Lecture Sales and distribution management: Chapter 15 - Krishna K Havaldar, Vasant M Cavale

Chapter 15, market logistics & supply chain management. After studying this chapter you will be able: Principles of materials management, logistics and supply chain management; logistics interface with other functions; inventory management principles and systems; warehousing management fundamentals;...

• Logistics interface with other functions

• Inventory management principles and

systems

• Warehousing management fundamentals

• Transportation management practices

• How IT enables the logistics function

• Understand about the performance

measurement of the logistics function

• Materials management function includes

planning and control, purchasing and stores and inventory control

• Materials management is the precursor to

logistics and supply chain management

Logistics……

SDM – Ch 15 Tata McGraw Hill 

Logistics Defined

• Logistics means having the right thing, at

the right place, at the right time

• The procurement, maintenance, distribution and replacement of personnel and materials –

Webster’s Dictionary

• The science of planning, organizing and

managing activities that provide goods or

services – Logistics World, 1997

SDM – Ch 15 Tata McGraw Hill 

Logistics

• Functions: planning, procurement,

transportation, supply and maintenance

• Processes: requirements determination, acquisition, distribution and conservation

• Business: science of planning, design and support of business operations of

procurement, purchasing, inventory,

warehousing, distribution, transportation, customer support, financial and human

resources

• Location and management of warehouses

• Choices of carriers, mode of transport

• Packaging decisions

• Relevant to all enterprises: manufacturing, Government, Institutions, service

organisations

•Time and Place utility

•Efficient move

to customer

Customer service Demand forecasting Distribution Communications Inventory control Materials handling Order processing Parts and service support Plants and warehouse selection

Procurement Packaging Return goods handling Salvage and scrap disposal Traffic and transportation Warehouse and storage

Lead Firm Customer

General cash flow

Information flow

Information flow General material flow/ service flow

Inbound / Upstream logistics Outbound / Downstream logistics

Source: ICFAI

SDM – Ch 15 Tata McGraw Hill 

Logistics and Marketing

• Interface on:

– Product design and pricing

– Customer service policies

– Sales forecasts and order processing

– Inventory policies and location of warehouses

– Channels of distribution and despatch planning

– Transportation to reach products to customers

• Production wants larger production runs to

minimise time spent on set up changes on the machines Marketing wants smaller runs of a variety of products

SDM – Ch 15 Tata McGraw Hill 

The Value Chain

Company Infrastructure Organisation, people, methods Systems & technology Procurement

Inbound

logistics Operations

Outbound logistics

SDM – Ch 15 Tata McGraw Hill 

Logistics Plan Outline

• Internal analysis (current position)

• External / situation analysis

– Competitor logistics performance

– Trends

– External environment / economy

– Public, private and contract warehouse

– Public, private and contract carriage

Use the power of information

Emphasise human resources

Form strategic alliances

Focus on financial performance

Target optimum service levels

Manage the details

Leveraging logistics volumes Measure and react to

performance

SDM – Ch 15 Tata McGraw Hill 

Logistics Focus Areas

Customer service related Operations related

Packaging

Order processing

Spare parts and service support

After sales Customer service

support

Demand forecasting

Distribution communications

Return goods handling

Plant and warehouse site location

Procurement Inventory control Materials handling Salvage and scrap disposal Traffic and transportation Warehousing and storage

Logistics may be confined to the company whereas SCM extends beyond

– Increasingly demanding, informed customer base

– Purchase decisions on dimensions of quality, price and time

• Innovative supply chain:

– To meet customer driven challenges

– To reduce costs

– Improve service levels

– Enhance speed to market

SDM – Ch 15 Tata McGraw Hill 

Supply Chain Integration

• Optimising the supply chain requires supplier and customer involvement to integrate processes, policies, systems, database and strategies between

diverse trading partners

SDM – Ch 15 Tata McGraw Hill 

Integrated Supply Chain Management

Manufacturing/

Re­manufacturing/

Assembly

Demand & Lead  Time Management

Storage & 

Transportation

Materials  Management

Inventory Management and 

control 

Customer Analysis

Purchasing/Supplier  Partnering

Order Fulfillment

Supply Chain Integration

Inventory management…

SDM – Ch 15 Tata McGraw Hill 

Why Carry Inventory?

• Support production requirements

• Support operational requirements

• Maximize customer service – ensure availability when needed – protect

against uncertainty

• Hedge against marketplace uncertainty

• Take advantage of order quantity

discounts

SDM – Ch 15 Tata McGraw Hill 

Functions of Inventory

• Inventory serves as a buffer between:

– Supply and demand

– Customer demand and finished goods

– Requirements for an operation and the output from the previous operation

– Parts and materials to begin an operation and the suppliers of the materials

The shock absorber of business !

SDM – Ch 15 Tata McGraw Hill 

Factors Which Drive Inventory

• Target service level parameters

• Lot sizing practices

• Safety stock and safety time

SDM – Ch 15 Tata McGraw Hill 

Categories of Inventory

• Anticipation – built in anticipation of future

demand – peak season, strike, promotion

• Fluctuation (safety) – to cover random,

unpredictable fluctuations in supply and

demand and lead time – to prevent disruption

in operations, deliveries etc

• Lot-size – to take advantage of quantity

discounts, reduce shipping, set up and

clerical costs – also called cycle stock

SDM – Ch 15 Tata McGraw Hill 

Categories of Inventory

• Transportation – pipeline or movement

inventories – to cover the time needed to move from one point to another – factory to distribution point for example

• Hedge – for materials where prices are

volatile

• Maintenance, repair and operating supplies (MRO) – to support M and O – spare parts, lubricants, consumables etc

SDM – Ch 15 Tata McGraw Hill 

Performance Measures

• Inventory turns = Annual cost of goods

sold /average inventory in value

• Days of sales = inventory on hand /

average daily sales

SDM – Ch 15 Tata McGraw Hill 

Types of Inventory Systems

• Pure Inventory – when and how much to

order RM procurement Simple

manufacturing operations

• Production Inventory – finite production

rates Demand fluctuation Products compete for manufacturing capacity

• Production – distribution Inventory –

compete for production capacity Geographic placement of inventory for best service of

demand

SDM – Ch 15 Tata McGraw Hill 

Types of Classification

• ABC category – most common for all

• HML - high, medium, low - similar

• FSND – fast moving, slow moving,

non-moving, dead – spare parts / FG

• SDE – scarce, difficult, easy to obtain –

SDM – Ch 15 Tata McGraw Hill 

ABC Inventory Analysis

• Based on Pareto’s law:

– A – 20% items worth 80% of value

– B – 30% items worth 15% of value

– C – about 50% items account for 5% of the usage

• Classify items based on the above criteria

• Apply degree of control in proportion to the importance of the group

SDM – Ch 15 Tata McGraw Hill 

Inventory Related Costs

• Unit costs – basic value of the item carried

• Ordering costs – generating and sending a material release, transport, any other

acquisition costs

• Carrying costs – capital, storage,

obsolescence

• Stock-out costs

• Quality costs – non-conforming goods

• Other costs – duties, tooling, exchange rate differences etc

– Safety stocks and forecasting methods

– Excess and obsolete inventory

• Part simplification and re-design

• On-site supplier managed inventory

• Use of supply chain inventory management

systems, Materials Requirement Planning,

Distribution Requirement Planning etc

• Automated inventory tracking systems

• Supplier – buyer cycle-time reduction

Warehouse management…

SDM – Ch 15 Tata McGraw Hill 

Stores Management

Objectives

• Providing efficient service to users

• Reduce cost of carrying goods

• Providing correct, updated stock figures

Temporary   Permanent 

Receive goods

Identify goods

Sort goods Despatch to storage

SDM – Ch 15 Tata McGraw Hill 

Purpose of Warehousing

• To provide desired level of customer

service at the lowest possible total cost

• It is that part of the firm’s logistics system that stores products (RM, Packing Materials, WIP, FG) at and between point of origin and point

of consumption and provides info to

management on the status, condition and

disposition of items being stored

• Distribution warehousing relates mainly to FG

SDM – Ch 15 Tata McGraw Hill 

Reasons for Warehousing

Maintain source of supply

Support customer service

Support JIT programs of

suppliers and customers

Provide customers with the right

mix of products at all times

Temporary storage of materials

to be disposed or re-cycled

Achieve production economies

Achieve transportation economies

Take advantage of Quantity Purchase discounts and forward buys

Least Logistics cost for a desired level of customer service

SDM – Ch 15 Tata McGraw Hill 

Distribution Warehousing

• The objective is to set up a network of

warehouses closest to the customer

locations to service markets better and minimise cost

• Could be C&FA s, depots or distribution centers

• Macro location strategies:

– Market positioned

– Production positioned

– Intermediately positioned

SDM – Ch 15 Tata McGraw Hill 

Distribution Center

• Warehouse designed to speed the flow

of goods and avoid unnecessary costs

• Speeds bulk-breaking to avoid

inventory carrying costs

• Helps to centralise control and

co-ordination of logistics activities

• Products can also be cross-docked

(one vehicle to another)

Market positioned

• Factors influencing are:

– Order cycle time

• Factors influencing are:

– Perishability of raw materials

– Number of products in the product mix

– Assortments ordered by customers

– Transport consolidation rates ex; FTL

In between…

SDM – Ch 15 Tata McGraw Hill 

Intermediate Positioned

• Mid point locations between the final

customer and the producer

• High customer service levels possible even if

products made in number of units

• Other macro approaches look at cost

minimisation or cost and demand elements to

maximise profitability

Transportation management….

SDM – Ch 15 Tata McGraw Hill 

Transportation

• Very important in the Logistics function:

– Movement across space or distance adds value to products

– Transportation provides time and place utility

• Role of transportation includes:

– Provides opportunity for growth under competitive conditions

– Deeper penetration into markets

– Can influence product prices favourably

Principles….

SDM – Ch 15 Tata McGraw Hill 

Transportation Principles

• Continuous flow

• Optimise unit of cargo - stackability

• Maximum vehicle unit – capacity utilization

• Adaptation of vehicle unit to volume and

nature of traffic

• Standardisation

• Compatibility of unit load equipment

• Minimum of dead weight to total weight

• Maximum utilization of capital, equipment and personnel

Process….

SDM – Ch 15 Tata McGraw Hill 

The Selection Criteria

• Environmental analysis: shipper, carrier, government regulations, public influence

• Deciding objectives

• Selecting mode

• Select transport type within the mode

• Define functions of transport

• Evaluation and control – customer

perception / satisfaction, best practice benchmarking

SDM – Ch 15 Tata McGraw Hill 

Cost Factors

• Can be product related or market related

• Product related: density, stowability, ease or difficulty of handling and liability

• Market related: competition, location of

markets, Government regulations, traffic in and out of the market, seasonality of

movements and impact on customer service

• Five prominent modes:

– Road, rail, air, water and pipeline

– Sixth one is use of Ropeways

• Coverage – door-to-door for example

• Flexibility in handling a range of

products

• Loss and damage performance

• Additional services provided

Reverse logistics…

SDM – Ch 15 Tata McGraw Hill 

Reverse Logistics

• Movement of goods from the market or

customer back to the company

• The need:

– Increased awareness of the environment

– Stringent legislation

– For some it is part of the business

– Profitability of dealing with scrap, surplus

• Surplus, obsolescence can result due to:

– Over optimistic sales forecasts, change in product

specs, errors in estimating material usage, losses

in processing or overbuying based on incentives

Comparison of modes……

• Not suitable for remote stations

• Costly terminal handling facilities

• Inflexible time schedules

Road transport…

SDM – Ch 15 Tata McGraw Hill 

Road Freight Advantages

• Through movement – direct from consignor to consignee, no transshipment

• Flexibility – routes and loading routines can

be easily altered, operate day and night

• Less capital costs – for own fleet + immunity from industrial action

• Fast turn-around – if articulated units like

tractors and trailers are used

• Minimum delays

• Unsuitability for heavy loads – rail transport

more economical for bulk loads

• Unsuitability for long distances – again the rail telescopic rates are more favourable

Air transport….

SDM – Ch 15 Tata McGraw Hill 

Air Transport Advantages

• Faster mode

• Reduction in cost particularly inventory

• Broad service range

• Increasing capabilities

• Disadvantages:

– High cost

– Weather affects flight conditions

– Limitations on heavy consignments

Water transport……

SDM – Ch 15 Tata McGraw Hill 

Water Transport

• Advantages:

– Mass movement of bulk

– Lowest freight cost

– Preferred for long haul of low value commodities

• Disadvantages:

– Not for quick transit

– Suitable for certain types on commodities only

Pipeline….

SDM – Ch 15 Tata McGraw Hill 

Pipeline Movement

• Advantages:

– Reliable, continuous, all weather transport

– Low maintenance and operating costs

– Can traverse difficult terrain

– Minimal transit losses

– Operation round the clock, safe

– Economies of scale – double the throughput for only 30% additional cost

• Disadvantage is in the investment cost

Ropeways….

SDM – Ch 15 Tata McGraw Hill 

Ropeways

• Advantages:

– In hilly or inaccessible areas

– Long and circuitous routes with streams / deep

valleys

– For commodities capable of movement in ropeway

buckets

– Short haulages of less than 50 kms

– Areas where other carriers are uneconomical

• Disadvantages:

– Heavy investments

– Limitations on size and quantity of haul

How to decide on the right carrier?

production and distribution

Availability of rail sidings

Stockholding policy Management

structure System of carrier evaluation

Speed (transit time) Reliability

Cost Customer relationship Geographical coverage Accessibility

Availability of special vehicles / equipment Monitoring of goods Unitisation

Ancillary services – bulk breaking, storage

supply chain management

• Production and marketing are the two internal customers of Logistics

• Logistics also has a direct impact on the

financials of a company

• Three important functions of logistics are

inventory management, warehousing and

transportation