Session:

Supply Chain and

Logistics

IIM Rohtak

Market Logistics
Physical Distribution starts from the factory.
Managers chooses a set of (a) Warehouses (stocking
points); and (b) transportation carriers that will
deliver the goods to final destination in the desired
time and at the lowest total cost.
Physical Distribution has now expanded into a broader
concept of Supply Chain Management (SCM).
SCM starts from:
strategically procuring the right inputs (raw materials and
capital equipments);
converting them efficiently into finished products; and
dispatching them to the final destination.

Market Logistics Planning: 4 stages

Deciding on the best Channel
design and network strategy
for reaching its customers
Implementing the solution

What on-time
delivery standard
should we offer?
What levels
should we attain
in ordering and
billing accuracy?

Should we serve
directly or through
intermediaries?
Where to source the
manufacturing
facilities? For what
products?
How many warehouses
should we maintain?
Where should we locate
these warehouses?

with the best

Sales Forecasting
Warehouse
Management
Transportation
Management
Material
Management

Deciding on the companys

Developing Operational

Value Proposition to its

excellence in

customers

Information Systems
Equipments
Policies
Procedures

Supply Chain for an Individual Firm

Transportation
Warehousing

Transportation

Customers

Information
flows

Factory

Transportation

Vendors/plants/ports
Warehousing

Transportation
1-2

Logistics Defined
Logistics is the process of planning, implementing and
controlling the efficient, cost-effective flow and storage
of raw materials, in-process inventory, finished goods
and related information from the point of origin to point
of consumption for the purpose of conforming to
customer requirements.
Council of Logistics Management

Supply Chain Management Defined

SCM is the integration of all activities associated with the
flow and transformation of goods from raw materials
through to end user, as well as information flows, through
improved supply chain relationships, to achieve a
sustainable competitive advantage.
Handfield and Nichols
1-5

The Logistics/Supply Chain Mission

Getting the right goods or services to

the right place, at the right time, and in
the desired condition at the lowest cost
and highest return on investment.
1-6

Evolution of Supply Chain Management

Activity fragmentation to 1960

2000+

Activity Integration 1960 to 2000

Demand forecasting
Purchasing
Requirements planning
Production planning
Manufacturing inventory

Purchasing/
Materials
Management

Warehousing
Logistics

Material handling
Packaging
Finished goods inventory
Distribution planning

Physical
Distribution

Supply Chain
Supply Chain
Management
Management

Order processing
Transportation
Customer service
Strategic planning
Information services
Marketing/sales
Finance

1-7

Significance of Logistics
Costs are high

About 10.5% of GDP domestically

About 12% of GDP internationally
A range of 4 to 30% of sales for individual firms, avg. about 10%
A high as 70-80% of sales if purchasing and production are
included

Customers are more demanding of the supply chain

Desire for quick response

Desire for mass customization

An integral part of company strategy

Generate revenue
Improve profit

Logistical lines are lengthening

Local vs. long distance supply

Logistics is a key to trade and an increased standard of living

Law of comparative economic advantage applies

Logistics adds value

Time and place utilities

1-8

Effect on Logistics Outsourcing

Internal handling

Profit
Marketing
Logistics
Overhead

Outsourcing

Profit

Increase

Marketing
Logistics

Increase

Tariffs
Overhead

Materials
Materials

Labor

Reduction

Labor
1-9

Scope of the Supply Chain for Most Firms

Business logistics

Physical supply
(Materials management)
Sources of
supply

Physical distribution

Plants/
operations
Transportation
Inventory maintenance
Order processing
Acquisition/ Procurement
Protective packaging
Warehousing
Materials handling
Information maintenance

Customers
Transportation
Inventory maintenance
Order processing
Product scheduling
Protective packaging
Warehousing
Materials handling
Information maintenance

Focus firms internal supply chain

1-14

Key Activities/Processes

Primary
- Setting customer service goals
- Transportation
- Inventory management
- Location

Secondary, or supporting
- Warehousing
- Materials handling
- Acquisition (purchasing)
- Protective packaging
- Product scheduling
- Order processing
1-11

The Logistics Strategy Triangle

Inventory Strategy
Forecasting
Storage fundamentals
Inventory decisions
Purchasing and supply
scheduling decisions
Customer
Storage
decisions

service goals
The product
Logistics service
Information sys.

Transport Strategy
Transport fundamentals
Transport decisions

Location Strategy
Location decisions
The network planning process

1-12

Strategic, Tactical, and Operational Decision Making

Decision area

Strategic

Tactical

Operational

Transportation

Mode selection

Seasonal equipment leasing

Dispatching

Inventories

Location, Control policies

Safety stock levels

Order filling

Order
processing

Order entry, transmittal,

and processing system
design

Purchasing

Development of supplierbuyer relations

Contracting,
Forward buying

Expediting

Warehousing

Handling equipment
selection, Layout design

Space utilization

Order picking
and restocking

Facility
location

Number, size, and

location of warehouses

Processing
orders, Filling
back orders

2-7

Integrated Logistics Systems (ILS)

ILS is used by many firms, with the help of
Information Technology for tracking and coordinating
the following functions effectively:
Material management
Material flow systems
Physical distribution

Volvo operates their warehouse in Memphis with the

support of third party suppliers, FedEx Logistics
Services, to handle stocks of truck parts. If a Volvo
dealer needed a part in an emergency, phones a toll-free
number and the part is flown out the same day and
delivered that night at either the airport or the dealers
office.

Market Logistics Objectives

Situations where logistics planning may go wrong:
The Traffic/ Logistics manager favours rail shipment over air shipment
because of the less rail cost. However, because the rail transport are slower,
it ties up working capital longer, delay customer payment, and might cause
customers to buy from competitors who offer faster service.
The Shipping department uses cheap containers to minimize shipping
costs. Cheaper containers lead to a higher rate of damaged goods.
The Inventory manager favours low inventory. This increases the
possibility of stockouts, back orders, huge paperwork etc.

Major objectives for any company logistics planning:

On-time delivery
Effectively meet emergency needs
Careful handling of merchandise
Willingness to take back defective goods and resupply them quickly.

Indian Logistic System: Scenario

IndustryOverview
Logistics functions are currently an in-house activity for
companies that hire discrete services such as transportation and
warehousing while internally performing order processing, distribution,
and logistics planning for inbound and outbound logistics.

Outsourcing of entire logistics to third-party logistics service

providers is highly limited.
The practice of complete logistics outsourcing is recent in
India with multinational companies being the major users of
this service.

Indian Logistic System: Scenario

The logistics industry in India is highly fragmented.
This is mainly due to the nature of the
transportation industry.
In India, over 50 percent of goods are transported
by road. The road transport sector is highly
fragmented with vehicle ownership firmly in the
hands of individual trucks owners with 67 percent
of the owners with a fleet of less than five vehicles.

Indian Logistic Scenario

Inventory carrying costs account for approximately
24 percent of the logistics cost.

Order processing and administrative costs account

for a significant 10 percent of the logistics costs.
Stock filing and warehouse management in many cases is
done manually increasing the administrative costs at the
same time adding an element of inefficiency in warehouse

management.

Indian Logistic Scenario

Companies in India are slowly moving towards total
outsourcing of logistics that provides access to
logistics services to their production facility,
warehouses, and IT systems.

A high level of integration is required between the

company and logistics service providers to provide

logistics services that fulfill the strategic objective of

the companies.

Indian Logistic Structure

The total logistics market consists of market participants
from the unorganized segment to highly technology savvy
and process driven service providers with high levels of
expertise in the area of logistics management.
The market participants in this industry can be broadly
classified into three broad segments, namely:
Pure transporters

Integrated transporters with warehousing facilities

Third-party logistics service providers (3PLs)

Pure & Integrated Transporters

Transporters are involved only in the physical
movement of goods. They can be classified as
small, medium and large based on the ownership
pattern of vehicles and their revenue.

Transporters are considered to be highly

unorganized although many large transporters form
a part of the organized segment of the market.
Many large transporters are diversifying their
operations to include total logistics management.

Third Party Logistics (3PLs)

Third-party logistics service providers
(3PLs) are involved in the complete value chain of
logistics management including inbound logistics,
supply chain management, tracking and data
reporting, warehousing, (JIT) deliveries, and
outbound logistics.
3PL companies currently present in India are multinational companies with wide experience in
handling international logistics.

Indian Supply Chain Scenario

Some Facts
GDP

: Rs. 27.55 Lakh Crores*

Inventory tied up

: Rs. 1.17 Lakh Crores

Logistics Cost

: 14% of our GDP

1% Reduction in LC

: Rs. 27550 Crores

2% Reduction in LC

: Rs. 55100 Crores

* Economic Survey 2003-04

Logistics Cost
Country

Australia

GDP (USD b)* Logistics Cost as % of GDP

393.0

10-11

1237.1

14.5

India

460.0

14.0

Japan

3996.2

10.5

Korea

468.7

12.4

87.0

12.4

281.5

13.5

Asian Region

China Mainland

Singapore
Taiwan
* World Competitiveness Year Book 2003

Logistics Cost
Country

cont

GDP (USD b)*

Logistics Cost as % of GDP

European Region
France

1419.3

11.7

Germany

1987.0

11.8

Italy

1186.0

12.6

Netherlands

418.8

12.2

Spain

654.0

12.1

1555.2

12.2

Canada

729.3

11.8

Mexico

637.3

14.4

10445.6

08.7

UK
North American Region

USA
* World Competitiveness Year Book 2003

International Comparison of Customer Orientation

Parameters

Product
Quality

Product Design

On-Time
Delivery

After-Sales
Service

Managing
Distribution

Brazil

52.39

56.62

36.34

39.15

51.83

Canada

68.13

58.06

62.19

62.50

66.45

France

55.94

66.96

44.64

45.56

66.09

Germany

92.50

71.39

88.06

78.61

75.83

India

41.08

34.05

30.27

41.08

52.43

Japan

92.68

81.46

93.17

89.76

72.20

Netherlands

72.89

63.11

69.78

68.44

74.76

South Korea

60.71

48.57

59.29

47.14

57.14

Thailand

63.00

58.50

57.00

54.00

66.50

USA

59.67

69.84

62.62

57.70

74.43

Note:

Companies are rated 0=poor to 100=excellent

Elements of Logistics cost

Transportation

35%

Inventories

25%

Losses

14%

Packaging

11%

Handling and Warehousing

9%

Customers' shopping

6%

Ma r k e t O p p o r t u n i t i e s a n d
Forecasts

Figure 1-1 and Chart 1.1 present the revenue

forecast of the Indian logistics industry over
the period 2002 to 2009.

Figure1-1

Logistics Industry: Revenue Forecasts (India), 2002-2009

Revenues
2002
2003
2004
2005
2006
2007
2008
2009

Year ($ Billion)
12.66
13.46
14.31
15.22
16.19
17.24
18.35
19.54

Compound Annual Growth Rate (2003-2009): 6.4%

Note: All figures are rounded; the base year is 2003. Source: Frost & Sullivan

Figure 1-2 and Chart 1.2 present the revenue

forecast of the third-party logistics solutions

market over the period 2002 to 2009.

End-userDemandAnalysis

Figure 1-3 and Chart 1.3 present the industry wise

revenue contribution to the total Indian logistics

industry.

Challenges Facing the Logistics Industry in India

Whats New in Supply Chain?

Global competition
Well informed more powerful Customers
Customer Expectations

Shorter product life cycle

New, low-cost distribution channels
Internet and E-Business strategies