACILITIES LOCATION DECISIONS

Factors for Selection of Location:

1. Availability of Land
2. Manufacturing Facility
3. Taxation and Regional Concession
4. Access to Transport
5. Power, Fuel, Water
6. Climate
7. Availability of Workforce
8. Union Activities
9. Political Pressure
10. Bank and Finance Facilities
11. Raw Material
12. Safety and Social Security
13. Supporting Industries
14. Market Site
15. People Culture and Site

CHAPTER 13 – INVENTORY CONCEPT

DEFINITION OF INVENTORY
Inventory may be defined as ‘usable but idle resource. Inventory management is the job basically
done for maintaining the stock.

NEEDS OF INVENTORY
1. Smoothing out irregularities in supply: Inventory of raw materials provide a buffer
to overcome the problems of uncertainties in supplies such as delayed deliveries and supply
of short quantities by vendors.
 2. Dealing with uncertainty of demand:  The customer demand may increase suddenly,
in such case an inventory of finished goods will act as a buffer against the uncertainties in
demand.
3. Buying or producing in batches: When the demand for a good does not require its
continued production, it is produced in batches. Thus during the period when the good is
not being produced, demands are met from the inventory which is accumulated from the
batch production.
4. To meet seasonal demand: When the demand is seasonal it may become economical
to have inventory during period of low demand to ease the strain of peak period demand.
5. To take quantity discount: Inventories may also be built up take advantage of price
discounts, as hedge against anticipative price rise in the future.
6. To maintain continuity in production process: It is necessary to maintain in-
process inventories or pipeline inventories at different stages in a manufacturing process to
continue production process smoothly without any work stoppage and delay.
7. Stock built up for Scale of economy: Inventories may also be maintained to get the
economy of scale so that total cost due to ordering, carrying and backlogging are minimized.

TYPES OF INVENTORY

1. Raw Material Inventory

Raw Material ITR =    Annual use of RM

Average RM

2. Work-in-Process Inventory

Work in Process ITR = Cost of Manufacture

Average WIP

3. Finished Goods Inventory

Finished Goods ITR =            Cost of Product Sold Yearly

Average Inventory of Product at Cost

4. Spares and Other Indirect Materials

PIPELINE INVENTORY (Nov. 01)

In any manufacturing organization the material undergoes different stages of processing from the
supplier place to the buyer’s place. These stages are called pipeline. There is no problem when
material moves from one department to another, but material waiting anywhere is not good. Indian
industries have longer pipeline, as the organization is more sophisticated. Longer the pipeline,
longer the time material waits. The value is added on the material only at stages where it is being
processed, but no value is added where it waits. So it is referred as waste.
Storage of material at any stage, inspection of any kind, packing, rejection, rework and lead-time etc.
are the operations to be eliminated. That is exactly done in the process of JIT. These activities add to
the cost of product and not to the value of the product. The customer is not willing to pay for these.

In the pipeline there are two types of periods involved:

1. Period in which the material is under the process on machine. Value addition activity.
2. Total period when material is kept in any form / place in the organization.

The ratio of B to A should be 1, which is ideal, but it may be difficult.

LEAD TIME (Nov. 04, May 06)

Lead Time is an interval between placement of order and delivery of material. It is a measure of
logistical performance. Logistic manager should ensure minimum lead-time so that the material
arrived as soon as possible. Local supplier needs the shortest lead time while the out of town
supplier requires much longer lead time. Lead-time also varies from supplier to supplier and even
same supplier will have different lead times for a given item at different times. Variations in lead are
one of the most difficult logistical problems.

RE-RODER LEVEL (ROL) (Nov. 06)

ROL is that inventory level at which an order should be placed to replenish the inventory.

ROL = Lead Time x Average Usage

If safety stock is present then reorder level becomes:

ROL = Safety stock + lead time consumption

SAFETY STOCK (May 07)

Safety Stock is a component of average inventory that takes care of short-term fluctuations in lead-
time and consumption.

Factors Affecting Level of Safety Stock:

1. Value of Item: Safety stock for high value items need be low.
2. Criticality of Item: Safety stock for critical items that affect the business need be high.
3. Lead Time: Longer the lead-time more is the chances of fluctuation and hence more is the
requirement of safety stock.
4. Number of Suppliers: If more number of suppliers is available for an item, there is no need
to keep high level of safety stock, as it can be procured from any alternate source.
5. Availability of substitutes: Lesser safety stock can be kept for items where substitutes are
easily available.
6. Risk of Deterioration: It is better to have low safety stock where the cost of deterioration is
more then the cost of stock out.

Role of Finished Goods Inventories in Physical Distribution System (May 07)

Inventory Functionality and Principles (May 04, Nov. 04)

CHAPTER 14 – ANALYSIS OF INVENTORY

SELECTIVE INVENTORY CONTROL

Each item of inventory has its own criteria of importance, thus depending upon the type and
importance of the inventory there will be variations in the controls employed. This is the selective
control of inventories.

Methods of Selective Inventory Control  (Nov. 04, May 06)

1. ABC Analysis
2. VED Analysis
3. FSN Analysis
4. P&Q System

ABC ANALYSIS (Nov. 02)

Principle: The basic principle of ABC Analysis is “10 percent of items hold 70 percent of value”.

Under ABC Analysis:

 A category items account for 10% of item & 70% of the value.
 B category items account for 20% of item & 20% of the value.
 C category items account for 70% of item & 10% of the value.

Mechanism: The steps involved in ABC Analysis are as follows

1. Calculate the Annual Consumption Value (ACV) for each item by multiplying the number of
units with the unit price of the item.
2. Arrange all the items in the order of descending sequence of ACV.
3. Calculate the cumulative ACV for each item.
4. Calculate the cumulative percentage ACV for each item.
5. Locate the items in the list for which cumulative ACV is 70%. Categories all the previously
listed items upto this item as A category item.
6. Locate the items in the list for which cumulative ACV is 90%. Categories the items listed after
A category item upto this item as B category item.
7. Categories the remaining items as C category item.

Advantages: (Application in Inventory Management)  (Nov. 03)

1. It helps to have a selective inventory control.

2. Safety stocks are kept low for the high value items to reduce total inventory costs.
3. Safety stock is kept much higher for low value items to prevent stock-outs.
Disadvantages:

1. It should be reviewed periodically so that changes in prices and consumption are taken into
account.
2. Importance is given only to the ‘annual consumption value’ of items and not its criticality for
the production.
3. It does not apply to the dependent demand inventory, which is controlled by Material
Requirement Planning (MRP).

VED ANALYSIS
Principle: VED Analysis classify items into three categories depending upon the consequences of
material stock out when demanded.

Under VED Analysis:

 Vital items are the most critical which can cause stoppage of the production, if not available,
hence should be available in stock at large.
 Essential items are quite critical whose non-availability may not adversely affect production;
hence a low stock of essential items should be available.
 Desirable items do not have very serious consequences if not available but can be stocked.

FSN ANALYSIS
Principle: FSN Analysis classify items into three categories depending upon the past consumption
pattern. Inventory policies and models for these three categories have to be different.

Under FSN Analysis:

 Fast moving items are those which drawn frequently from stores.
 Slow moving items are those which drawn only once or twice a year from stores.
 Non-moving items are those which not at all drawn for the past two years from stores.

INVENTORY CONTROL SYTEM (May 06)

1. Fixed Order Quantity System (Q-System)

Here the quantity to be ordered is worked out as the EOQ and the minimum stock level is also
worked out. When the stock in hand reaches this level, an order is placed for q quantity equal to the
EOQ.

Features of Q-System
 1. Reorder quantity is always the same, which is equal to the EOQ
2. Time interval between the orders varies.
3. Reordering is done when the stock in hand is equal to safety stock plus the lead-time
consumption.
4. Minimum inventory will be equal to the safety stock.
5. Maximum inventory will be equal to the safety stock plus order quantity.
6. This system is used for low value items where orders are placed infrequently.

2. Fixed Order Period (P-System)

Here the stock in hand is reviewed at periodic intervals and an order is placed which varies with level
of stock in hand. It is also known as “Periodic Review System” and  “Order Cycling System”.

Features of P-System

1. Review period is decided to minimize the sum of annual procurement cost and annual
inventory carrying cost.
2. Quantity ordered is decided depending upon the stock in hand, so that it will take care of the
requirement till the next review period.
3. The interval between two orders is fixed.
4. This system is used for high value items needing a strict control.

CHAPTER 15 – ECONOMIC ORDER QUANTITY

ECONOMIC ORDER QUANITY (Nov. 02, 04)

EOQ is the technique, which solves the problem of the inventory management. It is the order size at
which the total cost; comprising ordering cost plus carrying cost, is the least.

The cost of carrying inventories is called “Inventory Carrying Cost” and the cost of purchasing and
processing the order is called “Ordering Cost”. One of the most important goals in materials
department is to strike the most economic balance between ICC and OC in determining order
quantity.

The graph shows the relation of the ICC and OC. As the order quantity increases the ordering cost
reduces. While the ICC goes on increasing with increase in the order quantity. But at a certain stage
it is equal to the OC. This is shown by the crossing two lines, this is known as Economic Order
Quantity (EOQ).

Formula
Q = Ö_2BA_

PC

Q = Order quantity
A = Annual consumption

B = Order Cost

P = Price per unit

C = Carrying cost percent

T = Total ordering cost

Assumptions of EOQ  (Nov. 02)

Following assumptions are implied in the calculation of EOQ

1. Demand of the material occurs uniformly over the period at a known rate.
2. Delivery of the materials is instantaneous.
3. Price per unit is fixed and is independent of order size.
4. Ordering cost is fixed and does not vary with the order size.
5. Carrying cost varies directly and linearly with the order size and expressed as percentage of
average inventory cost.
6. Lead-time i.e. interval between placing order and receiving inventory is zero.
7. Materials can be procured in any desired quantity; there is no any restriction of quantity.
8. Materials have fairly long shelf life; there is no fear of deterioration or spoilage.

Limitations of EOQ                                                                                                   (Nov. 02)

1. The assumptions of EOQ may not true in real life, thus limiting the use of EOQ model.
2. Price of material may not remain same throughout the year.
3. There can be delays in real time situation in placing orders.
4. Formula presumes that the usage of materials is both predictable and evenly distributed.
Which may not be possible.
5. Ordering cost varies from commodity to commodity and the carrying cost can vary with the
company’s opportunity cost of capital.
6. Often inventory carrying cost and ordering cost cannot be identified accurately and
sometimes cannot be even identified.
7. Calculation of EOQ is time consuming and expensive. In many cases, the cost of calculating
EOQ exceeds the savings made by buying that quantity

EOQ V/S JIT (May 05)

CHAPTER 16 – INVENTORY CONTROL METHODS

JUST IN TIME
JIT is an organized approach to introduce in manufacturing cycle timelines, quality, productivity,
flexibility, and work simplification and waste reduction. This is a technique from TQM activity.
Basically this is waste control method; it is not the inventory control technique.

TECHNIQUES USED IN JIT

1. Kanban – An Integrated JIT System

Kanban stands for Kan-card, Ban-signal. Kanban concept suggest that a supplier or the warehouse
should only deliver components to the production line as and when needed, so that there is no
storage in the production area. In this system, workstations located along production lines only
produce or deliver desired components when they receive a card and empty container.

Advantages of Kanban Process:

1. It is a simple and understandable process.

2. Provides quick and precise information.
3. Provides quick response to changes.
4. Low costs associated with the transfer of information.
5. Avoids over production.
6. Minimize waste.
7. Delegates’ responsibility to line workers.

2. Group Technology (GT)

GT is a modular manufacturing system, which involves organizing machineries so that related

products can be manufactured in a continuous flow. Here, products flow smoothly from start to
finish, parts do not wait for move. This can be contrasted to a typical production system, where
machines are grouped by function and products move from one function to another and back again.
This results in long waiting times between procedures.

Benefits of GT

1. Reduction in work in process

2. Reduction in over all stocks of material
3. Reduction in overdue orders
4. Increase in out put per employee
5. Simplification of material flow system.
6. Improvement of production and planning control
7. Improvement in material handling

3. SMED (Single Digit Minute Exchange Die)

SMED is a technique for performing setup operations in number of minutes expressed in a single
digit. Mr. Shingo revolutionized the SMED method since 1950 in Japan. E.g. Bottling industries
sometimes spend more than 20% of their planned production time on changeovers. These setup
and changeover times can be reduced significantly when the changeover SMED system is applied.
4. JIDOKA (Automation)

JIDOKA is the concept of adding an element of human judgment to automated equipment. So that
the equipment can identify unacceptable items and the automated process becomes more reliable.
JIDOKA means not allowing problems to pass from one workstation to the next. Such that the
production of a defective part is detected immediately and machine responds by stopping and
requesting help. E.g. In Toyota power loom the shuttlecocks would stick and create defects in the
cloth being produced. The Toyota loom incorporated a simple stopper that was activated by a
sticking shuttlecock. The operator could stop machine when the shuttle would stick.

Objective of JIDOKA

1. Ensuring 100% quality.

2. Preventing equipment breakdowns.
3. Using manpower efficiently.

5. Total Productive Maintenance  (TPM)

In any factory it is necessary to run all the equipments on continuous basis to get maximum out put.
It is found that generally that does not happen. There is loss if any tool or machine is not in use. Due
to any reason like material not available or the machine is not working. In order to avoid such losses
TPM is implemented. For this purpose following steps should be taken.

1. All the reason for the loss of equipment should be avoided.

2. Preventive Maintenance program is to be made.
3. Operator should be given training to maintain his equipment when required.
4. Autonomous maintenance by the operator is to be done.

6. Pokayoke (Mistake Proofing)

Pokayoke invented by Shigeo Shingo in the 1960s. The term “Pokayoke” comes from the Japanese
words “poka”(mistake) and “yoke” (prevent). Pokayoke suggest that people are human and cannot
be expected to do everything like a machine, exactly the same each time. The basic principles of
Pokayoke advocate developing tools, techniques and processes such that it is impossible or very
difficult for people to make mistakes. E.g. a plate that must be screwed down in one orientation only
could have the screw holes in non-symmetrical positions so that it can only be screwed in the right
orientation.

Vendor Managed Inventory (May 07)

Management of inventory is passed on vendor. Purchase order is redundant. Strong mutual stake in
each other’s business is a basic requirement. It is beneficial to both customer and supplier.

Methods for Improving Inventory Management Performance (Nov. 06)

CHAPTER 17 – PURCHANING AND PRODUCT SCHEDULING DECISIONS

PRINCIPLES OF PURCHASE (7-R RULE)

The supply chain management is controlled by the purchase function. The purchase function is
assuming the following seven principles known as 7Rs.

The Rule of seven R’s means, buying the material

1. at right price
2. of right quality
3. in right quantity
4. at the right time
5. from the right source
6. at right place
7. with right mode of transport

– This is basic factor in logistics management.

– It is the link between the production unit and the customer directly or through the warehouses.

– Logistic cost based mainly on customer service. Better service and supplies provides economic
advantage to the customer.

– The supplier’s logistic manager has to balance the high service level that the customer desires and
the belief that the supplier may gain from possible increased sales against the cost of providing that
services.

ORDER PROCESSING CYCLE (May 07)

1. Getting Requisition from User Departments: The department in need of a material

presents a completed requisition form. Such requisition form includes details like
department name, requisition reference number, description of the material, quantity
required, suggested supplier, purpose and the approximate date when the material will be
required, followed by the name and signature of the person preparing and authorizing the
requisition form.
2. Sending Enquiries for Quotations: Purchase department invite suppliers to quote the rates
materials. For this purpose a standard format is used which is similar to a purchase order,
except that words such as “this is only a request for quotation” or “this is a not a purchase
order” are printed so as to ensure that the supplier does not construe the request for
quotation as a firm order.
3. Negotiating with Vendors to Fix the Price: If the presented cost does not match the
company’s budget, the purchasing department can negotiate with the seller price and terms
are met with. Another method that can be adopted here is competitive bid method. This
method is widely used by governmental purchasing departments because of statutory
requirements but also applied by industrial purchasing department.
4. Preparation of Purchase Order and Placing the Order: Having selected the supplier and
the rates agreed, the buyer places the purchase order; expressing terms and conditions. All
orders should be in writing and should be on the buyers purchase order to avoid possibility
 of level difficulties. When order is placed by telephone it is the practice to confirm the order
by sending the supplier a regular order.
5. Follow Up with Vendor: After the order has been placed, the purchasing department has
the responsibility of following-up of the order. Follow-up essentially holds the supplier to his
promise of delivery. A follow-up procedure is must when the costs or risks resulting from
delayed deliveries or non-deliveries are greater than the cost of follow-up procedures.
6. Receipt of Material, Inspection and Storing the Material: The material should be
inspected properly, checked for its quality as well as quantity. In addition to this, it should be
reserved in a proper room in a disciplined manner, so it is easy to recover it at any point of
time.
7. Maintenance of Records: Purchase orders requisition and similar other legal contracts and
documents should be preserved. Since they constitute the authority on which the
purchasing department had taken its actions to a given item.

SUPPLIER SELECTION (May 05)

While selecting the suppliers, the following factors must be taken into account:

1. Lead times and on-time delivery:

 What lead-time the supplier can provide.

 What procedures does the supplier have for assuring on-time delivery?
 What procedures does the supplier have for correcting delivery problems?

2. Price:

 Are prices given reasonable?

 Is the supplier willing to negotiate prices?
 Is the supplier willing to engage in a joint effort to reduce costs by value analysis?

3. Qualities and Quality Assurance:

 What procedures does the supplier have for quality control and quality assurance?
 Problems and corrective actions for quality are considered or not.

4. Product or Service Changes:

 How much advance notification does the supplier give when changes are made in products
or services?
 To what extent does the buyer have inputs regarding changes?

5. Flexibility:

 How flexible is the supplier in handling changes in quantity, delivery schedules and product
or services design changes.
6. Reputations and Financial Stability:

 What is the reputation of supplier?

 How financially stable is the supplier

7. Location:

 Is the supplier located nearby?

SUPPLIER EVALUATION (May 05)

For rating the suppliers, following factors should be considered:

1. Reliability in all Fields:

 Is the supplier reputable, stable and financially strong?

 Is the supplier going alongwith product development?
 Is the supplier’s competitive strength proved by past experience?

2. Technical Capabilities:

 Can he provide assistance as to the application engineering?

 Can he provide assistance as to the analytical engineering?
 Can he provide design assistance?

3. Convenience to deal with:

 Can he help to reduce the acquisition cost?

 Is he qualified to help in solving difficult problems?
 Does he pack his product conveniently?

4. Availability:

 Does he assure delivery in time?

 Are his stocks locally available at short time?
 Can he plan his supply to minimise the inventory.

5. After-Sales Services:

 Does the supplier have a service organisation?

 Is an emergency service available?
 Are parts available when needed?

6. Sales Assistance:
  Can the supplier help in building mutual market.
 Will he recommend our products?
 Does his products enhance the appearance of our products.

OUTSOURCING
Outsourcing is the contracting company’s business process to outside service providers for
increasing firm’s profitability by primarily reducing overall operating cost and focusing on core
competencies.

Objectives of Outsourcing

1. To reduce operating costs.

2. To focus on core competent functions.
3. To acquire new skills.
4. To avoid labour problems.
5. To avoid financial risks
6. To improve flexibility in functions.
7. To enhance market credibility.
8. To improve overall market performance.

Process of Outsourcing  (May 07)

CHAPTER 18 – LOGISTICS ORGANISATION

Logistics Interface with Marketing (Nov. 01)

Outbound logistics plays an important role in selling the product of the company through the
distribution system. Relation of logistics with 4Ps of marketing can be explained as follows:

1. Price: Logistics enables marketing to quote a competitive price by providing discount

opportunities on account of transportation cost savings. Logistics Management has to
balance inventories to tackle anticipated price-triggered sales.
2. Product: Size and shape of the product are quite important for logistics. Weight/volume
ratio plays very important role in deciding economics of logistics.
3. Promotion: Logistics Manager and Marketing Manager need to work closely in deciding
promotional strategies for the product in order to manage inventory needed to match sales
triggered by promotional activities in the market.
4. Place: Marketing decision to distribute the product directly to retailers or through
wholesalers has a great impact on logistical operations. Retailers’ demand often requires
time sensitive transportation methods, which are expensive.

RESPONSIVE ORGANISATION (Nov. 06)

The competitive scenario at marketplace necessitated the logistics organisation to be responsive. It
seeks to put customer at the center of business and design new systems and procedure to improve
the response. Logistics organisation should change its systems:

1. From function to process: emphasis on managing processes rather than managing

resources.
2. From profit to performance: emphasis on efficient performance, profit will follow.
3. From products to customers: emphasis on customer value and not on brand value.
4. Form transaction to relationship:  emphasis on long-term relationships with customer
and supplier rather than just having business transactions.

CHAPTER 19 – LOGISTICS COSTING AND PERFORMANCE AUDITING

TOTAL COST ANALYSIS (Nov. 02)

The expenses involved in logistics activities are:

1. Procurement Cost
2. Inventory Cost
3. Warehousing Cost
4. Material Handling Cost
5. Packaging Cost
6. Transportation Cost
7. Distribution Channel Cost
8. Customer Service Cost
9. Communication and Information Processing Cost

Activity Based Costing V/S Mission Based Costing (May 04)

Activity Based Costing (Nov. 02, May 06, 07)

Activity based costing is based on the concept that the expenses need to be assigned to the
value adding activities rather than to budget unit. It suggests that business activities are made up of
a series of activities that consumes costs.

Advantages  (May 06)

1. It provides better operational performance.

1. It provides information about cost drivers and the relationship of these drivers with resource
consumption.
2. It gives more accurate picture of the expenses and helps managers to make strategic
decisions about costs.
3. It identifies the activities to be improved in order to reduce the cost
4. It simplifies the internal audit operations
Mission Based Costing (Nov. 02, 03, 06)

Mission based costing seeks to identify unique costs that are generated as a result of
specific logistic activities with a mission to achieve certain objectives in a specific market.
It is the logistic costing which can identify the total costs of meeting a desired mission.

Stages of Implementing MBC

1. Define the customer service segment

2. Identify the specific resource use to support that customer segment
3. Identify the factors that produce variations in the cost of service.
4. Attribute activity costs by customer segment.

LOGISTICS PERFORMANCE MEASUREMENT

Performance measurement is a process of monitoring and evaluating activities to determines their

conformance to the requirements.

OBJECIVES (May 06, Nov. 02, 03, 06)

1. Monitoring Measures: To track historical logistics performance for reporting to

management and customers mainly on service level achieved and logistics cost components.
It may be monitored daily, weekly, or monthly depending upon the volume and criticality.
2. Controlling Measures: To track ongoing performance and refine a logistics process in
order to bring it into compliance when it exceeds control standards. To compares the actual
performance with the set standards. E.g. transportation damages tracking. If a system can
periodically report the product damage, logistics management can identify the cause and
adjust the packaging and loading process as needed.
3. Directing Measures: To motivate the warehouse or transportation personnel to enhance
their performance. E.g. pay for performance practices to encourage achieving higher levels
of productivity. When such directed measures are used, it is important that both positive
and negative performance to be measured.

Internal Performance Measures (Nov. 03)

Internal performance measures focus on comparing activities and processes to previous operations.

Elements  (May 07)

A] Financial Measures:

1. 1.  Operating Cost:  It reflects the efficiency of effectiveness of the logistics system. It is
measured in terms of percentage of sales value.
 1. Return on Investment:  It indicates whether the investment made in logistical assets like
warehouse, material handling etc. is paying dividends.

B] Non Financial Measures:

1. Customer Service:  It examines firm’s capacity to satisfy customer. It is measured by fill

rate, stock out, or cycle time etc.
2. Productivity:  It is a relationship between the goods and services produced and the amount
of input utilised by the system.
3. Time:  It indicates the system’s efficiency in terms of response time, lead-time, on time
product shipment, etc.
4. Quality:  It determines the effectiveness of series of activities rather than an individual
activity.

External Performance Measures (May 04)

The main objective of external performance measures is to understand, maintain, and monitor
customer perspective.

Elements  (May 07)

1. Customer’s Perception:  Customer’s feedback on delivery, reliability, and responsiveness

of the company needs to be regularly obtained to achieve competitiveness in logistical
operations.
2. Competitor’s Performance:  Customer’s feedback provides the company a comparative
analysis of service level and value added services offered by its competitors.
3. Benchmarking:

BENCHMARKING ((May 04)

Benchmarking is a process of measuring organisation’s overall performance against the other

organisation from the same industry or other industries. It is a part of external performance
measurement.

History
In the late 1970s When the Japanese competitors Canon and Mitsubishi etc. entered into US market,
the Xerox company pioneered the process of benchmarking its manufacturing costs against these
competitors. This concept has become widely accepted in the late 1980s.

Steps in Benchmarking                                                                                             (May 07)

1. Identify the items to be benchmarked and define them categorically i.e. never take
broad subject area.
 2. Create a benchmarking team and define rules and responsibilities of each member.
3. Trace out the benchmark partners , who may be a world-class benchmark leader,
articles from magazines or newspapers, publications of consultancies, trade literatures.
4. Identify the data collection process from different sources such as postal surveys,
direct interviews, questionnaire, and research through Internet etc.
5. Finalise the benchmark study, after analyzing all the data discarding the irrelevant and
inaccurate data. Compare your company’s strength and weaknesses with those of
benchmarking partners. If you find any performance gap between yours and the
benchmarking partners, fill that gap.
6. Implement the findings into the task force of predetermined operation, function or
service.

Steps in Performance Appraisal (Nov. 01)

Guidelines for Performance Measurement (May 04)

Factors Affecting Performance Measurement (Nov. 04)

CHAPTER 20 – WAREHOUSES

DEFINITION OF WAREHOUSING (Nov. 06)

Warehouse is a location provided with adequate facilities, where bulk shipments are received from
production centers, which are then broken into small order size for shipment to the customers as
per their requirement.

FUNCTIONS OF WAREHOUSING (Warehousing Operations) (Nov. 02)

1. Receiving finished goods from production centers

2. Performing quality and quantity checks
3. Sorting goods at specific locations
4. Packing the products for executing customer’s order
5. Shipping goods by selected mode of transport
6. Preparing records and documents of stock.
7. Information transfer to management

OBJECTIVES OF WAREHOUSING (May 04, 05, Nov. 04, 06)

1. To fulfill expected customer service level.

2. To achieve transportation economies by moving higher volume of goods.
3. To achieve economies of scale in production by accommodating additional quantity of
produced.
4. To maintain steady source of supplies by balancing supply and demand.
5. To provide mixed products option to customers.
6. To provide temporary storage of materials to be disposed off (reverse logistics)
WAREHOUSING DECISIONS (Nov. 03)

1. Type of Warehouses
2. Location of Warehouses
3. Size of Warehouses
4. Layout Warehouses
5. Number of Warehouses

TYPES OF
WAREHOUSE                                                                           
          (May 06, 07)

1. Private Warehouse
These are the warehouses owned by the company for their exclusive use of storing the goods
manufactured or traded by them for onward selling in the market.

Advantages:

1. Better control over storage and movement of goods

2. Less chance of errors in handling the goods
3. Customised design and flexibility in operations
4. Cost effective and economic

Disadvantages:

1. Lack of geographical flexibility

2. Requires stable demand and high product throughput
3. Requires initial larger financial investment
4. Has permanent liability

2. Public
Warehouses                                                                             
                              
These are the warehouses hired from other agencies for storing the goods for a specific period of
time by paying agreed rent. E.g. Central Warehousing Corporation (CWC)

Advantages:  (Nov. 05)

 1. Generally located near ports and market place and thus has fixed periodic operating cost
2. Great flexibility in location changeover.
3. No permanent liability.
4. Adjustments as per season are possible.

Disadvantages:

1. Lack of flexibility in operations

2. Not suitable for specialised services.

3. Contract Warehouses

It is a specialised form of public warehouses managed by Third Party Logistics companies for
providing total warehousing services by paying the agreed charges.

Advantages:

1. Great flexibility in location changeover

2. No permanent liability.
3. Adjustments as per season are possible.
4. Availability of expert manpower and dedicated resources.

Disadvantages:

1. Less control on operations

2. Performance of organisation depends on the performance on third party

4. Co-operative Warehouses

These warehouses are owned, managed and controlled by co-operative societies. They provide
warehousing facilities at the most economical rates to member of society.

LOCATION OF WAREHOUSE
The primary considerations while locating the warehouse are:

1. Cost – Warehouse may be located near production plant to reduce operating cost.
2. Customer Service – Warehouse may be located near market to serve the customer well.

Steps in Site Selection of Warehouse (Nov. 02)

While deciding the location of warehouse following factors are to be considered:

1. Desired level of customer service

2. Nature of product i.e. seasonal, perishable etc.
 3. Presence of Competitor’s warehouse
4. Marketing oriented – closer to market
5. Production oriented – closer to plant
6. Cost of distribution to market area
7. Availability of transportation facilities and its cost
8. Availability and cost of basic infrastructure i.e. power, water, gas, sewerage etc.
9. Availability and cost of labour supply
10. Local taxation levied by the local authority in the area.
11. Potential for further expansion of warehouse.
12. Geographical hazards like floods, earthquake etc.

DESIGN AND LAYOUT OF WAREHOUSE (Nov. 05)

Steps in Design / Layout of Warehouse (Nov. 02)

1. Number and nature of activities to be performed

1. Nature of products to be stored

2. Frequency of in and out movement of the products
3. Storage and handling equipments to be used
4. Total space availability
5. Statutory requirements
6. Safety and security of people and products

NUMBER OF WAREHOUSES
Factors Deciding Number of Warehouse  (May 04, 05, Nov. 04)

1. Desired level of customer service

2. Nature of the products
3. Presence of Competitor’s warehouse
4. Size of the market
5. Number of customer and their buying habits
6. Current and potential demand
7. Total operating cost of warehouse

SQUARE ROOT LAW (Nov. 03, May 04)

Square Root Law states that the total inventory in a system is proportional to the square root of the
number of warehouses.

Law:  The law determines the extent to which inventory reduces by reducing the number
warehouses. Provided that the total customer demand remains constant.

L = L1Ö _W2_
W1

L = Total inventory in future warehouses

L1 = Total inventory in existing warehouses

W1 = Number of existing warehouses

W2 = Number of future warehouses

Assumptions:

1. Inventory transfer from one warehouse to other is not done.

2. Lead-time for supply of goods is constant.
3. Customer service level does not change from any warehouse.
4. Demand level is well distributed from all the warehouses.

(May 05)

WAREHOUSE
DISTRIBUTION CENTER
Warehouses belong to an organisation Distribution center is a separate entity
Warehouses stores all products It keeps minimum inventory of high demand
items.
It handles products in four stages – receive, It handles products in two stages – receive and
store, pick and ship. ship.
It performs minimum value added activities. It performs more value added activities.
It focuses on reducing operating costs It focuses on maximizing the profits.

CHAPTER 21 – MATERIAL HANDLING AND PACKAGING

MATERIAL HANDLING SYSTEM

Material handling is a process of movements of raw materials, WIP and finished goods
within a facility most efficiently at the lowest possible cost.

OBJECTIVES OF MHS                                                                  (Nov. 05, Nov. 06, May 06)

1. To achieve efficiency in movement of products in & out of stores or warehouse.

2. To ensure movement of goods in right quantity
3. To ensure availability of products when and where required.
4. Effective utilisation of available space, equipment and manpower.
5. To sort inbound shipments as per precise customer requirements
SCOPES OF
MHS                                                                    
                                (May 06)
Activities performed during materials handling are as follows:

A] During Receipt of Materials:

1. Receipt of vehicle at nominated area

2. Unloading the consignment from vehicles.
3. Weighing, sampling and inspection of materials.
4. Moving the materials to assigned storage space.
5. Documentation of materials received and sold.
6. Management Information System

B] During Dispatch of Finished Goods:

1. Receipt of vehicle at nominated area

2. Weighing, counting and packing of goods to be dispatched
3. Movement of goods to the exit point
4. Loading the products to transport vehicles
5. Documentation of goods dispatched
6. Management Information System

CLASSIFICATION OF MHS

1. Manual System
Manual handling of materials is done when the weight of materials is low and distance to be
traveled is less. It is the cheapest option for material handling.

Equipments required are manual trolleys, racks, drawers, lockers etc.

2. Mechanical System

Mechanical handling of materials is done when the weight of materials is high and distance to be
traveled is more. It is the safest option for material handling.

Material Handling Equipments                                                                                 (Nov. 01, 05)

1. 1.  Forklift Trucks:  They are lifting devices, can move loads both horizontally and vertically.
 2. 2.  Cranes:  They are drag devices, either floor mounted or overhead mounted.
3. 3.  Conveyors:  They eliminate re-handling before and after each function.
4. 4.  Carousels:  several bins on an oval track keep rotating. The operator can choose
required bin to pick from. The system saves space and reduces walking time and distances.

3. Automated System

Automated handling of materials is done when the weight of materials is very high and distance to
be traveled is more as well as the warehouse space is limited. It is the best and efficient option for
material handling.

Material Handling Equipments                                                                                 (Nov. 01, 05)

1. Sortations:  In Sortations, labels are read and the packages are delivered to right docks for
onward dispatch
2. Robotics:  It is a human like machine that can be programmed to perform one or series of
activities.
3. Automated Storage and Retrieval System:  It has following merits and demerits.

Merits ARS:

1.
1. Reduction in labour cost and material handling costs
2. Increase in productivity
3. Increase accuracy and speed of services
4. Reduce handling related product damage.

Demerits of ARS:

1.
1. It requires huge initial capital cost
2. It has perpetual maintenance costs
3. It cannot not respond to the changing needs
4. Downtime of equipment may cause interruptions
5. Its user required proper training

1. Automatic Guided Vehicle System (AGVS):  It is as driverless vehicle that are controlled
by computers for task assignment, path selection, and positioning”.

Benefits of AGVS: same as that of ARS.

PRINCIPLES OF MHS
 1. Planning: All material handling should be as a result of a deliberate planning.
2. Work Principle:  Avoid unnecessary movement the products.
3. Ergonomic Principle:  Human capacities and limitations must be recognized.
4. Unit Load Principle:  Load should be of uniform size to have smooth material flow.
5. Standardisation:  Methods, equipments, controls and software should be standardized.
6. Space Utilisation:  Available space should be used efficiently.
7. Automation:  Operations should be automated wherever feasible to improve efficiency.
8. Systems:  All activities should be integrated to form a coordinated operational system.
9. Environment:  Environment impact and energy consumption should be considered.
10. Preventive Maintenance:  Materials handling equipments should be regularly
maintained.

PACKAGING
Packaging though an integral part of logistics, also affect marketing and production function.
Packaging helps in promotion of products and size, shape, material of the package affects
production labour efficiency.

Logistical Functions of Packaging (May 06, Nov. 06)

How packaging helps reducing overall costs and value addition?

1. Containment: Packaging provides containment for products.

2. Protection: Protection from environment, pilferage, shocks of handling and moving.

1. Cube Minimization: Reducing the space occupied by the product to cut the freight
charge. E.g. Round containers, oval shaped containers and square shaped bottles, etc.

1. Weight minimization: Reducing the weight of the consignment to fully utilize the

capacity of the truck. E.g. Liquids are packed in plastic bottles rather than glass bottles.
2. Apportionment: Grouping goods into convenient unit for distribution. E.g. mangos in
boxes, milk bags in crates.
3. Facilitating handling & using: fruit juices in tetra packs, handling and consumption by users
4. Convenience: Facilitating handling, storage & reuse. E.g. ink cartridges for printers,
reusable corrugated boxes, bottles and refill packs.
5. Communication:
1. Content Identification – Product, manufacturer, universal code etc.
2. Tracking: Bar codes and scanners.
3. Handling Instructions: Fragile, This side up, temperature restrictions,
environment concerns, potential dangers etc

Consumer Oriented Packaging V/S Logistics Oriented Packaging (May 07)

 1. Consumer Oriented Packaging: Focuses on consumer convenience and appeal, marketing
consideration and display.
2. Logistics Oriented Packaging: Focuses on handling convenience and protection during
transpiration, material handling and storage.

STAGES IN LOGISTICS PACKAGING

1. Products Packaging: Packaging the products itself, e.g. soft drinks are packed in cans.

1. Master Cartons: Packaged products are packed in larger cartons to facilitate quantity
handling.
2. Unit Load: Master cartons are consolidated into a single large unit to facilitate
transportation, protection and storage. It involves Unitisation or Palletisation.
3. Contenerisation: Unit load is placed in a rigid container for transportation.

Unitization / Palletisation (Nov. 03, May 05)

Unitization is a concept where size shape, weight, volume of the items is considered and master
cartons are placed to form a single larger unit. E.g. bottles in crates, steel sheets in coils, etc.

1. Leads to standardization of handling equipments and methods.

2. Facilitates use of standardized handling equipment like a forklift or a crane.
3. Reduces the time for handling and cost of handling.
4. Simplifies the checking of inbound shipments.
5. Improve product protection.

Types of Pallets
1. Wooden pallets – used commonly but break and disintegrate.
2. Pressed wood fiber pallet
3. Plastic pallets – light and recyclable
4. Solid molded plastic pallets
5. Corrugated fiberboard slip sheet – provide cushion effect to the unit load
6. Refrigerated pallets- for refrigerated materials

Contenerisation                                                                       
                      (Nov. 04, May 05)

Contenerisation is a technique of distributing goods in

unitized form and making convenient to establish an
intermodal transport system. Containers are of standard
size i.e. 20 ft or 40 ft.

Benefits of Contenerisation:

1.      It eliminates need for intermediate handling at

terminals.
1. Standardized containers helps in saving on packaging materials and labour for packaging.
2. Less risk of damage and pilferage.
3. Facilitates intermodal transportation without intermediate reloading.

Types of Containers:

1. General Cargo Containers – for general cargo like garments metals etc.
2. Refrigerated Containers – for food items that require cold storage like fish, meat.
3. Insulated Containers – for items that require airtight space like fruits and vegetables.
4. Ventilated Containers – for items that require fresh air like coffee seeds, tea leaves.
5. Flat Containers – They have only flat base with no walls, used when cargo the cargo is of odd
size or very heavy like trucks.
6. Liquid Containers – They have main holes for loading and unloading of liquid cargo like milk,
oil.
7. Gas Containers – They have fixtures to fill or empty liquefied gas. E.g. Liquid oxygen.

Polarisation                                                       
                                             (Nov. 04, May 05)
CHAPTER 22 – SUPPLY CHAIN MANAGEMENT

CONCEPT OF SCM
According to Martin Christopher; Supply Chain Management is defined as “the management of
upstream and downstream relationships with suppliers and customers to deliver superior customer
value at lesser cost”.

OBJECTIVES OF SCM
 1. To solve suppliers problems
2. To improve customer’s service performance
3. To reduce pre and post production inventory
4. To minimise total cost of operations and procurement
5. To achieve maximum efficiency in utilisation of labour, capital and plant.

ADVANTAGES OF SCM

For Customers

1. Improve customer’s service performance.

2. Reduce product cost
3. Improve delivery performance
4. Provide quick response to change in demand

For Company

1. Reduce pre and post production inventory

2. Minimise total cost of operations and procurement
3. Facilitates efficient utilisation of labour, capital and plant.
4. Sustained growth of sales

SUPPLY CHAIN MANAGEMENT

LOGISTICS
Logistics is concerned with getting goods and SCM is concerned with movement of goods
services where and when they required from raw material stage to the end user
It works within a single organisation It works in a coordination of various
organisations.
It is a part of supply chain management It is an extension of logistics management
The concept of logistics is relatively old The concept of SCM is relatively new
It is a narrow concept It is a broader concept
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