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Indira Gandhi National Open University MS-55
School of Management Studies
LOGISTICS AND SUPPLY
CHAIN MANAGEMENT

Logistics and SCM : An Overview 1

Indira Gandhi National Open University
MS-55
CHAIN MANAGEMENT

Design and Management of SCM 2

CHAIN MANAGEMENT

IT Enabled SCM 3

CHAIN MANAGEMENT

Cost and Performance
Measurement in SCM 4

CHAIN MANAGEMENT

Distribution Network Planning 5

CHAIN MANAGEMENT

Emerging Trends 6

MS-55: LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Course Components

BLOCK 1 LOGISTICS AND SCM : AN OVERVIEW
Unit 1 : Logistics and SCM : An Introduction
Unit 2 : Principles of Supply Chain Management
Unit 3 : Customer Focus in Supply Chain Management

BLOCK 2 DESIGN AND MANAGEMENT OF SCM
Unit 4 : Logistics : Inbound and Outbound
Unit 5 : Models for SCM Integration
Unit 6 : Strategic Supply Chain Management
Unit 7 : Organizing for Global Markets

BLOCK 3 IT ENABLED SCM
Unit 8 : Information Technology : A Key Enabler of SCM
Unit 9 : Intelligence Information System
Unit 10 : IT Packages in SCM

BLOCK 4 COST AND PERFORMANCE MEASUREMENT IN SCM
Unit 11 : Cost Analyses and Measurement
Unit 12 : Best Prictices and Benchmarkin for SCM
Unit 13 : Performance Measurement and Evaluation of SCM

BLOCK 5 DISTRIBUTION NETWORK PLANNING
Unit 14 : Transportation Mix
Unit 15 : Locational Strategy
Unit 16 : Logistics and SCM Environment

BLOCK 6 EMERGING TRENDS
Unit 17 : Future Trends and Issues
Unit 18 : Design for SCM and Greening the Supply Chain
Unit 19 : SCM in Service Organization/Non-Manufacturing Sector

MS-92 : MANAGEMENT OF PUBLIC ENTERPRISES

Course Components

BLOCK 1 PUBLIC ENTERPRISE: AN OVERVIEW
Unit 1 : Public Enterprise: Concept and Policy
Unit 2 : Public Enterprise Scenario National and International
Unit 3 : Nature and Scope of Public Enterprise
Unit 4 : Forms of Public Enterprises
BLOCK 2 PUBLIC ENTERPRISE: ACCOUNTABILITY AND GOVERNANCE
Unit 5 : Concept and Policy of Accountability and Autonomy
Unit 6 : Government - Public Enterprise : Interface
Unit 7 : Accountability to Legislature
Unit 8 : Relationship with other Agencies
Unit 9 : Corporate Governance and Corporate Social Responsibility
BLOCK 3 PUBLIC ENTERPRISE: PERFORMANCE AND EVALUATION
Unit 10 : Appraisal of Public Enterprise Performance-I
Unit 11 : Appraisal of Public Enterprise Performance-II
Unit 12 : Sickness and Public Enterprise and Turnaround Strategies
Unit 13 : Dimensions and Methods of Evaluating Enterprise Performance
BLOCK 4 ORGANISATION AND MANAGEMENT
Unit 14 : Board of Directors: Constitution and Functioning
Unit 15 : Personnel Management Issues in Public Enterprises
Unit 16 : Project Management
Unit 17 : Management of Finance, Marketing and Production, Issues
BLOCK 5 PRIVATISATION AND DISINVESTMENT
Unit 18 : Concept, Policy and Dimensions
Unit 19 : Privatisation: International Experience
Unit 20 : Disinvestment : Experience and Strategies
Unit 21 : Implications of Disinvestment
BLOCK 6 CASE STUDIES
Case 1 : State Bank of India, 19981
Case 2 : Corporate Planning at SAIL, 1989—93
Case 3 : Gloom to Glory: The Successful Turnaround of the Singareni Colleries
Company Limited
Case 4 : HR Initiatives for Turnaround of Visakhapatnam Steel Plant

Indira Gandhi
National Open University MS-55
School of Management Studies Logistics and Supply
Chain Management

Block

1
LOGISTICS AND SCM : AN OVERVIEW
Unit 1
Logistics and SCM : An Introduction 5
Unit 2
Principles of Supply Chain Management 18
Unit 3
Customer Focus in Supply Chain Management 27

Expert Committee (as on 24th March, 2000)
Prof. D.K. Banwet Prof Sadananda Sahu Dr. Sanjay S. Gaur
Dept of Management studies, Dept. of Industrial Engineering Shailesh J. Mehta School of
IIT, Delhi & Management, IIT, Kharagpur Management, IIT Bombay, Mumbai
Prof. B.S.Sahay, Prof. Atanu Ghosh Prof N. V. Narasimhan
Management Development Shailesh J. Mehta School of Director, SOMS,
Institute, Gurgaon Management, IIT Bombay, IGNOU
Mumbai New Delhi
Prof. Amarlal H. Kalro Mr. Satish Kumar Dr. Himanshu Kumar Shee,
IIM Kozhikode Director (Movement), (Coordinator)
Calicut Dept of Fertilizers, Ministry School of Management Studies,
of Chemical & Fertilizers, IGNOU
Krishi Bhawan, New Delhi
Prof. J.L.Batra Mr. Deepak Jakate,
FORE School of Management General Manager - Logistics,
New Delhi United Phosphorus Limited,
Mumbai
Prof. N. Sambandam Dr. Kaushik Sahu
NITIE, Xavier Institute of
Mumbai Management, Bhubaneswar

Course Preparation Team (2004)
Prof. Sushil (Course Editor) Dr. Ravi Shankar (Course Editor) Dr. Biplab Dutta
Dept. of Management Studies Dept. of Management Studies Vinod Gupta School of
Indian Institute of Technology Indian Institute of Technology, Management
New Delhi New Delhi IIT, Kharagpur
Prof. N. Sambandam Prof .Karuna Jain Lt Col. Kaushik Sircar
NITIE, Shailesh J. Mehta School of Assistant Quarter Master
Mumbai Management, Indian Institute of General Operations & Logistics,
Technology Bombay, Mumbai Headquarter 4 Corps
Prof Sadananda Sahu Mr. D N Srivastava Mr. Sandeep Biswas
Dept. of Industrial Engineering Advisor ( Training & Safety) & Institute for Integrated
and Management Head of Distribution Deptt. ) Learning in Management
IIT, Kharagpur (Retd.) in Cement Group (IILM), New Delhi
M/S Larsen & Toubro Ltd,
Jharsuguda
Prof. Atanu Ghosh Mr. Deepak Jakate Prof. B. B. Khanna
Shailesh J. Mehta School of General Manager - Logistics, Director,
Management, Indian Institute United Phosphorus Limited,
of Technology Bombay, Mumbai IGNOU, New Delhi
Mumbai

Dr. Anurag Saxena Dr. Himanshu Kumar Shee
(Course Co-ordinator) (Course Co-ordinator)-On leave
School of Management Studies School of Management Studies,
IGNOU, New Delhi IGNOU, New Delhi

Print Production: Tilak Raj, S.O.(P), SOMS, IGNOU

December, 2004
ã Indira Gandhi National Open University, 2004
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Paper Used : “Agrobased Environment Friendly”.

BLOCK 1 LOGISTICS AND SCM : AN
OVERVIEW

Unit 1: Logistics and SCM - An Introduction discusses about definition of Logistics
& Supply Chain Management It discusses the process of development of logistics
and its role in the economy. It also converse about Physical Distribution Management
(PDM) and its components.

Unit 2: Principles of SCM defines how the supply chain works. It highlights the key
processes required to integrate the supply chain. It further examines the critical areas
of Logistics-Marketing Interface and critical areas of Logistics-Manufacturing
Interface

Unit 3: Customer focus in SCM comprehends the key processes required to
enhance customer focus in the supply chain. It delineates with the concept of
Efficient Customer Response (ECR), Quick Response (QR) and Accurate Response
(AR). It further scrutinizes chain relationship within and beyond organization

Logistics and SCM : An
Overview

4

UNIT 1 LOGISTICS AND SCM : AN Introduction

INTRODUCTION

Objectives

After going through this unit, you should be able to:
· define Logistics and Supply Chain Management (SCM);
· understand the development of logistics and its role in the economy; and
· discuss Physical Distribution Management (PDM) and its components.
Structure
1.1 Introduction
1.2 Logistics and SCM
1.3 Development of Logistics
1.4 The Role of Logistics in the Economy
1.5 Logistics and Competitive Performance
1.6 Physical Distribution Management (PDM)
1.6.1 Components of PDM
1.6.2 The Systems or “Total” Approach to PDM
1.7 Summary
1.8 Self Assessment Exercises
1.9 References and Suggested Further Readings

1.1 INTRODUCTION

There is a great deal of material that is moved in any organization. Organizations
collect raw materials from suppliers and deliver finished goods to the customers. It is
logistics that executes this function. In other words, logistics is the function that
moves both tangible materials (e.g. raw materials) and intangible material (e.g.
information) through the operations to the customers (as a finished product). In
continuation to this explanation, we would introduce what a supply chain means. “ A
supply chain consists of a series of activities involving many organizations through
which the materials move from initial suppliers to final customers. There may be
different supply chain for each product. The chain of activities and organizations is
named differently as per the situation. If the emphasis is on operations then it is called
process; if the emphasis is on marketing then it is called logistics; if the emphasis is
on value-addition then it is called value-chain; if the emphasis is on meeting customer
demand then it is called demand chain; if the emphasis is on movement of material
then we use the most general term i.e., supply chain. This unit will introduce you with
the concept of a supply chain.

1.2 LOGISTICS AND SCM

A supply chain may be considered as a group of organizations, connected by a
series of trading relationships. This group covers the logistics and manufacturing
activities from raw materials to the final consumer. Each organization in the chain
procures and then transforms materials into intermediate/final products, and
distributes these to customers.

5

Logistics and SCM : An The supply chain can be defined as the integral management (within the company
Overview and through other companies) of the company’s various logistical stages such as
materials procurement, production, storage, distribution and customer service. The
Supply Chain concept should be seen as a whole, that is, the entire system from the
origin of procurement to the final consumption of goods or services.

In supply chain network we must include all the organizations involved in the
production of certain goods or services (from the origin of procurement to final
consumption), and each of the logistical stages within these organizations. Thus, the
supply chain is a network linking and interweaving different supply chains of all the
companies involved in a production process. A diagram depicting the typical supply
chain is shown in Figure 1.1.

Raw Semi-Finished Finished End
Material Products Products Distributors Consumer

Figure1.1: Typical Supply chain

The supply chain activity therefore constitutes complex objects, as it involves
decision-makers from many different companies, who sometimes have no direct
relationship and are place in very different geographical locations; yet the decisions
they make are mutually dependent upon each other. Hence, there is a need for an
information system capable of linking together the different members of the chain so
that there is an open communication between them.

The concept of supply chain is not new. Historically we have moved from physical
distribution to logistics management and then to supply chain management. This major
difference seems to be that supply chain management is the preferred name for the
actualization of “integrated logistics”, with it acting as an enabler, it is now possible to
have an integrated process view about the logistics and all allied processes related to
business. Ideally the supply chain should be a “seamless” chain as shown in Figure 1.2.

Raw Material Product Ordering
Channel

Seamless Supply
Chain

Material
Flow channel End Customer

Figure 1. 2: Seamless Supply Chain
6
Source: Sahay B.S., 1998

The importance of logistics can be gained from the fact that logistics and supply chain Logistics and SCM : An
management costs are in range of 10 to 15 of the GDP for developing countries while Introduction
it is around 18 to 20 per cent for developed countries. The concept of integrated
logistics consists of two interrelated efforts:
· Logistics operation: Logistic operation can be basically clubbed into
physical distribution management, materials management and internal inventory
transfer.
· Logistic coordination: Logistic coordination pertains to forecasting, order
processing, operational planning and product procurement or MRP. This
integration is effected through effective information flows.
Definitions

Forrester (1961) suggested that the five flows of any economic activity — money,
orders, materials, personnel and equipment are interrelated by an information
network, which gives the “system,” which is now called as supply chain due to its
own character.

According to Christopher (1992) supply chain is network of organizations that are
involved, through upstream and downstream linkages, in the different processes and
activities that produce value in the form of products and services in the hands of the
ultimate consumer. Managing these linkages and delivering the product/service to the
customer in a cost effective way is SCM. Supply chain management encompasses
materials/supply management from the supply of basic raw materials to final product
(and possible recycling and re-use). Supply chain management focuses on how firms
utilize their suppliers’ processes, technology and capability to enhance competitive
advantage. It is a management philosophy that extends traditional intra-enterprise
activities by bringing trading partners together with the common goal of optimization
and efficiency.

Supply Chain Management is a set of approaches utilized to efficiently integrate
supplier, manufacturer, warehouse and stores so that merchandise is produced and
distributed at the right quantities, to the right location and at the right time, in order to
minimize system under costs while satisfying service level requirements (Levi
(2000)).

The common thread in these definitions is that supply chain management seeks to
integrate performance measures over multiple firms or processes, rather than taking
the perspective of a single firm or process.

Supply chain management has provided the next logical stage in the evolution of
competitiveness for the manufacturing organization and added, importantly, a concern
for the flow of materials to and from the organization. Supply chain management
integrated suppliers to the end consumers and emphasized the need for collaboration
to optimize the whole system. As such, supply chain management is the process of
designing, planning and implementing change in the structure and performance of the
‘total’ material flow in order to generate increased value, lower costs, enhanced
customer service and yield a competitive advantage. In effect, the addition of supply
chain management to the marketing model created a truly ‘systems’ approach to the
organization and its direct and indirect trading relationships

The content of supply chain management with in a firm varies considerably with the
type of business. Figure 1.3 shows the different components of logistics
management.

7

Overview MANAGEMENT ACTIONS

Planning Implementation Control

INPUT INTO OUTPUT OF
LOGISTICS LOGISTICS

Natural Resources (Land, Marketing Orientation
Facilities and Equipment) (Competitive Advantage)

CUSTOMERS
SUPPLIERS

Human Resources Raw In process Finished Time, Place, Utility
Material Inventory Goods
Efficient movement to
Financial Resources
Customer

Information Resources Proprietary Asset

LOGISTICS ACTIVITIES
· Customer Service · Plant and Warehouse Site
· Demand Forecasting Selection
· Distribution Communication · Procurement
· Inventory Control · Packaging
· Material Handling · Return Goods Handling
· Order Processing · Salvage and Scrap Disposal
· Parts & Service Support · Traffic and Transportation

Figure 1.3: Components of Logistic Management
(Source: Douglas M. Lambert, 1998, Pg-5)

A representative list of logistic element for a firm is given in Table 1.1.
Table 1.1: Logistic Element

Facility Location Determining location, number and size of facilities needed,
Allocation demand to facilities
Transportation Mode and service selection
Carrier routing
Vehicle scheduling
Inventories Finished goods stocking policies
Record keeping
Supply scheduling
Short term sales forecasting
Customer Service Cooperate with marketing in:
determining customer needs and wants for service
determining customer response to service
Order Processing and Information Sales order procedure
Flows Information collection, storage and manipulation
Data analysis
Warehousing and Material Handling Space determination
Stock layout
Material handling equipment selection
Stock storage and retrieval
Equipment replacement policies
Protection Packaging Design for: handling, storage, protection
Product Scheduling Co-operate with production in :
specifying aggregate production quantities
8 sequencing and timing of production

1.3 DEVELOPMENT OF LOGISTICS Introduction

Logistic activity is literally thousand of years old, dating back to the earliest form of
organized trade. As this area of study however it first began to gain attention in the
early 1990s. More emphasis has been given to logistics after the Gulf war in 1990-91
when the efficient and effective distribution of store supplies and person were the
key factors for success. With rising interest rates and increasing energy cost logistics
received more attention as a major cost driver. Logistics cost became a more critical
issue for many organization because of globalization of industry. This has affected
logistics in two primary ways. First, the growth of world-class competitors from other
nations has caused organization to look for new way to differentiate their
organizations and product offerings. Second, as organizations increasingly buy and
sell offshore, the supply chain between the organizations becomes longer, more costly
and more complex. Excellent logistics management is needed to fully leverage global
opportunities. Information technology input has given a next boom to logistics
management. This gave organization the ability to better monitor transaction
intensive activities such as ordering movement and storage of goods and materials.
Combine with the availability of computerized quantitative models; this information
increased the ability to manage flows and to optimize inventory levels and movement.
Other factor contributing to the growing interest in logistics include advances in
information technology, increased emphasis on customer service, growing
reorganization of the system approach and total cost concept. The profit leverage
from logistics and realization that logistics can be used as a strategic weapon in
competing the market place.
The system approach is a critical concept in logistics. Logistics is in itself a system.
It is a network of related activities with the purpose of managing the orderly flow of
material and personal with in the logistic channel. The system approach simply states
that all functions or activities need to be understood in terms of how they effect and
are affected by other elements and activities with which they interact. The idea is
that if one looks at action in isolation, he or she will not understand the big picture or
how such action affects or are affected by other activities. In essence the sum or
outcome of a series of activities is greater than its individual parts.
Activity 1
Every organization has to move materials to support its operations. What do service
companies like Internet Service Providers move? Is the concept of supply chain
relevant for these companies?
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1.4 THE ROLE OF LOGISTICS IN THE ECONOMY

Logistics play a key role in the economy in two significant ways. First, logistics is of
the major expenditures for business. Logistics expenditure accounts for around
15-20% of GDP. Thus by improving the efficiency, logistics make an important
contribution to the economy as a whole.
9

Logistics and SCM : An Second, logistics support the movement and flow of many economic transactions; it is
Overview an important activity in facilitating the sale of virtually all goods and services. To
understand this role from a system perspective, consider that if goods do not arrive on
time, customer can not buy them. If goods do not arrive at the proper place or in the
proper condition, no sale can be made. Thus all economic activities throughout the
supply chain will suffer.
One of the fundamental ways that logistics add value is by creating utility. From an
economic stand point utility represent the value or usefulness that an item or service
has in fulfilling a want or need. There are four types of utilities namely; Form,
Possession, Time and Place. Form utility is the process of creating the good or
service or putting them in proper form for the customer to use. Possession utility is
value added to a product or service because the customer is able to take actual
possession like credit arrangement and loans. These two utility are not directly related
to logistics but these are not possible without getting the right item needed for
consumption or production to the right place at the right time and in the right condition
at the right cost. The time and place utility are directly related to logistics. Time utility
is the value added by having an item when it is needed. Place utility is the item or
service available where it is needed. The five rights of logistics are the essence of the
two utilities provided by logistics time and place utility.

1.5 LOGISTICS AND COMPETITIVE
PERFORMANCE
Today logistics department appears on the organization charts of many large
organizations. Linking logistics activities directly to organization strategic plan can
work effectively to support their organization for achieving competitive advantage.
Porter user a tool called the value chain as shown in the Figure 1.4 to separate
buyers, supplier and a firm into the discrete but interrelated activities from which
value stems. The value chain concept may be used to identify and understand the
specific source of competitive advantage and how they related to buyer value. Value
is the amount a customer is willing to pay for the products, services provided by an
organization. Value added is the difference between what the customer pays and the
cost to the organization in providing that product or service. Porter defines the five
categories of primary activity involved in competing in any industry.
Inbound logistics: Activities associated with receiving, storing and disseminating
input to the product.
Operation: Activity associated with transforming input into the final product form.
Outbound logistics: Activity associated with collecting storing and physical
distribution of the product to buyers.

Company Infrastructure

Support Organization, People
Activity
System & Technology

Procurement

Inbound Operation Outbound Marketing
Logistics Logistics & Sales Service

Primary Activity
Figure 1.4: Porter Value Chain
10 Source: Porter, Michael E., “Competitive Advantage”. 1985, the Free Press. New York)

Marketing and Sales: Activities associated with providing a means by which Logistics and SCM : An
buyers can purchase the product and inducing them to do so such as advertising, Introduction
promotion etc.
Service: Activity associated with providing service to enhancer maintain the value of
the product such as installation, repair etc.
The effective logistics management can provide a major source of competitive
advantage. The source of competitive advantage is found firstly in the ability of the
organization to differentiate itself in the eyes of the customer from its competitor and
secondly by operating at a lower cost and hence at greater profit. There are two
bases of success in any competitive context. One is the cost advantage and second is
the value advantage. Cost advantage is achieved through greater productivity and
value advantage is pursued through a different plus over competitive offerings.

Hi
Va l u e A d v a n t a g e

Service Leader Cost and Service
Leader

Commodity
Cost Leader
Market
Lo

Lo Productivity Advantage Hi

Figure 1.5: Competitive Matrix
Source : Christopher, M., 1992, Logistics and Supply Chain Management

From the matrix shown in Figure 1.5 it is clear that successful companies will often
seek to achieve a position based upon both a productivity advantage and a value
advantage. Logistics management can play a critical role to gain both advantages. In
many industries logistics cost represents such a significant proportion of total cost that
it is possible to make major cost reduction through fundamentally reengineering
logistics process. In term of value advantage, companies can gain through service
differentiation. Today markets have become more service sensitive. Customer in all
industries are seeking greater responsiveness and reliability from suppliers, they are
looking for reduced lead time, just in time delivery and value added services that
enable them to do better job of serving their customers.

Traditionally most organizations have viewed themselves as entities that exist
independently from others and indeed need to compete with them in order to survive.
However such a philosophy can be self-defeating if it leads to an unwillingness to
cooperate in order to compete. Behind this seemingly paradoxical concept is the idea
of supply chain integration. Supply chain integration links a firm with its customers,
suppliers and other channel members. As such it integrates their relationships,
activities, functions, processes and locations. The purpose is to improve the
effectiveness and efficiency of SC for ultimate consumers.

A model of the evolution of supply chain is shown in Figure 1.6 Integration starts with
the ‘baseline’ organization (Stage 1) with a reasonably informal approach to
management by departments. This level of evolution involves the processing of
material requirements and planning routines that are short term in nature. The
material inventories simply arise in response to reactive management practices. The
key requirement of employees is to react to failure and manage as best that they can.

The Stage 2 organization reflects the traditional form of supplier management. The
business departments tend to operate autonomously. The Stage 2 organization is 11

Logistics and SCM : An focused on the annual budget allocation and departmental cost management. For the
Overview purchasing function this implies seeking out the lowest price provider of material
requirements often through a process of tendering, the use of ‘power’ and the
constant switching of supply sources to prevent ‘getting too close’ to any
individual source.
The Four stage of Development
Stage 1: Baseline

Purchasing Material Production Sales Distribution
Control

Stage 2: Functional Integration

Materials Manufacturing Distribution
Management Management Management

Stage 3: Internal Integration

Materials Manufacturing Distribution
Management Management Management

Stage 4: External Integration

Suppliers Internal Supply Customers
Chain

Figure 1. 6: Supply Chain Integration

The Stage 3 organization is internally integrated and has a much greater level of
interest in material flow processes from suppliers to customers rather than the
‘grenade over the all’ approach of the earlier two forms. The organization has
integrated the aspects of the internal supply chain that it can influence and control. In
parallel, planning systems operated throughout the organization are integrated and
demand information, production schedules and material requirements are
synchronized by teams of individuals that were once subordinates of separate
departments. For this company, the demand and material flow drive the entire
system in an end-to-end supply chain and the organization makes use of Just in time
materials management techniques.

The Stage 4 company has begun to realize the benefits of true supply chain
management and the ability to synchronize all activities within the factory and to
interface the factory with its suppliers and customers. Under these conditions, the
collaborative and participative internal environment is extended upstream and
downstream and the planning of supply chain management is recognized formally.
The factory is ‘customer oriented’ instead of product oriented and seeks to partner
with key customers and suppliers in order to better understand how to provide value
and customer service. This form of company has full improvement processes within
the organization that are encapsulated in medium term plans for the organization and
its supply chain. The organization makes most use of information systems to enhance
12 the responsiveness of the organization and supply chain to deliver products and has

also developed a capability in terms of product design that includes customer and Logistics and SCM : An
supplier involvement. To enhance the nature of collaboration the organization Introduction
rewards supplier partnerships with sole sourcing agreements in return for a greater
level of support to the business and a commitment to on-going improvement of
material flow and relationship management. The model provides a useful means of
analyzing the current state of the organization and understanding where the
next interventions would be needed in order to improve performance.
Activity 2
Describe the Supply Chain for a paper manufacturing organization.
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1.6 PHYSICAL DISTRIBUTION MANAGEMENT (PDM)

There are many decisions that must be taken, when a company organizes a channel
or network of intermediaries, who take responsibility for the management of goods as
they move from the producer to the consumer. Each channel member must be
carefully selected and the company must decide what type of relationship it seeks
with each of its intermediate partners. Having established such a network, the
organisation must next consider how these goods can be efficiently transferred, in the
physical sense, from the place of manufacture to the place of consumption. Physical
distribution management (PDM) is concerned with ensuring the product is in the right
place at the right time.

It is now recognised that PDM is a critical area of overall supply chain management.
Business logistical techniques can be applied to PDM so that costs and customer
satisfaction are optimised. There is little point in making large savings in the cost of
distribution if in the long run, sales are lost because of customer dissatisfaction.
Similarly, it does not make economic sense to provide a level of service that is not
required by the customer but leads to an erosion of profits. This cost/service balance
is a basic dilemma that physical distribution managers face.

The reason for the growing importance of PDM is the increasingly demanding nature
of the business environment. In the past it was not uncommon for companies to hold
large inventories of raw materials and components. Although industries and individual
firms differ widely in their stockholding policies, nowadays, stock levels are kept to a
minimum wherever possible. Holding stock is wasting working capital for it is not
earning money for the company. To think of the logistical process merely in terms of
transportation is much too narrow a view. Physical distribution management (PDM)
is concerned with the flow of goods from the receipt of an order until the goods are
delivered to the customer. In addition to transportation, PDM involves close liaison
with production planning, purchasing, order processing, material control and
warehousing. All these areas must be managed so that they interact efficiently with
each other to provide the level of service that the customer demands and at a cost
that the company can afford.

1.6.1 Components of PDM

There are four principal components of PDM namely; Order processing, Stock levels
or inventory, Warehousing and Transportation. 13

Logistics and SCM : An Order processing
Overview
Order processing is the first of the four stages in the logistical process. The
efficiency of order processing has a direct effect on lead times. Orders are received
from the sales team through the sales department. Many companies establish regular
supply routes that remain relatively stable over a period of time ensuring that the
supplier performs satisfactorily. Very often contracts are drawn up and repeat orders
(forming part of the initial contract) are made at regular intervals during the contract
period. Taken to its logical conclusion this effectively does away with ordering and
leads to what is called ‘partnership sourcing’. This is an agreement between the
buyer and seller to supply a particular product or commodity as and when required
without the necessity of negotiating a new contract every time an order is placed.
Order-processing systems should function quickly and accurately. Other departments
in the company need to know as quickly as possible that an order has been placed
and the customer must have rapid confirmation of the order’s receipt and the precise
delivery time. Even before products are manufactured and sold the level of office
efficiency is a major contributor to a company’s image. Incorrect ‘paperwork’ and
slow reactions by the sales office are often the unrecognised source of ill will
between buyers and sellers. When buyers review their suppliers, efficiency of order
processing is an important factor in their evaluation. A good computer system for
order processing allows stock levels and delivery schedules to be automatically
updated so management can rapidly obtain an accurate view of the sales position.
Accuracy is an important objective of order processing, as are procedures that are
designed to shorten the order processing cycle.
Inventory
Inventory, or stock management, is a critical area of PDM because stock levels have
a direct effect on levels of service and customer satisfaction. The optimum stock
level is a function of the type of market in which the company operates. Few
companies can say that they never run out of stock, but if stock-outs happen regularly
then market share will be lost to more efficient competitors. The key lies in
ascertaining the re-order point. Carrying stock at levels below the re-order point
might ultimately mean a stock-out, whereas too high stock levels are unnecessary and
expensive to maintain. Stocks represent opportunity costs that occur because of
constant competition for the company’s limited resources. If the company’s
marketing strategy requires that high stock levels be maintained, this should be
justified by a profit contribution that will exceed the extra stock carrying costs.
Warehousing
Many companies function adequately with their own on-site warehouses from where
goods are dispatched direct to customers. When a firm markets goods that are
ordered regularly, but in small quantities, it becomes more logical to locate
warehouses strategically around the country. Transportation can be carried out in bulk
from the place of manufacture to respective warehouses where stocks wait ready for
further distribution to the customers. This system is used by large retail chains, except
that the warehouses and transportation are owned and operated for them by logistics
experts. Levels of service will of course increase when number of warehouse
locations increases, but cost will increase accordingly. Again, an optimum strategy
must be established that reflects the desired level of service.
Transportation
Transportation usually represents the bulk of distribution cost. It is usually easy to
calculate because it can be related directly to weight or numbers of units. Costs must
be carefully controlled through the mode of transport selected amongst alternatives,
and these must be constantly reviewed.
The patterns of retailing that have developed, and the pressure caused by low stock
14 holding and short lead times, have made road transport indispensable. When the

volume of goods being transported reaches a certain level some companies purchase Logistics and SCM : An
their own vehicles, rather than using the services of haulage contractors. However, Introduction
some large retail chains have now entrusted all their warehousing and transport to
specialist logistics companies.
For some types of goods, transport by rail still has advantages. When lead-time is a
less critical element of marketing effort, or when lowering transport costs is a major
objective, this mode of transport becomes viable. Similarly, when goods are hazardous
or bulky in relation to value, and produced in large volumes then rail transport is
advantageous. Rail transport is also suitable for light goods that require speedy
delivery (e.g. letter and parcel post). Except where goods are highly perishable or
valuable in relation to their weight, air transport is not usually an attractive transport
alternative. For long-distance overseas routes air transport is popular. Here, it has the
advantage of quick delivery compared to sea transport, and without the cost of bulky
and expensive packaging needed for sea transportation, as well as higher insurance
costs.

The chosen transportation mode should adequately protect goods from damage in
transit (a factor just mentioned makes air freight popular over longer routes as less
packaging is needed than for long sea voyages). Not only do damaged goods erode
profits, but frequent claims increase insurance premiums and inconvenience to
customers, endangering future business.

1.6.2 The Systems or ‘Total’ Approach to PDM

PDM has been neglected in the past; this function has been late in adopting an
integrated approach towards it activities. Managers have now become more
conscious of the potential of PDM, and recognize that logistical systems should be
designed with the total function in mind. A fragmented or disjointed approach to
PDM is a principal cause of failure to provide satisfactory service, and causes
excessive costs.

PDM is concerned with ensuring that the individual efforts that go to make up the
distributive function are optimised so that a common objective is realised. This is
called the ‘systems approach’ to distribution management and a major feature of
PDM is that these functions be integrated.

To plan an efficient logistics structure it is necessary to be aware of the interaction
between the different distribution costs and how they vary with respect to the
different depot alternatives (number, size, type and location).

Figure 1.7 demonstrates how the individual distribution and logistics cost elements can
build up the total logistics cost.

· Storage Cost: Storage cost will increase as the number of depots will increase
because there will be a need for more stock coverage, more storage space, more
management etc.

· Delivery cost: This will concern with the secondary transportation cost i.e. cost
of delivery from the depot to the consumer. The greater the number of depots,
the lesser is the secondary mileage and the delivery cost.
· Trunking Cost: This is the primary transport cost in the supply of products in
bulk to the depots from the central finished good warehouses or production
points. As the number of depots increases this cost will also increases.
· Inventory Cost: The main elements of inventory holding costs are:
· Capital Cost: The cost of physical stock. This is the financing charge, which is
the current cost of capital to a company. 15

Logistics and SCM : An · Service Cost: That is stock management and insurance cost
Overview
· Risk Cost: Which occur through pilferage, deterioration of stock, damage and
stock obsolescence.
· System Cost: These costs represent a variety of information or communication
requirements ranging from the order processing to load assembly lists.

Cost
Total Distribution Cost

Trunking Cost

Inventory Cost

Storage Cost

System Cost

Local Delivery
Cost

No. of Depots
Figure 1.7: Total Logistics Cost
Source: Croucher Phil et al, The handbook of Logistics and distribution Management Page No .123

The top line on the graph shows the overall distribution cost in relation to the
number of depots in the network. The minimum point on this curve represents the
lowest cost solution. The result will depend on a number of factors –product
type, geographical area of demand, service level requirements etc.

1.7 SUMMARY

Supply chain is network of organizations that are involved, through upstream and
downstream linkages, in the different processes and activities that produce value in
the form of products and services in the hands of the ultimate consumer. Logistics
expenditure accounts for around 15-20% of GDP. Thus by improving the efficiency
of logistics operations, logistics can make an important contribution to the economy as
a whole. Factors contributing to the growing interest in logistics include advances in
information system technology, an increased emphasis on customer service, growing
reorganization of the system approach and total cost concept. Supply chain
management seeks to integrate performance measures over multiple firms or
processes, rather than taking the perspective of a single firm or process. Supply chain
integration links a firm with its customers, suppliers and other channel members. As
16

such it integrates their relationships, activities, functions, processes and locations. Logistics and SCM : An
Physical distribution management (PDM) is concerned with ensuring the right Introduction
item needed for consumption or production to the right place at the right time and
in the right condition at the right cost

1.8 SELF ASSESSMENT QUESTIONS
1) “Logistics is the function that is responsible for the flow of materials into,
through and out of an organisation”. Elaborate?
2) “These are many possible structures for SC, but the simplest view has
materials converging on an organising through tiers of suppliers and products
diverging through tiers of customers”. Elaborate.
3) It is said that the overall aim for logistics is to achieve high customer
satisfaction or perceived product value. This must be achieved with
acceptable costs. How would you find the best balance?
4) What is Physical Distribution Management? Describe its components? Also,
elucidate the “total approach” to PDM.
5) Describe the evolution of Supply Chain concept. What in your opinion is the
most important stage?

1.9 REFERENCES AND SUGGESTED FURTHER
READINGS
1) Simchi Levi (2000), Designing and Managing the Supply Chain, Irwin/
McGraw-Hill, IL.
2) Christopher, M., 1992, Logistics and Supply Chain Management:
Strategies for Reducing Costs and Improving Services, Pitman, London.
3) Croucher Phil, Rushton Alan and Oxley John, The handbook of Logistics
and distribution Management
4) Douglas M. Lambert, 1998, Fundamental of logistics management,
McGraw Hill.
5) Sahay B S, 1998, Supply Chain Management for Global competitiveness
(Macmillan)
6) Chopra Sunil and Meindl P, 2001, Supply Chain Management: Strategy,
Planning, and Operation, Prentice Hall.
7) Forrester J W 1961, Industrial dynamics, Cambridge, Massachusetts,
The MIT press.
8) Waters Donald, 2003, Logistics: An Introduction to SCM, Palgrave
McMillan (Indian Edition), NY

17

Overview UNIT 2 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
2.1 Introduction
2.2 How does SCM Work?
2.3 The Logistics-Marketing Interface
2.3.1 Logistics and Product Life Cycle
2.3.2 Areas of Logistics and Marketing Interaction
2.4 The Logistics-Manufacturing Interface
2.4.1 Customer Service Issues at the Logistics-Manufacturing Interface
2.5 Summary
2.6 Self Assessment Questions

2.1 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.

2.2 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
18
information flows, which in turn helps to create the best product flows.

VALUE ADDED Introduction
INVENTORY FLOW

Enterprise

Physical Manufacturing
Customers Support Purchasing Suppliers
Distribution

REQUIREMENT
INFORMATION FLOW

Figure 2.1: Supply Chain System
Source: Logistics Management, Bowersox et al., 1986
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 Management

Order Fulfillment

Manufacturing Flow Management

Procurement

Product Development and Commercialization

Return Channel

Performance Metrics

Figure 2.2: Supply Chain Process for Integrated SCM
Source: Lambert 1998
19

Logistics and SCM : An Customer Service Management
Overview
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.
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 long-term 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 today’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
20
achieve a sustainable competitive advantage as managing the supply chain from an

out-bound perspective. Effective process management of return channel enables the Logistics and SCM : An
identification of productivity improvement opportunities and break through projects. Introduction

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
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-à-vis those proposed by
Lambert.

..............................................................................................................................

..............................................................................................................................

..............................................................................................................................

..............................................................................................................................

..............................................................................................................................

..............................................................................................................................

..............................................................................................................................

2.3 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.
21

Logistics and SCM : An 2.3.1 Logistics and Product Life Cycle
Overview

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
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.

2.3.2 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 levels
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.

22

2.4 THE LOGISTICS-MANUFACTURING INTERFACE Introduction

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
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
Tables 2.1 and Table 2.2 when organizations decide to compete on the basis of cost
leadership and differentiation respectively.

Table 2.1: Manufacturing / logistics approach when the basis for competing is cost leadership
(Source: Gattorna 1995)

Basis for Competing: Lowest – Cost Competitor

Old Approach New Approach

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 · Improved product performance
· Poor product quality · Reduced product variability
· Ageing equipment/processes · Improved flexibility
· Poor customer service · Improved responsiveness to market
· An image of being unreliable
· Poor product availability
· Poor delivery service

23

Logistics and SCM : An Table 2.2: Manufacturing / logistics approach when the basis for competing is differentiation
Overview (Source: Gattorna 1995)

Basis for Competing: Product Availability and delivery time

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
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.

24

2.4.1 Customer Service Issues at the Logistics-Manufacturing Logistics and SCM : An
Introduction
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:
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:
a) Finished goods inventory levels 25

Logistics and SCM : An b) Customer service in terms of stock availability
Overview
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 decision-
making process with the result being a superior plan which, when executed, results in
superior customer service.

2.5 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.

2.6 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

2.7 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
26 Perspective, Plagrave Macmillan Indian Reprinted Ed., 2004

UNIT 3 CUSTOMER FOCUS IN SUPPLY CHAIN Introduction

MANAGEMENT

Objectives

After reading this unit, you would be able to:
· understand the key processes required to enhance customer focus in the supply
chain;
· define Efficient Customer Response (ECR);
· define Quick Response (QR) and Accurate Response (AR); and
· examine chain relationship within and beyond organization.

Structure
3.1 Introduction
3.2 Customer Service
3.3 Functional vs. Innovative Products: SCM Issues
3.4 Efficient Consumer Response
3.5 Quick Response and Accurate Response
3.6 Chain Relationship within and Beyond the Organization
3.7 SCM as a Core Strategic Competency
3.8 Summary
3.9 Self Assessment Questions

3.1 INTRODUCTION
Management of a supply chain means managing all the different processes and
activities that produce value in the hands of the ultimate consumer. A supply chain
can be viewed as the network of entities through which the material and information
flow. Those entities may include suppliers, carriers, manufacturing sites, distribution
centers, retailers and customers. [1]. Effective streamlining of the supply chain can
improve the customer service levels dramatically, reduce excess inventory in the
system, and cut excess costs from the network of the organization. [2]
Supply Chain Management competency contributes to an organization’s success by
providing customers with timely and accurate product delivery. The customer is any
delivery destination – from consumers’ homes to retail and wholesale businesses to
the receiving docks of a firm’s manufacturing plants and warehouses. The customer
being serviced is the focal point and driving force in establishing Supply Chain
Management performance requirements. It is important to clearly understand
customer service deliverables when establishing Supply Chain Management
strategies.
The customer-focused marketing is built on three fundamental concepts.
· The essence of a marketing orientation to business policy
· Developing Supply Chain Management competency as strategic resource to
customer service planning
· The changing nature of most desired Supply Chain Management practice to
accommodate product life-cycle requirements.
This unit will discuss the customer focus in Supply Chain Management.
27

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