Elements of Logistics Management Notes

Elements of Logistics Management Notes. (some topics are missing plz refer to your txt book also) CHAPTER 2, 3, 4 – INTRODUCTION TO LOGISTICS. 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 (Nov. 03, 06) 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. 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 Such practices were expensive and risky and thus have been replaced by information technology to achieve positive logistics control. 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. 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. 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. 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. Rigid quality standards- it is critical in case of contaminated products, which can cause environmental hazard. Rigid laws prohibiting unscientific disposal of items Rigid laws making recycling mandatory Transit damage – e.g. leaking containers containing hazardous material. Product expiration. Erroneous order processing by supplier Exchange of new product for the old ones. 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: 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. Product Collection System: After the product location is identified, product collection is to be done through company’s field force or third party. 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. 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: Ever-increasing customer requirements. Competitive and complex market scenario Rising globalisation, liberalization and privatisation. Rising accessibility of supply chain technology. Inclination of companies to enter into higher margin business. Services provided by 4PL. Procurement and storage of materials. Manufacturing of products. Selection of 3PL companies Transportation and warehousing management Collection of payment and cash flow management Risk management and insurance. 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. 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. 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. 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. 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. 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. 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. Competition: Different rules in different countries concerning competitive governance also serve as global logistics barriers. 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. 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. 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. Bill of Material – This is prepared from product design documents 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: For purchase components it releases Purchase Request, Purchase Order etc in the form of soft copy For in-house manufactured components it releases Production Order It prepares different types of reports for the use of management as required. Benefits of MRP1. All the documents like purchase order, production order get ready as per required time. All information is ready on the screen at any time, which is duly updated. Making changes manually in Master Schedule is difficult task; this is done by MRP easily and accurately. It prepares the reports related to inventory status, production outputs, latest sales figures. MRP calculates and maintains an optimum-manufacturing plan, which will reduce cash flow and increase profitability. Reduced inventory levels Reduced shortage of components Reduced overtime on shop floor and offices Improved shipping schedule Improved production schedule Improved calculation of material requirements Better manpower planning on shop floor Reduction in lead time 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. Reduce distribution center freight costs resulting from coordinated shipments. Reduce inventory level. Coordinate inventory with organisational functions. Decrease warehouse space requirements because of inventory reduction. Improve service level by on time deliveries. 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. 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. *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. 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. 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. 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. 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. – 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. Receiving repeat orders from customers. To win new customers and keep existing customers 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: Retaining more customers result in higher profit. The cost of retaining customers is much less than to acquire them. It helps in strengthening and expanding customer base. If a regular customer were lost, then it would cost very heavily to generate new customer. Methods: Offer only quality services and products Demonstrate the use of product or services Provide responsive customer service Share testimonials of customers with other potential customers Educate the customer about the market and value of the business 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) 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. 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. – Domestic / International Transport. FUNCTIONS OF TRANSPORTATION (Nov. 06) Product Movement: Transportation facilitates the movement of raw material, semi-finished items, WIP, finished goods, packaging material, rejected material. 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: when unloading and loading is more expensive than storage. 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. 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. 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. Speed: Methods of working for the delivery of goods to the customers place should ensure the on time delivery. 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. 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. Responsiveness: Transporter has to respond the changing needs of the supplier and he should be able to handle various products. Capability: Transporter should be in a position to deliver the goods at any remote areas. He should have large number of geographic service points. Accessibility: Transporter should be easily accessible by providing door-to-door pick up and delivery. 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. It is the fastest mode of transportation. Fixed costs are lower than rail or road or pipeline. It brings distant markets closer. It overcomes the hassle and cost of setting up depots and service centers overseas. Full potential of peak seasonal demand can be exploited. Makes test marketing easy – Products can be shipped directly from the factory.

Most expensive – Operating costs are highest. Generally used to transport small volume items. Certain categories of items are not allowed 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. Water transport has low capital costs and low operating costs. Heavy and bulk goods of large quantities are transported by this mode. Private or ‘for hire’ shippers available in water transport. Water transport is limited due to availability of harbor. Water transport is the slowest mode of transportation. Require secondary mode of transport to deliver to ultimate customer. Deep-water ships designed for ocean and lakes are limited to shallow-water ports. Shallow water vessels like diesel-towed barges are flexible but are limited by their range of operations and speed. 3. Railways. Railways is comparatively fastest mode of transport Railways is an inexpensive mode of transportation Railways are suitable for large quantities. Railways provide door deliveries for industries. Unreliable mode – especially for high value goods and directly usable consumer goods. Railways lack flexibility of high-speed delivery. Railways require modal combination alongwith roadways. Rail network needs a high capital investment due to right of way, switching yards, terminals. 4. Roadways. Speedy – Deliver the goods directly to the consignee very fast. Highly flexible – handling different types of goods Ultimate mode – consignment reaches the doorsteps of the customer. Low capital cost as compared to railways. Private or ‘for hire’ shippers available. Higher operating costs – due to fuel requirement and higher labor requirement. Occasional fuel shortages – leads to delay in delivery. Strikes of carriers – due to disputes with government making the transportation idle. Limited availability of trucks poses a constraint. Octroi – posts are notorious for delays and harassment of carriers. 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. Pipelines are reliable mode – pilferage and loss of product is not possible. Pipelines have low energy consumption. Pipelines being under ground, space occupation is minimal. Pipelines operate all the time except when it is shut down for maintenance. No need to bring back empty container or wagon. Highest fixed costs – due to lying of pipeline but lowest operating costs. Pipelines are fixed – so the accessibility of product is limited on the rout. 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: 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. 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. 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. 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 are all based at the ICDs. Advantages / Uses. Connect major ports to hinterland i.e. land deprived of natural deep-water ports because of geography. Handle containers from road and rail to a container yard. Performing activities like weighing, inspection of scales, damages and safety stickers. Facilitate customs clearance and export import formalities. Increase the export potential of industries in the hinterland and also simplifies import of goods by hinterland. 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. Direct Shipping – From shipper directly to retailers. 2. Direct Shipping using Milk Runs – Single supplier to a number of retailers, deliver like a milkman. 3. All Shipping via CDC – Suppliers send the supplies to Central Distribution centers and distribution center caters the needs of retailers. 4. All Shipping via CDC Using Milk Runs – Suppliers send the supplies to CDC and from CDC to large number of suppliers. 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 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. It helps to reduce operating costs by eliminating handling and storage of products. It helps to reduce inventory level by direct shipment to the customers. It helps to increase sales by providing on time delivery to the customers. 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. Obtaining correct and prompt information. Maintaining and updating the information collected. Communicating the information to all the concerned as and when required. Taking proper decisions at all levels in the organisation. Supporting planning function. Importance of LIS. LIS is a key element to develop logistical competence. LIS integrates various activities of logistics. LIS is one of the three pipelines managed by logistical management. LIS is important to customer service. LIS underwent revolutionary change due to changes in technology. Primary Activities of LIS. Receiving, analysing, processing and storing related information within organisation. Communication of data to the decision makers. Communication of information to the supplier, service providers and customers. 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. 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. Control level – Here the efforts are to be taken to improve efficiency of the operating level by analysing the information. Decision level – Here the manager has to evaluate the information to see the operations and customer needs are equalised 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. Greater accuracy due to reduction in manual processing. Faster speed in order processing. Reduced clerical efforts in data entry, filing, mailing and related tasks. Reduced inventory due to reduced order cycle time. Increased productivity though faster information transmission. Improved channel relationships by reducing number of individuals involved in data entry. Decreased operating cost by reduction of labour and material cost associated with paper work and telephone fax expenses. 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: Availability of Land Manufacturing Facility Taxation and Regional Concession Access to Transport Power, Fuel, Water Climate Availability of Workforce Union Activities Political Pressure Bank and Finance Facilities Raw Material Safety and Social Security Supporting Industries Market Site 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. 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. 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. 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. 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. To take quantity discount: Inventories may also be built up take advantage of price discounts, as hedge against anticipative price rise in the future. 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. 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. 2. Work-in-Process Inventory. Work in Process ITR = Cost of Manufacture. 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: Period in which the material is under the process on machine. Value addition activity. 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: Value of Item: Safety stock for high value items need be low. Criticality of Item: Safety stock for critical items that affect the business need be high. Lead Time: Longer the lead-time more is the chances of fluctuation and hence more is the requirement of safety stock. 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. Availability of substitutes: Lesser safety stock can be kept for items where substitutes are easily available. 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) ABC Analysis VED Analysis FSN Analysis 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. Calculate the Annual Consumption Value (ACV) for each item by multiplying the number of units with the unit price of the item. Arrange all the items in the order of descending sequence of ACV. Calculate the cumulative ACV for each item. Calculate the cumulative percentage ACV for each item. 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. 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. Categories the remaining items as C category item. Advantages: (Application in Inventory Management) (Nov. 03) It helps to have a selective inventory control. Safety stocks are kept low for the high value items to reduce total inventory costs. Safety stock is kept much higher for low value items to prevent stock-outs. Disadvantages: It should be reviewed periodically so that changes in prices and consumption are taken into account. Importance is given only to the ‘annual consumption value’ of items and not its criticality for the production. 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. Reorder quantity is always the same, which is equal to the EOQ Time interval between the orders varies. Reordering is done when the stock in hand is equal to safety stock plus the lead-time consumption. Minimum inventory will be equal to the safety stock. Maximum inventory will be equal to the safety stock plus order quantity. 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. Review period is decided to minimize the sum of annual procurement cost and annual inventory carrying cost. Quantity ordered is decided depending upon the stock in hand, so that it will take care of the requirement till the next review period. The interval between two orders is fixed. 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). Q = Order quantity. A = Annual consumption. 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. Demand of the material occurs uniformly over the period at a known rate. Delivery of the materials is instantaneous. Price per unit is fixed and is independent of order size. Ordering cost is fixed and does not vary with the order size. Carrying cost varies directly and linearly with the order size and expressed as percentage of average inventory cost. Lead-time i.e. interval between placing order and receiving inventory is zero. Materials can be procured in any desired quantity; there is no any restriction of quantity. Materials have fairly long shelf life; there is no fear of deterioration or spoilage. Limitations of EOQ (Nov. 02) The assumptions of EOQ may not true in real life, thus limiting the use of EOQ model. Price of material may not remain same throughout the year. There can be delays in real time situation in placing orders. Formula presumes that the usage of materials is both predictable and evenly distributed. Which may not be possible. Ordering cost varies from commodity to commodity and the carrying cost can vary with the company’s opportunity cost of capital. Often inventory carrying cost and ordering cost cannot be identified accurately and sometimes cannot be even identified. 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: It is a simple and understandable process. Provides quick and precise information. Provides quick response to changes. Low costs associated with the transfer of information. Avoids over production. Minimize waste. 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. Reduction in work in process Reduction in over all stocks of material Reduction in overdue orders Increase in out put per employee Simplification of material flow system. Improvement of production and planning control 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. Ensuring 100% quality. Preventing equipment breakdowns. 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. All the reason for the loss of equipment should be avoided. Preventive Maintenance program is to be made. Operator should be given training to maintain his equipment when required. 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. at right price of right quality in right quantity at the right time from the right source at right place 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) 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. 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. 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. 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. 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. 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. 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? 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? 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. 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? 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. To reduce operating costs. To focus on core competent functions. To acquire new skills. To avoid labour problems. To avoid financial risks To improve flexibility in functions. To enhance market credibility. 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: 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. Product: Size and shape of the product are quite important for logistics. Weight/volume ratio plays very important role in deciding economics of logistics. 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. 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: From function to process: emphasis on managing processes rather than managing resources. From profit to performance: emphasis on efficient performance, profit will follow. From products to customers: emphasis on customer value and not on brand value. Form transaction to relationship: emphasis on long-term relationships with customer and supplier rather than just having business transactions.