IMTS SQM (Supply chain and logistic strategies) by IMTS INSTITUTE

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IMTS (ISO 9001-2008 Internationally Certified) SUPPLY CHAIN AND LOGISTICS STRATEGY

SUPPLY CHAIN AND LOGISTICS STRATEGY

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CONTENTS:

UNIT=1

01-11

PRINCIPLES OF SUPPLY CHAIN MANAGEMENT

Introduction,How does SCM Work?,The Logistics-Marketing Interface,Logistics and Product Life Cycle,Areas of Logistics and Marketing Interaction,The LogisticsManufacturing Interface,Customer Service Issues at the Logistics-Manufacturing Interface,Summary,Self Assessment Questions,References and,Suggested Further Readings

UNIT-2

12-30

DESIGN AND MANAGEMENT OF SCM MARKETS

.Introduction,Logistics: Definition,What is Supply Chain Management (SCM)? Design and Management of SCM,Logistics: Inbound and Outbound,Suppliers to Manufacturers,Manufacturers

Consumers,Logistics

Management,Integrating

Logistics,Perspectives in Logistics,Summary,Self Assessment Questions,References and Suggested Further Readings

UNIT 3

31-47

ORGANIZING FOR GLOBAL MARKET

Introduction,Strategies for WCSCM,What is WCSCM?,Features of World â&#x20AC;&#x201C;Class Companies,Globalization,Organizing for Global Markets,Stages to Global SCM,Supply Channels,International

Logistics,Integrating

Logistics,World

Class

Logistics

Management (WCLM),Summary,Self Assessment Questions References and Suggested Further Readings

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UNIT 4

48-54

COST ANALYSES & MEASUREMENT

Introduction,Cost

Drivers,Activity

Based

Costing

(ABC),Logistics

Cost,Customer,Profitability Analysis,Summary,Self Assessment Questions,References and Suggested Further Readings

UNIT 5

55-60

BEST PRACTICES & BENCHMARKING

Introduction,Importance Benchmarking,Change Implementation

and

Role

Management Benchmarking,

of and Case

Benchmarking,Methodology Benchmarking,Challenges Studies,Summary,Self

for

Faced

Assessment

Questions,References and Suggested Further Readings

UNIT 6

61-77

FUTURE TRENDS AND ISSUES

Introduction,Collaborative Logistics,Fourth

Party

Strategies,Vendor Logistics,Enterprise

Managed Resource

Inventory,Third

Planning,Internet

Party and

E-

commerce,Supply Chain Agents,Green Supply Chain,Reverse Logistics,World Class Supply Chain,Summary,Self Assessment Exercises,References & Suggested Further Readings

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UNIT 1 PRINCIPLES OF SUPPLY CHAIN MANAGEMENT Objectives After reading this unit, you would be able to: define how the supply chain works; understand the key processes required to integrate the supply chain; examine critical areas of Logistics-Marketing Interface; and examine critical areas of Logistics-Manufacturing Interface.

Structure Introduction How does SCM Work? The Logistics-Marketing Interface Logistics and Product Life Cycle Areas of Logistics and Marketing Interaction The Logistics-Manufacturing Interface Customer Service Issues at the Logistics-Manufacturing Interface Summary Self Assessment Questions References and Suggested Further Readings

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INTRODUCTION Now you are aware of what Logistics and SCM mean. You have appreciated the role of Logistics and SCM in the economy. SCM is basically a system that connects an organization with its customers and suppliers. SCM is the management of all key business processes across a number of supply chains. It is important to know about different supply chain processes for having an integrated SCM. Also there is a strong relation between Logistics group and Marketing group in an organization. Similarly, Manufacturing and Logistics are also interrelated. This unit will take you through to these concepts. HOW DOES SCM WORK? The supply chain management (SCM) is viewed as a system that links an enterprise with its customer and suppliers. As shown in Figure 2.1 information flows from customer in the form of forecast and orders to both the enterprise and suppliers. This information is refined through planning into specific manufacturing and purchasing objectives. As materials and products are purchased, a value added inventory flow is initiated which ultimately results in ownership transfer of finished product to customers. SCM is an integrated approach that is highly interactive and complex and requires simultaneous consideration of many trade-offs. SCM is the management of all key business process across a number of the supply chains. Successful SCM requires a change from managing individual function to integrating activities into key supply chain processes. Operating an integrated supply chain requires continuous information flows, which in turn helps to create the best product flows.

The customer remains the primary focus of the process. However, improved linkages with supplies are necessary because controlling uncertainty in customer demand, manufacturing processes and supplier performances are critical for effective SCM. The key processes for the integrated SCM (Figure 2.2) are as follows:

Customer Relationship Management This is the process to identify the key customers. With customer moving to centre stage, more companies have begun to treat a customer as a value independent entity. The companies no longer view sales as selling of their products, but as selling of relationships, solutions, support and care. Customer relationship teams develop and implement partnering program with key customer. Product and service agreements specifying the level of performance are established with these key customers.

Demand Management Customer Service Managemen Order Fulfillment

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Manufacturing Flow Managem Procurement Product Development and Commerci Return Channel Performance Metrics VALUE ADDE INVENTORY FL Enterprise Customers Physical Distribution REQUIREMEN INFORMATION F Manufacturing Support Customer Service Management Increased and intense competitions all around have made customer service as the key differentiator in a marketing system. Customer service provides the single source of customer information. It provides the customer with real time information on promised shipping dates and product availability. Customer service is a valuable business activity governing both resources and top management attention. Customer service is being offered in many forms such as post warranty support, fast repairs, speedy response to service calls from customers, easy availability of spares, qualified, competent and customer friendly technicians. Demand Management Customer demand in the form of irregular order pattern is the largest source of variability. Given this variability in customer ordering, demand management is a key to an effective SCM process. Manufacturers are moving from a push system to make to order mode, in such case predicting or forecasting demand is the key driver on which all of the supply related decision will depend. The demand management process must balance the customer’s requirement with the firm’s supply capabilities. A good demand management system uses point of sales and “key” customer data to reduce uncertainty and provide efficient information flows through out the supply chain.

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Customer Order Fulfillment The key to effective SCM is to achieve high order fill rate. Order fill rate can be defined as % of order fulfilled before or on the due date set by the customer. Performing the order fulfillment process effectively requires integration of firms manufacturing, distribution and transportation plans.

Manufacturing Flow Management This functional area decides how production should be organized and managed. Traditionally production system uses push strategy but in a customer focus environment pull strategy is more effective. To implement pull system, manufacturing process must be flexible to respond to market changes. This requires the flexibility to perform rapid change over to accommodate mass customization; orders are processed on a just in time basis in minimum lot size. In a customer focused business world, production process has to optimize balance between customer satisfaction and efficiency.

Procurement Procurement is concerned with buying and movement of materials, parts or finished inventory from supplier location to manufacturing or assembly plants, warehouse or retail stores. Traditionally procurement is carried out on the basis of bid and buys system whereas in new integrated concept longterm partnerships are developed with core group of suppliers. Suppliers are involved at the early design stage which can lead to reduction in product development cycle times. For quick response to customer demand purchasing activities are carried out with rapid communication mechanism such as EDI and interest linkages. This reduces the cost and time on the transaction portion of the purchase. Product Development and Commercialization In todayâ&#x20AC;&#x2122;s fast changing environment new products are life bloods of a company. For the firm to remain competitive it has to sharpen its product development times. This requires that customer and suppliers must be integrated into product development process.

Return Channel Managing the return channel as a business process offers the same opportunity to achieve a sustainable competitive advantage as managing the supply chain from an out-bound perspective. Effective process management of return channel enables the identification of productivity improvement opportunities and break through projects. Focusing effort on improvement in key business process is the foundation of SCM philosophy. Thus the goals of these processes are to:

a) Develop customer focused teams that provide beneficial product and service agreement to strategically significant customers b) Provide a permit of contact for all customers, which efficiently handle their

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inquiries. c) Continually gather, compile and update customer demand to match requirement with supply. d) Develop flexible manufacturing system that responds quickly to changing market conditions. e) Manage supplier partnership that allows for quick response and continuous improvement. f) Fill 100% of customer order accurately and on time g) Enhance profitability by managing the return channel (reverse logistics)

Activity 1 Take the case of an organization where you are working or about which you know of and identify the key processes within that organization vis-Ă -vis those proposed by Lambert. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. LOGISTICS-MARKETING INTERFACE Traditionally logistics group assumed primary responsibility for warehousing, inventory and transportation within many organizations while marketing group is responsible for negotiation, promotion and selling. As neither group had responsibility for over all channel management, conflicts arose at the expense of overall organization goal. The organizations had realized that functional interdependence, not internecine conflicts, is the key to satisfy customer needs. Despite the realization by logistics and marketing manager that cooperation is essential marketers often criticize logistics department for being cost minimizers having no concern for customer needs while logistics department accuses marketers of chasing sale at any cost. Therefore it is essential that organizations identify area of agreement and potential conflict. Senior management must be keen to actively support cooperation between the two groups. This can be assisted by performance measurement that rewards cooperation and a spirit of interdependence that actively discourages parochial behaviour.

Logistics and Product Life Cycle Product life cycle (PLC) is a key marketing concept that affects the relationship between logistics and marketing. For different stages of PLC i.e., introduction, growth, maturity and decline, different level of logistics support is required by marketing. In the introduction and growth stage timely cost effective fulfillment of order is a major requirement in ensuring initial acceptance of the product. Later as

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sales slow down and the product moves into the maturity and decline stages, the company changes to trimming cost as the product faces stiff price competition and consequent pressure on margins. Hence there is need for a logistics manager to understand what marketing is trying to achieve with each product and what appropriate level of logistics support is required accordingly.

Areas of Logistics and Marketing Interaction In today’s competitive environment organizations are utilizing the benefits of their established logistics/marketing interface to be competitive not in terms of product and price but also logistics services tailored to meet individual customer needs. These organizations are able to differentiate themselves from their competitors by offering a total service with logistics forming an essential part of the total value chain. The major area of interaction between logistics and marketing includes (Gattorna 1995):

Product Design: This can have a major effect on warehouse and transportation utilization (and therefore costs). Pricing: This is the means by which logistics services customer demand affects the overall cost of the product and in turn the organization’s pricing policies. Market and Sales Forecasts: Marketing forecasts will largely dictate the level of logistics resources needed to move products to customers. Customer Service Policies: If marketing opts to offer a very responsive level of service to customer, logistics resources, in the form of facilities and inventory, will need to be very considerable. Number and Location of Warehouses: This is one of the greatest areas of contention and can only be satisfactorily resolved if marketing and logistics develop the policy jointly. Inventory Policies: This is another area of contention, as these decisions have a significant bearing on operational costs and the extent to which desired level of customer service are achieved. It is another key area where policy should be developed jointly.

Order Processing: Responsibility for who receives customer’s orders and the speed and efficiency with which they are processed has a major impact on operational costs and customer’s perceptions of service levels. This is another area where joint policy-making is preferable. Channels of Distribution: Decisions to deliver direct to the customer or through intermediaries will greatly influence the level of logistics resources required. As channels change, so will the resources required. Marketing should definitely consult with logistics when making channel decisions. THE LOGISTICS-MANUFACTURING INTERFACE Manufacturing and logistics are interrelated so no one can be considered in isolation. Decisions made in these two areas commit the organization to relatively long-lasting

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cost structures and also determine the manner in which the business competes in its chosen markets. To maintain its competitive position in a dynamic industry, the manufacturing and

logistics functions

must respond positively by considering the manufacturing/logistics network as whole and continuous improvement programmes coordinated across the various activities like delivery service, production priority control and purchasing to exploit the synergy available. There are two fundamental competitive strategies, which every organization has to decide to remain unbeaten in the competitive environment. Cost leadership i.e., be the lowest-cost producer in the industry or meaningful differentiation i.e., to differ by competitor in some form, that can be in terms of service like delivery time, delivery reliability etc. or in terms of technical advantages like superior features, superior product etc. In new environment, where integration is the driver to achieve competitive advantage, organizations have evolved new approaches to develop interface between two functions. The differences in these perspectives are shown in

Cost-reduction programmes Eliminate all non-value adding activities/procedures/ tasks etc Reduce inventory Reduce the need to buy capacity by shortening internal lead times Trim 10% all budget allocations Reduce the material conversion cost by simplifying processes through integration and technology Defer capital expenditure Emphasize product and process quality so as to reduce costs associated with rework, breakdowns etc. Emphasize control on expenses Reduce need for inventory through superior planning particularly direct labour systems, shortened internal lead times; linking processes etc Which also results in: Which also results in: Inadequate support Poor product quality

Improved product performance Reduced product variability

Ageing equipment/processes Poor customer service

Improved flexibility

Improved responsiveness to market

An image of being unreliable Poor product availability Poor delivery service

Old Approach New Approach Increase inventory to act as a buffer Shorten internal lead times to improve responsiveness to market Increase number of branch warehouses Emphasize schedule performance to ensure reliable supply Increases capacity to provide flexibility Emphasize product and process quality so as to reduce delays caused by rework, breakdowns etc. Release orders early to production Utilize express transport and centralized distribution

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to prevent misallocation of stock Emphasize production output Initial superior customer service and order entry systems to enhance customer communication

Which also results in: Which also results in: Higher costs Lower costs Negatives cause by the complexity of Improved product performance the system and poor product quality Reduced product variability caused by emphasis on ‘getting the product out’ Long internal lead times caused by An image of reliability early release of works orders to give the plant ‘plenty of time’ Stock-outs due to work order overload, Improved flexibility in volume and product mix confused priorities and difficulty in allocating stock to many warehouses Logistics link the manufacturing both from characteristics of inputs i.e., suppliers of raw materials and characteristics of market i.e., customers. For a given manufacturing organization there is a production/branch warehouse configuration, which satisfies most constraints or pressures imposed by the inputs or the markets. For effective operation of manufacturing/logistic interface there are two primary determinants i.e., Capacity and Location. Capacity is related to location and logistics in the following way. First, production capacity must be matching in some sensible way to the market demand then in accordance with the production capacity matching is required for the logistics network i.e., procurement, storage, order entry and processing, outbound transport, branch warehouse and final customer delivery. The capacity issues are very crucial decision and are required to change as per the market demand and demand locations. Short-term solutions can be capacity enhancement by overtime, second and third shifts, third party contracting, extension of the existing facility and long-term solution are additional facility in a new location or extensive capacity in new location. Short term decisions possess the least risk, and impact on the logistics network only in terms of the additional capacity requirement where as long term solution demand a re-evaluation of the manufacturing/logistics network not only in terms of the capacity of each component but also the strategic necessity and location of each facility (factory, warehouse) in terms of its contribution to the effectiveness of the total network. In other words, a change in location and capacity of any one facility requires a review of the location and capacities of all other facilities. Clearly, the issues involved in location, capacity and logistics are inextricably linked.

Customer Service Issues at the Logistics-Manufacturing Interface Customer service strategy is an on-going process of increasing both the quality and number of links between the manufacturing organization and the customer. The whole emphasis in today’s service intensified businesses are to increase a series of both human and information based technological relationships between customer and the organization so that better customer services and satisfaction to the customer can be realized. The issues at the manufacturing/logistics interface for better customer service are as follows:

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Demand Forecasting The general function of product forecasting in the short to mid term is to contribute to the process of ensuring the availability of stock for customers. This includes the use of distribution requirements planning (DRP) wherever appropriate. For the longer term, forecasting at the product group level is crucial for manufacturing capacity and flexibility decisions.

Customer and Supplier Oriented System Organizational systems will need to be directly related to the issues of how to bind the customer more tightly to the organization and how effectively integrate suppliers into the overall supply chain with the objective of enhancing customer service. The systems installed by organizations will need the capability to formally link the customer in a form that benefits both parties. Systems will also be required to link with suppliers in a manner that gives meaning to the concept of strategic alliances. In a strategic alliance the supplier and the manufacturer agree to a relationship that goes beyond the normal commercial relationship such that each obtains synergistic benefits similar to that obtained by forward/backward integration but with least associated risks and negative attributes.

Plant Configurations The location, nature and operating performance of manufacturing facilities, central warehouses and branch warehouses impact heavily on both cost structure and service levels. In the longer term, and in conjunction with other factors (systems, supplies), the plant/branch configuration is a major structural input to reducing overall supply chain costs. When the links between manufacturer and customer and manufacturer and supplier are complete, a rethink of the logistics (supply chain) network from supplier through to customer will be required, for two reasons:

Available technology, particularly information technology, will allow certain plant/branch configurations, previously ruled out, to be feasible. There will be an on-going need to reduce (in real terms) the cost of the network. A key feature of this process will be the requirement of involving in an appropriate manner both customers and suppliers. This will be new ground for many organizations and will force a re-evaluation of values and mission in some circumstances.

Master Production scheduling The master production schedule (MPS) is an area where a number of parties (manufacturing, logistics, marketing, finance) have a vested interest. Often as not, though, it is done by one group in isolation from the others. In the operational sense the MPS is primarily concerned with stock availability within a set of constraints such as capacity. As such, it is the single instrument, which demonstrates the plan for:

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a) Finished goods inventory levels b) Customer service in terms of stock availability c) Machine utilization d) Capacity utilization e) Labor productivity f) Output g) Need for overtime/casual employees and so on.

The real power of the MPS, however, is its potential to involve all interested parties. In practice, when people from marketing, logistics and manufacturing get together and agree on a schedule, the result is a superior schedule. Clearly the MPS may be used as a vehicle to integrate a number of parties into the planning and decisionmaking process with the result being a superior plan which, when executed, results in superior customer service. SUMMARY In this unit, we have discussed how the supply chain works and what are the key processes required to integrate the supply chain. We have also examined the critical areas of logistics-marketing interface and logistics-manufacturing interface. These interfaces are critical for enhancing supply chain performance. Finally we have discussed how manufacturing-logistics interface could provide better customer service.

SELF-ASSESSMENT QUESTIONS 1) Explain various supply chain processes for an integrated SCM. Are there any other processes that you can think of? 2) What are the primary responsibilities of logistics group and marketing group within an organization? Why there is a conflict between the two? What measures can be taken to enhance cooperation? 3) What are the differences between manufacturing/logistics approach when the basis for competing is i) Cost leadership ii) Differentiation

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REFERENCES AND SUGGESTED FURTHER READINGS 1) Bowersox D. J., Closs D. J. and Helferich O K, 1986, Logistical Management, Macmillan. 2) Chopra S. and Meindl P, 2001, Supply Chain Management: Strategy, Planning, and Operation, Pearson Education Inc. 3) Christopher M., 1992, Logistics and Supply Chain Management: Strategies for Reducing Costs and Improving Services, Pitman. 4) Lambert D. M., 1998, Fundamental of Logistics Management, McGraw Hill. 5) Gattorna J, 1995, Handbook of Logistics and Distribution Management, Ashgate Publishing Company. 6) Gattorna, J. L. & Walter P. W., 1996, Managing the Supply Chain : A strategic Perspective, Plagrave Macmillan Indian Reprinted Ed., 2004

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UNIT-2 DESIGN AND MANAGEMENT OF SCM MARKETS Objectives After reading this unit you would be able to: define Logistics; describe the facets of Logistics i.e. Transportation & Warehousing; portray Logistics as a key to supply chain management; discuss about Inbound & Outbound Logistics; and describe Logistics from supplier to manufacturer & manufacturer to consumers.

Structure Introduction Logistics: Definition What is Supply Chain Management (SCM)? Design and Management of SCM Logistics: Inbound and Outbound Suppliers to Manufacturers Manufacturers to Consumers Logistics Management Integrating Logistics Perspectives in Logistics Summary Self Assessment Questions References and Suggested Further Readings

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INTRODUCTION The role of logistics has for long been perceived by many senior managers and chief executives, as nothing more than getting the right product at the right place in time and within costs. However, in recent times to be successful logisticians a wider perspective has to be developed with due consideration to the strategic role played by logistic management in an organization. Strategic management of acquisitions, movement, storage of raw materials, production and shipment to delivery to end-users are some of the significant tasks of logistics management. Cost-effectiveness and speed are the inherent requirements to make the operation a successful one. Logistics is a very intricate yet a very simple subject to learn about, but a very complicated subject in case the channels of logistics are not in place and not integrated. Logistics per se, require a lot of coordination and integration at the highest and the lowest of levels. Rightly said, a logisticians phone never stops ringing, he moves from crisis to crisis, and from one criticality to another. LOGISTICS: DEFINITION We will begin with an illustration. Take the case of a small time businessman who manufactured and marketed jam, those were the days when it had only a few brands to reckon with. It entailed traveling long distances from Calcutta (now Kolkata) to the remotest parts of Bengal & Bihar (some areas of Jharkhand). The load used to be huddled up at the rear (body of the vehicle) neatly packed in bright colored cardboard packages. The manufacturer processed the guavas/mangoes/pine-apple etc into a jelly like substance, bottled them carefully under his eyes, sealed them with molten wax (that was the practice those days), labeled them, packed them into neat containers careful enough to prevent breakages, marked them for the consignor and dispatched them to their destination. The surplus were sent to a badly lit room and stacked neatly by placing bricks under the packages to prevent against damp. You must have observed how meticulous he was and so concerned about his products. One must admit here that one learn logistics in a very practical way. Right from the time you used your tricycle to lug the loads your friends carried. When you played as children, unknowingly, stacking your belongings neatly and carefully, inadvertently, and later delivered them to another friend and took a few marbles in return of those proud possessions. Till date one is doing almost the same thing; mobilizing men, material, equipment and supplies over long distances across the length and breadth of this country, and stocking them for a further use. That is what is logistics in short. Coming to the proper definition, the term logistics could be used to cover all aspects of movement, storages of material and to deliver the material to the user. For a manager the definition would mean involving movement of goods both in the inbound and outbound sides. It is responsible for both incoming goods and distribution of goods to the next member of the supply chain and to the end consumer per se. In almost all cases, the logisticians design and manage the companyâ&#x20AC;&#x2122;s distribution system, which consists of warehouses, distribution points and transport systems. Logistics can play a

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major role in shaping and determining the nature of the overall corporate response to exploit market opportunities (Deshmukh & Mohanty, 2004). Marketing forecasts precede exploration of market opportunities, since, overall potential of the market, customer profiles, price/volume combinations and resellers profile is to be identified before the best suited infrastructure is utilized to maximize the opportunities available. A logistic activity enables a broader view that has to be undertaken on how the available opportunity can at best be approached. This would further enable the management to review the number of production options available whether it is manufacturing of components, assembly operations or a combination approach. The important characteristics of this decision process concern the relationship between fixed and variable costs ab-initio and also through the product life cycle. This will require a view of the markets, the response of the product competitors and an assessment of market risk. Logistics can make or break a company. How? Once a logistics decision is taken, the implications of that will be, high level of services in terms of product availability and delivery. Failure of logistics will affect your company repute and overall affect the market share. Therefore, in a nutshell one has to understand the importance of logistics and its related decision, since it’s the key to effective supply chain management, and also the first step towards building a strong market position.

Once you have generally understood the basics of logistics we can now inch forward to the intricacies involved in making this logistics happen and what helps in a successful logistics activity. Like in the army it is said that no war can be won without the foresight and planning of an expert logisticians. A soldier can fight a battle in the adverse of conditions, only when, the logistician ensures timely supply of stores, ration and ammunition in all weather and terrain conditions. The two major aspects of logistics are transporting and warehousing, without which logistics is seriously affected.

Transportation Transportation happens to be the most fundamental part of strategic logistic management. Transport costs include all costs associated with movement of products from one location to another. The average transport costs ranges from 5 to 6% of the recommended retail price of the product. Transportation is the movement of products, materials and services from one area to another, both inbound and outbound. It can also be said as movement from one node of the supply chain to the other. As Deshmukh and Mohanty (2004) says, “ by providing for the swift and uninterrupted flow of products back and forth through the chain, transportation provides a sort of lubrication to run the chain smoothly. It also permits deeper penetration of newer markets far from the point of production.”1 Therefore, in order to effectively manage this transportation system the first step would be to establish a cost effective transportation mode. In other words highest customer service in lowest price, leads to company growth

MATERIALS MOVE OF RAW MATERIALS BY DIFFERENT MODES OF TRANSPORT BY DIFFERENT MODES OF TRANSPORT IN-DIRECT CONSUMERS OUTLETS OUTLETS

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DIRECT WAREHOUSING & STORAGE PRODUCT PROCESSING CUSTOMER SATISFACTION TRANSPORTATION SYSTEM COST OPTIMUM PRODUCT PRICE LEVEL COMPANY EXPANSION COMPANY GROWTH

Where, numerical 40 is a variable factor representing the optimum level in terms of costs & growth in X & Y axis. With the transportation costs coming down from 40 to 30 the product costs lowers to even between 10 and 5, which is directly proportional to the customer satisfaction, which rises to 30 to 35 and affects company growth to 40. Transportation system has a strategic bearing on operation of a company. Therefore, failure to identify the best transportation mode can directly affect the growth of a company. Higher transport costs will raise prices, which will directly affect the customer satisfaction in a negative way. The three factors as mentioned by Gattoma & Walters required to consider are: Customer Environment Product & company. Organization, which involves physical movement of goods require transport services that varies from mode to mode. The best suitable mode is required to be identified depending upon the nature of product that has to be moved.Therefore, in order to identify the right transport system the following have to be considered:

Impact of the transport system on the supply chain. Factors that determine the choice of transport mode. Who are the customers to your product per se? What are the environmental factors? What is the product? What is your company profile? Feedback and reporting both from within and the environment on the choice of transport, and rectify in case you went wrong the first time.

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Your foresight, flexibility & integration of available resources in planning stage will be one of the crucial factors that will dictate the choice of transport. Next we have to see as to what are the considerations that influence transportation?2 Considerations Influencing Transportation Customer Communications: in order to obviate delays in transportation and handling of logistics both the suppliers and distributors are relying more and more on electronic transfer systems, IT & the internet. This will help in considerable reduction in time delays and effect better cooperation between the chains. Market Coverage: transportation costs influence the size of markets covered in a big way. The characteristics are: costs, flexibility, reliability and availability. The product per se will influence the economics of the decision. A low volume and high value product will be able to support higher costs, which means extended delivery distances and increase in delivery frequency. Sourcing Decisions: the geographical dimension of the source markets can be influenced by low cost transportation system, i.e. â&#x20AC;&#x2DC;reliable bulk freight services could extend the source markets,â&#x20AC;&#x2122; says Mohanty & Deshmukh. Companies therefore have to consider a trade off between price & quality and the costs involved in delivering to the processing point, i.e. volume & cost of transportation.

Organizing for Global Markets

Manufacturing Operations: cost of transporting has a direct bearing on the location of the manufacturing market center. That is why, extraction based units are close to the source of raw materials and the products related to customer satisfaction are closer home, i.e. near to the customer hub center. Pricing Decision: transportation happens to be the important component of product costs. Therefore, selection of the appropriate transportation mode will have a direct bearing on the product costs per se, with more relevance to exports. Increase in transportation costs increases the product pricing.

Customer Service Decisions: both customer service policy and transportation decisions go hand in hand and hence one cannot be considered in isolation of the other. Moreover, the type of market will also dictate the decision and will vary considerably. Therefore, its pertinent to overrule the cost factor while servicing the medical customers, since speed is more important than cost in selecting the transport mode.

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An Effective Selection System Transport selection can effectively be resolved by adhering to the five stages of selection framework:3 Stage I: identification of those factors affecting the choice of transport selection. Stage II: categorize the significant factors and identify the potential risks. Stage III: determination of the distribution network depending upon the number and size of the depots. Stage IV: application of matrix analysis for selecting the right transport. Stage V: measure and monitor costs continuously.

A Decision Framework Determining an organizationâ&#x20AC;&#x2122;s transport requirement will be based on the following underlying considerations: The available depots, their sizes including movement requirements of raw materials to manufacturing units and finished products to the warehouses and on to the consumers. The best choice of mode available depending on the distance involved. Product characteristics that will further dictate the type of transport mode to be employed. The choice of equipment in terms of type of transport for each requirement. The financial option that could be employed in terms of individual type of equipment. The operation needs in terms of usage of the equipment for maximum utilization and minimum operational costs. From the above its evident that transportation is one of the important facets of logistics and equally important in the process of SCM, because they impact the customer services and other areas of cost. These decisions are prominent within the purview of company logistics decisions due to the factor of trade off potential that exists between alternative modes of transportation and other logistics functions within the firm. Therefore, an understanding of costs and benefits of alternative transport modes, together with an in-depth evaluation of overall corporate implications is mandatory. Transportation costs will always have a direct bearing on the product

costs, i.e. increased transport costs will have risen prices and vice versa. Therefore, appropriate selection of the right transport mode is necessary for optimum customer satisfaction and for a balanced logistics system of the firm.

Warehousing: This happens to be the other important facet of logistics chain and works side-by-side with transportation. It is that segment of logistics function that deals with storage and handling of inventories starting from supplier receipt to consumption point. The management of this includes the maintenance of accurate and timely information relating to inventory status, location and disbursement. Factors influencing the warehousing decisions are:

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Type of distribution. Value of the firm. Quantity and potential for obsolescence. Competitiveness. Economic condition. Warehousing perform a variety of roles as mentioned below: Material handling. It consists of receiving, storing and shipping. Storage. This maximizes customer services by improving product and location positioning. Transfer of information. This ensures timely and accurate information on inventory status, space utilization, equipment and manpower availability and transport capacity. In order to develop an effective warehousing strategy the following areas have to be addressed: Documentation of existing warehouses operations. Documentation of the storage facilities and put forth requirements over the planning horizon. Identify the shortfalls within the warehouses that are available including the deficiencies. Alternate warehousing plans to meet contingencies in strategy. Selection of the best alternative. Update the warehouse strategic plan. With that as a backdrop to our study let us see the design and management of Supply Chain Management, since logistics happens to be the key of SCM.

WHAT IS SUPPLY CHAIN MANAGEMENT (SCM)? A simple definition would be; an integrated, synchronized and a closely knitted chain which links all the supply interacting organization in a two way communication system in order to maintain a high quality of inventory in the most effective manner. Managers at all levels should understand this, since this is related closely to worldclass supply management. It can also be defined as:

An integrated system that helps in managing the flow of distribution channel from supplier to the consumers. SCM is a systematic method designed to manage the flow of information, materials and services both inbound and outbound, i.e. from the supplier to manufacturer to the end customers.

Organizing for Global Markets Itâ&#x20AC;&#x2122;s a strategic coordination of all the related business functions within a particular firm and across businesses within the supply chain, in order to improve performance of the individual companies and of the supply chain.

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It is associated with all the activities encompassing the upward and downward movement of goods and materials from the nascent stage to the production stage and to the consumer. SCM is integrating these activities under one control for better management and for attaining substantial and sustainable advantage. It can be better achieved through better coordination and relationship.

Itâ&#x20AC;&#x2122;s a concerted effort of all in the channel to develop, design, manage and implement value added services towards ultimate customer satisfaction. Integrating men, technology, information, finances and material under one roof is the ultimate aim of this SCM system. These varied definitions placed above are to guide you to understand the concept of SCM better and can be used as per individual perception. The common factor to all this is one has to go beyond the realms of traditional functioning to include and integrate external entities to include customers and suppliers. For better assimilation let us put it across this way.

The Chocolate Way You manufacture a particular brand of chocolate, a popular one with all age groups. Now, in order to make your product responsive and hold fast into the competitive market you got to maintain a close link with suppliers who will provide the best milk for your money, the best coca powder for the flavor, an efficient product manager with an equally trained staff who will design and manufacture what the market requires, an effective marketing system and above all the vendor who will carry it and distribute it to my consumers. This is your supply chain and managing this to maintain a high quality at all times is called the supply chain management. It is a linkage, so designed, that one cannot function with out the other and all have to function in close unison and you, as the entrepreneur has to ensure this. It involves a well conceived strategic planning and long-term tactical orientation, and there is a world of difference between practicing and preaching. A few flow diagrams have been placed for your better understanding. Once you have understood this part of the unit the associated and related matters to supply chain will follow suit, (figure 4.3).

Activity 1 Visit a nearby industry and understand the SCM system being followed in that organization and co-relate the same with what you have learnt theoretically. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. ..............................................................................................................................

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DESIGN AND MANAGEMENT OF SCM Internal functions and external suppliers constitute a company’s supply system, which are involved in identification and fulfillment of requirement for equipment, materials and key services in an optimized manner. Supply management is the foundation to successful supply chain management. It can create a tremendous impact on any company’s bottom line more than any other business function. In case the supply chain is not positively been addressed there is bound to be problems in the firm. Integration of these services and managing them under one head is therefore the key to an effective supply chain system in the organization. The principle phases of supply chain management are:

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

Generation of Requirements As an entrepreneur what is your requirement, and how do you get them? It is a question that is continuously lingering in the minds of all managers involved with this. It is a critical activity that terminates in identifying the right and the best material along with development of specifications and statements of work that describe these requirements. The exodus of materials, services and equipments are ‘designed in’ during this particular phase5 , to the tune of almost 85%. Therefore in order to ensure appropriate consideration to the services, raw materials and costs per se, supply management should be involved right from the word go during generation of requirement phase.

Sourcing When one decides to go shopping just try and visualize what all plays up in one’s mind? Say, you have to buy a Music System for example. Then what? The mental appreciation quickly says thems following:

Budget: How much money can you spend on a system?

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Brand: Which is the best brand available in the market for the budget you have? Availability: Is it readily available too? Services: In case it is available how are its after sales services? Final selection: What is the best that suits all the above?

That is exactly the appreciation one got to do before sourcing. Identifying and selection of the best supplier available in the market, whose costs, materials, dependability, quality and services suits the manufacturers requirements. Sourcing is development of a supply alliance, and it is an activity by itself.6

Pricing It’s a two way traffic aimed both at the supplier and the manufacturer. It’s done in such a way that it benefits the supplier for its effort and also results in lowest cost for the firm who buys the supplies. Keeping in mind inflationary trends, pricing forms part of the on-going process in supply management with inbuilt negotiations, to arrive at the best deal possible. If the supplies are costly the price of the commodity also rises. Therefore, in order to strike a balance the job of supply management is to continuously monitor this aspect so as to keep the prices from rising. For example, when the prices of diesel goes up, the transportation cost increases leading to increase in prices of supply. Foresight and planning on the part of the manufacturer plays a leading role in assessing and reacting to such eventualities in a big way.

Post pricing This is another important phase which ensures that the firm receives what it demanded, and that too timely. It also ensures that the prices are in check and that quality is being maintained. This also includes supplier developments, criticalities management, technical assistance and management of the complete contract. That is what are the principal phases of supply chain management (SCM). All the sub phases are inter-related and managed under one head the SCM systems. Let us see this more closely with this block diagram. 5 “Manufacturing by Design” by D Whitney, Harvard Business Review, July 1988, pp. 83-91 6 ‘The Foundation’, chapter 1 of WCSM, by Burt, pp. 16.

LOGISTICS : INBOUND AND OUTBOUND Let us now take a closer look at the logistics both inbound and outbound. Let me tell you this is the most intricate part of the system of SCM. If your goods don’t reach in time and they are of inferior quality you as an entrepreneur earn a bad name too. So why give the consumer a chance? Plan it in a way that you

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ensure both quality and quantity in a reasonable time frame. Take for example 7 days trucker’s strike in 2004. It was bad for economy of the country and above all worse for those manufacturer’s who couldn’t deliver goods on time. A strike or a bandh as we call it in India is a happy situation for the fleet owners but a bad time for the drivers, mill owners, small timers, labourer, suppliers, manufacturers and the consumers. That is the reason contingency planning plays a predominant role in shaping our SCM system. How, let us see.

Suppliers to Manufacturers The most complicated, yet, the most important phase in any production is the movement of raw materials from the supply point by the suppliers to the manufacturing unit. Identification of the right type of suppliers is therefore the key to effective SCM system. Can you envisage the various agencies and steps that are involved in this total system? Let us see them one by one. What is the raw material that has to be moved? What is the cheapest and the best available with the suppliers? Where is it available? What are the credentials of the supplier? What is the mode of transport being utilized for the move? Is it cost effective? What is the time factor involved in the movement? Does weather and climate play a predominant role in moving the raw material? What are the terrain conditions in the areas from where it has to be moved? What is the distance involved? Is it of acceptable quality?

All these have to be addressed before one plans for movement of these raw materials, that too in great detail. That is what is an effective SCM system to be followed by every firm. Let us see this with an illustration.

An Illustration A material ‘X’ has to move from Bihar, which is famous for lot of ores and raw materials responsible in shaping our products. Let me be more specific in saying so. Some minerals from Sasaram have to be moved to Surat in Gujarat for making some product ‘Y’. The road distance works out close to approximately 1600 kilometers, quite a lot as per Indian standards. A truck loaded with X leaves Sasaram on D-day (where D is 1). As per Indian road conditions it could take anything between 3 to 4 days for the material to reach. Therefore the total time works out to D+3/D+4, i.e. 4th/5th day the truck will reach

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Surat. Unloading time ½ a day, running time works out to 4 ½ /5 ½ days. Thereafter quality checks and various processes to place these raw materials on the production line will take another 2 days works out to 6 ½ /7 ½ days. Production time of 1 to 2 days depending on the type of product works out to 7 ½ / 8 ½ days. Keeping a cushion of 1 day the time taken for the finished product will be anything between 9 to 10 days. That is the planning involved in making a finished product and achieving your target. That is under absolute ideal conditions. India is subjected to numerous disruptions in form of natural calamities, man made obstacles, disasters, accidents and unrest. One has to cater for these criticalities and therefore foresight in planning is must. Suppose there is flood like situation at Sasaram, then what? One has to plan for warehousing near Surat where certain stocks catering to these kinds of contingencies have to be catered for, ab-initio. Like floods there could be strikes and bandh too. These are the gray areas that have to be addressed in totality, apart from the fact that the vehicle could also break down enroute. There could be a number of examples related to movement of stocks and supplies, be it rail, water, road or air. All have their complexities and peculiarities, but the underlying basics are the same one has to plan ahead come what may, to avoid irregularities.

Movement of supplies from suppliers to manufacturers differs from place to place. Terrain plays a predominant role in this aspect and you have to realize this point. In mountains the criticalities are far too many and you can understand the aforesaid through this chart in a better way. From the above it’s evident that criticalities in any form disrupts movement in a big way irrespective of the terrain but you got to plan your time schedule depending on the terrain on which your supplies are moving. Therefore, knowledge on these areas is very important so that the suppliers cannot take you for granted on these counts. Studies on geography and layout of an area of responsibility and related aspects are therefore important for a manager dealing with logistics. Activity 2 Study the aspects of terrain and its implications on logistics management. Visit a few places in the hilly and mountainous terrain and understand the implication of these areas on logistics management. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. Differences in Urban and Rural Areas India is one such country, which enjoys a rare mix of both urban and rural pockets at regular intervals. Rural areas require tremendous amount of logistics supply and coordination to make the SCM system effective. That is the lay of Indian society and hence one has to understand and be live to the problem.

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Actually most of our supplies move generally from these rural areas and hence you should be aware of these areas in a nutshell. Let us discuss them for a while. The various criticalities pertaining to logistics in rural areas are:

Large quantities and more number of collection points. Distance between the manufacturers and users are large. Materials are bulky, perishable, and expendable and have inferior packaging. Certain places have to be communicated through handcarts, tractors, boats, cycles and bullock carts. Trips are generally one-way and hence not cost effective. Uniformity in work is missing, since; logistics are restricted to peak seasons only. A mix of intermediaries and direct delivery. Storage, movement and packaging of agro products are difficult and time consuming.

There are many more to this depending upon the nature of terrain and climatic conditions too, but these are the salient ones and you as a manager have to understand this aspect. Trading in rural areas is difficult and risky too. Storage in rural areas is another criticality due to restriction in storage areas and because the agro produces are seasonal in nature. These are to be consumed round the year, both in season and off-season. Storage starts right from the time the harvest is ready till its distributed to the consumers. The various storage places available are:

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

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Activity 3 As a student of Logistics suggest a few practical viewpoints, which differs urban from rural logistics, both in terms of management and maintenance. Organize a visit to a rural area factory and carry out a feasibility study on how logistics can be improved for better response. ............................................................................................................................................. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. Urban Areas Coming on to urban areas, the process is certainly different since; it doesn’t have to go through the exercise of moving through bad roads too often and poor storage system. Things move more systematically and less time consuming, though at times the carriers perforce move through difficult stretches of rural areas, generally a mix of urban and rural areas. What happens in urban areas? Let us see. The procurement is done generally closer home and very near to the towns and cities. The supplier’s job is to supply the goods in the time frame and price that is fixed initially. The company management generally contacts the supplier who has nominated go-downs close to the place of manufacture, for better and even time management. Unlike rural areas the suppliers in the fastest mode deliver the material and services in order to save on time; a combination of rail, air and road at places even waterways. Manufacturing takes lesser time in production and distribution thereafter. A better market available to the manufacturer for his goods. From the above it’s evident that a manufacturer in the rural area stands at a disadvantage visa-vie his urban counterpart for the following reasons: Movement of raw materials. Transport system. Storage facility. Production. Preservation. Distance from source to market area. Availability of market. In a nutshell the SCM involved in managing a rural enterprise is more cumbersome than the urban one.

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Manufacturers to Consumers Let us now visualize the various stages involved in moving the finished products from the manufacturing units to the consumers. They are: Packaging of goods. Stocking them in warehouses/containerization. Loading into carriers/transportation. Delivery to the nearest wholesalers. Wholesalers to retailers. Retailers to market places/stores. To consumers. These 7 steps are like any of those 7 days. It’s difficult to skip one to save on another. Yes, there are direct marketing that the companies are following these days, but they are numbered. But the basic stages of these companies too move through pre-designated franchises and not directly. Hence, the time taken or cost per se generally remain the same. Problems envisaged in movement of products from manufacturing units to consumers are many and can be listed as under: Perishable products. Losses in transit. Accidents and calamities. Unavoidable delays in terms of strikes and bandh. Labor unrest. Rats and rodents. Breakages during handling. General costing since at times even double handling is involved.

From the above it’s evident that labor’s unrest is generally common in the complete process and an effective SCM in position can only help reducing these miscalculations and criticalities. Natural calamities and strikes do pose a problem for the manufacturer and indirectly increases the cost of items ultimately available to the consumers. What is therefore your ultimate aim in this process of SCM? It’s the response of the consumer for whom you made this happen, and side-by-side what is the effect of the problems and criticalities on your product? It affects the costing Where does the raw material come from? Who supplies it to you? What is the best course available to you in procuring the right material with in the cost per se from the available options? Who decides on that? You and the management.

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How is the material moved and where to? How do you store this? What are the various contingencies involved in this? What if the stores don’t reach on time? What is the option available to you? What would be the losses in production? What would be the losses in packaging? If the production channel breaks down, then what? How do you transport the finished goods in the time frame available to you? How will your marketer’s distribute or market the products? What will be the response of the consumers to your product, your ultimate aim?

All of the above are interlinked and have a direct bearing on the net output of the firm. An effective SCM system in place wards off any such minor shortcomings that can run into problems and criticalities later. LOGISTICS MANAGEMENT Before we went on to this let us see the triangle that is formed in the supply chain management (SCM). The three critical components of SCM are: Supply management Demand management Logistics management You would learn about the supply and demand part of SCM in next unit and would discuss on logistics part of it now. As discussed earlier that the logistics professionals play a vital role in shaping the success of SCM as regards management of transportation, storage and warehousing. We sometimes do tend to ignore the role of logistics but the supply and demand chain cannot be met without the integrated and close-knit support of the logistics. Logistics management deals with receiving, handling, movement, storage and delivery of material, services and finished product in an SCM system. Logistics is required both at the beginning and at the end of it. As Coyle puts it, “ logistics is the part of supply chain process that plans, implements and controls the efficient, effective flow & storage of goods, services and related information from point of origin to point of consumption for the purpose of conforming to consumer requirements”. Logistics include the following

An effective SCM system will never be possible without the integration of logistics, since logistics is the foundation of SCM discipline and is responsible for its activities. Needless to mention here is that the transportation cost is the heaviest in the entire chain, and even more than product selling prices. Therefore, in order to maximize customer satisfaction and meeting firm’s goal it is mandatory to ensure that effective storage facilities for goods and services are in place.

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INTEGRATING LOGISTICS

Logistics planning has to be integrated with material and capacity planning in order to achieve maximum and optimum level of satisfaction. The needs and requirements of our customers is variable and never a constant factor, therefore, in order to serve them better and be profitable you got to tailor your logistics and ensure it to be more dynamic with passing time. The emphasis should be on reduction of cycle time and elimination of waste in order to increase customer satisfaction. You have to understand that movement of goods, warehousing of materials and delivery is time consuming and at times requires precision synchronization at all levels i.e. from supplier to manufacturer and from manufacturer to consumer.

Illustration Can you visualize the effort involved in moving crackers from Shivakasi in Tamil Nadu to Kolkata? A child who burst these crackers only have to demand them, and you as the guardian have to procure them from the shop, which sells these. Where does the shopkeeper get it? He gets from the wholesaler, and the wholesaler from the distributor/stockiest of that area. How does the company X stock the stockiest? The crackers are packed at Shivakasi and loaded in carriers, depending upon the time it has to reach and the time in hand before it is required. In case the planning fails the crackers will land up after Diwali to the dismay of many. Thatâ&#x20AC;&#x2122;s dead stock and is of no use to the consumer. Therefore, logistics involves procuring and transporting of the raw materials required to make firecrackers from the source to the manufacturer and once again tran-shifting the finished products to the warehouses near to the target area, so that closer to the festival the crackers could be utilized at once. When this is happening another set of crackers are in the process of moving from Shivakasi for the target area to meet any contingency. What if the warehouse catches fire? That actually depends on the demand per se and supply thereof, which we shall see in the follow up unit. From the above itâ&#x20AC;&#x2122;s seen, as to what all gets involved in movement of firecrackers, from the source to the consumer, and how logistics play a predominant role in assisting the products to reach the consumers in time. PERSPECTIVES IN LOGISTICS One has to continuously think and think rightly to get over the routine criticalities that are involved with logistics. Theory will surely help you to understand the

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guidelines involved in logistics, but unless you understand the practical aspects and device methods to tackle them, you will find yourself in a quandary each time, when faced with a criticality. Certain newer perspective in logistics planning and execution could be as enumerated below.

Produce at Source: This will involve production near to the source of raw material and cheap labor. It will also involve lesser movement of transport and reduce double handling to a large extent. There are other disadvantages in this though, like distance from the target population, which will involve more number of stocking points and areas. But, this can reduce the basic cost of production considerably.

Fleet Management: Can you think of managing your own set of transport? Yes, certainly you can. Thinking of additional costs and expenditure? Yes, there are. But, certainly not more than hiring and facing the problems of truckerâ&#x20AC;&#x2122;s strike, and incessant rise of carriage charges. Maintaining a fleet is cumbersome today, but if you can maintain a good sixty vehicles along with a minor repair organization, it will help you immensely on a rainy day. You have something to call your own. Integration of logistics network. Logistics have to be integrated with the others in the firm for a better coordination. How? Let us see with the help of a figure.

Activity 4 Suggest a new perspective to logistics management keeping in mind the present changing logistics scenario. .............................................................................................................................. .............................................................................................................................. .............................................................................................................................. ..............................................................................................................................

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SUMMARY Logistics plays a predominant role in designing and shaping of SCM in a firm. Without an effective logistics system the effectiveness of the firms SCM channel is questionable. Logistic activity helps in enabling a broader view to be taken for handling the best available opportunity and how it is to be approached. If we understand and know the economics of logistics activities it is possible to review a number of production options that may include individual production (manufacturing of all components), assembling, or an ideal combo approach. The key players of logistics activity that is transportation and warehousing has been amply discussed and will enable you to understand the nuances of selecting the right transport mode for the right product and equipment within the overall gambit of cost effectiveness. We have discussed the issues pertaining to move of logistics both in-bound and out-bound in the Indian scenario, within the scope of this unit per se. Last but not the least, we have understood the designing and management of SCM and the key to effective SCM, the logistics.

SELF ASSESSMENT QUESTIONS 1) Define logistics and elucidate with appropriate examples in the Indian context. 2) Explain the various factors of logistics with special reference to transportation. 3) What are the stages for selection the appropriate transport mode and why? 4) Why is transportation important in a firmâ&#x20AC;&#x2122;s supply chain? 5) What is more important-inbound or outbound logistics in a supply chain? 6) Give relevant examples of the problems involved in logistics activity. How can we overcome them? 7) What is a supply chain and what is effective SCM? 8) What are the factors that link supply chain?

REFERENCES AND SUGGESTED FURTHER READINGS 1) Krishnaveni Muthiah (2003), Logistics Management & World Sea-borne Trade, Himalaya Publishing House, Mumbai (for basics of Logistics & marketing interface) 2) Deshmukh & Mohanty(2004), Essentials of SCM , Jaico Publishing House, Mumbai (should be included in compulsory reading, since the text pertains to Indian context, simple and easy to comprehend) 3) Simchi-Levi, David Kaminsky, Philipsimchi-Levi, Edith (2004), Designing And Managing The Supply Chain, Tata McGraw-Hill 4) Mentzer, Fundamentals of Supply Chain Management, Sage India Publishers 5) Burt, Dobler & Starling, World Class Supply Management, Tata Mc Graw-

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UNIT 3 ORGANIZING FOR GLOBAL MARKET Objectives define WCSCM and International SCM; discuss international logistics and globalization; identify the steps to be initiated before going global; talk about organization for global markets & global sourcing; and describe world-class logistics management & interfacing of logistics.

Structure Introduction Strategies for WCSCM What is WCSCM? Features of World â&#x20AC;&#x201C;Class Companies Globalization Organizing for Global Markets Stages to Global SCM Supply Channels International Logistics Integrating Logistics World Class Logistics Management (WCLM) Summary Self Assessment Questions References and Suggested Further Readings

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INTRODUCTION After having seen the strategic SCM, supplier alliances, quality management & SCM re-engineering let us see SCM as organized for global markets. This particular unit is focused on world-class supply chain management, which is spreading rapidly in almost all countries across the globe, and in most advanced economies. Broad product range, shorter product life cycle and growing changes in the market place are becoming the norm. More and more companies are coming forward to provide customized value based services to their clientele and at the same time maintaining a high volume of production. Internet, ebusiness and e-commerce have become the business drivers of today with companies able to converge geographically through the electronic media. At the same time data warehousing and data mining is allowing the companies to contact the customers over a wide front and at the same time maintain a one to one contact. World-class is a wide term extending over a vast spectrum of correlated developments, which together define a comprehensive change in the prevailing environment of hypercompetition.

They are: At the marketing level, customer satisfaction, and integration of product and services, characterizing a world-class supply chain. At the organizational level, world-class supply chain is defined by the integration of new productive capabilities out of available resources. It refers to the physical facilities and knowledge base irrespective of the location within one group or cooperating companies.

At the individual (people) level, the development and emergence of a flexible, skilled and knowledgeable workforce as the ultimate differentiators.

At the management level, world-class supply chain is governed by a philosophy of leadership, empowerment, motivation and productive performance (White, 1994). The world-class manufacturing model is summed up by Schonbergerâ&#x20AC;&#x2122;s agenda that included:2

Design & organization. Operations. Human resources development. Quality and problem solving. Accounting and control. Capacity. Marketing.

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The Cranfield Competitive Manufacturing Model (New, 1987) has identified the performance characteristics of manufacturing systems through seven fundamental objectives for step change, they are: Reduction of inventory by 50% or even more. Reduction in manufacturing lead-time by 50% or more. Introduction of new products at 2 to 3 times the rates. 50% of the current design/development lead-time. Reduction in costs by 30% or more. Reduction in support labor by 50% or more. Improve quality to parts per million. With this as a backdrop let us now see the strategies for WorldClass Supply Chain Management (WCSCM). STRATEGIES FOR WCSCM WCSCM is a result of the developments of the world-class manufacturing model and is to be capable of operating profitably in a competitive environment to the factors of uncertainty and unpredictability. The companies that are able to respond to the structural and functional changes in this changing market place can emerge profitable in the long run. WCSCM is a process that is value centric, and therefore all the processes like development, sourcing, movement, production and distribution of products and services are centered on value generating paradigm. It is an ongoing process from buying a product to buying a solution on a long-term basis. WCSCM can be conceptualized under three basic dimensions:3

Enrichment of Customers: Represents varying degrees of collaboration and interaction in defining products, services and concepts. Schonberger, 1990 as also in Deshmukh & Mohanty in Essentials of SCM p 282 WCSCM Chapter 17, in Essentials of SCM by Deshmukh & Mohanty, 2004, p 283 Recognition of Company by the Customers: Quality speaks, and reduction in fixed price to shared risks and recognition. A Linkage between Suppliers, Company and Customers: Represents linked networks of workstations, shared databases, tools and facilities. In order to meet the challenges of globalization, economies that are liberal will require restructuring their operating policies and a complete reformulation of the systems to eliminate wastes and create a value base. Value for money is becoming a strategic necessity in this competitive world, i.e. high quality at reasonable prices at the appropriate time. But, for the manufacturer the realities like increase in costs of labor and energy continue to pressurize them. They have to realize this aspect and identify what and how to do it, by servicing the

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existing customers, dealings with suppliers, opening new channels for newer customers, reduction in costs and adding to value added services. What is WCSCM? Before getting on with the various components of WCSCM, we must understand the working definition of this term. It has to be understood that every company aims to make profits, which further results growth. World-class denotes to be able to sustain oneself, in this competitive market and at the same time make profits in the long run. For profit, a company got to sell its product at a cost higher than its costs, and at the same time offer its product through the supply chain at the competitive market place with a value for money. In actuality, worldclass denotes being able to provide the better value than the competition without going broke.

Features of World â&#x20AC;&#x201C;Class Companies The world-class companies as compared to non-world-class companies are featured by a set of different characteristics as under: Management Level: The various tasks performed by them are: Visionary: Has a set of managers who are continuously improving performance through leadership, coaching, vision, and motivation. They work towards eliminating of wastes and create competitiveness. The top management in such circumstances performs the role of a visionary force and the middle management involve in coaching and training the subordinates. The supervisory staff executes the role of facilitator and supporter of the employees in eliminating waste. Policy Making: These companies use benchmarking methodologies to seek and evaluate the best policies and practices for setting agendas to tide over the old traditions and new set of thinking, to strive towards previously unreachable goals (Senge, 1990). Long-term Strategies: They generally have a long-term strategic plan, defining the corporate activities, objectives, goals, and operational plans to add value to companyâ&#x20AC;&#x2122;s products and services. The Tata Group is one such living example.

Human Resource Development: They generally involve their employees and their staff through extensive training programs for providing them the skills and knowledge base to achieve these policies and goals. It is a proven fact that if the employees are treated equally and with respect, is provided meaningful jobs and is involved intimately in decision-making and problem solving the company will develop, because it satisfies personal goals andZ4

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company objectives. Tata group is once again one such example of human resource development. The Sahara Group has of late started to show results. Holistic Approach: The management policies and practices are so tuned that it provides a holistic approach, which helps in integrating the objectives and activities of different functional areas. These developments of common corporate goals are necessary for competing successfully. Providing leadership by the top management in an eventuality can obviate losses in certain circumstances.

Measurement and Rewards: It is recognized that what gets measured and rewarded gets done (Deshmukh & Mohanty 2004). Simple performance related policies are used towards human resource improvement, team efforts and selected key variables necessary for adding value to its product, thereby avoiding short term dictates, evolving from financial controls and dictated standards.

Quality Control: They can further be divided as under:

Customer Focus: These companies establish relationship and linkage with university systems, promoting research and educational activities for longterm competitive advantage. All these activities are aimed at customer focus and service.

Customer Oriented Products: These companies aim at customer driven strategies for product development and marketing, organizing customer contact, and intellectual commitment for product concepts, performance and specifications. One has to continuously determine the customer requirements and expectations. Hearing the ‘voice of the customer’ is the key issue. It’s customer definition of value that counts for a faster and flexible supply chain. Cross-functional Teams for Product Design: These companies use design, manufacturing, marketing & distribution for responding and communicating the needs of the customer throughout the organization, and integrate the cross-functional teams for a better quality product in a faster time frame. Team approach to product development and improvement has allowed many companies to achieve 4 to 6 fold improvements in product reliability, 70-90% reductions in warranty costs, 40-50% reduction in workmanship and 20-40% reductions in product costs. It is a key for becoming world-class manufacturers and the top management can influence this aspect more than anyone else, since It is more of cultural changes than technological. Quality Improvement: There is no compromise in quality as far as such companies are concerned. The quality improvement department continuously serves as a support and coordinate functions for quality improvements and excellence all through the organization.

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Process Control: These companies, control the products based on statistics and encourage decision making at operating level using local data sources on key variables for comparisons against customer needs.

Innovation: These companies are innovators, who constantly experiment to improve existing products and processes, and develop new ones (Deshmukh & Mohanty 2004). Lesser variability and greater capability.

Partnership: Vendor partnership provides a win-win situation as regards quality improvement and new product development efforts. These companies seek outwardly for such partnership like relationship, since suppliers are important to success and crucial too. Integrated Operations/Production: They are further sub-divided as under: Cellular Manufacturing: The main focus in standardizing and simplifying their manufacturing operations and related instructions, thereby, reducing complexity, and facilitating the effective use of continuous-flow processing concepts for reducing lead-times, process inventories and materials handling. Continuous flow processing, often implemented through cellular manufacturing, provides quantum leaps. Improvements in manufacturing lead-time from 10-12 weeks, to one to three days are common along with corresponding reductions in work-in-process levels from weeks to days. These companies use multidisciplined and multi-level work teams to standardize and simplify changeover procedures, thus reducing equipment downtime during job changeovers and allowing production in smaller lot sizes, a key requirement for flexible production. Demand-based Processing: These companies believe that by adopting an enlarged view of manufacturing operations even at the cost of allowing machines to sit idle can provide gains in plant efficiency and quality; whereas, pushing the machines to their optimum usage can yield poor quality products and longer manufacturing lead-time, over and above wear and tear of the machines.

Standardization: World-class companies rely on high technology and automation more as complementary tools than as part of the manufacturing

strategy, with focus on standardization,

simplifying and proving the integrity of the manufacturing process before automating. Automation before standardization creates non-solving problems. It focuses on flexible changes and decisions and avoids making expensive changes and inflexible decisions. Shankar says, principal of USA (understand, simplify and automate) is extensively applied by these companies, in their organization.

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TPM (Total Productive Maintenance): In these organizations preventive and predictive maintenance are given importance, based on worker involvement so as to minimize occurrence of machine downtime. Technological Advances. Communication Systems: These companies recognize the importance of effective communication skills and strive to establish and maintain simple procedures so as to provide timely and accurate information flow throughout the manufacturing enterprise (Chatterjee 2000). Information is the basic survival of any organization, both directional and feedback oriented. It is the management’s responsibility to provide effective, simple and appropriate information to the workforce for better results. Information Technology (IT): It can be utilized in a big way to the competitive advantage of an organization. Data mining and warehousing and ERP are the technological solutions available today. The main purpose being shortening the lead-time and remove non-value added activities. Human & Technology Interface: These companies recognize and acknowledge the interface and importance of humanity and technology. It is the responsible of the top management to do so across the organization. The required resources are so deployed so as to make the interface more and more active. At every stage of technology deployment, the human issues are dealt in a serious manner. All these don’t happen automatically, but with the interference of the management’s leadership, and application of the policies to strive better to eliminate waste and creating better value for the customer, the end user.

Activity 1 Identify the role of management in integration of SCM and its positive implication on the organization through a case study you have encountered. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. GLOBALIZATION WCSCM is responsible for those actions and values responsible for continuous up gradation and improvement of the development, design & management process of a firm’s supply system. The main objective is to, improve the profitability, survival and mere existence of both the supplier and the customer. A world-class supply manager is not departmentally or internally focused, but concentrates in

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continuously improving the system with an ultimate goal of upgrading the competitive capability of the firm and it’s supply chain. Senior management must always recognize supply management’s critical nature and support the required transformation, to see the firm grow to a world-class status. It is indeed necessary in that case to appoint a Chief Supply Officer at the organizational level equated in stature and responsibility like the marketing, engineering and operations. The transformation has to be planned very carefully and executed well with the commitment of the top management and their involvement.4

Organizing for Global Markets Before going global you got to answer the set of six questions, which needs to be addressed as a candidate of global sourcing:5

4 WCSM, chapter 1 by Burt, Dobler & Starling, pp. 6-7. 5 Raul Casillas, “Foreign Sourcing: Is it for you?” Pacific purchaser, November-December 1988, p.9 (Burt & Dobler in WCSM Tata Mc Graw-Hill pp. 361-369.)

Does it qualify as high-volume in your industry? Does it have a long life (two to three years)? Does it lend itself to repetitive manufacturing or assembly? Is demand for the product fairly stable? Are specifications and drawings clear & well defined? Is technology not available domestically at a competitive price and quality? If the answer to all the six questions is yes, then the supply manager may want to evaluate the support network within his/her firm, asking the following questions: Does sufficient engineering support exist to efficiently facilitate engineering change orders (ECOs) when they occur? Will the buyer be able to allow sufficient time to phase out existing “in the pipeline” inventory? Will the supply managers firm take the responsibility for providing the necessary education and training for those that will have to interact with and support foreign suppliers? Is the firm ready to make a financial commitment for expensive trips to the supplier? Is the management willing to change the approach, in some cases even policy matters of how business and related transactions are conducted? Is the buyer aware of the environment? If the answer is positive to both sets of these questions, global sourcing is possible.

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Activity 2 Visualize the impact of globalization and its effect on Indian companies and how they could effectively gear up to the international order? ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. .............................................................................................................................

Stages to Global SCM Most of the firms today are replacing the term international sourcing by a broader philosophy of “global supply management”.7 The three stages of world class wide sourcing is as follows, as suggested by Joseph Carter:8

Stage One: International Purchasing : Organizations focus on leveraging volumes, minimizing prices, and managing inventory costs. These areas are the characteristics of an organization first entering the global purchasing arena.

6 Burt & Dobler in WCSM by Tata Mc Graw-Hill pp. 369-370 (7th edition) 7 Robert M. Monczka & Robert J. Trent, Global Sourcing: A development Approach”’ International Journal of purchasing and materials Management, Spring 1991, p. 3 (Burt & Dobler in WCSM by Tata Mc Graw-Hill pp. 365-366) 8 Joseph R Carter, PhD, “The Global Evolution”’ Purchasing today, July 1997, p. 33 (Burt & Dobler in WCSM by Tata Mc Graw-Hill p. 365)

Stage Two: Global Sourcing : Organizations focused on global opportunities will put more emphasis on supplier capability, supporting production strategies, and servicing customer markets. Of those that have sourced offshore for some time, most are at this stage.

Stage Three: Global Supply Management : Organizations optimizes supply networks through effective logistics and capacity management. These organizations have effectively minimized risks in offshore sourcing and have sourced worldwide for technology leadership. (As enumerated by Burt, Dobler & Starling in their book World Class Supply Management) Let us now take a look at the reasons for doing global sourcing. It requires additional efforts as compared to regional/domestic sourcing; but natural, but yields greater profits in the bargain. The biggest criticality or complexity of purchasing goods from foreign countries is the wide variability

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available in the open market. The difference comes in quality, services and the dependability factor. Quality could be very high in the products of a particular country and unacceptably low or inferior in another. With this in the backdrop let us now see the reasons for purchasing the goods and services from international sources.9

Superior Quality : A key reason to global supply management is to obtain the required level of quality. Although this is loosing its significance, yet the managers worldwide are still looking at international sourcing for the critical quality requirements. Better Timed : Another good reason for global tendering is to meet the schedule requirements. Leadtime between orders and delivery is lesser as compared to domestic sourcing and more reliable too. This aspect has in fact improved considerably over the years and so has the capability of the suppliers in meeting the growing requirements. Once the initial hiccups are stabled many international sources have proved more dependable than those closer home, specifically in meeting the time schedule. Lower Cost : There are a lot of add on expenditures that are involved during international sourcing compared to domestic ones. Communications, transportations, duties and investigation of potential supplier’s add to these expenses, however, cost of material being cheaper compensates these expenses. Yet, it’s very seldom that a company’s total cost of material through global sourcing could be lowered.

Advanced Technology : Globally this is more advanced as compared to domestic products and materials. Advantage will always be of the manufacturer who can identify the right source of the technologically superior material in order to maintain a monopoly in business. An entrepreneur who fails to identify this will loose out on the product competition too soon. Larger Supply Base : International sourcing increases the number of possible suppliers resulting in a choice among many. Competitiveness will enhance the chances for the firm to get the best deal keeping in mind reliability and low cost options. Broadening the supply base doesn’t increase the quantity of suppliers but increases the options of finding better suppliers, so as to enable the purchaser firm to reduce the number of contracted suppliers and pursue collaborative or alliance relationship at the appropriate time. 9 “World Class Supply Management,” Burt, Dobler & Starling Tata Mc Graw-Hill pp. 366-367, 7th edition. Larger Customer Base : Global sourcing can create opportunities to sell in countries where the buyer’s suppliers are based. With minimal trade restrictions sales opportunities could arise just out of interaction itself. Yet, some countries have arrangements like barter, offsets or counter trade, wherein there are

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tremendous trade restrictions. Here the international suppliers/non-domestic suppliers are required to procure materials in the buying country as part of sales transactions. This kind of tying makes both marketing and supply management far more challenging than when pure money transactions are involved. Such an arrangement of competing and selling in many countries makes it a necessity to enter into some kind of agreement to purchase items from that particular country,

There are however certain criticalities in going global too, it’s not so easy as it seems and one has to keep this at the backdrop before setting out

Cultural Aspects : These are mostly in relation to beliefs and superstitions that are generally prevailing in Asian and African countries. These are real issues and shouldn’t be ignored.10 These are generally due to the versatile regions available across the globe; every region has its belief and faith that revolve around their day-to-day dealings.

Longer Timeframe : Longer lead-time in shipping of material and services from international sourcing creates a major problem. Generally through sea, which are prone to storm damage. Hence, there is a requirement to tap the aerial route; a much costlier option although.

Inventory Increase : There could be an increase in inventory in such conditions, and this can never be determined. Therefore to obviate such criticalities inventory-carrying cost must be added to purchase price, the freight costs, and administrative cost to determine the actual cost of buying from global resources.11 Inferior Quality : As mentioned earlier, global sourcing is generally resorted to due to high level of quality control, however, there are chances that there is a risk of production outside the control of the domestic firm, resulting in “off-spec” incoming material. Like for example, the United States is the only major non-metric country in a metric world, which frequently leads to manufacturing tolerance problems for buyers of US products and vice versa.12

Labor Problems : This is a growing problems world over, mainly in the third world countries. This would entail stringent measures to be adopted by these countries to improve the labor laws to tide over this menace.

10 Chapter Strategic Sourcing: WCSM by Burt & Dobler Tata Mc Graw-Hill, pp. 368-369. 11 ‘Additional Inventory’ paragraph 3 of Potential Problems, WCSM, and p. 368.

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12 “Lower Quality”, paragraph 4 of Potential Problems, WCSM, p. 368.

Cost Factor : There are a considerable amount of add on costs due to the communication factor, translators cost, and distances involved. These increase the cost of doing business. Moreover, inadequate logistical support complicates communication and product distribution in the long run. High Opacity : Bankers, investors and supply managers involved in global activities have been aware that the risk of conducting business varies from country to country. Recently, a risk factor called the “opacity index” has been developed to address the risk costs associated with conducting business in a specific country.13 It addresses the following areas: Corruption at bureaucratic levels. Contract & property right laws. Economic policies. Accounting standards. Business regulations.

China for example has a higher opacity in comparison to USA. US have fewer hurdles of types mentioned above and very less corruption.

Supply Channels After having decided to go global the next step is to infer the supply channels that are to be used. Direct procurement is the easiest and lowest cost option to procure goods globally. It entails dealing with all the associates in procurement by the buying firm along with the facilities. However, limited resources in supply management may make direct procurement infeasible more often than not. Therefore, intermediaries will play a key role in streamlining the efforts of procurement through international sources, in fact, the simplest way to procure globally.14 Though sourcing through the intermediaries is costly option, yet, in most of the cases it avoids many unforeseen problems. The supply manager venturing into global sourcing is advised to solicit the advice of the contemporaries from the local supply management association. Certain, typical intermediaries are as mentioned below:15

13 “The Opacity Index: Launching a new measure of the effects of opacity on the cost and availability of capital in countries World-wside (Executive Summary)”, Price Waterhouse Coopers, London, January 2001, pp. 1-3. http://www.opacityindex.com/. Burt, Dobler & Starling in WCSM, Tata Mc Graw-Hill, p. 369. 14 ‘Supply Channels’ Strategic sourcing in WCSM by Burt, p. 370. 15 N. A. DiOrio, “International Procurement”, Guide to Purchasing 1987, p. 7, & Strategic Sourcing

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Corruption at bureaucratic levels Contract & property right laws Economic policies Accounting policies Business regulations.

Import Merchants: They buy the goods for their own account and sell through their own outlets. They including all intermediary activities carry out all the risks of clearing. Commission Houses: They generally act for exports abroad, like selling in USA & receiving commission ex foreign exporters. Bills are generally never billed to them, though they handle all clearing of shipping and customs.

Agents: These are representatives or firm that carry out the selling. They handle all the clearing and handling of material but hold no financial responsibility of the principal. They receive their commission from the seller and hence their primary interest is the exporter.

Brokers: Just like the marriage brokers, they mediate between the buyer & the seller from different nations. They receive the commission from both the buyer & the seller, but are not involved in clearance/shipment of the material. They often do act as special purchasing agent against commission, for predesignated material. They donâ&#x20AC;&#x2122;t have any fiscal responsibility of the seller, just like the import brokers.

Trading Companies: These are large companies that generally perform all functions like the agents/groups listed above. They have an added advantage over the others and are listed in directories and trade publications.

Subsidiaries: They are established by MNCs in countries where a physical government restrictions. Akin to most of the publishing houses that carry out reprint of the popular titles worldwide from established publishing house and also act as their subsidiary in India. Hitachi America is also such an

example that was created primarily to look after the interest of North American market. Subsidiaries can increase sales and lower employment costs by the principal of sons of the soil concept. They slowly develop the host managers over a period of time and train them according to their requirements. Most

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of the MNCs in India are following this principle, like Citibank, HSBC and Alcatel. These subsidiaries offer to set prices in the local currency and deliver material to buyers with all duties paid. However, at times they could block flow of technical information since they are remote from manufacturing and marketing decision. The above are the intermediaries for global trade and an organization interested in going global should perforce follow the proper channel, lest you fall prey to the upheavals of the host country. Various offices like the IPO (international procurement offices) are set worldwide to tide over these intricacies. These offices facilitate business transactions and interactions in the foreign country and surrounding areas.

INTERNATIONAL LOGISTICS ‘Logistics management includes the design and administration of systems to control the flow of material, work in progress and finished inventory to support business unit strategy’, (Krishnaveni Muthiah 2003). Logistics is a strategic resource and its importance has to be understood by one and all (the functional members in the supply chain). But, in order to achieve this strategic influence, a good amount of competency has to be achieved and a well-defined logistical mission and objective has to be committed to, by everyone in the firm, especially by the top management. As brought out earlier in unit 4, international logistics can be well comprehended with this figure, the triangle that is formed in the supply chain management

The Three Critical Components of WCSCM are: World class Supply management World class Demand management World class Logistics management As discussed earlier, the logistics professionals play a vital role in shaping the success of WCSCM as regards management of transportation, storage and warehousing is concerned. We sometimes do tend to ignore the role of logistics, but the supply and demand chain cannot be met without the integrated and closeknit International Logistics management deals with receiving, handling, movement, storage and delivery of material, services and finished product in a WCSCM system, at a global level. Logistics is required both at the beginning and at the end of it, As Coyle puts it, “ logistics is the part of supply chain process that plans, implements and controls the efficient, effective flow & storage of goods, services and related information from point of origin to point of consumption for the purpose of conforming to consumer requirements”. Logistics include the following

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Role of Logistics An effective SCM system will never be possible without the integration of logistics, since logistics is the foundation of SCM discipline and is responsible for its activities. Needless to mention here is that the transportation cost is the heaviest in the entire chain, and even more than product selling prices. Therefore, in order to maximize customer satisfaction and meeting firm’s goal it is mandatory to ensure that effective storage facilities for goods and services are in place.

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

World Class Logistics Management (WCLM)

The third side of WCSCM triangle, is the WCLM include the following: Value-added Activity: WCLM ‘tailors’ products to the consumers/customers needs and requirements. Logistics characteristics for each type of customer are incorporated into each product’s specifications. Product testing prior to delivery, packaging for unique storage related to the type of product being shipped, specialized marking and labels, and tracking of products through the supply chain are some of the events involved in WCLM. These are the value added activities that take place and are enhanced as per the customer requirements.

Real Time Trace Ability of Materials and Product: WCLM organizations employ paperless inventory status and movement in real time, through out the supply chain. Enhanced Logistics Competency: Logistic competencies of the supply chain members are continuously being gauged by survey and related activities. Effort is on to reduce waste and continuous improvement in all spheres. Focus is generally ‘outward’ towards extended enterprise.

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Collaborative Cross-functional Teams: (as discussed earlier in same unit They involve both the customers and the suppliers and integrate their respective functions under one head. Actually, more often than not the changing pace of market and technological advances mandate the requirement of a team based effort and a collaborative approach to logistics planning and execution. Each of the functional areas in SCM is important to each other and together they serve an important role in achieving WCSCM. The professionals in logistics, finance, marketing, accounting, engineering, IT, and other functional areas are never geared adequately both in skills and know how to manage the interrelationship based on which the successful supply chains are built. The integration of these functional areas is what separates the excellent from the lesser ones. It is quite unfortunate that supply management and logistics donâ&#x20AC;&#x2122;t collaborate the way it should in many companies, and hence, effort should be there to collaborate these functional areas and integrate them to perform better. This would not only gather efficiency but at the same time will eliminate wastes in a big way.

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

More often, a firmâ&#x20AC;&#x2122;s approach to global supply management progresses from a reactive mode to a proactive one. Therefore, in order to remain in this competitive world the supply management professionals must have the following ability: Develop a strategic point of view with relation to global supply management Deal with continuous changing scenario

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Dealing with diversity in culture Work with and within distributed organizational structures Work with others as team members and leaders Communication aspects.

Keeping the above in mind we can conclude by saying that this will not only help us to become successful supply chain professionals but also help us in becoming better human beings in this far reached professional and busy environment.

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

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

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UNIT 4 COST ANALYSES & MEASUREMENT Objectives After reading this unit you would be able to: discuss Cost analyses & measurement in terms of Logistics; define Cost drivers and Activity Based Costing (ABC) etc.; illustrate Logistics cost; and have an insight from customer profitability analysis.

Structure Introduction Cost Drivers Activity Based Costing (ABC) Logistics Cost Customer Profitability Analysis Summary Self Assessment Questions References and Suggested Further Readings

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INTRODUCTION Many a times it so happens that even if a company has good products, it offers good service like delivering the products on time. It has plethora of satisfied customers. The company has sufficiently good productivity and growth levels. Even then it fails to achieve sufficiently good profitability levels. Many reasons are cited for this like lack of sales, harder times, competitiveness etc. However in reality, the main reason for this is the lack of knowledge of possible losses. It is here that one finds the need for determining the â&#x20AC;&#x153;trueâ&#x20AC;? cost for a cost object (product, job, service, or customer). This is important in order to generate opportunities for cost improvement for probable objects that are generating losses. It is also important to prepare a business plan and improve strategic decision-making. Major factors for determination of market price are competitors (those who are offering a similar product) and customer value. There are many ways to determine object cost like intuition, guessing, traditional cost accounting and activity based costing. Total cost for a cost object is determined by the direct cost (e.g. labor, material, transportation etc.) and the overhead cost. In this unit we will discuss about cost drivers and Activity Based Costing (ABC). We will also study about the logistics cost and ways to reduce them.

COST DRIVERS As businesses have become more complex, the elements of cost also have become complex. Overhead costs are replacing the direct costs of labor and purchased materials. These overhead costs are incurred on technology and the managers who maintain productivity and production. As managers attempt to understand and manage cross-functional business processes, organizations are finding that traditional approaches for managing these costs are ineffective.

Business processes need to be mapped so that the activities and associated drivers are identified and their relationships analyzed. Analysis like ABC helps to understand variable cost behavior and cost-of-quality for activities and processes. The most useful way to analyze costs is to do it in terms of the various stages of the overall value chain of which the firm is a part. Gattorna (1998) defined cost driver as cost, e.g. the number of customer orders received in a specific period. A positive cost driver results in a revenue, production or support related activities that generate profit. A negative cost driver causes unnecessary work and reduces profitability. A cost pool is a grouping of costs caused by related cost drivers and activities. Gattorna illustrated the concept of cost drivers which comprised of identifying activities and the cost drivers & cost pool associated with them. The need of identifying the cost drivers arose due to the dissatisfaction with the conventional cost accounting. These problems were summarized by Christopher (1998) as follows:

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There is general ignorance of the true costs of servicing different customer types/channels/market segments. Costs are captured at too high a level of aggregation.

Cost Analyses and Measurement Full cost allocation still reigns supreme Conventional accounting systems are functional in their orientation rather than output oriented. Companies understand product costs but not customer costs- yet products don’t make profits, customers do. The above discussion highlighted lack of visibility in costs as they are incurred in various stages in logistics. Christopher(1998) stressed the need for capturing the costs as products and orders flow towards the customer. It is here that Activity Based Costing (ABC) comes into picture and the key to ABC is to define the “cost drivers” from the logistics point of view. ACTIVITY BASED COSTING It is a more accurate cost management methodology. It focuses on indirect costs (overheads). It identifies each expense category to the particular cost object and makes “indirect” expenses “direct”. It is based on the fact that cost objects consume activities and activities consume resources. It is this consumption of resources that drives costs. One can use ABC when overhead is high, products are varied, cost of errors is high and competition is hard. ABC also makes it easier to understand variable cost behavior and cost-of-quality for activities and processes. Litt in one of his articles commented, “Activity based costing (ABC) is an accounting technique that utilizes cost attachment rather than cost allocation to determine the actual cost of products and services”. ABC has the ability to clearly define the critical attributes of today’s business processes. The real beauty of an ABC model is that it forces organizations to adopt a cost management paradigm that focuses on understanding thei processes. Once an organization accepts this paradigm, they soon recognize that their products or services are produced through cross-functional business processes. These processes contain a wide variety of activities that not only define the process, but also more importantly, reflect how effectively the process performs.

The ABC can be performed by: Identifying activities Determining cost for each activity Determining cost drivers (Cost drivers are the factors that affect the cost of an activity, e.g. poor quality) Collecting activity data Calculating product cost Activity based costing (ABC) highlights the customer characteristics in terms of the buying behavior and distribution requirements. It depicts the cost attached at each

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level of activity and thus decides about the true cost. ABC uses a more logical basis for allocating the costs. Let us take an example of a manufacturing company, which sells its products through a network of dealers to the industrial users. We would first use the traditional cost accounting method and then use ABC to demonstrate the difference.

Activity 1 IGNOU is a service industry in its own right. One can visualize this organization from a supply chain perspective also. Its Material Production and Distribution Division (MPDD) prints and dispatches the study material to the students, Schools develop the course material, Regional Services Division (RSD) supports the students and Student Registration and Evaluation Division (SRED) keeps the students records and evaluations. Do an activity based costing (ABC) for the fees of a course for the management program of IGNOU. ............................................................................................................................. ............................................................................................................................. ............................................................................................................................. .............................................................................................................................

LOGISTICS COST The performance of a supply chain can be illustrated with the help of total logistics cost. Since logistics begins from start and continues till the end, the costs associated with it are of immense importance in the supply chain. There is a need of a trade-off based cost accounting system that is activity based and a change in any process is followed by a change in the costs. To define the logistics cost one must define the desired outputs from the logistics system and then seek to identify the costs associated with providing those outputs. Christopher (1998) defined the concept of “mission”. In context of logistics, a mission is a set of customer service goals to be achieved by the system within a specific product/market context. Missions are specific to the type of market served. The successful achievement of defined mission goals involves inputs from a large number of functional areas and activities. A good logistics costing system is thus based on the total systems cost of meeting desired logistic objectives (the ‘output’ of the system) and the costs of the various inputs involved in meeting these outputs. This approach is called “Mission Costing”. The cost of logistics varies from industry to industry e.g. building material say bricks will have very high logistics costs as compared to Pharmaceuticals. It is generally believed that logistics costs are 15-20% of the turnover. Logistics becomes more and more expensive as the cost of fuel, land, safety, environmental conservation and human resources increase. However there is also a general belief that new productive models and good practices are effective in reducing the cost of logistics.

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Logistics has an impact on the overall financial performance of a company. It has an effect on return on assets (ROA). Let us discuss some expense saving strategies for the logistician (Ashcroft, 2004). Companies who have yet to squeeze all possible benefits from their supply chain, significant low hanging benefit opportunities may be waiting in the Logistics area. This is especially true with respect to mergers or acquisitions. For a Lowest Cost Logistics approach to succeed, it must begin by addressing two key starting points, firstly, a clear identification of the firm’s Customer Service / Business Goals; and secondly a detailed, accurate and complete calculation of current Logistics costs. The task of identifying the customer service targets and business goals must be a collaborative effort including all stakeholders within the organization and even key customers, carried out on a participative basis to ensure consensus and buy-in on the results. Logistics costs identified by incorporating all business costs incurred due to logistics functions, support costs and transfer credits. Once these cost numbers are known to be accurate and truly representative, the next step is to Benchmark them against companies in similar business and industry areas (you will read it in more detail in the next unit). Another approach to drive these costs down is to utilize ABC Costing methodologies (as discussed earlier).

CUSTOMER PROFITABILITY ANALYSIS Earlier accounting systems were unable to add value to a particular customer. As customer profitability was calculated on the basis of gross profit only. These systems were based on the formula given below: Customer Profitability = Net sales revenue generated by the customer in a given period – Costs of goods sold for actual product mix purchased. To derive the real profitability of customers many other things are to be taken into account. Customer profitability analysis illustrates the cluster of customers who are not worth serving or in other words are not providing profits. Many of the costs like cost of service, order processing costs and transport costs, material handling costs, inventory and warehousing costs that depends on the customer characteristics. The basic principle of customer profitability analysis thus depends on identifying the cost saving opportunities if business is done only with ‘good’ customers only. Christopher (1998) gave a checklist of costs, which should be included when doing an analysis.

Revenues

Net Sales Value Less

Costs (Attributable costs only)

Cost Of Sales (Actual Product Mix)

Commissions Sales Calls Key Account Management Time Trade Bonuses and Special Discount Order Processing Costs Promotional Costs (Visible And Hidden) Merchandising Costs

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Non-Standard Packaging/ Unitization Dedicated Inventory Holding Costs Dedicated Warehouse Space Material Handling Costs Transport Costs Documentation/Communications Costs Returns/Refusals Trade Credit (Actual Payment Period) Christopher (1998) also presented a model for customer profitability analysis. The model is presented in. It explains the deductions from the gross sales all these steps one gets the customerâ&#x20AC;&#x2122;s gross contribution. Any other customer related costs like trade credit, returns etc are subtracted to give a net contribution to overheads and profit. The main purpose of doing this exercise is to get an idea of the less profitable customers vis-Ă -vis more profitable customers. It can guide the managers to derive strategies for managing customers with high servicing costs. Customer profitability matrix is another approach for getting some generalized guidance for making strategic decisions. The main idea behind all these approaches is to develop an accounting system that routinely collects data on customerâ&#x20AC;&#x2122;s profitability.

SUMMARY It is evident from the discussions in the sections of this unit that logistics costs have a huge impact on the total costs. It is therefore important to manage them well. It has been proved over a period of time that the traditional approaches to costing results in business losses. This unit has highlighted another approach to costing that is activity based costing (ABC). By ABC one can generate opportunities for cost improvement for probable objects that are generating losses. We have studied about cost drivers in logistics. A positive cost driver results in a revenue, production or support related activities that generate profit. A negative cost driver causes unnecessary work and reduces profitability. Finally this unit has touched upon logistics cost and customer profitability analysis. In the subsequent unit you will be studying about the benchmarking and best practices and methods of measuring the performance of a supply chain.

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SELF ASSESSMENT QUESTIONS 1) “Logistics Management impacts not only upon the profit and loss account of business but also upon the balance sheet?” Comment! 2) When Christopher says that “supply chains compete, not companies” what exactly does he mean. Evaluate this statement from the cost point of view. 3) What were the reasons for the fall of management accounting? Explain activity based costing and mention the benefits it had over the management accounting. 4) What are cost drivers in a supply chain? Take the case of a paper manufacturing company and portray all its cost drivers. 5) What is Customer Profitability Analysis? Why it has gained importance in the recent times. Is it ethical to deny a customer that is not profitable? REFERENCES AND SUGGESTED FURTHER READINGS 1) Bowersox, Closs & Cooper (2002), Supply Chain Logistics Management, McGraw-Hill (International Edition) 2) Bradley S. Litt(2001), “Learning the ABCs of Cost Analysis”, at http:// www.gantthead.com/article.cfm?ID=18628 3) Christopher Martin (1998), “Logistics and Supply Cain Management: Strategies for reducing cost and improving Service”, 2nd edition, Financial times, Pitman Publishing. 4) Gattorna J.L. & Walters D.W. (1996), “Managing the Supply Chain: A Strategic Perspective”, Palgrave Macmillan, Indian Reprinted ed. 2004. 5) Harrison, Hoek (2002), Logistics Management and Strategy, Pearson Education 6) Jeff Ashcroft(2004), “Lowest Cost Logistics”, http://logistics.about.com/od/ strategicmodeling/a/aa071604.htm 7) Waters Donanld (2003), “Logistics: An Introduction to Supply chain Management”, Palgrave Macmillan, Indian Reprinted ed. 2004. 9

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UNIT 5 BEST PRACTICES & BENCHMARKING Objectives After reading this unit you would be able to: understand the role of benchmarking in business empathize reasons why benchmarking is required. recognize the process in which benchmarking can effectively be brought about address the challenges faced in bringing about benchmarking process comprehend what elements are involved in bringing about change management.

Structure Objectives Introduction Importance and Role of Benchmarking Methodology for Benchmarking Change Management and Benchmarking Challenges Faced in Implementation of Benchmarking Case Studies Summary Self Assessment Questions References and Suggested Further Readings

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INTRODUCTION David T Kearns, CEO: Xerox Corporation once said, “Benchmarking is the continuous process of measuring product, services and practices against the toughest competitors, or those companies recognized as industry leaders”. Benchmarking is an external focus on internal activities, functions or operations in order to achieve continuous improvement. Starting from an analysis of existing activities and practices within an organization, the objectives are to understand existing processes, or activities and then to identify an external point of reference, or standard, by which each activity can be measured or judged. A benchmark can be established at any level of the organization, in any functional area. The ultimate goal is to be better than the best i.e. to attain a competitive edge. Organization that introduces benchmarking correctly can use it to make a quantum leap in their performance, and develop a culture in which managers and staff constantly searches for improvements. Within logistics and supply management, benchmarking can be used for a number of different purposes, from assessing the performance of the entire operation, through prioritizing improvements, to searching for the off-the-shelf improvement strategies in a specific area of a logistics or supply chain activity. In some senses, benchmarking is imitation and stealing – “creative swiping”! At its best it is skillful appropriation and adaptation requiring imagination and innovation; at its worst it can be an expensive and time – consuming piece of corporate tourism. It is a long-term process, requiring senior management’s commitment, with the emphasis upon continuous improvement and organizational learning. The focus is primarily upon the role, strategic issues, processes and practices, rather than on the bottom line and numeric measure of performance. The mere comparison of operations and costs is not sufficient; considerable attention must be paid to how the activities are organized and performed. This will provide good understanding of how superior performance has been achieved, rather than just the magnitude of the performance gap. Benchmarking targets the critical success factors (CSF’s) of a specific organization. What needs to be done to ensure long-term success? Where do management see the potential for competitive advantage? Benchmarking helps to identify those features critical to ongoing success, as well as those parts of the organization that are less important and from which resources may be diverted. In Benchmarking, a “role” describes in essence what a person or function does for an organization. What responsibilities, services and tasks are offered to a customer or client by the organization? How do these compare with other organizations in terms of process architecture, structure or capability? Roles, in this instance are bundles of services provided either to external customer or to an internal customer. Questioning the roles within an organization leads to the question, “ Are we doing the right things?” – in other words, the question of effectiveness – while assessing processes raises concerns about whether things are being done right – in other words, the

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question of efficiency. Every process within any organization consumes resources. To leverage the most value from processes, an organization must eliminate Non-Value- Adding Activities (NVA) in the process itself. Benchmarking supports the targeting of processes or process elements, that are of high importance to the business, but are perceived to be operating sub-optimally. While every process can be improved, an often-overlooked issue is getting the most value out of every rupee spent on process improvement. Only through the process of continuous benchmarking a process against itself, and with other external sources, can this be truly assessed. The identification and the setting of new goals, projects or ventures are fundamental to the long-term success of any business. The environment within which any organization operates changes rapidly; cost reduction targets that were deemed aggressive months ago can quickly become the Industry norm. Benchmarking then can be used to target strategic issues, gain enough information to prioritize competing projects and establish an overall program of events geared towards achieving optimum economic value added.

IMPORTANCE AND ROLE OF BENCHMARKING Benchmarking provides the basis for meeting and exceeding stakeholder expectations. Understanding its potential benefits requires understanding the type of benchmarking to be deployed and the purpose of conducting such an exercise. While benchmarking can be performed at any time, it is often undertaken as a response to an information need associated with a project or issue within the organization. The situations that may trigger the benchmarking process are:

Operations / Logistics and Supply Chain improvement efforts. Management / Organizational changes Merger & Acquisitions Competitive Threats Cost Reduction Initiatives

Benchmarking in any of these situations is a logical step in developing new objectives, setting new performance standards and metrics and redesigning process and procedures.

A company benchmarks because it wants to be the best. To this end, benchmarking should not be considered as an optional activity. It is more so a call of the day for companies to maintain their competitive advantages. Internal Benchmarking is the analysis of existing processes and practices within various departments or divisions of an organization. The objective is to identify and analyze best performance within the confines of the organizationâ&#x20AC;&#x2122;s own boundary, and drive performance to this level or beyond. The process will facilitate an understanding of the basic activities that constitute the processes within the organization and the drivers associated with these. Drivers are the causes of

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work, the triggers that set in motion a series of activities. In conducting Internal Benchmarking, the management is looking at itself first before thinking about comparisons outside. Significant improvements are often made through Internal Benchmarks and these are often the first steps in a benchmarking process. While Internal Benchmarking focuses on specific functions or processes, Competitive Benchmarking looks outwards in order to understand how direct competitors are performing. Knowing the strengths and weaknesses of competitors is important to strategic decision-making. Competitive benchmarking helps to level the playing field, but it is less likely to provide that innovative, step-out improvement that so many organizations are searching for today. Industry Benchmarking looks beyond the competitive relationship and looks for trends. The technique of benchmarking can be focused on specific processes, activities or functions, but this is only part of the answer. An associated issue is the depth to functions and department, or horizontally upon specific processes or activities. While early forays into the world of benchmarking might be constrained to functional or departmental performance, the goal has to be a cross-functional view of the value chain needed to meet customer expectations in an efficient and effective manner. A well-planned, systematic and structured benchmarking program can provide organizations with a number of important benefits. In essence, the search for industry best practices and subsequent efforts to maintain competitive superiority effectively provide the basis for superior performance. Almost any study that requires detailed examination of the organization’s operations results in a greater understanding of how the business works; it’s critical success factors (CSF’s) and the key performance indicators (KPI’s). But here again it is important to bear in mind that any form of continuous improvement in one part of the business does not just push to another area of operation – a phenomenon known as the “waterbed effect”. Most organizations can learn from the experience of others, even though they may have very different customer requirements and competitive environments. Much can be gained by making comparisons with organizations that have to adopt a fundamentally different approach to the same or a similar task.

METHODOLOGY FOR BENCHMARKING In most companies traditional measures are based on fiscal and legal requirements. These are then often used for planning purposes to facilitate comparison. The problem with these measures is that they are based upon derived information and have no clear relationship to the organization’s operational data. On the other hand, operations develop their own set of KPI’s and measures – that may be unrelated to the financial results – to identify levels of customer satisfaction and market needs. This division often leads to conflict in the evaluation of performance. This has led to the development of the Balanced Score Card Concept (Kaplan & Norton, 1996) Measurements can either be quantitative (numeric) or qualitative (opinion based). Quantitative and qualitative benchmarks are not being viewed as isolated categories, though. At one end of the continuum

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are highly qualitative measurements, for example assessment of customer or employee satisfaction. At the other end of the range are highly quantitative measurements such as cost per unit, or productivity measures. There are many tools for approximating qualitative characteristics with numbers, but these techniques will never have precision to back them up. As part of the continuum of measures it is important to recognize that qualitative measures are a mid- point in terms of ‘hardness’ or reality. Hard measures make the user feel as though they are real. Facts with numbers attached to them take on a life of their own; they appear to possess certain “magic” and people tend to believe these hard numbers. But, with each gain in precision, relevance is sacrificed. Therefore in developing benchmark measurement the goal is to develop a metric that is as “hard” as it can get without losing vital insights provided by the “softer” more intuitive qualitative indices.

A Systemic Approach Many organizations have developed their own process. All approaches are fundamentally the same and are based on Deming’s Plan–Do–Check–Act (PDCA) cycle. Step 1: Prioritize what to Benchmark The first step focuses on the processes and activities that the organization believes will yield the maximum benefit. In any supply chain there are too many activities and processes to benchmark all of them in one go, therefore improvement effort cannot be spared too thinly, and all areas cannot be addressed simultaneously.

Step 2: Identify Comparable Companies Benchmark partner selection can be determined by a benchmarking mechanism, for example through an existing benchmarking network or through an industry trade association. When this is not done, a number of issues need to be considered:

Should competitors be approached? If so, how will confidentiality be addressed? Are they likely to have significantly better activities and operations?

Can best–in-class organization be easily identified and what can be offered to them in exchange which is of interest to them? How many benchmark partners are required?

Which organizations have similar requirements for operational processes, but are likely to have developed better processes to deal with them?

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How should the different areas of interest of partner organizations be accommodated within the process?

Step 3: Data and Information Collection Once it has been decided what to benchmark, and the organization is identified and gained agreement from partners, the next step is to determine the process for data and information collection. The key here is to achieve commonly agreed understanding of the activities, processes, definition, terminology and time periods. Failure to achieve this will result in major problems in both the analysis and comparison activities, which ultimately may lead to rejection of the output by key managers. All the participants must sign off the common understanding and a forum needs to be established to discuss and resolve any queries that arise during the process.

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UNIT 6 FUTURE TRENDS AND ISSUES Objectives After reading this unit, you would be able to: discuss the trends and issues in the management of supply chains in the future; discuss collaborative strategic alliances for enhancing supply chain effectiveness; discuss about importance of outsourcing services like third and fourth party logistics; describe integrating supply chain logistics through the use of IT and the Internet; discuss green supply chain strategies like reverse logistics; and portray a vision of deploying world-class supply chains in the future.

Structure Introduction Collaborative Strategies Vendor Managed Inventory Third Party Logistics Fourth Party Logistics Enterprise Resource Planning Internet and E-commerce Supply Chain Agents Green Supply Chain Reverse Logistics World Class Supply Chain Summary Self Assessment Exercises References & Suggested Further Readings

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INTRODUCTION Management of the supply chain has evolved over the last two decades from an emphasis on integrating logistics and lowering cost to providing better products and services that provide value to ultimate customers. Managing uncertainty and understanding customers in the global market is the challenge that current supply chain systems are facing the world over. Efforts are being made to manage demand flow, supplier collaboration and customer services using cutting-edge information technology. Traditionally, the focus of companies has been on the intra-organizational flows over which the organization had some control. However, companies are increasingly recognizing that supply chain management involves the management of the complete chain starting from inbound logistics, processing, outbound logistics, marketing and sales, customer service and also reverse flow of unused materials and waste for successful value reclaimation through reuse, remanufacturing and recycling etc. This Emerging Trends involves a large and complex network of suppliers, transporters, manufacturers, distributors and customers. Successful supply chain flow requires synchronization of operations through effective collaboration among the various channel players. Organizations must provide world-class services to remain profitable and continue serving the society in an effective manner in the ever-changing and turbulent market space. The following sections are devoted to a discussion of the issues and trends that supply chains are likely to adopt in times to come.

COLLABORATIVE STRATEGIES In the future, supply chains must embark upon a collaborative strategy to manage demand flow and customer satisfaction through technology integration. Collaboration enables channel partners to jointly gain a better understanding of product demand flow and implement effective programs to satisfy customers through collaborative product development, synchronized production scheduling, collaborative demand planning and logistic solutions. Effective collaboration among channel partners can help in aligning them to enhance the value of the integrated activities in the supply chain. This can contribute to faster product development through shared design development and modification documents. It can also contribute to synchronization of production and delivery schedules and smoothen the material flow process obviating inventory management problems. This can result in better capacity utilization, order fulfillment and customer satisfaction. Down-stream collaboration with distributors, wholesalers and retailers can result in real-time flow of point-of-sales (POS) data across the supply chain. This can help in jointly formulating effective forecasting and replenishment schemes and smoothen demand variations along the supply chain. One of the crucial objectives of manufacturers is to meet in orders to reduce losses on account of inventory excesses or shortages. Collaborative forecasting strategy involving all channel partners can contribute to effective demand planning. Each partner in the supply chain should be

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able to plan demand based on a single, reliable source of demand data. However, this can be possible through seamless data interchange among channel partners. Reducing channel inventory pileups by reducing demand irregularities in the supply chain is an issue of primary concern as it can lead to improved efficiencies and lower cost. This can be tackled through collaborative efforts made through strategic partnerships (SP) or strategic alliances (SA). Retailer-Supplier Partnerships (RSP), Vendor Managed Inventory (VMI) and Distributor Integration (DI) are examples of strategic alliances that can prosper through collaborative efforts. Such strategic alliances can help both partners by:

Adding value to products through collaborative efforts. Improving market access. Strengthening operations by lowering costs and cycle times. Increasing technological strength and flexibility Enhancing strategic growth by pooling the combined expertise of partners Enhancing organizational competencies through mutual learning. Building financial strength by sharing costs and eliminating non-value added activities among partners. Collaboration can also enhance the logistics function in the supply chain. Transporters can better organize inbound, inter-facility and outbound transportation to optimize capacity utilization. Collaboration with third party (3PL) and fourth party (4PL) logistics organizations can also enhance supply chain effectiveness. Sustainable supply chain configurations can be established by trading off cost, revenues, profits, market share and adaptability to new products and technologies through a collaborative approach. VENDOR MANAGED INVENTORY (VMI) VMI has been recognized as an effective strategy for combating irregularities in the supply chain caused due to demand variability. In this system, the vendor plays an intermediate role between the manufacturer and the wholesaler/retailer. The vendor collects point-of-sales (POS) data from the wholesaler/retailer and accordingly plans their demand from manufacturers in order to manage the wholesaler’s inventory. This eliminates the wholesaler’s/retailer’s need for dual buffering against customer demands on one hand and supply disruptions on the other. In fact, by adopting a process of just-in-time or continuous replenishment, the inventory can be reduced to a bare minimum, thereby lowering both risks and costs. Vendors are in an excellent position to manage inventory for the wholesaler/retailer because they are a middle link in the supply chain and can track the needs both from the supplier’s and the customer’s ends. Since the supplier/vendor understands his/her own product better than anyone else, they can handle the replenishment needs of the retailer who has to otherwise keep track of numerous products. The buyers’ role of

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creating purchase orders from sales and supply forecasts is eliminated as the vendor does handle this on behalf of the wholesaler/retailer. The buyers’ role becomes one of assessing the recommendations made by the supplier and providing adequate aggregate data and insightful information while collaborating on sales/demand forecasts. Once VMI has been implemented, customers can benefit from 30 to 40 per cent reductions in inventory and 75 percent forecast accuracy. When the supplier plays the role of a vendor, this strategy is called Supplier Managed Inventory (SMI). This is an offshoot of the Retailer-Supplier Partnership (RSP) that can be used to synergise the flow inventory between the retailer and the supplier. Accordingly, suppliers like Shell, a company manufacturing automotive lubricants etc., integrate customer’s forecast, consumption data and inventory information to its own production and shipping capabilities for creating rolling production schedules. This reduces inventory-carrying costs in the supply chain. This way, besides managing the inventory, Shell does not need to pad its own inventory in anticipation of varying demands from its customers. This technique can in-turn be carried upstream to Shell’s suppliers. Similarly, Shell’s customers can now emulate the strategy and reap benefits accruing out of reduced inventory in the supply chain. Implementing VMI or SMI can be difficult when the supplier starts accounting for the time and cost involved in managing the inventory. Some customers may not be using computers and may be reluctant to allow suppliers to manage their inventory, if it is a crucial business secret. Moreover, plant managers may be forced to stop production if they stock out and suppliers are not able to replenish them just in time. However, these problems can be overcome with some patience in understanding customer’s and supplier’s inventory movement trends and building mutual trust. Since buyers are often trained not to disclose information related to their inventory, enough trust must be built to enable vendors and buyers to share inventory related information. Once inventory flows are understood, the initial implementation cost is well offset by recurring savings in inventory carrying costs and gains through

Emerging Trends optimum capacity utilization. For instance, Shell has reported returns of 10:1 on its investment on SMIs. Since data must be available on-line and is difficult to process manually, it is necessary to use computers if this strategy has to be successfully implemented. Often, suppliers can provide customers with computer hardware and easy-to-use software in order to obtain real-time customer’s inventory status that is crucial for preparing rolling production forecasts and schedules. VMI or SMI can also be offered to customers as a value added service and can help in locking-in customers.

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Once this cost-effective strategy is in place, all channel partners are able to reap rich dividends and extend the strategy to other parts of the supply chain. Third party and fourth partly logistics form some of the other collaborative efforts being evolved towards effective management of supply chains. THIRD PARTY LOGISTICS Third-party logistics (3 PLs) is the use of an outside company to perform all or part of the companyâ&#x20AC;&#x2122;s materials management and product distribution functions. The competitive advantage for any company is to focus on their core competencies, and let the 3PL firm handle those supply chain functions in which they specialize. In order to provide truly value-added services, 3PL firms must interact with customers to understand their needs and then adjust their offerings to meet them. It is obvious that companies can parcel out numerous supply chain processes to entities that specialize in the efficient performance of those processes. Outsourcing a wide array of supply chain processes can generate greater value across the entire supply chain because specialized firms performing the selected processes enjoy a level of expertise and leverage, that would not be available to manufacturers, wholesalers or retailers. Transportation, warehousing, order processing and fulfillment, packaging, labeling, and bill payment are some of the key processes that can be outsourced to specialist firms called third-party logistics firms, or 3PLs. If these firms are efficient and effective, then the entire supply chain can benefit from improved capacity utilization, enhanced service levels and lower costs. 3PLs can provide technological and other flexibility to client companies. For instance, channel partners may need to change their technology for implementing quicker systems. Similarly, they may have changing needs for warehousing and transportation facilities. Such changing demands can be easily taken care of by third-party logistics companies. Customers of 3PL companies look for four dimensions of value to be derived from outsourcing a process to a 3PL firm. These values include trust, information, capital utilization and cost control. The 3PLâ&#x20AC;&#x2122;s customer orientation, level of specialization, asset ownership status and the price at which the service is offered form some of the main issues that a client will consider while selecting an appropriate service provider. 3PL companies must provide reliable services and solve channel problems so that smooth flow of goods and information can take place. This helps customers to trust 3PL companies. 3PLs can create value for their customers in the accuracy, quality and timeliness of the information that they provide their clients, different channel partners and to ultimate customers. This information can be electronically integrated into the customerâ&#x20AC;&#x2122;s MIS for direct access. 3PLs can help customers reduce inventory and fixed assets, such as buildings and equipment. This leads to better utilization and financial returns on both working and 5 SCM in Service Organization/NonManufacturing Sector fixed capital. Although capital utilization is important to 3PL customers, reduction of

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supply chain costs and sharing the savings with customers is probably the most visible (though not the most important) value. Each supply chain will have firms with different levels of expertise and 3PL must customize their services according to their clients’ expectations. Firms using 3PL services are seeking performance levels where the overall net benefits exceed the amount paid to the 3PL. Improving service-related benefits also produces value, particularly when combined with the reduction of logistics costs. Many CEOs now see this value as critical to business survival. An important contribution of the 3PL is providing the leverage that its customers cannot generate by themselves via the provision of information, cost reduction activities, service enhancements, or better asset utilization. In addition, by becoming more integrated into its customer’s operations, the 3PL will be able to recognize and understand changes in the logistic needs of the customers. An important disadvantage of third party logistics for companies is the loss of control faced by the company due to out sourcing a particular function. Engaging reliable 3PL service providers can offset this problem. Moreover, 3PL companies can assure their clients of their reliability by integrating their activities seamlessly with latter’s operations. Painting clients’ logos on transport vehicles etc. can signify close integration between the client and the 3PL service provider. All channel partners must be successful if meaningful and lasting value is to be achieved. This requires open communication and collaboration. If any element in this supply chain relationship is neglected, the chain is broken and the value is lost.

Activity 1 Explain how a company can select a third party logistics (3PL) firm on the basis of 1) Customer orientation 2) Level of specialization 3) Asset ownership status 4) Price of the service ............................................................................................................................... ............................................................................................................................... ............................................................................................................................... ............................................................................................................................... Activity 2 Which of the above criteria is most important for a company manufacturing fast moving consumer goods (FMCG)? Why? ............................................................................................................................... ............................................................................................................................... ............................................................................................................................... ............................................................................................................................... ...............................................................................................................................

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FOURTH PARTY LOGISTICS The term “fourth-party logistics provider” is a trademarked term owned by Andersen Consulting. It refers to the evolution in logistics from suppliers focused on warehousing and transportation (third-party logistics providers) to suppliers offering a more integrated and value added solution. Among other services, fourth party logistics providers include supply chain management and solutions, change management capabilities, and value added services as part of their offering. A 4PL company delivers a comprehensive supply chain solution and adds value by influencing the entire supply chain. A 4PL leverages a full range of service providers (3PLs, IT providers, contract logistics providers, call centers, etc.) along with the capabilities of the client and its supply chain partners. The 4PL acts as a single point of interface with the client organization and provides the management of multiple service providers through a teaming partnership or an alliance. A 4PL adds value to the entire supply chain, through reinvention, transformation, and execution. Reinvention

implies synchronization of supply chain planning and execution activities across all supply chain participants. This is achieved by: Leveraging traditional supply chain management skills, Aligning business strategy with supply chain strategy, and Creatively redesigning and integrating the supply chains of the participants.

Transformation efforts focus on specific supply chain functions including sales and operations planning, distribution management, procurement strategy, customer support, and supply chain technology. This is done by: Leveraging strategic thinking and analysis, Process redesign, organizational change management, and Technology to integrate the client’s supply chain activities and processes.

Execution of the supply chain integration strategy leads to increased revenue, operating cost reduction, working capital reduction, and fixed capital reduction while traditional approaches tend to focus only on operating cost reduction and asset transfer. Revenue growth and customer satisfaction are driven by enhanced product quality and product availability due to the elimination of stock-outs and ‘ship-complete’. Dramatic customer service improvements can be attained as the 4PL focuses on the entire supply chain and is not limited to increasing efficiencies associated with warehousing and lowest-cost transportation. Operating-cost reductions are driven through operational efficiencies, process enhancements and

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procurement savings. Savings are achieved through the complete outsourcing of the supply chain function instead of only a few components as in the case of a 3PL solution. Savings are also achieved due to the economies of scale that accrue due to the large size of the operations involved in the entire service chain. Synchronization of supply chain activities by channel partners leads to operating-cost reductions and a lower cost of goods sold, due to integration of processes, and improved planning and execution of supply chain activities. Technology is proactively used to manage order and inventory movement throughout the pipeline, thereby minimizing the amount of inventory required, and increases item availability to reduce cycle times. Thus, working-capital reductions can be realized through inventory reductions and reduced “order to cash” cycle times. Fixed-capital reductions result from capital asset transfer and enhanced asset utilization. 4PL’s can undertake the ownership of physical assets, thus freeing up assets held by various companies that form part of the supply chain. This allows the client organization to invest in its core competencies like research and design, product development, marketing and sales, etc.

A 4PL can use any of the three operating models to deliver supply chain solutions.

1) A partnership can be forged between the 4PL organization and a third-party service provider to market supply-chain solutions that capitalize on the capabilities and market reach of both organizations. The 4PL provides a broad range of services to the 3PL including technology, supply chain strategy skills, capability to go to market, and program management expertise.

2) The 4PL can operate and manage a comprehensive supply chain solution for a single client. This arrangement encompasses the resources, capabilities, and technology of the 4PL and complementary service providers to provide a comprehensive integrated supply chain solution that delivers value throughout a single client organization’s supply chain components.

3) As a supply chain innovator, a 4PL organization can develop and run a supply chain solution for multiple industry players with a focus on synchronization and collaboration. The formation of industry solutions provides the greatest benefits; however, this model is complex and can challenge even the most competent organizations. The 4PL service provider needs to possess a comprehensive set of skills to effectively deliver an integrated supply-chain solution. These include:

Availability of a large body of trained supply chain professionals, global capabilities, reach and resources. Ability to manage multiple service providers. Ability to transition clients’ employees and other assets smoothly to the new 4PL environment.

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Strong relationship and teaming skills. Delivery of world-class supply chain strategy formulation and business process redesign. Strength in integrating supply chain technologies and outsourcing capabilities. Understanding of organizational change issues.

Fourth Party Logistics is the next generation of supply chain outsourcing. Supply chain activities are information-rich, complex and increasingly global. At the same time, technology and e-enabled capabilities are racing ahead. To enable a firm to capture all the benefits of supply chain collaboration and synchronization, a new generation of integration must be deployed, which is currently beyond the capabilities of traditional outsourcing methods.

Activity 3

Illustrate with examples, the three models that a 4PL company can adopt to deliver supply chain services. ............................................................................................................................... ............................................................................................................................... ............................................................................................................................... . ENTERPRISE RESOURCE PLANNING Information technology (IT) has an ever-increasing role to play in providing fully integrated supply chain management solutions that incorporate supply chain configuration, demand planning, logistics and warehouse management. The contribution of IT has become imperative for capturing point-of-sales (POS) data and calculating near-accurate demand forecasts. For instance, Modi Xerox uses IT to reduce their cash-to-cash cycle time through fast flow of order/demand data and their execution through shipment and delivery/installation confirmation. Various solutions are available ranging from enterprise resource planning (ERP) tools to Internet based e-commerce opportunities. Some of these tools are discussed in the following sections. Enterprise resource planning (ERP) tools are capable of capturing data and automating financial, inventory and customer order tracking tasks. ERP systems utilize a single data model and have an established set of rules for accessing data.

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Although this is possible within an organization, more complex systems like electronic data interchange (EDI) are required for accessing data from various databases strewn along the entire supply chain. EDI consists of a communications standard that supports inter-organizational electronic exchange of common business documents and information. It represents a cooperative effort between buyer and seller. They can become more competitive by streamlining the communication process through the elimination of many steps involved in traditional information flows. The basic components of an EDI system includes: 1) A standard set of rules for formatting and syntax agreed upon by the user in the network like the American National Standards Institute (ANSI) standards. 2) Software that can translate company specific database information into EDI standard format for transmission. 3) A mail service responsible for the transmission of the document usually through its own network or a third party value-added network (VAN). Hence, the EDI involves three basic processes: 1) Collecting and receiving data from application programs in different computers, 2) Converting data from application program formats to standard format for transmission over the network and reversing the same at the user end, and 3) Transmission of data between clients on the network. For instance, a typical EDI inventory replenishment process could consist of the following steps: 1) The buyer’s (customer’s) computer maintains a real-time inventory of each product using automated technologies like bar-code readers. 2) It generates and delivers a predetermined purchase order to the supplier when the inventory is reduced to the re-order level. The information is simultaneously transmitted to accounts payable, warehouse and invoice files. 3) The supplier’s computer translates the purchase order into its own format and automatically sends an acknowledgement to the customer. 4) A shipping note is electronically created with the fulfilled order and is sent to the customer. Upon receipt of the consignment, the receiver creates an electronic receipt notice that is sent to accounts payable and the supplier.

5) An invoice is then generated at the supplier’s end and sent to the customer where the purchase order, receipt notice and invoice are automatically reconciled and a payment authorization is created and sent to accounts payable. 6) On receipt of this authorization, payment is transmitted electronically from the

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customer’s bank to the supplier’s bank. 7) An electronic remittance advice is sent to the supplier and upon receipt, this information is translated into accounts receivable and the buyer is given credit for payment. This process requires manual data entry at only three instances and reduces paperwork drastically, thereby increasing the efficiency of the supply chain. However, a significant investment has to be made by companies to implement EDI and use VAN services. Due to excessive automation, collaboration is usually not possible, thereby alienating business processes from the EDI process. In order to overcome the difficulties that arose due to the use of EDI, companies, more recently, have started using the Internet for integrating and exchanging information across the supply chain.

Activity 4 Illustrate how EDI can help information flow for replenishing the inventory held by a wholesaler stocking consumer durables. ............................................................................................................................... ............................................................................................................................... ............................................................................................................................... ............................................................................................................................... INTERNET AND E-COMMERCE In the concluding years of the last decade, the Internet, World Wide Web and electronic commerce (e-commerce) have grown extensively due to their open standards, rapid adoption, low cost and graphical user interface. Companies like FedEx, and Cisco have used the Internet to communicate with channel partners and maintain customer relationships. The Internet can be used for communicating information, accessing databases and automating transaction processing. The Internet can benefit a supply chain in the following ways: 1) Enhance collaboration among partners for quick product development, logistics and marketing. 2) Help channel partners to log into each other’s ERP systems and data warehouses for receiving realtime transaction processing data. It can enable online and real-time receipt of downstream demand signals for accurate forecasting, inventory management and synchronizing production schedules. This can enhance capacity utilization and reduce channel blockages. 3) Reduce the time and cost of communicating, thereby enhancing customer service quality and customer relationships. Also helps in receiving valuable customer feedback for measuring supply chain effectiveness. 4) Increase the capability of reaching out to new customer segments and markets. 5) Purchase orders and shipping notices etc. can be received using the Internet.

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6) Enables shipment tracking and tracing facilities thereby reducing uncertainties and ensuring better customer support. 7) Smoothen and speed up order processing by integrating order requests and availability modules thereby helping to send order confirmation, calculate lead times and shipment dates. Vendors, suppliers and manufacturers can be alerted about received orders. Payment can be routed via the Internet in the form of secure money transfers. 8) Duplication and paper use can be minimized and limited to legal requirements. 9) Increases the visibility of the supply chain and enhances operational transparency. All partners are able to conduct business on a level playing field and are not at a loss due to lack of information. 10) Enhance organizational competitiveness through quick product development and marketing, enhanced responsiveness to customer requirements leading to customer satisfaction, and lowering costs through synchronized production, channel efficiencies and process innovations. Channel partners can use the Internet to create a customer-centric supply chain. This requires clear vision, strong planning and technical insight into the Internetâ&#x20AC;&#x2122;s capabilities. The Internet is being increasingly used in order to bring the supplier and customers closer using the electronic media. This form of business over the electronic medium is popularly known as e-commerce. E-commerce proceeds through the following four stages: 1) Web presence 2) E-trading 3) Data delivery, and 4) Automation Web presence involves uploading relevant information on a server hooked on to the world-wide-web that allows browsing and downloading information anywhere and from any computer. Besides, company and product related information the web site should be good in appearance, be easy to use, allow search facilities within the web site, contain contact information and allow users to provide feedback for improvement and customization. It should also contain necessary links to useful information both related to the company and outside it.

E trading involves using the companyâ&#x20AC;&#x2122;s web site on which product features are displayed. The web site should have features that allow customers to compare and see product previews, place orders, track their delivery and make payments. It should also allow them to provide suggestions, feedback and complaints. It should allow them to ask for after sales service and facilitate return of goods if desired. This stage is known as the e-commerce stage.

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Data delivery implies updating and delivery of information related to the customer on the latter’s computer. This includes updating customer’s inventory data, and generating re-order alerts based on the information of inventory on-line from various sources. In this way, the supplier and customer’s data are integrated to assist the customer in taking decisions regarding the supply chain. All processes related to order placement and fulfillment between the supplier and customer are tightly integrated at this stage. Vital real-time information, like product rates, is available on the customer’s computer enabling it to support complex decisions like vendor selection, etc.

SUPPLY CHAIN AGENTS Software agents are being developed to be deployed by companies on the World Wide Web to gather necessary information and initiate action by themselves. Intelligent agents are software entities that can carry out operations on behalf of a user or another program, with some degree of independence or autonomy while using some knowledge or representation of the user’s behavior, goals or desires. COOL (COOrdination Language), Java, KQML (Knowledge Query & Manipulation Language), Telescript and Tcl (Tool Control Language) are some of the computer languages being used to create agents, define their jobs and establish coordination protocols for communication and collaboration among multiple agents. Some of the supply chain activities that e-Agents can take up include: Trading: e-Agents can collect required information on behalf of the supplier/ customer by contacting them and conducting a variety of online business transactions and functions including negotiations. It has been widely felt that human negotiation performance falls significantly short of optimal performance in real life while e-agent driven negotiations can offer significant benefits. Brokering: e-Agents can find information about products, sellers and prices, while providing privacy and protection. They can be instrumental in validating purchasers’ credit, billing, accounting, etc. Auction: e-Agents can help potential bidders search for specific auction items on the internet, automatically update the latest item bid prices and notifying users when an auctions closes. Coordination: e-Agents can contact supply chain partners and conduct teleconferences etc. Managing Customer Relationships: e-Agents can facilitate on-line search and customer query handling.

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In a nutshell, e-agents can act as smart assistants performing complex and collaborative tasks. They reduce the amount of human-computer interaction. This can lead to considerable saving in time and cost for every partner in the supply chain. eAgents can help channel partners collaborate and manage the supply chain to enhance customer satisfaction and reduce operational costs.

GREEN SUPPLY CHAIN Green supply chain involves the management of materials and resources from suppliers to manufacturers, service providers to customers and back while protecting and conserving the natural environment. A green supply chain involves the implementation of appropriate strategies to reconcile the supply chain to environmental protection and conservation on a sustainable basis. Waste minimization and elimination of inessential non-value added activities is one of the most important strategies towards a green supply chain. Process wastage decreases efficiency and lowers productivity. Reduced output and blocked inventory decreases profitability and growth thereby making the business process unsustainable in the end. Such business processes ultimately end up firing fuel and energy without delivering value to the society. Another important green strategy is to automate processes by using the electronic media as far as possible. This reduces paper work, and eliminates non value added activities involved in filing, storing, maintaining and retrieving documents. Usage of materials must be limited to the extent required. Excessive trimming and disposal of partially filled containers of materials is both wasteful and environmentally harmful. Wastage can take place when materials or goods are unnecessarily stored before they can be used. Just-in-time delivery and usage of materials can reduce the wastage that can occur during multiple storage and handling. While preventing and eliminating waste would be the best policy, some waste is inevitable at the customerâ&#x20AC;&#x2122;s end in the form of used containers, packaging etc. Recycling these materials helps to use them once again thereby reducing their role in environmental pollution. The process of recycling, renovating and reusing materials can be undertaken through a separate supply-chain channel, collectively termed as reverse logistics.

REVERSE LOGISTICS Reverse Logistics is the process of moving goods from the ultimate customer to another point, for extracting value that is otherwise unavailable, or disposing them properly. Goods returned to the supplier may be in the form of: Manufacturing returns from the production floor consisting of products having unsatisfactory quality or left over materials Commercial returns arising out of contracts for taking back obsolete stocks of short-life products Product recalls arising out of the detection that defective products have been released in the supply chain

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Warranty returns of defective products under warranty Service returns of products for servicing End-of-use returns for re-manufacturing or re-cycling End-of-life returns for appropriate disposal Reverse Logistics activities include the following activities: Processing returned products Recycling packaging materials and reusing containers Reconditioning, remanufacturing and refurbishing products Disposing obsolete equipment Reuse or disposal of hazardous materials Asset recovery

Reverse logistics is a part of the closed-loop supply chain as depicted in The reverse logistics parts of the supply chain starts with collection of returned goods or refuse which then pass through sorters to reprocessing (reuse, recycle, recondition, remanufacture, refurbishing and asset recovery) or to disposal. One of the main objectives of reverse logistics is to keep the cost of reprocessing returned/refused materials lower than that of new products in order to keep the venture profitable. Accordingly, transportation and handling costs have to be kept to a minimum. Often the extra cost incurred in reverse logistics is added to the products when they are first sold new. Moreover, recycling and disposal procedures must incorporate applicable government and environment protection laws. At most companies, returns are primarily managed through a series of disconnected and paper-intensive processes. As a result, it takes the average company between 30 and 70 days to get a returned product back into the market, including return transportation, repair or refurbishing, and redistribution to the customer or market. Moreover, both companies and customers have limited visibility into the returns process. In fact, a manufacturer frequently finds out about a return only after it lands on the receiving dock. Long reverse logistics cycles are harmful for products that have short lifecycles such as high-tech products that can lose up to half their value in a single business quarter. Moreover, Internet-based sales have increased the incidence of returns to around 60%. Delays and lack of visibility into the reverse logistics process can result in lost sales, customer dissatisfaction and inventory carrying costs.

WORLD CLASS SUPPLY CHAIN World-class supply chains are capable of providing better value to customers than the competition while remaining financially healthy and environment friendly. They would be differentiated by the excellent quality of service that they provide to the customers. Their activities would be value driven, they would be responsive to customers and continuous learning, improvement and innovation would be their hallmark.

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Their employees would be empowered to think and act like owners and would go to any extent to keep their customers delighted. They would be provided with the right environment, management support and training to ensure excellent performance. They would be fully involved and happy to meet organizational objectives. World-class supply chain service providers would have a proactive management that is balanced and consistent. Their management would be based on facts and analyzed data. Activities and processes across the supply chain would be seamlessly integrated with the help of IT, which would also be employed to assist decision-making, reducing waste and remaining flexible. They would undertake a systems approach to management. The leadership would establish unity of purpose and provide direction to the organization. They would create an environment that provides continuous challenge and rewards tied to performance and fair opportunities for growth. They would collaborate and maintain strategic alliances with suppliers based on ethics, honesty, professionalism and a win-win philosophy that can lead towards combined growth of all the players involved in the supply chain. Examples of some companies providing world-class services in the supply chain are Federal Express (Inventory Control), British Telecom (Billing and Collection), Xerox (Customer Service), Caterpillar (Information Systems), Wall-Mart (Logistics), Honda (Purchasing), 3M (Supplier Management) and L. Bean (Warehousing and Distribution). Managers and researchers agree that providing world-class services can prove to be a sustainable strategy in the long run.

SUMMARY Effective management of large and complex supply chains necessitates the implementation of new strategies in the ever-changing market space in the future. Keeping customers satisfied and happy by delivering greater value than the competitor would be the prime concern of organizations in the coming years. Supply chains having smooth product and information flow can continue to compete and grow in the market space. Strategic alliances among channel partners can be one way of enhancing supply chain effectiveness. Collaborative strategies like VMI, RSP etc. are gaining momentum. Companies can outsource supply chain services to third party and fourth party logistics companies in order to focus on their core-competencies. Information technology and the Internet have become indispensable for adding value to traditional supply chain services. Nations around the world are working towards the implementation of environment friendly supply chain activities. Reverse logistics closes the supply chain and can contribute to environmental protection and conservation.

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